FEDERAL COURT OF AUSTRALIA
Li v Wu [2013] FCA 1067
Citation: Li v Wu [2013] FCA 1067 Parties: YU XIN LI v TAO WU File number: ACD 54 of 2011 Judge: JAGOT J Date of judgment: 22 October 2013 Catchwords: CONTRACTS – misleading and deceptive conduct – breach of express and implied terms – equitable compensation – construction of contract – indemnity provisions – member loans Legislation: Fair Trading Act 1992 (ACT) Cases cited: Antaios Companios Naviera SA v Salem-Rederiesna AB [1985] AC 191
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Ballard v Multiplex Ltd (2008) 68 ACSR 208; [2008] NSWSC 1019
Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753
Commissioner of Taxation v Firth (2002) 120 FCR 450
Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189
Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257; [2003] HCA 10
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204
Steggles Ltd v Yarrabee Chicken Company Pty Ltd [2012] FCAFC 91
Toll (FGCT) Pty Ltd Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52Date of hearing: 2 - 6, 9 - 10, 12 and 16 - 17 September 2013 Date of last submissions: 2 October 2013 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 77 Counsel for the Applicant: I Neil SC with M J Heath Counsel for the Respondent: C Erskine SC with D Shillington Solicitor for the Applicant: Goodman Law Solicitor for the Respondent: Johannessen Legal
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
ACD 54 of 2011
BETWEEN: YU XIN LI
ApplicantAND: TAO WU
Respondent
JUDGE:
JAGOT J
DATE OF ORDER:
22 OCTOBER 2013
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties confer and file agreed or competing proposed orders reflecting these reasons for judgment, including orders for costs, within 14 days.
Note: The matter will be listed thereafter for the making of orders, if agreed, or a further hearing on the orders as necessary.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
ACD 54 of 2011
BETWEEN: YU XIN LI
ApplicantAND: TAO WU
Respondent
JUDGE:
JAGOT J
DATE:
22 OCTOBER 2013
PLACE:
SYDNEY
REASONS FOR JUDGMENT
1. INTRODUCTION
This proceeding involves claims by the applicant, Yu Xin Li (Mr Li) against his one-time business confederate, the respondent, Tao (Tom) Wu (Mr Wu).
There are four groups of claims. The first is the claim under the indemnity provisions…
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- Li v Wu [2013] FCA 1067
- Case
- [2013] FCA 1067
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CaseChat Overview and Summary
In the case of Li v Wu, Yu Xin Li, a shareholder in a company, sought compensation from Tao Wu, another shareholder, for breaches of fiduciary duties, misleading and deceptive conduct, and breaches of contract. The dispute arose from the management and control of a real estate development project, with allegations that Wu had acted against the interests of the company and its shareholders. The court was tasked with determining the validity of Li's claims for compensation under the GEI shareholder agreement, including equitable compensation for breach of fiduciary duty, and assessing any losses resulting from Wu's conduct.
The court examined the evidence provided by Li and Wu regarding the alleged breaches and the consequential damages. It was established that Wu had engaged in misleading and deceptive conduct by procuring the 2008 agreement, but Li failed to demonstrate any loss or damage resulting from this conduct. Additionally, the court found no breach of contract by Wu. The key issue was Li's claim for equitable compensation for breach of fiduciary duty, which the court found problematic. Li's claim for compensation was based on the proportion of liquidator’s fees spent on liquidating companies set up by Wu without Li's knowledge. However, Li did not provide a substantiated calculation of this claim, leading the court to conclude that it was arbitrary and unsupportable. The court granted leave for Li to rely on the Second Further Amended Statement of Claim, excluding the claim for equitable compensation.
The court ruled in favour of Li for the indemnity claim under the GEI shareholder agreement, awarding Li $976,866.80, along with interest. It dismissed Li's other claims, including those for equitable compensation for breach of fiduciary duty and any breach of contract by Wu. The court directed the parties to confer and file proposed orders for costs and any other necessary orders within 14 days, with the matter to be listed for final orders or further hearing as needed.
The court examined the evidence provided by Li and Wu regarding the alleged breaches and the consequential damages. It was established that Wu had engaged in misleading and deceptive conduct by procuring the 2008 agreement, but Li failed to demonstrate any loss or damage resulting from this conduct. Additionally, the court found no breach of contract by Wu. The key issue was Li's claim for equitable compensation for breach of fiduciary duty, which the court found problematic. Li's claim for compensation was based on the proportion of liquidator’s fees spent on liquidating companies set up by Wu without Li's knowledge. However, Li did not provide a substantiated calculation of this claim, leading the court to conclude that it was arbitrary and unsupportable. The court granted leave for Li to rely on the Second Further Amended Statement of Claim, excluding the claim for equitable compensation.
The court ruled in favour of Li for the indemnity claim under the GEI shareholder agreement, awarding Li $976,866.80, along with interest. It dismissed Li's other claims, including those for equitable compensation for breach of fiduciary duty and any breach of contract by Wu. The court directed the parties to confer and file proposed orders for costs and any other necessary orders within 14 days, with the matter to be listed for final orders or further hearing as needed.
Orders
Orders of the court
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Background
Background to the litigation
The recitals are set out in a section entitled Background and are in these terms:BACKGROUNDA.The Members are shareholders in the Company and have formed the Company to carry on the Project.B.The Members hold A Class shares in the Company as follows:Tao Wu2,500 A Class SharesYu Xin Li5,500 A Class SharesXui Zhen Ji2,000 A Class SharesC.The Members agree to execute this Agreement to regulate their relationship as members of the Company in respect of the management and control of the Company, its business and affairs as is contemplated by the provisions of this Agreement.D.The Members have been afforded the opportunity to obtain independent legal and accounting advice.E.The Company has joined in this Agreement in order to take notice of the provisions contained in this Agreement and as far as is permitted by the Corporations Act to conduct its business and affairs as is contemplated by the provisions of this Agreement. The “Project” is defined by the following terms in cl 1:Land means //insert description//.…Project means:(a) the subdivision of the land;(b) the carrying on of the Works; and(c) the marketing and sale of the Land and the Works.…Works means the development of the Land by:(a) the upgrading and refurbishment of the existing buildings;(b) the construction of improvements in buildings in accordance with the Plans;(c) all associated and ancillary works to be effected on or to the Land.… Despite the parties having had legal representation for the making of the GEI shareholder agreement they omitted the description of the land. Nevertheless, it is reasonably clear form the loan agreement executed at the same time between Mr Li and GEI that the land in question was at Fox Place in Lyneham in the ACT. GEI had contracted to buy this land in January 2005 for the purpose of redevelopment as residential units. I do not accept the submissions for Mr Li that the agreement deliberately leaves the land blank. Substantive provisions of the GEI shareholder agreement include:2 COMMITMENT TO COMPANY AND PROJECT2.1 Beginning ProjectThe Members must ensure that the Company begins to establish the Project under the Initial Monthly Program.2.2Obligations of MembersEach Member must:(a)co-operate and use the Member’s best endeavours to ensure that the Company successfully conducts the Project;(b)not reasonably delay any action, approval, direction, determination or decision which is required of the Member;(c)devote all necessary, time, attention, work and effort to the Project;(d)make approvals or decisions that are required of the Members in good faith and in the best interests of the Company and the conduct of the Project as a commercial venture;(e)be just and faithful in the Member’s activities and dealings with the other Members;(f)furnish the Directors with a full and correct account and information with regard to all matters and transactions relating to the Project;(g)not do any act or thing which may prejudicially effect the Project, the Company, any Company property or the Company’s reputation; and(h)not divulge to any unauthorised person or corporation any information concerning the Project or the Company.…3 INITIAL CAPITALThe Members agree that their shareholdings reflect their contribution to the capital of the Project.4 FURTHER FUNDING4.1 Capital as a LoanThe Members acknowledge that they have contributed further funds to the Project by way of unsecured loan to the Company in accordance with the Loan Agreement contained in Schedule 2.4.2Sufficient CapitalThe Members must ensure that the Company has sufficient working capital to conduct the Project under each Monthly Program either from:(a)loans by the Members to the Company; or (b)borrowings by the Company supported by several guarantees from the Members in their Proportionate Share.4.3Further LoansThe Members agree that any further capital required by the Project which is contributed by a Member by way of a loan is to be in accordance with the schedule to the Loan Agreement contained in Schedule 2.…5 INDEMNITYIn the event that the Company is unable to repay any Member loan (including interest), the other Members, jointly and severally, agree to indemnify that Member for their Proportionate Share of the loan amount.For example, if Yu Xin Li has loaned the Company $1,000,000 and at the completion of the Project the Company is only able to repay $500,000 of that loan, Tao Wu will indemnify Yu Xin Li against 25% of the unpaid amount (being $125,000) and Xiu Zhen Ji will indemnify Yu Xin Li against 20% of the unpaid amount (being $100,000).…7.5 Responsibilities of the BoardThe Board is to be responsible for managing the Project and the affairs of the Company including:(a)establishing the general policies of the Company;(b)establishing the strategic priorities and objectives of the Company;(c)establishing the financial objectives and criteria of the Company;(d)determining the matters of a major or unusual nature which are not in the ordinary course of business of the Company;(e)preparing and adopting the Monthly Program for each month of the Project (each Monthly Program is to be finalised within 7 days before the end of the month to which it relates); and(f)monitoring the performance of the Company against the Monthly Programs.…8 MANAGEMENT AND OPERATIONS8.1 Obligations of the Each MemberEach Member agrees to take any steps which for the time being are within its power and are necessary to cause the Project and the affairs of the Company to be properly and efficiently managed and administered.8.2 Managing DirectorThe Managing Director is responsible for:(a)the management of all activities of the Company in the conduct of the Project;(b)the day to day management of the financial affairs of the Company;(c)the recruitment of all staff, consultants and sub-contractors as required to meet the staffing and operational requirements of the Project from time to time;(d)the direction of all employees and officers of the Company; and(e)the general administration of the Company;Subject to compliance with the Monthly Programs and directions from the Board from time to time.8.3 Management and Financial InformationThe Managing Director must ensure that the Directors receive from the Company sufficient management and financial information and reports to allow them to control the efficient conduct of the Project, including but not limited to the following reports:…9LIMITATIONSNo Member may without the consent of the Directors:(a)Contract any debt on account of the Company except in the usual and regular course of the Project;(b)employ any of the money, goods or effects of the Company or engage the credit of the Company except upon the account of and for the benefit of the Project;(c)do or allow anything that could result in the property of the Company being seized, attached or taken in execution for all debts greater than $//insert amount//;(d)compound, release or discharge any debt which is due or owing to the Company without receiving the full amount of that debt;(e)lend any money on behalf of the Company;(f)borrow or raise any money on behalf of the Company or give any security over the Company or any part of it in respect of any loan;(g)assign, mortgage or charge its share or interest in the Company or any part of it; or(h)sell or offer for sale any interest in the Company.…10.3 Unanimous consentThe following matters require unanimous consent:(a)the issue or transfer of additional shares;(b)the admission of a new shareholder;(c)any amalgamation or merger with any other business;(d)the sale of the Company, the Project or any other business of the Company;(e)the termination or winding up of the Company;…17.7 DurationThis agreement continues to be binding on each of the Members whilst remaining the registered legal or equitable holders of shares in the Company.
Evidence
Evidence Before The Court
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Decision
Reasons for decision
The problem with Mr Li’s claim for equitable compensation for breach of fiduciary duty is that, ultimately, the compensation claimed is for the proportion of liquidator’s fees expended on dealing with the liquidation of the companies that Mr Wu had incorporated without Mr Li’s knowledge or consent (GII, Golden Crop and Golden Constructions). The argument is that these companies were caused to be incorporated by Mr Wu in breach of his fiduciary duty to Mr Li. Even assuming in Mr Li’s favour the existence of fiduciary obligations owed to him by Mr Wu (and, on the facts of this case, that claim is not without merit), the problem is that even in the intended final submissions for Mr Li reference was made only to the total cost of the liquidation and no calculation of the so-called “wasted” expenditure (that is, wasted on the liquidation of the companies Mr Wu caused to be incorporated) was provided. The calculation was first provided after the hearing in a supplementary note that I granted leave to be filed. But, as the further submissions for Mr Wu which I also granted leave to be filed rightly said, not only has Mr Wu had no opportunity to call evidence to meet this claim but also the figure is simply an apparently arbitrary proportion of the total cost of the liquidation. On this basis the objection of Mr Wu to Mr Li being able to rely on this claim in the Second Further Amended Statement of Claim (also filed pursuant to my direction after final submissions in an attempt to clarify what claims were now pressed by Mr Li) is sound. Accordingly, leave is granted to Mr Li to rely on the Second Further Amended Statement of Claim other than para 207(k) in respect of equitable compensation. 6. CONCLUSIONS For the reasons set out above I consider that Mr Li has established his claim against Mr Wu under the indemnity in cl 5 of the GEI shareholder agreement. Mr Wu’s liability to Mr Li in this regard is $976, 866.80. Mr Li is entitled to interest on that sum. Mr Li established that Mr Wu engaged in misleading and deceptive conduct in procuring entry into the 2008 agreement but failed to prove loss or damage. Mr Li has not proved any breach of contract by Mr Wu. Mr Li’s claim for equitable compensation for breach of fiduciary duty should not be permitted because of a failure by Mr Li to articulate in sufficient time the basis for the claim for compensation. In any event, the calculation of the compensation is arbitrary and unsupportable. The parties are directed to confer and to file agreed or competing proposed orders reflecting these reasons for judgment, including orders for costs, within 14 days. The matter will be listed thereafter for the making of orders, if agreed, or a further hearing on the orders as necessary.
Ratio Decidendi
Legal Principle Established
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