In the matter of Australian International Yacht Club Pty Limited

[2021] NSWSC 586

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 586

Hearing dates:

20 – 23 April 2021 (last submissions 21 May 2021)

Decision date:

25 May 2021

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Plaintiffs succeed in claims for breach of directors’ duties and oppression. Plaintiffs fail in claims in respect of misleading and deceptive conduct. Parties to bring in agreed short minutes of order, or alternatively, their respective drafts with submissions as to the differences between them.

Catchwords:

CONSUMER LAW — Misleading or deceptive conduct — Reliance upon misleading representations — Representation as to profit — Representation as to visa application.

CORPORATIONS — Members’ rights and remedies — Oppression — Where director’s conduct amounted to “commercial unfairness”.

EQUITY — Fiduciary duties — Breach — Rule in Barnes v Addy — Knowing involvement — Where director caused company to purchase asset from company controlled by his spouse — Whether relevant knowledge can be inferred — Whether knowledge can be imputed to company controlled by director’s spouse.

EQUITY — Fiduciary duties — Conflict of interest and duty — Where director caused company to purchase asset from company controlled by his spouse — Inadequate disclosure of material facts.

RESTITUTION — Ineffective transactions — General principles — Restitution of money paid — Failure of consideration — Total failure rule — Whether total failure of consideration established.

Legislation Cited:

- Competition and Consumer Act 2010 (Cth) – Schedule 2, ss 18, 237

- Corporations Act 2001 (Cth), ss 181, 182, 232, 233

Cases Cited:

- Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd (2016) 340 ALR 580; (2016) 116 ACSR 566; [2016] NSWCA 347

- Australian Competition and Consumer Commission v Fisher & Paykel Customer Services Pty Ltd [2014] FCA 1393

- Australian Competition and Consumer Commission v Jewellery Group Pty Ltd (2012) 293 ALR 335; [2012] FCA 848

- Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470; [2007] FCA 1904

- Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640

- Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267

- Australian Securities and Investments Commission v Drake (No 2) (2016) 340 ALR 75; (2016) 118 ACSR 189; [2016] FCA 1552

- Australian Securities & Investments Commission v Flugge and Geary (2016) 342 ALR 1; [2016] VSC 779

- Australian Securities and Investments Commission (ASIC) v Gallop International Group Pty Ltd (2019) 138 ACSR 395; [2019] FCA 1514

- Australian Worldwide Pty Ltd (In Liq) v AW Exports Pty Ltd [2019] NSWSC 1475

- Baltic Shipping Co v Dillon (1993) 176 CLR 344; [1993] HCA 4

- Barnes v Addy (1874) LR 9 Ch App 244

- Blythe v Northwood (2005) 63 NSWLR 531

- Boyd v Feeney [2017] NSWSC 1595

- Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60

- Celermajer Holdings Pty Ltd v Kopas (2011) 16 BPR 30,735; [2011] NSWSC 40

- Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; (1975) 5 ALR 231

- Coope v LCM Litigation Fund Pty Ltd (2016) 333 ALR 524; [2016] NSWCA 37

- Dentown Pty Ltd v PWI Group Pty Ltd (as trustee of the Australia No 1 Group Trust) (2019) 141 ACSR 330

- Digital Cinema Network Pty Ltd v Omnilab Media Pty Ltd (No 2) [2011] FCA 509

- EC Dawson Investments Pty Ltd v Crystal Finance Pty Ltd (No 3) [2013] WASC 183

- Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

- Forty Two International Pty Ltd v Barnes (2014) 97 ACSR 450; [2014] FCA 85

- Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

Grimaldi v Chameleon Mining NL (No 2) (2012) 87 ACSR 260; [2012] FCAFC 6

- Hart Security Australia Pty Ltd v Boucousis (2016) 339 ALR 659; (2016) 117 ACSR 408; [2016] NSWCA 307

- Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; (2014) 101 ACSR 167; [2014] NSWCA 266

- John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451

- Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

- Munstermann v Rayward [2017] NSWSC 133

- Netglory Pty Ltd v Caratti [2013] WASC 364

- One.Tel Ltd (in liq) v Rich (2005) 190 FLR 443; (2005) 53 ACSR 623; [2005] NSWSC 226

- Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191

- Primacy Underwriting Agency Pty Ltd v Kilborn (2007) 25 ACLC 160; [2007] NSWSC 158

- Ramsay v BigTinCan Pty Ltd (2014) 101 ACSR 415; [2014] NSWCA 324

- Re Bicher & Son Pty Ltd (2020) 147 ACSR 108; [2020] NSWSC 711

- Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789

- Re ICB Medical Distributors Pty [2018] NSWSC 1315

- Re Kit Digital Australia Pty Ltd (in Liq) [2014] NSWSC 1547

- Re Mudgee Dolomite & Lime Pty Ltd [2020] NSWSC 1510

- Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914

Re Sirrah Pty Ltd (in prov liq) [2021] NSWSC 413

- Redmond Family Holdings v GC Access Pty Ltd [2016] NSWSC 796

- Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152

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

- Twigg v Twigg (No 4); Lambert v Twigg Investments Pty Ltd (No 3) (2020) 147 ACSR 389; [2020] NSWSC 1159

- Vanguard Financial Planners Pty Ltd v Ale (2018) 354 ALR 711; (2018) 125 ACSR 1; [2018] NSWSC 314

- Watson v Foxman (1995) 49 NSWLR 315

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

- Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 270 FLR 1; (2012) 89 ACSR 1; [2012] WASCA 157

- Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65

Texts Cited:

- K Mason, JW Carter & GJ Tolhurst, Mason & Carter’s Restitution Law in Australia, 2nd ed 2008

Category:

Principal judgment

Parties:

Hui Lin and Xiaonan Su (Plaintiffs)
Jason Zong (First Defendant)
Zhenhua Tang (Second Defendant)
J & G Holding Group Pty Ltd (Third Defendant)
Australian International Yacht Club Pty Ltd (Fourth Defendant)

Representation:

Counsel:
Mr G Campbell (Plaintiffs)
Mr M W Young SC (First Defendant)
Mr D Ratnam (Second Defendants)

Solicitors:
WB Legal (Plaintiff)
Dixon Holmes Lawyers (First Defendant)
Harbourside Legal (Second Defendants)

File Number(s):

2019/181433

Judgment

The nature of the proceedings

1. The Plaintiffs, Ms Lin and her husband, Mr Su, seek a range of relief on their own behalf and, by a statutory derivative action brought with leave granted under s 237 of the Corporations Act 2001 (Cth) on behalf of Australian International Yacht Club Pty Ltd (“Company”) against a director and shareholder of the Company, Mr Zong, his wife, Ms Tang and a company associated with Ms Tang, J&G Holding Group Pty Ltd (“J&G”). Ms Lin and Mr Su, in their personal capacities, also bring claims as to misleading representations as to the extent to which her investment in the Company would meet visa requirements to assist her to advance her attempt to obtain residence in Australia and other claims.

2. By way of broad background, the Company was established with a view to purchasing a motor boat to provide services for a predominantly Chinese market, and assisting Ms Lin and Mr Su to achieve their objective of obtaining permanent residency in Australia; Mr Zong subsequently caused the Company to buy a boat which was not registered for commercial use from J&G, which was unsuitable for the proposed business, and which the Plaintiffs claim was sold to the Company at over-value; and the Plaintiffs challenge a range of expenditures incurred on behalf of the Company, including very substantial payments made to the solicitors acting for Mr Zong over a two day period.

The affidavit evidence, cross-examination and credit

3. The parties relied on voluminous affidavit evidence, and the multiplication of affidavits has been an unfortunate aspect of the conduct of these proceedings. In addressing the affidavit and oral evidence, I have regard to the fallibility of human memory which increases with the passage of time, particularly where disputes or litigation intervene: Watson v Foxman (1995) 49 NSWLR 315 at 318–319; Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 at [41]; Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786 at [424]–[425]; Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 at [7]; John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [94]-[96]; Boyd v Feeney [2017] NSWSC 1595 at [25].

4. The Plaintiffs read two affidavits of Ms Lin dated 22 June 2020. Ms Lin gave evidence of a discussion with Mr Ye, who is an accountant, who she claimed was assisting her as a friend in relation to the possibility of her investing in a yacht tourism business, in order to assist her application for a business visa in Australia. She referred to meeting Mr Zong on 5 March 2020 and set out a conversation which originally occurred in Chinese, at some length. Her evidence was that Mr Zong showed her a set of powerpoint slides with a forecast of the profit and loss of the first year of the potential investment, which was later incorporated into a business plan she submitted to the Department of Immigration and Border Protection. A copy of those powerpoint slides was not in evidence, but Ms Lin annexed a copy of that business plan to her affidavit. That business plan was plainly prepared after the Company had been established, since it referred to its establishment on 12 March 2018 and in the past tense. It also referred to the extent of Ms Lin’s experience as a businesswoman, claiming that “[s]he has enough business experience and company administration skills to start a new business in Sydney” and that she would make an investment of approximately $800,000 in the proposed business (which did not occur) and that “[w]ith sufficient experience of operating a business, she is confident in establishing a company hereafter [sic] her entry to Australia”. That business plan also stated that Ms Lin’s initial capital transfer from China that would be injected into the New South Wales economy would be a total of approximately AUD$800,000 and that Ms Lin and Mr Su had assets in excess of AUD$800,000 available for transfer. That proposition was or became false or seriously misleading, because capital of approximately $800,000 was not transferred from China to be invested in the Company; Mr Su instead borrowed a lesser amount in Australia on the security of a property he owned in Australia; and Ms Lin and Mr Su did not have assets in excess of $800,000 available for transfer and ultimately contributed a lesser sum by way of borrowed funds to the business.

5. A financial forecast contained in that business plan, which I accept reflected information likely to have been discussed at the meeting, forecast a profit before tax for the Company “for the first year” of $181,900, derived from income from boat rental of $768,000 less certain costs and expenses. Mr Zong denied in his affidavit evidence (to which I refer below) that he had prepared that forecast or showed it to Ms Lin and contended that Mr Ye prepared it and showed it to her on his computer at that meeting. On balance, I think it likely that the forecast was prepared by Mr Ye, from information provided by Mr Zong rather than information which Mr Ye had generated for himself, and I am not able to conclude whether Mr Ye or Mr Zong showed them to Ms Lin. Little turns on that, where the information originated from Mr Zong, and I find below that any representation made by it was displaced by subsequent changes in the Company’s business model before Ms Lin signed a Shareholder Agreement or made the substantial part of her investment in the Company.

6. Ms Lin also refers, in that affidavit, to the establishment of the Company, the amounts which she paid into the Company, the entry into a Shareholder Agreement on 30 November 2018 and the circumstances in which she became aware of later transfers of funds out of the Company. Ms Lin also outlined subsequent events which are largely uncontroversial, including the payment of salary to Ms Tang and the purchase of a second hand power boat, the Dauphin, by the Company from J&G.

7. By a second affidavit also dated 22 June 2020, Ms Lin responded to Mr Zong’s affidavit dated 3 May 2020, referring, inter alia, to a suggestion by Mr Zong in late November 2020 that the Company could rent a boat from other companies, and Ms Lin’s response that she would reduce her investment in the Company and take 55% of the shares instead of 60%. Ms Lin also gave evidence of a conversation in which she said she had invested all her funds in the Company and asked when Mr Zong’s funds would be ready; Mr Zong suggested he would use his boat as an investment instead of a monetary contribution, Ms Lin rejected that possibility and noted that his boat did not have a valid licence (although it is unclear how she would have known that); and Mr Zong then suggested he would contribute his knowledge, skill and labour and Ms Lin also rejected that proposal. That conversation did not take place in those terms at that time, because Ms Lin did not inject the bulk of her funds into the Company until after the Shareholder Agreement was executed on 30 November 2020. It is not necessary to determine whether Mr Zong had, at some point, raised these matters in conversation, where he plainly raised them in proposed amendments to the Shareholder Agreement and the fact that he would contribute his skill and goodwill, such as it was, rather than money was accepted by Ms Lin in the executed Shareholder Agreement, whether or not she had read it.

8. By a third affidavit dated 5 November 2020, Ms Lin provided more detail as to the visa requirements applicable to her and Mr Su. She set out a lengthy account of the conversation with Mr Zong on 5 March 2018. It seems to me that that account is largely reconstruction, from information contained in the business plan (or possibly Mr Ye’s WeChat message to Mr Zong), so far as it refers to numerous figures contained in that business plan (and that message) which Ms Lin was largely unable to recall in cross-examination. Ms Lin also refers to a WeChat message which she sent to Mr Zong on the evening of 5 March 2018, requesting further details regarding the business so that an amended business plan could be submitted to the New South Wales Government. Ms Lin also there refers (Lin 5.11.20 [15]) to a request by Mr Zong on 19 March 2018 for the deposit of start up capital, with her to contribute $12,000 and Mr Zong to contribute $8,000, and to her contribution of that amount, and to a WeChat message sent by Mr Zong on 23 March 2018 (to which I refer below) which is consistent with his representing that he would contribute his proportion of that amount, and to further WeChat communications between Mr Zong and Mr Ye (to which I also refer below) relating to negotiations for the purchase of substantial vessels with purchase prices in excess of $1 million. Ms Lin also refers to Mr Su’s obtaining a loan of $490,000 from a commercial lender over his property, in order to finance her contribution to the Company. Ms Lin also addresses a meeting with Mr Zong on 4 November 2018 and a conversation in which she contends that Mr Zong referred to his purchase of a boat which could be rented by the Company, to his having said that it was not necessary for the Company to purchase a new boat, and to a discussion of the shareholding structure.

9. Ms Lin also refers to a conversation in which she claims that Mr Zong said that her immigration criteria could be met and that:

“There are no differences in respect of the business model for purchasing a yacht and that for leasing a yacht. The advantage for leasing a yacht is that the costs will be significantly reduced compared with that for purchasing a yacht as there is no depreciation. It is easy to make the annual revenue of $300,000 and employing two local staff remains unchanged. As long as the investments are made, we can start the business immediately to meet the requirements of two years’ active business operations.”

I am not satisfied that Mr Zong said these words, given the extent of reconstruction in Ms Lin’s evidence, although I think it is likely that there was some discussion of leasing rather than purchasing a boat at this time. I do not accept that a businesswoman of Ms Lin’s claimed experience would rely on a representation that there were “no differences” between purchasing a boat with a capital expenditure of $1 million, and leasing a boat, where that capital would not be expended initially and where there would be no basis to assume that the return on the capital expended and the costs of leasing a substantial vessel would be the same.

10. Ms Lin also refers to the several drafts of the Shareholder Agreement prior to the execution of that agreement on 30 November 2018, to which I refer below; to her transfer of $25,000 to the Company on 30 November 2018 and $513,000 on 3 December 2018; and to a WeChat message from Mr Zong on 1 December 2018 confirming that her investment (or at least her initial investment) had been received and that “the Company will launch its business next week”. Ms Lin also refers to subsequent financial transactions undertaken by Mr Zong, without her authority, including the transfer of $315,028 to an account which was then unknown to her, in respect of the purchase of the Dauphin; the payment of $55,000 to the solicitor now acting for Mr Zong in the proceedings, in March 2019, and to salary payments to Mr Zong and Ms Tang, to several payments to third parties, and to a transfer of $220,800 to an account ending 33664 (“33664 account”) on 11 January 2019.

11. By a fourth affidavit dated 8 December 2020, Ms Lin further elaborated on the meeting on 5 March 2018, contending that Mr Zong had initially showed slides with a financial model forecasting the profit and loss of the first year containing words in English, and had then presented (by which she may mean spoken to) the slides in Chinese when she had told him that she could not understand English. By a fifth affidavit dated 10 December 2020, Ms Lin took issue with Mr Zong’s affidavit dated 9 December 2020, although that evidence is not material to a determination of the issues in dispute. By a sixth affidavit dated 16 February 2021, Ms Lin took issue with Mr Zong’s affidavit dated 1 February 2021 and provided a further account of the meeting at Pyrmont Bay Park and a visit to the Dauphin on 4 November 2018. By her seventh affidavit dated 21 April 2021, Ms Lin led evidence that she would not have continued with the Company’s business after 4 November 2018 or executed the Shareholder Agreement had Mr Zong not made the Payment Representation and the Second Visa Representation as set out in that affidavit.

12. Mr Young, who appears for Mr Zong, submits that Ms Lin presented as a “highly-motivated witness” and as “ready to strongly contradict almost any proposition put to her”, including parts of her affidavit evidence. Mr Campbell, who appears for the Plaintiffs, contests those criticisms in submissions in reply. It is not necessary to address the specific matters on which Mr Young relies for these criticisms and there is some force in Mr Campbell’s response to them. I give limited weight to those criticisms, although I have noted my impression that there is a degree of reconstruction in Ms Lin’s evidence above. Mr Young also pointed to several concessions made by Ms Lin in cross-examination, to which I have regard in reaching my findings.

13. The Plaintiffs also rely on the affidavit dated 17 December 2020 of Ms Lin’s husband, Mr Su, which set out a lengthy account of the meeting with Mr Zong on 5 March 2018, in substantially similar terms to Ms Lin’s account of that meeting. I am satisfied that Mr Su’s account of that meeting drew upon discussions with Ms Lin about her evidence or a review of her evidence, and I bear in mind the probability that his independent recollection and his evidence of that meeting has been adversely affected by that approach: Celermajer Holdings Pty Ltd v Kopas (2011) 16 BPR 30,735; [2011] NSWSC 40; Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789 at [18]; Dentown Pty Ltd v PWI Group Pty Ltd (as trustee of The Australia No 1 Group Trust) [2019] NSWSC 1032 at [15]-[19]. I treat Mr Su’s account of that meeting with caution. Mr Su also referred to several WeChat exchanges with Mr Zong, including an exchange in which Mr Zong set out the price which could be achieved for renting 45 and 55 feet vessels, and a WeChat exchange concerning a substantial sailing yacht, which Mr Zong contended was “under negotiation with the vendor about the price”, to which I refer in the chronology of events below. Mr Su also referred to his and Ms Lin’s visiting the Sydney International Boat Show on 4 August 2018 with Mr Zong and to his and his son’s attending the boat show with Mr Zong and Ms Tang on 5 August 2018, and to Ms Tang assisting with negotiations with a vendor on that occasion about purchasing a substantial vessel with a sale price of $1,397,000. A purchase of a vessel of that price would likely have been unrealistic unless at least $1 million had been contributed to the Company, an issue to which I return below. Mr Su also refers to his obtaining a loan to provide money to Ms Lin to invest in the Company and to the transfer of funds from his account to Ms Lin’s account to invest in the Company.

10. Mr Young submitted that “[Mr] Su’s demeanour under cross-examination was less problematic than [Ms] Lin’s” but also made submissions adverse to Mr Su’s credit. I have had regard to those submissions, and the most significant of them is that Mr Su claimed in cross-examination (T67) that his recall of figures in relation to the 5 March 2018 meeting was “purely based on [his] memory” rather than being extracted from any document”, was then unable to recall those figures accurately and then accepted (T69-70) that they had been supplied by Ms Lin or derived from her affidavit as I have noted above.

11. The Plaintiffs also rely on an affidavit dated 25 June 2020 of Mr Ye, who referred to his conduct of an accountancy business, to his acting for Ms Lin since 2015 and to his knowing Mr Zong in a social capacity since 2017. He referred to a conversation with Ms Lin in late February 2018 or early March 2018 in which he offered to introduce her to Mr Zong, who was looking to expand his business in yacht tourism, and to a conversation with Mr Zong at the same time. Mr Ye’s evidence is that he recommended that Mr Zong prepare a forecast for Ms Lin or another investor and Mr Zong offered to provide the relevant figures and requested Mr Ye to prepare documents. The forecast containing those figures (which were later included in Ms Lin’s business plan) were sent as a WeChat message by Mr Ye to Mr Zong. As I noted above, I think it likely that Mr Zong provided the relevant information to Mr Ye, who then included it in that forecast. It is not necessary to reach a final conclusion as to that matter given the other findings that I reach below. Mr Ye’s evidence was also that Mr Zong presented information regarding the yacht business in a form annexed to his affidavit; the annexed document was the business plan provided by Ms Lin to the Department of Border Protection. It is plain that Mr Zong did not provide that document at the meeting on 5 March 2018, although it is possible that he provided the forecast as to the business included in it to Mr Ye as I have noted above. Mr Ye also gives evidence of subsequent conversations with Mr Zong in relation to the business structure, although he did not have a strong recollection of those matters in cross-examination. Mr Young points to, and I have regard to, Mr Ye’s presence in court for part of Lin’s cross-examination, and it seemed to me that, as Mr Young pointed out, Mr Ye was inclined to minimise his role in assisting the Plaintiffs, including in respect of their immigration plans, although not as their immigration agent.

12. The Plaintiffs also relied on the expert evidence of Mr MacDonald who is a certified valuer and a specialist in marine vessels. By his report dated 4 December 2019, Mr MacDonald rightly recognised that the Dauphin should be valued on the basis of market value, defined by reference to a transaction between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing, in which both parties acted knowledgeably, prudently and without compulsion. On that basis, Mr MacDonald valued the Dauphin as at 22 December 2018, based on an inspection performed on 16 October 2019. He noted that the boat presented in above average condition for a 1997 model, although observing that the boat is now 22 years old and “shows its age in areas and its design is now quite dated”. He also observed that it had low hours for a vessel of its age, although that may be a statement of limited weight given its age; that the boat was fitted with diesel motors and that had a significant positive impact on its value; and that its age limited its desirability and value. Mr MacDonald noted that no comparable vessels were located in Australia, but that the average asking price for comparable boats overseas with the diesel option was approximately AUD $119,000. He valued the boat at $110,000, having regard to the discount which would likely be allowed to the asking price on a sale.

13. Mr MacDonald was cross-examined and presented as a knowledgeable and impressive witness. I accept Mr MacDonald’s evidence in cross-examination that a comparison between sales prices for the Riviera 4000 and the Bayliner, on which the Defendants relied, was analogous to comparing a second-hand premium motor vehicle (being the Rivera 4000) with a vehicle of a lesser quality produced in large volume (the Dauphin). He did not accept in cross-examination and I also do not accept that the value he assessed for the Dauphin should be increased to include transport costs to import an overseas vessel such as the Dauphin into Australia. There seems to me to be no likelihood that a rational purchaser of a second hand boat would incur such costs in order to import a 22 year old mass market American-manufactured boat into Australia, as distinct from purchasing any of the many other second hand mass market American-manufactured boats already available for sale in Australia.

14. I now turn to the evidence on which the Defendants rely. By his affidavit dated 3 May 2020, Mr Zong referred to an initial contact with Mr Ye prior to 5 March 2018 in which Mr Ye suggested the possibility that Ms Lin could invest in Mr Zong’s boat hiring and tourism business. Mr Zong presented that conversation as though his business then had some substance, although it is not apparent from the evidence that that was the case. Mr Zong’s evidence is that he then disclosed to Mr Ye that he would only contribute his “market knowledge and business skill and labour” for his share. I am satisfied that Mr Zong did not then disclose that position, since he there refers to Ms Lin having then proposed to invest $600,000; the parties plainly subsequently proceeded on a basis that $1 million would be invested, including investigation of the purchase of boats to that value; and a suggestion of that kind, made at that time, would have been wholly inconsistent with the way in which later drafts of the Shareholder Agreement developed, as I note below.

15. Mr Zong also referred, in that affidavit, to a further conversation with Ms Lin in early 2020 in which she explained the business visa requirements, including as to the net assets and level of her investment in the Australian business, and Mr Zong said “I think I can achieve that if I get to run the business the way I want to run it” (Zong 3.5.20 [9]). Mr Zong also set out (Zong 3.5.20 [10]) a lengthy conversation with Ms Lin in November 2018, in which he claims that Ms Lin said she could only provide $550,000; he again said that he was “only contributing knowledge, skill and labour and the goodwill I’ve established in the Sydney boating and tourism market, not money”; Ms Lin emphasised the significance to her of meeting her immigration requirements; and Ms Lin indicated she would leave it completely to Mr Zong to manage the business. I am not satisfied, having regard to the self-serving character of that conversation as set out in Mr Zong’s affidavit and the view that I have formed as to his credit, that that conversation took place in that form.

16. Mr Zong also there referred to the circumstances of the purchase of the Dauphin and to the difficulties which he encountered in seeking to convert the Dauphin to commercial use after its purchase in December 2018; he claimed that he tried to import a boat from China which would be commercial conversion ready and less costly for about $220,000; and he also refers to an attempt to engage in a boat hiring business, without a commercial vessel, and to offer training sessions to learners, which did not take place. Mr Zong also referred to the circumstances in which Ms Lin caused the Company’s bank to freeze transactions in its account from late March 2019, which was hardly surprising or unreasonable where Mr Zong had previously paid some $220,000 from that account to his own account or a joint account with Ms Tang. He also referred to Ms Lin’s refusal to approve the entry into a lease of commercial premises for the Company at a cost significantly exceeding that contained in the original budget.

17. By a further affidavit dated 7 December 2020, Mr Zong provided an explanation of several minor payments made by the Company. By another affidavit dated 9 December 2020, Mr Zong took issue with aspects of Ms Lin’s affidavit dated 8 December 2020, which are not material to the determination of these proceedings. By another affidavit dated 1 February 2021, Mr Zong responded to Ms Lin’s affidavit dated 5 November 2020 and Mr Su’s affidavit dated 17 December 2020, denied their account of conversations and set out, for the first time, lengthy additional conversations which he claimed to have had with Ms Lin and Mr Su, including a conversation with Ms Lin as to her immigration requirements and a conversation with Mr Su after the meeting on 4 November that contemplated a possible purchase of the Dauphin for the Company and its conversion to commercial use. Given the credit issues with Mr Zong’s evidence and the lateness of the reference to these conversations, I am not persuaded that they took place. By another affidavit dated 21 April 2021, Mr Zong referred to a conversation which he attributed to Ms Lin, concerning the preparation of false accounts of the Company to satisfy her immigration requirements. Given the credit issues with Mr Zong’s evidence, I am also not persuaded that conversation took place.

18. Mr Young submits that Mr Zong presentation was a calm and somewhat reserved witness, and accepts that not all of his answers were directly responsive to the questions asked, and I have had regard to his submissions in response to the Plaintiffs’ criticisms of Mr Zong’s credit. Mr Zong’s affidavits set out long conversations which I am not persuaded reflected a recollection of events, and it seems to me that they are at best a reconstruction of conversations so as to advance his interests in the proceedings and seek to deflect any responsibility for forecasts provided to Ms Lin and Mr Su to Mr Ye. Mr Zong did not have any real recollection of one of those conversations when asked for his recollection of it in cross-examination without reference to his affidavit, and I am not persuaded that reflected either tiredness or stress as he claimed, although I recognise that he had a better recollection of his affidavit evidence in respect of another conversation. Mr Zong was evasive in cross-examination, seeking to avoid addressing many aspects of the conduct of the Company’s business by claims that he would need to look for documents or think about it, and was unwilling to make any concession, including as to obvious matters, that he perceived as adverse to his interest. I am comfortably satisfied that Mr Zong gave false and not merely mistaken evidence when he suggested that the account to which he had transferred $220,000 of the Company’s funds was that of an agent assisting to buy a boat from China, where his and his wife’s “wages” paid by the Company were also paid into that account. It seems to me that Mr Zong was not a credible witness, and I would not accept his evidence except where it is, rarely, corroborated by documents or against his interest.

19. Ms Tang was not called and I infer that her evidence would not have assisted her or J&G’s defence of the cases brought against them.

20. The Defendants also relied on the evidence of Mr Hunt, a marine broker, to value the Dauphin. It is not apparent that Mr Hunt has any valuation qualifications, although he plainly has experience in boat sales from operating as a marine broker for many years. Mr Hunt’s report indicated that he had read and agreed to be bound by the Expert Witness Code of Conduct, although it seemed to me that his report fell somewhat short of compliance with that Code. Mr Hunt indicated that he inspected the Dauphin on 28 February 2021; he noted that the boat currently required maintenance work, but relied on an unproved assertion that that work had not been required in December 2018, and appears to have concluded the Dauphin was in “very good condition” in December 2018 by reference only to two photographs of the exterior of the vessel.

21. Mr Hunt assessed the value of the Dauphin in December 2018 as being between $195,000 and $240,000, with the fair market price of $220,000, and he appears to have relied on sale prices for the Australian built Riviera 4000 which was advertised for sale for a price of $229,000. He did not identify any rational basis for that comparison, which assumed, without explanation and contrary to Mr MacDonald’s evidence in cross-examination that those brands and models were of comparable quality. Mr Hunt neither identified any comparable prices for the same vessel in Australia or overseas, as Mr MacDonald had done; nor did he source prices of other mass market United States manufactured vessels of a similar age for sale in Australia. I am not persuaded that Mr Hunt’s evidence established a sufficient basis for his conclusion and I give limited weight to that evidence.

Chronology of events

26. A number of background facts are common ground on the pleadings, and I set out below the findings that I have reached as to matters of greater controversy. The Plaintiffs plead (FASC [1]-[1A], [5A-[5B]) that Ms Lin is a Chinese national residing in Australia on a subclass 188A temporary resident visa and that she has limited English language skills; and Mr Su is a Chinese national and Ms Lin’s husband and previously held a subclass 188A temporary resident visa as the secondary holder to Ms Lin and also has limited English language skills. Mr Zong was and is a businessman in Sydney conducting (or at least claiming to conduct) business in the yacht tourism industry and Ms Tang was his wife and the sole director of J&G (FASC [2]-[3]). It is common ground (FASC [5C]-[7]) that, from 12 March 2018 to 30 November 2018, Ms Lin was a director of the Company and held 60% of its shares and Mr Zong was a director of the Company and held 40% of its shares and, from 30 November 2018, Ms Lin remained a director of the Company and held 55% of its shares and Mr Zong also remained a director and held 45% of its shares.

27. On 4 March 2018, Mr Zong requested Mr Ye, who had introduced Ms Lin to Mr Zong, to prepare a business forecast for a proposed yacht tourism business based on figures supplied by Mr Zong, and Mr Ye provided that forecast to Mr Zong. The Plaintiffs rely on a meeting on 5 March 2018, at which they allege certain representations were made, to which I have referred above. On 5 March 2018, a further WeChat conversation between Ms Lin and Mr Zong addressed amendments to a proposed business plan directed to Ms Lin’s visa requirements (Lin 5.11.20 [12]). Mr Ye’s evidence is that a subsequent discussion took place soon after 5 March to the effect that Mr Zong would invest $400,000 and Ms Lin would invest $600,000 in the new business (Ye 25.6.20 [12]).

28. The Company was incorporated on 12 March 2018 and an ASIC Form 281 signed by Mr Zong recorded that both Ms Lin and Mr Zong were its directors and Ms Lin had a 60% shareholding and Mr Zong had a 40% shareholding and recorded the total amount paid for 10,000 shares issued to them as $1,000,000 (Lin 22.6.20 [7]–[9]). That statement was plainly inaccurate since neither had subscribed any substantial funds at that time. In mid-March 2018, Mr Zong opened a bank account for the Company, with Mr Zong and Ms Tang (rather than Ms Lin) as signatories to that account (Lin 5.11.20 [14], Zong 1.2.21 [3]).

29. Ms Lin’s evidence is that, on 19 March 2018, she and Mr Zong had a telephone call in which they agreed that Ms Lin would provide $12,000 and Mr Zong would provide $8,000 in start up capital for the Company (Lin 5.11.20 [15]). Ms Lin transferred $9,000 to the Company’s bank account on 21 March 2018 and $3,000 to that account on 23 March 2018 and her evidence is that Mr Zong said he would put money into the Company’s account but did not do so (Lin 22.6.20 [10], Lin 5.11.20 [18], [36]). By a WeChat exchange on 23 March 2018, Ms Lin stated that “I have already transferred my part of start up capital of the Company” and Mr Zong responded:

“Okay, no problem. I will visit the bank tomorrow. I am inspecting boats outside today. I will visit the bank tomorrow morning or noon and check the account. I will check whether we could formally use the account. After reconciling accounts, I will put the money here into the account as well.”

That email is consistent with Mr Zong then having committed to contribute funds to the Company and inconsistent with his claim that he had indicated he would not do so from the parties’ first meeting on 5 March 2018. The Plaintiffs plead, in an admission that they were not permitted to withdraw on the first day of the hearing, that that amount then paid by Ms Lin was applied to pay amounts incurred for the Company’s incorporation and other set up costs for the Company.

30. By a further WeChat exchange on 8 April 2018 between Mr Ye and Mr Zong, Mr Ye indicated that he had Ms Lin’s business plan and requested a quotation for the boat to be bought by the Company so that Mr Ye could submit Ms Lin’s loan application. Mr Zong responded:

“I will have to send the quotation to you on Monday or Tuesday, because I am still negotiating with him about the time of delivery. If the time of delivery for the boat which we ordered is too long, I will need to confirm with him which boat will be given to us as transition. It’s still not decided which boat will be given to us. If a transitional boat is not given to me and the time of delivery is too long during the transitional period, there could be a new choice.”

That email appears to record that a boat had already been ordered, but there is no other evidence that had occurred.

31. By a WeChat message to Mr Ye on 16 April 2018 (Lin 5.11.20 [20]), Mr Zong indicated that two quotations were ready and invited Mr Ye or Ms Lin to “select the one you think is OK”. The attached quotations are for a 77 foot motor yacht with a price of $1,189,000 and a 2004 65 foot motor yacht with a price of $935,000, which would only have been possible had the Company raised substantial capital.

32. By a WeChat exchange dated 30 July 2018, Mr Zong advised Mr Su (Su 17.12.20 [14]-[15]) that:

“Mr Su, I have sent the above photos and videos which show the rental status of the yachts of our company so you could have a look. The last document includes details of the yacht regarding under which we are under negotiation with the vendor about the price. We may want to purchase this type of large yacht which could carry many passengers. You may have a look at it and get a general idea.”

It is not apparent that any entity associated with Mr Zong then had any yachts, still less that they were under rental or that there was any basis for any negotiation with the vendor of that vessel as to price, whether by the Company or any other entity associated with Mr Zong. On 31 July 2018, Mr Zong sent Mr Su an electronic version of a business profile of “Australian Yacht Club” which claimed that it was established in 2011 and “provides dozens of luxurious yachts of various models and sizes in Sydney”. That presentation contained photographs of substantial vessels, and referred to “more than 40 luxurious yachts available for use by clients”. It is not apparent that, if that entity had any association with Mr Zong, it was either established in 2011 or provided any such services at that time.

33. On 4 and 5 August 2018, Mr Zong, Ms Lin and Mr Su attended the boat show and inspected a large vessel priced at $1,397,000 (Su 17.12.20 [18]; Lin 16.2.21 [5]). The parties’ interest in boats in this price range supports Ms Lin’s claim that their understanding at that time was that the Company would be capitalised to $1 million, and I find below that this funding was intended to be provided by Mr Zong as well as Ms Lin, and not by Ms Lin alone.

34. On 24 October 2018, Mr Su applied for loan of $490,000 secured by a Parramatta property, with an interest only period of 3 years from settlement date, that loan settled on 2 November 2018 and an amount of $472,596.77 was then paid by the lender to Mr Su (Su 17.12.20 [19]-[20], Lin 5.11.20 [26]).

33. On 4 November 2018, a discussion took place between Mr Zong, Ms Lin and Mr Su concerning the Dauphin, a boat owned by J&G, and the possibility that the Company could lease rather than buy a boat and the suggested agreement (or proposal) was varied so that Ms Lin would reduce her investment in the Company from $600,000 to $550,000, and Mr Zong would increase his investment from $400,000 to $450,000, with a corresponding change to the shareholdings to 55% and 45% respectively (Lin 22.6.20 [4], Lin 5.11.20 [26]). Also in early November 2018, Mr Su transferred $470,000 to Ms Lin’s bank account where it would be available for use as part of her capital contribution to the Company, but was not yet committed for that purpose (Lin 5.11.20 [23], Su 17.12.20 [21]).

34. On 14 November 2018, Ms Lin’s solicitor sent a first draft of a Shareholder Agreement to Mr Zong which would have required Mr Zong to pay $450,000 into the Company and provided for Ms Lin’s participation in the daily operation and management of the business (Lin 5.11.20 [28]). By a WeChat message sent on 16 November 2018 (Lin 5.11.20 [29]), Mr Zong (with the assistance of an English-speaking friend) marked up that draft Shareholder Agreement with changes, which replaced the reference to a cash contribution by Mr Zong with a statement that:

“[Mr Zong] will contribute the equivalent asset of $450,000 (Business Goodwill value at $350,000 and 43 foot yacht value at $350,000. Due to the total contribution of [Mr Zong] exceed the proportioned capital sum, the exceeded amount of $250,000 will be paid back to [Mr Zong] by [the Company] at the time of [Ms Lin’s] capital is paid into the Company.”

This amendment contemplated that Mr Zong would contribute a yacht of value of $350,000. It seems to me that this draft provides some support for the view that it was originally intended that the Company have a capital of $1 million, and that it was originally intended that Mr Zong contribute part of that capital, although I recognise a possible alternative explanation for his proposal to contribute a boat which would have had some value, if it had already been agreed that all he need contribute was his skill and business goodwill, was his wish to extract funds from the Company. Mr Zong’s draft contemplated that Mr Zong would be paid $250,000 from the funds of $550,000 that Ms Lin was to contribute to the Company, and Ms Lin did not accept that proposal. In the event, Mr Zong ultimately achieved a similar result by causing the Company to purchase the Dauphin so that J&G extracted the excess of its purchase price over its real value from the Company in late December 2018. This draft also removed Ms Lin’s right to participate in the daily operation and management of the business.

37. On 21 November 2018, Mr Zong sent a third draft of the Shareholder Agreement to Ms Lin (Lin 5.11.20 [30]), which further amended the proposal to provide that he would contribute “his skills and business goodwill” rather than the yacht and added the words to a recital:

“In the event that [Ms Lin’s] permanent resident visa is not granted within 3 years of the date of this agreement, this agreement would terminate automatically. Termination clause will come into effect.”

That draft provided that Mr Zong would not be contributing money to the venture and, as a necessary consequence, there was no longer any prospect that the Company could acquire a boat valued at $1 million or achieve financial results that were premised on its doing so. Ms Lin denies that her then solicitors translated that draft of the agreement for her, although nothing turns on that where the final version of the Agreement was translated for her. On 30 November 2018, Mr Zong provided a fourth draft of a shareholder agreement to Ms Lin, which now removed his obligation to advise Ms Lin “promptly in relation to important issues about the business” (Lin 5.11.20 [32], Lin 22.6.20 [19]).

38. The Shareholder Agreement (Lin 22.6.20 Annexure F) was signed by Ms Lin on 30 November 2018. Ms Lin accepted in cross-examination (T41) that her then Chinese-speaking solicitor went through the Shareholder’s Agreement with her before she signed it, and that she knew the contents of Recital B (which dealt with the proposed contributions of Ms Lin and Mr Zong) at the time she executed the agreement. I bear in mind, but give little weight to, her criticisms of that solicitor and note that, as Mr Young points out, aspects of that Agreement were plainly drafted to protect her interests, including the provision that Mr Zong “ensure” a turnover of $300,000 in the 2020 financial year. That Agreement recited that the capital sum to be contributed to the Company was $1 million and Ms Lin would provide $550,000 capital in cash, to be paid into the Company bank account and Mr Zong would contribute his “skills and business goodwill”, and that the agreement “will be end/terminate until [Ms Lin’s] permanent residence status being granted”. The provision for Mr Zong to contribute his “skills and business goodwill” reflected the amendments to which I have referred above; they were unlikely to have been a significant contribution, given his recent entry into the yacht tourism business and the fact that he had not previously had a yacht to operate in that business or, so far as the evidence goes, in fact operated that business.

39. Clause 1 of that Agreement provided that Mr Zong “shall respond for the daily operate/manage the Business” although Ms Lin had the right to monitor and audit the business, Mr Zong was required to provide specified information if requested and to show Ms Lin the Company’s accounting report each quarter. Clause 4 provided that Mr Zong was to be paid $2,292 (including superannuation and personal income tax withheld) each month as a director’s fee and that Ms Lin would not be paid any wages, bonus or dividend. Mr Zong was to ensure that financial data in the 2020 financial year met specified criteria for a business visa for Ms Lin, including turnover of more than $300,000 per annum. Clause 7 purportedly permitted Ms Lin to withdraw her invested capital from the Company or renegotiate the share structure with Zong from two and a half years from the date of the agreement and her being granted a permanent resident visa, and Mr Zong agreed to maintain the company structure until her permanent resident visa was successfully granted.

40. Also on 30 November 2018, Ms Lin transferred $25,000 to the Company’s bank account; on 1 December 2018, Mr Zong informed Ms Lin by a WeChat message that the Company will “launch its business next week” (Lin 22.6.20 [12], Lin 5.11.20 [34]) and, on 3 December 2018, Ms Lin transferred $513,000 to the Company’s bank account. This occurred after the Shareholder Agreement was signed, any expectation that the Company would have capital of $1 million or acquire a boat to that value or generate profits on that basis had been displaced by the terms of that Agreement, and was the first point at which Mr Su and Ms Lin placed the relevant funds outside their control and under Mr Zong’s effective control. On 17 December 2018, Mr Zong lodged a Form 484 indicating that Ms Lin held 55% of the shares in the Company and he held 45% of those shares and recording consideration of $450,000 for his 4,500 shares (Lin 5.11.20 [35]).

41. On 22 December 2018, Mr Zong caused the Company to purchase the “Dauphin”, which was 12.6m long and not configured for commercial use, for $315,200 exclusive of GST from J&G, his wife’s company (Zong 03.05.20 [16]–[17]). That transaction was implemented by a Bill of Sale, on the basis that the vessel was sold “as is” and without any warranty other than as to title and that it was free from encumbrances. On 24 December 2018, Mr Zong caused $315,028 to be transferred from the Company’s bank account to J&G’s bank account in payment for that boat (Lin 5.11.20 [38]).

42. On 11 January 2019, Mr Zong caused $220,800 to be transferred out of the Company’s account into the 33664 account. He gave evidence in cross-examination that that account was the account of a boat broker who was to purchase a boat from China, which he claimed was already registered for commercial use in Australia. That evidence was plainly false, because Mr Zong’s and Ms Tang’s salaries were paid into that account and there can be no real doubt that it was either his account, Ms Tang’s account or a joint account.

43. By 25 February 2019, the balance of the Company’s account had been reduced to $611.19 (Lin 22.6.20 [21]–[22]); and, after multiple requests for financial information by Ms Lin, after Mr Zong did not attend a general meeting of the Company called for 4 March 2019, and after a letter dated 15 March 2019 from Ms Lin’s solicitors, Mr Zong caused $204,048.00 to be transferred back from the 33664 account into the Company’s account on 22 March 2019 (Lin 22.6.20 [26], Zong 3.5.20 [21]).

44. Mr Zong also made several other transfers out of the Company’s account in the first part of 2019, including significant payments of wages to him and Ms Tang. On 27-28 March 2019, Mr Zong transferred $55,000 from the Company’s bank account to Mr Junn, the solicitor then and now acting for Mr Zong in the proceedings and purportedly then also acting for the Company (Lin 22.6.20 [30]). By letter dated 29 April 2019, Mr Junn stated that the $55,000 received was for “costs and disbursements incurred in the ordinary course of the Company’s business, not for acting for Mr Zong in his personal capacity” (emphasis added), but refused to provide any evidence or documentation in support of that claim to Ms Lin. Mr Zong has not led evidence to support that claim in these proceedings.

Alleged breaches of statutory and fiduciary duties

45. The Plaintiffs plead (FASC [26]-[27], where second occurring) statutory directors’ duties under ss 181-182 of the Corporations Act and the no conflict duty in equity. I will first set out the applicable principles before turning to the Plaintiffs’ pleaded case, the parties’ submissions and determining these claims.

46. The Plaintiffs allege that Mr Zong breached s 181 of the Corporations Act which requires a director or officer of a corporation to exercise his or her powers and discharge his or her duties in good faith in the best interests of the corporation and for a proper purpose. There are differing views as to whether any part of that duty is to be assessed by a subjective standard, which it is not necessary to address in this case: Re Colorado Products Pty Ltd (in prov liq) above at [421]; Australian Securities and Investments Commission v Drake (No 2) (2016) 340 ALR 75; 118 ACSR 189; [2016] FCA 1552 at [494]; Hart Security Australia Pty Ltd v Boucousis (2016) 339 ALR 659; (2016) 117 ACSR 408; [2016] NSWCA 307 at [75]; Australian Securities and Investments Commission v Flugge and Geary (2016) 342 ALR 1; [2016] VSC 779 at [1980]ff; Vanguard Financial Planners Pty Ltd v Ale (2018) 354 ALR 711; (2018) 125 ACSR 1; [2018] NSWSC 314 at [133]. I summarised the relevant principles in respect of that section and the broadly corresponding general law duty in Re Colorado Products Pty Ltd (in prov liq) above at [419]–[421] and I need not repeat that summary given the findings that I reach below.

47. Section 182 of the Corporations Act prohibits a director, secretary, officer or employee of a corporation from improperly using his or her position to gain an advantage for himself or herself or someone else, or cause detriment to the corporation. I summarised of the applicable principles in Re Colorado Products Pty Ltd(in prov liq) above at [432]–[433] and I also need not repeat that summary given the findings that I reach below. The case law also recognises that a director owes an equitable duty to act in good faith and in the company’s best interests and to exercise his or her powers for a proper purpose, although there is an open question whether that duty can properly be characterised as “fiduciary” where it imposes positive obligations: Westpac Banking Corporation v TheBell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 270 FLR 1; (2012) 89 ACSR 1; [2012] WASCA 157 at [918]-[933] per Lee AJA, at [1956] and [1978] per Drummond AJA, at [2733] per Carr AJA; Netglory Pty Ltd v Caratti [2013] WASC 364 at [345]ff. It is not necessary to determine the status of this duty in order to determine these proceedings.

48. So far as this claim relies on fiduciary rather than statutory duties, a director of a company is a recognised category of fiduciary and the “no conflict” rule applies to a director as a status-based fiduciary. The “no conflict rule” has a strict application when it applies in the sense that, if a transaction has occurred in conflict of interest, a company director cannot avoid a breach of that rule by asserting the fairness of the transaction or that it was in the company’s best interests or that the director was not acting with subjective dishonesty. I observed (by reference to authority) in Re Colorado Products Pty Ltd (in prov liq) above at [351]:

“Broadly, the no conflict rule prohibits conduct where a fiduciary has a personal interest or duty owed to a third party which gives rise to a real and sensible possibility of a conflict. That rule and the no profit rule, which provides that a fiduciary cannot obtain a profit from its fiduciary position without the principal’s consent, may overlap.”

49. In Coope v LCM Litigation Fund Pty Ltd (2016) 333 ALR 524; [2016] NSWCA 37, Payne JA (with whom Gleeson and Leeming JJA agreed) summarised the no conflict and no profit rules as follows (at [105]):

“A fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is a conflict, or a real or substantial possibility of a conflict, between the personal interest of the fiduciary and those to whom the duty is owed … A conflict arises if there is a real and sensible possibility that the personal interests of the fiduciary divide the loyalty of the fiduciary with the result that he or she could not properly discharge their duties to the beneficiary. …” [citations omitted]

50. Turning now to the Plaintiffs’ pleaded case, they plead (FAS [24]-[32]) withdrawals from the Company’s bank account, each of which are said to have been done without Ms Lin’s consent or knowledge and (FASC [33]-[36]) the purchase of the boat “Dauphin” from J&G. In respect of the Company’s purchase of “Dauphin” from J&G, the Plaintiffs plead (FASC [41]) that:

“[Mr Zong] breached his statutory and fiduciary duties owed to the [Company] by taking advantage of his position as a director to benefit related parties to the detriment of the company, rather than acting for the best interest of the company in circumstances where:

a. purchasing a vessel known as Dauphin from [J&G] without notice to [Ms Lin];

b. [J&G] is an entity solely owned by [Ms Tang], [who] is the spouse, or alternatively de facto partner, of [Mr Zong];

c. The purchase price for Dauphin was $315,200.00; and

d. Market price for the Vessel was $110,000 at the time of the transaction.”

51. Mr Campbell submits that none of the relevant transactions were authorised by Ms Lin, who was a director of the Company, and that there has been no evidence put forward by Mr Zong to substantiate any of the transactions, other than for limited evidence as to the purchase of the Dauphin. He submits that these transactions generally occurred in circumstances of a conflict in breach of the “no conflict” rule, and the majority of these transactions also involved an unauthorised profit by one of Mr Zong, Ms Tang or J&G and that, as each of these three entities are related in some personal way to Mr Zong, such a transaction also benefits or profits Mr Zong. Mr Campbell also relies on Ms Lin’s right to access to certain information under the Shareholder Agreement and contends that documents to substantiate those transactions were documents required to monitor and audit the business to which she was entitled to access. Mr Campbell also relies on a director’s right of access to a company’s books and to financial records of a company under ss 198F and 290 of the Corporations Act and to the Court’s power to order that a shareholder have access to information under s 247A of the Act. These submissions are, at best, context for the limited evidence led by Mr Zong to support the specific transactions and it is not necessary to address them further given the findings that I reach below.

52. The Company’s largest claim relates to the payment on 24 December 2018 of $315,028 to J&G for the purchase of the Dauphin. Mr Campbell submits that the Dauphin was sold by the J&G, a company owned by Ms Tang, who was Mr Zong’s wife; it was valued at either $110,000 on the Plaintiffs’ evidence or somewhere between $195,000 to $240,000 on Mr Zong’s evidence; it was not configured for commercial use; and the Company paid J&G $315,028 for the purchase of the Dauphin, which he submits was well above its value. He submits that the fact that the other party in the transaction of the purchase of the Dauphin was J&G, Ms Tang’s company, put Mr Zong in a position of conflict with respect to the purchase of the Dauphin by the Company; that any informed consent to that conflict would have required full disclosure by Mr Zong; and that disclosure to the Company would have to involve Mr Zong informing Ms Lin of all material facts in relation to that conflict. Mr Campbell submits that (on the Plaintiffs’ case) Mr Zong did not inform Ms Lin of the potential purchase of the Dauphin prior to its purchase on 24 December 2018. He also submits that, on Mr Zong’s evidence, he informed Mr Su that the Dauphin “might be suitable” for purchase by the Company, and that it was “owned by the family” and that, on that evidence, Mr Zong did not disclose the fact that the Company (through Mr Zong) was intending to buy the Dauphin or that it was owned by his wife’s company. Mr Campbell also points to Mr Zong’s evidence that he told Ms Lin that the value of the Dauphin was “about $315,000”, about the amount that it was purchased for, and the value of the Dauphin was far less than this figure. Mr Campbell submits that the fact that J&G would receive a substantial profit on the purchase was not disclosed by Mr Zong to Ms Lin. I interpolate that another way of putting that proposition, possibly more precisely, is that the fact that the Dauphin was to be purchased at overvalue was also not disclosed to Ms Lin. Mr Campbell also submits that, where Ms Lin was not fully informed of the relevant facts of the purchase of the Dauphin, she and the Company could not give fully informed consent to that purchase.

53. Mr Campbell also submits that, on Mr Zong’s evidence, the Dauphin needed to be upgraded for commercial use before it could be used by the Company, and that the cost of this upgrade was an issue that Mr Zong was aware of prior to its purchase; his evidence is that he told this to Ms Lin on 4 November 2018, indicating that the cost of conversion to commercial use would have to be investigated prior to any purchase; and, after the Company purchased the Dauphin, Mr Zong determined that “the cost of the conversion [of the Dauphin] would take it over budget” and provides this as a reason for not upgrading the Dauphin. Mr Campbell submits that, where the Dauphin was not a commercial vessel, and the Company’s purposes required a commercial vessel, the purchase of the Dauphin by the Company could not have been for a proper purpose. It is not necessary to reach a concluded finding as to that matter given the findings that I reach on other grounds.

54. In Mr Young’s closing submissions, Mr Young concedes that Mr Zong had a duty to avoid conflicts of interest; that the purchase of the Dauphin from J&G put him in a position of conflict of interest; and that, unless Ms Lin provided her fully-informed consent to the purchase, then that purchase was made in breach of fiduciary duty. Mr Young submitted that Ms Lin gave her fully informed consent to that purchase, referring to Mr Zong’s evidence of the discussion with Ms Lin on 4 November 2018 (Zong 1.2.21 [6]) and to his evidence that Ms Lin had told him in early December 2018 that she wanted him to urgently acquire a boat for the company and pay a little over $300,000 for it (Zong 3.5.20 [13]). That does not amount to consent, still less informed consent, to acquiring the Dauphin (or any other vessel) at overvalue. Mr Young also submits that:

“If Zong’s evidence is accepted, Lin knew that the Dauphin was owned by Zong’s family, that Zong considered it was valued at $300,000, and that purchase of the boat for the company was in serious contemplation by Zong. When she then asked Zong to pay a little over $300,000 for a boat, she thereby authorised him to acquire for the Company the Dauphin at a price in the vicinity of the $315,000 which was paid, and she did so notwithstanding her knowledge that the Dauphin belonged to Zong’s family.”

55. Mr Young also submits that “[t]he fiduciary obligation to disclose a conflict” extends only to conveying the fiduciary’s own knowledge of the facts giving rise to the conflict, referring to Blythe v Northwood (2005) 63 NSWLR 531, and “hence the failure by [Mr] Zong to disclose a fact unknown to him”, namely that the Dauphin was purchased at overvalue, is “immaterial”. I do not accept this submission. First, it depends on Mr Zong’s evidence that he did not know the Dauphin was sold at overvalue, and I do not accept that evidence. Second, there is no fiduciary “duty” of disclosure, and disclosure is required to obtain fully informed consent to what would otherwise be a breach of the fiduciary’s duty. Neither principle nor the case law require that consent be treated as sufficient to extinguish a breach of duty if the fiduciary did not disclose the relevant facts, or that non-disclosure or partial disclosure be treated as disclosure, or that uninformed or partly informed consent be treated as fully informed consent, because a fiduciary was not sufficiently diligent to acquire the facts that were required for full disclosure.

56. I am satisfied that the claim for breach of fiduciary duty by Mr Zong is established in respect of the purchase of the “Dauphin”, where that transaction was authorised and undertaken by Mr Zong in circumstances where he faced a real and substantial conflict between his duties to the Company and his personal interest in advancing the position of Ms Tang and J&G, including as to whether the Dauphin should be purchased and the price at which such a purchase would take place. Mr Zong did not make full disclosure of the material facts, including the true value of the Dauphin to Ms Lin; the purchase was not approved by board resolution so as to have the benefit of any restriction of the no conflict rule in any constitution of the Company; and Mr Zong did not seek consent from Ms Lin to the Company’s purchase of the boat or the price at which it was purchased to establish any unanimous consent to or ratification of that conflict. It is not necessary to determine whether the purchase of the Dauphin also amounted to a breach of Mr Zong’s statutory duties under ss 181 or 182 of the Corporations Act where a breach of fiduciary duty is established at general law and breach of the statutory provisions would not give rise to different relief.

57. The loss suffered by the Company is the amount by which the purchase price exceeded Dauphin’s present realisable value, as distinct from its then market value, where any diminution in that value flows from the fact that it was purchased in breach of duty in the first place. Mr Young refers to the evidence of Mr MacDonald for the Plaintiffs and Mr Hunt for Mr Zong, in relation to the sale price of the Dauphin and submits that Mr Hunt’s $220,000 figure is, at least, much closer to the true figure than that of Mr MacDonald, for several reasons to which I have had regard. I have addressed that evidence above and I accept Mr MacDonald’s evidence that the value of Dauphin, at the time of the transaction or now, does not exceed $110,000 and the loss suffered by the Company in this respect is $205,200. I may more readily draw that inference, otherwise available on the evidence, where Mr Zong, Ms Tang and J&G did not lead evidence of the price they paid to purchase the Dauphin and I can properly infer that evidence would not have assisted in rebutting the case against them.

58. The Plaintiffs also plead (FASC [42]) breach of duties in respect of several other transactions, as follows:

“[Mr Zong] breached his statutory and fiduciary duties owed to the [Company] by effecting the transactions pleaded at [24], [26], [29] and [31] above in circumstances where those transfers:

(a) were not made for the benefit of the [Company];

(b) were not in good faith and were not in the best interests of the [Company];

(c) were made for an improper purpose;

(d) placed the personal interests of [Mr Lin] in conflict with the interests of the [Company];

(e) caused advantage to [Ms Lin] and /or [Mr Su] and/or caused detriment to the [Company]; and

(f) were the result of [Mr Zong] improperly using his position as director of [the Company] to gain an advantage for [Mr Zong], [Ms Tang], and/or [J&G], and to cause detriment to the [Company].”

59. The transactions addressed by this claim are, first, the payment of the amount of $315,028 out of the Company’s account on 24 December 2018, which is less than the amount applied to the purchase of the Dauphin and duplicates the claim in respect of that purchase. I need not address this further given the findings I have reached above.

60. The Company also claims $16,752, being the difference between the amount of $220,800 transferred on 11 January 2019 to the 33664 account and the amount of $204,048.00 returned from that account on 22 March 2019. Mr Campbell points to Mr Zong’s evidence that, on 11 January 2019, he withdrew $220,816.20 out of the Company’s account and transferred it into the 33664 account ending for the purpose of purchasing a commercial-conversion ready boat from China and that, once the disagreement arose with Ms Lin, on 22 March 2019, he decided not to go through with the purchase and returned “all the money”, although there was in fact a shortfall of $16,768.82 in the amount returned. Mr Campbell submits that:

“There are four problems with this contention by Mr Zong:

(a)    this same account was used by Mr Zong to transfer his and Ms Tang’s wages, which means it must have been a personal account shared between himself and Ms Tang;

(b)    the contention that Mr Zong transferred the Company’s money from its business account into his personal account as a first step in order to effect a business purchase using that money is absurd;

(c)    it was in his personal account for two and a half months without being used for the alleged business purpose, before it was returned; and

(d)    in any event, he did not return it all; $16,752 went missing and its loss has not been explained in any way.”

61. Mr Campbell points to Mr Zong’s unconvincing evidence as to this transaction on cross-examination, including his claim that the money was transferred to the account of a boat broker, to which I referred above. Mr Campbell also points out, and I give weight to, the absence of any contemporaneous documentation of negotiations for the purchase of such a vessel from China. I do not accept Mr Zong’s explanation of this transaction. Mr Campbell also submits that, by retaining $16,752 of the Company’s money in his personal account, without proper explanation, Mr Zong breached his fiduciary obligations not to profit from the transaction and also breached ss 181 and 182 of the Corporations Act.

62. The Company also claims the amount of several payments on 25 March 2019 to the 33664 account for Mr Zong’s or Ms Tang’s benefit, namely $3,708 for wages for Ms Tang; $3,708 for wages for Ms Tang; $4,583 for wages for Ms Tang; $6,124.67 for wages for Mr Zong; $6,124.67 for wages for Mr Zong; and $8,334.67 for wages for Mr Zong. Mr Campbell submits that:

“The claim for wage payments to Mr Zong and Ms Tang is disputed because there is no evidence that Mr Zong or Ms Tang ever actually performed any real work that benefitted the Company. There are no employment contracts or superannuation contributions, and no documents of any kind that have been produced to support the payment of $32,583.01 in wages to the first and second defendants, apart from 7 pay slips detailing the payment of $18,374.01 to Jason Mr Zong, and $14,832.00 to Ms Tang, which largely, but not precisely, correlate to the payments out of the Company account.”

63. Mr Campbell also disputes the “genuineness” of these payments, by which I understand him to refer to their having the character of wages. He also points out that the payments were also all made at around the same time on 25 March 2019, after correspondence relating to the dispute was sent by Ms Lin’s solicitors, and were not made at regular intervals as one would expect for genuine wage payments. I am not satisfied that these payments had the character of wage payments, being the description that Mr Zong had given or caused to be given to them in the bank accounts. Mr Campbell submits that, in any event, the payments by Mr Zong of wages to himself and his wife are clearly transactions made in a position of conflict; there is no evidence of any informed consent to them; and these transactions are in breach of ss 181 and 182 of the Act and Mr Zong’s fiduciary duties

64. Mr Young responds, in closing submissions, that:

“It should be remembered that the Shareholder’s Agreement expressly provided that Zong was to have the daily operation and management of the Company, and any payments Zong made from Company funds did not require the consent or prior authorisation of Lin.

Zong was not challenged in cross-examination on the rectitude of his making a series of 11 payments collectively totaling $37,764.01 from the Company’s account between 5 April 2018 and 25 March 2019. This total included $31,932.16 payments to Zong and Tang, with the remainder to third parties.

At [8] of his 7 December 2020 affidavit, Zong explains that the third-party payments were business expenses of the Company, and itemizes the reason for each such expense. At [22] of his 3 May 2020 affidavit, Zong explains that the $31,932.16 was salaries paid to himself and Tang for work performed for the Company. It was, of course, necessary for the Company to employ at least 2 persons (and to have evidence to that effect) as Lin had insisted that was necessary to satisfy one of her visa criteria.

It was not put to Zong that the above third-party payments were not in fact paid to third parties, that the amounts were not in fact owing to those third parties, that the payments were made outside Zo[n]g’s authority as manager of the Company’s business or that the payments were otherwise improper. It was not put to Zong that the salaries the Company paid to himself and his wife were not in fact payable, that Zong and/or Tang were not truly employed or that Zong lacked authority as manager of the Company to employ staff.”

65. The Company also claims the amount of the payment on 27-28 March 2019 $55,000 to Mr Junn’s firm. In submissions, Mr Campbell refers to cl 21.2 of the Company’s constitution, which does not seem to me to be directed to the appointment of legal representatives to the company. He submits, and I accept, that Ms Lin was not consulted and did not consent to the appointment of Mr Junn as the Company’s solicitor, and there was no quorum of the directors of the Company at any meeting to appoint Mr Junn in that capacity and Mr Zong’s appointment of Mr Junn cannot have been made on behalf of the Company. He submits, and I accept, that cl 1 of the Shareholder Agreement which provides that “[t]he Party B [Mr Zong] shall respond for the daily operate/manage the Business” is not sufficiently wide to authorise the appointment of a solicitor, and that point is stronger where that would involve a payment of some $55,000, which was hardly a matter of the “daily” or day to day operation of a yacht tourism business.

66. Mr Campbell also submits, with substantial force, that, at the time the payment was made to Mr Junn:

“It was clear that at that time, Mr Zong was facing legal proceedings [I interpolate, subject to the probability that leave would be granted to Ms Lin to bring a derivative claim, which was later sought and obtained] by the Company against him personally for breach of director’s duties. This put him in a position of conflict with the interests of the Company when it came to using Company funds to engage solicitors for any reason, given the fact that at the time there was an effective deadlock between the directors of the Company and no further business of the Company was possible, but in particular in relation to the proceedings. As detailed above, Mr Zong was under a fiduciary duty not to put himself in such a conflict. There can be no assertion that the Company, by consent of Ms Lin, consented to the engagement of Mr Junn and the payment of $55,000 for this purpose.”

67. Mr Young responds, in closing submissions, pointing to Mr Zong’s evidence (3.5.20 [23]) that these payments were made by the Company to Mr Junn’s firm for them “to act and advise in the ordinary course of [the Company’s] affairs and business matters” and to an email from Mr Junn’s firm to Ms Lin’s solicitors claiming that the nature of the legal work to which the payment related was advice on “Corporations Act matters arising from the management of the Company”, “leasing matters arising from management of the Company” and “disputes with contractors in relation to boat maintenance services arising from the management of the Company”. Mr Zong led no evidence of the particular work done to seek to support those assertions as to its nature. I do not accept those assertions and I find, as a matter of inference from the timing of the payment, that it likely related to anticipated future costs of these proceedings, payment of which would benefit Mr Zong in his personal capacity.

68. The other payments challenged by the Plaintiffs were payments on 5 April 2018 of $451 to “Print Stati”; on 5 April 2018 of $2,280 to Chan Noi Investments, on 18 March 2019 of $250 to Service Today Australia, on 18 March 2019 of $1,000 to the mooring fee account, on 22 March 2019 of $200 to the 33664 account with the description “Michael Harrison”; and on 22 March 2019 of $1,000 to the mooring fee account. Mr Campbell makes detailed submissions as to the circumstances of the $200 withdrawal on 22 March 2019, which Mr Zong contends was linked to an attempt to provide training sessions to learners wanting to learn how to drive a boat, hiring third party providers to do so. Mr Campbell submits that:

“Without evidence of students paying to take the alleged boat driving course, there could have been no profit for the Company from the course, and the most likely reason for this withdrawal is for the improper purpose of making it appear that Mr Zong was actually doing something after three and a half months of operation during which he did nothing of benefit to the Company.”

69. I am not prepared to draw the inference in respect of that payment for which Mr Campbell contends, and I am not satisfied that the claim for breach of duty is made out in respect of the several third party payments, and to the 33664 account with a reference to Mr Harrison, where there is not sufficient evidence of conflict of interest or improper purpose in respect of those payments.

70. I am satisfied the claim for breach of fiduciary duty is established in respect of the payments to Mr Zong and Ms Tang and the payments to Mr Junn’s firm, but not the other third party payments, where those payments were again authorised by Mr Zong where he faced a real and substantial conflict between his duties to the Company and his personal interest in advancing his and Ms Tang’s position. Mr Zong did not make full, or indeed any, disclosure of the material facts of the payments to Ms Lin before they occurred; they were not approved by board resolution so as to have the benefit of any constitutional restriction of the no conflict rule; and Mr Zong did not seek consent from Ms Lin to the payments to give rise to any unanimous consent to or ratification of that conflict. It is again not necessary to determine whether that conduct also amounted to a breach of Mr Zong’s statutory duties under ss 181 or 182 of the Corporations Act where a breach of fiduciary duty is established at general law and breach of the statutory provisions would not give rise to different relief. The loss suffered by the Company is the amount of those payments.

Relief sought against Mr Zong

71. The Plaintiffs seek a declaration, under s 1317E of the Corporations Act or otherwise, that Mr Zong breached statutory and fiduciary duties owed under ss 181 and 182 of the Corporations Act (AOP [3], [5]). No declaration of a contravention should be made under s 1317E of the Act, since I have not found it necessary to reach a finding as to breach of ss 181 and 182 of the Act and the balance of the case law indicates that s 1317E of the Act only applies to proceedings in which relief is sought by the Australian Securities and Investments Commission: One.Tel Ltd (in liq) v Rich (2005) 190 FLR 443; 53 ACSR 623; [2005] NSWSC 226 at [69]–[70]; Primacy Underwriting Agency Pty Ltd v Kilborn (2007) 25 ACLC 160; [2007] NSWSC 158 at [6]–[8]; Re Sirrah Pty Ltd(in prov liq) [2021] NSWSC 413 at [158]. I do not consider that a declaration should be made in respect of any breach of fiduciary duty where it would be merely anterior to the other relief that I will order.

72. The Plaintiffs seek (AOP [3B]) a declaration that Mr Zong holds all funds that he has received from the Company on trust for it. An order should not be made in that form where it does not identify the relevant funds and would prefer the interests of the Company to other creditors of Mr Zong. The Plaintiffs seek an order (AOP [4]) that Mr Zong pay equitable compensation or damages to the Company and an order (AOP [5A]) that he pay compensation to the Company under s 1317H of the Act, which allows the Court to order a person to compensate a corporation for damage suffered by it, if that person has contravened a civil penalty provision in relation to the corporation and the damage resulted from the contravention. There should be an order for equitable compensation in respect of the breaches of fiduciary duty that I have found, and no order for compensation under s 1317H of the Act is necessary.

Claim against Ms Tang and J&G for knowing involvement or knowing assistance

73. The Plaintiffs also bring claims for knowing involvement in a breach of statutory duty and knowing assistance in a breach of fiduciary duty against Ms Tang and J&G. No claim for knowing receipt was brought, although Mr Campbell also referred to that form of liability in submissions. The Plaintiffs plead these claims in a shorthand fashion, to which the Defendants took no objection, pleading that (FASC [44]-[45]) the knowledge of Ms Tang is imputed to J&G and vice versa and then (FASC [46]) that:

“[Ms Tang] and [J&G] were knowingly involved and/or knowingly assisted [Mr Zong] in his breaches of statutory and fiduciary duties owed to the [Company].”

74. The latter allegation is then particularised by several matters that should properly have been pleaded as allegations of material facts and Mr Campbell in turn referred to several of those matters in submissions. Those matters include that Ms Tang is Mr Zong’s wife and Ms Tang and Mr Zong have the same residential address as disclosed on the ASIC register; they share a bank account into which Mr Zong caused funds to be transferred from the Company; Ms Tang is the sole director and shareholder of J&G; J&G transferred the Dauphin to the Company by a bill of sale executed by Ms Tang; Ms Tang was one of the two signatories of the Company’s bank account (the other being Mr Zong) at all material times, including when the bill of sale for the Dauphin was signed; and Ms Tang and J&G were aware that Mr Zong was a director of the Company and were also aware that he was not the Company’s sole director.

75. The Plaintiffs also particularise additional allegations that Ms Tang and J&G were aware that the market price of Dauphin was substantially less than the purchase price of $315,200; they were aware that the monies paid to the Company had been paid by Ms Lin and that Mr Zong had not contributed any monies to the Company; Ms Tang was engaged by Mr Zong as an employee of the Company and aware of its business activities and therefore also aware that the relevant transfers of the Company’s money were not in its best interests and not for a proper purpose, and that those payments were made to gain an advantage for Mr Zong, Ms Tang or third parties; and, likely irrelevantly to this claim, Ms Lin and Mr Su were new to Australia, were unfamiliar with Australian culture and business practices and had limited English language skills. I do not consider that any of these matters are necessary to establish the allegation of knowing involvement in breach of Mr Zong’s fiduciary duty and I do not consider it necessary to reach findings in respect of them.

104. I also cannot accept that the entry into the Shareholder Agreement or the investment of funds in the Company (other than potentially Ms Lin’s initial $12,000 funding to the Company) was taken in reliance on the Profit Representation and the Visa Representation, given the difficulties with Ms Lin’s and Mr Su’s evidence of the 5 March meeting, and the extent to which those representations were displaced by subsequent reductions in the amount of capital subscribed to the Company and the change in business plan so that it would no longer purchase a boat for a purchase price in the order of $1 million, as assumed in any forecasts underlying the alleged representations. The Plaintiffs did not put an alternative case in respect of a claim limited to the initial $12,000 funding, which would scarcely have been warranted. I cannot accept the claims based on the Payment Representation and Second Visa Representation where I have not found those representations were made or reasonably relied on. I also bear in mind Ms Lin’s evidence, in cross examination, was that she never really trusted Mr Zong (T24, T56).

105. The Plaintiffs formulate the loss they claim to have suffered in several ways. First, they plead (FASC [35], partly duplicated in FASC [37]) that, by reason of the making of the Profit Representation, the Visa Representation, the Payment Representation, and the Second Visa Representation, Ms Lin has suffered loss and damage, being the amount invested in the Company less the current value of the shares held by her in the Company. The basis of this claim in not established for the reasons noted above. In any event, the evidence does not establish the amount of any loss quantified on this basis, by reference to the current value of the Company’s shares having regard to either its current assets or any recoveries made by reason of this judgment.

106. The Plaintiffs also plead (FASC [35A]) that, but for the making of the Profit Representation, the Visa Representation, the Payment Representation, and the Second Visa Representation, Mr Su would not have transferred $470,000 of the Loan proceeds to Ms Lin for the purpose of her using them for her capital contribution to the Company and would have instead used them to repay the Loan on or about 5 November 2018. The basis of this claim is not established for the reasons noted above. As I noted above, Mr Su also suffered no loss at the point of transfer of the funds to Ms Lin. I also do not accept that, but for the alleged representations, Mr Su would have repaid the Loan where that would have involved abandoning any hope of a visa based on an investment in the Company or by applying the borrowed funds to an investment in an alternative business.

107. The Plaintiffs plead (FASC [37A]-[37B]) a further overlapping claim that, but for the making of the Profit Representation and the Visa Representation, Mr Su would not have entered into the Loan and, by reason of those representations, he has suffered loss being any amount of the Loan transferred to Ms Lin that is lost. The basis of this claim is not established where the making of the Profit Representation and the Visa Representation are not established for the reasons noted above.

108. The Plaintiffs in turn plead (FASC [37C]) that, pursuant to s 236 of the ACL, as a result of Mr Zong’s alleged breaches of the ACL, Ms Lin claims the amount of $550,000 she invested in the Company from Mr Zong. That claim is not established where it does not allow for the continuing value of Ms Lin’s shares, having regard to either the Company’s current assets or any recoveries made by reason of this judgment. Mr Su in turn claims, in the alternative to any claim that Ms Lin may have over the same money, any amount of the Loan transferred to Ms Lin that is lost. I have addressed that claim above.

Oppression claim

121. The Plaintiffs seek relief in oppression. I should first refer to the applicable legal principles, as to which I have drawn upon my summary of the relevant principles in Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914, Re ICB Medical Distributors Pty Ltd [2018] NSWSC 1315 at [65]ff and Re Bicher & Son Pty Ltd (2020) 147 ACSR 108; (2020) 147 ACSR 108; [2020] NSWSC 711 at [74]ff. Section 232 of the Corporations Act in turn provides that the Court may make an order under s 233 if:

“(a)   the conduct of a company’s affairs; or

(b)   an actual or proposed act or omission by or on behalf of a company;

or

(c)   a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d)   contrary to the interests of the members as a whole; or

(e)   oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.”

122. Section 233(1)(d) of the Corporations Act relevantly provides that the Court may make an order for the purchase of shares by a member of a company and s 233(1)(j) allows the Court to make an order requiring a person to do a specified act. Such an order may be made where the matters specified in s 232 of the Corporations Act are established.

123. Section 232 of the Corporations Act and its predecessors extend to conduct involving “commercial unfairness” or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or 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: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 68. In Morgan v 45 Flers Avenue Pty Ltd above at 704, Young J observed that the phrases “oppressive, unfairly prejudicial or unfairly discriminatory” in a predecessor to s 232 of the Corporations Act should be construed as “a composite whole and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely commercial unfairness”. His Honour also there noted that whether oppression was established was to be determined by reference to the nature of the business carried on by the company and the nature of the relations between its participants and:

“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.”

124. The principles applicable to a claim for oppression were also summarised by Austin J in Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [39], and the Court of Appeal noted the parties did not challenge that summary of the applicable principles in Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121; [2011] NSWCA 104 at [140]. His Honour observed that:

“(a)   consistent with the principle that the purpose of relief is to terminate the effects of oppression, relief will generally be inappropriate as a matter of discretion if there is no continuing oppression: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, at [182]; [2009] HCA 25;

(b)   unfairness is assessed by reference to 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”: eg, Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359, per Basten JA at [181]; [2008] NSWCA 95;

(c)   while it is recognised that conduct may be oppressive if inconsistent with the “legitimate expectations” of shareholders, expectations are not immutable. The non-fulfilment of expectations will not establish oppression, if there has been some good reason for the extinguishment of the expectation: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, at [85], [86], [175]; [2001] NSWCA 97; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343, at [96]; [2009] NSWSC 342 per Barrett J;

(d)   “it is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower”: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, Young J at 739; [1998] NSWSC 413;

(e)   a particular matter which will be taken in account in assessing the gravity of any allegation of oppression, is the extent to which the minority shareholder has “baited” the majority shareholder to act in an oppressive manner: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, at 741; [1998] NSWSC 413 …”

125. In Munstermann v Rayward [2017] NSWSC 133 at [22], Stevenson J summarised the applicable principles as follows (omitting citations):

1. The test of oppression is an objective one of unfairness ...

2. The court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly …

3. A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director ...

4. Conduct of a company’s affairs may be oppressive even though the conduct is otherwise lawful ...

5. Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole …

6. A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used …

7. The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined at the date of the hearing …

8. The discretion under s 233 is wide as to the appropriate remedy …

9. The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive ….

10. The aim of any order under s 233 must be to put an end to the oppression …

11. The court should only look to wind up an otherwise solvent company as a “last resort” …

12. As a remedy for oppression, an oppressor can be ordered to sell their shares to the oppressed party ….

13. If an order is to be made for the purchase of shares under s 233 the task of the court is to fix a price that represents a fair value in all the circumstances.” [citations omitted]

    126. I have also borne in mind the observation in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above that each case has to be considered on its own facts and circumstances, and by reference to the conduct as a whole.

    127. Mr Campbell relies, in support of the oppression claim, on the transactions in and out of the Company’s bank account, a failure to commence the Company’s business in order to meet Ms Lin’s visa requirements, and his failure to invest his “promised contribution of $450,000” to the Company. The last of those claims has the fundamental difficulty that that promise was not made in the executed Shareholder Agreement. Mr Young responds that:

“If the derivative action succeeds, the remedy granted in relation to that action will have cured any detriment caused by any breach of duty by Zong, and hence there would be no remaining oppression to cure. If the derivative action fails, then the factual basis of the oppression claim will not exist. In either event, the oppression claim can be easily disposed of.”

I do not accept that submission, where a judgment for damages against Mr Zong will not necessarily address the issues arising from his management of the Company’s affairs.

128. I am satisfied that the purchase of the Dauphin and the transfer of a substantial sum from the Company to the 33664 account and a failure by Mr Zong to contribute the any evident skill or business goodwill to the conduct of the Company’s affairs each involve “commercial unfairness” and involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play, and impose a disadvantage, disability or burden on Ms Lin who contributed the only monies to the Company and that, according to ordinary standards of reasonableness and fair dealing, is unfair. The Plaintiffs therefore succeed in their oppression claim. They seek an order removing Mr Zong as a director of the Company and that 4500 shares in the Company be transferred to Ms Lin. I am satisfied that such an order should be made where Mr Zong has made no financial contribution to the Company; the conduct to which I have referred above does not amount to a contribution of skill or business goodwill to the Company; and a winding up without such an order would transfer to Mr Zong a part of the value of Ms Lin’s financial contribution to the Company, so far it is restored by orders for compensation against Mr Zong, Ms Tang and J&G.

129. The Plaintiffs also seek orders that the Company institute these proceedings, which have no utility where the proceedings have already been brought as a derivative action, for which leave was previously granted, and determined. An order is sought that Mr Zong, Ms Tang and J&G pay compensation to the Company of all amounts transferred out of the Company’s bank account but such an order could not be made where it does not distinguish between legitimate and illegitimate transactions.

Other claims

130. The Plaintiffs plead (FASC [23A]) that, in breach of the Varied Agreement, Mr Zong did not transfer $450,000 to the Company. That allegation is not established where I have not held the Agreement or the Varied Agreement are established and that obligation was not contained in the executed Shareholder Agreement. The Plaintiffs also plead a claim for access to the Company’s books and records under s 198F and s 290 of the Corporations Act (FASC [38]-[40]) but made no attempt to have it determined prior to the hearing of the substantive application. I can see no utility in now making such an order.

131. The Plaintiffs also plead a claim for total failure of consideration (FASC [56]ff), as follows:

“In breach of the term of the Agreement pleaded at [10(b)] above [relating to the Business Purpose as defined], the term of the Varied Agreement pleaded at [21(f)] above [relating to meeting Ms Lin’s visa requirements], and clause 6 of the Amended Written Varied Agreement, [Mr Zong] has taken no steps towards developing the business of the [Company] such that it satisfies the business requirements of [Ms Lin’s] subclass 888 visa application.

In breach of the Agreement, the Varied Agreement, and the Amended Written Varied Agreement, [Mr Zong] has not developed the business of the [Company] in accordance with the Business Purpose.

In the circumstances detailed above, there has been a total failure of consideration flowing from [Mr Zong] to [Ms Lin] in relation to the Varied Agreement and the Amended Written Varied Agreement such that these agreements are void ab initio.”

132. Mr Campbell refers, in submissions, to various actions taken by Mr Zong in performance of the Shareholder Agreement and submits those steps were inadequate or insufficient for various reasons, including the purchase of the Dauphin at overvalue and where it was not suitable for the Company’s business; the failure to convert it to commercial use or import an alternative vessel from China; and the failure to enter the boat hiring business, and submits that the registration of the Company and issue of shares was not contemplated by the Shareholder Agreement or can be severed from performance of the rest of that Agreement.

133. Mr Young responds, in closing submissions, that:

“That “total failure of consideration” attack in relation to the initial 5 March 2018 agreement must fail as on any view Lin has received at least consideration sufficient to support a contract, being 55% of the shares in the Company. The Company has assets which include the yacht Dauphin, some $117,000 in the Company’s bank account and whatever value attaches to the present derivative action being brought against the first to third defendants.

With respect to the 30 November 2018 Shareholder’s Agreement, Lin received valuable consideration through having her contractual commitment to provide $600,000 reduced to $550,000 and through various promises made by Zong in that agreement, including that in clause 6 to ensure that there would be a turnover of $300,000 in the 2020 financial year.”

134. This claim cannot succeed as to the Agreement or the Varied Agreement, as defined, because I have not found that they are established. This claim cannot succeed in respect of the Shareholder Agreement (to which the Plaintiffs refer as the Amended Written Varied Agreement), because the matters pleaded do not amount to a total failure of consideration. A claim for money had and received is only available where there is a total failure of consideration, or at least any consideration received could properly be described as de minimis: see K Mason, JW Carter & GJ Tolhurst, Mason & Carter’s Restitution Law in Australia, 2nd ed 2008, LexisNexis Butterworths at [926]. The relevant principle was summarised by Mason CJ in Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 350; [1993] HCA 4 as follows:

“When, however, an innocent party seeks to recover money paid in advance under a contract in expectation of the entire performance by the contractbreaker of its obligations under the contract and the contractbreaker renders an incomplete performance, in general, the innocent party cannot recover unless there has been a total failure of consideration. If the incomplete performance results in the innocent party receiving and retaining any substantial part of the benefit expected under the contract, there will not be a total failure of consideration.”

Deane and Dawson JJ similarly noted (at 375) that:

“… the receipt of a payment of money for a consideration which wholly fails ‘is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution ... to the person who has sustained the countervailing detriment’.”

McHugh J noted (at 388–389) that, where a payment of the fare for a cruise had been made in advance:

“Because the common law has no doctrine of apportionment in respect of a partial failure of consideration, [the plaintiff’s] remedy in respect of [the defendant’s] failure to complete the cruise was an action for damages for breach of contract and not an action for partial restitution of the sum paid as the price of the fare.”

135. Ms Lin has been allocated shares in the Company; the Company still has funds in hand so those shares have value, although it would be less than the value they had when the Company was established and funded by Ms Lin; and their value will be increased by any recovery of damages pursuant to this judgment. It is plain that the consideration which Ms Lin received in exchange for her obligations under the Shareholder Agreement and her subscription of funds to the Company is more than de minimis, and the elements of a restitutionary claim for total failure of consideration are not established. The plaintiffs claim for orders that (AOP [3C]) that Mr Zong, Ms Tang and J&G repay those funds by way of restitution must fail where but no basis for that claim is established.

136. The Plaintiffs bring a further alternative claim (FASC [59]) as follows:

“Further and the alternative to the above, [Mr Zong’s] breaches of the Agreement, the Varied Agreement, and the Amended Written Varied Agreement are such that these agreement(s) have been repudiated by the [Mr Zong], and [Ms Lin], but by this pleading elects to terminate and sue for damages, and the [Ms Lin] claims her damages from [Mr Zong].”

137. On that basis, the Plaintiffs seek orders for damages for Mr Zong’s alleged repudiation of the Agreement, the Varied Agreement and/or the Shareholder Agreement (to which the Plaintiffs refer as the Amended Written Varied Agreement (AOP [6G]). This claim cannot succeed in respect of the Agreement or the Varied Agreement (as defined) since they were not established. It cannot succeed in respect of the Shareholder Agreement since it has not been established that Mr Zong repudiated the somewhat limited obligations he owed under that Agreement, although I have found he breached his duties to the Company as noted above.

137. Ms Lin also claims compensation for Mr Zong’s alleged breach of fiduciary duty owed to the Company or Ms Tang’s and J&G’s involvement in those breaches (AOP [6H]). This claim is untenable, even putting aside any issue as to reflexive loss, where Ms Lin has no personal cause of action in respect of any breach of duties owed to the Company and not to her.

Orders and costs

139. Orders will need to be made to give effect to this judgment. My preliminary view is that there should be an order that Mr Zong, Ms Tang and J&G pay 50% of the Plaintiffs’ costs of the proceedings. Although the Plaintiffs have succeeded in establishing claims for breach of directors’ duties and oppression, which could likely have been determined within two days at most, the hearing has been substantially extended to a hearing of four days by additional claims, inter alia, for misleading and deceptive conduct, all of which have failed, and most of which have failed at several levels. However, I will hear the parties as to costs.

140. I direct the parties to bring in agreed short minutes of order, including as to costs, within 7 days or, if there is no agreement, their respective draft short minutes of order and short submissions as to the differences between them.

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Amendments

03 June 2021 - Correct typographical error in case name.

Decision last updated: 03 June 2021