NSD 1312 of 2024 NSD 1324 of 2024 NSD 1233 of 2024
Judgment of:
O’CALLAGHAN, O’BRYAN AND VANDONGEN JJ
Date of judgment:
12 September 2025
Catchwords:
TRUSTS AND TRUSTEES – where respondents invested in secured income mortgage fund for purpose of obtaining a significant investor visa – where primary judge found that corporate trustee of fund committed breaches of trust by making three improper loans – where breaches of trust were dishonest and fraudulent – where primary judge found that appellant directors knowingly assisted in the dishonest and fraudulent design – where primary judge found that appellant directors knowingly procured or induced certain breaches – where primary judge found that appellant directors had actual knowledge of the relevant dishonest and fraudulent breaches of trust – where appellant directors did not contest finding of primary judge that corporate trustee was in breach of trust by making loans because they were imprudent investments in hazardous securities – where appellant directors did not contest finding of primary judge that two of the three loans were made for an improper purpose
EQUITY – where primary judge held that a director of a trustee company, whose conduct is the conduct of the trustee that involves a breach of trust, can be liable either for knowingly procuring or inducing a breach or for knowingly assisting in a dishonest and fraudulent design – where primary judge awarded respondent directors equitable compensation – consideration of the so-called principle in Said v Butt[1920] 3 KB 497 – held that a director acting as such can knowingly induce or procure a breach of trust, or knowingly assist in a dishonest and fraudulent design, by a trustee company of which that person is a director, when the directors lack relevant bona fides because they acted in their own personal interest and contrary to the interests of the company in breach of their duties to it – held that in such circumstances the principle in Said v Butt has no application – where notice of contention allowed
PRACTICE AND PROCEDURE – where appellants contended that pleas of accessorial liability were not properly pleaded – where appellant contended that primary judge failed to give adequate reasons for finding that he had knowledge of the breaches of trust to render him liable for knowingly procuring those breaches or knowingly assisting in them
COSTS – where primary judge awarded successful defendant 20% of his costs – where discretion of primary judge miscarried – where leave to appeal granted and appeal allowed – where order made in lieu that the plaintiffs below pay successful defendant’s costs of the proceeding
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Lin v Chu [2025] FCAFC 130
Case
[2025] FCAFC 130
Decision Date
CaseChat Overview and Summary
In Lin v Chu, the Federal Court considered an appeal against a decision involving breaches of trust by a corporate trustee and the liability of its directors for those breaches. The respondents, Ms Chu and Mr Xu, had invested in a secured income mortgage fund to obtain a significant investor visa. They alleged that the corporate trustee, Gold Stone Capital Pty Ltd, committed breaches of trust by making three improper loans. The primary judge found that the corporate trustee made unauthorised, imprudent, and improper purpose loans, and that the appellant directors, Ms Lin and Mr Cai, knowingly procured or induced these breaches of trust. The primary judge also found that the breaches were dishonest and fraudulent and that the directors knowingly assisted in the fraudulent design.
The legal issues before the court included whether the pleas of accessorial liability were properly pleaded and whether the primary judge adequately considered the knowledge requirement for holding the directors liable. The court held that a director of a trustee company can be personally liable for knowingly procuring or inducing a breach of trust or for knowingly assisting in a dishonest and fraudulent design. The court further held that the principle in Said v Butt had no application where directors lack relevant bona fides and acted in their own personal interest.
The primary judge’s findings regarding the knowledge requirement for the directors' liability were upheld. The court rejected the appellants' contention that the pleas of accessorial liability were not properly pleaded. The primary judge's reasons for finding that the directors had knowledge of the breaches to render them liable were deemed adequate. The primary judge awarded the respondents equitable compensation and costs, which the appellants contested on the basis that the discretion was miscarried. The appeal was allowed, and the order for costs was set aside, with the respondents paying the appellants' costs of the proceeding and the appeal.
The court's decision confirms that directors can be held liable for breaches of trust when they knowingly assist in a fraudulent design, even if they lack bona fides and act in their own personal interest. The case also highlights the importance of properly pleading and proving knowledge in claims of accessorial liability.
Orders
Orders of the court
1. The appellant be granted leave to rely on the draft notice of appeal.
2. The appellant be granted leave to appeal.
3. The appeal be allowed.
4. Order 9 of the orders made by the primary judge on 23 August 2024 against the appellant be set aside.
5. In lieu thereof, the respondents pay the appellant’s costs of the proceeding below and of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
In relation to relief, his Honour ordered as follows in Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (No 4) [2024] FCA 980 (J2):1.Each of the first, second, third, and seventh defendants is to pay the first plaintiff equitable compensation in the amount of $3,100,386.79, together with compound interest in the sum of $1,844,581.31, pursuant to s 23 of the Federal Court of Australia Act 1976 (Cth) (FCA Act).2.Each of the first, second, third, and seventh defendants is to pay the second plaintiff equitable compensation in the amount of $3,100,386.79, together with compound interest in the sum of $1,816,550.42, pursuant to s 23 of the FCA Act.3.The first and seventh defendants pay equitable compensation to the first plaintiff in the amount of $42,771.08, together with compound interest in the sum of $111,377.52, pursuant to s 23 of the FCA Act.4.The first and seventh defendants pay equitable compensation to the second plaintiff in the amount of $42,771.08, together with compound interest in the sum of $111,377.52, pursuant to s 23 of the FCA Act.5.The second and seventh defendants pay equitable compensation to the first plaintiff in the amount of $196,659.70, together with compound interest in the sum of $62,093.90, pursuant to s 23 of the FCA Act.6.The second and seventh defendants pay equitable compensation to the second plaintiff in the amount of $196,659.70, together with compound interest in the sum of $62,093.90, pursuant to s 23 of the FCA Act.7.The plaintiffs’ claims against the fourth, fifth, and sixth defendants be dismissed.8.The first, second, and third defendants pay the plaintiffs’ costs of the proceedings.9. The plaintiffs pay 20% of the costs of each of the fourth and fifth defendants. …THE RELEVANT FACTS The court was not taken in any detail to the primary judge’s factual findings, or to many of the underlying documents. What follows is taken largely from the reasons of the primary judge.Requirements for a significant investor visa As I have already noted, Ms Chu and Mr Xu were citizens of the People’s Republic of China who wished to obtain a SIV. The SIV program commenced on 24 November 2012, introducing a new type of visa to promote innovation and business. Among the requirements for SIV applicants was the making of investments of at least $5 million in complying investments, which included ASIC-regulated managed funds with a mandate for investing in Australia. Regulation 1.03 of the Migration Regulations 1994 (Cth) defined “managed fund” as follows: managed fund means an investment to which all of the following apply:(a)the investment is a managed investment scheme (within the meaning of the Corporations Act 2001) in which members acquire interests in the scheme;(b)the interests are not able to be traded on a financial market (within the meaning of section 767A of the Corporations Act 2001);(c)no representation has been made to any member of the managed investment scheme that the interests will be able to be traded on a financial market;(d)the issue of the interest is covered by an Australian financial services licence issued under section 913B of the Corporations Act 2001.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
The trial occupied 15 hearing days. Numerous witnesses were called and cross-examined, including Mr Cai, Mr Wu and Mr Fong. Ms Lin did not give evidence.Summary of the primary judge’s conclusions The primary judge found that, in making the three loans to entities controlled by Mr Fong, Gold Stone committed breaches of trust in three of the four ways alleged by Ms Chu and Mr Xu, being the: (1)unauthorised investments breaches (J [203]); (2)imprudent investments breaches (J [205]); and(3)Turramurra project improper purpose breaches (J [207]). As to Ms Lin, the primary judge found that the allegations made against her were not confined to conduct by her merely in her alleged capacity as a director (J [210]). As to Mr Cai, his Honour found that Ms Chu and Mr Xu did not allege that he acted in any capacity other than as a director of Gold Stone (J [211]). His Honour also found that Ms Lin and Mr Cai knowingly procured or induced those three breaches of trust by Gold Stone, including through negotiating and agreeing to the loans and signing documents to give effect to them (J [212], [216], [217], [223]). The primary judge also rejected Ms Lin and Mr Cai’s contention that those claims were not properly pleaded (J [227]). The primary judge found that the breaches of trust by Gold Stone in knowingly making unauthorised investments and in having the improper purpose of procuring Mr Fong’s assistance with the Turramurra project were dishonest and fraudulent (J [228]). The primary judge found that Ms Lin and Mr Cai knowingly assisted in the dishonest and fraudulent design by Gold Stone in two of its three breaches — viz, (i) the unauthorised investments breaches and (ii) the Turramurra project improper purpose breaches (J [228]) — and that they were liable under the “second limb” of the rule stated in Barnes v Addy (1874) LR 9 Ch App 244 at 251–252 (Lord Selborne LC) (that is, a defendant will be liable if that defendant assists a trustee with knowledge of a dishonest and fraudulent design on the part of the trustee). The primary judge held that a director of a trustee company, whose conduct is the conduct of the trustee that involves a breach of trust, can be personally liable for either (i) knowingly procuring or inducing a breach of trust (J [209] and [211]), or (ii) knowingly assisting in a dishonest and fraudulent design (J [228]). The primary judge also rejected Ms Lin and Mr Cai’s contention that the claims made under the second limb of Barnes v Addy (knowing assistance in a dishonest and fraudulent design) were not properly pleaded (J [229]). The primary judge also held that Ms Lin and Mr Cai were liable for various sums he found they had misappropriated or otherwise improperly spent (J [238]–[248]). The primary judge dismissed the claims against Ms Lin and Mr Cai for misleading or deceptive conduct and for breaches of the MIS provisions, because the limitation period in each case started accruing more than six years before the commencement of the proceeding, such that the claims were statute-barred (J [269]–[272] and [294]).
Ratio Decidendi
Legal Principle Established
Ms Chu and Mr Xu also alleged that Ms Lin and Mr Cai:(1)contravened s 601ED(5) of the Corporations Act 2001 (Cth) (the CorporationsAct) by operating an unregistered MIS that was required to be registered (J [254]); and (2)breached the equitable and statutory duties they owed to Gold Stone in its capacity as trustee (J [295]). Ms Chu and Mr Xu also alleged that Ms Lin engaged in misleading or deceptive conduct contrary to s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), or alternatively s 1041H(1) of the Corporations Act, by failing to disclose various matters to them (J [281]). Unlike the breaches of trust alleged, which have an applicable limitation period of 12 years, the actions brought by Ms Chu and Mr Xu under the Corporations Act and/or the ASIC Act have a six-year limitation period. Ms Chu and Mr Xu further alleged that Gold Stone also misappropriated to its own use and benefit monies held on trust for Ms Chu and Mr Xu, in breach of trust. They alleged that Gold Stone misappropriated the proceeds of a settlement with the liquidators of MVDA and MVLC (which proceeds were essentially derived from the money that Ms Chu and Mr Xu had invested) by making various other payments on behalf of the Fund. They further alleged that Ms Lin and Mr Cai knowingly procured or, alternatively, assisted with knowledge in the misappropriation of the money. In their second further amended originating processes, Ms Chu and Mr Xu sought compensation or damages from Ms Lin and Mr Cai totalling $3.5 million each (being the amount of their investments lost), or orders requiring the restoration of the Fund. The trial occupied 15 hearing days. Numerous witnesses were called and cross-examined, including Mr Cai, Mr Wu and Mr Fong. Ms Lin did not give evidence.Summary of the primary judge’s conclusions The primary judge found that, in making the three loans to entities controlled by Mr Fong, Gold Stone committed breaches of trust in three of the four ways alleged by Ms Chu and Mr Xu, being the: (1)unauthorised investments breaches (J [203]); (2)imprudent investments breaches (J [205]); and(3)Turramurra project improper purpose breaches (J [207]). As to Ms Lin, the primary judge found that the allegations made against her were not confined to conduct by her merely in her alleged capacity as a director (J [210]). As to Mr Cai, his Honour found that Ms Chu and Mr Xu did not allege that he acted in any capacity other than as a director of Gold Stone (J [211]). His Honour also found that Ms Lin and Mr Cai knowingly procured or induced those three breaches of trust by Gold Stone, including through negotiating and agreeing to the loans and signing documents to give effect to them (J [212], [216], [217], [223]). The primary judge also rejected Ms Lin and Mr Cai’s contention that those claims were not properly pleaded (J [227]). The primary judge found that the breaches of trust by Gold Stone in knowingly making unauthorised investments and in having the improper purpose of procuring Mr Fong’s assistance with the Turramurra project were dishonest and fraudulent (J [228]).