Mao v Bao

[2023] NSWCA 278

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Mao v Bao [2023] NSWCA 278

Hearing dates:

25 July 2023

Date of orders:

21 November 2023

Decision date:

21 November 2023

Before:

Ward ACJ at [1]; White JA at [199]; Mitchelmore JA at [246]

Decision:

1.   Allow the appellant’s appeal with costs.

2.   Set aside the orders made by the primary judge on 16 December 2022 and in lieu thereof order that judgment be entered for the appellant against the respondent in the sum of $3,491,289.50, comprising:

(i)   the value of the appellant’s claim as at 5 May 2014 ($2,069,020) plus interest on that claim at 24% per annum from 6 May 2014 to 12 December 2022, minus

(ii)   the value of the respondent’s claim as at 5 May 2014 ($2,050,084) plus interest on that claim at the pre-judgment interest rate prescribed by the Supreme Court from 6 May 2014 to 12 December 2022.

3.   Dismiss the cross-appeal with costs

Catchwords:

EQUITY – Set-off – Where the appellant had been ordered to account to the respondent in respect of moneys drawn under a mortgage facility secured over property held for the respondent’s benefit and the respondent had been ordered to re-pay the appellant sums owing under a loan unrelated to the mortgaged property – Whether the two claims were sufficiently closely connected that one could be said to impeach the other in the sense required for an equitable set-off.

EQUITY – Whether Brickenden principle (see Brickenden v London Loan & Savings Co [1934] 3 DLR 465) that prohibits speculation by defaulting fiduciaries as to counterfactuals had the default not occurred has application to the issues raised as to equitable set-off in the present case.

Legislation Cited:

Civil Procedure Act 2005 (NSW), ss 21, 100

Real Property Act 1900 (NSW), s 57(2)(b)

Cases Cited:

Active Adult Management Pty Ltd v Milstern Retirement Living Pty Ltd [2017] NSWSC 1238

Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 98 ACSR 615

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58

Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109; [2004] HCA 7

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43

Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5; (2021) 151 ACSR 204

Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17

AWA Ltd v Exicon Australia Pty Ltd (1990) 19 NSWLR 705

Beach Petroleum v Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408

Blacksheep Productions Pty Ltd v Waks [2008] NSWSC 488

Boardman v Phipps [1967] 2 AC 46

Boensch v Pascoe (2019) 268 CLR 593; [2019] HCA 49

Brickenden v London Loan & Savings Co [1934] 3 DLR 465

British Anzani (Felixstowe) Ltd v International Management (UK) Ltd [1980] QB 137

Browne v Dunn (1893) 6 R 67 (H.L.)

Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534; (1991) 85 DLR (4th) 129

Chamberlain Early Learning Centre Pty Limited v Precious 1 Pty Limited in its own right and as trustee for The 4 Chamberlain Holdings Family Trust [2017] NSWSC 189

Concrete Constructions v Dalma Formwork [1999] NSWCA 16

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

Forsyth v Gibbs [2009] 1 Qd R 403; [2008] QCA 103

Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453

Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd (No 2) [2001] NSWSC 6

Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1

Gwembe Valley Development Co Ltd & Anor v Koshy [2004] BCLC 131

Hanak v Green [1958] 2 QB 9

Hawes v Dean [2014] NSWCA 380

Hill v Ziymack (1908) 7 CLR 352; [1908] HCA 13

House v The King (1936) 55 CLR 499; [1936] HCA 40

HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479

James v Commonwealth Bank of Australia (1992) 37 FCR 445; [1992] FCA 617

Magnus v Queensland National Bank (1888) 37 Ch D 466

Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23

Mao v Bao (No 2) [2022] NSWSC 1699

Mao v Bao [2021] NSWSC 1096

Mittiga v Community Corporation 20582 Inc (2012) 114 SASR 557; [2012] SASC 202

Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297

Murad v Al-Saraj [2005] EWCA Civ 959

Muscat v Smith [2003] 1 WLR 2853; [2003] EWCA Civ 962

Norman v FEA Plantation Ltd (2011) 195 FCR 97; [2011] FCAFC 99

O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262

Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11

Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642

Product Development Solutions Australia Pty Ltd v Parametric Technology Corporation [2012] NSWCA 211

Ralston v South Greta Colliery Ltd (1912) 13 SR (NSW) 6

Rawson v Samuel (1841) Cr & Ph 161

Re Brogden; Billing v Brogden (1888) 38 Ch D 546

Re Dawson (dec’d) (1964) 84 WN (Pt 1) (NSW) 399

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

Roadshow Entertainment v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462

Short v Crawley (No 30) [2007] NSWSC 1322

Stephen James Rigg v Paul Sheridan [2008] NSWCA 79

Target Holdings Ltd v Redferns [1996] 1 AC 421; [1995] UKHL 10

Thomas v SMP International Pty Ltd (No 4) [2010] NSWSC 984

Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211

Warman International Ltd v Dwyer (1995) 182 CLR 544

Watson v Ebsowrth & Ebsworth (Watson) [2010] VSCA 335

White v Illawarra Mutual Building Society Ltd [2002] NSWCA 164

Wollongong Coal Ltd v Gujarat NRE Properties Pty Ltd [2020] NSWSC 254

Wollongong Coal Ltd v Gujurat NRE India Pty Ltd (2019) 100 NSWLR 432; [2019] NSWCA 135

Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15

Texts Cited:

M Conaglen, ‘Brickenden’ in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Hart Publishing, 2017) 111

J D Heydon KC, “Causal Relationships between a Fiduciary’s Default and the Principal’s Loss” (1994) 110 Law Quarterly Review 328

J Glister, ‘Breach of fiduciary duty: Brickenden lives on’ (2011) 5 Journal of Equity 59, 66-67

J Glister, “Equitable Compensation” in J Glister and P Ridge (eds), Fault Lines in Equity (Hart Publishing, 2012) 143

S Harder, ‘Equitable compensation for a fiduciary’s non-disclosure and hypothetical courses of events’ (2011) 5 Journal of Equity 22

Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015)

Rickett, “Equitable Compensation: the giant stirs” (1996) 112 Law Quarterly Review 27

Category:

Principal judgment

Parties:

Duoxiang Mao (Appellant)
Linchun Bao (Respondent)

Representation:

Counsel:
H Stowe (Appellant)
PM Knowles SC and DJ Delany (Respondent)

Solicitors:
JurisBridge Legal (Appellant)
CKSD Lawyers (Respondent)

File Number(s):

2022/387702

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2021] NSWSC 1096

Date of Decision:

31 August 2021

Before:

Parker J

File Number(s):

2016/389706

HEADNOTE

[This headnote is not to be read as part of the judgment]

This matter involved disputes between two former business associates, the appellant (Mr Mao) and the respondent (Mr Bao). The dispute centred on a claim by Mr Mao, on the one hand, for moneys outstanding in respect of a loan allegedly made by Mr Mao to Mr Bao in 2011 (the loan claim) and, on the other hand, a claim by Mr Bao (made by cross-claim in the proceedings relating to the loan claim) in respect of unauthorised borrowings made by Mr Mao under a loan facility which secured the acquisition of a property that was purchased in 2004 in Vaucluse, Sydney (the Vaucluse Property) in the name of Mr Mao but for Mr Bao’s benefit (the account claim).

The Vaucluse Property was purchased with a loan from National Australia Bank (NAB) in Mr Mao’s name, together with funds provided by Mr Bao. The arrangement between the parties was that Mr Bao was to pay the continuing expenses for the Vaucluse Property. It was accepted by both parties that Mr Mao held the Vaucluse Property on trust for Mr Bao. Without Mr Bao’s knowledge, in 2007 and 2008, Mr Mao increased the NAB loan facility limit and drew down sums totalling $1.59 million which were largely applied for Mr Mao’s personal purposes.

In April 2011, Mr Mao made a payment of 11 million Chinese yuan (¥) to Mr Bao. The status of this transaction was disputed but the primary judge found (and this was not challenged on Mr Bao’s cross-appeal) that it was a loan which was to be repaid by 1 August 2011, with interest to be charged at a rate of 2% per month. Mr Bao did not repay the loan.

In October 2011, Mr Bao ceased making payments in respect of the Vaucluse Property. For a short period, Mr Mao provided his own funds to make good the mortgage repayments under the loan facility but when he stopped doing so the mortgage went into default. NAB ultimately sold the property as mortgagee in possession (without opposition by either of the parties) for $3.26 million, leaving a shortfall on the then $3.42 million loan balance. As a consequence, no portion of the sale proceeds was received by Mr Bao. NAB did not pursue Mr Mao for the outstanding balance due under the loan facility.

Mr Mao’s loan claim succeeded. The primary judge found that the 2011 payment to Mr Bao was a loan which he was liable to re-pay, together with a substantial amount of interest calculated at the rate under the agreement. Mr Bao’s account claim succeeded in part. The primary judge found that Mr Mao was prima facie liable to account to Mr Bao in relation to the unauthorised drawings (i.e., to account to Mr Bao for the amount that Mr Bao would have received from the ultimate sale proceeds had the unauthorised borrowings not been made) plus some other amounts. The total sum calculated by the parties as owing to Mr Bao was around $2 million.

In a subsequent judgment, addressing matters relating to the accounting process that his Honour had considered necessary to be undertaken, the primary judge found that the requirements for an equitable set-off had been met and that the set-off between the respective claims should occur as at the date the Vaucluse Property was sold (i.e., in 2014); not as at the date of judgment, which would have been the case had the statutory set-off applied.

Mr Mao appealed in respect of the equitable set-off orders that had been made. Mr Bao cross-appealed (but only if equitable set-off were found to be unavailable) challenging the conclusion as to interest on the sum due by him to Mr Mao; in effect contending that the same rate of interest should apply both to the amount due on Mr Mao’s loan claim and to the amount for which Mr Mao was liable to account on the account claim.

The principal issues before this Court were whether the primary judge erred: (i) in finding that the requirements for an equitable set-off had been met; and (ii) if the requirements for an equitable set-off had not been met, in failing to exercise the Court’s discretion to allow an award to the respondent of pre-judgment interest under s 100 of the Civil Procedure Act 2005 (NSW) at the same rate as the debt due under the loan agreement.

Held (per Ward ACJ, Mitchelmore JA agreeing, White JA dissenting) allowing the appeal and dismissing the cross-appeal:

As to issue (i) per Ward ACJ and Mitchelmore JA:

1. The applicable test for equitable set-off requires that there be such a connection between the respective claims that one impeaches the other, such that it would be unconscionable to allow one party to insist on its legal right without accommodating the other’s countervailing right: [55]-[57] (Ward ACJ). The interdependence or connection between the liability arising under the loan agreement and the liability arising under the mortgage was not established: [184] (Ward ACJ), [246] (Mitchelmore JA). Nor was there evidence that Mr Mao’s failure to account to Mr Bao either compromised Mr Bao’s financial capacity to repay the loan or that Mr Bao would have claimed a set-off in 2014 had Mr Mao complied with his obligation to account upon the sale of the Vaucluse Property: [189] (Ward ACJ), [246] (Mitchelmore JA). Intuitive unfairness alone is insufficient to found an equitable set-off: [184] (Ward ACJ), [246] (Mitchelmore JA).

   Hill v Ziymack (1908) 7 CLR 352; [1908] HCA 13; Forsyth v Gibbs [2008] QCA 103; [2009] 1 Qd R 403; Hawes v Dean [2014] NSWCA 380; Wollongong Coal Ltd v Gujarat NRE India Pty Ltd [2019] NSWCA 135 applied.

2. As to whether the Brickenden principle had application to this case to preclude Mr Mao (in denying the sufficiency of connection between the respective claims) from relying on a counterfactual as to what Mr Bao would have done had Mr Mao not failed to account to Mr Bao on the sale of the Vaucluse Property for the unauthorised borrowings, the Brickenden principle has narrow application (if at all) in Australia and is not applicable whether by extension or analogy to the question of equitable set-off: [172], [174] (Ward ACJ), [246] (Mitchelmore JA). The Brickenden principle did not assist Mr Bao: [177], [182] (Ward ACJ), [246] (Mitchelmore JA).

   Brickenden v London Loan & Savings Co [1934] 3 DLR 465; Magnus v Queensland National Bank (1888) 37 Ch D 466; Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1; Murad v Al-Saraj [2005] EWCA Civ 959; Re Brogden; Billing v Brogden (1888) 38 Ch D 546 considered.

As to issue (i) per White JA (dissenting):

1. The direct connection between the accrual of interest on the moneys advanced by Mr Mao to Mr Bao, and Mr Mao’s failure to account for the drawdown on the mortgage over the Vaucluse Property in 2014 was such as to impeach Mr Mao’s entitlement to the continued accrual of interest on the loan. Mr Mao’s contention that there was no basis to infer that, had he accounted for the proceeds of sale at the time of sale, Mr Bao would have agreed to a set-off was inconsistent with the fact that Mr Mao himself pleaded an equitable set-off, and adduced no evidence that he could otherwise have paid the moneys he owed when the Vaucluse Property was sold. In line with the high standards to which equity holds fiduciaries, it was not open to Mr Mao to speculate as to what would have happened had his breach of fiduciary obligation not occurred: [223]-[244].

   Brickenden v London Loan & Savings Co [1934] 3 DLR 465; Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15, discussed.

   Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211; Boardman v Phipps [1967] 2 AC 46; Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18; Murad v Al-Saraj [2005] EWCA Civ 959; Short v Crawley (No 30) [2007] NSWSC 1322; Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17; Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43, cited.

As to issue (ii):

1. Error in a House v The King sense was not demonstrated in respect of the primary judge’s decision not to exercise the statutory discretion under s 100 of the Civil Procedure Act 2005 (NSW) to make an order in Mr Bao’s favour for interest at the higher rate on the moneys for which Mr Mao was required to account: [195] (Ward ACJ), [246] (Mitchelmore JA).

   House v The King (1936) 55 CLR 499; [1936] HCA 40 applied.

JUDGMENT

1. WARD ACJ: The dispute between the parties in this matter, two former business associates, arises out of various property and commercial dealings between them. At first instance, the appellant (Mr Mao) obtained judgment for the amount outstanding under an alleged loan made to the respondent (Mr Bao) in 2011 in the sum of 11 million Chinese yuan (¥) (the receipt of that amount was not in dispute but its characterisation as a loan had been disputed by Mr Bao) and the respondent (Mr Bao) was in turn partially successful in his cross-claim for an account in respect of moneys he claimed were owing with respect to the parties’ dealings in relation to a property acquired in the name of Mr Mao but for the benefit of Mr Bao in 2004 in Vaucluse, Sydney (the Vaucluse Property) (see Mao v Bao [2021] NSWSC 1096, to which I will refer as the principal judgment). There is no challenge to the factual findings made by the primary judge in the principal judgment.

2. The primary judge subsequently delivered further reasons for judgment, addressing various matters relating to the accounts process that his Honour considered necessary to be taken (Mao v Bao (No 2) [2022] NSWSC 1699, to which I will refer as the quantification judgment). Relevantly, his Honour concluded that the requirements for an equitable set-off as between the respective claims (Mr Mao’s claim on the loan agreement and Mr Bao’s claim for an account in respect of moneys owing in respect of the dealings in relation to the Vaucluse Property) were satisfied and that the set-off (and currency conversion) should be undertaken as at 5 May 2014 (see at [55] of the quantification judgment).

3. By his appeal, Mr Mao challenges the finding by the primary judge that the parties’ respective claims satisfied the requirements for an equitable set-off. By his notice of cross-appeal, filed pursuant to leave granted at the hearing of the appeal on 25 July 2023 (AT 2.10-13), Mr Bao challenges the conclusion reached by the primary judge as to interest on the sum due to him by Mr Mao (but only in the event that equitable set-off is held to be unavailable). Mr Bao contends that the discretion under s 100 of the Civil Procedure Act 2005 (NSW) should be exercised to allow interest on the unaccounted funds due to Mr Bao at the same rate as the debt due to Mr Mao under the loan agreement (see Mr Bao’s submissions at [58]), this being put on the basis that: the purpose of an award of interest is to do justice between the parties and the award of interest must always be approached in a broad and practical way.

4. For the reasons that follow, I am of the opinion that the appeal should be allowed and the cross-appeal dismissed; and that costs should follow the event.

Background

5. The factual background to the dispute is set out in the principal judgment (and the factual findings are not here the subject of challenge). It is convenient, however, briefly to note the chronology of events. In what follows, references to paragraph numbers, unless otherwise indicated, are to the principal judgment.

6. On 27 May 2004, Mr Mao purchased the Vaucluse Property in his name with the intention (and this was common ground) that it be for the benefit of Mr Bao (who was then living in China but interested in establishing a home in Australia) ([41]-[42]). The primary judge found that when Mr Bao and his wife, Ms Qiu, visited Australia in late 2003/early 2004 an unwritten agreement was reached between Mr Mao and Mr Bao ([42]); and that, by this agreement, Mr Mao agreed with Mr Bao to hold the Vaucluse Property in his name and pay the expenses, provided that Mr Bao contributed the necessary funds to meet those expenses ([216]-[217]). Pursuant to the arrangement, Mr Bao was to provide funds to cover the ongoing interest and holding costs in respect of the Vaucluse Property ([42]).

7. Funds for the purchase of the Vaucluse Property were provided from three sources: funds provided by Mr Bao to Mr Mao’s now ex-wife, Ms Zhang (between March and May 2004, Mr Bao transferred ¥12,586,200 ($2,076,113) via an intermediary, KVB Kunlun, to Australia ([43], [156])); a mortgage loan from National Australia Bank (NAB) in the name of Mr Mao (in the sum of $2.275 million – [42], [44]); and an additional sum of approximately $200,000 lent by Ms Zhang’s mother, Ms Xia Zheng Bao ([43], [44]).

8. On completion of the purchase of the Vaucluse Property for $3.8 million ([44]; [199]), $2.275 million was drawn down under the NAB loan facility ([44]). That facility was established as a loan account with an associated offset account. Monthly loan repayments were, for most of the relevant period, automatically debited to the offset account ([45]).

5. To cover the loan repayments, and other costs such as council rates, Mr Bao initially sent remittances on an “as-required” basis, typically every few months ([46]). From 8 June 2004, Mr Bao commenced making remittances in respect of the mortgage finance for the Vaucluse Property and also in relation to the holding costs of the property ([46], [157]-[159]). The total amount of the remittances made was $1,162,475 ([159]). While some of these payments were made by parties other than Mr Bao (including payments by Ms Qiu), there was no dispute that these payments were made on Mr Bao’s behalf ([157]).

6. There was no dispute between the parties that the consequence of this arrangement was that Mr Mao held the Vaucluse Property on trust for Mr Bao ([10] of the quantification judgment).

7. The Vaucluse Property was initially kept available for Mr Bao to use as a home in Sydney (although the primary judge noted that he seemed not to have done so) ([6] of the quantification judgment).

8. In October 2007 and March 2008 (and without Mr Bao’s knowledge), the NAB loan facility limit was increased to a total of $3.44 million; and an additional total of $1.59 million was drawn down on the facility ([47]). First, in September or October 2007, Mr Mao obtained an increase in the NAB loan facility in respect of the Vaucluse Property by $950,000 to $3.25 million. At this stage, the amount drawn on the loan had been reduced to about $2.205 million. Mr Mao then drew down approximately $1.41 million ([47]). Second, in March 2008, Mr Mao obtained a further increase of $190,000 in the NAB loan facility, increasing the limit to $3.44 million; and Mr Mao drew down a further $181,000 ([47]).

9. Of those draw downs, $200,000 was used to repay Ms Zhang’s mother (Ms Xia). There was no evidence as to how Mr Mao deployed the balance of the funds drawn down in 2007/2008, but the primary judge accepted that the funds were applied for Mr Mao’s personal purposes ([47]-[48], [205], [222]-[225], [265]-[268]); ([7] of the quantification judgment).

10. Mr Bao obtained no benefit from these borrowings (except to the extent that the $200,000 loan to Ms Xia was repaid) ([47]-[48]); nor did Mr Bao know about them ([222]-[223]).

11. In his written submissions (at [22]), Mr Bao notes that it was Mr Mao’s unchallenged evidence that he borrowed most of these funds from NAB as a precaution, to guard against the risk of Mr Mao defaulting upon Mr Bao failing to repay any moneys that Mr Mao would lend to him (see Mr Mao’s affidavit affirmed 6 August 2019 at [29]-[30]). The primary judge did not expressly reject Mr Mao’s explanation but doubted it, since drawing down on the mortgage in fact increased Mr Mao’s own exposure to NAB ([222]-[223]).

12. In 2009, Mr Bao and his wife (Ms Qiu) obtained residency status in Australia. They established a home in Melbourne and bought a winery in rural Victoria ([49]). The couple also established an Australian company, Guang Tian International Group Pty Limited (GTIG), ([50]), which in August 2010 acquired a property in Parramatta (the Harris Park Property) for development purposes ([52]).

13. Mr Bao and Mr Mao, together with a third party, also became involved in a venture for the acquisition of a development site in Burwood (the Burwood Property) for the sum of $24.75 million ([55]).

14. Mr Mao provided to Mr Bao some statements of account regarding the state of financial dealings between the parties in relation to the Vaucluse Property (the primary judge discussing these statements at [174]-[185], [207]-[208], [221], [224]-[227], [269]-[271]) the last of which was provided in February 2010 for the year to 31 January 2010 (showing Mr Bao in credit on the remittances in the sum of $30,000, and his share of the loan principal as $2.072 million) ([269]). The February 2010 account did not disclose the amount of the additional borrowings or any interest thereon.

15. By early 2011, Mr Bao had been late with some of the regular monthly payments on the Vaucluse Property ([62]) and, on 28 March 2011, Mr Mao leased the Vaucluse Property to a tenant ([62], [28]-[229]), the rental payments being deposited into the offset account from which mortgage payments were made (see [74], [166], [274]).

16. On 11 April 2011, Mr Mao made the payment of ¥11 million to Mr Bao which was the subject of Mr Mao’s claim in the proceedings below ([65]), the status of which was disputed. The primary judge held that it was a loan made pursuant to an agreement between Mr Mao and Mr Bao reached on 30 March 2011 ([151]), the terms of that loan being that it was to be repaid by 1 August 2011, and that interest would be charged at a rate of 2% per month ([107], [387](1)).

17. On 16 and 20 August 2011, Mr Mao sent text messages to Mr Bao seeking repayment of his loan, which by then was overdue ([101], [102]). Mr Bao did not repay the loan.

18. By the end of October 2011, Mr Bao stopped making payments on the Vaucluse Property (and did not reply to text messages from Mr Mao about this; nor did Ms Qiu, to whom Mr Mao had also sent text messages). The last payment by Mr Bao to Mr Mao in respect of the Vaucluse Property occurred at the end of October 2011 ([74]).

19. From December 2011 to February 2012, Mr Mao paid a total of $54,000 into the offset account to facilitate mortgage repayments ([74]).

20. As part of the dealings in relation to the Burwood Property, $800,000 was transferred to Mr Bao in November 2011 ([71]-[72]). The primary judge found that the transfer of these funds was part payment of the ¥11 million loan ([71], [137]).

21. The primary judge noted that by this time the relationship between Mr Mao and Mr Bao had apparently become strained ([67]).

22. On 23 February 2012, Mr Bao placed a caveat over the Vaucluse Property ([77]).

23. On 9 March 2012, Mr Mao sent Mr Bao’s solicitor (Mr Ku) a letter, calling upon Mr Bao to repay the remainder of the ¥11 million loan, together with (among other things) $2 million in relation to the loan on the Vaucluse Property (i.e., Mr Bao’s share of the loan balance in respect of the Vaucluse Property) ([78]; [105]). (The actual loan balance at that time was in fact over $3 million by reason of the additional drawdowns on the mortgage by Mr Mao in 2007 and 2008 ([78]).) Mr Bao did not comply with that demand and Mr Mao stopped paying moneys into the offset account. The mortgage then fell into arrears as the lease payments on the Vaucluse Property were insufficient to cover the mortgage payments ([81]; and see [9] of the quantification judgment).

24. On 7 May 2012, NAB issued a formal demand and notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of the sum owing on the NAB facility ([81]).

25. On 28 June 2012, Mr Mao complained to the police about Mr Bao’s conduct, making allegations of fraud ([82]).

26. Mr Mao did not contest NAB’s enforcement action with respect to the Vaucluse Property; rather, on 20 July 2012, he invited NAB to sell the property ([83]). On 30 August 2012, NAB commenced possession proceedings, which were not defended by Mr Mao ([84]). The primary judge found that Mr Bao stood by while NAB took enforcement action ([231]).

27. In December 2012, NAB obtained judgment against Mr Mao for $3.42 million ([85]). That sum incorporated both money which Mr Mao had borrowed on Mr Bao’s behalf for the purchase of the Vaucluse Property and Mr Mao’s own unauthorised borrowings.

28. The Vaucluse Property was sold by NAB as mortgagee in possession and, on 5 May 2014, the proceeds of settlement of the sale ($3.26 million) were received by NAB ([86]). On 27 May 2014, NAB closed off the loan account with a shortfall of $338,000. Mr Mao has apparently not been pursued for this amount ([86]).

29. Proceedings were commenced by Mr Mao in respect of the amount outstanding on the claimed ¥11 million loan. In those proceedings, Mr Bao filed a cross-claim (which went through a number of iterations) seeking to recover certain amounts.

30. It is convenient at this point to note the relief claimed by Mr Bao. In the first cross-claim filed by Mr Bao, the claim was simply for “payment” of certain amounts (without reference to whether this was a claim for an account or a claim for equitable compensation). In the Further Amended First Cross-Claim, Mr Bao similarly sought an order that Mr Mao “pay to the cross-claim the following amounts …”. However, in this version there were also claims for additional or alternate relief expressed as follows:

7.   Additionally or alternatively, order that an account be taken of all monies received and disbursed by the cross-defendant as trustee for the cross-claimant, and of all monies lost by the cross-claimant as a result of the cross-defendant breaching the trust as set out in Order 5(b) above. [Order 5(b) sought a declaration that Mr Mao had breached the trust by failing to take action to prevent NAB from selling the Vaucluse Property]

8.   Order that the cross-defendant pay to the cross-claimant the amount, if any, which is found to be due to him on the taking of the account, together with interest on that amount.

35. Thus, the language of account was here employed. Similarly, at [54] of the revised pleading, it was alleged that:

54.   The cross-claimant is entitled to an account by the-cross claimant of all money paid by the cross-claimant, or paid on his behalf, to the cross-defendant, or at his direction, pursuant to the Agreed Trust, being the payments in Schedule 3 and the monies referred to in paragraphs 43 to 48 above.

36. The language of ordering that “an account be taken” remained in the Revised Further Amended Statement of Cross-Claim, the relief that had been claimed at [7]-[8] being modified at [9]-[10] as follows:

9.   Additionally or alternatively, order that an account be taken of all monies received by the cross-defendant or anyone on his behalf pursuant to the Agreed Trust. as set out in paragraphs 41 and 42 below. including by way of rent for the property as set out in paragraphs 43 and 44 below and by way of purchase monies on sale of the property as set out in paragraph 20 below. and disbursed from those monies by the cross-defendant or anyone from 1 March 2004 until 31 May 2014;

10.   Order that the cross-defendant pay to the cross -claimant the amount, if any, which is found to be due to him on the taking of the account. together with interest on that amount.

37. There was no change to [54] of the pleading.

38. The language of “account” was also employed in the submissions made at first instance for Mr Bao (see [15] of the cross-claimant’s submissions), there being no reference there to any claim for equitable compensation.

39. That said, on a number of occasions during the course of the hearing before the primary judge, Senior Counsel for Mr Bao accepted that part of his claim was properly described as a claim for equitable compensation. However, it appears that this discussion was in relation to Mr Bao’s claim regarding an alleged discrepancy in the payment price of the Vaucluse Property, and not the more general dealings regarding the unauthorised loan draw-downs (see T 33.29-37; T 250.26-251.9; T 277.16-36; T 22.13-16).

40. I simply raise this at this stage given the debate to which I will turn in due course as to the import (or otherwise) of the so-called Brickenden principle to the issues on appeal (see below at [114]ff), in the course of which the issue of causation in relation to claims of equitable compensation is discussed.

Principal judgment

41. As noted above, the nature of the ¥11 million payment by Mr Mao (the subject of Mr Mao’s claim) was in dispute between the parties. Mr Mao alleged that: there was an oral agreement for him to lend Mr Bao ¥11 million; that agreement was reached at a meeting between himself and Mr Bao at Mr Bao’s house in Melbourne; and the purpose of the loan was to assist with the Harris Park development ([106]). Mr Bao, on the other hand, denied that he borrowed the ¥11 million (or any money) from Mr Mao at that time; and contended that the payment was part of the arrangement which had originally been made for the purchase of the Vaucluse Property (namely, that, if he decided in the future that he did not want the property, Mr Mao would take it over and buy him out) ([114]).

42. The primary judge preferred Mr Mao’s evidence to that of Mr Bao on the key factual issues in the case. The primary judge said, in this regard, at [96]-[97] of the principal judgment, that:

I was left with the impression that Mr Bao has little real recollection of the relevant events. Although I have not found it possible to decide whether Mr Bao was actually trifling with the Court in the manner in which counsel for Mr Mao suggested, I found the overall effect of his evidence so opaque that I was left with little confidence in the reliability of his evidence…..there were similar, if not so extensive, difficulties with some of the evidence given by Mr Mao and Ms Zhang. Although I have generally preferred their evidence to that of Mr Bao, I have not accepted it on every point, and I have generally treated it with circumspection.

43. As to the loan claim, the primary judge found that the evidence clearly favoured Mr Mao’s account over that of Mr Bao and was satisfied that the ¥11 million payment in April 2011 was a loan and not a partial repayment of moneys owed pursuant to the arrangement concerning the Vaucluse Property ([151]). His Honour made no finding as to the purpose of the loan, concluding that the purpose of the borrowing was unclear. His Honour noted that Mr Mao said that Mr Bao sometimes said the money was for the Harris Park development, and sometimes for the Burwood development ([110]). The primary judge concluded that Mr Mao’s claim for repayment of the ¥11 million which he paid to Mr Bao in April 2011 (less the $800,000 received in November 2011), together with interest at 2% per month, succeeded ([387]).

44. As to the purchase of the Vaucluse Property, the primary judge found that there was a trust arrangement, saying at [264] that:

Implicitly, if not expressly, this arrangement conferred rights and obligations on both parties. Mr Bao was obliged to indemnify Mr Mao against his liability to the NAB and the other costs of holding the property. The payment of the remittances reflected that liability. On the other hand, Mr Bao was entitled to require Mr Mao to hand the property over (or sell it on Mr Bao’s behalf), thus benefiting from any increase in its value, upon indemnifying Mr Mao against the outstanding amount of the loan and any other resulting costs.

45. As to Mr Bao’s cross-claim, some of the claims made by Mr Bao against Mr Mao concerning the financial dealings in relation to the Vaucluse Property were rejected but, relevantly, it was not contested that some of the drawdowns on the mortgage facility for the Vaucluse Property were for the personal benefit of Mr Mao ([275]). His Honour considered that Mr Mao must prima facie account for the benefit that he received from sale of the Vaucluse Property, in the form of a discharge of Mr Mao’s own liabilities to NAB, and that Mr Bao was prima facie entitled to recover from Mr Mao the difference between the net proceeds of sale and the principal amount of Mr Bao’s share of the loan ([276]). His Honour found that Mr Mao’s recognition of this obligation was implicit in the statement of account which Mr Mao had prepared for Mr Bao in February 2010 ([267]).

46. The primary judge ultimately concluded that Mr Bao was entitled to an account incorporating: the net proceeds of the Vaucluse Property when it was sold in May 2014; the rent received from the tenant of the Vaucluse Property; and the remittances sent to Mr Mao “but only back to 31 January 2010 (or perhaps 29 December 2010, coupled with an enquiry going back to 31 January 2010)” ([387]). The significance of this date appears to be that this corresponds with the last statement of account provided to Mr Bao by Mr Mao, and thus may have been seen to comprise the appropriate base for any subsequent accounting (as it did not incorporate the additional borrowings or any interest on them to that point). His Honour considered that it would be necessary to proceed with the taking of the account (or account and enquiry) to which he had found Mr Bao was entitled; and that the parties would need to consider what further procedural steps, and what further evidence, would be required to undertake that task ([389]). This then led to the further hearing, which was the subject of the subsequent quantification judgment.

Quantification judgment

47. By the time of the further hearing, the parties had agreed that the amount calculated in accordance with the accounting ordered by the primary judge resulted in Mr Mao having received a net benefit of $2,050,084, for which he was liable to account (see [13] of the quantification judgment).

48. The primary judge found that the loan agreement in respect of the ¥11 million payment was properly construed as being in ¥ (rather than Australian dollars) (see [42] of the quantification judgment) and there is no challenge to that finding on appeal. The primary judge also held that interest began to accrue when the loan agreement was made on 11 April 2011, and that the first interest period was therefore only 20 days (see [47] of the quantification judgment); and, again, there is no challenge to that finding on appeal.

49. As to the question of set-off (the sole issue in Mr Mao’s appeal), the primary judge noted that Counsel for Mr Mao had contended that the set-off between Mr Bao’s liability under the loan and Mr Mao’s liability to account to Mr Bao under the mortgage should take place as at the date of judgment (i.e., as would be the case for a statutory set-off) whereas Counsel for Mr Bao had contended that it should take place as at the date on which the Vaucluse Property had been sold (see [48] of the quantification judgment). The significance of the date on which the set-off was to take place lies in the difference between the interest rate applicable under the loan agreement (2% per month) (relevant to Mr Bao’s liability for the outstanding loan amount) and the much lower Court interest rate (relevant to Mr Mao’s liability in respect of the amounts owing in relation to the funds due in respect of the Vaucluse Property dealings). The primary judge noted that Counsel for Mr Bao had pointed out that Mr Mao would also be benefited by the depreciation of the Australian dollar since May 2014 ([48] of the quantification judgment); and that, in support of his contention, Mr Bao relied on “an equitable right of set-off” (see [49] of the quantification judgment).

50. The primary judge found that the requirements for an equitable set-off were met and, as noted earlier, that the set-off should occur at the time the Vaucluse Property was sold. The primary judge’s reasoning was that:

52.   It was common ground between the parties that an equitable set-off depends on whether Mr Mao’s obligation under the mortgage account impeached his entitlement to claim payment (and interest) under the loan. I was not referred to any authorities specifically in point, and have therefore approached the question as one of principle.

53.   As already noted, the arrangement about the Vaucluse mortgage imposed obligations on both parties. Having failed to cover the costs, or give Mr Mao any instructions, Mr Bao could not complain about Mr Mao throwing up his hands and allowing the bank to sell the property. But, once the property was sold, Mr Bao’s obligations came to an end. Mr Mao had received Mr Bao’s money and was a fiduciary in respect of that money. The amount due to Mr Bao was capable of precise calculation in accordance with the method Mr Mao had already used.

54.   In those circumstances, Mr Mao had an obligation immediately upon sale of the property to account to Mr Bao for his share of the proceeds, or at least to apply the moneys to Mr Bao’s best advantage. That was an affirmative obligation which did not depend upon a request by Mr Bao. Mr Mao did not comply with it, and appropriated Mr Bao’s money to himself. In my view, he cannot be heard to say that the money he appropriated should bear interest at court rates while he maintains a claim for interest on moneys owing to him by Mr Bao at a far higher commercial rate.

55.   In my view the requirements of an equitable set-off are met. The set- off (and the currency conversion) should be undertaken as at 5 May 2014.

51. The parties then agreed upon orders providing for judgment in accordance with the reasons set out in the quantification judgment. In light of the set-off of the parties’ respective claims at the date of completion of the sale of the Vaucluse Property (on 27 May 2014), and interest on the account balance from that point to the date of judgment, the balance owing in favour of Mr Mao was $57,611 (as opposed to the amount of over $3 million which Mr Mao had claimed) (see [2] of the orders made by Parker J on 16 December 2022).

Grounds of Appeal

52. Mr Mao’s Notice of Appeal raised two grounds of appeal:

1.   The trial judge erred in finding that the requirements of an equitable set-off were satisfied, as between the parties’ respective claims: Judgment [55], [56(1)]

2. The trial judge erred in finding that the set-off between the parties respective claims is to be undertaken at 5 May 2014, and failing to find that the set-off is to be undertaken at the date of judgement [sic] on 12 December 2022 (pursuant to section 21 of the Civil Procedure Act 2005): Judgement [sic] [54], [55], [56(1)]

Grounds of Cross-Appeal

53. Mr Bao’s cross-appeal, raised only if it is held that equitable set-off is unavailable, is on the following ground:

1.   If, contrary to the trial judge’s primary finding, equitable set-off is unavailable, the Court below erred:

a. in failing to exercise its discretion to allow an award to the cross-appellant of pre-judgment interest under s 100 of the Civil Procedure Act 2005 (NSW) on the unaccounted funds due to the cross-appellant; and

b.   failing to award such interest at the same rate as the debt due to the appellant under the appellant’s loan agreement with the cross-appellant.

Legal Principles

54. It is convenient at the outset to summarise briefly the applicable principles as to the doctrine of equitable set-off, which were broadly not in issue between the parties. Of the four species of equitable set-off identified by the authors of Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5^th ed, 2015) (Meagher, Gummow & Lehane), that relevant to the present proceeding is described as the “true equitable set-off” (see at [39-050](d), citing Rawson v Samuel (1841) Cr & Ph 161 (Rawson v Samuel) at 178), namely “the kind which equity recognised wherever ‘the party seeking the benefit of it can show some equitable ground for being protected against his adversary's demand’”.

55. The classic test for equitable set-off, articulated by Lord Cottenham LC in Rawson v Samuel and endorsed by the High Court of Australia in Hill v Ziymack (1908) 7 CLR 352 at 361-2; [1908] HCA 13 (Hill v Ziymack) is that of impeachment, namely that the cross-demand must “impeach” the initial claim. Keane JA, then sitting in the Court of Appeal in Queensland (with whom McMurdo P and Fraser JA agreed) said in Forsyth v Gibbs [2009] 1 Qd R 403; [2008] QCA 103 (Forsyth) at [10] that:

It is essential that there be such a connection between the claim and the cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim.

56. This formulation has been broadly adopted across Australia (see, for example, Boensch v Pascoe (2019) 268 CLR 593; [2019] HCA 49 at [9]; Hawes v Dean [2014] NSWCA 380 (Hawes) at [61]; Norman v FEA Plantation Ltd (2011) 195 FCR 97; [2011] FCAFC 99 (Norman) at [143]; Mittiga v Community Corporation 20582 Inc (2012) 114 SASR 557; [2012] SASC 202 at [28]; Chamberlain Early Learning Centre Pty Limited v Precious 1 Pty Limited in its own right and as trustee for The 4 Chamberlain Holdings Family Trust [2017] NSWSC 189 (Chamberlain) at [69]-[70]; Meagher, Gummow & Lehane [39-060](g) 1108-1110).

57. The strictness of the “impeachment” requirement was emphasised in this Court in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479 (HP Mercantile) at [136] where Emmett JA (with whom Beazley P, as Her Excellency then was, and Meagher JA agreed) said:

For there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant. Equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary’s demand. The mere existence of a cross-claim is not sufficient. There must be some ground for equitable intervention beyond the mere existence of a cross-claim, such that it can be said that the equity of the defendant impeaches the claimant's title to the legal demand being enforced (James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 457-458).

58. In Hawes, Barrett JA (Bathurst CJ and McColl JA agreeing) emphasised at [65] that the notion of impeachment is fundamentally underpinned by unconscionability, in the sense that the two claims must be so closely linked that it would be unconscionable to allow one to be enforced without accommodating the other, his Honour saying that:

In all the hypothetical cases to which Emmett JA referred [in HP Mercantile at [137]] two wrongs or defaults are so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right. It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim.

59. That said, it has also been recognised that the notions of conscience or unconscionability that underpin equitable set-off do not operate at large (Active Adult Management Pty Ltd v Milstern Retirement Living Pty Ltd [2017] NSWSC 1238 (Active Adult Management) at [84]) nor is unconscionability of itself sufficient to establish a defence of equitable set-off (see Wollongong Coal Ltd v Gujurat NRE India Pty Ltd (2019) 100 NSWLR 432; [2019] NSWCA 135 (Wollongong Coal) at [113] per Leeming JA, Bathurst CJ and McCallum J agreeing). In Forsyth (in a passage referred to and affirmed in Hawes) Keane JA made clear (at [10]) that “the availability of an equitable set-off does not depend upon an unfettered discretionary assessment of whether it would be “unfair” in a general sense for a plaintiff to insist on payment of the debt owed to it while the cross-claim remains unpaid”.

60. A key feature of many cases (including the present) is that the respective liabilities and entitlements arose from separate transactions from different points in time. It has been said that this feature is one that tends to mitigate against a set-off; and it can be a decisive factor in the set-off enquiry (see Hawes at [66]; [81]). In Hawes, Barrett JA draws attention to “the separateness of the transactions from which the rights arose, both in time and as to subject matter”. In Forsyth, the key reason that the cross-claim was held not to impeach the initial claim was that “the transactions which gave rise to the respondent's claims were entirely distinct from the loans in respect of which the appellants sue” (at [13] per Keane JA, McMurdo P and Fraser JA agreeing). Similarly, in Chamberlain at [72], Emmett AJA said:

…if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off.

61. However, the fact that there are separate transactions is not determinative. A cross-claim may give rise to an equitable set-off even if the cross-claim does not arise from the same transaction or same contractual relationship; see for example Norman at [156] (Jacobson, Nicholas and Yates JJ, citing Forbes J in British Anzani (Felixstowe) Ltd v International Management (UK) Ltd [1980] QB 137, 154-155), in the context of a dispute involving a tenancy:

… the tenant’s cross-claim may give rise to an equitable set-off even if the cross-claim does not arise from the lease itself, or directly from the relationship of landlord and tenant, provided that the claim for rent and the cross-claim arising from another contract are so closely connected that the principles affecting equitable set-off can be said to apply.

62. In Forsyth, Keane JA explained the relevance of the distinction between the transactions as being that, where the misconduct that founds the cross-claim was not a feature in inducing the cross-claimant to assume the liability that founded the initial claim, there is not a sufficiently close connection that the cross-claim impeaches the initial claim (see [14]). In Forsyth, the respondent’s loan indebtedness (i.e., the respondent’s liability under the initial claim) neither arose nor was increased as a result of any misconduct of the appellant. The fact that the misconduct may have in some general way contributed to the cross-claimant’s negative financial situation, such that the cross-claimant was unable to make repayments under the loan (leading to the initial claim) was considered to be “clearly an insufficient connection to give rise to a set-off” (Forsyth at [15]). Keane JA said (at [15]):

The point is that there must be a connection between claim and cross-claim beyond the mere fact that the payment of the claim has been rendered more difficult than would have been the case had it not been for the matters the subject of the cross-claim.

63. It is also relevant (in circumstances where there is here a dispute as to the time at which the set-off arises) to note the substantial (as opposed to procedural) nature of equitable set-off. Campbell JA in Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 noted at [53] that an equitable set-off can be asserted “as soon as circumstances subsist which support the equitable set-off, and regardless of whether proceedings have been brought at that time” (cf cases that have attempted to confine equitable set-off to a procedural right such as Muscat v Smith [2003] 1 WLR 2853; [2003] EWCA Civ 962 and Blacksheep Productions Pty Ltd v Waks [2008] NSWSC 488, which have generally been criticised across case law and commentary alike – see AWA Ltd v Exicon Australia Pty Ltd (1990) 19 NSWLR 705 (AWA v Exicon) at 710 (Giles J); Roadshow Entertainment v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462 at 481 (Gleeson CJ, Handley JA and Brownie AJA); Concrete Constructions v Dalma Formwork [1999] NSWCA 16 at [21]-[22] (Sheppard AJA, Mason P and Handley JA agreeing); and Meagher, Gummow & Lehane at [39-060(f)]).

64. Counsel for Mr Mao identified two broad categories of cases where interdependence satisfying the impeachment test has been satisfied (citing Forsyth and Chamberlain, where it was said that the link between the demands must be such that “the two are, in a sense, interdependent”), those being: first, where the original claimant’s own breach of obligation to the counter-claimant brought about or at least contributed to the counter-claimant’s liability to the original claimant (citing, inter alia, HP Mercantile), though noting that there must be some additional connection beyond the mere fact that the original claimant’s own breach of obligation rendered more difficult the counter-claimant’s breach; and second, where the original claimant’s breach of obligation is responsible for reducing or denying to the counter-claimant the benefit which was the quid pro quo for satisfying the obligation upon breach of which the original claim is based (citing, inter alia, Hawes and Chamberlain).

65. Mr Bao maintains that it is necessary to look at all the circumstances of the case, taking into account the guiding principles; and says that a rigid taxonomy cannot be applied to limit the scope of the doctrine, cavilling with the proposition that there are only two broad categories where the necessary inequity will be found so as to give rise to the impeachment of title and emphasising the need to take into account the particular circumstances of the case and that what must be shown is “a recognised equitable ground for being, to the relevant extent, protected from his adversary’s demand”, the mere existence of cross-claims not being sufficient.

66. It is not necessary here to attempt a taxonomical categorisation of cases which have been recognised as satisfying the impeachment test (thoughtful as the detailed submissions of Mr Mao in this regard are). It suffices to note that, among the guiding principles that have been identified in the authorities referred to above, are that: the mere existence of a cross-claim is not sufficient (HP Mercantile; Hawes); it is not necessary that the claims arise from the same transaction (Norman) although if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off (Chamberlain); it is not necessarily sufficient to show that the cross-claim is in some way related to the transaction which gave rise to the claim, or turns on similar findings of fact (Hanak v Green [1958] 2 QB 9 at 23); mutuality is not necessary but is potentially relevant (Wollongong Coal at [110]); and it is necessary to look at all the circumstances of the case (AWA v Exicom at 709). The notion of a sufficient connection between the claims will ordinarily be satisfied if the claims are interdependent in the sense considered in Forsyth and Chamberlain (such that it would be unconscionable for the original claimant to take the benefit of its claim without taking into account the other party’s cross-claim).

67. With that summary of the legal principles, I turn to the submissions by the respective parties as to Mr Mao’s appeal against the finding of equitable set-off in the present case (grounds 1 and 2 of the appeal). Those grounds may conveniently be considered together, ground 1 challenging the finding of equitable set-off, ground 2 challenging the date at which the set-off between the parties’ claims was to be undertaken. Ground 2 does not of course arise if ground 1 succeeds.

Grounds 1 and 2 of the appeal

Mr Mao’s submissions

68. Mr Mao submits that the primary judge (although having referred to the need to determine the matter on first principles) failed to have regard to the principles which determine the nature and degree of the closeness of connection between competing claims which regulate the finding of unconscionability and the operation of the impeachment test in relation to the doctrine of equitable set-off. Complaint is made that the finding of impeachment was not clearly articulated and was underpinned by general notions of fairness, unconstrained by the orthodox principles of equitable set-off. Mr Mao argues that intuitive unfairness (if that be established) is insufficient to support the finding of impeachment necessary to ground an equitable set-off.

69. In this regard, Mr Mao says that there is no finding of fact which supports any degree of interdependence between the respective claims (Mr Bao’s accounting claim arising from Mr Mao’s breach of his obligation to account to Mr Bao for the proceeds of sale of the Vaucluse Property on the one hand and the loan claim on the other hand giving rise to Mr Bao’s liability under the ¥11 million loan agreement). Mr Mao contends that his failure to account did not bring about or contribute to Mr Bao’s liability under the loan agreement, pointing in this regard to the absence of any finding to support a conclusion that Mr Bao was induced to enter the loan agreement by reason of any dealings between the parties relating to the Vaucluse Property (which were the subject of the account order made by the primary judge) or that Mr Mao’s failure to account for the proceeds of sale of the Vaucluse Property caused or contributed to Mr Bao’s default under the loan agreement.

70. In particular, Mr Mao says that there were no findings (and no basis for any findings) that the failure by Mr Mao to account at the time of the completion of the sale of the Vaucluse Property compromised Mr Bao’s financial capacity to discharge his obligations under the loan agreement or that Mr Bao lacked the financial capacity to discharge his obligations under the loan agreement. It is noted that the primary judge referred to Mr Bao’s evidence to the effect that he was a person of very substantial means. Mr Mao submits that the only reasonable inference is that Mr Bao failed to discharge his obligations under the loan agreement because he did not consider himself obliged under the loan agreement. Further, Mr Mao says that, even if there were findings to support the conclusion that Mr Mao’s failure to account had compromised Mr Bao’s financial capacity to discharge his obligations under the loan agreement, there is no basis for a finding that the dealings in relation to the Vaucluse Property were entered into for the purpose, or in contemplation, of facilitating Mr Bao’s discharge of his obligations under the loan agreement.

71. Mr Mao further contends that there is no basis for a finding that Mr Mao’s breach of his duty to account for the proceeds of sale was responsible for reducing or denying to Mr Bao the benefit which was the quid pro quo for satisfying the obligation to repay the amounts due under the loan agreement; and says that, on the findings made by the primary judge, the dealings in relation to the Vaucluse Property (which grounded Mr Mao’s obligation to account) and the loan agreement, were entirely unrelated.

72. Mr Mao places weight on the separateness of the transactions under which the respective liabilities arose, arguing that: the demand by Mr Bao that Mr Mao account in relation to dealings in connection with the Vaucluse Property is distinct from, and unrelated to, Mr Mao’s demand under the loan agreement; Mr Bao’s claim for account and Mr Mao’s claim under the loan agreement lack the requisite “connection” to render it unconscionable for Mr Mao to “insist on his legal right without first accommodating Mr Bao’s countervailing legal right” under the doctrine of equitable set-off; and hence that Mr Mao’s claim under the loan agreement is not impeachable by Mr Bao’s claim for account, and Mr Bao is not entitled to equitable set-off between the parties’ respective claims at the time of completion of the sale of the Vaucluse Property.

73. As to ground 2, Mr Mao points out that the statutory set-off under s 21 of the Civil Procedure Act 2005 (NSW) occurs at the time of judgment; and thus (if equitable set-off is unavailable), for the purpose of determining the statutory set-off, interest accrues on Mr Mao’s claim under the ¥11 million loan agreement to the date of judgment at the contractual rate of interest of 2% per month.

Mr Bao’s submissions

Equitable Set-Off

74. As adverted to above, Mr Bao broadly accepts the articulation of the legal principles as summarised above (though cavilling with the notion that a rigid taxonomy should be employed in determining the sufficiency of connection to satisfy the impeachment test).

75. Mr Bao submits that there was no error in the finding by the primary judge that the requirements for an equitable set-off were made out, emphasising the chronological sequence of events as found by the primary judge, which Mr Bao maintains were in relation to four interrelated matters: the purchase of the Vaucluse Property by Mr Mao as trustee for Mr Bao; the unauthorised borrowing by Mr Mao as trustee; the ¥11 million loan made by Mr Mao to Mr Bao; and the dispute as it developed in relation to these matters. Mr Bao points out that it was only when he issued a subpoena to NAB on 20 April 2018, well after the primary proceedings were commenced, that Mr Bao discovered that Mr Mao had made the unauthorised borrowings which founded the account ultimately ordered (see the affidavit of Mr Bao’s solicitor, Carl Ku, affirmed 4 September 2018 at [4]-[5]).

74. Mr Bao accepts that it is not sufficient (for a debt to impeach another) that it be found to be “unconscionable” to permit the enforcement of one without regard being had to the other; and accepts that the notion of unconscionability does not license unconstrained discretion (i.e., that notions of conscience do not “operate at large”) (there quoting Wollongong Coal and Active Adult Management). However, Mr Bao argues that the concept of unconscionability (which, as noted above, underpins the availability of equitable set-off) is sufficiently broad to mean that the facts of earlier cases, while instructive, are not determinative, citing Keane JA’s observations in Forsyth at [9]-[10]. For this reason, Mr Bao argues that, while it is accurate to say that “if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off”, a single transaction is not to be regarded as a pre-condition of the establishment of impeachment (referring by way of example in this context to Ralston v South Greta Colliery Ltd (1912) 13 SR (NSW) 6). (Mr Mao does not argue otherwise.)

75. Mr Bao cavils with the proposition by Mr Mao that there is no factual finding that would support any degree of interdependence. Mr Bao argues that the interdependence of the corresponding liabilities, and the consequent impeachment, can be demonstrated in four ways.

76. First, Mr Bao refers to Mr Mao’s unchallenged evidence that he borrowed money from NAB (prima facie breaching his obligations as trustee for Mr Bao) in order to protect himself against Mr Bao not paying to him money which he would lend to him. Mr Bao argues that, although the primary judge doubted that evidence, a finding that Mr Mao borrowed money for his own purposes is not inconsistent with Mr Mao’s evidence that he borrowed the funds as security against Mr Bao’s later breach of an obligation. Mr Bao submits that this demonstrates the necessary interconnectedness between the two transactions; i.e., that Mr Mao created the liability to account as trustee by engaging in borrowing using as security the Vaucluse Property owned in equity by Mr Bao. It is said that Mr Mao engaged in that borrowing to guard against the very possibility that Mr Bao would not repay to him any moneys which Mr Mao loaned to Mr Bao; and that, in those circumstances, it is unconscionable for Mr Mao to insist on his legal right to be repaid his loan before first accommodating Mr Bao’s right to an account in respect of the Vaucluse Property.

77. Second, Mr Bao points to the temporal connection between the relevant events. Mr Bao argues that Mr Mao’s demand for repayment of Mr Bao’s loan triggered (in a temporal sense) Mr Bao’s failure to continue paying the costs associated with the Vaucluse Property, thereby ultimately triggering the mortgagee sale and Mr Mao’s failure to account for the proceeds of that sale. Mr Bao submits that it was, in turn, only the mortgagee sale, and Mr Mao’s claim on his loan, that led to the discovery of Mr Mao’s unauthorised borrowing and the claim for the account.

78. Third, Mr Bao submits that it is not necessary for Mr Mao’s failure to account to have been the causa sine qua non of Mr Bao’s liability under the loan; rather, it is sufficient that the conduct of Mr Mao “at least contributed to the existence” of the liability owed by him (citing Gummow J in James v Commonwealth Bank of Australia (1992) 37 FCR 445; [1992] FCA 617; and noting that Gummow J there observed that impeachment was not to be narrowly understood). In this regard, Mr Bao points to the fact that his relevant liability is not simply to repay principal under the loan agreement but also to repay the very high rates of interest that have accrued.

79. It is accepted by Mr Bao that there was no finding by the trial judge that the failure by Mr Mao to account at the time of completion of the sale of the Vaucluse Property compromised Mr Bao’s financial capacity to discharge his obligations under the loan agreement. Nevertheless, Mr Bao says that the failure to account contributed to the liability for ongoing interest. It is submitted that, had Mr Mao offered to account for the surplus from the sale of the Vaucluse Property, it is almost certain that Mr Mao himself would have asserted a right of set-off (since his evidence was that he drew down the mortgage funds as security for any default by Mr Bao). Conversely, Mr Bao argues that an inference is available that he (Mr Bao) would have agreed to such a proposal since it would be rational for Mr Bao to seek to discharge or reduce the loan given the high rates of interest which were accruing. In this sense, it is submitted that the default of Mr Mao contributed to the liability of Mr Bao because it allowed for the indebtedness of Mr Bao to spiral through the application of the contractual rate of interest.

80. Fourth (and Mr Bao emphasises this last contention), Mr Bao argues that the equity which impeaches Mr Mao’s claim in the present case arises from the failure of Mr Mao to account to him (in relation to the unauthorised borrowings in relation to the Vaucluse Property). Mr Bao says that Mr Mao’s submissions treat the case as involving no more than two competing money claims debts; and he submits that this overlooks the fact that Mr Mao was a trustee (or fiduciary agent) (referring to [23] of the quantification judgment) who owed fiduciary duties to him (noting the description of the fiduciary obligation by Payne JA, with whom Gleeson and Leeming JJA agreed, in Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 at [105]). Mr Bao says that, at least by the time of his failure to account, Mr Mao was in a position of hopeless conflict: that he was, on one hand, a fiduciary whose default left him holding Mr Bao’s funds; and, on the other hand, he was profiting from interest accruing on Mr Bao’s unpaid debt (and he points out that there was no attempt by Mr Mao to obtain informed consent to the use of the funds).

81. Mr Bao argues that it is the equity arising from Mr Mao’s breach of duty which gives rise to the equitable set-off and that, in light of this interconnection, it would be unfair for Mr Mao to have the benefit of 2% monthly interest on the loan, without taking into account his liability to account to Mr Bao as trustee.

82. Mr Bao submits that the fact that the primary judge made no findings to the effect that Mr Bao was induced to enter the loan agreement by reason of any dealings between the parties relating to the Vaucluse Property or that the failure to account at the time of completion of the sale of the Vaucluse Property compromised Mr Bao’s financial capacity to discharge his obligations under the loan agreement does not mean that equitable set-off is not available by reference to established principle (simply that there is no precise analogy with other cases such as Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642).

83. As to ground 2, Mr Bao points out that this turns on the conclusion as to ground 1, noting that no separate submission is made that (if the equitable set-off was correctly found) equitable set-off ought to have run from a different date.

Pre-Judgment Interest

86. Further, Mr Bao argues that there is an alternative path of reasoning to reach the same overall conclusion as that reached by the primary judge, namely that it would have been open to the primary judge to exercise the discretion to award pre-judgment interest under s 100 of the Civil Procedure Act in relation to the unaccounted surplus. In this regard, Mr Bao points to his Honour’s observation (at [50]-[51] of the quantification judgment):

50.   The Court’s power to award pre-judgment interest under s 00 of the Civil Procedure Act involves discretion both as to the rate of interest and the date from which it accrues. But counsel for Mr Mao emphasised that Mr Mao was enforcing a contractual entitlement to interest. This falls entirely outside s 100: see s 100(3)(b).

51.   Seen in this way, the claim for interest might have attracted further questions. If interest is compensation for the agreed time value of money, could Mr Mao really maintain the claim when he had Mr Bao’s money in his possession? And even if some sort of formal appropriation were required, then had Mr Mao failed to mitigate his loss? But these points were not debated, and, having regard to my decision on the equitable set-off point, it is not necessary to go into them.

87. Mr Bao submits that the question posed by the primary judge at [51] of the quantification judgment reinforces the intertwined nature of the obligations which gives rise to equitable set off but also points to this as indicating the course for which he advocates in his cross-appeal (see below at [109]).

Reply submissions

88. In response to Mr Bao’s submissions as to the relevant principles (see Mr Bao’s submissions dated 13 June 2023 at [37]-[43]), Mr Mao accepts that a single transaction is not to be regarded as a pre-condition of the establishment of impeachment but says that if the countervailing claims arise from different transactions, it is still necessary for underlying operative principles of unconscionability (relating to the interdependence or close connection between the countervailing claims) to be identified (or developed) and satisfied on the facts.

89. Insofar as Mr Bao submits that it is not accurate to state that there are only two broad categories where the necessary inequity will be found so as to give rise to the impeachment of title or that a rigid taxonomy is antithetical to equitable principles, Mr Mao does not contend for a “rigid taxonomy”. Mr Mao submits that the specific principles referred to in his submissions at [80]-[87] and the categories of case referred to at [91]-[93], are formulated consistently with the “flexible but principled principles of equity” referred to in his submissions.

90. Mr Mao submits that none of the four contended grounds for interdependence (considered in isolation or collectively) supports the basis for an equitable set-off between Mr Mao’s claim in respect of his loan to Mr Bao of ¥11 million (the loan claim) and Mr Bao’s claim for account in relation to the proceeds of sale of the Vaucluse Property (the account claim).

91. As to the first ground raised by Mr Bao (that Mr Mao’s purpose in borrowing the money from NAB establishes the necessary interconnectedness between the two transactions), Mr Mao submits that this does not generate a proper basis for equitable set-off for two reasons: first, the absence of a positive finding of fact that Mr Mao borrowed money from NAB in order to protect himself against Mr Bao not repaying the loan (the primary judge finding it more likely that Mr Mao had simply drawn down those additional funds for his own convenience); and, second, that the evidence does not support a positive finding on appeal that Mr Mao made the NAB borrowing “in order to protect himself against Mr Bao not paying to him money which he would lend him”.

92. Mr Mao submits that his affidavit evidence is ambiguous and consistent with the inference that Mr Mao’s purpose in making the NAB borrowing was to provide some protection in relation to Mr Bao’s repayment of the NAB Loan (i.e., the mortgage facility in respect of the Vaucluse Property).

93. Mr Mao notes that, in his affidavit affirmed 6 August 2019, he deposed that:

26.   In early October 2007, I was offered a further loan of around a million dollars by the NAB … I accepted the loan offered

….

29.    I transferred an amount of $800,000 of the loan monies into an account of mine in China by reason of the belief that the Cross-Claimant had failed to repay the $200,000 loan made by Zheng Bao Xia to him

30.    I developed that belief by reason of Xiaomei [Ms Zhang] having said to me words to the effect of:

“Look at how difficult it has been for Linchun Bao to pay back $200,000. Just imagine what it would be like if you were to seek repayment of further monies from him. It may well be very difficult. I think you should take precautions to prevent him from defaulting on any monies you lend him”

94. Mr Mao says that in cross-examination he sought to explain the “process” (of increasing the loan) but was not permitted by the cross-examiner to do so (see T 39.15-17; 25 May 2020); and notes that later (at T 59.21-24; 26 May 2020) Mr Mao said that “the reason I borrowed the money because Mr Bao didn’t pay the loan which owed [sic] – which was to my ex-mother-in-law”. Mr Mao complains that it was never put to him in cross-examination that at the time of the NAB borrowing he anticipated making future loans to Mr Bao (let alone that he specifically anticipated the specific loan) or that he made the NAB borrowing for the purpose of somehow creating security for future lending generally, let alone specifically as security for the specific loan.

95. Mr Mao says that considerations of fairness (analogous to rule in Browne v Dunn (1893) 6 R 67 (H.L.)) further undermine a proper basis for a positive finding by this Court that Mr Mao’s purpose in making the NAB borrowing was “to protect himself against Mr Bao not paying to him money which he would lend him”.

96. Further, Mr Mao argues that such a purpose makes no commercial sense in circumstances where Mr Mao was himself liable to repay the NAB borrowing; and says that this weighs strongly against construing Mr Mao’s ambiguous evidence as supporting the finding that his purpose in making the NAB borrowing was “to protect himself against Mr Bao not paying to him money which he would lend him” or alternatively supports the primary judge’s rejection of Mr Mao’s explanation as to the purpose of the NAB borrowing.

97. Mr Mao points out that his Honour (at [222]) said that Mr Mao’s explanation for the transactions was difficult to accept, noting that, in increasing the amount being lent, Mr Mao was increasing his exposure to NAB; that it did not make any commercial sense for him to do that simply to raise a fund against the possibility that Mr Bao might later find it difficult to repay the bank debt; and that “[n]or, on the evidence, was there any other liability against which [it] would have made sense to take some form of security”. It is noted that, at [18](1) of the quantification judgment the primary judge said again that Mr Mao’s evidence that he made the additional drawdowns in 2007 and 2008 as security against the possibility of Mr Bao being unable to repay some future loan was “difficult to accept”, and found that “it was more likely that Mr Mao had simply drawn down those additional funds for his own convenience, so as to use the monies for his own purposes”.

98. Mr Mao maintains that there is no basis for a finding that Mr Mao was contemplating the possibility of making further loans to Mr Bao at the time of the NAB borrowing and that this weighs against the inherent plausibility of the inference that the purpose of the NAB borrowing was to protect himself against Mr Bao in relation to future lending.

99. Even if (which Mr Mao denies) there was a proper basis for a finding that Mr Mao made the NAB borrowing “to protect himself against Mr Bao not paying to him money which he would lend him”, Mr Mao argues that such a finding would not constitute a proper basis for equitable set-off for two alternative reasons: first, that there is no basis for the finding that the loan was even in contemplation at the time of the NAB borrowing (so it is said that there can logically be no interdependence between the loan and the NAB borrowing); second, that the mere fact that the NAB borrowing was “to protect himself against Mr Bao not paying to him money which he would lend him” does not of itself give rise to a significant level of “close connection” or “interdependence” between the relevant transactions.

100. As to the second ground raised by Mr Bao (the proposition that the factual chronology illustrates a clear temporal connection between the relevant events), Mr Mao maintains that in the absence of some material causal connection the temporal sequence is immaterial to establishing the requisite “interdependence” between the two claims. It is submitted that Mr Bao has conflated merely temporal connection with causal connection in the submission that Mr Mao’s demand for repayment of Mr Bao’s loan triggered (temporally) Mr Bao’s failure to continue paying costs associated with the Vaucluse Property. Mr Mao argues that there is no contended (or available) basis for a finding that entry into (or performance or default or demand or liability under) one of the dealings, materially contributed to entry into (or performance or default or demand or liability under) the other dealing.

101. As to the third ground (the contention by Mr Bao that there would be a sufficient contribution to Mr Bao’s liability to generate equitable set-off if Mr Mao’s failure to account “contributed to the liability for ongoing interest” and that “an inference is available that, if Mr Mao had offered to account for the surplus from the sale of the Vaucluse Property”, then Mr Bao would have agreed to a set-off of his account claim against the loan), Mr Mao argues that there is no basis for such a finding (noting that there is no finding by the primary judge to that effect and no appeal against the absence of such finding).

102. Further, Mr Mao argues that Mr Bao’s own evidence and the primary judge’s findings weigh overwhelmingly against a finding to the effect contended. It is noted that Mr Bao’s defence to Mr Mao’s ¥11 million loan claim was that the payment was not a loan but a payment on account of an alleged agreement by Mr Mao to buy him out of the Vaucluse Property; alternatively, that, if the payment was a loan, it was a loan to the Parramatta development company and not to him personally (see [16] of the principal judgment); and that Mr Bao’s evidence was consistent with that defence (see [113]-[125] of the principal judgment). Mr Mao argues that, in light of Mr Bao’s denial of liability under the loan (which he characterises as consistent, emphatic and unconditional), there is no basis for a finding that, if Mr Mao had accounted or offered to account to Mr Bao, Mr Bao would have acknowledged liability under the loan and agreed to a set-off between the account claim and loan.

103. Mr Mao points to various findings that he argues negative the causal significance of Mr Mao’s dealings in relation to the NAB loan, and the causation of loss to Mr Bao. First, that, although the NAB borrowings increased the interest payable under the NAB loan his Honour said that “the important fact is that Mr Bao was not being charged for the additional interest” ([225] of the principal judgment); and that this would have been “obvious” to Mr Bao from the February 2010 account statement ([226] of the principal judgment; [18](4) of the quantification judgment). (As to this, his Honour must have here meant that this would have been obvious to Mr Bao after he became aware of the unauthorised borrowings themselves because there is nothing in the statement to suggest any such borrowings.) Second, that as Mr Bao was unaware of the additional borrowings (until after the proceedings commenced), it cannot have affected his decision to abandon the Vaucluse Property ([268] of the principal judgment). Third, Mr Mao says that there is no basis for a finding that Mr Mao’s failure to account for the proceeds of sale of the Vaucluse Property affected Mr Bao’s financial capacity to discharge his part of the NAB loan. Fourth, Mr Mao says that Mr Bao ignored his requests for payment and cannot now complain that in the face of this Mr Mao allowed NAB to sell the property (referring here to [275] of the principal judgment and [26]-[29] of the quantification judgment).

104. As to the fourth ground (Mr Bao’s contention that the relevant equity to impeach Mr Mao’s claim arises from Mr Mao’s failure to account), Mr Mao argues that this conflates two notions of “the equity of the defendant” and fails to identify any circumstance which supports an equitable set-off. Mr Mao does not contest that the circumstance of the NAB borrowing generates “an equity” in favour of Mr Bao to call on Mr Mao to account. However, he argues that the fact that Mr Bao has “an equity” to call on Mr Mao to account is irrelevant to whether Mr Bao has “an equity” to assert equitable set-off. Mr Mao says that the mere fact that the countervailing claim is equitable in nature is not sufficient to create the “equity” to assert equitable set-off with respect to that countervailing claim; rather, the “equity” to assert equitable set-off arises by reference to established principles relating to the nature and extent of the “connection” and “interdependence” of the competing claims.

183. As to the second (the temporal connection between the demand for repayment and the cessation of the payments by Mr Bao towards the Vaucluse Property), I do not accept that this is a connection that would make unconscionable the enforcement by Mr Mao of the loan (without taking into account his liability to account under the mortgage). Mr Bao’s refusal to pay the loan was referable to his denial that the moneys represented a loan at all.

184. As to the third (the contention that the failure to account contributed to the loan claim by compromising Mr Bao’s financial capacity to repay the loan), there is no evidence of this. As to the fourth (the contention that the equity that arises is generated by the breach of fiduciary duty), Mr Mao does not deny that there is an equity arising that renders him liable to account for the proceeds of sale of the Vaucluse Property. Such an equitable claim clearly arises on the facts which are not here disputed. However, the mere existence of an equitable claim is not sufficient to establish the relevant connection. The fact that higher interest has accrued on the loan claim which would not have accrued had Mr Mao complied with his obligation to account presupposes that there would have been a set-off arrangement reached in 2014; and, not only is there no evidence of Mr Bao’s intention in that regard, it is inconsistent with his denial that there was a loan at all.

185. Accordingly, I am not persuaded that the requirements for an equitable set-off were met. For similar reasons, I do not see the necessary interconnectedness to support a conclusion that the alternative path of reasoning (see at [86] above) should be adopted to arrive at the conclusion that the equitable set-off requirements were met.

186. Therefore, I consider that ground 1 should be allowed, with the consequence that ground 2 is unnecessary to determine.

187. I should here add that, since writing these reasons, I have had the opportunity of reading White JA’s dissenting reasons. I have no difficulty with the proposition that there would have been a sufficient connection between the respective claims (to give rise to an equitable set-off) had the failure of Mr Mao to account causally contributed to the continuing accrual of the higher rate of interest on the loan (as I had sought to indicate at [189] above). However, while the fact that the loan continued to be outstanding after May 2014 meant that interest continued to accrue on that loan, the evidence was that Mr Bao disputed the very existence of that loan. I remain of the view that the Brickenden principle does not apply to preclude Mr Mao from pointing to the lack of evidence as to what Mr Bao would have done had he (Mr Mao) accounted for the unauthorised borrowings at the time the Vaucluse Property was sold.

Cross-Appeal

193. As to the cross-appeal, I have already concluded that the alternative path of reasoning suffers from the same problems as the equitable set-off claim. Insofar as the argument is made that pre-judgment interest should have been awarded in the exercise of the statutory discretion conferred by s 100 of the Civil Procedure Act this in essence must be a complaint as to the exercise (or non-exercise in the present case) of that discretion by the primary judge (which would be subject to House v The King (1936) 55 CLR 499; [1936] HCA 40 (House v The King) constraints on appellate review).

194. It is well recognised that when a statutory discretionary power is conferred, the power is to be exercised judicially “that is to say not arbitrarily, capriciously or so as to frustrate the legislative intent” (Oshlack v Richmond River Council (1998) 193 CLR 72 at 81; [1998] HCA 11 per Gaudron and Gummow JJ); and that the grounds upon which the discretion is exercisable must be limited to what is relevant to the purpose and subject matter to which the legislature intended the discretion to be exercised.

195. Mr Mao emphasises that the purpose for which interest is awarded is compensatory, namely to compensate a plaintiff for the loss which he or she has suffered by being kept out of his or her money during the relevant period; and that, to fulfil that compensatory function, the purpose of an award of interest is to place the successful party “in the position in which he would have been had the amount of the verdict been paid to him when the cause of action accrued”. The amount of interest is not ordered to punish the defendant for having been dilatory in settling the plaintiff’s claim.

196. The primary judge, as already noted, did not find it necessary to determine the issues debated on the question of interest under the Civil Procedure Act (see [51] of the quantification judgment) and hence in that sense did not address the exercise of the discretion under s 100 of that Act. However, approaching this on the basis that the primary judge did not ultimately exercise the statutory discretion to make an order for interest at the higher rate from the time of the failure properly to account for the sale proceeds, I do not consider that error in the House v The King sense has been demonstrated. Mr Bao points to no error of principle or misapprehension of facts or law; rather, he relies on the unfairness of the situation where he is liable to pay a contractual rate of interest at a far higher sum than the interest awarded to him for Mr Mao’s failure to account in relation to the Vaucluse Property. I am not persuaded that the result is so unreasonable as to bespeak error of a kind that would support appellate review of the decision as to interest. Were it necessary on the cross-appeal to exercise the statutory discretion as to interest, I would come to the conclusion that the order sought by Mr Bao should not be made.

197. Accordingly, I would dismiss the cross-appeal. There is no reason why costs should not follow the event.

Orders

198. The orders I propose are as follows:

1. Allow the appellant’s appeal with costs.

2. Set aside the orders made by the primary judge on 16 December 2022 and in lieu thereof order that judgment be entered for the appellant against the respondent in the sum of $3,401,289.50, comprising:

1. the value of the appellant’s claim as at 5 May 2014 ($2,069,020) plus interest on that claim at 24% per annum from 6 May 2014 to 12 December 2022; minus

2. the value of the respondent’s claim as at 5 May 2014 ($2,050,084) plus interest on that claim at the pre-judgment interest rate prescribed by the Supreme Court from 6 May 2014 to 12 December 2022.

3. Dismiss the cross-appeal with costs.

199. WHITE JA: I have had the advantage of reading in draft the reasons for judgment of Ward ACJ. Her Honour has fully explained the issues arising in the appeal and the parties’ submissions. I have taken a different view on the availability of equitable set-off.

200. The issue is significant. The primary judge entered judgment for Mr Mao for $57,611 with that sum to bear interest at 2% per month from 16 December 2022. Mr Mao contends that the judgment sum should be $3,401,29.50, to bear interest at that rate.

201. It is not obvious why, after judgment, interest should run at the contractual rate, given that Mr Mao’s cause of action on the loan would merge in the judgment. But that question was not raised on appeal.

202. The difference between the amount of the judgment obtained ($57,611) and the judgment sought ($3,401,289.50) is attributable to the difference between the contractual rate of interest on the loan and the court rate on Mr Bao’s cause of action against Mr Mao and the change in exchange rates.

203. The essential facts can be summarised as follows.

204. On 27 May 2004, Mr Mao purchased the Vaucluse property for $3.8 million (J1 [199]). The purchase was funded partly by mortgage finance obtained by Mr Mao from the National Australia Bank (“NAB”) of $2.275 million. As between Mr Mao and Mr Bao, Mr Bao was responsible for repayments of principal and payment of interest. The balance was provided by Mr Bao, apart from $200,000 borrowed from Ms Xiaomei Zhang’s mother. Ms Zhang was Mr Mao’s former wife (J1 [43] and [44]).

205. It was admitted on the pleadings that Mr Mao agreed to purchase and hold the property in his own name, but on behalf of Mr Bao; that he would use the money advanced by the NAB towards the purchase of the property on the basis of Mr Bao’s agreement to make all repayments of the NAB loan and to pay to Mr Mao the balance needed to purchase the property; and that, by reason of those agreements, he held the Vaucluse property on an express trust for Mr Bao. (Cross-claim pars 2, 6, 13; defence to cross-claim pars 2, 6 and 13)

206. From 8 June 2004, Mr Bao, or other persons acting on his behalf, made remittances of $1,162,475 in mortgage finance and holding costs for the property (J1 [46], [157]-[159]).

207. In October 2007, the loan facility was redrawn by Mr Mao to increase the limit by $950,000 to $3.25 million. By that time, the amount drawn on the loan had been reduced to about $2.205 million. Mr Mao drew down approximately $1.41 million, of which $200,000 was used to repay Ms Xia. After obtaining a further increase of the facility, Mr Mao drew down a further $181,000 in March 2008 (J1 [47]).

208. Mr Mao did not disclose these additional borrowings to Mr Bao (J1 [233]). Mr Mao provided statements of the loan account to Mr Bao (without disclosing his additional borrowings) which, as at February 2010, showed that the parties were working on a total loan debt at that time of $2.275 million (J1 [221]). Interest payable to the NAB was calculated on that balance (J1 [225]).

209. In April 2011, Mr Mao paid Mr Bao ¥11 million on terms that it be repaid by 1 August 2011, and that interest would be charged at a rate of 2% per month (J1 [107], [151]).

210. When he made that loan, Mr Mao had not disclosed to Mr Bao that he had made the additional borrowings on the security of the property of which he subsequently acknowledged Mr Bao to be the beneficial owner. Mr Mao adduced no evidence as to how he used the moneys that had been drawn down from the NAB loan. Nor did he adduce evidence as to the source of the funds used to make the ¥11 million loan to Mr Bao.

211. Mr Mao commenced proceedings against Mr Bao for recovery of the loan on 29 December 2016. On 4 September 2018, Mr Bao’s solicitor made an affidavit in support of his application for leave to file a cross-claim on the basis of bank records obtained from the NAB on subpoena. The subpoena had been issued on 20 April 2018. The solicitor deposed, and the primary judge found, that Mr Bao did not know until the NAB bank records were produced of the drawings that Mr Mao had made from the NAB loan account.

212. One of the orders sought by Mr Bao in his cross-claim was:

“11.   Order that any liability of the cross-claimant to the cross-defendant pursuant to the Statement of Claim in these proceedings be set-off against the cross-defendant’s liability to the cross-claimant under this Amended Cross-claim.”

213. In his defence to cross-claim, Mr Mao pleaded:

“53. In further answer to the whole of the Cross-Claim, if the Cross-Defendant is found liable for any relief granted by the Court with respect to the Cross-Claim (which is denied), then he is entitled in Equity and pursuant to s 21 of the Civil Procedure Act 2005 (NSW) to set-off any amounts payable to the Cross-Claimant against the monies adjudged to be due to him in his claim in these proceedings.”

214. Although Mr Bao’s cross-claim did not specifically identify whether he relied on an equitable or statutory set-off, Mr Mao’s defence to cross-claim expressly pleaded both an equitable and a statutory set-off.

215. In March 2014, NAB sold the Vaucluse property. On 5 May 2014, the bank received the proceeds of settlement of the sale of $3.26 million and the bank then closed off the loan account. It did not pursue Mr Mao for the shortfall of $338,000 (J1 [86]). Mr Bao’s share of the mortgage debt was $2,050,084 (J2 [56(1)]).

216. The primary judge found that Mr Bao was liable to Mr Mao for the moneys which his Honour found were paid to Mr Bao by Mr Mao by way of loan at an interest rate of 2% per month. His Honour found that the money of account on the loan was Chinese yuan and not Australian dollars. There is no appeal from these findings.

217. His Honour also held that Mr Bao was entitled to an account from Mr Mao for the difference between the net proceeds of sale of the property and the principal amount of Mr Bao’s share of the loan after taking into account the rent which Mr Mao received from a tenant in the property and the remittances he had sent to Mr Mao either from 31 January or 29 December 2010 (in the latter case, coupled with an inquiry going back to 31 January 2010). (J1 [275], [276], [387]).

218. That finding is also not challenged on appeal.

219. The possibility of an equitable set-off arising from the date of the loan made by Mr Mao to Mr Bao was not raised at trial, nor on appeal.

220. The set-off for which Mr Bao contended at trial and on appeal was from the date on which the Vaucluse property had been sold, that is, 5 May 2014. The primary judge observed that it was common ground between the parties that the statutory right of set-off under s 21 of the Civil Procedure Act 2005 (NSW), arose as at the date of judgment. Mr Bao relied upon an equitable set-off (J2 [49]).

221. The primary judge’s grounds for upholding this claim were as follows:

“[52] It was common ground between the parties that an equitable set-off depends on whether Mr Mao’s obligation under the mortgage account impeached his entitlement to claim payment (and interest) under the loan. I was not referred to any authorities specifically in point, and have therefore approached the question as one of principle.

[53] As already noted, the arrangement about the Vaucluse mortgage imposed obligations on both parties. Having failed to cover the costs, or give Mr Mao any instructions, Mr Bao could not complain about Mr Mao throwing up his hands and allowing the bank to sell the property. But, once the property was sold, Mr Bao’s obligations came to an end. Mr Mao had received Mr Bao’s money and was a fiduciary in respect of that money. The amount due to Mr Bao was capable of precise calculation in accordance with the method Mr Mao had already used.

[54] In those circumstances, Mr Mao had an obligation immediately upon sale of the property to account to Mr Bao for his share of the proceeds, or at least to apply the moneys to Mr Bao’s best advantage. That was an affirmative obligation which did not depend upon a request by Mr Bao. Mr Mao did not comply with it, and appropriated Mr Bao’s money to himself. In my view, he cannot be heard to say that the money he appropriated should bear interest at court rates while he maintains a claim for interest on moneys owing to him by Mr Bao at a far higher commercial rate.

[55] In my view the requirements of an equitable set-off are met. The set-off (and the currency conversion) should be undertaken as at 5 May 2014.”

222. Having regard to the way the claim of equitable set-off was advanced at trial, it may be accepted that there was not such a connection between Mr Mao’s conduct in borrowing on the security of the Vaucluse property for his own purposes, and Mr Bao’s borrowing ¥11 million from Mr Mao, that Mr Bao’s claim impeached Mr Mao’s title to sue for the loan debt and interest.

223. On the sale of the Vaucluse property by the NAB in May 2014, Mr Mao was liable to account to Mr Bao for the difference between the purchase price received by the bank, and that portion of the mortgage debt that was Mr Bao’s responsibility. That is accepted. Mr Mao’s obligation was not merely to provide an account to Mr Bao that disclosed the borrowings he had made on security of the Vaucluse property, but to pay Mr Bao that difference.

224. I agree with the observation of Ward ACJ (at [179]):

“I accept that, irrespective of the fact that there was no finding in terms of breach of fiduciary duty in the principal judgment, it is not in dispute that Mr Mao held the Vaucluse Property on trust for Mr Bao (this was admitted on the pleadings); and the primary judge held that this gave rise to a prima facie obligation to account to Mr Bao on the sale of the property ([276] of the principal judgment). His Honour also referred in terms to unauthorised borrowings ([277] of the principal judgment). It can hardly be disputed, therefore, that Mr Mao was a defaulting fiduciary in that he failed to account for the proceeds of sale of the Vaucluse Property (by failing to account for the share of the proceeds to which Mr Bao would have been entitled but for the unauthorised borrowings).”

225. There was a direct connection between Mr Mao’s failure to account and the continued accrual of interest at the high rate of 2% per month on the loan. True it is that Mr Bao denied any liability for the loan or accruing interest. But it is evident that Mr Mao stood to profit by the continued accrual of interest at the rate of 2% per month on the loan.

226. The counter factual to be considered is what would have been the position if, in May 2014, Mr Mao had disclosed his unauthorised borrowing and liability to account for the difference between the price received by the bank ($3.26 million) and that part of the mortgage debt for which Mr Bao was responsible ($2,050,084); a difference of $1,209,916.

227. Mr Mao submitted that there was no basis to infer that, if he had accounted for the proceeds of sale at the time of sale, Mr Bao would have agreed to a set-off in relation to the loan or repaid the loan. He characterises Mr Bao’s claim to an equitable set-off as an attempt to obtain a windfall gain by relieving Mr Bao of the obligation to pay the contractual interest under the loan. I do not accept that characterisation. It assumes that if Mr Mao had performed his duty and accounted to Mr Bao at the time of sale for what he was liable to pay, Mr Mao would not himself have asserted a claim for an equitable set-off. No such assumption should be made. This is so for the following reasons.

228. First, when the unauthorised borrowing was discovered and a claim for an account made, Mr Mao pleaded equitable set-off.

229. Secondly, there was no evidence that Mr Mao could have paid the moneys he owed at the time of sale ($1,209,916). If he could not, he would himself have had to assert a right of set-off, as he ultimately did. If Mr Mao could have paid what he owed Mr Bao in May 2014, and would have been prepared to do so rather than claiming a set-off, the onus was on him to lead evidence that would establish those facts. This is partly because they are facts which lie solely within his knowledge (see, eg, Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [258]; Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453 at [26]). It is also partly by reason of the policy considerations which underlie equity’s treatment of defaulting fiduciaries (below at [36]-[46]).

230. At the very least, if Mr Mao had disclosed his borrowings and liability to Mr Bao, matters would have been brought to a head in 2014, rather than in 2018.

231. The profit Mr Mao has derived over that period in the form of accrued interest at 24% per annum rather than at court rates and the profit he has derived by the movement in exchange rates, is partly attributable to Mr Bao’s denial of his personal liability for the loan. But it is also partly attributable to the delayed disclosure of Mr Mao’s unauthorised borrowings, which, in turn, is wholly due to his breach of fiduciary duty in not disclosing those borrowings and offering to account.

232. This connection between Mr Mao’s breach of duty in not disclosing his borrowings and offering to account, and the profit derived by Mr Mao, is sufficient to impeach Mr Mao’s entitlement to the continued accrual of interest at the higher rate. Mr Mao’s breach of duty contributed to the existence of Mr Bao’s liability to him for interest from May 2014 (James v Commonwealth of Australia (1992) 37 FCR 445 at 459-460 and cases cited).

225. Mr Mao characterised Mr Bao’s submission as dependent upon notions of intuitive justice or fairness unrelated to principle. For these reasons I disagree.

226. As a matter of policy in holding fiduciaries to high standards of loyalty and in recognition of the difficulties of proof and the speculation involved in a counterfactual, equity has generally refused to countenance speculation as to what would have happened had the breach of duty not occurred. The apotheosis of this position is found in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469 where Lord Thankerton, giving the advice of the Judicial Committee of the Privy Council in a case where equitable compensation was sought by a client from its solicitor, said:

“When a party holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered his decision to proceed with the transaction, because the constituent’s action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.”

235. In Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15, the High Court ordered a defaulting trustee to make substitutive equitable compensation for the entire value of moneys paid out of a trust fund in breach of trust notwithstanding the fact that, on the counterfactual posited by the defaulting trustee, the beneficiary would have suffered the same pecuniary loss even if there had been no breach of trust (see at [51]-[69]). The prohibition equity imposes on resort to counterfactuals in cases of substitutive equitable compensation, as well as cases of accounts of profits, illustrates the more “absolute nature” of equitable liability for breach of trust and breach of fiduciary obligation (see generally Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 216).

236. Mr Mao’s liability was to restore the value of trust property which had been diminished by his wrongful borrowings. His obligation was to make substitutive equitable compensation.

237. Ward ACJ has extensively considered the current state of the law in relation to the principles stated in Brickenden v London Loan & Savings in relation to claims against a defaulting fiduciary for reparative compensation for loss suffered as a result of the breach of fiduciary duty. Authority in this country now favours the position that, notwithstanding what was said by Lord Thankerton in Brickenden, it is still necessary for the plaintiff to establish that, but for the breach of fiduciary duty, the losses for which compensation is sought would not have been incurred.

238. There has been no departure from the principle stated by the Privy Council in Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 and by the House of Lords in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 that a fiduciary in a position of conflict between interest and duty who has failed to make full disclosure of his interest and obtain the informed assent of his principal, is liable to account for the profits and cannot be heard to say that he or she would have derived the same benefit had the duty been discharged (Short v Crawley (No.30) [2007] NSWSC 1322 at [413]; Murad v Al-Saraj [2005] EWCA Civ 959 at [59(1)], [71], [76]).

239. Underlying this is the policy of the law in holding fiduciaries to high standards of loyalty. In Regal (Hastings) Ltd v Gulliver, Lord Wright put the matter thus:

“What the Respondents did, it was said, caused no damage to the Appellant, and involved no neglect of the Appellant's interests or similar breach of duty. But I think the answer to this reasoning is that both in law and equity it has been held that if a person in a fiduciary relationship makes a secret profit cut of the relationship, the Court will not enquire whether the other person is damnified or has lost a profit which otherwise he would have got. The fact is in itself a fundamental breach of the fiduciary relationship. Nor can the Court adequately investigate the matter in most cases. The facts are generally difficult to ascertain or are solely in the knowledge of the person who is being charged. They are matters of surmise; they are hypothetical because the enquiry is as to what would have been the position if that party had not acted as he did, or what he might have done if there had not been the temptation to seek his own advantage, if in short interest had not conflicted with duty.”

(see also Boardman v Phipps [1967] 2 AC 46 at 110-111).

240. Where the fiduciary is liable to account for profits derived from a breach of fiduciary duty, the onus lies on the defendant to show, if he can, what profits were not attributable to his wrongful act, but rather to the contribution of his own skill, effort, property, and resources (Warman International Ltd v Dwyer (1995) 182 CLR 544 at 561-562; [1995] HCA 18; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [13]-[14]).

241. The profit of 2% interest per month on Mr Mao’s loan to Mr Bao was not derived by Mr Mao from his breach of his fiduciary duty in borrowing on the security of the Vaucluse property without the knowledge and consent of Mr Bao. But the failure to account at the time the Vaucluse property was sold contributed to the continued accrual of interest for almost four years until Mr Bao learned the facts during the course of preparation for trial. Not to allow an equitable set-off would permit Mr Mao to profit from his breach of fiduciary duty in not providing that account.

242. The principles to which I have referred in relation to defaulting fiduciaries, and the policy underlying those principles, have an analogical application to the present facts. On one view, speculation should not be permitted as to what would have happened had disclosure been made. That is, Mr Mao should not be allowed to say that no set-off would have been applied at that time because Mr Bao denied the existence of the loan. Rather, the set-off should be allowed as at the date found by the primary judge so as to strip Mr Mao of the profit he would otherwise derive, being the excess of the interest on the loan for the period whilst he remained in breach of his duty of disclosure over the interest for which he was liable at court rates.

243. Another view is that, if the counterfactual is to be explored, the onus is on Mr Mao to demonstrate that even on the counterfactual, there would have been no set-off at the time of sale of the property.

244. On either view, Mr Bao is entitled to an equitable set-off, as found by the primary judge. In any event, even if these principles have no application, for the reasons at [228]-[229] it should be inferred that, had disclosure and an offer to account been made by Mr Mao in 2014, he would have invoked an equitable set-off.

245. For these reasons I would dismiss the appeal with costs.

246. MITCHELMORE JA: I agree with the reasons of Ward ACJ and with the orders her Honour proposes.

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Decision last updated: 21 November 2023