Lin v Chu
[2025] FCAFC 130
•12 September 2025
FEDERAL COURT OF AUSTRALIA
Lin v Chu [2025] FCAFC 130
Appeal from: Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766; Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (No 4) [2024] FCA 980 File number(s): NSD 1312 of 2024
NSD 1324 of 2024
NSD 1233 of 2024Judgment 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
Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12DA, 12GF
Competition and Consumer Act 2010 (Cth) ss 601ED, 1051H, 1322, 1325, Sch 2 (Australian Consumer Law)
Corporations Act 2001 (Cth)
Trade Practices Act 1974 (Cth)
Migration Regulations 1994 (Cth), reg 1.03
Trustee Act 1925 (NSW), ss 14A, 14C
Limitation Act 1969 (NSW), s 47
Fair Trading Act 1999 (Vic)
Companies and Securities (Interpretation and Miscellaneous Provisions) (Western Australia) Code
Cases cited: Abbott v Zoetis Australia Pty Ltd (No 2) [2019] FCA 462
ADGA Systems International Ltd v Valcom Ltd [1999] OJ No 27; 168 DLR (4th) 351
A-G v Corporation of Leicester (1844) 7 Beav 176 at 179; 49 ER 1031
Alleyne v Darcy (1854) 4 Ir Ch Rep 199
Anchorage Capital Master Offshore Ltd v Sparkes (2023) 111 NSWLR 304
Anderson v Canaccord Genuity Financial Ltd [2022] NSWSC 58
Artistic Builders Pty Limited v Nash [2011] NSWSC 350
Australasian Annuities Pty Ltd (in liq) (receivers and managers appointed) v Rowley Super Fund Pty Ltd [2015] VSCA 9; (2015) 318 ALR 302
Australian Securities and Investments Commission v Letten (No 17) [2011] FCA 1420; 286 ALR 346
Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504
Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509
Barnes v Addy (1874) LR 9 Ch App 244
Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785
Binqld Finances Pty Ltd (in liq) v Binetter [2024] FCA 361
Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534
Chief Commissioner of Police (Vic) v Crupi [2024] HCA 34; 98 ALJR 1131
Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (No 4) [2024] FCA 980
Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Coulthard v South Australia [1995] SASC 4927; 63 SASR 531
Dare v Pulham (1982) 148 CLR 658
Eaves v Hickson (1861) 30 Beav 136; 54 ER 840
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) (2015) 90 ALJR 270
Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285
Fouche v The Superannuation Fund Board (1952) 88 CLR 609
Fyler v Fyler (1841) 3 Beav 550; 49 ER 216
Giorgianni v The Queen (1985) 156 CLR 473
Hamilton v Whitehead (1988) 166 CLR 121
Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609
Houghton v Arms (2006) 225 CLR 553
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 328
JR Consulting & Drafting Pty Ltd v Cummings [2016] FCAFC 20; 329 ALR 625
Keller v LED Technologies Pty Ltd (2010) 185 FCR 449
Knights Capital Group Ltd v Bajada and Associates Pty Ltd [2016] WASC 69
Lee v Lee (2019) 266 CLR 129
Lee v Lees Air Farming Ltd [1961] AC 12
Lee v Sankey (1873) LR 15 Eq 204
Lifestyle Equities CV v Ahmed [2024] UKSC 17; [2025] AC 1
Lumley v Gye (1853) 2 E & B 216; 118 ER 749
Mallan v Lee (1949) 80 CLR 198
Multinail Australia Pty Ltd v Pryda (Aust) Pty Ltd [2002] QSC 105
NCR Australia v Credit Connection Pty Ltd [2004] NSWSC 1
Norwest Refrigeration Services Pty Ltd v Baine Dawes (WA) Pty Ltd (1984) 157 CLR 149
O’Brien v Dawson (1941) 41 SR (NSW) 295
O’Brien v Dawson (1942) 66 CLR 18
Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62
Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27; 419 ALR 30
PT Sandipala Arthaputra v STMicroelectronics Asia Pacific Pte Ltd [2018] 1 SLR 818
Queensland Nickel Sales Pty Ltd v Park (2023) 299 FCR 169
R v Goodall (1975) 11 SASR 94
Realtek Holdings Pty Ltd v Wetamast Pty Ltd [2019] NSWSC 1869
Root Quality Pty Ltd v Root Control Technologies Pty Ltd [2000] FCA 980; 177 ALR 231
Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378
RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385
Said v Butt [1920] 3 KB 497
Sino Iron Pty Ltd v Palmer (No 3) [2015] 2 Qd R 574
Standard Chartered Bank v Pakistan National Shipping Corporation (No 4) [2003] 1 AC 959
Tsaprazis v Goldcrest Properties Pty Ltd [2000] NSWSC 206; 18 ACLC 285
Wilson v Moore (1834) 1 My & K 337; 39 ER 709
Woods v Multi-Sport Holdings Pty Ltd (2002) 208 CLR 460
Yorke v Lucas (1985) 158 CLR 661
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 385 Date of hearing: 24–26 March and 19 May 2025 Counsel for the Appellant in NSD 1233 of 2024: Mr V Bedrossian SC Solicitor for the Appellant in NSD 1233 of 2024: Kydon Segal Lawyers Counsel for the Appellant in NSD 1312 of 2024: Mr NC Hutley SC with Mr T Bagley Solicitor for the Appellant in NSD 1312 of 2024: SHL & Associates Lawyers Counsel for the Appellant in NSD 1324 of 2024: Mr DR Pritchard SC with Mr DH Southwood and Dr N Lennings Solicitor for the Appellant in NSD of 1324 2024: Juris Cor Legal Counsel for the Respondents in NSD 1233 of 2024,
NSD 1312 of 2024 and
NSD 1324 of 2024:Mr D Thomas SC with Mr D Meyerowitz-Katz Solicitor for the Respondents in NSD 1233 of 2024,
NSD 1312 of 2024 and
NSD 1324 of 2024:McCabes Lawyers ORDERS
NSD 1312 of 2024 BETWEEN: LOUISE CAROL LIN
Appellant
AND: HONG CHU
First Respondent
XUEPING XU
Second Respondent
ORDER MADE BY:
O’CALLAGHAN, O’BRYAN AND VANDONGEN JJ
DATE OF ORDER:
12 SEPTEMBER 2025
THE COURT ORDERS THAT:
1.The respondents’ notice of contention be allowed.
2.The appeal be dismissed.
3.The appellant pay the respondents’ costs of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 1324 of 2024 BETWEEN: HAI ZHONG CAI
AppellantAND: HONG CHU
First Respondent
XUEPING XU
Second Respondent
LOUISE CAROL LIN (and others named in the Schedule)
Third Respondent
AND BETWEEN: HONG CHU
First Cross-Appellant
XUEPING XU
Second Cross-Appellant
AND: LOUISE CAROL LIN
First Cross-Respondent
HAI ZHONG CAI
Second Cross-RespondentDAVID DARMALI
Third Cross-Respondent
ORDER MADE BY:
O’CALLAGHAN, O’BRYAN AND VANDONGEN JJ
DATE OF ORDER:
12 SEPTEMBER 2025
THE COURT ORDERS THAT:
1.The respondents’ notice of contention be allowed.
2.The appeal be dismissed.
3.The appellant pay the respondents’ costs of the appeal.
4.Each party bear its own costs of the cross-appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 1233 of 2024 BETWEEN: XIAO WU
Appellant
AND: HONG CHU
First Respondent
XUEPING XU
Second Respondent
ORDER MADE BY:
O’CALLAGHAN, O’BRYAN AND VANDONGEN JJ
DATE OF ORDER:
12 SEPTEMBER 2025
THE COURT ORDERS THAT:
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.
REASONS FOR JUDGMENT
O’CALLAGHAN J:
INTRODUCTION
In 2014, Ms Hong Chu and Mr Xueping Xu, who were citizens of the People’s Republic of China, each wished to obtain a “significant investor visa” (SIV) from the Australian government. In order to do so, they were required under relevant regulations to make an investment of at least $5 million in “complying investments”, which included loans secured by mortgages over real property in Australia.
In May and August 2014 respectively, each of Ms Chu and Mr Xu (who did not know each other) invested $3.5 million in a fund called the Gold Stone Secured Income Mortgage Fund (the Fund), which was an unregistered managed investment scheme (MIS) of which Gold Stone Capital Pty Ltd (Gold Stone) was the trustee. The Fund was constituted by a trust deed dated 10 February 2014 (the Fund Constitution), and Ms Chu and Mr Xu were unitholders in it. Gold Stone’s sole activity was to act as trustee of the Fund.
Gold Stone then lost almost all of Ms Chu’s and Mr Xu’s investments, and in 2022 they commenced proceedings in this court against it and six other defendants.
Each of the first to sixth defendants was involved in the management or administration of the Fund. The seventh defendant was Gold Stone.
The first defendant, Ms Louise Carol Lin, was a de facto director of Gold Stone. She was a licenced conveyancer and migration agent. The primary judge found that she was a driving force in the establishment and operation of the Fund and that she played a very substantial role in directing the affairs of Gold Stone and the Fund. See Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766 (J) at [212].
The second defendant, Mr Cai (who was the husband of Ms Lin), was appointed as a director of Gold Stone. He was also a licensed real estate agent.
Ms Lin and Mr Cai together owned DCK Asset Holding Pty Ltd, which owned 50% of the shares in Golden Destiny Investments Pty Ltd (GDI), which in turn had a 95% shareholding in Gold Stone.
The third defendant, Mr David Darmali, was a director of a company called Fiducia Resources Pte Ltd (Fiducia Singapore), which owned 5% of the shares in Gold Stone and was the ultimate owner of all the shares in the fourth defendant, Fiducia Asset Management Pty Ltd, of which Mr Darmali was the sole director. He was the manager of the Fund. He did not pursue an appeal in respect of the findings made against him by the primary judge, and orders were made on 19 May 2025 dismissing it with costs.
The fifth defendant, Mr Xiao Wu, was a director of Gold Stone until 19 March 2018. He was also the secretary of Wei Feng (Australia) Pty Ltd, which held the other 50% of the shares in GDI. The claims made by Ms Chu and Mr Xu against Mr Wu failed, including because the primary judge held that they were statute-barred.
The sixth defendant, Ms Josephine Darmali (Mr Darmali’s daughter), was appointed a director of Gold Stone in February 2014. She did not appear at trial. The primary judge found that she had no involvement in Gold Stone, save for her name appearing on the ASIC records (J [8] and [39]). The primary judge said that “the most plausible explanation [was] that Mr Darmali caused his daughter (rather than himself) to be appointed as a director on the ASIC records in an attempt to avoid personal liability in the event that anything went wrong, and to preserve his record of never having been a director of an insolvent company” (J [39]).
The third, fourth, sixth and seventh defendants played no part in the appeals, and their respective roles in the events that occurred are relevant to the appeals only insofar as they explain the context in which the events relevant to the parties to the appeals occurred.
Most of the funds that Ms Chu and Mr Xu had invested in the Fund were lost because the loans that Gold Stone made with their invested monies to companies associated with a property developer called Mr Victor Fong were never repaid to Gold Stone.
Mr Fong was not a party to the proceedings. In or around early 2014, Mr Darmali introduced Mr Fong to Gold Stone with the intention that Mr Fong’s companies could borrow from it to fund various property developments in New South Wales, including in Lane Cove and Manly.
Mr Darmali was subsequently involved in negotiating and drafting three loans from Gold Stone (using monies entrusted to it by Ms Chu and Mr Xu) to entities controlled by Mr Fong, called MV Developments (Lane Cove) Pty Ltd (MVLC) and MV Developments (Aust) Pty Ltd (MVDA). Mr Fong’s companies subsequently went into liquidation, and Mr Fong was made bankrupt.
The allegations made by Ms Chu and Mr Xu
In their third further amended statement of claim dated 3 June 2024 (3FASOC), Ms Chu and Mr Xu alleged that Gold Stone committed breaches of trust in four ways, by making three loans totalling $6.4 million to entities controlled by Mr Fong:
(1)that fell outside the power of investment conferred by cl 20.4 of the Fund Constitution (J [195]) (the unauthorised investments breaches);
(2)that were imprudent investments (J [204]) (the imprudent investments breaches);
(3)for the improper purpose of Gold Stone achieving a performance fee under cl 17.1 of the Fund Constitution (J [206]) (the performance fee improper purpose breaches); and
(4)for the improper purpose of procuring Mr Fong’s investment in an unrelated property development in Turramurra in which GDI had an interest but in which Ms Chu and Mr Xu had no commercial interest (J [207]) (the Turramurra project improper purpose breaches).
Ms Chu and Mr Xu also alleged that Ms Lin and Mr Cai:
(1)knowingly procured or induced the four alleged breaches of trust by Gold Stone (J [194]); and
(2)knowingly assisted in a dishonest and fraudulent design by Gold Stone in committing the alleged breaches of trust (J [194], [228]).
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]).
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]).
In relation to the alleged breaches of the MIS provisions (which Ms Chu and Mr Xu submitted enlivened the court’s power under s 1325(2) of the Corporations Act to award compensation for loss suffered as a result of such breaches), his Honour also found, as a matter of statutory construction, that the limitation period under s 1325(4) could not be extended pursuant to s 1322(4)(d) (J [277]).
His Honour also dismissed the derivative actions for breaches of directors’ duties, on the basis that Ms Chu and Mr Xu had not established the “special circumstances” required under the Corporations Act to bring claims on behalf of Gold Stone against Ms Lin and Mr Cai in their personal capacities (J [297]).
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.
For an ASIC-regulated managed fund to qualify as a complying investment, it had to be limited to categories of investments specified by the relevant Minister in a legislative instrument in writing. The relevant legislative instrument (known as IMMI 13/092) specified a number of categories of investments, including relevantly “bonds or term deposits issued by Australian financial institutions”, “real property in Australia” and “loans secured by mortgages over” real property in Australia.
Gold Stone established
After Gold Stone was incorporated on 7 February 2014, it was appointed as trustee of the Fund (with Mr Cai and Mr Wu as its directors) (J [71]–[73]).
The Fund was structured as a unit trust and was governed by a deed poll dated 10 February 2014. The primary judge called it the “Fund Constitution”, and I also adopt that term to describe it. Consistently with legislative instrument IMMI 13/092, clause 20.4 provided as follows:
20.4On the behalf of the Trust [Gold Stone] is permitted only to invest in the following:
(a)infrastructure projects in Australia;
(b)cash held by Australian deposit taking institutions (including negotiable certificates of deposit, bank bills and other cash-like instruments);
(c)bonds issued by the Commonwealth Government or a State or Territory Government;
(d)bonds, equity, hybrids or other corporate debt in companies and trusts listed or expected to be listed within 12 months on an Australian Stock Exchange;
(e)bonds or term deposits issued by Australian financial institutions;
(f)real property in Australia;
(g)Australian Agribusiness;
(h)annuities issued by an Australian registered life company in accordance with section 9 or 12A of the Life Insurance Act 1995;
(i)derivatives used for portfolio management and non-speculative purposes which constitute no more than 20 per cent of the total value of the Net Asset Value;
(j)loans secured by mortgages over the investments listed in paragraphs (a) to (h) above;
(k)other managed funds that invest in the investments listed in paragraphs (a) to (j) above;
(h)[sic] and other investment categories contained in the list of "Eligible Investments" as gazetted by the Minister from time to time for purposes of Regulation 5.19B of the Migration Regulations 1994 (Cth) or the said regulation's successor.
(Emphasis added.)
In February 2014, Gold Stone issued an information memorandum in relation to the Fund. It stated that the investment strategy of the Fund was “[t]o invest directly or indirectly in Australian real estate mortgages, property mezzanine finance, term deposits and interest deposits”. The fund manager would “manage the investment in the most professional and competent way to achieve the target return”, and would manage investment risks “through a conservative lending policy and by diligent management …”. The target return for the Fund was 8% per annum. Further, Gold Stone was entitled to pay quarterly distributions to the unit holders.
The Turramurra project
On 17 December 2013, GDI entered into contracts to purchase six properties in Turramurra, New South Wales for a total purchase price of $13,558,389, for the purpose of developing those properties (J [64]).
Mr Cai personally guaranteed the contracts (J [64]). At around that time, Mr Darmali caused Fiducia Singapore to enter into a joint venture agreement with MVLC in relation to future property development projects (J [65]).
By early 2014, Ms Lin (who along with Mr Cai, as I have noted, were directors and shareholders of DCK Asset Holding Pty Ltd, which held 50% of the shares in GDI, which in turn owned 95% of the shares in Gold Stone) had lost confidence in GDI’s ability to conduct the Turramurra development, and formed the view that for GDI to do so would be a “financial disaster” (J [69]). Ms Lin then took various steps to seek to extricate herself, Mr Cai and GDI from the Turramurra project (J [70], [83]–[84], [89]–[90]).
On 17 March 2014, GDI failed to attend the scheduled settlement of the contracts to purchase the Turramurra properties. At that time, Ms Lin was seeking funding, and she discussed with Mr Darmali the possibility of finding a new investor to take over the Turramurra development (J [90]).
On 4 April 2014, the solicitors for the vendors of the Turramurra properties served notices to complete on GDI (J [97]).
On 10 April 2014, Mr Darmali sent an email to Mr Fong, Mr Cai and Ms Lin in which he:
(a)referred to their discussions to date in which they had all agreed that Mr Fong would take over the Turramurra project from GDI; and
(b)attached a draft joint venture agreement between the Fund and Mr Fong which contemplated the incorporation of a jointly held special purpose vehicle (SPV) through which Mr Fong could manage the Turramurra project once GDI’s interest in that project had been novated to the SPV (J [98]).
On 17 April 2014, Ms Lin sent an email to Mr Darmali and Mr Fong, telling them that “[w]e are negotiating a replacement contract with the vendor with 3 months addition settlement period. That gives everyone time for the proposed SPV. Either NGI [New Galaxy Investments Pty Ltd] or Gold Stone Capital can be the funding partner for the SPV …” (J [100]).
On the same day, the solicitors for the vendors of the Turramurra properties wrote to the solicitors for GDI, stating that GDI had had ample time to settle the purchase and that the vendors were not prepared to wait any longer for completion beyond three months from the expected date of exchange of the new contracts for sale, namely 22 July 2014 (J [103]).
On 23 April 2014, GDI entered into six new contracts for the purchase of the Turramurra properties and, before the exchange of those contracts, Ms Lin “expressed that she no longer wanted to take the risks associated with the project and wanted to get out of the project” (J [103]).
In July 2014, a deed of novation was executed pursuant to which GDI novated its interest under the Turramurra purchase contracts to MV Golden Destiny Development (Turramurra) Pty Ltd (MVGD), a company half-owned by each of GDI and Mr Fong (J [125], [207]). The Fund had no commercial interest in MVGD (and therefore no interest in the Turramurra project).
The investments by Ms Chu and Mr Xu in Gold Stone, and the loans made by Gold Stone with the invested monies
On 3 April 2014, Ms Chu was invited by the Department of Immigration and Border Protection to make a $5 million complying investment for a SIV. On 17 April 2014, she received and signed a letter from Fiducia Fund Management Pty Ltd (Fiducia Fund), of which company Mr Darmali was the sole director, providing a mandate to Fiducia Fund to obtain $1.5 million of investments in “Waratah bonds” issued by the NSW government (J [95]).
In late April 2014, Ms Chu deposited a total of $5 million into the Fund’s Macquarie Bank account (J [104]).
On 30 April 2014, Mr Darmali gave written confirmation to Ms Chu on behalf of Gold Stone of her investments of $1.5 million in the Waratah bonds and $3.5 million in the Fund. He also confirmed as much to the Commonwealth Government (J [106]).
On 5 May 2014, Gold Stone, as trustee of the Fund, agreed to lend $500,000 to MVLC (of which Mr Fong was the sole director), which was developing a property in Lane Cove (the MVLC loan agreement). Mr Cai signed the agreement on Gold Stone’s behalf. The loan was for a term of 9 months at an interest rate of 30% for 9 months (and 40% per annum in relation to unpaid amounts of interest) (J [108]).
Clause 12.1 of the MVLC loan agreement provided that “[t]he Borrower hereby charges with payment of monies hereby secured all the right, title and interest of the Borrower in the Land Mortgaged”. The term “Land Mortgaged” was defined in clause 1.1(g) as “Unit 1.06/3–9 Finlayson Street, Lane Cove, NSW unregistered plan which is part of Lot 71–74 Plan 10155 …” (J [109]–[110]).
At the time that the MVLC loan agreement was executed, MVLC was developing Lot 71–74, but the proposed strata plan was unregistered. There were also two mortgages already registered on the title of the Lane Cove property in favour of third parties (J [110]).
The loan under the MVLC loan agreement was advanced on 6 May 2014 out of the funds invested by Ms Chu, pursuant to a withdrawal form signed by Mr Cai (and Mr Darmali) (J [112]).
On 26 May 2014, Gold Stone, as trustee of the Fund, agreed to lend $2.7 million to MVDA, another company of which Mr Fong was the sole director (the first MVDA loan agreement). The loan was for a term of 12 months with an annual interest rate of 18% (or a default rate of 25% per annum) (J [116]). The “Mortgaged Property” for the loan was 12–13 Marine Parade, Manly and 102 Bower Street, Manly. At the time of the loan, MVDA did not own those properties. The primary judge found that Mr Fong told Mr Darmali, Ms Lin and Mr Cai at the time that that he did not own either of the two Manly properties and that he was trying to borrow funds to buy the properties. The agreement was signed by Mr Cai on behalf of Gold Stone. Mr Wu’s signature was not genuine (J [56], [116]–[117]).
The loan under the first MVDA loan agreement was advanced on 27 May 2014 from the Fund’s Macquarie Bank account out of the funds invested by Ms Chu, pursuant to a withdrawal form signed by Mr Cai (and Mr Darmali) (J [121]).
On 4 July 2014, Mr Darmali provided a letter to Mr Xu on behalf of Gold Stone in relation to Mr Xu’s proposed investment of $1.5 million in bonds issued by the Victorian government and $3.5 million in the Fund. In that letter, Mr Darmali confirmed that the Fund was a complying fund for the purpose of the SIV requirements (J [126]). The primary judge also found that this letter was designed to assure Mr Xu as a potential investor that Gold Stone’s loans were secured over the real property assets of the relevant projects (J [126]). That investment plan was amended in late July 2014.
On 28 July 2014, Mr Xu was invited to make a $5 million complying investment for a SIV (J [131]).
On 31 July 2014, Ms Lin requested from Mr Darmali an investment mandate letter for Mr Xu, and Mr Darmali provided the letter on the following day (J [132]).
Mr Xu paid $3,069,229.12 into the Fund’s Macquarie Bank account between 5 and 7 August 2014 and paid further amounts of $892,540.10 on 11 August 2014 and $1,746.06 on 14 August 2014, totalling $3,963,515.28 (J [133]).
That same month, Mr Darmali gave written confirmation to Mr Xu of his investment of $3.5 million in the Fund “as per [the] mandate” (J [144]). The balance of Mr Xu’s $5 million investment (being $1.5 million) was transferred to the Treasury Corporation of Victoria in accordance with his instructions (J [147]).
On 8 August 2014, after the Turramurra project deed of novation had been executed, Gold Stone, as trustee of the Fund, agreed to lend $3.2 million to MVDA, (the second MVDA loan agreement) (J [134]). The “Mortgaged Property” for the loan was “Unit 4, 12–13 Marine Parade, Manly, NSW 2095 and 102 Bower Street, Manly, NSW 2095. Unregistered Plan: Lot in an unregistered Strata Plan …” as well as two units in the Lane Cove development (in which MVDA had no interest). The loan was for a term of 6 months with an interest rate of 10% for 6 months (20% per annum) or a default rate of 25% per annum (J [134]).
Mr Cai executed the second MVDA loan agreement on behalf of Gold Stone (J [137]). Mr Wu’s signature was not genuine (J [56]).
On 8 August 2014, Ms Lin and Mr Darmali signed withdrawal forms for the advance of $3.2 million from the Fund’s Macquarie Bank account to MVDA (J [138]). The loan was advanced in two tranches (i.e. $3 million on 11 August 2014 and $200,000 on 13 August 2014). The loan advance was predominantly paid out of the funds invested by Mr Xu, with the balance from funds invested by Ms Chu.
The Manly properties completed
On 18 August 2014, MVDA completed the purchase of the Manly properties. Mortgages to three other lenders were registered shortly thereafter. MVDA did not at that time execute a mortgage in favour of Gold Stone (J [145]).
Gold Stone’s loans to MVLC and MVDA were never repaid
MVLC and MVDA did not repay any of the loans when due (J [153], [155], [274]).
The wash up
On 31 August 2015, MVDA and MVLC were wound up (J [168]).
In November 2017, Gold Stone’s claims were settled with the liquidators of MVLC and MVDA for a payment to Gold Stone of $445,000, of which $395,504 was received by Gold Stone (net of legal fees) (J [179]). Mr Cai misappropriated all of those monies (J [180]–[193]).
THE PLEADED CASE AGAINST MS LIN AND MR CAI
The claims made by Ms Chu and Mr Xu as plaintiffs were ultimately contained in their 3FASOC.
The pleaded case against Gold Stone, Ms Lin and Mr Cai for breach of trust was relevantly as follows:
THE FUND
…
28In its capacity as trustee of the Fund, Gold Stone owed fiduciary and other equitable duties to the unit holders of the Fund, including duties:
(a)to act in good faith and in the best interests of the unit holders (“Best Interests Duty”);
(b)to comply with the terms of the trust, including the terms of the [information memorandum];
(c)not to place itself into a position in which its interests or those of its principals may conflict with those of the unit holders (save with the fully informed consent of the unit holders) (“No Conflicts Duty”);
(d)not to derive, or seek to derive, an unauthorised profit or benefit (“No Profits Duty”); and
(e)to exercise due skill and care in administering the trust property (“Skill and Care Duty”).
29In its capacity as trustee of the Fund, in exercising its power to invest the trust funds, Gold Stone owed a duty to the unit holders of the Fund pursuant to s 14A(2) of the Trustee Act 1925 (NSW), to exercise the care, diligence and skill that a prudent person engaged in the business of fund management would exercise in managing the affairs of other persons (“14A(2) Duty”).
30Pursuant to s 14C(1) of the Trustee Act 1925 (NSW), in its capacity as trustee of the Fund, Gold Stone was required, when exercising its power to invest the trust funds, to have regard to the following matters (“14C(1) Matters”):
(a)the purposes of the trust and the needs and circumstances of the beneficiaries;
(b)the desirability of diversifying trust investments;
(c)the nature of, and the risk associated with, existing trust investments and other trust property;
(d)the need to maintain the real value of the capital or income of the trust;
(e)the risk of capital or income loss or depreciation;
(f)the potential for capital appreciation;
(g)the likely income return and the timing of income return;
(h)the length of the term of the proposed investment,
(i)the probable duration of the trust;
(j)the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment;
(k)the aggregate value of the trust estate;
(l)the effect of the proposed investment in relation to the tax liability of the trust;
(m)the likelihood of inflation affecting the value of the proposed investment or other trust property;
(n)the costs (including commissions, fees, charges and duties payable) of making the proposed investment; and
(o)the results of a review of existing trust investments in accordance with section 14A(4).
…
BREACH OF TRUST BY GOLD STONE
145 At the times that the MVLC Loan and the First MVDA Loan were made, Chu:
(a)was the sole unit holder in the Fund; or, alternatively
(b)held a substantial majority of the units in the fund …
146At the time that the Second MVDA Loan was made, Chu and Xu, between them:
(a) held all of the units in the Fund; or, alternatively
(b)held a substantial majority of the units in the fund (save for the units held by Yi Zhou and Yu Sheng).
147At the times that each of the MVLC Loan, the First MVDA Loan, and the Second MVDA Loan (together, “Loans”) was made, each of Lin [and] Cai … knew the matters pleaded in paragraphs 145 to 146 above [particulars omitted].
147ALin [and] Cai caused Gold Stone to make each of the Loans for the purpose of furthering the proposed relationship between GDI and Fong in relation to the Turramurra development in which GDI held an interest because Lin [and] Cai … were concerned that if Fong did not become involved in the Turramurra development then GDI might:
(a)lose the money it had contributed to the Turramurra development (including a deposit of about $1.5 million);
(b)lose any opportunity to profit from the Turramurra development; and
(c) become liable to the vendors of the Turramurra properties for damages for failure to complete the purchase contracts, which liability would be guaranteed by Cai and Xufeng Wu [particulars omitted].
147BThe purposes referred to in the preceding paragraph did not advance the interests of the unit holders of the Fund in any respect.
Paragraphs [148]–[150] and [152] next alleged that:
(a)the Loans were contrary to the interests of the unit holders;
(b)the Loans were imprudent and highly risky;
(c)Ms Lin and Mr Cai knew as much;
(d)it was likely that the Fund would lose its investment; and
(e)the investments were not permitted by cl 20.4 of the Fund Constitution.
Paragraph [153] continued:
153In the premises of paragraphs 145 to 152, by making each of the Loans, Gold Stone:
(a)in breach of the Best Interests Duty (as defined at paragraph 28 above), acted otherwise than in good faith and in the best interests of the unit holders;
Particulars
The making of the Loans was otherwise than in good faith and was contrary to the best interests of the unit holders because Gold Stone knew that the best interests of the unit holders was for it to make low risk investments that would preserve their funds, but it chose instead to make high risk investments with a substantial probability that the invested funds would be lost. Further, to the extent that Gold Stone acted for the purpose of furthering the relationship between Fong and GDI in relation to the Turramurra development, that was not in the best interests of the unit holders.
(b)in breach of the No Conflicts Duty (as defined at paragraph 28 above), placed itself in a position where its interests and those of its principals were in conflict with those of the unit holders; and
Particulars
The interests of Gold Stone and its principals were: (i) to maximise the returns achievable on the investments Gold Stone made, even if that risked losing the invested funds; and (ii) to further relationship between GDI and Fong. That was contrary to the interests of the unit holders, which was to preserve their invested funds through low risk investments.
(c) in breach of the No Profits Duty (as defined at paragraph 28 above), sought to derive an unauthorised profit or benefit.
Particulars
The unauthorised benefit was the potential benefit that Gold Stone stood to receive from high-risk, high-return investments, and the benefit that Gold Stone’s major shareholder, GDI, stood to receive from the Turramurra development should Fong become involved.
Paragraph [154] contained a plea, among others, that a reasonable prudent fund manager exercising due skill and care would not have made each of the loans.
Paragraph [155] alleged that “in the premises of paragraphs 145 to 152 and 154, by making each of the Loans, Gold Stone breached”: the “Competence Term” and the “Investment Risk Term” of the information memorandum; its duty of skill and care; its duties as trustee under s 14A(2) of the Trustee Act 1925 (NSW); and cl 20.4 of the Fund Constitution.
Paragraph [156] pleaded the loss suffered by the Fund by reason of the breaches of trust, being: the entirety of the first MVDA loan and the second MVDA loan; the shortfall from the MVLC Loan after receipt of the settlement payment (see paragraph 73 above); and the opportunity to earn interest through prudent investments.
The pleas against Ms Lin and Mr Cai commenced at paragraph [157], as follows:
Knowing Involvement by Lin [and] Cai …
157 At the times that each of the Loans was made, each of Lin [and] Cai … knew:
(a) of the terms of the [information memorandum] and the Trust Deed; and
Particulars
(i) Lin knew the terms of the IM and the Trust Deed because of her role in promoting the Fund.
(ii) … Cai knew, or [is] taken to have known, the terms of the [information memorandum] and the Trust Deed because of [his] role[] as [a] director[] of Gold Stone and … he had executed the Trust Deed on behalf of Gold Stone.
(iii) Alternatively, in the circumstances, if any of Lin … or Cai did not have actual knowledge of those matters, they had knowledge of matters which would have led an honest person in their position to suspect those matters and make inquiries through which the matters would have been revealed.
…
(b) of the matters pleaded at paragraph 152.
Particulars
(i) Lin knew the terms of the Loans because of her role in negotiating the Loans, as particularised in the particulars to paragraph 19.
(ii) Cai knew the terms of the Loans because he signed the Loan Agreements.
…
(iv) Each of Lin [and] Cai … knew that the Loans were risky because they were experienced businesspeople and it is obvious that a high-interest, short term loan of the type of the Loans with no registered security is risky.
(v) Alternatively, if the knowledge was not actual knowledge then by reason of the matters in sub-paragraphs (i)-(iv), each of Lin [and] Cai … had knowledge that would have caused an honest and reasonable person in their position to suspect the matters in paragraph 152, such that an honest and reasonable person in their position would have conducted inquiries as to the terms and risk profile of the Loans, which inquiries would have revealed those matters.
…
158 Lin … negotiated the Loans on behalf of Gold Stone [particulars omitted].
159 Cai signed each of the MVLC Loan Agreement, the First MVDA Loan Agreement, and the Second MVDA Loan Agreement …
160 In the premises of paragraphs 145 to 157, each of Lin … and Cai, through their respective conduct pleaded at paragraphs 158 to 159, assisted with knowledge in the Breaches of Trust and, or alternatively, knowingly procured the Breaches of Trust.
Particulars
(a) As pleaded above, the acts comprising the Breaches of Trust are the making of the Loans.
(b) Lin’s involvement in the making of the Loans is pleaded at paragraph 158 above.
(c) Lin’s knowledge is as pleaded at paragraph 157 above and also as follows:
(i) in relation to paragraph 153(a) above, Lin knew:
(A) that it was in the best interests of the unit holders for Gold Stone to make low risk investments, by reason of:
(1) her knowledge of the Chu Characteristics by reason of her being told them by Chu (see paragraphs 43 and 46 above);
(2) her knowledge of the Xu Characteristics by reason of her being told them by Xu (see paragraph 59 above);
(3) her knowledge of the plaintiffs’ investments in the Fund, which can be inferred from matters pleaded at paragraphs 39 to 53 above (in relation to Chu) and 55 to 66 above (in relation to Xu); and
(4) her knowledge of the terms of the Trust Deed and IM (see paragraph 157(a) above), which included the Competence Term and the Investment Risk Term; and
(B)that the Loans were high risk investments (see SOC paragraph 157(b));
(ii) in relation to paragraph 153(b) above, Lin knew:
(A) of the interests of the unit holders (see sub-paragraph (i) above); and
(B) of the interests of Gold Stone and its principals because of:
(1) her own interest in Gold Stone, through DCK (see paragraphs 18 and 20 to 24 above); and
(2) her knowledge of the terms of the IM, including the remuneration to which Gold Stone was entitled under the [information memorandum];
(iii) in relation to paragraph 153(c) of the SOC, Lin knew:
(A) that Gold Stone stood to benefit from the Loans, because this was obvious from the terms of the Loans, having regard to the remuneration to which Gold Stone was entitled under the [information memorandum] (of which Lin was aware); and
(B) that Gold Stone had not been authorised to enter into the Loans, because:
(1) the Loans were contrary to the plain terms of the [information memorandum], of which Lin was aware, including the Competence Term and the Investment Risk Term; and
(2) there was no basis on which Lin could reasonably have believed that those terms had been dispensed with or waived by the unit holders.
(d) Cai’s involvement in the making of the Loans is pleaded at paragraph 159 above.
(e) Cai’s knowledge is as pleaded at paragraph 157 above and also as follows:
(i) in relation to paragraph 153(a) above, Cai knew:
(A) that it was in the best interests of the unit holders for Gold Stone to make low risk investments, by reason of his knowledge of the terms of the [information memorandum] (see paragraph 157(a) above), which included the Competence Term and the Investment Risk Term;
(B) that the Loans were high risk investments (see paragraph 157(b) above);
(ii) in relation to paragraph 153(b) above, Cai knew:
(A) of the interests of the unit holders (see sub-paragraph (i) above); and
(B) of the interests of Gold Stone and its principals because of:
(1) his own interest in Gold Stone (see paragraph 151 above); and
(2) his knowledge of the terms of the [information memorandum], including the remuneration to which Gold Stone was entitled under the [information memorandum];
(iii) in relation to paragraph 153(c) above, Cai knew:
(A) that Gold Stone stood to benefit from the Loans, because this was obvious from the terms of the Loans, having regard to the remuneration to which Gold Stone was entitled under the [information memorandum] (of which Cai was aware); and
(B) that Gold Stone had not been authorised to enter into the Loans, because:
(1) the Loans were contrary to the plain terms of the [information memorandum], of which Cai was aware, including the Competence Term and the Investment Risk Term; and
(2) there was no basis on which Cai could reasonably have believed that those terms had been dispensed with or waived by the unit holders.
…
161 In the premises, each of Gold Stone, Lin … and Cai should be ordered to restore the Fund’s Losses to the Fund.
Dishonest and Fraudulent Design
162 The Breaches of Trust:
(a) were effected by Gold Stone:
(i) through Lin … and Cai, through their respective conduct pleaded at paragraphs 158 and 159; and
(ii) in circumstances where Lin … and Cai had the knowledge pleaded at paragraphs 157 and 160 above;
(b) in the premises, were effected by persons who had knowledge that they were causing Gold Stone to act in breach of trust; and
(c) in those circumstances, were committed with dishonesty or at least some knowledge of the impropriety of the conduct involved.
THE FINDINGS OF THE PRIMARY JUDGE
Unchallenged findings made by the primary judge in respect of Gold Stone’s liability for breaches of trust
Neither Ms Lin nor Mr Cai challenged the finding of the primary judge that Gold Stone was in breach of trust by making the three loans because each of them was an imprudent investment in a hazardous security. That is to say, because the breaches of trust were of such a nature, they were breaches of trust ab initio, which equity will do everything necessary to prevent or to redress. As Dixon, McTiernan and Fullagar JJ explained in Fouche v The Superannuation Fund Board (1952) 88 CLR 609 at 636–637:
It has been necessary to deal with the facts of the case at considerable length, but, when once the facts are understood, the case may be disposed of comparatively shortly. Such difficulties as it presents do not arise from any doubt as to the commission of very serious breaches of trust. The execution of the deed, with the obligations which it imposed on the board, was a breach of trust. And every payment under it was a breach of trust and a misapplication of the board's funds in a sense which will be considered later. Such difficulties as the case presents relate to the remedies to be applied in a somewhat peculiar situation. The case seems to us to be very plainly a case in which a trustee would be held liable for any loss resulting from the investment, but it is not the ordinary case in which a security has been realized for less than the amount invested. And the trustee is a corporation which has no assets worth mentioning apart from the funds which it holds in trust. Up to a point, however, the position seems reasonably clear, and we think that most of the difficulties disappear when the nature of the breach of trust is properly understood.
As to the nature of the breach of trust, we agree with the learned Chief Justice of Tasmania. It is no mere case of a trustee advancing too much on a proper security ... The investment was of such a kind that it ought never to have been made at all for any amount large or small ... What is important is that the investment was, in itself and by reason of its inherent nature, and not merely because of the investment of an excessive amount, a breach of trust. The words of Lindley LJ in Re Whiteley (1886) 33 ChD 347 apply with redoubled force to this case. Speaking of the investment there in question he said: – “A security of so hazardous a nature as this, though in one sense and to some extent a real security, is not a proper security for trust money; it is not in truth a real security for any sum beyond the value of the land as land. The security for more than this value is the solvency of the borrower, and the trade carried on by him” (1886) 33 ChD, at pp 356, 357. In Royds v Royds (1851) 14 Beav 54 (51 ER 207), although the security was found to be ample in point of value, the whole case proceeded on the footing that the investment was in breach of trust because of the hazardous nature of the security. The importance of the fact that the vice of the investment lay in its inherent nature is this. It follows that there was a breach of trust ab initio, and that at any moment early or late after the execution of the deed, equity would be both able and bound, at the suit of any competent plaintiff, to do everything necessary both to prevent the breach of trust from being carried out or further carried out, and to redress the position and restore the trust fund.
The fact that neither Ms Lin nor Mr Cai challenged the finding of the primary judge that the three loans were imprudent investments in hazardous security is hardly surprising in light of the fact that Ms Chu and Mr Xu led unchallenged expert opinion evidence, from a mortgage fund manager, that each of the three loans was a high risk unsecured loan, and that no competent fund manager would have made any of them. Further, there was “no evidence that anything resembling a due diligence process was undertaken in relation to any of the loans” (J [205]).
Ms Lin and Mr Cai also did not challenge the finding of the primary judge that Ms Chu and Mr Xu had established breaches of trust on the basis that the MVLC loan and the first MVDA loan were made for an improper purpose, principally the purpose of procuring Mr Fong’s assistance for the Turramurra project. His Honour found (J [207]) that “Ms Lin was determined to extricate herself from the Turramurra project by enticing Mr Fong to assume the burdens of developing that project, and expressly recognised the need to provide financial incentives to Mr Fong in doing so”, explaining as follows:
Mr Darmali’s and Ms Lin’s emails of 17 April 2014 (copied to Mr Fong), are explicit as to that purpose … as too was Ms Lin’s affidavit in the NSW Supreme Court of 27 November 2015 which stated that all three loans were “In the interests of furthering the proposed relationships between GDI and Fong” … Although the Deed of Novation was entered into in July 2014 …, and therefore before the Second MVDA Loan Agreement of 8 August 2014, there was a commercial imperative to keep Mr Fong and his entities in funds in order to meet the payment obligations under that deed, and in any event the company receiving the novation, namely [MVGD], was half-owned by each of GDI and Mr Fong …
His Honour concluded that:
(1)“Ms Lin thus retained a substantial commercial interest in the Turramurra project”;
(2)“[t]he purpose of enticing Mr Fong to assume a substantial part of the burden of the Turramurra project was of no benefit to the unitholders in the Fund because the Fund had no interest in the Turramurra project”;
(3)“[r]ather, Ms Lin was exposed to the failure of that project by reason of GDI’s investment in it, and Mr Cai was exposed by reason of the guarantee which he had given”; and
(4)accordingly, “the three loans were procured for an improper purpose in breach of Gold Stone’s duty as trustee of the Fund”.
Conclusion of primary judge that a director acting purely in their capacity as director of a company is capable of procuring or inducing a breach of trust
The primary judge held that as a matter of principle, a director acting purely in his or her capacity as director of a company may be found liable for knowingly inducing or procuring a breach of trust (and knowingly assisting in a dishonest and fraudulent design) (J [209] and [211]).
In reaching that conclusion, his Honour turned first to the reasons of Leeming JA (with whom Bell P and Brereton JA agreed) in Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62 (Pittmore v Chan) and summarised what he said, relevantly as follows:
208… I gratefully adopt the analysis of Leeming JA, which may relevantly be summarised as follows (omitting references):
(a)“inducing” and “procuring” a breach of trust are synonyms or substantial equivalents: [161];
(b)a third party’s liability for inducing or procuring a breach of trust has two elements, the first of which is the intentional conduct which causes, and is intended to cause, the breach of trust, which requires more than merely assisting a breach of trust: [186] and [192]–[194];
(c)the second element is that the third party knew that he or she was bringing about a breach of trust, with any of the following four categories of knowledge being sufficient: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable person: [186] and [191]–[192]; and
(d)what is required is knowledge of the essential matters which go to make up the breach of trust, even if the procurer or inducer did not know that those matters amounted to a breach of trust: [195].
209Leeming JA also dealt with the question whether a director “acting as such” is capable of procuring or inducing a breach of trust by the director’s company: [162]–[170]. It was not necessary for Leeming JA to decide the point, although his Honour said that he was far from convinced about the correctness of the proposition that a director acting as such could be so liable for his or her company’s breach of trust: [162]. (I note that Leeming JA’s hesitation appears to have been shared by Ward P, Brereton JA and Griffiths AJA in Anchorage Capital Master Offshore Ltd v Sparkes (2023) 111 NSWLR 304 at [293].) Leeming JA regarded the proposition as sitting awkwardly with the position concerning the tort of inducing a breach of contract, as expressed in O’Brien v Dawson (1944) 66 CLR 18, in which Starke J (at 32–33) and McTiernan J (at 34) said that a director could not be liable for inducing a breach of contract by the company where he was acting in pursuance of his authority as a director: [163]–[164]. However, Leeming JA said that none of that reasoning is to deny that directors who act other than in their capacity as one of the organs of a company may be found to have procured or induced a breach of trust of fiduciary duty: [166]. Even so, Leeming JA observed that the reasoning of Finn J in Australian Securities Commission v AS Nominees Ltd [1995] FCA 915; (1995) 62 FCR 504 at 523 proceeds on the basis that directors exercising the powers of the board who thereby cause their company to commit a breach of trust are “peculiarly vulnerable” to liability for knowing assistance: [168]. I can see no reason why the reasoning of Finn J would not also extend to the cause of action of knowingly procuring or inducing a breach of trust.
At J [210], his Honour said that the question whether a director acting purely in his or her capacity as director as one of the organs of a company is capable of procuring or inducing a breach of trust was academic insofar as it concerned the accessorial liability allegations against Ms Lin because they were “not confined to conduct by [her] merely in [her] alleged capacity as [a] director[]”, citing paragraph [19(d)] of the 3FASOC.
As to Mr Cai, his Honour said (J [211]):
[T]he plaintiffs do not allege that he acted in any capacity other than as a director … However, I do not share Leeming JA’s hesitation as to whether a director of a trustee company acting as such can be liable for knowingly procuring or inducing the company’s breach of trust. The question is now the subject of an illuminating article by Ms Max McHugh, “Directors’ Liability for Inducing a Breach of Trust or Fiduciary Obligation” (2024) 140 LQR 223, which advances a compelling argument as to why there should be no objection in principle to a director acting as such being found liable for knowingly inducing or procuring a breach of trust.
His Honour adopted Ms McHugh’s analysis of the relevant principles, and her conclusion, in her article (J [211]). He also referred in passing to the decision of the UK Supreme Court in Lifestyle Equities CV v Ahmed [2024] UKSC 17 (since reported in [2025] AC 1), relevantly as follows:
…
(d) However, there is a body of authority holding that a director who knowingly causes a company to breach its contract is not personally liable for the tort of inducing breach of contract: Said v Butt [1920] 3 KB 497 at 505–6 (McCardie J); O’Brien v Dawson (1942) 66 CLR 18 at 32–3 (Starke J) and 34 (McTiernan J); this line of authority should be regarded as weak and anomalous, but in any event any analogy between inducing breach of trust and inducing breach of contract is imperfect and should not be pressed too far. (I note that about a month after Ms McHugh’s article was published, the Supreme Court of the United Kingdom held in Lifestyle Equities … at [54]–[63] that the rule stated in Said v Butt as a principle of the law of tort is sound but does not apply to civil wrongs which do not depend on any contract or voluntary arrangement between the parties. That may require some qualification to Ms McHugh’s argument but does not strike me as adversely affecting the central thrust of the argument. In particular, while a unit trust as in the present case may be regarded as a kind of voluntary arrangement, the Supreme Court did not consider whether the rule in Said v Butt has any analogical application to directors inducing a breach of trust by their company. I doubt whether (to adopt the language of Lord Leggatt at [54]) there is any “general norm or social understanding” that if a director knowingly induces a trustee company to commit a breach of trust then only the trustee company (which often has very minimal paid up capital, and no assets of its own other than its right of indemnity over trust assets for liabilities which are properly incurred) and not its directors will incur liability to the beneficiaries. Further, the Supreme Court at [63] acknowledged that the law in this area is not completely coherent.)
(e) A considerable number of cases have recognised the existence of liability on the part of directors (acting as directors) for knowing assistance in their company’s breach of trust or fiduciary duty (including ASC v AS Nominees Ltd [(1995) 62 FCR 540] to which I have referred at [209] above), and there is no sufficient justification for taking a different approach to directors’ liability for inducing a breach of trust;
(f) A director causing a company to commit a breach of trust or fiduciary duty is best seen as inducement rather than assistance, and a director who induces such a breach with (at least) knowledge of facts which would indicate a breach to a reasonable person should be in no better position than a stranger; in both cases, their conscience is sufficiently affected to attract the intervention of equity.
(g) Just as a director should not be liable merely by virtue of their position as a director, so too should they not escape liability due to their position.
Finding made by the primary judge that Ms Lin knowingly induced or procured Gold Stone’s breaches of trust
The primary judge found that there was “no doubt that Ms Lin induced or procured the breaches of trust” which he found Gold Stone had committed (J [212]) because she:
(1)referred to Gold Stone as “my company” and to the Fund as “my mortgage fund”;
(2)had accepted that she controlled Gold Stone as the trustee of the Fund; and
(3)played a very substantial role in directing the affairs of Gold Stone and the Fund and was a driving force in the establishment and operation of the Fund.
Dealing first with Ms Lin’s knowledge of the unauthorised investments breaches, the primary judge made the following findings:
213… I accept Mr Cai’s evidence that Ms Lin gave him the Fund Constitution and asked him to sign it … and that he observed in 2014 that Ms Lin had a copy of the Fund Constitution in her possession … That evidence is inherently plausible. Ms Lin clearly knew the terms of the three loan agreements, as she acknowledged in her affidavit in the Supreme Court of New South Wales of 20 November 2015 that she was the person on behalf of Gold Stone who carried out the discussions and negotiations with Mr Fong, including in relation to the three loan agreements ... She therefore knew the nature of the so-called security referred to in the Schedules. As a licensed conveyancer, she must have been aware that a mortgage could not validly be granted over a proposed lot in an unregistered strata plan. In relation to the MVLC Loan Agreement, Ms Lin was aware that Gold Stone had purported to take security over lots in an unregistered strata plan in Lane Cove … In relation to the First MVDA Loan Agreement, I have accepted at [117] above the evidence of Mr Fong that he told Ms Lin (as well as Mr Darmali and Mr Cai) at the time that he did not own either of the two Manly properties which were referred to as the Mortgaged Property in the Schedule. In addition, in relation to the Second MVDA Loan Agreement, Ms Lin was a signatory to the withdrawal forms … which withdrew the total of $3.2 million and advanced that money to MVDA. She was also copied in on the emails of 11 and 12 August 2014 concerning the substitution of the Schedule to that loan agreement.
His Honour concluded that there was accordingly “no doubt that Ms Lin had actual knowledge of the facts constituting the breaches of trust by way of unauthorised investments”.
With respect to the imprudent investments breaches, he concluded (J [214]) that:
(a)it followed from Ms Lin’s knowledge of the terms of the three loan agreements that “she knew that the loans were high-risk unsecured loans at high interest rates”; and
(b)she understood “the importance of security and serviceability for loans”, “that high interest rates were associated with high risk” and “that it was wrong to speculate with investors’ funds”.
Dealing next with Ms Lin’s knowledge of the Turramurra project improper purpose breaches, the primary judge made the following findings:
215… Ms Lin was very concerned to extricate GDI from the Turramurra project because she had invested her own funds and perceived that her investment, and the assets of Mr Cai (her then husband) as guarantor, were at significant risk. Her concern was sufficiently great that she considered GDI to risk “financial disaster” if it was unable to extricate itself from the project … The avoidance of that disaster was the primary reason for the engagement with Mr Fong … That rationale is a principal theme of her affidavit in the Supreme Court proceedings dated 17 October 2014 … It is also apparent from her cross-examination in that case … As Ms Lin expressed the matter succinctly in her affidavit of 27 November 2015, Gold Stone agreed to lend money to MVLC and MVDA pursuant to the three loan agreements “In the interests of furthering the proposed relationship between GDI and Fong”.
His Honour concluded (J [215]) that “[a]ccordingly, Ms Lin knowingly used the trust money in the Fund for the purpose of advancing her own commercial interests in circumstances which were detrimental to the interests of the plaintiffs as unitholders in the Fund”.
The primary judge concluded that Ms Lin procured or induced the breaches of trust by Gold Stone in making the three loans in question with actual knowledge of the circumstances constituting those breaches of trust. His Honour said that he so concluded on the basis of direct evidence and inferences, and that, to the extent that he had drawn inferences against her, he drew them with greater confidence because she did not give evidence in circumstances where she was in a position to cast light on whether such inferences should be drawn (J [216]).
Finding made by the primary judge that Mr Cai knowingly induced or procured Gold Stone’s breaches of trust
The findings of the primary judge in respect of the allegation that Mr Cai knowingly induced or procured Gold Stone’s breaches of trust by way of the three loan agreements were relevantly as follows:
217… [H]e played a central role in negotiating the loan agreements with Mr Fong (along with Ms Lin and Mr Darmali), as his affidavit in support of the statutory demand on 23 June 2015 expressly acknowledged … He signed each of the three loan agreements and signed the bank withdrawal forms in order to make the advance of $500,000 to MVLC and the advance of $2.7 million under the First MVDA Loan Agreement.
218As to Mr Cai’s knowledge, I have found at [28] above in relation to Mr Cai’s credibility that he had a copy of the Fund Constitution which Ms Lin gave to him after he signed it, that he read it and that Ms Lin explained some of it to him … In addition, Mr Cai read cl 20.4 and he understood that Gold Stone as trustee could only invest in loans secured by mortgages … He plainly knew the terms of the three loan agreements, including the purported security referred to in the Schedule to each of them. As a licensed real estate agent, he knew what a mortgage was ... He understood that strata plans had to be registered, and indeed had been involved in a lot of off-the-plan sales … Mr Cai was a participant in the conversation with Mr Fong in which Mr Fong said that he did not own either of the two Manly properties referred to as the Mortgaged Property in the First MVDA Loan Agreement, and was trying to borrow funds to buy those properties.
219As to the First MVDA Loan Agreement, Mr Cai understood at the time that the proposed lot referred to in the Collateral Documents was in a strata plan which was not registered at the time of the loan … In relation to the Second MVDA Loan Agreement, Mr Cai said that he was told by Ms Lin that Mr Fong planned to build on a block of land and “afterwards, when the construction is complete, all these properties would be used to – as security” … It follows that he was aware that the purported security comprised non-existent properties[.] Mr Cai accepted that he knew at the time that the strata plans referenced in Item 6 of the Second MVDA Loan Agreement had not been registered …
220Mr Cai denied that he knew that the MVLC Loan Agreement was not secured by mortgage over real property in Australia … He accepted that he took no steps to check that the payments to MVLC and MVDA were authorised by the Fund Constitution, and in relation to the MVLC Loan he accepted that he made a deliberate decision not to take such steps … Mr Cai said that he did not look at the loan agreements properly and did not see that the proposed security property was unregistered … but he was aware that the Lane Cove development had not been completed … I do not accept that evidence except for the last proposition. I find that Mr Cai had actual knowledge that the three loan agreements were not secured by mortgages over real property, and that they were not authorised by the Fund Constitution. However, even if I were to accept Mr Cai’s evidence, I would have found that his knowledge fell within one or more of the other categories sufficient to render him liable, namely wilfully shutting one’s eyes to the obvious, wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make, and knowledge of circumstances which would indicate the facts to an honest and reasonable man.
The primary judge also found that “Mr Cai also knew of the facts which rendered the three loans recklessly imprudent investments” because “he knew that the security for the loans was non-existent”, and “must have observed that the interest rates referred to in the three loan agreements were extraordinarily high, reflecting the very high risk involved in making the loans”. He also found that Mr Cai “did not undertake any due diligence, and did not believe that anyone else on behalf of Gold Stone had done so” (J [221]).
As to Mr Cai’s knowledge of the improper purpose of the loans, the primary judge made the following findings (J [222]):
Mr Cai knew that he was a guarantor under the contracts to purchase the Turramurra properties and that GDI did not have sufficient funds itself to complete those contracts … Mr Cai denied that Ms Lin conveyed to him that GDI would not be able to develop the Turramurra properties without assistance …, that it was in his financial interest for Mr Fong to take over the project …, and that the loans had anything to do with the Turramurra project … I reject those denials, which are not at all credible in the face of the contemporaneous documents. It is obvious from the contemporaneous documents that Ms Lin was highly concerned about those matters and Mr Cai was involved in the discussions concerning Ms Lin’s purpose of seeking to extricate GDI (and therefore herself and Mr Cai) from the Turramurra project. He must have been well aware of the financial risks which he was facing personally as guarantor, and the fact that Mr Fong’s involvement was intended to extricate him (as well as Ms Lin and GDI) from those risks. He was obviously paying attention to what was happening with the Turramurra project, because he was heavily involved in selling units off-the-plan …
His Honour concluded accordingly (J [223]) that Mr Cai knowingly induced or procured the breaches of trust by Gold Stone in relation to the three loan agreements.
In summary, his Honour found that both Ms Lin and Mr Cai knowingly induced or procured all of the breaches of trust by Gold Stone (that is, the unauthorised investments breaches, the imprudent investments breaches and the Turramurra project improper purpose breaches).
Finding made by the primary judge that Ms Lin and Mr Cai knowingly assisted in a dishonest and fraudulent design
The primary judge found (J [228]) that he was “comfortably satisfied 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 within the ordinary and natural meaning of those words, as discussed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [(2007) 230 CLR 89] at [159]–[186]”. It is to be assumed that his Honour had in mind the following statements of principle in that case (per Gleeson CJ and Gummow, Callinan, Heydon and Crennan JJ):
(1)the second limb of Barnes v Addy makes liable a defendant who assisted a trustee or fiduciary with knowledge of a dishonest and fraudulent breach of trust or breach of fiduciary duty on the part of the trustee or fiduciary: at 159 [160];
(2)as a matter of ordinary understanding, and as reflected in the criminal law in Australia, a person may have acted dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards: at 162 [173];
(3)it is customary to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the following four categories of knowledge: actual knowledge; wilfully shutting one’s eyes to the obvious; wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and knowledge of circumstances which would indicate the facts to an honest and reasonable man: at 163 [174]–[177], citing Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 at 575–576, 582; [1992] 4 All ER 161 at 235, 242–243 (Peter Gibson J); and Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 398 (Gibbs J); at 412 (Stephen J); at 376–377 (Barwick CJ concurring).
It is clear from other parts of his Honour’s reasons that he found that Ms Lin and Mr Cai had actual knowledge of the relevant dishonest and fraudulent breaches of trust, being the unauthorised investments breaches and the Turramurra project improper purpose breaches. See, for example, J [213] (“[T]here is no doubt that Ms Lin had actual knowledge of the facts constituting the breaches of trust by way of unauthorised investments”; J [216] (“I find that Ms Lin procured or induced the breaches of trust by Gold Stone in making the three loans in question with actual knowledge of the circumstances constituting those breaches of trust”); and J [220] (“I find that Mr Cai had actual knowledge that the three loan agreements were not secured by mortgages over real property, and that they were not authorised by the Fund Constitution”). The primary judge found that because “assisting” is a lower level of involvement than “inducing” or “procuring”, that element was also satisfied.
For those reasons, his Honour held that Ms Lin and Mr Cai were liable under the second limb of Barnes v Addy in respect of the unauthorised investments breaches and the Turramurra project improper purpose breaches.
Finding made by the primary judge in respect of the misappropriation claims and the clear accounts rule
Under a deed of settlement with the liquidators of MVLC and MVDA, on 20 November 2017 Gold Stone was paid $395,504.40 (J [241]).
From 2019 to early 2020, an aggregate amount of $340,169.40 was paid out of the Fund, under the authority of Mr Cai, by way of a repayment of a (genuine) loan from GDI (J [244] and [245]).
The primary judge also considered it relevant that on 21 July 2016, under the authority of Ms Lin, the Fund paid $300,000 to G3 Asset Holdings Pty Ltd (a company controlled by Ms Lin as sole director and shareholder). He explained as follows (at J [241]):
… I have also included in this section of the judgment the payment on 21 July 2016 of $300,000 to G3, even though it was paid well before the settlement deed of 14 November 2017. As I have said at [163] above, this amount should be treated as having been paid at the request or direction of GDI, and thus was a partial repayment by Gold Stone of its loan account with GDI. I have included it here along with the post-14 November 2017 repayments to GDI because it raises the same issue of legal principle concerning the clear accounts rule.
His Honour held (J [246] and [247]) that the above payments were in breach of what is often called the “clear accounts rule”, because Gold Stone as trustee was not entitled to exercise its right of indemnity against the trust assets before such time as it had restored to the trust estate the amount of the loss incurred by reason of its breaches of trust in having made the three loans in question (citing RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 (Brooking J); Australian Securities and Investments Commission v Letten (No 17) [2011] FCA 1420; (2011) 286 ALR 346 (Gordon J); Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 at [138] (Lee, Hill and Drummond JJ); and Queensland Nickel Sales Pty Ltd v Park (2023) 299 FCR 169 at [185]–[186] (Markovic, Banks-Smith and Halley JJ).
In relation to the last finding, at J [220], the primary judge explained that he reached that conclusion having rejected Mr Cai’s evidence to the contrary. Earlier in his Honour's reasons, the primary judge very clearly explained why he reached the view that Mr Cai was ‘an unsatisfactory and unreliable witness who was determined to say whatever he perceived to be in his forensic interests’: J [25].
The primary judge’s reasons for concluding that Mr Cai had the requisite knowledge to be liable for knowingly inducing or immediately procuring Gold Stone’s breach of trust by making imprudent investments were not inadequate.
Ground 3 must be dismissed.
Ms Lin’s appeal - Ground 4; Mr Cai’s appeal - Grounds 4, 9 and 12
By ground 4 in each of their appeals, Ms Lin and Mr Cai challenge the primary judge’s findings that they knowingly procured three of the four breaches of trust that are referred to at [15] of the reasons of O’Callaghan J.
At trial, Ms Chu and Mr Xu relevantly alleged that Gold Stone committed four breaches of trust by ‘making’ three loans, in circumstances in which each of those loans were unauthorised by the Fund Constitution, were imprudent investments, or were made for improper purposes. Ms Lin was alleged to have knowingly procured each of those breaches of trust by ‘[negotiating] the Loans on behalf of Gold Stone’: 3FASOC at paragraph 158. Mr Cai was alleged to have knowingly procured the breaches because he ‘signed each of the MVLC Loan Agreement, the First MVDA Loan Agreement, and the Second MVDA Loan Agreement’: 3FASOC at paragraph 159.
Neither Ms Lin or Mr Cai suggest that the primary judge did not find, or that he was in error in finding, that they did engage in the conduct relied on by Ms Chu and Mr Xu as constituting the acts of procurement. Ms Lin does not challenge the primary judge’s finding that she had the knowledge required to otherwise justify a conclusion that she was a participant in the relevant breaches of trust found to have been committed by Gold Stone. Mr Cai does challenge that finding, but only on the basis that the primary judge failed to give adequate reasons for that finding (ground 3). As has been seen, I would dismiss that ground of appeal.
Further, having regard to what I have said in the context of Ms Lin’s ground 3, and as Mr Cai was formally appointed as a director of Gold Stone, it may be accepted that when they engaged in such conduct, both Mr Cai and Ms Lin were acting as the controlling organs of Gold Stone.
It is against this factual background that Ms Lin and Mr Cai argue that because their relevant conduct was conduct that was carried out only in their capacity as a director (or organ) of Gold Stone, and not in their personal capacity, it was not open to the primary judge to conclude that they were liable for having knowingly procured the relevant breaches of trust.
Mr Cai presses the same argument in support of his grounds 9 and 12, which, as I have explained, relate to several other separate breaches of trust which concerned payments made by Gold Stone out of settlement funds paid by the liquidators of MVDA and MVLC. Once again, Mr Cai does not challenge the primary judge’s findings that the payments were made, or that Mr Cai authorised each of the payments, or that he had the knowledge required to be liable as a participant in the breaches of trust when those payments were made. However, Mr Cai argues that when he authorised the payments he was acting, and only acting, in his capacity as a director of Gold Stone. On that basis, Mr Cai argues that the primary judge erred in finding that he was liable because he knowingly induced or immediately procured Gold Stone’s breaches of trust.
By their grounds of appeal, Ms Lin and Mr Cai appear to make two separate although related contentions. The first is that, as a matter of general principle, a person cannot be liable as a participant in a breach of trust committed by a company, on the ground that the person knowingly induced or immediately procured the breach, where the alleged acts of inducement or procurement are carried out by that person while acting only in their capacity as a director of the company. It appears to be asserted that such conduct could only ever be an act of the company and therefore could not, at the same time, amount to an independent act of the director. In support of this contention, Ms Lin and Mr Cai rely on what was said by McCardie J in Said v Butt, and what was later separately said by Starke J and McTiernan J in O’Brien v Dawson.
The essential principle that has now emerged from Said v Butt and O’Brien v Dawson is that a director of a company, acting as such, will not incur tortious liability to a party to a contract with that company, for knowingly procuring or inducing the company to break the contract. This principle has been regularly applied in Australia: see, for example, Realtek Holdings Pty Ltd v Wetamast Pty Ltd [2019] NSWSC 1869 at [242]-[243], citing Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 328 at [17]-[29], Root Quality Pty Ltd v Root Control Technologies Pty Ltd [2000] FCA 980; (2000) 177 ALR 231 at [125]-[136], Tsaprazis v Goldcrest Properties Pty Ltd [2000] NSWSC 206; (2000) 18 ACLC 285 at [11]-[14] and Multinail Australia Pty Ltd v Pryda (Aust) Pty Ltd [2002] QSC 105 at [121]-[126].
Importantly, as the obiter reasons in each of Said v Butt and O’Brien v Dawson demonstrate, the underlying premise or rationale for this principle is that when a director of a company acts as such, their acts are the acts of the company, and that they are not at the same time the personal acts of the director. Earlier in these reasons at [341] I reproduced the passage from McCardie J’s judgment in Said v Butt where this is made clear. The relevant passages from the separate reasons of Starke J and McTiernan J in O’Brien v Dawson are reproduced in the reasons of O’Callaghan J and need not be repeated here.
Ms Lin and Mr Cai submit that the underlying rationale for the rule in Said v Butt has been applied in other contexts, suggesting that it has broader application. Specifically, they rely on the following passage in Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88; (2023) 111 NSWLR 304 at [293], a case in which it was argued that a company’s former chief financial officer and former treasurer were liable as accessories for the company’s alleged negligence or misleading or deceptive conduct:
Thus, the liability of a director for procuring a tort of the company is a form of joint liability, the director and the company being joint tortfeasors. Where the director or officer is merely acting as a corporate organ in the ordinary way, no such liability arises, just as a director of a company is not liable for inducing a breach of contract by the company where the director is no more than the individual through whom the company acts. In order to incur liability as a joint tortfeasor, the director must be so personally involved in directing or procuring the tort as to “make it his or her own” tort, above and beyond reasonably and in good faith directing the company’s decision-making as a director.
(Emphasis added, footnotes omitted.)
However, notwithstanding what was said in Anchorage, or in the decision of this Court in JR Consulting, upon which the New South Wales Court of Appeal placed considerable reliance, the underlying rationale for the rule in Said v Butt and in O’Brien v Dawson cannot be elevated to one of general application. To so hold would at least be inconsistent with the decision of the High Court in Hamilton v Whitehead.
The circumstances in Hamilton v Whitehead have been summarised by O’Bryan J. The facts of that case reveal that the acts comprising the conduct element of the offence alleged to have been committed by the company in question was physically carried out by its own managing director. In carrying out those acts, the director was the company. Therefore, the company was directly (not vicariously) liable. However, and importantly, it was in this context that the High Court said that there was nothing conceptually wrong with the company being liable as a principal offender while at the same time, and in respect of the same conduct, the managing director being liable as an accessory. The High Court evidently agreed with observations that were made in Lee v Lees Air Farming Ltd [1961] AC 12 at 26, that one person may function in dual capacities. Further, the High Court referred to what was said by Bray CJ in R v Goodall (1975) 11 SASR 94 at 101, that
the company, being a legal entity apart from its members, is also a legal person apart from the legal personality of the individual controller of the company, and that he in his personal capacity can aid and abet what the company speaking through his mouth or acting through his hand may have done.
(Emphasis added.)
The decision in Hamilton v Whitehead was referred to in a later decision of the High Court in Houghton v Arms [2006] HCA 59; (2006) 225 CLR 553, with evident approval. In that case, employees of a company were alleged to have made misleading or deceptive statements to one of the company’s clients. At first instance, judgment was given against the company, but the proceedings against the employees were dismissed because neither of them had engaged in trade or commerce on their own account as distinct from their roles as employees of the company. An appeal against the decision to dismiss the proceedings against the employees was allowed. That decision was affirmed on appeal to the High Court.
In the High Court it was argued that if company employees, officers or directors act only as the company, it is the company that engages in the relevant conduct, not the individuals. In that regard, the appellants attempted to gain support from what had been said in Hamilton v Whitehead. However, the Court found that the reasoning in Hamilton v Whitehead assisted the respondent, and not the appellants.
Ms Lin and Mr Cai make a second, and narrower (although related), contention. They argue that a principle that emerges from Said v Butt, and from O'Brien v Dawson, namely, that a director acting as such will not be liable for inducing the company of which they are a director to breach a contract with a third person, also applies to deny liability for such a director for the equitable wrong of knowing inducement or immediate procurement of a breach of trust. However, because the rule in Said v Butt (and in O'Brien v Dawson) has no direct application to that equitable wrong, and in the absence of any authority to that effect, Ms Lin and Mr Cai are driven to argue that the rule applies because the wrong is analogous with the tort of inducing a breach of contract. As Ms Lin put it in her written submissions in reply at paragraph 25:
The question for this Court is whether – having regard to the High Court’s decision in O’Brien v Dawson … and the position at law concerning a director’s liability for inducing a breach of contract – equity must follow the law.
Ms Lin and Mr Cai say that this court should apply the maxim, ‘equity follows the law’, by adopting the same reasoning used by King CJ in Coulthard v South Australia [1995] SASC 4927; (1995) 63 SASR 531, a case which concerned the question of whether the doctrine of vicarious liability should be applied to equitable liability for breach of confidence, by analogy. As Ward CJ in Eq (as her Honour then was) noted in Anderson v Canaccord Genuity Financial Ltd [2022] NSWSC 58 at [1732], King CJ reasoned in Coulthard on the basis of; first, the analogy of the particular equitable wrong with a common law tort; second, the equitable maxim that equity follows the law; and third, that equity would act upon the conscience of the employer to accept responsibility for the employee’s wrong.
It may be accepted that the tort of procuring a breach of contract and the equitable wrong of knowingly inducing or immediately procuring a breach of trust ‘share rationales and fulfill similar functions in their respective areas of law’: McHugh M, ‘Directors’ Liability for Inducing a Breach of Trust or Fiduciary Obligation’ (2024) 140 LQR 223-249, 238. However, as the Hon William Gummow AC said in his paper, ‘Knowing Assistance’ (2013) 87 ALJ 311 at 318, ‘[t]he analogy with the tort of intentional interference with contractual relations should not be pressed too far’.
In my view, it is sufficient to note in that regard that the remedies that are available for inducing a breach of contract are significantly different, when compared to the remedies available for knowingly inducing a breach of trust. The remedy for the former is an award of damages. On the other hand, knowing inducement renders a person accountable as a constructive trustee (Farah Constructions at [161]), which may give rise to an award of equitable compensation, an account of profits, or proprietary remedies. Those differences reflect the fundamentally different characteristics of the respective wrongs, and the purposes they seek to achieve. Further, as Lord Nicholls said in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 386‑387:
Affording the beneficiary a remedy against the third party serves the dual purpose of making good the beneficiary’s loss should the trustee lack financial means and imposing a liability which will discourage others from behaving in a similar fashion.
That observation has obvious force in circumstances in which there is a corporate trustee.
As the respondents point out in their written submissions at paragraph 106, McLachlin J in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 543 (quoted with approval in Youyang Pty Limited v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [40]) said:
The basis of the fiduciary obligation and the rationale for equitable compensation are distinct from the tort of negligence and contract. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self-interest. Consequently the law seeks a balance between enforcing obligations by awarding compensation and preserving optimum freedom for those involved in the relationship in question, communal or otherwise. The essence of a fiduciary relationship, by contrast, is that one party pledges itself to act in the best interest of the other. The fiduciary relationship has trust, not self-interest, at its core, and when breach occurs, the balance favours the person wronged.
Pausing to highlight the last sentence in the above passage taken from Canson Enterprises, I express my agreement with O’Callaghan J that equity would not follow the law so as to, in effect, provide an immunity to a person who knowingly procures a breach of trust by a company, by dint of the fact that the person’s acts are also attributed to that company because they are one of its directors or organs acting as such. In my view, equity would act upon the conscience of a director (or other organ) of a corporate trustee to accept responsibility for having induced or immediately procured a breach of trust by that company.
In this context, it is important to appreciate that even before Barnes v Addy was decided, there had already been a line of cases (including Fyler v Fyler [1841] 49 ER 216; (1841) 3 Beav 550 at [561]-[562], [567]-[568]; Alleyne v Darcy (1854) 4 Ir Ch Rep 199 at 209 and Eaves v Hickson [1861] 54 ER 840; (1861) 30 Beav 136) where it was recognised that a third party might be liable in equity for knowingly inducing or immediately procuring a breach of trust (see Farah Constructions at [161]). As Ms McHugh points out at page 238 of her paper, to which I have already referred, this demonstrates that ‘[t]he inducing breach of trust claim evolved in Chancery to protect trust beneficiaries before the development of the [tort of inducing a breach of contract in] Lumley v Gye… [(1853) 2 El & Bl 216; [1853] 118 ER 749]’ (Footnotes omitted, emphasis added).
It must also be noted that while the two ‘limbs’ of accessorial liability in Barnes v Addy are concerned with two other distinct bases on which a third party may be treated as a participant in a breach of trust, namely ‘knowing receipt’ and ‘knowing assistance’ (Farah Constructions at [163]), and although Lord Selborne LC’s famous statement should not be read as a statutory enactment, it is nonetheless significant that the statement expressly contemplates that agents may be liable as a participant even if acting ‘within their legal powers’:
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
(Emphasis added.)
Ms Lin and Mr Cai have not referred to any authority in which that statement has been qualified by the rule in Said v Butt, applied by analogy or otherwise. In fact, there are cases in which directors have been held liable as knowing assistants of breaches of trust committed by the companies of which they were a director: see, for example, Biala Pty Ltd v Mallina Holdings Ltd (No 4) (1993) 11 ACSR 785; (1993) 13 WAR 11 and NCR Australia v Credit Connection Pty Ltd [2004] NSWSC 1.
In the absence of any authority to support Ms Lin’s and Mr Cai’s contention, and having regard to equity’s long-standing recognition of the wrong of inducing or immediately procuring a breach of trust, which, as I have already said, pre-dated both Lumley v Gye and Said v Butt, I am of the view that equity would not follow the law in these circumstances and apply the rule in Said v Butt, by analogy.
I agree with O’Bryan J that the obiter statements made by Leeming J in Pittmore must be afforded great respect. However, in light of what I have said, I do not think that there is any relevant inconsistency between the rule in Said v Butt applying in the context of the tort of inducing a breach of contract, and it not being a rule that is applied to the equitable wrong of inducing or procuring a breach of trust.
Ms Lin and Mr Cai submit that the decision of the Supreme Court of the United Kingdom in Lifestyle Equities supports their argument. They contend that in that case, the Supreme Court confirmed the continued application of the rule in Said v Butt and, further, held that it was a rule of more general application to relationships that are equivalent to contract and involve an assumption of responsibility. However, while the Supreme Court did conclude that the rule in Said v Butt is ‘sound’ (at [54]), it did not reach that conclusion on the basis of the rationale upon which McCardie J originally reached his decision.
At [50] of his Honour's judgment, Lord Leggatt (with whom the other members of the Court agreed), identified the reason given by McCardie J in Said v Butt for the rule that an agent or employee who procures their principal or employer to break a contract with a third person is not liable in damages to that person, in the following terms:
[I]f an employee or agent acting within the scope of their authority causes their principal to break a contract, then their act (on ordinary agency principles) is to be attributed to the principal. Thus, if the agent could be held liable in tort for inducing a breach of the contract, so too could the principal. Yet this would result in the principal being liable not only for breaking the contract but for inducing himself to break the contract, which would be nonsensical. Therefore, the agent in this situation cannot be liable for inducing the breach.
Lord Leggatt then went on to say that he considered that this reasoning was ‘flawed’ (at [52]), explaining that:
Contrary to what was said by McCardie J, an employee is not the ‘alter ego’ of their employer. As discussed above, the fact that the employee’s acts ‘are in law the acts of his employer’ does not relieve the employee of liability if the act of the employee is tortious. That is the ‘disattribution fallacy’ discussed above. Thus, in my view, McCardie J’s argument does not provide a valid reason for his conclusion that an employee or agent cannot be liable in damages for inducing a breach of contract by their employer or principal.
The reference in this passage to the ‘disattribution fallacy’ is a reference to a term used in various academic articles that were cited earlier in Lord Leggatt's judgment (at [35]) in which it was argued that ‘it is fallacious to suppose that the attribution to B of an act done by A results in the dis-attribution of the act from A’.
Notwithstanding his conclusion that the reasoning in Said v Butt was flawed, Lord Leggatt did say that the rule in that case was sound. However, he provided a different justification for the rule, which did not rest on the rationale originally favoured by McCardie J. Adopting reasoning that emerged from PT Sandipala at [54]-[55] Lord Leggatt said:
I would explain it in this way. When parties make a contract, unless the contract is personal in nature, the general rule is that a party may employ agents to carry out its obligations. When the contracting party is a company, that is of course the only possible means of performance. If a company breaks a contract, that must be because one or more agents of the company have caused the breach. When an agent, acting as such, makes a contract, the normal understanding is that the agent assumes no liability towards the other contracting party. Only the principal does. Similarly, the normal understanding is that, if the agent causes the principal to break the contract, only the principal will incur liability to the other contracting party, and not the agent. This is, I think, a general norm or social understanding which the law should and does reflect.
It would be inconsistent with that understanding for the law of tort to make an agent who, acting within the scope of their authority, causes or procures a breach of contract by the principal liable to compensate the other contracting party for loss resulting from the breach. By the same token, to allow the injured party to recover damages from the agent would give them a free ride. That is because the same norm or understanding that, unless otherwise specifically agreed, only the contracting parties themselves will be liable in the event of a breach of the contract entails that, if a party wants a right of recourse against an agent of the other party, they must bargain for it.
(Emphasis added.)
This reasoning does not support Ms Lin’s and Mr Cai’s argument that the rule in Said v Butt should be applied by analogy to the equitable wrong of knowing procurement. In view of the long‑standing authority to which the High Court referred in Farah Constructions at [161], which, as I have explained, pre-dated both Lumley v Gye and Said v Butt, the ‘normal understanding’ would be that a director acting as such will assume liability for knowingly procuring a breach of trust by the company of which they are a director.
For these reasons, I would also dismiss Ms Lin’s ground 4, as well as Mr Cai’s grounds 4, 9 and 12.
I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Vandongen. Associate:
Dated: 12 September 2025
SCHEDULE OF PARTIES
NSD 1324 of 2024 Respondents
Fourth Respondent:
DAVID DARMALI
Fifth Respondent:
GOLD STONE CAPITAL PTY LTD
0
21
9