In the matter of Vinidici Rushcutters Bay Pty Ltd — Vinidici Rushcutters Bay Pty Ltd v Zhang - [2023] NSWSC 151

Supreme Court

New South Wales

Medium Neutral Citation: In the matter of Vinidici Rushcutters Bay Pty Ltd — Vinidici Rushcutters Bay Pty Ltd v Zhang [2023] NSWSC 151
Hearing dates: 29, 30, 31 March 2022
Date of orders: 28 February 2023
Decision date: 28 February 2023
Jurisdiction: Equity - Corporations List
Before: Williams J
Decision:
Proceedings dismissed

Catchwords:
DECEIT – whether deliberate concealment of information about ownership of company with which plaintiff entered into convertible note agreement pursuant to which plaintiff paid $2,000,000 to the company.
MISLEADING OR DECEPTIVE CONDUCT – whether deliberate concealment or misleading non-disclosure of information – whether reasonable expectation of disclosure in all the circumstances.

Legislation Cited:
Competition and Consumer Act 2010 (Cth) sch 2
Corporations Act 2001 (Cth) ss 79, 763A(1), 763B(a)(ii), 1041E(1), 1041F(1), 1041H(1), 1041I(1B), 1041I(4), 1317S
Evidence Act 1995 (NSW) s 30

Cases Cited:
Australian Securities and Investment Commission v SunEnergy Asia Pacific Pty Ltd [2011] FCA 275
ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; (2021) 150 ACSR 461; [2021] NSWCA 24
Fox v Percy (2003) 214 CLR 118; (2003) 197 ALR 201; (2003) 77 ALJR 989 [2003] HCA 22
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; (1995) 130 ALR 1; (1995) 69 ALJR 629; [1995] HCA 68
Magill v Magill (2006) 226 CLR 551; (2006) 231 ALR 277; (2006) 81 ALJR 254; [2006] HCA 51
Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; (2010) 270 ALR 204; (2010) 84 ALJR 644; [2010] HCA 31
Moubarak by his tutor Coorey v Holt (2019) 100 NSWLR 218; (2019) 374 ALR 150; [2019] NSWCA 102
OXS Pty Ltd v Sydney Harbour Foreshore Authority [2016] NSWCA 120
Watson v Foxman (1995) 49 NSWLR 315
Wood v Balfour (2011) 15 BPR 29,773; [2011] NSW ConvR 56-291; [2012] Q ConvR 54-768; [2011] NSWCA 382
Wormald v Maradaca Pty Ltd [2020] NSWCA 289

Texts Cited:
D Rolph, J Varuhas, P Crossley and M Douglas, Balkin & Davis Law of Torts (LexisNexis, 6th ed, 2021)

Category: Principal judgment
Parties: Vinidici Rushcutters Bay Pty Ltd ACN 614683019 (Plaintiff)
Yihao (Eric) Zhang (Defendant)
Representation:
Counsel:
Mr P Herzfeld SC with Mr G Drew (Plaintiff)
Mr M Condon SC with Mr E Chan (Defendant)
Solicitors:
Meridian Lawyers (Plaintiff)
Juris Cor Legal (Defendant)

File Number(s): 2021/108531
Publication restriction: N/A

Judgment

Introduction

These proceedings arise from an agreement entered into on 8 September 2016 between the plaintiff (Vinidici Rushcutters Bay Pty Ltd, or Vinidici) and TFM Rushcutters Bay Land Pty Ltd (TFMRB), pursuant to which Vinidici subscribed for a convertible note for a principal sum of $2,000,000 with the right to convert the note into shares in TFMRB at any time before the maturity date of 31 March 2017 (the Convertible Note Agreement).
TFMRB was incorporated on 31 August 2016 for the purpose of purchasing and developing residential apartments on land at 18-28 Neild Avenue, Darlinghurst, although the parties referred to the location as Rushcutters Bay (the Project). The apartment building that was subsequently developed was known as “Encore”. At the time of its incorporation, Dr Yihao Zhang (also known as Eric Zhang) was the sole director of TFMRB and Tasman Development Holdings Pty Ltd (Tasman) was its sole shareholder. Dr Zhang was also the sole director and sole shareholder of Tasman.
Vinidici was incorporated on 7 September 2016 for the purpose of investing in the Project. Mr Wei Shi (also known as Patrick Shi) and Mr Shengli Xi (also known as Victor Xi) have been the directors of Vinidici at all times since its incorporation. They each hold 40 per cent of the shares in the company. The remaining twenty per cent of the shares in Vinidici are held by Ms Mengjie Zhang.
TFMRB issued the convertible note to Vinidici on 9 September 2016. Vinidici paid the $2,000,000 principal sum to TFMRB in three instalments on 9 September 2016 ($1,000,000), 23 January 2017 ($500,000) and 9 February 2017 ($500,000).
On 7 September 2016, Tasman had entered into a Cooperation Deed with Australia Bai Fu Xin (International) Investment Pty Ltd (ABFX) setting out the terms on which those two companies agreed to “jointly invest in” the Project. Tasman had transferred all of its shares in TFMRB to ABFX on 5 September 2016. Eighty per cent of those shares were transferred in consideration of ABFX’s contribution of $20,000,000 to the Project. The remaining 20 per cent were transferred to ABFX as a pledge for TFMRB’s guarantee of a return of $9,600,000 on ABFX’s investment over two years.
Vinidici claims that it entered into the Convertible Note Agreement and paid the principal sum in the belief that TFMRB had been established as, and would remain, a special purpose vehicle for the Project within the Tasman group of companies, and that Dr Zhang knew or ought to have known that Vinidici held that belief. Vinidici claims that Dr Zhang did not disclose that Tasman had transferred its shares in TFMRB to ABFX.
TFMRB purchased the land for the Project for $24,500,000 in late 2016. Vinidici’s investment of $2,000,000 and the $20,000,000 invested by ABFX under the Cooperation Deed appear to have been applied to the purchase price. Construction of the apartments was financed by loans that TFMRB subsequently obtained from Perpetual Corporate Trust Limited and Westpac Banking Corporation Limited.
Vinidici did not convert its $2,000,000 loan into shares. It claims that $747,270.58 of the principal sum of remains owing and that this amount is unsecured and unlikely to be repaid by TFMRB in circumstances where a receiver and manager was appointed to that company on 15 September 2020, the apartments that remain to be sold are mortgaged to Assetline Capital Pty Ltd and the receiver’s most recent annual administration report states that there are no assets available to be realised to pay any dividend to unsecured creditors.
Vinidici claims that it would not have entered into the Convertible Note Agreement and would not have paid the principal sum if Dr Zhang had disclosed to Vinidici that Tasman had transferred its shares in TFMRB to ABFX.
Vinidici sues Dr Zhang for deceit, alleging that he deliberately concealed from Vinidici the transfer of 80 per cent Tasman’s shares in TFMRB to ABFX and the pledge of the remaining shares.
Alternatively, Vinidici claims that Dr Zhang’s alleged deliberate concealment or non-disclosure was misleading or deceptive conduct that contravened s 1041H(1) of the Corporations Act 2001 (Cth). Vinidici also relies on the equivalent cause of action under s 18 of the Australian Consumer Law if the Court finds that the convertible note is not a “financial product” for the purposes of Chapter 7 of the Corporations Act. As both parties submitted and as referred to later in these reasons, the convertible note is a financial product. Vinidici’s pleaded alternative claims that the alleged deliberate concealment or non-disclosure contravened s 1041E(1) and/or s 1041F(1) of the Corporations Act were not pressed after senior counsel acknowledged in opening submissions that those claims would “ultimately not rise higher than s 1041H(1)”.
By the end of the hearing, Vinidici’s misleading or deceptive conduct case was limited to the alleged conduct of Dr Zhang. In closing submissions, Vinidici abandoned its pleaded alternative case that the alleged concealment or non-disclosure was conduct of TFMRB in which Dr Zhang was “involved” within the meaning of s 79 of the Corporations Act.
Vinidici claims that it would not have entered into the Convertible Note Agreement and would not have paid the $2,000,000 if it had not believed that TFMRB was, and would remain, a company within the Tasman group of companies. Vinidici claims damages for deceit, or alternatively misleading or deceptive conduct, in the amount of the alleged outstanding principal sum of $747,270.58 plus accrued interest.
Dr Zhang denies the allegations of deliberate concealment or non-disclosure. He says that he disclosed to Vinidici before it entered into the Convertible Note Agreement that the majority of Tasman’s shares in TFMRB had been sold to an investor. If Dr Zhang is found not to have disclosed that matter, he denies that the non-disclosure was a deliberate concealment and denies that it constituted deceit or was misleading or deceptive. Dr Zhang also denies that Vinidici has suffered any loss. He contends that the whole of the amount owing under the Convertible Note Agreement has been repaid to Vinidici. Alternatively, Dr Zhang contends that Vinidici is estopped from resiling from representations allegedly made in 2019 and 2020 that certain waived interest charges and alleged discounts on the sale prices of apartments would be set off against the amount owing by TFMRB to Vinidici under the Convertible Note Agreement.
To the extent that he may be found liable, Dr Zhang contends that his liability should be reduced pursuant to s 1041I(1B) of the Corporations Act on the grounds of Vinidici’s alleged failure to take reasonable care by not making inquiries about the ownership of TFMRB and/or that he should be relieved of liability under s 1041I(4) and s 1317S of the Corporations Act. Dr Zhang did not press his pleaded proportionate liability defence.
For the reasons that follow, Vinidici’s claims fail.

Summary of evidence

The plaintiff read affidavits of Mr Shi affirmed on 5 July 2021 and 10 September 2021 and an affidavit of Ms Claire Tian affirmed on 11 September 2021. The defendant read affidavits of Dr Zhang affirmed on 13 August 2021 and 14 March 2022, an affidavit of Ms Peixun Zhang (also known as Penny Zhang) affirmed on 13 August 2021, an affidavit of Yuchen Gao affirmed on 13 August 2021 and an affidavit of Ms Xinian Liu (also known as Yvonne Liu) affirmed on 13 August 2021. The following summary is drawn from those affidavits, the evidence given by Mr Shi, Ms Tian and Dr Zhang in cross-examination [1] and the documents tendered by the parties. Disputed factual matters are identified in the summary and my findings of fact are set out in a later section of these reasons.
1. The defendant’s other witnesses were not cross-examined.
Mr Shi has been living in Australia for approximately 20 years. He studied at the University of Wollongong from 2001 and was awarded the degree of Bachelor of Marketing in 2005 and a Masters in International Studies in 2007. Since 2010, Mr Shi has been operating a real estate agency business through ACCE Investments Group Pty Limited (ACCE), including property developments and investing in property developments. Mr Shi is the sole director of ACCE.
Dr Zhang immigrated from China to Australia in 2003. He has a Master of Engineering from the University of Technology, Sydney and a Master of Science and doctorate in financial modelling from Macquarie University. Mr Zhang has been involved in residential property development since 2014 through his directorship of and shareholding in various companies in what he describes as the Tasman group of companies.
Mr Shi gave evidence that he was first introduced to Dr Zhang by a mutual acquaintance in about early 2016. By that time, Mr Shi was aware through his work in the property industry that Dr Zhang was the director of Tasman. Dr Zhang’s evidence puts their first meeting considerably earlier in about October 2014. Nothing turns on the timing of their first meeting.
According to Mr Shi, from early 2016 until about early 2020, he and Dr Zhang met “for a social chat” almost every week during which they would “discuss business opportunities and … just generally hang out”.
Dr Zhang disputed this but gave evidence in cross-examination that, in the period after about February 2016, he did occasionally meet Mr Shi at his apartment and that he often spoke with Mr Shi on the telephone.
Ms Claire Tian, who was living together with Mr Shi as his girlfriend during 2016 and 2017, gave evidence that Mr Shi met with Dr Zhang “on a very regular basis” when she and Mr Shi were living in an apartment in the city from late 2015 until May 2017. According to Ms Tian, these meetings often occurred in the evening and Mr Shi would go downstairs to meet Dr Zhang and have a smoke. Ms Tian also gave evidence that Mr Shi and Dr Zhang were often on the phone together during this period. However, despite this regular contact that Ms Tian described between the two men, she only met Dr Zhang a few times during this period.
Mr Shi’s evidence is that, during the course of those meetings in the period from early to mid-2016, Dr Zhang told Mr Shi that he was the sole director and shareholder of Tasman, that he was able to source money from Chinese investors to purchase development sites and then arrange loans from banks for the development activities on those sites. Mr Shi says that Dr Zhang told him that he had sites in Wolli Creek, Epping and the Blue Mountains that “I have purchased … through Tasman using investment money from Chinese investors”. In relation to the Epping site, Mr Shi says that Dr Zhang told him that the construction of about 90 units on that site was “being done through a sole purpose company TFM Epping which is owned by Tasman.” Mr Shi says that Dr Zhang also told him that he was eager to buy development sites in Australia, particularly in Sydney and Melbourne. Mr Zhang denies saying these things to Mr Shi and says that he treated matters about the funding of developments as confidential. In particular, Dr Zhang denies describing TFM Epping as a sole purpose or special purpose company owned or controlled by Tasman.
According to Mr Shi, he and Dr Zhang had conversations in about early 2016 during which they discussed the general idea of working together on property development projects. These discussions did not concern any particular existing or prospective development site. Mr Zhang denies discussing working together with Mr Shi and says that he neither had, nor intended to have, any direct business relationship with Mr Shi or his associated companies in early 2016. It appeared to Dr Zhang that Mr Shi was eager to have a business relationship with him. Dr Zhang’s evidence is that “it is common for sales agents to strike up a relationship with developers with the goal of securing an agency agreement with the developer so that the sales agent can sell lots in the development.”
Mr Shi gave evidence that, by mid-2016, he was “keen to do business with Eric, and ultimately to make money with him” because Mr Shi wanted to expand his own business “instead of being a lone wolf fighting in the battleground” and he believed that Dr Zhang’s ability to source money from China was “very beneficial” because it meant that “a project or multiple projects could grow quickly and things could get done at a faster rate”. Mr Shi was impressed with Dr Zhang’s enthusiasm, ambition and confidence and admired his aggressive approach to land acquisition. Mr Shi thought that he and Dr Zhang shared common values. He trusted Dr Zhang’s approach to business.
For some time prior to mid-2016, Mr Shi (or ACCE) was acting as the selling agent for residential apartments that were being developed by Lindsay Bennelong Developments Pty Ltd (LBD) at Neild Avenue, Darlinghurst. The development was being constructed in three stages. Stages 1 and 2 had been completed by mid-2016, when Mr Shi became aware that LBD was looking to sell the land for stage 3 at 18-28 Neild Avenue.
Mr Shi informed Dr Zhang about the opportunity to acquire the stage 3 land and introduced Dr Zhang to LBD as a prospective buyer in late July 2016.
According to Mr Shi, he had a conversation with Dr Zhang at about that time in which he told Dr Zhang: “I have 2 million dollars which I am prepared to invest with you and Tasman in this Rushcutters Bay site.” Mr Shi says that Dr Zhang responded: “Ok, let me secure the balance of the purchase monies from China and we can document it.” According to Dr Zhang, Mr Shi first informed him of his wish to invest in the Project at some time after LBD’s acceptance of Tasman’s offer to purchase the stage 3 land on about 10 August 2016, as referred to below.
Mr Shi arranged for Dr Zhang to inspect the stage 3 site on or about 3 August 2016. On 8 August 2016, Tasman made a written offer to LBD to purchase the stage 3 land for $24,500,000 subject to contract on acceptable terms, with a deposit of 20 per cent and settlement to occur on 31 March 2017.
Mr Shi informed Dr Zhang on about 10 August 2016 that LBD had accepted Tasman’s offer.
On 13 and 14 August 2016, Mr Shi and Dr Zhang exchanged a series of messages in which Mr Shi set out his calculation of the total sales revenue for stage 3 and a rate of return based on an assumed construction cost per square metre. Dr Zhang asked to see the calculations underlying Mr Shi’s estimates and Mr Shi forwarded him an excel document entitled “Feasibility”. Dr Zhang then sent messages to Mr Shi, saying: “This is almost the same, we measured similarly at the scene. 28%.” Further messages followed between the two men concerning the amount that would or could be borrowed. It appears from the messages that there were also telephone calls between Mr Shi and Dr Zhang concerning the Project during this period. Dr Zhang says that most of their communications were by telephone.
According to Dr Zhang, it was during this period after LBD accepted Tasman’s offer that Mr Shi first mentioned in telephone conversations his interest in investing in the Project. Dr Zhang could not identify the specific conversation, but gave evidence that he recalled that Mr Shi said words to the effect that: it was “good project” and a “viable project” and “I want to invest as well” and “I am thinking about how much to invest”. According to Dr Zhang, Mr Shi did not initially specify an amount that he wanted to invest, and first mentioned the amount of $2,000,000 just a few days before the first draft of the loan agreement referred to below was prepared.
At some stage during or after Dr Zhang and Mr Shi’s discussions about the rate of return, feasibility and financing of stage 3, Dr Zhang says that he told Mr Shi that he needed to get loans from the bank and that he was going to China on 23 August 2016 “to meet an investor for funding of the development”.
According to Dr Zhang, he and Mr Shi had telephone conversations prior to 23 August 2016 and he said to Mr Shi during one of those conversations: “If you want to be part of the project, tell me what you want to do. We will give you the agreement and you can modify it from there.”
Dr Zhang says that they had a separate telephone conversation to the following effect a few days before Dr Zhang left for China on 23 August 2016:

“[Mr Shi] I want to be involved in the project. I want to invest $2,000,000 and an interest rate of 4%.

Give me two Epping units as security. I need to give my investors some comfort.

I am not going to exchange the contracts for the two Epping units. It is only for investors’ reference.

[Dr Zhang] OK

[Mr Shi] Please prepare the documents, just the general ones. I will give more details to Yvonne.”

Dr Zhang’s evidence is that:

“I did not discuss with Mr Shi the details or the nature of his investment. I considered that the best way for dealing with an investor, such as Mr Shi, was to send an agreement to him which he could then modify.”

Mr Shi denies that he stipulated an interest rate of 4 per cent. He also denies asking Dr Zhang to give him two Epping units as security and denies referring to his investors. Mr Shi maintains that he “did not even have any ‘investors’ and was intending to put my own money into the project, which I did.”
Dr Zhang arrived in China on the evening of 23 August 2016. He received messages from Mr Shi following up on the “security contract”. Dr Zhang says that he instructed his assistant, Ms Yvonne Liu, that:

“Patrick wants to invest $2,000,000 in the Rushcutters Bay Project at 4% interest and wants two securities in the Epping development. Prepare the documents for him.”

Ms Liu gave evidence to the same effect.
On 24 August 2016, Dr Zhang’s assistant sent Mr Shi a draft loan agreement between ACCE and Tasman. Ms Liu gave evidence that she prepared the document by making a few amendments to a standard template loan agreement. The draft agreement provided for a loan of $2,000,000 repayable on 31 March 2017 at an interest rate of 4 per cent per annum. The draft agreement provided that Tasman offered two off-the-plan units in its Epping development as “security” for the loan. The draft agreement set out an unorthodox series of steps for the provision of this “security”. Tasman would exchange contracts for the sale of those units off the plan to ACCE and provide a written acknowledgement that ACCE had paid the contract prices in full. Upon Tasman repaying the loan in full, ACCE would take all necessary steps to rescind the contracts. In the meantime, ACCE agreed not to sell, offer for sale, assign, pledge, transfer or encumber the units or its interest in the units.
Mr Shi gave evidence that he engaged Madison Marcus Lawyers to advise Vinidici in relation to the proposed transaction, and that:

“It was decided that the transaction would proceed as a convertible note agreement rather than in a loan agreement.”

Mr Shi and Dr Zhang exchanged the following WeChat messages on 25 August 2016 while Dr Zhang was in China:

“[Dr Zhang]: How’s the contract?

[Mr Shi]: Have you checked?

This contract.

[Dr Zhang]: I cannot receive email in China.

Your ideas can be added and amended directly.

[Mr Shi]: I’ll call you later, the contract is terrible.

[Dr Zhang]: Ok, we can talk directly.

[Mr Shi]: I asked for revisions, trying to finish it within today, any feedback from Auyeung?

[Dr Zhang]: I got reply and will forward it to you in a minute.

[Mr Shi]: Have a call?

[Dr Zhang]: Will give you a new contract at tomorrow noon.

[Mr Shi]: Ok.”

The reference to “Auyeung” is a reference Auyeung Hencent & Day Lawyers, the solicitors acting for Tasman in relation to the purchase of the stage 3 site from LBD.
Dr Zhang gave evidence that he had a telephone conversation with Mr Shi during the exchange of WeChat messages above during which Mr Shi told him: “I want an agreement that debt can be converted into equity.” Dr Zhang then instructed his assistant, Ms Liu, to amend the agreement “so that the debt can be converted into equity”. Mr Shi accepted in cross-examination that he did not tell Dr Zhang that he wanted the right to convert the debt into equity so that he could be a partner or joint venturer in the Project with Dr Zhang.
Ms Liu gave evidence that Dr Zhang told her that Mr Shi wasn’t happy with the agreement, and that he wanted “a debt that can be changed to equity”. Dr Zhang asked Ms Liu to “just cooperate with Patrick with things he want.” According to Ms Liu, she also had a conversation with Mr Shi in which he told her that the loan agreement was “not what I want. I don’t want a loan. I want shares.”
On 26 August 2016, Ms Liu sent Mr Shi an email attaching a draft convertible note agreement, which Mr Shi forwarded on to Madison Marcus Lawyers. The parties to the draft convertible note agreement were Tasman (defined as “the Company”) and ACCE (“the Investor”). The terms of the convertible note were set out in Schedule 1 to the draft agreement. Schedule 1 specified a loan amount of $2,000,000, an interest rate of 4 per cent per annum and a maturity date of 31 March 2017. Clause 3.1 of Schedule 1 provided:

Rights of Conversion

3.1 Conversion of Convertible Note

(a)    Any time before the Maturity Date the Investor may elect to convert the Convertible Note by delivering to the Company a written notice requiring the Company to procure the conversion of the Loan Amount into Shares.
(b)   If the Investor elects to convert in accordance with Condition 3.1(a), the Company may elect to repay any accrued interest on the date Shares are issued to the Investor by:
(i)   paying the accrued interest to the Investor in immediately cleared funds; or
(ii)   in addition to the Shares to be issued under Condition 3.1(a), issuing such additional number of Shares to the Investor at the time of conversion is equal to 9% of the total number of Shares in the Project Company.”

The term “Project Company” was not defined in the draft agreement.
Mr Shi sent Dr Zhang the following WeChat message shortly after Ms Liu’s email attaching the draft agreement:

“The new one has been received, much better and looking at it now. But the proportion of 9% equity ratio does not look right. Don’t you use leverage? …”

Later on 26 August 2016, Mr Benoir Bayssari of Madison Marcus sent an email to Mr Shi outlining his comments following his preliminary review of the draft convertible note agreement. The comments included:

“1. you should use a clean SPV entity other than ACCE to enter into this agreement;

you are required to advance the money on the Completion Date being 1 September 2016,
you must elect to convert the note into shares by 31 March 2017;
if you do not elect to convert the note by this time, the Company must pay you the $2,000,000 back plus interest at 4% per annum;
interest accrues up until the date you convert the note into shares and is payable quarterly commencing on the date of the agreement;
the definition of Project Company does not make sense, it refers to shares;
the Project Company should be the Company and the party which contracts under this document, we are unsure why there is a definition of Project Company and Company;
the definition of Shares does not specify a number or percentage of shares In the Company which you have the right to acquire, this needs to be specified so that you can determine your potential interest in the Company;
there may be stamp duty consequences if you convert the notes to acquire more than 50% of the shares as the Company may be land rich when you acquire those shares;
there should be a restriction on the Company from varying its share capital after this agreement is signed to ensure that your interest is not reduced when you convert into shares (particularly if you are acquiring a number of shares and not a percentage of shares)

…

you should add a clause charging the development site in your favour to secure the loan amount, this would allow you to lodge a caveat over this site to secure your money;
we are of the view that the off-the-plan security proposed is unable to be properly secured without an exchanged contract for the purchase of those properties;
you should consider taking personal guarantees as security and also a specific security interest over the shares in the Company;
ultimately, the security you take Is a commercial matter for you;
you should ensure that the Company is the entity which exchanges the Contract and not some other entity, otherwise your shares in the Company will be worthless.”
1. On 27 August 2016, Mr Shi prepared a draft email to Ms Liu by cutting and pasting the points Mr Bayssari’s email above, excluding points 9 and 17, and changing “you” to “we” so as to refer to ACCE. Mr Shi then forwarded that draft email on to Mr Xi for his consideration. In his affidavit affirmed on 5 September 2021, Mr Shi described Mr Xi as “an employee of mine who does all the development feasibility studies and reviews all the documents”. As I have referred to earlier in these reasons, Mr Xi has been Mr Shi’s co-director of Vinidici and has owned 40 per cent of the shares in that company since its incorporation on 7 September 2016.
2. In cross-examination, Mr Shi denied having read Mr Bayssari’s email before cutting and pasting it into a draft email to Ms Liu that he then sent to Mr Xi. Mr Shi answered: “Absolutely not. If I read, I don’t need to send it to Xi. … I’m not good at reading the legal clause. That’s why I copy and paste and let my people to read. Let the – my boss to read to double confirm this is correct, or good, or an agreement I can sign.” Mr Shi confirmed that he sent the email to Mr Xi to “[a]sk to give his opinion and explanation on something.” However, when asked whether Mr Xi in fact gave that opinion or explanation, Mr Shi answered: “Nothing significantly important, and because Mr Xi is not a - a lawyer. He’s a – he’s just a nerd.” That last answer is inconsistent with Mr Shi’s earlier evidence that he had sent the email to Mr Xi (who Mr Shi described as “my boss”) to confirm whether this was an agreement that Mr Shi could sign because he (Mr Shi) was “not good at reading the legal clause”. It was put to Mr Shi that he did read Mr Bayssari’s email because he took the trouble to delete paragraphs 9 and 17 of that email when preparing the draft email to Ms Liu. Mr Shi replied: “It could be”, but denied reading Mr Bayssari’s email carefully.
3. Earlier in his cross-examination, Mr Shi had given evidence that Mr Xi became a director of Vinidici, not because he wanted to be involved in the management of the company but because “… I know his mum. His mum is a heavy duty business woman back in China. His mum is also in our industry doing a property development. His mum want for her son who’s Mr Xi in my company trying to learn and more importantly his mum say, ‘Look, they going to transfer the money from China. Invest the money from China to Australia slowly, slowly” and because Mr Xi “… want to study. He want to learn. He want to do the feasibility report. That’s what he good at, and what he is trying to do.” That evidence is inconsistent with Mr Shi’s conduct referred to above in forwarding to Mr Xi the draft email prepared for Ms Liu and seeking an opinion or confirmation from Mr Xi (“my boss”) about whether “this is correct, or good, or an agreement I can sign.” It is also inconsistent with the WeChat messages exchanged between Mr Shi and Dr Zhang on 2 November 2016, which reveal that Mr Shi understood at that time that Mr Xi would put Vinidici in funds to pay part of the $2,000,000 principal sum under the Convertible Note Agreement that it had by then entered into. [2]
  2. See [111]-[115] below.
4. On 29 August 2016, Mr Shi emailed to Ms Liu a draft version of the convertible note agreement in which some amendments proposed by Madison Marcus Lawyers were marked up. The parties to the draft agreement remained Tasman and ACCE. The amendments did not cover all of the 17 points raised in Mr Bayssari’s email dated 26 August 2016. However, a new clause 9.3 had been inserted pursuant to which Tasman charged the stage 3 land in favour of ACCE as security for repayment of the $2,000,000 loan plus interest.
5. Ms Liu has given evidence that Mr Shi telephoned her shortly after he sent the email with the revised draft agreement referred to immediately above. Mr Shi told Ms Liu that his solicitor had advised that the “security for Epping is not strong enough” but that Mr Shi had “sorted this out” with his solicitor and that the “security is not critical because I want shares”.
6. I interpolate to note that, notwithstanding Mr Shi’s WeChat messages to Dr Zhang concerning the draft agreement[3] , his preparation of a draft email to Ms Liu based on his solicitor’s advice and his telephone conversations with Ms Liu referred to above, Mr Shi gave evidence in cross-examination that he only read the drafts of the agreement “very briefly, because like what I said, I can’t understand every clause of these legal terms”. Later in his cross-examination, in the course of answering questions about whether he read Mr Bayssari’s email of 26 August 2016, Mr Shi said: “Normally when you brief read you normally you read the last two sentence and the beginning first two sentences.”
7. Mr Shi has given evidence that, about two days after the conversation in which he says that he told Dr Zhang that he had $2,000,000 to invest (which Mr Shi says occurred in late July 2016 but which Mr Zhang says occurred a few days before he left for China on 23 August 2016 to meet with investors), Dr Zhang told him: “My investors have come in from China overnight. They have seen the Rushcutters Bay site and have agreed to go ahead with the purchase.”
8. Mr Shi says that he became aware at about the same as the conversation referred to immediately above (which Dr Zhang denies) that TFMRB had been incorporated for the purpose of the Project. According to Mr Shi, Dr Zhang said to him: “I have set up a new Tasman company for the Rushcutters Bay development. It is called TFM Rushcutters Bay Land.”
9. As I have already mentioned, TFMRB was incorporated on 31 August 2016. At the time of its incorporation, Dr Zhang was its sole director and Tasman was its sole shareholder. Dr Zhang has given evidence that he told Mr Shi in early September 2016 (and before 7 September 2016) that:

“I have set up a developer company called TFM Rushcutters Bay Land Pty Ltd. It is a special purpose company that will develop the Rushcutters Bay Development.”

3. See [43] and [49] above.

In cross-examination, Dr Zhang agreed with a version of this conversation in which he described the company established for the Project as a “new Tasman company”.
On 1 September 2016, Ms Liu sent a further draft of the convertible note agreement to Mr Shi including the new clause 9.3 charging the stage 3 land as security for repayment of the $2,000,000 loan plus interest.
Mr James Tenghui Zhang was the representative of Dr Zhang’s investor from China. Dr Zhang did not tell Mr James Tenghui Zhang that Mr Shi was planning on investing $2,000,000 in the Project by way of a convertible note. [4] However, according to Dr Zhang, he invited Mr Shi to attend an inspection of the stage 3 site together with Mr James Tenghui Zhang on 7 September 2016. Dr Zhang says that he introduced the investor to Mr Shi as “Mr Zhang” and that this was the first time that he had disclosed the identity of the investor to Mr Shi. Dr Zhang did not tell Mr Shi anything else about Mr James Tenghui Zhang during the site inspection. Mr Shi denies being introduced to Mr James Tenghui Zhang at the stage 3 site.
4. T152.38-153.17.
As I have mentioned earlier in these reasons, Tasman had already transferred its shares in TFMRB to ABFX on 5 September 2016. This was recorded in the Cooperation Deed that Dr Zhang says was executed by Tasman and ABFX on 7 September 2016 after the site inspection referred to above. Clause 3 of the Cooperation Deed set out certain warranties given by Tasman, including that Tasman “warrants for” legal and compliance issues relating to the Project, the management of working capital financing and the construction loan for the Project (including obtaining construction loans in a timely manner), completion of unit sales for the Project, completion of construction on time and settlement of all unit sales. Clause 3 also contained a guarantee by Tasman that “the return of the Project is 24% p.a., the Project’s completion will be approximately 24 months …” and that “the guaranteed return of the Project to Bai Fu Xin is $9,600,000 for 24 months”. Clause 4 of the Cooperation Deed required ABFX to contribute $20,000,000 in order to acquire 80 per cent of Tasman’s shares in TFMRB. Clause 4 recorded that this share transfer had occurred on 5 September 2016. Clause 4 also provided that:

“Tasman agrees to pledge 20% of the shares in TFM Rushcutters Bay Land Pty Ltd to [ABFX] … as the Guarantee of $9,600,000 total return of the Project to [ABFX]. (This share pledge has been occurred on 5^th September 2016.)

If Tasman cannot finish the Project within 27 months and repay the principle [sic] and interest to [ABFX], Tasman agree to sell 20% of shares of TFM Rushcutters Bay Land Pty Ltd at $1.

Tasman warrants that TFM Rushcutters Bay Land Pty Ltd is a company established solely for the purposes of the Project, and that the company does not carry any other liabilities or debts.”

Mr James Tenghui Zhang was nominated in the Cooperation Deed as ABFX’s representative. As referred to below, Mr James Tenghui Zhang was subsequently appointed as a director of TFMRB on 22 January 2017.
The Form 484 notifying the transfer of all of the 100 shares in TFMRB from Tasman to ABFX on 5 September 2016 was not lodged with the Australian Securities and Investments Commission (ASIC) until 23 November 2016. Neither Mr Zhang nor Ms Liu gave any evidence as to the reasons why the Form 484 had not been lodged sooner after the transfer of shares to ABFX on 5 September 2016. In cross-examination, Dr Zhang denied that the reason was to ensure that ABFX did not appear as a shareholder on any company search of TFMRB prior to 23 November 2016.
Dr Zhang says that he telephoned Mr Shi on the evening of 7 September 2016, after executing the Cooperation Deed, and told Mr Shi:

“The investor is investing most of the money for the Rushcutters Bay project. The majority of Tasman’s shares in TFM Rushcutters Bay has been sold to the investors. I got 20% shares left in the company.”

According to Dr Zhang, Mr Shi replied: “Good”.
In his affidavit affirmed on 13 August 2021, Dr Zhang deposed that it was his understanding at the time he entered into the Cooperation Deed that 80 per cent of Tasman’s shares in TFMRB had been sold to ABFX but that Tasman retained the remaining 20 per cent of the shares in TFMRB. Dr Zhang attributed his understanding to the terms of the Cooperation Deed:

“I understood from the Cooperation Deed that ABFX would:

a.   only acquire 80% of Tasman’s shareholding in TFM Rushcutters Bay;
b.   give a guarantee over the remaining 20% of the shares. The guarantee was in relation to the total return of the Rushcutters Bay Development; and
c.   return the 20% of the shares if ABFX got a $9,600,000 total return from the Project and Tasman finished the Project within 27 months of the date of the Cooperation Deed.”

Mr Shi is “absolutely certain” that the conversation described by Dr Zhang and referred to at [66]-[67] above did not occur.
As I have already mentioned, Dr Zhang did not tell Mr James Tenghui Zhang that Mr Shi was planning to invest $2,000,000 in the Project or that Mr Shi might become a shareholder in TFMRB. Dr Zhang accepted in cross-examination that, if Vinidici did convert the $2,000,000 loan into a 9 per cent shareholding in TFMRB, the 20 shares in TFMRB that Tasman had transferred to ABFX pursuant to the pledge under the Cooperation Deed would no longer represent 20 per cent of the shares in TFMRB. Dr Zhang also accepted that Mr James Tenghui Zhang had insisted on Tasman pledging 20 per cent of the shares in TFMRB. Dr Zhang denied, however, that the reason he did not tell Mr James Tenghui Zhang about Mr Shi and Vinidici’s involvement in the Project was because he knew that it meant the shareholding structure required by Mr James Tenghui Zhang wouldn’t work and that ABFX might not proceed with its investment.
As I have already mentioned, Vinidici was incorporated on 7 September 2016. Mr Shi and Mr Xi were the directors of Vinidici and, between them, held 80 per cent of the shares. The remaining 20 per cent of the shares were held by Ms Mengjie Zhang, whom Mr Shi described as his secretary. The directorship and shareholding of Vinidici have not changed since the incorporation of the company.
On 8 September 2016, Mr Shi received a further updated version of the convertible note agreement from Dr Zhang’s assistant, Ms Liu. At Mr Shi’s request, ACCE had been removed as a party to the agreement and replaced with Vinidici. Tasman had been removed as a party and replaced with TFMRB.
There is no evidence of any contemporaneous correspondence or discussion between the parties concerning the change from Tasman to TFMRB, save for an email from Mr Shi to Ms Liu (copied to Mr Xi) dated 7 September 2016 requesting her to finalise the agreement between Vinidici (instead of ACCE) and “Tasman Rushcutters Bay”. [5] As I have already mentioned, Mr Shi knew by this time that TFMRB had been incorporated for the purpose of the Project and Marcus Madison had advised Mr Shi on 26 August 2016 to ensure that the company that was the borrower under the convertible note agreement was the same company that purchased the stage 3 land.
5. Exhibit PS-1, p 128.

Ms Liu sent Mr Shi a further draft convertible note agreement later in the afternoon on 8 September 2016. In this further draft, the due date for the second instalment of the $2,000,000 principal sum had been extended from 17 September 2016 to 15 October 2016.
According to Dr Zhang, he and Mr Shi had a few telephone conversations on 8 September 2016 prior to the execution of the Convertible Note Agreement. Dr Zhang says that, in one of those conversations, he exchanged words to the following effect with Mr Shi:

“[Dr Zhang]: The money is ready. 80% of the shares in TFM Rushcutters Bay are held by our investors and 20% held by myself.

[Mr Shi]: Why not a land loan?

[Dr Zhang]: I don’t want to. The funds can fully cover and so no need for a land loan.”

Mr Shi denied that any such conversation occurred. He deposed:

“… I say with absolute certainty that this conversation never happened, and Eric has never said to me anything to that effect. I would recall if he had said those things to me, because if I had known that Eric was only a minority shareholder I would not have proceeded with my investment in the project, especially as Eric’s ‘investors’ were not known to me.”

Dr Zhang also gave evidence that he had a conversation with Mr Shi before TFMRB exchanged contracts for its purchase of the stage 3 site on 9 September, in which he told Mr Shi:

“We are going to settle the purchase of the land in cash and borrow money from banks for the construction.”

The Convertible Note Agreement was executed by Mr Shi and Mr Xi as the directors of Vinidici (“the Investor”) and TFMRB (“the Company”) on the evening of 8 September 2016.
The Recitals to the Convertible Note Agreement stated:

“A. The Investor has agreed to subscribe for, and the Company has agreed to issue, the Convertible Note for the sum of AUD$2,000,000,000.00 to be used by the Company for the development project at 18-28 Neild Avenue, Darlinghurst and being the whole of the land in Certificate of Title Folio Identifier Number 4/1136932 and being Lot 4 in Deposited Plan No. 1136932.

B. The development project is DA approved for forty (40) apartments development, and the contract price for the purchase of the development is $24,500,000.00.

C. The Parties acknowledge that the moneys referred to in this Agreement will be used to exchange the contract for the purchase of land address at 18-28 Neild Avenue, Darlinghurst and being the whole of the land in Certificate of Title Folio Identifier 4/1136932 and being Lot 4 in Deposited Plan No. 1136932. The contract for the sale of land is attached to Appendix I in this Agreement.

D. The parties wish to record their mutual understanding as to the terms of the loan. This Agreement sets out the terms of the loan as mutually agreed by the Parties.”

Clause 2 of the Convertible Note Agreement provided:

“2 Convertible Note

2.1 Agreement to subscribe

The Investor has agreed to subscribe for the Convertible Note for an amount equal to the Investment Amount on the terms and conditions set out in this agreement.

2.2 Repayment or Conversion of Convertible Note

(a)   If the Investor elects to convert the Convertible Note in accordance with the terms and conditions set out in Schedule 1, the Company must procure the issue of Shares to the Investor in accordance with Schedule 1.
(b)   The Company may elect to redeem the Convertible Note after the Rights Issue Completion Date on the terms set out in Schedule 1.
(c)   The Company must repay the Investment Amount and any interest payable (if applicable) if the Investor does not elect to convert the Convertible Note in accordance with the terms and conditions of Schedule 1.”

The “Investment Amount” is defined as $2,000,000. The “Maturity Date” is specified in Schedule 1 to the Convertible Note Agreement as 31 March 2017. The term “Shares” is defined as meaning a percentage of ordinary fully paid shares in TFMRB calculated in accordance with a stated formula but being not less than 9 per cent.
Clause 4 of the Convertible Note Agreement provided for the “Investment Amount” to be paid in two tranches of $1,000,000, with the first being payable on 9 September 2016 and the second being payable on 15 October 2016.
Pursuant to clause 9.3, TFMRB charged the stage 3 land in favour of Vinidici as security for repayment of the $2,000,000 “Investment Amount” plus interest. The clause contained an express acknowledgement by TFMRB that the charge is a caveatable interest.
Clause 10.5 of the convertible note agreement provided:

“10.5 Operation of this agreement

(a)    This agreement contains the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to that subject matter is replaced by this agreement and has no further effect.
(b)    Any right that a person may have under this agreement is in addition to, and does not replace or limit, any other right that the person may have.
(c)    Any provision of this agreement which is unenforceable or partly unenforceable is, where possible, to be severed to the extent necessary to make this agreement enforceable, unless this would materially change the intended effect of this agreement.”

The terms of the convertible note were set out in Schedule 1 to the Convertible Note Agreement, including the “Loan Amount” of $2,000,000, interest rate of 4 per cent per annum and the maturity date of 31 March 2017. The terms included:

“2.3 Nature of Convertible Note

The Convertible Note will be secured by two off the plan properties as set out in Condition 8 and the charging provision provided in clause 9 of the agreement. The Company will not apply for official quotation of the Convertible Note.

Rights of Conversion

3.1 Conversion of Convertible Note

(a)    Any time before the Maturity Date the Investor may elect to convert the Convertible Note by delivering to the Company a written notice requiring the Company to procure the conversion of the Loan Amount into Shares.
(b)   If the Investor elects to convert in accordance with Condition 3.1(a), the Company may elect to repay any accrued interest on the date Shares are issued to the Investor by:
(i)   paying the accrued interest to the Investor in immediately cleared funds; or
(ii)   in addition to the Shares to be issued under Condition 3.1(a), issuing such additional number of Shares to the Investor at the time of conversion is equal to 9% of the total number of Shares in the Company.

Issue of Shares on Conversion

4.1 Notices irrevocable

A notice given under Condition 3.1 is irrevocable.

4.2 Conversion

Subject to Condition 6, on conversion the Loan Amount will be converted into the Shares.

4.3 Obligations on conversion

Upon receipt of a notice from the Investor under Condition 3.1, the Company must within 2 Business Day [sic] procure the conversion of the Loan Amount in accordance with Condition 4.2 and take all steps necessary to cause the Investor to become entitled to be registered as the holder of the relevant Shares (and any additional Shares issued under Condition 3.1 (b)(ii)).

4.4 Record Dates

The Company will keep the Investor informed in a timely way of the Record Dates relating to any dividends or distributions to be paid by the Company.

4.5 Shares issued to rank equally

Any Shares issued on conversion (and any additional Shares issued under Condition 3.1 (b)(ii)) must rank from the date of issue in all respects equally with all other Shares in the Company.

Redemption

5.1 The Company may redeem

If the Investor has not elected to convert the Convertible Note in accordance with Condition 3.1, the Company may redeem the Convertible Notes at any time following the 30 day anniversary of the Rights Issue Completion Date by repaying to the Investor any outstanding Loan Amount plus any accrued interest payable.

Reconstructions of Capital

6.1 Reconstructions

If, before conversion or repayment, there is a reorganisation of the issued share capital of the Company (including by way of subdivision, consolidation or reduction), a proportional adjustment will be made to the number of Shares into which the Convertible Note is convertible so as that the Convertible Note is convertible into the same percentage of the issued ordinary share capital as the percentage into which they are convertible immediately before the relevant event (subject to the same provisions with respect to rounding of entitlements as sanctioned by the meeting of shareholders approving the reconstruction of capital) in a manner which will not result in additional benefits being conferred on the Investor which are not conferred on shareholders, but in all other respects the terms for conversion shall remain unchanged.
…

Security

8.1 The Company grants security

The Company grants the following off the plan properties as Security for the Company's obligations under this Agreement, contracts are to be exchanged and the Company acknowledges that the prices have been paid in full by the Investor:
(a) Unit A01/2-8 Hazlewood Pl Epping NSW 2121. Unregistered Plan: Lot 41 in an unregistered plan which is part of Lot 15 Plan DP28934, Lot 14 Plan DP 28934, Lot 13 Plan DP 28934 and Lot 12 Plan DP 28934.
(b) Unit B02/2-8 Hazlewood Pl Epping NSW 2121. Unregistered Plan: Lot 41 in an unregistered plan which is part of Lot 15 Plan DP28934, Lot 14 Plan DP 28934, Lot 13 Plan DP 28934 and Lot 12 Plan DP 28934.

8.2 Release the security

Upon the Terms of the Convertible Note in Schedule 1, being satisfied. The Investor will follow all reasonable steps to rescind the contracts and return the properties mentioned in clause 8.1 to the Company.

8.3 Shall not sell

The Investor shall not sell or offer to sell, assign, pledge, transfer, create, permit to subsist any encumbrance over, or otherwise deal with the properties mentioned in clause 8.1 without the prior written consent of the Company, which shall not be unreasonably withheld.”

As Dr Zhang submitted, neither the Convertible Note Agreement nor the terms of the convertible note in Schedule 1 contained any representation or warranty concerning the ownership of shares in TFMRB as at the date of the agreement or at any time thereafter. Clause 6.1 of Schedule 1 was directed to ensuring that Vinidici would be issued with the agreed percentage shareholding in TFMRB in the event of a restructure of that company’s share capital between the issue of the convertible note and the date of any election by Vinidici to convert the loan to shares. Clause 6.1 was not directed to changes in the ownership of shares, although the reference to any reorganisation of the share capital being “sanctioned by the meeting of shareholders” contemplated that there might be more than one shareholder in TFMRB before Vinidici exercised its right of conversion. A reorganisation of a company’s share capital may occur for many different reasons. Investment in the company by a new, incoming shareholder is one of those potential reasons, as Dr Zhang submitted, but only one of many.
Mr Shi gave evidence that he signed the Convertible Note Agreement at Dr Zhang’s office on 8 September 2016, after which they stood together for a photograph at Dr Zhang’s suggestion. According to Mr Shi, Dr Zhang said: “This will be historical moment for both of us, we will be very successful.”
Mr Shi gave the following evidence during cross-examination on the first day of the hearing about his desire for shares in TFMRB and his understanding that Vinidici’s right of conversion under the Convertible Note Agreement had to be exercised before the end of March 2017 (emphasis added):

“Q. … At what point in time did you agree that the interest should be at 4% per annum?

I agree that from the beginning I never argue about that cause my intention is not for the interest. If I just lending the money to Eric, 4% interest rate is way too low, according to the market rates. The market rate is normally above 10%. I was focusing on this joint venture with him, working together and making big profit, real money from the project. I'm not working for the interest.

Q. My question was slightly different. When was the discussion had about the interest rate being 4%?

A. I never said that.

…

Q. … when, if at any time, was there a discussion between you and him to be the effect that the loan would bear the rate of 4%?

A. … We never discussed that cause he give me 4%, I take it. Yeah.

…

Q. Can I suggest to you that you were concerned to reach an agreement about the rate of interest?

I don't concern that much.

Q. Well, you were concerned, weren't you?

A. Well, if the project failed, yeah. It's just the normal business, logical thinking.

Q. Let me understand that, and the fault is, no doubt, mine. I want to suggest to you that in August 2016 you wanted to reach an agreement with Mr Zhang about the rate of the interest that the loan would bear?

A. No. I disagree.

Q. Are you saying to her Honour that it never crossed your mind to negotiate with Mr Zhang what the rate of interest the loan would bear?

A. You mean the question, right?

Q. The question. That's all I'm allowed to do.

A. All right. I don't want a loan agreement. I want to be a shareholder, like a JV partner. If I want a loan agreement, 4% is way too loan [sic]. Like the way I said it before, the market rate is about 10%. I want shares. If we win, we win; if we lose, we lose. 4% is just a whatever number. I don't really pay too much attention on the interest rate. If it's a loan agreement, 4% is way too low. I'd probably say that, but that's why we change it from a loan agreement to a convertible agreement because I want shares. I want to run the project. I don't want to just become a lender, give the money.

…

Q. You told her Honour a few moments ago that you wanted the loan agreement to change to a convertible note agreement so you could have an investment in the venture. Do you remember saying that to her Honour?

A. Yeah.

Q. You certainly told Mr Zhang that you wanted to change the loan agreement to a convertible note. You told him that?

A. Yeah.

Q. But you never told him that you wanted to take, or be a joint venture, in this business, did you? You never told him that?

A. I don't remember, because that's - that's - that's maybe a little bit of professional legal knowledge there.

Q. On your part?

A. On my part, yeah.

Q. Well, you had the legal knowledge at the time, didn't you?

A. Not as much as you are.

Q. … But you never told Mr Zhang in late 2016 that the reason you wanted it to change from a loan agreement to a convertible note was that you could be a partner or a joint venturer in this project; correct?

(No verbal reply).

Q. Correct?

A. Correct.

…

Q. Did you understand, pursuant to the terms of the convertible note agreement, how you would come to acquire shares in TFM Rushcutters Bay? I'm asking for your understanding in late 2016?

A. Could you repeat the question again? In late 2016?

Q. I'm focusing upon the period late 2016. August/September.

A. Uh-huh.

Q. Did you have any understanding how, pursuant to the terms of the convertible note agreement, you ever obtain shares in TFM Rushcutters Bay?

A. I understand I have 9% shares from the projects, from TFM Rushcutters Bay.

Q. Did you understand how you would get the 9% shares? As to what would have to happen before you get that?

A. By investing $2 million.

Q. Pardon?

A. Investing $2 million.

Q. Can I ask you, please, to go to page 617 of that volume. I'm going to show you the convertible note agreement.

A. Yes.

Q. I take it you read this document before you came to execute it?

A. Yeah.

Q. Indeed, you had the firm, Madison Marcus, acting for you, for your company, that is, in relation to the drafting of this document; correct?

A. Correct.

…

Q. If you go to page 629, we say a document called, ‘Schedule 1’.

A. Yes.

Q. We see there's something called the "Maturity Date" at the top. 31 March 2017. Do you see that?

A. Yes.

Q. In clause 3.1, it says this, and I'm looking at page 629. Do you have that, Mr Shi?

A. Yes.

Q. ‘At any time before the maturity date, the investor may elect to convert the convertible note by delivering to the company written notice requiring the company to procure the conversion of the loan amount into shares.’ Do you see that?

A. Yes.

Q. Now, did you understand in September 2016, when you signed this document, that the company, of which you were a director, the plaintiff, could exercise a right to convert the loan into shares on or before 31 March 2017, being the maturity date.

A. I understand that.

Q. You understood at the time, didn't you?

A. I understand at the time, yeah.

Q. And--

A. But can I explain?

Q. No. I'll just keep going for the moment. You didn't actually issue any such notice, did you?

A. No.

Q. You understood that the only way you could convert your loan into equity was by issuing a notice in accordance with this convertible note agreement; correct?

A. Correct.

Q. And you had to do it by the end of March 2017?

A. Correct.

Q. The reason you didn't exercise that right is because you didn't want to convert the loan into equity, did you?

A. I didn't exercise it because the project is not even finished.

Q. That was the only way, as you understood at that time, that you would convert, or obtain shares, in TFM Rushcutters Bay? That was the only mechanism as you understood it; correct?

A. Yes.

Q. And you understood that once 31 March 2017 had gone, your company, the plaintiff, lost that right?

A. I don't know.

…

Q. Did you understand in late 2016 or early 2017 any other mechanism by which your company could obtain shares in TFM Rushcutters Bay? I simply want your understanding?

A. Yeah.

Q. What was the other mechanism by which you could obtain shares in TFM Rushcutters Bay?

A. Well, look, I didn't think in that way, because we plant the seeds, and the fruits not even grow up. No-one would think about it to - to exercise these things, you know?

Q. You knew when you executed the convertible note agreement that the construction would take many months, if not years, to undertake; correct?

A. I know that.

Q. And in September 2016, you understood that the construction work would be close to finishing by 31 March 2017; correct?

A. Could you repeat the--

Q. Yes. I'm sorry. You knew when you signed the convertible note agreement--

A. Uh-huh.

Q. -in September 2016 that the construction work would not be finished any time soon before 31 March 2017? You knew that, didn't you?

A. I'm not too sure.

Q. Are you suggesting--

A. Because it's a - I approved the project, and it's only 40 units. If you have time - in one year time, if everything runs smoothly, you can - you are able to complete the construction.

Q. Did you have in your mind in September 2016 that a development of 40 units could be completed between September 2016 and March 2017? Is that seriously your evidence?

A. No, it can't. It can't.

…

“Q. You knew when you came to sign the convertible note agreement that the project wouldn't be completed by the maturity date of 31 March 2017; correct?

Incorrect. I didn't pay too much attention on this.

Q. You never asked Mr Zhang to extend the maturity date, did you?

A. No.

Q. Not once?

A. Not once.

Q. Can I suggest to you that if you wanted to obtain equity in TFM Rushcutters Bay, if that was truly your concern, you would have exercised, when noticed, on or before 31 March 2017?

A. No. Because that was not truly my concern at that time.

Q. And if you truly wanted to obtain equity in TFM Rushcutters Bay, you would have asked Mr Zhang to extend the maturity date past 31 March 2017. What do you say about that?

A. Can you repeat again?

Q. Yes. If you were truly concerned to obtain equity in TFM Rushcutters Bay, you would have asked Mr Zhang to extend the maturity date, wouldn't you?

A. No. Because that was not truly my concern.

Q. What was your concern?

A. My concern is to run the project. To make it profitable and get the shares.

Q. Part of your concern was, as you told her Honour on your case, to obtain a share in the venture; correct? That was part of your concern, wasn't it?

A. Share of venture?

Q. Share in the venture?

A. Yeah.

Q. After you executed the convertible note agreement, can you think of a single step you took to try and obtain some form of share in the venture?

A. No.

Q. You didn't do anything in that regard, even though you knew, so you say, that Mr Zhang was telling you that he was losing control of the venture? That never prompted you to seek to negotiate with him for share in a venture, did it?

A. He told me that - that's a few years later.

Q. And it didn't prompt you to ask for a share in the venture then, did it?

A. Could you repeat the question again?

Q. It didn't cause you then to ask Mr Zhang then to give you a share in the business, did it?

A. No. Because that was too late.

Q. How do you know it was too late?

A. He told me. He told me the situation.

Q. He told you it was too late for you to get a share in the business?

A. He never offered that.”

On the second day of the hearing, Mr Shi gave the following evidence in cross-examination:

“Q. You understood in September 2016 that this document [referring to the convertible note agreement] did not give any rights to you to receive the profits of the business, except through any shareholding you might acquire in TFM Rushcutters Bay. You knew that, didn’t you?

A. I don’t know. … Based on your question, I don’t know if I knew – I understand it properly. So because this is all the legal expertise, legal knowledge, so I’m not too sure if I can understand this properly – correct – in a correct way.

Q Let me just try and do this a little bit slowly. I'm asking for your understanding as at September 2016. Do you understand that?

A. Yes.

Q. As at September 2016, you understood that apart from whatever shares you might obtain in TFM Rushcutters Bay, no part of the profits of the development would flow through to your company, Vinidici; correct? You knew that.

A. Before when?

Q. I'm asking for your understanding as at September 2016.

A. Yeah.

Q. You knew that apart from such shares as Vinidici might secure in TFM if the convertible note agreement was exercised, your company had no rights to the profits of the development at Neild Avenue. You knew that, didn't you?

A. I don't know.

Q. You don't know.

A. Mm.

Q. Is that a serious answer, Mr Shi, that you did not know that at the time?

A. I don't know. I have the - this right things.”

Mr Shi then gave the following evidence about the Madison Marcus email dated 26 August 2016, referred to at [50] above (emphasis added):

“Q. Did you read Mr Bayssari's email to you which is on page 1 of that bundle?

Yes, of course, I read that, but I don't understand this. I can't understand all this clause, so normally, I make a phone call to Benoir Bayssari, just simply ask, ‘Is this okay? Should I sign? Any problem?’ Cause this just the normal mentality thinking.

Q. You certainly read paragraph 3, didn't you? "You must elect to convert the note into shares by 31 March 2017." You certainly read that, didn't you?

A. Probably. I can't be certain.

Q. You certainly knew as at late August 2017 that your company, Vinidici, had to elect to convert the note into shares by 31 March 2017. You knew that, didn't you?

A. I knew that now.

Q. You knew that then, didn't you?

A. I don't pay too much attention back to those days.

Q. With respect, I'll ask the question again. You knew in late August 2016 that Vinidici must elect to convert the note into shares by 31 March 2017. You knew that, didn't you?

A. Very honestly, I don't know.

Q. You don't recall, when you read this email, having any confusion about the contents of paragraph 3, do you?

A. Like what I said, when Benoir sent me - Madison Marcus Lawyers sent me all these clause changes, I just take a brief look cause I can't understand every single word or every clause in the legal way. So, what I do is ask - normally ask my lawyer, ‘Is this a good contract? Okay contract. I can sign or not?’

Q. When you swore your three affidavits in this case, you didn't require a translator, did you?

A. No.

Q. You can read English--

A. Yeah.

Q. -perfectly competently, as far as you understand it; correct?

A. I can read English, but my English is not perfect.

Q. But it was good enough for you to be able to sign your affidavits without the need for a translator; correct?

A. Well, I signed the affidavit, yes.

Q. In August 2016, you knew exactly what paragraph 3 was talking about, didn't you?

A. No.

Q. As you sit in the witness box now, you understand what paragraph 3 is communicating to you.

A. You mean the clause 3?

Q. Yeah.

A. Yeah.

Q. As you sit in the witness box now, it's perfectly plain what it's saying to you, isn't it?

A. In the box, it is perfectly what, sorry?

Q. Plain, what's it's saying to you. Perfectly clear.

A. Perfectly clear.

Q. Yeah.

A. If you ask me to read the clause 3, ‘You must elect to convert’, look, I don't understand what it means of elect to convert.

Q. Mr Shi, you knew by this stage that your company was negotiating an agreement which was called a convertible note agreement; correct?

A. Yeah.

Q. You knew that an element of that contract was that on certain terms and conditions, the loan your company was extending could be converted into shares of TFM Rushcutters Bay. You knew that, didn't you?

A. I knew that.

Q. That involved a conversion; correct?

A. What do you mean by conversion?

Q. A conversion of the loan into shares.

A. A conversion, yeah, is - yeah.

Q. By this stage, 26 August 2017, you knew that that was the sort of agreement the parties were negotiating. You knew that, didn't you?

A. Could you repeat? Back to 26--

Q. You knew as at the date of this email that the parties were negotiating an agreement that provided for the conversion of the loan into shares.

A. I can't remember.

Q. When do you say you became aware, if you can remember, that that was an element of the transaction you were negotiating?

A. That's my lawyers on behalf of me to negotiate the clause.

Q Mr Shi, I want to suggest to you, you knew full well as at 26 August 2017 that an element of this contract - let me go back. I'm asking for your understanding as at late August 2016. As at late August 2016, you knew that your company, Vinidici, would be lending $2 million; correct?

A. Yes.

Q. You also knew in late August 2016 that the terms of the agreement which was being negotiated allowed Vinidici to convert the $2 million into shares in TFM Rushcutters BAY.

A. I don't remember in that date I fully understand or not. Now, I fully understand I can convert.

…

Q. Do you recall when you first understood that Vinidici had the right to convert its loan into the shares of TFM? When did you first remember that that right existed for Vinidici's benefit?

A. Well, around the 2019. When I realised that there could be a problem, I bring this agreement to see some lawyer friends. Then they told me, ‘You can elect to convert’, something, something.

Q. Is it your evidence that when you got this email, the one in front of you, from Mr Bayssari, that you telephoned someone from Madison Marcus to ask about what it was saying?

A. I can't remember. Well, I just ask, ‘Is that a good contract? Can I sign?’

Q. I want to suggest to you that the evidence you've been giving about your lack of recollection is incorrect. You knew full well at this time what the convertible note agreement provided insofar as it related to the conversion of loan into shares.

A. Sorry, what do you mean?

Q. I'm suggesting to you, your evidence is false.

A. No, I disagree.

Q. How many times did you speak to people from Maddison Marcus between, say, in the two weeks preceding the execution of the convertible note agreement concerning the terms of the agreement or the drafts? How often would you speak to them?

A. Twice, probably.

Q. Was that to Mr Bayssari or to Mr Qutami, or to someone else?

A. Bayssari is the junior drafter of the agreement or look at the agreement, sorry, not drafted. Rimy is his boss.

Q. That’s R-I-M-Y.

A. Yes.

Q. You asked them for advice about the contract, didn’t you?

A. I ask them the advice, yes.

Q. They told you what a convertible note agreement involved, didn’t they?

A. I can’t remember but I think they must have say something.

Q. You must have understood before you signed it, even from what they said or from what you read, that the loan could be converted into shares. You must have understood that?

A. At that time, at 26 August, no.

Q. As at the time you executed the agreement. Or about that time?

A. No.

Q. What I want to suggest to you is that evidence is false. What you just told her Honour is false and you know it to be false.

A. What do you mean?

Q. I’m suggesting to you, with great respect, that you are not telling the truth to her Honour about your recollection?

A. No. I’m telling her 100% truth.

…

Q. Go to paragraph 4 of the email. You understood that the company would pay 4% per annum interest.

A. Yeah.

Q. And do you recall reading paragraph 4 in that email?

A. I can’t remember.

Q. It said if you do not elect to convert the note by this time the company must pay you 4%. Do you see that?

A. Yeah, saw that.

Q. I suggest you understood that the interest at 4% would kick in, as it were, once you had not elected to convert the loan into equity?

A. No, back to that date. What I understood is if the projects is not that profitable, I probably will have my $2 million back plus 4% interest rate as a little bit of bonus. That’s what I always understood until in 2019 when I realised there could be problem, I bring the convertible note agreement to see my lawyer friends then I realised that I can elect to convert the shares or whatever. So I’m just being very, very honest. I’m tell the 100% truth.

Q. When you say you saw some lawyer friends in 2019, who were the lawyers you say?

A. CKSD Lawyers.

Q. Did you understand from what they told you that as at 2019 you could then convert the loan into equity?

A. They told me that at that time, yes.

Q. Just so it’s entirely clear, did they tell you that you could then at that point in time in 2019 still convert your loan into equity?

A. No. I can’t remember.

Q. What did they tell you about this issue?

A. They said, ‘Look, it could be a problem. You could be in trouble’, because I didn’t meet them in the formal way because I just ask them to have a coffee, pass the document, ask their opinion. They say, ‘Look, this could be a problem.’

Q. Even then you didn’t ask Mr Zhang if the loan could be converted to equity, did you?

A. At that time no I didn’t ask him to convert but I ask him to pay the money back.

Q. If we go back to this document in front of you, we see paragraphs 3, 4 and 5 all refer to a conversion, or convert. You see the word convert appears in each of those three paragraphs, 3, 4 and 5?

A. Yes, I saw that.

Q. You must have understood when you read this email that the issue of converting or conversion was an important part of this transaction?

A. In 2016?

Q. Yes, when you read this email.

A. No. At that time your mentality is trying to set up the company, the JV company, trying to start up a project, trying to run things. You think this is a great opportunity.

Q. Did you before 2016 ever negotiate a joint venture agreement?

A. Could you say that again, please, sorry.

Q. You mention a JV company in the last answer you gave to her Honour. Before August 2016, had you ever been involved in drafting or signing a joint venture agreement?

A. No.

Q. But you knew that the agreement that you signed in September 2016 never once mentions a joint venture, does it?

A. Yeah.

Q. That’s because it wasn’t your intention in September 2016 to enter into any joint venture with Mr Zhang or any entity associated with him?

A. No, because like what I said, I’m not a legal expert. There could be many forms of the joint venture.

Q. You certainly have expertise in dealing with contracts because you’ve been an estate agent since 2010. Correct?

A. A real estate agent doesn’t explain the contracts.

Q. Your evidence is even though the word ‘convert’ appears in paragraphs 3, 4 and 5 of this email, you don’t recall asking Mr Bayssari or Rimy anything about what these paragraphs were referring to. Is that right?

A. I didn’t ask specifically because I don’t have the knowledge and the capacity to ask specifically. Normally the question I ask are very general in like, ‘Is this a good contract I can sign?

Q. I’m suggesting that evidence is false, and you know it to be false.

A. I disagree.”

Although Mr Shi gave evidence that he was aware from the outset that Dr Zhang was procuring funds from investors in China to purchase the stage 3 land[6] , he also gave evidence that:

“I didn’t ask Eric specifically for any details about the Chinese investors, as that was his business. I didn’t want to encroach on his territory as Eric dealt with the investors while I focused on pre-sales and marketing. I did not want Eric to think that I was trying to poach his investors.”

6. See [26]–[29] above.

Mr Shi gave evidence that, at the time Vinidici entered into the Convertible Note Agreement, he did not know that Tasman had transferred its shares in TFMRB to ABFX on about 5 September 2016. Nor did he know that Tasman had entered into the Cooperation Deed. In paragraph 47 of his affidavit affirmed on 5 July 2021, Mr Shi gave evidence that he believed that he was investing in the Project together with Dr Zhang through their respective companies established for that purpose, albeit that Dr Zhang “had obtained money from his Chinese investors”. Mr Shi deposed that:

“I signed the Convertible Note Agreement in the belief that TFM Rushcutters Bay was the special purpose company owned by Tasman, which I knew was a company in which Eric was the majority shareholder and controlling director.”

Mr Shi’s evidence is that he held that belief because that was the substance of what Dr Zhang had told him in their previous conversations. I have referred to Mr Shi’s evidence of those previous conversations at [24]-[25] and [57]-[60] above.
In paragraph 49 of his affidavit affirmed on 5 July 2021, Mr Shi gave the following further evidence of his state of mind at the time Vinidici entered into the Convertible Note Agreement and paid the first tranche of the $2,000,000 investment sum:

“I placed a lot of trust in Eric. Most importantly, in deciding to invest in the Rushcutters Bay project I placed great significance on Eric’s expressions of personal interest in the Rushcutters Bay site and its development, and how motivated he was to see a successful and profitable project. I also placed great significance on what I understood to be his direct financial interest in the project, because I believed that would mean he would be committed to managing the project prudently and successfully. I wanted to be alongside him as a business partner in this venture and based on the substance of our discussions and developing relationship I believe he also wanted to be in partnership with me. My relationship with Eric and his direct personal and financial involvement in the Rushcutters Bay project were truly the main reason for my investment.”

In paragraph 51 of his affidavit affirmed on 5 July 2021, Mr Shi deposed:

“If I had been informed that Tasman had sold either all of its interest in TFM Rushcutters Bay or most of its interest, I would not have proceeded to sign the Convertible Note Agreement and would not have invested in the project. As mentioned in paragraphs 47 and 49 above, I was interested in investing in a development in which Eric was the other investor or at least was a major investor because that would mean that he was directly invested in the profitability of the project. If I had known that had no or very limited direct ownership and therefore limited incentive to ensure that the development was profitable, I would not have invested in the project.”

Mr Shi was asked in cross-examination whether his reference to Dr Zhang being “at least … major investor” meant that he understood in August and September 2016 that there might be other shareholders in TFMRB. Mr Shi answered: “Maybe. It could be.” However, when asked whether he thought in August and September 2016 that there might be other shareholders in TFMRB that were not associated with Dr Zhang, Mr Shi replied: “No. I didn’t think that way.”
According to Mr Shi’s evidence, Dr Zhang told him nothing about the identity of the investors or the structure or terms of their investment in the Project and Mr Shi did not ask him any questions because he did not want Dr Zhang to think that he (Mr Shi) was trying to poach his investors. In cross-examination, Mr Shi said: “Every business middle man will be very, very sensitive because to them, like the investors like the treasure vault, they don’t want other people to get involved, get in contact, communicated. So normally they protect their investors very well. They don’t want to tell people who are my money man.” Dr Zhang denied this sensitivity.
After some cross-examination about his reasons for wanting to invest in the Project, Mr Shi was asked in about his understanding in early September 2016 about the terms on which the other investors might invest in the Project. Mr Shi gave the following evidence:

“Q. At this time, did you understand the terms upon which the investors might invest?

A. Yeah.

Q. Did you know they were going to take shares in the company or a loan or what? Did you have any idea?

A. Absolutely no idea. That’s – sorry.

Q. … As at late 2016, you know that investors might in vest in the project such as this in a number of ways. You knew that, didn’t you?

A. I knew that, but may I explain?

Q. No. You knew that one way was they might take a secured loan over the property; correct?

A. Yes.

Q. You knew another way was they might buy shares in the company which owned and was developing the land; correct?

A. Could you say that again?

Q. Yes, of course. You knew that another way was they might acquire shares in the company which owned and was developing the land; correct? That was another possible form of investment; correct?

A. No.

Q. You disagree with that proposition, that an investor would take units or shares in the company.

A. No, I don’t know.

[Mr Shi was then asked about his experience in the real estate industry between 2010 and 2016.]

Q. … you had extensive experience over a number of years about the construction and sale of residential apartment blocks; correct?

A. Yes.

Q. Those, in your experience, commonly involved investors investing money; correct?

A. Yes.

Q. You must’ve had some idea in late 2016 as to the form of the investment those investors might make. Do you agree with that proposition?

A. Yes.

Q. One of them, as I asked you about a few moments ago, was taking a mortgage over the land; correct?

A. Now I know, yes.

Q. You knew then, didn’t you, Mr Shi?

A. I know – I now – now, I know.

Q. I’m asking you, with respect, something slightly different. You knew in late 2016 that one form by which the investors might invest was taking a mortgage over the land; correct?

A. No, absolutely no idea at that time.

Q. You also knew, didn’t you, as an experienced estate agent, that one form the investors might take was buying shares in the company that owned and developed the site, didn’t you?

A. Yes.

Q. Can you –

A. But not in this case.

Q. Thank you –

A. In generally, yes.

Q. Thank you. I’m asking for your knowledge Mr Shi.

A. Yeah.

Q. Apart from those two devices or mechanisms, did you know of any other way in which an investor might invest his or her, or its money, in a development of this kind?

A. Can you repeat the question again?

Q. As at late 2016, did you know of any other form of investment which an investor might make by way of investing his, her or its money in the project such as the Oncore project?

For all of the reasons at [214]-[221] above, I find that the principal reason for Mr Shi’s involvement in the Project (through Vinidici) was his assessment that the Project was a “good project” which provided an opportunity for him to earn profits (through his shareholding in Vinidici). [58]
58. See [100] above.
It was submitted on behalf of Vinidici that a belief by Mr Shi that TFMRB had been established for the special purpose of the Project is the only objectively plausible reason for the $2,000,000 investment sum having been paid by Vinidici to TFMRB rather than to Tasman. I reject that submission. The objectively plausible reason is that Madison Marcus had advised in its 26 August 2016 email referred to at [50] above that the company entering into the Convertible Note Agreement as borrower and defined as “the Company” should be the same company that was undertaking the Project and exchanging contracts to purchase the stage 3 land. [59] That advice was not expressed to be based on any assumption about who would be the owner or owners of the shares in “the Company” at the time Vinidici came to enter into the Convertible Note Agreement with “the Company” or at any time thereafter during the course of the project.
59. Paragraphs 6, 17 and 18 of the email set out at [50] above.
Even if I had found that Mr Shi believed when Vinidici entered into the Convertible Note Agreement and paid the investment sum that TFMRB was owned or majority owned by Tasman, which was in turn owned and controlled by Dr Zhang, I would have found for all of the reasons explained at [214]-[221] above, that this belief was the result of an erroneous assumption made by Mr Shi that was not caused or induced by any representation or other conduct on the part of Dr Zhang.
One specific aspect of Dr Zhang’s conduct that Vinidici sought to impugn was his failure until 23 November 2016 to cause ASIC to be notified of Tasman’s transfer of shares in TFMRB to ABFX. Dr Zhang denied in cross-examination that this was to conceal from Mr Shi or Vinidici the fact that ABFX was a shareholder in TFMRB. [60] I accept Dr Zhang’s denial. As senior counsel for Vinidici very fairly acknowledged in closing submissions, it is not uncommon as a matter of commercial reality for there to be some delay between a change to a company’s membership or officeholders and submission of the requisite notice to ASIC. In the present case, it is inherently improbable that Dr Zhang deliberately delayed notifying ASIC of the changes concerning ABFX in order to conceal those changes from Vinidici, yet caused ASIC to be notified and the changes to be recorded on ASIC’s publicly available register for TFMRB before Vinidici paid the second tranche its $2,000,000 investment. [61]
60. See [65] above.
61. See [107]-[115] above.
Hypothetical, counterfactual evidence given after the event about what Vinidici would have done if it had been informed that Tasman had transferred 80 per cent of the shares in TFMRB to ABFX and pledged the remaining 20 per cent in support of Tasman’s guarantee of the rate of return on ABFX’s investment, must be closely scrutinised: Wormald v Maradaca Pty Ltd [2020] NSWCA 289 at [108] (Bell P, as the Chief Justice then was, with Bathurst CJ and Payne JA agreeing) and the authorities there cited. For the reasons at [212]-[224] above and the following additional reason, I do not accept Mr Shi’s evidence to the effect that Vinidici’s investment in the Project would not have proceeded and that it would not have paid the $2,000,000 investment sum if Mr Shi had known that Dr Zhang was “only a minority shareholder”. [62] The additional reason is that the investment was made by Vinidici. Mr Shi and Mr Xi each owned 40 per cent of the shares in Vinidici and were the two directors of that company. That remains the position. Mr Shi considered Mr Xi to be his “boss” and sought instructions or confirmation about whether he should sign the draft convertible note agreement as 26 August 2016. [63] There is no evidence of any resolution of the directors of Vinidici or any business record of Vinidici recording the reasons why Vinidici entered into the Convertible Note Agreement on 8 September 2016. Contrary to Vinidici’s submission, the evidence does not establish that Mr Shi was the sole decision-maker or controlling mind behind Vinidici’s entry into the Convertible Note Agreement. I have found that the decision was made jointly. [64] There is no evidence from Mr Xi about his reasons why Vinidici entered into the Convertible Note Agreement or his reasons for signing the agreement in his capacity as a director of Vinidici.
62. See [76] and [210] above.
63. See [202] above.
64. See [203] above.
Contrary to Vinidici’s submissions, its unexplained failure to adduce evidence from Mr Xi has left such a lacuna in the evidence about its reasons for entering into the Convertible Note Agreement that it would be an exercise in speculation and conjecture for the Court to make any finding about those reasons, or about what Vinidici would have done if Mr Shi had known that Tasman had transferred 80 per cent of the shares in TFMRB to ABFX and pledged the remaining 20 per cent of the shares in support of its guarantee of the return to be generated on ABFX’s investment. I accept Dr Zhang’s submission that an inference that Mr Xi’s evidence would not have assisted Vinidici is available to be drawn, but the inference adds nothing meaningful to the analysis of the evidence as a whole.
For the following reasons, I find that TFMRB did not agree to sell Lots 8, 11 and 20 to Mr Shi or his associates at a price that was discounted from the market value of those units on the basis that the alleged discount would be set off against the amount owing by TFMRB to Vinidici under the Convertible Note Agreement. Nor did Mr Shi make any representations to Dr Zhang to the effect that the alleged discounts would be credited to TFMRB in that manner.
Dr Zhang’s evidence about the conversations that he claims to have had with Mr Shi after receiving the 14 November 2016 sales list is both uncorroborated and inherently improbable. [65] It is inherently improbable for three reasons. First, it is implausible Dr Shi sought discounts from Dr Zhang in circumstances where the prices for Lots 8, 11 and 20 had been agreed with LBD in or before February 2015 and there is no evidence that Dr Zhang or TFMBR questioned those prices or indicated that it would not honour them. Dr Zhang’s evidence that he did not know why some of the units on the 14 November 2016 sales list (including Lots 8, 11 and 20) were marked as sold was a lie. [66] It was obvious from the face of the sales list that it recorded prices that LBD had agreed with purchases of those lots that were marked as sold albeit that contracts had not yet been exchanged. I note that Dr Zhang had no difficulty in understanding the meaning or significance of units being marked as sold in the sales lists during his cross-examination. [67] Second, it is highly implausible that Dr Zhang and Mr Shi agreed upon discounts in November 2016, and agreed to set off the discount amounts against repayment of the loan being made by Vinidici under the Convertible Note Agreement, without agreeing on the amount of the discounts. According to Dr Zhang, the discount amounts were not even discussed until late 2019. Third, there is no evidence of any commercial reason why Mr Shi would agree that any discount in respect of Lot 20 to the benefit of the purchaser (Ms Lu) would be set off against repayment of the loan being made by Vinidici under the Convertible Note Agreement. [68]
65. See [143] above.
66. See [142] above.
67. See [161]-[171] above.
68. See [153] above.
For the same three reasons, I reject Dr Zhang’s submission that the Court should infer from the timing of the exchange of contracts in respect of Lots 8 and 20 on 23 March 2017, shortly before the 31 March 2017 conversion/repayment date under the Convertible Loan Agreement, that there was an agreement to discount the prices of those lots and to set off the discount amounts against the $2,000,000.
I reject Dr Zhang’s uncorroborated and inherently improbable evidence that Mr Shi agreed in late 2019 that the amount owing under the Convertible Note Agreement should be reduced by $1,008,000 on the basis that the prices that he, Mr Xi and Ms Lu had agreed with LBD in about February 2015 and for which they had contracted with TFMRB in 2017 to purchase Lots 8, 11 and 20 (respectively) were lower than the market value of those lots on settlement of those contracts in late 2019. [69] The notion that a person with Mr Shi’s qualifications and experience would agree to cede the benefit of any upwards market movement between exchange and settlement to the vendor is fanciful. Moreover, if Mr Shi had conducted himself in such an uncommercial manner, it is inherently improbable that the alleged discounts and offset agreement would not have been included in the list of “repayments” in Ms Zhang’s 17 March 2020 email. The only discounts included in that email were the undisputed vendor incentives referred to at [126] above.
69. See [156]-[158] above.
The lack of corroboration and implausibility of Dr Zhang’s evidence referred to at [229]-[231] above lead me to conclude that he invented the evidence of the conversations that he claims to have had with Mr Shi about discounts to market value, as senior counsel for Vinidici put to him in cross-examination, in order to avoid paying any damages in these proceedings if he were found to have engaged in misleading or deceptive conduct or deceit.
I also find that Dr Zhang constructed his comparisons of the sale prices of Lots 8, 11 and 20 with other lots on a flawed basis by ignoring important differences in the attributes of the lots and, more importantly, ignoring the fact that the sale prices for Lots 8, 11 and 20 had been struck in February 2015 whereas the sale prices for the lots selected by Dr Zhang for comparison purposes were agreed several years later. [70] Dr Zhang’s flawed comparisons provide no support for his contentions that the sale prices of Lots 8, 11 and 20 were less than the market value of those lots, bearing in mind that the purchasers agreed those prices with LBD in February 2015 and there is no evidence that Dr Zhang or TFMRB sought to renegotiate the prices after it acquired the stage 3 land and before it entered into the contracts for sale of those lots in March 2017 and August 2017.
70. See [161]-[172] above.
Finally, I reject Dr Zhang’s uncorroborated evidence that he and Mr Shi agreed to set off the penalty interest waived in respect of Lots 8, 11 and 37 against the amount owing by TFMRB to Vinidici under the Convertible Note Agreement. [71] Ms Zhang’s evidence[72] was not inconsistent with Dr Zhang’s evidence in respect of Lot 11, but did not go so far as to corroborate his evidence in relation to that lot [73] and did not provide any support for his evidence in relation to Lots 8 and 37. Having regard to Ms Zhang’s responsibilities, it is inherently improbable that Dr Zhang would not have informed her about any agreement that he had reached with Mr Shi to deduct the waived penalty interest from the loan amount under the Convertible Note Agreement. It is equally improbable that Ms Zhang would not have included the waived penalty interest amounts in the list of “repayments” in the email that she sent to Mr Shi on 17 March 2020. For those reasons, I find that Vinidici did not agree and Mr Shi did not represent that the amount owing to Vinidici under the Convertible Note Agreement would be reduced by the amounts of penalty interest waived by TFMRB in respect of Lots 8, 11 and 37.
71. See [174]-[178] above.
72. See [179]-[182] above.
73. As senior counsel for Dr Zhang appropriately conceded at T234.29-234.39.

The cause of action in deceit

The principles applicable to Vinidici’s cause of action in deceit are well established and were not the subject of any dispute in these proceedings. Vinidici must establish that:[74]
74. Magill v Magill (2006) 226 CLR 551; [2006] HCA 51 at [114] (Gummow, Kirby and Crennan JJ); Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 574-579 (Brennan, Deane, Gaudron and McHugh JJ); Wood v Balfour (2011) 15 BPR 29,773; [2011] NSWCA 382 at [6] (Giles JA, Meagher JA agreeing); D Rolph, J Varuhas, P Crossley and M Douglas, Balkin & Davis Law of Torts (6th ed, 2021) at [23.24].

Dr Zhang made a false representation, concealed true facts, or made a true representation that was rendered false by matters that were subsequently concealed or not disclosed;

to the extent that such a representation was made, Dr Zhang knew that the representation was false (or became false by reason of matters subsequently concealed or not disclosed), or was reckless as to the truth or falsity of the representation;

Dr Zhang intended that Vinidici should rely on the false representation or proceed in ignorance of the matters concealed;

Vinidici acted in reliance on the false representation or in ignorance of the matters concealed; and

Vinidici thereby suffered loss.

Words or conduct by which a representation is made may be understood in different senses. For the purpose of determining whether any representation made by Dr Zhang was false, the sense in which the representation would be understood by a reasonable person in the position of Vinidici is relevant. For the purpose of determining whether Vinidici was induced by any such representation to act on it, the sense in which Vinidici understood the representation is relevant. For the purpose of determining whether any such representation was made fraudulently, the sense in which Dr Zhang intended the representation to be understood is relevant. [75]
75. Krakowski v Eurolynx Properties Ltd, supra, at 576-577 (Brennan, Deane, Gaudron and McHugh JJ
Any finding of liability in deceit will involve a conclusion that Dr Zhang has acted dishonestly. [76]
76. Magill v Magill, supra, at [17] (Gleeson CJ).
Vinidici’s pleaded cause of action in deceit alleged false statements, the substance of which were not articulated in the pleading. However, senior counsel for Vinidici opened and ran its case at final hearing on the basis that its cause of action in deceit rested on Dr Zhang’s alleged concealment or failure to disclose Tasman’s transfer of 80 per cent of its shares in TFMRB to ABFX and the pledge of its remaining shares, in circumstances where Dr Zhang had previously told Mr Shi that he (Dr Zhang) was the sole director of Tasman through which he conducted the property development business and that he had established TFMRB as “a new Tasman company” for the Project. It is the combination of those statements with the subsequent alleged concealment or non-disclosure that is relied on as the foundation of Vinidici’s claimed belief that TFMRB, as the special purpose vehicle established for the Project, was and would remain within the Tasman group of companies. Vinidici alleges that Dr Zhang knew that it entered into the Convertible Note Agreement holding that belief and intended that it should do so.
It is appropriate to record that no objection was taken to Vinidici running that deceit case at trial, although the submissions made on behalf of Dr Zhang did identify that the case differed from that which had been pleaded. I do not suggest that any objection should have been taken.
I have found that, at some time between early 2016 and late July 2016 and prior to any discussion about the Project, Dr Zhang told Mr Shi that he was the sole director and shareholder of Tasman, that he was able to source money from Chinese investors in order to purchase development sites and to then borrow money from banks to develop those sites and that he mentioned some development sites that he had previously acquired “through Tasman using investment money from Chinese investors”. [77] There is no evidence that this statement was false at the time it was made.
77. See [194] above.
I have also found that, in their discussions about the Project and negotiation of the terms of the Convertible Note Agreement, Dr Zhang told Mr Shi on or shortly after 31 August 2016 that he had incorporated a “new Tasman company” called TFM Rushcutters Bay for the purpose of the Project. [78] That statement was true at the time it was made.
78. See [207] above.
At the time of the second statement, Mr Shi knew that Dr Zhang was seeking funding for the Project from investors in China. Mr Shi had no information and sought no information about the structure or terms on which that investment would be made or was likely to be made in the Project. Mr Shi had only the rather vague information conveyed by the first statement about the Chinese investment funds that Dr Zhang had procured for previous projects. In my opinion, Dr Zhang’s statements would not have conveyed to a reasonable person in Mr Shi’s position at the time that TFMRB was and would remain within the Tasman group of companies, with Dr Zhang as the sole or majority owner through Tasman. Nor would Dr Zhang’s statements have been understood in that way by a reasonable person in the position of Vinidici when it was subsequently incorporated and at the time that it entered into the Convertible Note Agreement.
For those reasons, Dr Zhang did not make any representation about TFMRB that was false when made or that was later falsified by his subsequent non-disclosure of Tasman’s transfer of 80 per cent of its shares in TFMRB to ABFX and the pledge of the remaining shares.
Dr Zhang’s non-disclosure of those matters cannot be characterised as dishonest or deliberate concealment. Irrespective of whether the relationship between Mr Shi and Dr Zhang was a friendship or a mere acquaintance, it was not a relationship of mutual trust and confidence. [79] As I have mentioned above, Mr Shi proposed investing $2,000,000 in the Project in the knowledge and expectation that Dr Zhang would source substantial additional investment funds from China. [80] Mr Shi chose to make no inquiries about the terms or structure of that investment. [81] Contrary to Vinidici’s submission, the negotiation of the Convertible Note Agreement was a commercial negotiation that was conducted at arm’s length, during which Mr Shi had the benefit of legal advice that he conveyed to Mr Xi. [82] Neither those circumstances nor any other evidence adduced in the proceedings supports a finding that the non-disclosure involved Dr Zhang deliberately holding back information that he knew Vinidici would want to know for the purpose of its investment decision. [83]
79. See [213] and [217]-[218] above.
80. See [195]-[205], [214] and [216] above.
81. See [215]-[216] above.
82. See [196]-[205] above.
83. Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 at [21] (French CJ and Kiefel J).
I have already rejected Vinidici’s contention that Dr Zhang delayed notifying ASIC of the TFMRB share transactions in order to deliberately conceal those transactions from Mr Shi or Vinidici. [84] I also reject Vinidici’s submission that Dr Zhang’s untruthful evidence in which he claimed to have introduced Mr Shi to Mr James Tenghui Zhang demonstrates that he deliberately concealed the terms of ABFX’s investment from Mr Shi. [85] Dr Zhang’s untruthful evidence reflects very poorly on him as a witness in these proceedings but it does not alter my assessment of the evidence as a whole and my findings referred to at [193]-[227] above or my conclusions at [240]-[244] above.
84. See [225] above.
85. See [208]-[209] above.
For the reasons explained at [213]-[224] and [226]-[227] above, Vinidici has not proved that it entered into the Convertible Note Agreement or paid the instalments of the investment sum to TFMRB in the belief that TFMRB was and would remain within the Tasman group of companies. Nor does the evidence establish that Dr Zhang intended that Vinidici should act on that basis.

For all of those reasons, Vinidici has failed to establish the key elements of its cause of action in deceit.

The statutory cause of action for misleading or deceptive conduct

As Vinidici submitted, the Convertible Note Agreement is a “financial product” for the purpose of Chapter 7 of the Corporations Act2001 (Cth). [86] Accordingly, it is the provisions of ss 1041H and 1041I of that Act rather than the provisions of the Australian Consumer Law that applies to Vinidici’s cause of action for alleged misleading or deceptive conduct.
86. Sections 763A(1) and 763B(a)(ii); Australian Securities and Investments Commission v SunEnergy Asia Pacific Pty Ltd [2011] FCA 275 at [34].
Vinidici submitted that Dr Zhang’s non-disclosure was misleading or deceptive conduct because Vinidici entered into the Convertible Note Agreement and paid the instalments of the investment sum to TFMRB in the belief that TFMRB was (and would remain) a special purpose company owned by Tasman which was in turn controlled by Dr Zhang. Vinidici submitted that, by reason of their personal and business relationship, Dr Zhang knew or ought to have known that Mr Shi would reasonably expect to be told about Tasman’s sale of 80 per cent of its shares in TFMRB to ABFX and the pledge of its remaining shares. It was submitted that this was a reasonable expectation because disclosure of those matters was necessary to enable Mr Shi to consider whether or not he wished to proceed with the proposed investment through Vinidici.
I reject Vinidici’s submissions. The evidence adduced by Vinidici in relation to the alleged belief was directed solely to the state of mind of Mr Shi. For the reasons explained at [213]-[224] above, the evidence does not establish that Mr Shi held the alleged belief. Mr Shi and Dr Zhang were both experienced in the development and sale of residential apartment projects,[87] and the relationship between them was not one of trust and confidence. [88] Mr Shi proposed investing $2,000,000 in the Project in the knowledge and expectation that Dr Zhang would source substantial additional investment funds from China. [89] Mr Shi chose to make no inquiries about the terms or structure of that investment. [90] Mr Shi and Mr Xi conducted their own feasibility analysis for the Project and had legal advice during the negotiation of the terms of and structure of the investment that was made by Vinidici. [91] That negotiation was a commercial negotiation conducted with Dr Zhang at arm’s length. [92] In my opinion, those circumstances did not give rise to a reasonable expectation that Dr Zhang would disclose to Mr Shi or Vinidici the sale of 80 per cent of Tasman’s shares in TFMRB to ABFX to raise $20,000,000 for the Project and Tasman’s pledge of the remaining shares in connection with Tasman’s guarantee of the return to be generated by the Project for which Tasman had given “warranties” to ABFX that it would complete the construction of units on time and sell all units. [93] The evidence does not establish that the non-disclosure of the terms and structure of the Chinese investment that Mr Shi knew Dr Zhang was arranging for the Project, and about which Dr Shi asked no questions, was likely to lead or in fact led Vinidici into error in relation to its investment decision. [94]
87. See [18]-[19] above.
88. See [213], [217]-[219] above.
89. See [195]-[205], [214] and [216] above.
90. See [215]-[216] above.
91. See [195]-[205] above.
92. See [244] above.
93. See [63] above.
94. Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd, supra, at [14]-[23] (French CJ and Kiefel J) and [91] (Heydon, Crennan and Bell JJ); OXS Pty Ltd v Sydney Harbour Foreshore Authority [2016] NSWCA 120 at [177]-[178] (Gleeson JA, Macfarlan and Leeming JJA agreeing) and the authorities there referred to; Wormald v Maradaca Pty Ltd , supra, at [107]-[115] (Bell P, Bathurst CJ and Payne JA agreeing) and the authorities there cited.

Matters not arising

Questions of causation and loss do not arise in light of my conclusions above that Dr Zhang did not deliberately conceal ABFX’s shareholding in TFMRB from Vinidici and that his non-disclosure of the transfer and pledge of Tasman’s shares in TFMRB was not misleading or deceptive in all the circumstances. In case a different view may be taken in any appeal, it is appropriate to record that, if Vinidici had succeeded in establishing the alleged deceit or misleading or deceptive conduct, I would not have been satisfied on the balance of probabilities that this had caused loss to Vinidici. That is essentially for the same reasons that Vinidici has failed to establish the alleged deceit and misleading or deceptive conduct, and for the further reasons referred to at [226]-[227] above.
If Vinidici had succeeded in establishing the alleged deceit and/or misleading or deceptive conduct and had also succeeded in establishing causation, I would have held that Vinidici had suffered loss in the amount claimed of $747,270.58 plus interest, having regard to Vinidici’s concessions referred to at [126] above and TFMRB’s inability to make further repayments in the circumstances referred to at [185] above. For the reasons explained at [228]-[234] above, I would have rejected Dr Zhang’s contentions that the whole of the amount owing to Vinidici under the Convertible Note Agreement has already been repaid. Dr Zhang’s estoppel defence would have failed because the alleged representations upon which that defence was founded were not proved.
Dr Zhang’s pleaded defences under s 1041I(1B) and ss 1041I(4) and 1317S of the Corporations Act are defences to the misleading or deceptive conduct claim only. If Vinidici had succeeded on its cause of action for misleading or deceptive conduct, but failed to prove dishonesty, I would have reduced the damages recoverable by Vinidici pursuant to s 1041I(1B) by 50 per cent on account of its failure to make any inquiries about the structure or terms of the Chinese investment in the Project and whether or how it would affect the ownership of TFMRB in circumstances where Mr Shi knew that the investor may take shares in TFMRB. [95]
95. See [214] above.
The submissions made on behalf of Dr Zhang maintained that, if he were found to have engaged in misleading or deceptive conduct without dishonesty, it would be appropriate to excuse him from the contravention under ss 1041I(4) and 1317S of the Corporations Act. The submissions did not articulate any reason why that would be an appropriate exercise of the discretion under s 1317S. I would not have formed the view that Dr Zhang ought fairly to be excused for the contravention because, in that hypothetical scenario, there would have been findings that Vinidici had a reasonable expectation that the undisclosed matters would be disclosed and that the misleading or deceptive conduct had caused loss to Vinidici. I do not consider that the absence of dishonesty, which is not an element of the statutory cause of action for misleading or deceptive conduct, would have been a reason to excuse Dr Zhang from liability in this case.

Conclusion

For all of the foregoing reasons, Vinidici’s claims have failed and an order will be made dismissing the proceedings. I am not aware of any reason why costs should not follow the event, but I will hear the parties in relation to costs.

**********

Endnotes

Decision last updated: 28 February 2023

Medium Neutral Citation:	In the matter of Vinidici Rushcutters Bay Pty Ltd — Vinidici Rushcutters Bay Pty Ltd v Zhang [2023] NSWSC 151
Hearing dates:	29, 30, 31 March 2022
Date of orders:	28 February 2023
Decision date:	28 February 2023
Jurisdiction:	Equity - Corporations List
Before:	Williams J
Decision:	Proceedings dismissed
Catchwords:	DECEIT – whether deliberate concealment of information about ownership of company with which plaintiff entered into convertible note agreement pursuant to which plaintiff paid $2,000,000 to the company. MISLEADING OR DECEPTIVE CONDUCT – whether deliberate concealment or misleading non-disclosure of information – whether reasonable expectation of disclosure in all the circumstances.
Legislation Cited:	Competition and Consumer Act 2010 (Cth) sch 2 Corporations Act 2001 (Cth) ss 79, 763A(1), 763B(a)(ii), 1041E(1), 1041F(1), 1041H(1), 1041I(1B), 1041I(4), 1317S Evidence Act 1995 (NSW) s 30
Cases Cited:	Australian Securities and Investment Commission v SunEnergy Asia Pacific Pty Ltd [2011] FCA 275 ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; (2021) 150 ACSR 461; [2021] NSWCA 24 Fox v Percy (2003) 214 CLR 118; (2003) 197 ALR 201; (2003) 77 ALJR 989 [2003] HCA 22 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; (1995) 130 ALR 1; (1995) 69 ALJR 629; [1995] HCA 68 Magill v Magill (2006) 226 CLR 551; (2006) 231 ALR 277; (2006) 81 ALJR 254; [2006] HCA 51 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; (2010) 270 ALR 204; (2010) 84 ALJR 644; [2010] HCA 31 Moubarak by his tutor Coorey v Holt (2019) 100 NSWLR 218; (2019) 374 ALR 150; [2019] NSWCA 102 OXS Pty Ltd v Sydney Harbour Foreshore Authority [2016] NSWCA 120 Watson v Foxman (1995) 49 NSWLR 315 Wood v Balfour (2011) 15 BPR 29,773; [2011] NSW ConvR 56-291; [2012] Q ConvR 54-768; [2011] NSWCA 382 Wormald v Maradaca Pty Ltd [2020] NSWCA 289
Texts Cited:	D Rolph, J Varuhas, P Crossley and M Douglas, Balkin & Davis Law of Torts (LexisNexis, 6th ed, 2021)
Category:	Principal judgment
Parties:	Vinidici Rushcutters Bay Pty Ltd ACN 614683019 (Plaintiff) Yihao (Eric) Zhang (Defendant)
Representation:	Counsel: Mr P Herzfeld SC with Mr G Drew (Plaintiff) Mr M Condon SC with Mr E Chan (Defendant) Solicitors: Meridian Lawyers (Plaintiff) Juris Cor Legal (Defendant)
File Number(s):	2021/108531
Publication restriction:	N/A