Mao v Bao

[2021] NSWSC 1096

Supreme Court

New South Wales

Medium Neutral Citation:

Mao v Bao [2021] NSWSC 1096

Hearing dates:

25, 26, 27, 28, 29 May 2020; 1 September 2020; 16 March 2021; 18, 19 May 2021

Date of orders:

31 August 2021

Decision date:

31 August 2021

Jurisdiction:

Equity

Before:

Parker J

Decision:

See [387]-[391]

Catchwords:

CONTRACTS – payment of sum of money by the plaintiff to the defendant – whether the payment constituted a loan repayable by the defendant – identity of borrower

EQUITY – equitable remedies – account – purchase of the property funded in part by a bank loan obtained by the cross-defendant and in part by remittances by the cross-claimant – cross-defendant borrows additional sum largely for his own purposes, and lets property to tenant – scope of account to which cross-claimant entitled

LIMITATION OF ACTIONS – equitable defence of laches and acquiescence – whether inordinate delay in commencing the cross-claim – prejudice to cross-defendant

LIMITATION OF ACTIONS – statutes of limitation – Limitation Act 1969 (NSW), s 15 – whether s 15 applied directly or by analogy – whether the cross-claim was an action founded on a duty at common law to account – whether s 15 operated by analogy to claim for account in equity’s exclusive jurisdiction – relation back of amendments to cross-claim – discretionary factors – effect on items in account prior to beginning of limitation period

Legislation Cited:

Civil Procedure Act 2005 (NSW), ss 56, 65

Judicature Act 1873 (Imp) (36 & 37 Vict, c 66), s 25

Limitation Act 1939 (Imp), ss 2, 28

Limitation Act 1969 (NSW), ss 15, 23, 47, 48, 54, 55, 74

Limitation of Actions Act 1958 (Vic), s 5

Mercantile Law Amendment Act 1856 (Imp) (19 & 20 Vict, c 97), s 9

Real Estate (Limitation of Actions) Act 1837 (NSW) (8 Wm IV, No 3)

Real Property Act 1900 (NSW), s 57

Real Property Limitation Act 1833 (Imp) (3 & 4 Wm IV, c 27), ss 2, 24, 25

Statute of Limitations 1623 (Imp) (21 Jac I, c 16), s 3

Trustee Act 1888 (Imp) (51 & 52 Vict, c 59)

Cases Cited:

Adams v Bank of New South Wales [1984] 1 NSWLR 285

Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1

Burdick v Garrick (1870) LR 5 Ch App 233

Colin D Young Pty Ltd v Commercial and General Acceptance Ltd (Court of Appeal (NSW), 24 August 1982, unrep)

CSR Ltd v Amaca Pty Ltd [2016] VSCA 320

Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317

Faitrouni v El Omar [1999] NSWSC 84

Feiglin v Ainsworth [2011] VSC 454

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

How v Earl Winterton [1896] 2 Ch 626

In the application of Roderick Mackay Sutherland and Sule Arnautovic [2014] NSWSC 821

Jane v Bob Jane Corporation Pty Ltd [2013] VSC 406

Knox v Gye (1872) LR 5 HL 656

Lyell v Kennedy (No 3) (1889) 14 App Cas 437

Manufacturers Mutual Insurance Ltd v GIO (Supreme Court (NSW), 5 March 1993, unrep)

McDonnell & East Ltd v McGregor (1936) 56 CLR 50 at 57

McGee v Yeomans (1977) 1 NSWLR 273

Metropolitan Bank v Heiron (1880) 5 Ex D 319

Nelson v Rye [1996] 2 All ER 186

Paragon Finance PLC v DB Thakerar & Co [1999] 1 All ER 400

Re Sharpe [1892] 1 Ch 154

Soar v Ashwell [1893] 2 QB 390

Sze Tu v Lowe (2014) 89 NSWLR 317

Taylor v Davies [1920] AC 636

Tito v Waddell (No 2) [1977] Ch 106

Weldon v Neal (1887) 19 QB 394

Wheatley v Bower [2001] WASCA 293

Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2021] NSWSC 614

Texts Cited:

Heydon, J D, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths)

New South Wales Law Reform Commission, First Report on the Limitation of Actions (Report No 3, October 1967)

Stoljar, S J, “The Transformations of Account” (1964) 80 LQR 203

Watson, J A, The Duty to Account: Development and Principles (2016, Federation Press)

Category:

Principal judgment

Parties:

Duoxiang Mao (Plaintiff/Cross-Defendant)
Linchun Bao (Defendant/Cross-Claimant)

Representation:

Counsel:
M Condon SC/H Zhao (Plaintiff/Cross-Defendant)
C Harris SC (Defendant/Cross-Claimant)

Solicitors:
Juris Cor Legal (Plaintiff/Cross-Defendant)
CKSD Lawyers (Defendant/Cross-Claimant)

File Number(s):

2016/389706

Publication restriction:

Nil

Judgment

1. These proceedings arise out of a dispute between two former business associates about property and commercial dealings between them. The plaintiff seeks judgment for the amount outstanding under an alleged loan to the defendant in 2011 of 11 million Chinese yuan (¥): about $1.6 million at the then exchange rate. The defendant cross-claims for several million dollars said to be owing with respect to the parties’ dealings over a property at Vaucluse which the plaintiff purchased with funds provided by the defendant and held until 2014.

2. Both the parties are businessmen of Chinese origin. The plaintiff, Mao Duoxiang, has been an Australian citizen since 1998 and lives in Sydney. The defendant, Bao Linchun, obtained Australian permanent residency in 2009 and then established a home in Melbourne for his wife and children. He himself spent considerable time in Sydney from mid-2010 until April 2011. Since then he appears to have been living back in China.

Claims and defences for determination

3. The dealings between the parties go back to 2004. It was in that year that Mr Mao bought the Vaucluse property. The property was initially acquired as a home for Mr Bao, although as events transpired he appears not to have used it much, if at all.

4. Mr Bao remitted about $2.1 million towards the purchase, which was supplemented with mortgage finance from the National Australia Bank (“NAB”). The amount borrowed from the NAB was $2.275 million. After the purchase was completed Mr Bao continued to make remittances to finance the loan repayments and other expenses of holding the property.

5. Starting in 2010, Mr Bao became involved in further dealings concerning the purchase, through Australian companies, of properties at Parramatta and Burwood in Sydney for redevelopment purposes. Mr Mao became a fifteen per cent shareholder in the Burwood project.

6. The ¥11 million payment which is the subject of Mr Mao’s claim was made in April 2011. By mid-2011 the relationship between the two men was under strain. Mr Bao’s remittances for the Vaucluse property ceased in October. All communication ceased in 2012.

7. In 2007 and 2008, Mr Mao had obtained increases in the NAB loan facility and had drawn down the funds, largely, if not entirely, for his own benefit. According to Mr Bao, he was unaware of this at the time. After the final rupture between the parties in 2012, Mr Mao ceased to make payments on the loan. The NAB conducted a mortgagee sale of the property in 2014. The net proceeds amounted to $3.260 million, less than the amount outstanding under the loan.

8. Mr Mao commenced these proceedings as plaintiff in late 2016. He alleged that the ¥11 million payment was a loan to Mr Bao which carried interest at two per cent per month. Mr Mao allowed a credit for $800,000 (¥5.2 million at the then exchange rate) received from the Burwood development company in November 2011.

9. Mr Bao’s response to Mr Mao’s claim has developed over time. His initial defence was filed in April 2017. That defence simply put Mr Mao’s allegations in issue. Mr Bao denied any loan agreement. Indeed, he did not even admit that he had received the ¥11 million from Mr Mao.

10. When the time came for Mr Bao’s affidavit evidence to be filed, his case expanded. Mr Bao alleged that the ¥11 million payment was not a loan but a part-payment by Mr Mao pursuant to an earlier agreement between the parties that Mr Mao would buy Mr Bao out of the Vaucluse property. In June 2018 Mr Bao’s defence was amended so as to reflect these allegations.

11. On Mr Bao’s case, the ¥11 million had only partly discharged Mr Mao’s obligations under the alleged purchase agreement. But it was not until later in 2018 that a cross-claim was foreshadowed. The proposed statement of cross-claim pleaded a case of breach of contract. Anticipating a defence based on the statute of frauds, it also included an alternative claim for restitution.

12. By this time Mr Bao had obtained access to documents from the Land Titles Office and from the NAB. On the basis of those documents, further claims were included in the proposed cross-claim. Those claims were independent of the claim based on the alleged agreement. It was alleged that Mr Mao received the remittances, and held the Vaucluse property, as trustee, or fiduciary agent, of Mr Bao. The claims included allegations of breach of trust (or breach of fiduciary duty; for simplicity, I will refer only to breach of trust in the description which follows).

13. First, Mr Bao alleged that not all of the money remitted in 2004 was actually applied to the purchase of the property. The sum of $480,000 was unaccounted for, which Mr Bao alleged Mr Mao must have stolen. Mr Bao next claimed $1.226 million as monies received by Mr Mao from the drawdowns in 2007 and 2008. In each case, this was said to have been a breach of trust. Thirdly, it was alleged that Mr Mao’s conduct in allowing the NAB to sell the property was both a breach of contract and a breach of trust.

14. On behalf of Mr Mao, objection was taken to the introduction of these claims by way of cross-claim in the proceedings. Any cross-claim should have been filed at the same time as Mr Bao’s defence, and Mr Bao therefore needed an extension of time from the Court. That extension was resisted by Mr Mao.

15. The ground, or one of the grounds, for resistance was that limitation periods had expired in the meantime. Once the cross-claim had been filed, for limitation purposes the claims in it would relate back to the commencement of the proceedings (see Limitation Act1969 (NSW), s 74, set out at [367] below). On Mr Mao’s behalf it was contended that the Court should only allow the extension of time on terms that the cross-claim would operate for limitation purposes from the date on which it was filed. It was agreed between the parties that this question would be reserved for determination by the trial judge, and in November 2018, consent orders were made for the filing of the cross-claim on that basis.

16. As a result, the state of play when the case came on for hearing in May last year was as follows. Mr Mao maintained his claim for the balance of the ¥11 million, plus interest at two per cent per month. Mr Bao’s defence to this 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, Mr Bao contended that, if the payment was a loan, it was a loan to the Parramatta development company and not to him personally.

17. On his cross-claim, Mr Bao sought judgment for the total amount remitted (said to be $3.45 million), based on breach of contract (or breach of trust). Alternatively, Mr Bao sought judgment by way of restitution in that sum, less the ¥11 million paid by Mr Mao in 2011. Mr Bao also sought judgments against Mr Mao for breach of trust in the sums of $480,000 and $1.226 million.

18. In his defence, Mr Mao denied the alleged purchase agreement. In response to the restitution claim, he alleged that he had applied the remittances by Mr Bao to the purchase of the property and the making of loan repayments. Mr Mao denied misappropriating the $480,000 remitted in 2004 for the purchase of the property. He admitted that he had drawn down $1.226 million from the loan increases in 2007 and 2008, but alleged that some of the monies had been applied to making loan repayments, or otherwise for Mr Bao’s benefit, and should be set off. Mr Mao denied liability for any loss suffered as a result of the mortgagee sale; he alleged that the sale was Mr Bao’s responsibility because he had ceased to make remittances to cover the loan repayments.

19. As foreshadowed, Mr Mao also contended that the claims were statute barred. In reply, Mr Bao disputed that this was so. In particular, it was contended that one of the limitation periods upon which Mr Mao relied only began to run when Mr Bao discovered, or might with reasonable diligence have discovered, the cause of action: Limitation Act 1969, s 47(1)(e). Furthermore, other applicable limitation periods were extended because Mr Mao’s conduct amounted to fraud or fraudulent concealment: s 55. There was also the issue about the relation back of the allegations in the cross-claim.

20. The hearing took place over five days between 25 and 29 May 2020. At the end of the hearing, issues arose as to how, if Mr Bao’s claim concerning the additional mortgage drawdowns succeeded, the amount due would be quantified. Counsel for Mr Bao accepted that Mr Bao was still responsible for ongoing interest to the extent of the $2.275 million originally borrowed with his approval.

21. Counsel also raised further claims based on evidence given at the trial. Mr Mao’s ex-wife gave evidence in cross-examination that she spent the missing $480,000 (she said she paid $400,000 to two other real estate agents involved in the transaction and kept the other $80,000 for herself). Evidence also emerged of Mr Mao having received rent monies from a tenant he put into the property in 2011. Eventually counsel foreshadowed an application to amend the cross-claim so as to seek, in the alternative to specific sums by way of equitable compensation, the taking of a full account of all the monies paid over by Mr Bao or derived by Mr Mao from the property.

22. Unfortunately, this resulted in a protracted delay. Mr Bao’s amendment application was opposed by Mr Mao. His contention was that the further claims and new prayers for relief were statute barred. Mr Bao countered that the subject matter of the amendments could not with reasonable diligence have been discovered before they emerged at the trial (or, at least, before the proceedings were instituted). Mr Bao also expanded his plea of fraud and fraudulent concealment.

23. For Mr Mao it was contended that the claims could, and should, have been raised earlier. It became apparent that if the amendments were permitted, that would give rise to further factual issues which would require both parties to reopen their cases. In itself, this was, so it was submitted, sufficient to refuse the application on discretionary grounds. For similar reasons, it was contended that if the Court would otherwise have been inclined to allow the amendments, they should only operate from the date on which they had been notified. Should the Court take that view, it was contended, the claims would be clearly out of time and therefore leave should be refused in any event.

24. Following a hearing on 1 September, I decided to allow Mr Bao to amend his cross-claim even though it would require a reopening. I directed that an amended statement of cross-claim, and a defence, be filed, reserving leave to Mr Mao to apply to disallow any amendments to the statement of cross-claim which went beyond those foreshadowed in Mr Bao’s application. I also reserved for the final hearing the question about the relation back of the amendments.

25. The amended pleadings were filed. Mr Bao’s statement of cross-claim was amended to include the foreshadowed claim for a full account, and to make specific claims for the rental monies allegedly received by Mr Mao. The defence disputed the further claims on the merits, and pleaded limitation defences to them and to the claim for an account. The defence also pleaded the defence of laches to the equitable claims. On behalf of Mr Bao the application of the limitation and laches defences was disputed, including by reliance on s 55.

26. No application was made on Mr Mao’s behalf to have any parts of the amended statement of cross-claim struck out. The parties agreed a timetable for the preparation of supplementary evidence.

27. But after that evidence had been prepared, an application was made on behalf of Mr Mao to reagitate my decision to permit the amendments. I was asked to set aside the orders I had previously made. The parties agreed that there should be a formal hearing of this application, which took place on 16 March this year.

28. In presenting the application, counsel for Mr Mao proceeded on the basis that my orders permitting amendment had been made on a provisional basis, so that they could be reconsidered once the revised pleadings and new evidence had been analysed. That was not reflected in the terms of my orders last September, and I am not sure that it is what I intended. But counsel for Mr Bao did not object and I dealt with the application on its merits.

29. I decided to reject the application and reaffirm the approach I took last September. Set out below are the reasons which led me to this conclusion. I was influenced by five main factors.

30. First, it had become quite clear (and it was clear by the end of the hearing in May last year) that if Mr Bao’s claims succeeded, some sort of accounting process would be required, covering at least the mortgage drawdowns and the subsequent dealings on the NAB loan account. It would have been unfair to Mr Mao to order compensation in the full amounts drawn down when the evidence showed that at least some of the monies were not spent for his benefit. Equally it would have been intolerable to refuse relief entirely because Mr Bao failed to prove an entitlement to the whole of the drawdown sums. While Mr Bao’s legal advisers could be criticised for failing to appreciate the need for an account earlier, it was clearly in both parties’ interests that if the Court was to grant any relief, it should be the proper relief.

31. Second, there was clearly a substantial case that Mr Bao did not know about the $480,000. Senior counsel for Mr Mao himself described Mr Mao’s ex-wife’s evidence in cross-examination as having “come out of left field”. Whether Mr Bao could with reasonable diligence have found out about the payments might have been debatable. But the issue could only be properly decided by looking at the evidence as a whole, including evidence from Mr Bao himself. The same observations applied to Mr Bao’s attempt to invoke s 55. It was not possible on the papers to dismiss Mr Bao’s claims as being statute barred.

32. Third, Mr Mao’s laches defence gave rise to the same considerations. That too was going to require evidence, including, it would seem, from Mr Bao. This defence also could not be determined on the papers.

33. Fourth, there might have been stronger arguments against permitting Mr Bao to claim the rental monies. But once the conclusion had been reached that at least some of the amendments should be permitted and a reopening should take place, the convenient course was to deal with all of the further claims in that way.

34. Fifth, there was force in Mr Mao’s discretionary argument based on the protracted delays in the proceedings up to May last year. But this argument arose out of essentially the same factual background as would be canvassed in reopening. By permitting the amendments I was requiring Mr Mao to face a further hearing which he said was unjustified. Orders for costs would go some way to curing the prejudice, but not the whole way. Nevertheless it was still open to Mr Mao to rely on essentially the same discretionary grounds to argue that the limitation dates should run from the date of the amendment, and thus defeat, or arguably defeat, the claims. On balance, the prejudice to Mr Mao was not a decisive factor.

35. In these circumstances, I considered that the objectives set out in s 56 of the Civil Procedure Act 2005 (NSW) (“CPA”) were best reconciled by allowing Mr Bao’s cross-claim to proceed in its amended form. At the same time, there were some deficiencies in the statement of cross-claim and I directed a further round of pleadings. I fixed the further hearing before me on 1 and 2 July. Later it proved possible to move the hearing forward to 18 and 19 May.

Summary and analysis of evidence

Chronology of events

36. Mr Mao was originally from Ningbo in China. He was born in January 1959, and so was 44 or 45 years old in late 2003 or early 2004 when the dealings between the parties which are the subject of these proceedings began.

36. At the time, Mr Mao was living in the Sydney suburb of Earlwood with his ex-wife, Zhang Xiaomei. They had divorced in August 1999 but continued to live under the same roof.

37. Mr Mao has been an Australian citizen since 1998. His business, or his main business, is exporting Australian food and wine to China. In the course of this business he makes frequent visits to China.

38. Mr Bao and his wife, Qiu Chunyue, are also from Ningbo. They are a few years younger than Mr Mao. Mr Bao was born in February 1966 and Ms Qiu was born in December 1967. Mr Bao was thus 36 or 37 years old when the dealings between the parties began.

39. Mr Bao is a builder and property developer who specialises in residential properties in Ningbo. He operates through companies which are either wholly owned or majority owned by himself or his wife. According to Mr Bao, he has been very successful financially. In his affidavit he stated that in 2015 his income from property development was approximately ¥100 million, or $20 million.

40. The parties first met in Ningbo in 2002 or 2003 when Mr Mao was on one of his visits to China. Mr Bao and Ms Qiu were interested in establishing a home in Australia. In late 2003 or early 2004 they visited Australia and met up with Mr Mao and his ex-wife, Ms Zhang (who apparently had some contacts among Chinese real estate agents). Mr Bao wanted to buy a property in Black Street, Vaucluse. The property was apparently a townhouse, but a very extensive one. It is said to have had eight bedrooms, eight bathrooms, two garages and a downstairs flat.

41. There is no written evidence of the deal struck between the parties, but it appears to have been agreed that the property would be purchased in Mr Mao’s name, but for Mr Bao’s benefit. Mortgage finance was obtained in Mr Mao’s name for $2.275 million on the basis that Mr Bao would provide the additional funds required to complete the purchase and to cover the ongoing interest and holding costs.

42. The funds for the purchase were provided by Mr Bao to Ms Zhang via an internet organisation called KVB Kunlun (see Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2021] NSWSC 614 at [81]-[84] for a description of how KVB Kunlun operates). Between March and May 2004 Mr Bao sent ¥12.6 million (equating to $2.1 million) to Ms Zhang by this means.

43. The purchase was completed on 27 May 2004. A total of $2.275 million was drawn down from the NAB. In order to complete the purchase, the additional sum of approximately $200,000 was borrowed from Ms Zhang’s mother, Xia Zheng Bao.

44. The NAB loan was established as a loan account together with an associated offset account, the credit from which was set off against the principal owing on the loan for the purpose of calculating interest. Monthly loan repayments were, for most of the period, automatically debited to the offset account.

45. To cover the loan repayments, and other costs such as council rates, Mr Bao sent remittances on an as-required basis, typically every few months. The first payment was made on 8 June 2004. The initial remittances were made in cash, often to Mr Mao when he was visiting China. Later remittances were made by direct credit to Mr Mao’s offset account.

46. In October 2007 the loan facility was varied so as to increase the limit by $950,000 to $3.25 million. At this point the amount drawn on the loan had been reduced to about $2.205 million. The capital repayment of about $70,000 was redrawn, with the result that Mr Mao received (after payment of fees) approximately $1.41 million. Of this, $200,000 was used to repay Ms Xia. About five months later, in March 2008, the loan facility was further varied to increase the limit by $190,000 to $3.44 million. A further $181,000 was drawn down by Mr Mao.

47. According to Mr Bao he was never told about these borrowings. I discuss the evidence about the borrowings in more detail below. One thing which is clear is that Mr Mao appropriated most of the resulting funds, apart from the money used to repay Ms Xia, for his own use. Mr Bao received no benefit from those funds.

48. Early in 2009 Mr Bao and Ms Qiu obtained residency visas for Australia. In April or May they bought a house at Balwyn in Melbourne and established a home there. They also bought (apparently so as to satisfy their visa requirements) a winery in rural Victoria.

49. At about the same time as they bought the house in Balwyn, Mr Bao and Ms Qiu established an Australian company, Guang Tian International Group Pty Limited (“GTIG”). Its issued share capital was $100,000, with Mr Bao holding forty per cent of the shares and Ms Qiu sixty per cent. Mr Bao and Ms Qiu were also the directors.

50. Once Mr Bao had bought the house in Balwyn, Ms Qiu began making some of the regular payments for the Vaucluse property on his behalf, and there seems to have been contact between Mr Mao and Ms Qiu for this purpose. By 2010, payments were being made approximately monthly. There seem to have been other dealings between the parties as well, involving liquor purchases, but the evidence does not contain any details about them, and generally speaking they seem to have been kept separate from the payments for the Vaucluse property.

51. In the first half of 2010, Mr Bao visited Sydney on several occasions (accompanied by Ms Qiu) looking for property to invest in. Mr Mao put Mr Bao in touch with contacts of his for this purpose. In June 2010 Mr Bao looked at a property in Parkes Street, Parramatta (referred to in the evidence as the “Harris Park” site), for development purposes. On 28 July GTIG exchanged contracts on the purchase of the property. The price was $2.92 million and the purchase was completed in August.

52. Mr Bao appears to be an enthusiastic gambler. When in Sydney he would gamble at the Star City Casino at Darling Harbour. Star City’s records for Mr Bao from 1 July 2010 to 31 October 2011 are in evidence. They show visits to the gaming rooms over 92 days between the first visit on 16 July 2010 and the last visit on 28 April 2011. During these visits Mr Bao would deposit $50,000 a time, and sometimes more, to gamble with.

53. Although the Vaucluse property would appear to have been available at least until it was let in March 2011 (see [62] below), Mr Bao seems to have preferred to stay at the Casino itself. At one point he was prevented from staying at the Casino over an incident there, during which time he moved to a hotel nearby so he could continue to gamble at the Casino.

54. As well as taking on the Harris Park project through GTIG, Mr Bao also became interested in a development site at Wynne Avenue, Burwood, which was being sold by Burwood Council. Also involved were Mr Mao and Doan Ngat, a Vietnamese businessman who was an acquaintance of Mr Mao. Contracts were exchanged with the Council to buy the property on 12 August 2010. The purchase price was $24.75 million.

55. The vehicle used for the purchase was a company called Bond Varsity Lakes Complex Pty Limited. That company had originally been Mr Doan’s: it was incorporated in February 2010 with Mr Doan holding all of the shares then on issue and being the sole director.

56. The deal between the three participants was that Mr Bao would have seventy per cent of the Burwood project, and Mr Doan and Mr Mao fifteen per cent each. Additional shares were issued by Mr Doan’s company so that the shareholdings were in these proportions. Mr Bao and Mr Mao were appointed as directors, and the company’s name was changed to Burwood Central Square Pty Limited (“BCS”).

57. It was also agreed that the parties would contribute the $2.475 million deposit, and in due course the balance of the purchase price, in accordance with their shareholdings in BCS. Mr Mao’s fifteen per cent share of the deposit was $371,025. There is a factual dispute about whether Mr Mao actually contributed this amount from his own monies; Mr Bao claims that he put the money in for Mr Mao as a loan to him. I will refer to this in more detail below.

58. BCS experienced difficulties in raising the funds necessary to complete the purchase. On 26 October, Burwood Council issued a notice to complete requiring payment to be made by 10 November. At this point, Mr Doan pulled out of the project. He sold his 1,500 shares in BCS to Mr Bao, who now had eighty-five per cent of it.

59. BCS was unable to complete on 10 November, but an extension was agreed with the council to 25 January. In the meantime, on 10 January, Mr Mao became a director of GTIG. According to his evidence, he was asked to do so by Mr Bao because of the need to have a resident director.

60. BCS was still unable to complete the purchase on 25 January. The purchase date was extended to 8 March, then to 30 March then to 8 June.

61. Meanwhile, Mr Bao had been late with some of the regular monthly payments on the Vaucluse property. On 28 March, Mr Mao leased the property to a tenant, Mr Matthew Eaton. The rent was about $8,700 per month. A formal residential tenancy agreement was entered into, beginning on 28 March 2011 and extending for twelve months.

62. Two days later, on 30 March, Mr Mao obtained a signature from Mr Bao on a handwritten document in which Mr Bao undertook that, in the event of termination of the contract for the purchase of the Burwood site, he would accept responsibility for all resulting “debts and compensation claims”. The date of this document coincided with BCS’ failure to complete on that day. On the following day the Council formally agreed to an extension until 20 April.

63. According to Mr Mao, the indemnity document was signed by Mr Bao at the office of a solicitor, Mr Carl Ku, who was acting for Mr Bao (and BCS). This was not disputed by Mr Bao or Mr Ku. Mr Ku in fact acts for Mr Bao in these proceedings.

64. The payment of ¥11 million, which is the subject of Mr Mao’s claim in these proceedings, was made twelve days later, on 11 April 2011. The payment was made by Mr Mao from a Chinese bank account of his to a bank account of Mr Bao, also in China. Mr Bao and Mr Mao appear to have both been in China at the time.

65. According to Mr Mao this payment was made as a loan to Mr Bao following an agreement which had been made in Australia shortly beforehand. Mr Bao’s version of events was quite different. He said the payment was made by Mr Mao in effect to buy out his (Mr Bao’s) interest in the Vaucluse property. I deal with the evidence on this issue in more detail below.

66. BCS again was unable to complete the purchase on 20 April. This resulted in a further extension granted by the Council to 8 June, but that date was not met either.

67. By now the relations between Mr Mao and Mr Bao appear to have become strained at best. On 18 July Mr Mao notified the Australian Securities and Investments Commission (“ASIC”) that he had ceased to be a director and secretary of BCS. On 26 July, he prepared a memorandum of agreement between himself and Mr Bao. The memorandum provided that Mr Mao would transfer his fifteen per cent share of BCS to Mr Bao, would resign as secretary, would cease to be a signatory on the company’s bank accounts, and would be refunded the $371,250 paid towards the deposit. The memorandum also confirmed a promise by Mr Bao to repay the ¥11 million.

68. Mr Mao dated the memorandum 27 July and signed it. It was however never signed by Mr Bao. According to Mr Mao, he showed the memorandum to Mr Bao in China and Mr Bao put him off on the basis that a more formal document should be drawn up in Australia in due course. Mr Bao denies this conversation and contends that he was never shown the document or asked to sign it. I address this conflict in the evidence as part of my analysis below.

69. BCS still proved unable to complete the purchase of the Burwood property. On 27 September the Council sent a further notice to complete which was not complied with. On 12 October the contract was formally terminated and the deposit forfeited.

70. BCS had earlier established a term deposit of $860,000 with the NAB, apparently as a condition of the NAB providing a finance facility for the purchase of the Burwood property. On 18 November the term deposit was redeemed, with the principal and accrued interest, totalling $894,000, being transferred to BCS’ operating account. On 22 November $800,000 was transferred from the operating account to a company called Five Links International Group Pty Limited (“Five Links”), which belonged to Mr Mao. At the same time, four payments were made from the operating account for expenses associated with the project.

71. According to Mr Mao, the $800,000 transfer was agreed between himself and Mr Bao as part repayment of the ¥11 million borrowed by Mr Bao in April. Mr Bao denies that he ever agreed to the transfer, and says it was made without his knowledge or approval. Again, I discuss this conflict in the evidence when resolving the issue as to the true nature of the April payment, below.

72. The withdrawals of the $800,000 and the other expenses left BCS with only $1,600 in its bank account, and the account was closed on 29 November. Nothing further appears to have been done with the company, and it was eventually struck off in May 2013.

73. Meanwhile, the monthly payments by Mr Bao on the Vaucluse property ceased. The last payment occurred at the end of October 2011. Mr Mao sent text messages about this to Ms Qiu and Mr Bao, to which there was no reply. Over the months of December, January and February Mr Mao paid a total of $54,000 from his own money into the offset account. He also started to have the rent payments being made by Mr Eaton deposited directly to that account.

74. At this stage, Mr Mao had possession of the certificate of title for one of the parcels of land making up the Parramatta property which had been acquired by GTIG in August 2010 (see [52] above). The certificate had been provided to him on Mr Bao’s instructions, apparently for safe keeping. On 13 February 2012, Mr Mao lodged a caveat over the parcel. The caveat claimed an interest in the land in the nature of an equitable mortgage by a deposit of title deeds as security for monies (unspecified) allegedly borrowed from Mr Mao by “the registered proprietor”.

75. According to Mr Mao, he was later asked by Mr Ku to return the certificate. Mr Mao then gave it to Mr Ku on the assurance that it would be returned, but it was not. This evidence was not contested by Mr Ku.

76. On 23 February Mr Bao placed a caveat on the Vaucluse property. The caveat was lodged by Mr Ku on Mr Bao’s behalf. It claimed an equitable interest in the property. It alleged that the property had been “purchased by” Mr Bao and that Mr Mao as registered proprietor held it on trust for Mr Bao.

77. On 9 March, Mr Mao emailed a letter to Mr Ku complaining about Mr Bao’s conduct. He called on Mr Bao to repay the remainder of the ¥11 million together with his $371,250 deposit on the Burwood property, and $2 million representing his loan on the Vaucluse property (the loan balance at the time was actually over $3 million, owing to the additional borrowings by Mr Mao).

78. On 12 April, an application was made to the Registrar-General to issue a lapsing notice against Mr Mao’s caveat on the Harris Park land. It appears that the notice was issued and the caveat was removed. Mr Mao said that he was in China for an extended period at the time and the lapsing notice did not come to his attention.

79. The lease of the Vaucluse property to Mr Eaton had expired at the end of March 2012. On 2 May, it was renewed for a two year period at a rent of $9,125 per month.

80. In the meantime, Mr Mao had stopped paying monies into the offset account. The loan payments on the Vaucluse property had fallen into arrears of approximately $39,000. On 7 May, the NAB issued a formal demand and notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW).

81. By now Mr Mao saw himself as the victim of a fraud which had been perpetrated by Mr Bao. On 28 June he complained to the police and signed a statement detailing his complaints against Mr Bao.

82. Mr Mao did not dispute the NAB’s enforcement action with respect to the Vaucluse property. On 20 July he submitted a hardship request form in which he asserted that he had been defrauded of about $2 million in 2011, and invited the bank to sell the property.

83. On 30 August, the NAB began possession proceedings. The proceedings were not defended by Mr Mao but they were defended by Mr Eaton, who sought to remain in occupation of the property in accordance with his tenancy agreement.

84. Judgment was given against Mr Mao for $3.42 million in December 2012 but it was not until September 2013 that a writ of possession was finally obtained. Then in February 2014, a last-minute caveat was lodged by Ms Zhang. It was lodged in the name of her mother, Ms Xia, and asserted that $200,000 which she had lent had not been repaid.

85. This did not in the end stop the sale which took place in March 2014. On 5 May the proceeds of settlement of the sale ($3.26 million) were received and on 27 May the bank closed off the loan account. There was a shortfall of $338,000. It seems that the bank has never pursued Mr Mao for this amount.

86. According to Mr Mao, when he visited China in March and April 2012, he consulted a lawyer there about Mr Bao’s conduct but was told that he would need to take action in Australia. It was not until June 2016 that Mr Mao’s current solicitors sent a letter of demand to Mr Bao. Mr Mao’s statement of claim in these proceedings is dated 1 November but it was not filed until 29 December 2016. I have set out the course of the proceedings thereafter in the preceding part of this judgment.

Witnesses

88. At the hearing in May last year, the witnesses in Mr Mao’s case were Mr Mao and Ms Zhang. Both of them were cross-examined on their affidavits. Mr Bao and Ms Qiu both gave evidence in Mr Bao’s case, and were cross-examined. Mr Ku also gave evidence in Mr Bao’s case about Mr Mao’s letter of 9 March 2012 (see [78] above). He was not cross-examined.

89. At the hearing in May this year, further affidavits were read from Mr Bao in support of his cross-claim and from Mr Mao in opposition to it. There was a brief further cross-examination of Mr Bao.

90. Mr Bao and Ms Qiu do not read or speak English. All of the communications between the four witnesses who gave evidence took place in Chinese. All four of the witnesses gave evidence through interpreters.

91. The witnesses were giving evidence years after the event about dealings which had largely been oral, with all of the frailties which that entails. In particular the witnesses could not be expected to be able to recall the precise words which were used in their conversations, and any evidence they did give about those conversations therefore involved the risk of misinterpretation. This risk would have been compounded by the need to translate the witnesses’ evidence about conversations which were originally in Chinese into English.

92. The conditions under which the witnesses gave their oral evidence were challenging. All of the witnesses gave evidence remotely. Mr Mao and Ms Zhang were accompanied by an interpreter, but Mr Bao and Ms Qiu gave evidence from China with a remote interpreter in Australia. Naturally this made the task for the interpreters even more difficult than usual. I am sure the interpreters were doing their best but there were occasions on which I was informed through counsel that the lawyers on one side or another (who were bilingual) thought that the translation of questions or answers left something to be desired.

93. Ms Qiu’s evidence was peripheral and her cross-examination was brief. No challenge was made to her credit. But the credit of the other three witnesses was challenged at various points in cross-examination and some of the challenges were pursued in final submissions.

94. It is easy to understand why these challenges were made. As relayed by the interpreters, there were instances of answers which were non-responsive, sometimes repeatedly so. There were also contradictions between answers given orally and earlier affidavits and oral evidence.

88. These difficulties were particularly pronounced in the case of Mr Bao, whose cross-examination was the most extensive. Counsel took up some of his challenges with Mr Bao, putting to him on some occasions that he was refusing to answer questions and on other occasions that evidence he gave which contradicted earlier evidence was false. But the limitations in the process made it very difficult to be satisfied that this was deliberate, as opposed to being the result of difficulties in the translation process (or, in the case of contradictions between the oral evidence and the affidavit evidence, in the translation given to Mr Bao when he made the affidavit).

89. As will be seen, I have preferred Mr Mao’s evidence (supported in some instances by Ms Zhang) to that of Mr Bao on the key factual issues in the case. 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.

90. As I have indicated, 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.

Nature of ¥11 million payment by Mr Mao

98. Documentary evidence: Although there are bank records which confirm the making of the payment in April 2011, there are no contemporaneous records of the dealings between Mr Mao and Mr Bao which led to that payment. The first written record which refers to it is the memorandum of agreement prepared by Mr Mao on 26 July 2011 (see [68] above).

99. The memorandum identified the parties as Mr Bao (Party A) and Mr Mao (Party B). The parties were identified by reference to their passport numbers and telephone numbers (presumably mobile numbers). Mr Bao’s passport and telephone number were Chinese. Mr Mao’s were Australian.

100. The operative provisions of the memorandum were (according to the translation provided; emphasis added):

1. Upon the agreement of Party A, Party B will proceed with the registered equity transfer of the real estate development company originally established for the two lots, transferring 15% equity of Burwood Central Square Pty Ltd to Party A and resigning his position as the secretary of the company. Hereafter, Party B will not own any entity in the cooperation of Party A and correspondently spare [sc will be spared] all the relative responsibilities and obligations.

2. The Agreement shall come into effect upon signing by both parties, after which Party A shall refund AU$371,250.00 invested by Party B within several days.

3. When the Agreement is effective, B will be eliminated from the ANZ joint account of the two real estate development companies. In addition, Party B will not undertake any related financial or taxation responsibilities and obligations.

4. Upon withdrawing from the Company, Party B shall not seek any possible profits or distribution which might be gained during the later term of the two real estate development projects and not liable to any loans or creditor's rights regarding to the Company's operation.

5. Party A shall keep his original promise and repay RMB 11 million to Party B which was lent by Party A [sic] upon Party B's [sic] request, within several days after the Agreement coming into effect (See the bank transfer voucher as evidence). Considering there is a cost for Party B's funds and Party B will not be involved in the two projects due to reasons of other than Party B's, Party A shall pay at a monthly interest rate of 2% as a return for the funds cost. Party B expects that Party A could repay the loan and the interest to Party B in a short time.

   101. On 16 August Mr Mao sent Mr Bao a text message stating (in translation):

It's been changed again and again at your side. Until when do you intend to drag it? I would not keep waiting in such endless and boring manner. Yes, to this day, I won't kindly persuade you to stop gambling as a friend, as I am not that low. It's also not necessary.

I just want to take back what belongs to me. I have my own business and my own choice for doing investment. I also need to support my family. I am absolute not liable for the current situation of Burwood project. I am just a victim and my time was wasted for nearly a year. I think you should be clearer about it. Public opinion is the best judge.

As a partner, I have done my part of job. It's totally the choice of you in deciding to do the Parramatta and Burwood projects. You cannot blame others. Did you know why the Vietnamese [Mr Doan] determinedly withdrew?

I have said enough. It's meaningless now. I just want you to give my investment amount back to me by September, including the interests per months. I will use this money to make other investments. I trust you can't go so far as to harm your friends. with no reasons considering your character and conduct. I also hope there are no other results happening between us. As it's a reasonable requirement from me which is also the amount payable by you, there should be no problem for you to pay it based on your strength.

I am looking forward to your prompt reply.

102. On 20 August 2011 Mr Mao sent Mr Bao a text message stating (in translation; emphasis added):

If it's not for the loan between you and me, I would have not sent you this message.

There is no need to elaborate the reason for ending our cooperation at the end of March upon agreement. I am planning to invest coal business in Inner Mongolia with my friends in China. … We have pumped 10 million [sc RMB] into the project already. By the end of August, another 14 million needs to be pumped in from our side. I was supposed not to have financial pressure if you had returned me the money. I feel pity for your financial situation and won’t push you too hard. We have been friends for over [illegible] years after all. So, I suggest you prepare [sc pay] half of this amount, i.e. 7 million and I will solve the other half in other ways. It should not be unreasonable request for you. You would be able to make it based on your strength. I trust that you would not make me to break my promise in front of my partners in China and give me a dilemma, right? As to the balance, I agree with your suggestion about settling it by November.

Hope you could understand and give support.

103. Following the payment of $800,000 from BCS to Mr Mao’s company, Five Links, on 22 November (see [71] above), Mr Mao sent a text message to Mr Bao on 6 December stating (in translation; emphasis added):

I replied you in the morning. Please ask someone else about the refund and law suit. I will stop my involvement in this from now on and it's not related to me either for its cause or outcome. You promised to repay me RMB and the interest by the end of November, but today is already 6 December. I trust you, but I have my arrangement for the money for a long time. I could provide some help again with your matters in Melbourne. Meanwhile, I ask you to solve my RMB issues. You have arrangement for your money, so do I.

I hope you could make a one-time settlement.

104. Also in evidence are three further text messages from Mr Mao to Mr Bao which stated (in translation; emphasis added):

13 December 2011:

Tony, who helped with your Parramatta building construction, called me several times and came to me yesterday. He said many people were pushing him and you. There is no insurance for the construction site for a long time. The site is full of puddles and garbage. Serious collapse occurred at the piling. The people of the neighborhood and the Council are looking for you. l suggest you'd better to face it. Once it's getting serious, I am afraid it may cause other effects. I have remitted the AUD800,000 returned [sc from the BCS term deposit] to China. As I said, I also have arrangement for my money. l heard from your wife that you have not paid the loan for your house in eastern Sydney. l have paid the bank penalty for you several times for nothing. If the loan is failed to pay for over three months, the bank will arrange an auction. Considering the downturn of the luxury house market in Australia recently, it'll bring a huge loss.

10 January 2012:

In the past days, I have balanced the books with Xiaoyan Shi for the wine cost. Guang Tian should have a settlement for A$350,000. A$75,000 is payable to the wine plant. Deducting the refund from the bank last time [sc the $800,000 from the term deposit], I want to know the when you could pay the balance duly refunded [sc refundable] by you to me. I have given enough understanding ethically. I cannot wait endlessly anymore. What is your plan for the loan of the house in eastern Sydney? The bank is keeping sending me letters for inquiring about it. If it's dragged like this, my reputation will be damaged.

29 January 2012:

How is it going? Have you arrived in Australia? I have been waiting for your message. You delayed it again and again. As I understood your situation, I patiently waited until the Chinese New Year. But we have to settle our books. I believe you are a man who keeps his promise. The Letter of Commitment signed by you [on 30 March 2011, concerning the Burwood project: [see [63] above] was still kept by Attorney Ku. I won't leave it for nothing. I have paid two months for the housing loan and soon it will be payable for another month. What do you want? How long and how much you will drag me down? I won't bear it for too long.

105. I have already referred to Mr Mao’s caveat on one of the Harris Park properties which was lodged on 13 February 2012 (see [75] above) in which he claimed money was owing by the “registered proprietor” (that is, GTIG). The loan issue was also raised in Mr Mao’s letter to Mr Ku of 9 March 2012. Mr Mao stated (in translation; emphasis added):

This is my opinion and principled stand on how to deal with those debts. If necessary, my solicitor will discuss details with you.

1. Before I deal with previous related matters with Mr Linchun Bao, he must settle the payable balance of the ¥ 11 million (Bank transfer statement is available) that I transferred to him in April 2011 including the 2% monthly interest of this ¥ 11 million. (It is requested by him and he also wrote a letter of commitment). He received 2.5% of the monthly interest from others. My capital also has a cost. I charge him 2%, which is absolutely justified and reasonable.

2. Mr Linchun Bao must first return the $371,250 that I paid in proportion to my original shares for the "B" plot project (or offset the amount of money of liquor he exported). The reason and facts for the project's failure are obvious to all and have nothing to do with me. I have prepared the record of all legal proceedings and will not repeat them here today. Because his capital was not in place all the time and countless postponements caused by his wild gambling, the project was finally terminated by Burwood City Council and the land was reclaimed. Why did I transfer ¥ 11 million to him at the beginning by his request and promise? At the beginning, I also believed the assurances he gave me many times. He said that he was not in financial difficulty and the money was only a matter of time. I also wanted to complete the project wholeheartedly. Today, I have no obligation to accompany him to bear any unwarranted consequences, and I have his letter of commitment in writing. I also hope that you will keep the original written by him from the legal point of view. Today, he made irresponsible and untrue statements, which even made me unable to trust a gambler. (I had no intention to evaluate other people's private behavior). Today, he wants to rely on me, including his unreasonable demand that I share with him the interest penalty he pays to the Burwood City Council because his funds are not in place. This is just his unreasonable wishful thinking.

3. Regarding debt problems related to the property, Linchun Bao must pay off my bank loan of $2 million and my money paid to Home Loan Repayment. Then I can make a deal and a decision regarding the sale of the property. Because of the above debt of ¥ 11 million yuan and interest payable, I am very tired of the repeated failure of recovery since July last year. At the same time, it also affects and disturbs my other investment plans. I can no longer trust him. He has repeatedly lied and delayed. Today, I can only seek notarization [clarified by the interpreter at the trial as meaning “justice” or “recourse”] through legal means.

…

1. If the above debts are settled by Mr. Linchun Bao according to the agreement, I have the obligation to settle the balance of payment for exported red wine that Guang Tian made part of payment previously due to some reasons, the balance of design fees for Parramatta Project and all balance settlement. Meanwhile I will distinguish which the new design cost is in the later period. I will not bear the additional expenses in the later period.

…

1. I reserve the legal right to claim debt recovery and compensation from Mr Linchun Bao through legal proceedings.

These are my opinions. Please contact my solicitor if you have any suggestions.

106. Witness evidence: In the particulars to his November 2016 statement of claim (which he verified), Mr Mao alleged that the oral agreement for him to lend Mr Bao ¥11 million was reached at a meeting between himself and Mr Bao at Mr Bao’s house in Melbourne. The purpose was allegedly to assist with the Harris Park development. But in his initial affidavit, made in September 2017, he recounted a conversation between mimself and Mr Bao in Sydney, after the meeting with Mr Ku on 30 March at which Mr Bao had signed the indemnity (see [63]-[64] above).

107. In an affidavit sworn at the beginning of last year’s hearing, Mr Mao corrected himself. He stated:

The defendant and I had a conversation on 30 March 2011 at the office of his solicitor Carl Ku in words to the following effect:

Bao:   Mao, I am currently facing some difficulties with finance for the project at Harris Park. I would like to ask if you can lend my around 12 million Yuan for the purpose of funding the project. Otherwise, the project will be in great trouble.

Mao:   Well, I've gathered funds from China and originally intended for it to be used to fund the project at Harris Park, but let me check my bank account balance to ascertain how much I am able to lend to you. I'll let you know later.

Bao:   Alright. I can repay you 2.5% interest per month as this is the interest rate that I always charge. I will repay the money you lend together with all the interest on or before 1 August 2011.

Mao:   I will charge you 2% interest per month for the loan, but you must repay the money by 1 August.

On the next day, I called the defendant and we had a phone conversation with words to the following effect:

Mao:   I am able to lend you around 11 million to you for a short term. As we agreed, I will charge 2% interest per month on the loan and you will need to repay me the money by 1 August 2011.

Bao:   Ok. Thank you. I agree with the terms.

108. At the time Mr Mao was holding the certificate of title for one of the Harris Park parcels of land (see [75] above). In his initial affidavit Mr Mao stated that once he agreed to make the loan he saw the certificate of title as operating as a form of security.

109. In his statement of claim, his initial affidavit and his correcting affidavit, Mr Mao stated that Mr Bao’s purpose in making the borrowing was to fund the Harris Park project. Mr Mao’s version of the conversation, quoted above, has him suggesting that the monies might be made available out of monies he (Mr Mao) had set aside for the Harris Park project. But this seems to be incorrect; the Harris Park project was entirely being carried out by Mr Bao (through GTIG) and there is no suggestion in the evidence that Mr Mao was making any contribution to funding that project. Mr Mao’s reference must have been to the Burwood project not the Harris Park project.

110. In his cross-examination, it was suggested to Mr Mao that in his letter to Mr Ku of 8 March 2012, he had stated that the purpose given by Mr Bao for borrowing the money was to fund the Burwood project, not the Harris Park project. I am not sure that Mr Mao accepted there was a contradiction (and I do not think there clearly is). But in the end Mr Mao’s evidence left the purpose of the borrowing unclear. Mr Mao said that Mr Bao sometimes said the money was for the Harris Park project, and sometimes for the Burwood project.

111. Returning to Mr Mao’s initial affidavit, he next referred to the July 2011 memorandum of agreement (see [68] above). Mr Mao stated that he showed the memorandum to Mr Bao at a meeting in Ningbo, but Mr Bao replied:

Mao, I’ll be back in Australia soon. Perhaps it’d be better for the lawyer to prepare a formal document and for us to sign it in his office.

112. In his affidavit Mr Mao presented the $800,000 payment in November 2011 (see [71] above) as having been initiated by Mr Bao. He said that he received a call from Mr Bao and the following exchange took place:

Bao:   Mao, I am paying you $800,000 right now as my term deposit with NAB has expired. I'll repay the rest of the Loan as soon as possible.

Mao:   Alright. Just make sure you do pay me back in full together with the outstanding interest.

113. Following this, no further repayments were made, despite requests, and Mr Bao also stopped making payments towards the Vaucluse loan (see [81] above).

114. In his initial affidavit, made in March 2018, Mr Bao denied that he borrowed the ¥11 million from Mr Mao, or indeed that he borrowed any money from Mr Mao at any time. According to Mr Bao, the origin of the payment lay in the arrangement which had originally been made for the purchase of the Vaucluse property. He said that it was part of the arrangement that if he decided in the future that he did not want the property, Mr Mao would take it over and buy him out (the full version of Mr Bao’s version of the conversation is set out at [186] below).

115. On Mr Bao’s version of events, he decided not to continue with the Vaucluse property in August 2010. He said that following the exchange of contracts on the Burwood redevelopment project on 12 August, he had the following conversation with Mr Mao:

Bao:   I am now arranging funding for my share of the purchase price from China. Can you pay me back the money I paid for the Vaucluse property and your share of the deposit?

Mao:   OK, I will pay you in China but please give me a bit of time. I can't get two million on such short notice.

Bao:   Don't get me wrong, I only need it by the completion of the Burwood purchase. You will have about 4 months from now to get the money. Please pay me Renminbi in China for the Vaucluse property and the Australian dollar for the Burwood deposit.

116. According to Mr Bao, when no monies had been forthcoming, he spoke again to Mr Mao. This was shortly after he agreed to purchase Mr Doan’s share of the Burwood project in November 2010 (see [59] above). He said they had the following conversation:

Bao:   Can you repay me the money I put in the Vaucluse property? If you don't have the money, you can transfer the property back to me and I can sell it. I need that money to complete the Burwood purchase.

Mao:   Can't you arrange funds from China? I am refinancing the property and once my refinance is done, I will have the money to pay you.

Bao:   In addition to Vaucluse, where is your money for the Burwood project?

Mao:   I am still working on it.

117. Mr Bao stated that thereafter he continued to press Mr Mao for the Vaucluse property monies, but Mr Mao seemed to be avoiding him. Then, on 11 April 2011 or shortly afterwards, he received a call from Mr Mao and the following exchange took place:

Mao:   I have transferred RMB ¥11 million to your bank account in China for the house at Vaucluse. Please check if you have received the money. I still owe you some interest repayments and I will transfer that over before the end of the year

Bao:   Alright.

118. According to Mr Bao, he was also waiting for Mr Mao’s share of the monies required by BCS to complete the purchase of the Burwood site. Mr Bao stated that matters came to a head after BCS missed the deadline of 8 June 2011 (see [67] above). He spoke to Mr Mao and the following conversation ensued:

Bao:   You still haven't repaid me all the money for the Vaucluse Property. When do you intend to pay me the rest?

Mao:   I am organising it. I will finalise our accounts shortly.

Bao:   You are just a liar. I don't trust you anymore. You didn't even get your money ready when Burwood was about to settle. I have been paying all the money to Council in order to get an extension of the settlement date.

Mao:   You are a gambler. You should be ashamed of what you did. You gambled away the entire project and everyone lost money.

119. Mr Bao stated that he did not speak to Mr Mao again after this conversation. He denied ever being shown the memorandum of agreement prepared by Mr Mao, or receiving any of Mr Mao’s text messages. According to Mr Bao, he was still at the time using a phone with a numeric keypad and it could not be used (or at least he did not know how to use it) to write text messages in Chinese characters.

120. In his affidavit, Mr Bao denied that he had anything to do with the transfer of the $800,000 to Mr Mao’s company, Five Links, in November 2011. He noted that he had signed some cheques on BCS’ operating account in blank to allow for the payment of expenses. Mr Bao acknowledged that four of the payments were for expenses incurred in the Burwood project, albeit that he had never been informed by Mr Mao that the cheques were to be issued. The implication was that the fifth payment had been made (presumably by one of the pre-signed cheques) without Mr Bao’s knowledge or approval.

121. Mr Bao stated that he noticed the debits to BCS’ account on the bank statement and as a result obtained copies of the cheques. He then reported the matter to a police station “in central Sydney” but was told that the matter was a civil one and he should consult a lawyer. A few days later he had a meeting with a solicitor in the CBD of Sydney. This was not Mr Ku, who had acted for Mr Bao on the BCS transaction. In his affidavit, Mr Bao stated that he could not recall the name of the solicitor that he consulted.

122. Mr Bao said he did not take legal action at the time as he “did not have sufficient time to provide proper instructions” and that he “believed I could always pursue the money at a later time if I intended to do so”. He said he later returned to China and had “not been able to return to Australia for any significant period due to my work obligations”.

123. Mr Bao did not refer in his affidavit to Mr Mao’s caveat over the Harris Park property, or his letter of 9 March 2012. But Mr Ku confirmed in his evidence that he did receive the email from Mr Mao, although he no longer had a copy of the letter itself, which had been an attachment to the email. He continued:

I did not send the attachment to the defendant [Mr Bao]. However, it was my usual practice to inform the defendant that I received a letter and ask whether I needed to explain the letter to him. He never asked me to explain the letter or respond to it.

I have very little contact with the defendant after the time that the $860,000 term deposit with NAB was paid to the plaintiff's [Mr Mao’s] company.

I believe the defendant suspected that I was working with the plaintiff in allowing that to happen, and the defendant's wife had previously queried about why I had given the Certificate of Title for the Harris Park property to the plaintiff.

124. This evidence from Mr Ku appeared in an affidavit he made on the second day of the hearing in May last year. There was no further affidavit evidence about the letter from Mr Bao.

125. In reply to Mr Bao’s evidence about the text messages, Mr Mao stated that when he sent such messages to Mr Bao, it was Mr Bao’s practice to ring him back to discuss them rather than to send a text message in response. Mr Mao said however that he had on many occasions seen Mr Bao reading text messages he received on his phone, and sending responses. In cross-examination Mr Mao confirmed that Mr Bao would read text messages, although it was less clear whether he actually sent any himself.

126. Conclusions: In evaluating the conflict of evidence between the parties, I think there are five features of the evidence which are of particular significance. I will deal with them in turn.

127. First, the objective evidence supports Mr Mao’s contention that Mr Bao was short of money in 2011. There was unchallenged evidence from Mr Mao that work on the Harris Park site ceased and the site was left in a state of disarray. There is also the repeated failure of BCS to provide the money to settle the purchase of the Burwood property, and the eventual termination of the purchase contract by Burwood Council.

128. There is also the indemnity document signed on 30 March 2011. The indemnity is consistent with Mr Bao being under financial pressure and wishing to keep Mr Mao in the Burwood property transaction.

129. In his affidavit, Mr Bao attempted to blame the failure of the Burwood project on Mr Mao’s inability to raise his fifteen percent share, but as Mr Bao was himself responsible for the other eighty-five percent I did not find this credible. It was not put to Mr Mao in cross-examination. Nor did it explain the problems with the Harris Park project.

130. On his own admission in his affidavit, Mr Bao set $17 million aside to fund the completion of the Burwood property purchase but then lost some of it gambling at Star City. In cross-examination, it was put to him that he lost $43 million at Star City in the period up to March 2011. Mr Bao did not directly answer this but did go on to give the following, rather startling, evidence:

Q.   Well, how much do you say you lost at Star City as at March 2011?

…

A.   I haven't done the maths. I don't - I don't have the figure. So - Star City cannot give me the figure as well. But, thank you for the lawyers of the - both parties and you guys provided some figures to me.

…

Q.   You lost over $17 million, didn't you, Mr Bao?

…

A.   If you add up everything, yes.

131. The second factor is that Mr Bao’s dealings with Mr Mao in 2011 are difficult to reconcile with Mr Mao having agreed to pay Mr Bao $2 million or more for to buy him out of the Vaucluse property. Counsel for Mr Mao put to Mr Bao in cross-examination that he would hardly have signed the indemnity document of 30 March 2011 if Mr Mao owed him money, and Mr Bao appeared to accept this.

132. More important still was the fact that Mr Bao’s loan repayments on the Vaucluse property continued, even after April 2011 when Mr Mao made what, according to him, was a major down-payment on the purchase of the property. When cross-examined about this, Mr Bao could only say that he forgot to tell his wife about his deal with Mr Mao.

133. I did not find this at all credible. It is especially difficult to accept when the payments continued after Mr Mao’s statement of 6 July 2011 (see [182] below). When challenged on this in cross-examination, Mr Bao said he had not seen the statement. But this was contrary to his own affidavit, which had exhibited the document in the first place, and in which Mr Bao expressly stated that he saw it when it was sent to him.

134. The third point is that both the memorandum of agreement prepared by Mr Mao in July 2011 and the text messages from August support the existence of the loan. There was uncontested expert evidence which confirmed that the memorandum document had been created on 26 July 2011, the day before the date it bears, and that the text messages had indeed been generated and sent on the dates which they bear.

135. This in itself makes it difficult to accept that Mr Bao would not have received the text messages. Mr Bao was pressed on this in cross-examination, and denied counsel’s suggestion that he must at least have received some form of notification that the text had arrived, even if he did not look at it. I did not find this evidence very persuasive but in the end, even if it were accepted, that would have only limited significance.

136. The memorandum and the texts were written only a few months after the event and provide strong corroboration for Mr Mao’s evidence that the April 2011 payment was a loan. They also, incidentally, confirm Mr Bao’s gambling problem as being the source of the problems with the Burwood project, and in particular the cause of Mr Doan’s withdrawal (contrary to affidavit evidence of Mr Bao asserting that it was simply because Mr Doan lacked money). The messages in December 2011 and January 2012 are also entirely consistent with Mr Bao having had an ongoing obligation to finance the Vaucluse property.

137. The fourth point is that what purports to be Mr Bao’s signature appears on the 22 November transfer authorisation form which resulted in $800,000 being paid from BCS to Mr Mao. This is consistent with Mr Mao’s evidence that it was an agreed, partial, repayment of the monies advanced in April. Mr Bao had no explanation for the payment except to say that the authorisation was a forgery.

138. In the face of a purported signature by a party, that party faces a significant evidentiary onus in asserting that the signature is false: see Kunc J in In the application of Roderick Mackay Sutherland and Sule Arnautovic [2014] NSWSC 821 at [62]-[67]. There was no expert evidence to support Mr Bao’s assertion in this case, and his own evidence was unsatisfactory.

139. Mr Bao’s initial affidavit was based on the inaccurate supposition that the money had been transferred by way of cheque withdrawal. When it emerged that there had been two signed transfers (see [71] above), Mr Bao did not dispute that the signature on the transfer which terminated the term deposit and credited the proceeds to the operating account was his. It was only the second signature which he maintained was false. Of itself this demonstrated that there must have been some communication between Mr Bao and Mr Mao about the term deposit. Mr Bao did not attempt in his evidence to explain how he had been so mistaken in his affidavit.

140. Furthermore, when asked in cross-examination why he agreed to the term deposit transfer, Mr Bao said that he trusted Mr Mao. This conflicted with the evidence in his affidavit that by June he thought that Mr Mao was a liar and untrustworthy. When this conflict was put to Mr Bao in cross-examination he had no real explanation.

141. The fifth important feature of the evidence is Mr Bao’s lack of action to recover the $800,000 BCS payment (or to pursue the further money supposedly owing on the Vaucluse property). Mr Bao’s evidence that he consulted some other solicitor about the payment was surprising, when Mr Ku had acted for BCS on the transaction. Mr Bao’s evidence of the consultation was unimpressively vague and his excuses for not taking action I thought were unconvincing.

142. There was also Mr Bao’s lack of response to the letter of 9 March. It is clear from the evidence of his own solicitor, Mr Ku, that Mr Bao would have been told about the letter and asked whether he wanted to have it explained to him. Clearly he took no notice of the letter. In cross-examination, Mr Bao said only that he could not recall Mr Ku telling him about the letter.

143. I suspect that, at least from Mr Bao’s side, the friendship between the parties ended in June 2011 when Mr Mao indicated that he no longer wished to be involved in the Burwood project or to assist with the management of the Harris Park project. That would explain Mr Bao’s failure to respond both to Mr Mao’s subsequent texts and to the letter of 9 March 2012. But if that is the explanation for what happened, it does nothing to undermine Mr Mao’s version of events.

144. For his part, counsel for Mr Bao said little if anything to counter these points. But counsel did advance several arguments of his own as to why Mr Mao’s version of events should not be accepted overall.

145. First, counsel referred to the inconsistences in Mr Mao’s account about where the alleged agreement to make the loan was made, and Mr Bao’s stated purpose in borrowing. But in my view any inconsistency about the purpose of the loan is unimportant. Whether the monies were to be used to fund the Harris Park project or the Burwood project (or for any other purpose) was irrelevant to the nature of the payment. And the inconsistency about where the conversation took place, while not irrelevant, seems to me to be of little significance in the scheme of things.

146. Next, counsel submitted that the logic of events supported Mr Bao’s case. Counsel submitted that Mr Bao had invested a great deal of money in the Vaucluse property. Why, counsel asked, should Mr Bao have borrowed when Mr Mao had agreed to buy him out of the property? The first answer to this question is that I only have Mr Bao’s word that Mr Mao had promised to buy Mr Bao out. As will be seen below, I do not accept that Mr Mao ever agreed to buy the property from Mr Bao, let alone to pay Mr Bao everything he had spent on it since 2004.

147. I suppose that, if he wished, Mr Bao could have required Mr Mao to sell the property and account to him for the difference between the amount received and the loan which he had authorised (which at that point would have been $2 million or so: see [269] below). But the fact that he continued to make repayments on the loan indicates that at the time Mr Bao wished to continue to retain it under the then current arrangements.

148. Counsel for Mr Bao also pointed to the claim in Mr Mao’s caveat that he had lent money to GTIG. But I think this is of no real assistance to Mr Bao for present purposes. Indeed the caveat supports the assertion that the payment was a loan, rather than a payment for the Vaucluse property. I will refer to the issue about the identity of the borrower in the next part of this judgment.

149. The evidence in Mr Mao’s initial affidavit about the transfer of the $800,000 in November 2011 also has its deficiencies. Clearly the impetus for the execution of the transfers and their lodgement with the bank would have come from Mr Mao, not from Mr Bao as Mr Mao suggested in the affidavit. But while that is a reason to suspect reconstruction in the affidavit, it does not negate the fact of the transfer with what appears to be Mr Bao’s signature on it.

150. There is also the fact that Mr Mao was slow to bring his action against Mr Bao. It is not implausible that Mr Mao was advised by a Chinese lawyer in 2012 not to bring proceedings in China, but the further delay for more than four years is completely unexplained. However, this point was not the subject of cross-examination, and given the existence of contemporaneous, or near-contemporaneous, assertions of liability I think it has little weight.

151. On balance I think the evidence clearly favours Mr Mao’s account over Mr Bao’s. I am satisfied that the ¥11 million payment in April 2011 was a loan and not a partial repayment of monies owed pursuant to the arrangement concerning the Vaucluse property.

Financial dealings concerning Vaucluse property

152. Remittances by Mr Bao: As I set out in Xinfeng at [84], the way in which the KVB Kunlun system operates is a form of barter. Where a KVB Kunlun customer wishes to receive money in Australia from a payer in China, KVB Kunlun nominates accounts in China to which the payer pays money in Chinese currency, and the Australian customer receives, in Australian currency, payments of an equivalent value organised by KVB Kunlun.

153. The records of the payments made in China by Mr Bao were in evidence. They totalled ¥12,586,200. Mr Bao’s cross-claim also contained an Australian dollar figure for each payment. Those figures totalled $2,106,300. But it is not clear where the figures came from. They may simply have been calculated according to prevailing exchange rates, without reference to the specific rates offered and fees charged by KVB Kunlun.

154. The documents included a copy of one KVB Kunlun deal sheet, apparently issued in Sydney. This showed Ms Zhang as KVB Kunlun’s “client”, and a Sydney account in the name of her mother, Ms Xia, as the account to which payment would be credited. The Australian dollar amount was less than the corresponding figure in Mr Bao’s cross-claim. Instead it reconciled with the figure in the July 2004 statement provided to Mr Bao (see [174] below).

155. The July 2004 statement showed total receipts of ¥12,576,200, ¥10,000 less than the figure shown in the Chinese bank transfer records. But counsel for Mr Bao expressly took no point about this. Given that the Australian dollar figures in the statement appear to have been taken from the actual KVB Kunlun deal sheets, I propose to adopt those figures for the purposes of this judgment. They total $2,076,113.

156. The KVB Kunlun remittances are summarised in the following table:

Date	¥ Payment	$ Receipt
01/03/2004	2,466,200	380,000
16/03/2004	2,970,000	480,000
21/05/2004	2,950,000	500,426
24/05/2004	1,800,000	307,167
25/05/2004	1,800,000	307,426
26/05/2004	600,000	101,095
Total	12,586,200	2,076,113

157. As already noted, further remittances were sent by or on behalf of Mr Bao from June 2004 until October 2011. Some of the payments were made by Mr Bao and some by Ms Qiu. One payment was made by Jiang Hongya, who is the nephew of Mr Bao and worked for him as an accountant or bookkeeper in China. Other payments were made by Qiu Ailan and Han Xiangdong, who are not identified in the evidence, but there is no dispute that those payments were made on behalf of Mr Bao.

158. Some of the payments were made in cash to Mr Mao, who would write out and sign a receipt for them, and those receipts are in evidence. The other payments were made by direct credit to Mr Mao’s offset account (or by cheque deposited to the offset account).

159. The remittances totalled $1,162,475 and are summarised in the following table:

Date	Payer	Method	$Amount
08/06/2004	Bao Linchun	Cash	50,000
15/08/2004	Bao Linchun	Cash	50,000
12/01/2005	Bao Linchun	Cash	50,000
30/04/2005	Bao Linchun	Cash	50,000
13/10/2005	Bao Linchun	Cash	20,000
23/03/2007	Qiu Chunyue	EFT	27,648
12/06/2007	Qiu Chunyue	Cash	25,300
17/08/2007	Bao Linchun	EFT	50,000
30/04/2008	Bao Linchun	EFT	50,000
23/06/2008	Qiu Chunyue	EFT	50,000
26/09/2008	Qiu Ailan	EFT	54,985
09/10/2008	Jiang Hongya	EFT	54,985
07/02/2009	Qiu Chunyue	Cash	70,000
18/02/2009	Bao Linchun	EFT	75,585
19/06/2009	Qiu Chunyue	EFT	63,987
27/11/2009	Han Xiangdong	EFT	53,985
22/02/2010	Qiu Chunyue	EFT	20,000
31/05/2010	Qiu Chunyue	Cash	20,000
09/06/2010	Qiu Chunyue	EFT	20,000
12/07/2010	Qiu Chunyue	Cheque	20,000
04/08/2010	Qiu Chunyue	Cheque	20,000
02/09/2010	Qiu Chunyue	Cheque	20,000
03/10/2010	Qiu Chunyue	Cheque	18,000
08/11/2010	Cheque	20,000
06/12/2010	Cheque	18,000
10/01/2011	Qiu Chunyue	EFT	20,000
24/02/2011	Cash	18,000
23/03/2011	Cheque	18,000
18/05/2011	Qiu Chunyue	Cheque	18,000
02/06/2011	Qiu Chunyue	Cheque	18,000
01/07/2011	Qiu Chunyue	Cheque	8,000
07/07/2011	Qiu Chunyue	Cheque	18,000
01/08/2011	Qiu Chunyue	Cheque	18,000
02/09/2011	Qiu Chunyue	Cheque	18,000
03/10/2011	Qiu Chunyue	Cheque	18,000
31/10/2011	Qiu Chunyue	Cheque	18,000
Total			1,162,475

160. Loan payments to the NAB: The NAB loan account statements showed that initially the automatic monthly loan payments debited to the offset account were $13,755. This amount covered both interest and a relatively small principal repayment. Automatic monthly payments continued until December 2005 at which point they were suspended (but occasional credits appear and during this period the loan balance remained below the facility limit).

324. In the course of his decision, Millett LJ (as his Lordship then was) referred to an earlier case, Nelson v Rye [1996] 2 All ER 186. In that case the plaintiff was a musician who retained the defendant as his manager. The defendant was required to collect the plaintiff’s earnings and account to him annually. The plaintiff’s claim was brought more than six years after the relationship came to an end, but the judge concluded that because the defendant owed fiduciary duties, the limitation period for an action of account did not apply. Millett LJ considered that this was wrong. He said (at 415, citations omitted):

The law on this subject has been settled for more than a hundred years. An action for an account brought by a principal against his agent is barred by the statutes of limitation unless the agent is more than a mere agent but is a trustee of the money which he received. A claim for an account in equity, absent any trust, has no equitable element; it is based on legal, not equitable rights. Where the agent’s liability to account was contractual equity acted in obedience to the statute. Where, as in Knox v Gye, there was no contractual relationship between the parties, so that the liability was exclusively equitable, the court acted by analogy with statute.

327. In New South Wales, the 1623 Act applied from settlement. The provisions of the 1833 Act were reflected in a local statute passed in 1837 (Real Estate (Limitation of Actions) Act 1837 (NSW) (8 Wm IV, No 3), with the time limit being reduced from twenty years to twelve years in 1874. Thus matters stood at the time of the comprehensive reform effected by the Limitation Act 1969 (“NSW Act”).

328. The enactment of the NSW Act followed a report from the Law Reform Commission: First Report on the Limitation of Actions (Report No 3, October 1967). For present purposes, three of the changes made in the Act should be referred to.

329. First there was the enactment of s 15, the text of which I have already set out. The report dealt with this at [109]-[112]. After observing at [109] that s 3 of the 1623 Act applied “primarily, and perhaps exclusively” to the obsolete common law action of account, the report continued (at [110]):

Proceedings for accounts are now taken by suit in equity and this is so whether the liability to account is a legal Iiability or an equitable liability. Where a suit for an account is brought on a legal liability to account a court of equity applies a six-year period of limitation: it has, however, been a matter of controversy whether the six-year period of limitation is applied in direct obedience to section 3 of the Act of 1623, or by analogy to the requirements of that section. Where the liability to account is equitable, the court applies the six year period by analogy, for example, where the accounting party has a fiduciary duty.

330. The report continued at [111] by referring to the potential difficulties created by the wording of s 2(2) and 2(7) of the 1939 Act, discussing the views taken in different textbooks and thus anticipating the problem discussed by Megarry V-C in Tito. The report concluded (at [112]):

We have attempted to draw what we think is the right line in section 15 of the Bill. It will apply directly to an action, whether at law or in equity, for an account founded on a legal liability to account: it will be applicable by analogy to an action in equity for an account on an equitable liability to account. Section 23 of the Bill, the counterpart of section 2(7) of the Imperial Act of 1939, does not apply to section 15 of the Bill.

331. The second change was the enactment of s 23, just referred to. That section provides:

Sections 14, 16, 17, 18, 20 and 21 do not apply, except so far as they may be applied by analogy, to a cause of action for specific performance of a contract or for an injunction or for other equitable relief.

332. The report explained (at [132]):

Section 23 states the position reached by judicial decision on the enactments whose place is taken by the provisions mentioned in the section. We should give here a reference to the discussion in relation to section 15 of the application of the limitation period to an action in equity for an account (paragraphs 109 to 112 above).

333. The third relevant change was to replace the convoluted law concerning limitations against trustees deriving from the 1888 Act with a more direct set of statutory rules. By s 48, the standard limitation period for an action against a trustee was fixed at six years. Then s 47 provided for certain classes of trust claims, including claims for fraudulent breach of trust and claims for appropriation by the trustee of the trust property, which were, despite the application of any other limitation period, to have a limitation period of twelve years from the date on which the plaintiff knew of, or might with reasonable diligence have discovered, the existence of the cause of action.

334. In Manufacturers Mutual Insurance Ltd v GIO (Supreme Court (NSW), 5 March 1993, unrep) the question before Cohen J was whether there was a limitation period applicable to a claim for contribution between insurers. His Honour recognised that the claim was an equitable one but rights of contribution had historically been recognised at law also. He considered that there was no limitation period which applied to a contribution claim, whether directly or by analogy.

335. Cohen J went on to consider however whether there was a limitation which applied to an equitable claim for contribution. His Honour was seemingly prepared to assume that a claim for contribution between insurers might be classified as a claim for an account, but even so he considered that s 15 did not apply to it directly or by analogy. This was based on the reasoning of Megarry V-C in Tito which I have summarised at [324] above.

336. On the other hand, in Faitrouni v El Omar [1999] NSWSC 84 Windeyer J was faced with an application for the taking of partnership accounts where the proceedings had been commenced more than six years after the dissolution of the partnership. His Honour considered that s 15 (which had not formally been pleaded) did not directly apply, but held that it did apply by analogy. However, his Honour does not appear to have been referred to authority.

337. The Court of Appeal authoritatively considered the application of s 15 in Sze Tu v Lowe (2014) 89 NSWLR 317. That case arose out of a family partnership. One of the partners effectively appropriated the partnership assets to himself. He did not account to the other partners for the income, and applied some of it to the purchase of property in the names of himself and some of his children. When the partnership business ceased, he closed the partnership down without accounting to the partners for their share of the proceeds. More than six years later, two of the partners became aware of the use of the partnership monies to purchase the properties. They then instituted proceedings seeking a general account of all of the partnership dealings, including the proceeds of the sale of the partnership businesses, and a share of the properties in question, and the income which had been derived from them.

338. The leading judgment was given by Gleeson JA, with whom Meagher JA and Barrett JA agreed. His Honour quoted with approval the passage from the judgment of Millett LJ in Paragon which I have set out at [326] above. His Honour stated (at [360]-[361]):

Paragon may be taken to establish two matters. First, a claim for an account in equity, absent any trust, has no equitable element. It is based on legal, not equitable rights. Accordingly, where the liability to account is contractually based, equity acts in obedience to the statute of limitations. However, if there is no contractual relationship between the parties, and the liability is exclusively equitable, the court acts by analogy with the statute.

Secondly, there is a distinction between the liability of an agent to account and the liability of an agent for funds held as a constructive trustee. The same may be said in the case of partners. Thus the fact that someone is a fiduciary, that is, an agent or partner, does not make their failure to account a breach of fiduciary duty or make them liable to pay equitable compensation. This is because the simple duty to account is not a fiduciary duty: Coulthard v Disco Mix Club Ltd [1999] 2 All ER 457 at 477–478 (Jules Sher QC).

339. It followed that the claim for a general account (including the proceeds of sale of the businesses) was a claim founded “on a duty at law to account”. Therefore s 15 applied directly so as to bar that claim. The conclusion reached by Windeyer J in Faitrouni was thus upheld, albeit by a different route.

340. But this did not prevent the plaintiffs from litigating their specific claims with respect to the properties acquired by the defaulting partner, and the income derived from them. Gleeson JA characterised the claim as a purely equitable one. His Honour acknowledged the possibility that the claim could be characterised as a claim for an account of profits, to which s 15 might apply by analogy, but reasoned that an attempt to rely on s 15 by analogy with respect to those specific claims would be unconscionable until the fraud had been revealed (at [387]-[388]). In any event, his Honour preferred to analyse the claim as a claim to recover trust property, with the result that the time limit prescribed under s 47 had not expired (at [389]).

341. Application of s 15: This brings me to the application of s 15 in the current case. The first question is whether s 15 applies directly. That depends on whether these proceedings can be described as an action “founded on a duty at common law to account”. As the Court of Appeal emphasised in Sze Tu, this wording is designed to include equitable relief as well as (obsolete) relief at law. If equity is acting in its concurrent jurisdiction s 15 will apply directly.

342. Application of the reasoning in Paragon would suggest that the question is to be resolved by asking whether there was a “trust element” to Mr Mao’s obligations to account. I will address this first, before returning to the particular statutory language of s 15.

343. Looked at in the broad, the relationship between Mr Bao and Mr Mao bears resemblances to the circumstances of both Burdick and Nelson. The distinction between the two cases lies, it seems, on the fact that in Burdick the property the subject of the power of attorney had to be separately held and accounted for on demand, whereas in Nelson the arrangement allowed the defendant to account only at defined intervals and make use of any monies received as his own in the meantime.

344. This is a fine distinction, and the court must beware of falling into circular reasoning. A trustee is generally under a duty to keep trust property separate, so if the existence of such a duty is to make Mr Mao a trustee, that duty must arise independently out of the arrangements between the parties.

345. In the present case, the arrangements were informal in the extreme, and may well have varied over time. There must have been discussions between Mr Bao and Mr Mao (or Ms Zhang) about the accounting procedure to be followed, but the evidence before me did not address those discussions.

346. What is clear from the evidence is that Mr Mao did not in fact segregate the remittances from his own money: he used the offset account for his own purposes as well as to make the loan repayments. Nor did he segregate the loan account, in the sense of restricting the amount borrowed to the $2.275 million originally authorised by Mr Bao. But he may not have been asked to do so. And he did not segregate the expenses either: it seems that the holding costs such as council rates were often if not invariably paid by Mr Mao out of his own private account and only later recouped when an accounting was undertaken. Furthermore, the non-segregation of the loan (as I have described it) was something which was apparent, on analysis, from the way in which the accounts were presented to Mr Bao: see [226] above.

347. I think there may be a shorter answer to the question, given the language of s 15. As we have seen at [338] above, Gleeson JA said if the relationship between the parties is “contractually based”, then a claim for an account in equity is made in the concurrent jurisdiction. As I have pointed out, the arrangement between Mr Bao and Mr Mao imposed obligations on both parties. It could readily be analysed as contractual, and thus as giving rise to a duty to account at law.

348. The same ultimate conclusion is supported by the historical analysis undertaken by Watson in The Duty to Account (cited at [247] above). Long before trust law had even developed, the medieval action of account was available against many classes of defendant who were in possession of property but were subject to obligations to deal with that property in the interests of someone else. These included bailiffs or stewards ([217]), receivers ([225]), and other mercantile agents such as factors ([274]). Significantly, although originally based on servitude, these categories of legal relationship came to be based on agency. And although equity later came to see such relationships as fiduciary, exercise of its jurisdiction to order an account was not based on that characterisation but on the unavailability of relief at law, that is, as part of the concurrent jurisdiction: see at [387]-[388].

349. In its essence, the relationship between Mr Bao and Mr Mao was a relationship of the same type. Mr Mao was effectively managing the Vaucluse property for Mr Bao. As a matter of history, therefore, the claim for an account against Mr Mao is indeed a claim “founded on a duty at law to account”.

350. The alternative question is whether, if the claim for an account from Mr Mao is properly characterised as a claim against a trustee, s 15 applies by analogy.

351. The report which preceded the introduction of s 15 contemplated explicitly that it would operate by analogy in claims in equity’s exclusive jurisdiction. As I have already noted, the paradigm case of a claim for an account in equity’s exclusive jurisdiction is a claim against a trustee for an account of administration. On the face of it, the application of s 15 by analogy to such a claim would have been the very thing which the authors of the report would have had in mind when framing the legislation.

352. Such an approach is completely consistent with the application of the doctrine of analogy. The wording of s 15, unlike the earlier United Kingdom provisions, applied directly to an equitable account. The analogy is exact between a claim in equity for an account under a partnership (to which s 15 applies directly) and an account against a trustee in the exclusive jurisdiction. In fact, it might more accurately be said as a matter of history that the two claims are identical; they are simply applications in different jurisdictions of the same equitable remedy of account.

353. It is true that historically equity did not apply statutes of limitation by analogy to a claim for account against the trustee of a trust. But as we have seen this was not so much because there was no analogy perceived, but because of a broader rule which prohibited the application of all equitable remedies against trustees. That rule has now been swept away and there is no reason why it should now be partially read back into s 15.

354. All the more is this so because the NSW Act was deliberately drafted so as to allow the doctrine of analogy to apply in an untrammelled way. It is notable that s 23 does away with the reference in s 2(7) of the 1939 Act to the doctrine of analogy being applied “in like manner” to the way in which previous statutes were applied. In the application of the doctrine of analogy under the NSW Act there is thus no need to pick up the distinctions developed in the case law under those earlier statutes.

355. More fundamentally still, there was a deliberate decision to omit reference to s 15 entirely from s 23. Presumably this was because, unlike the other legal remedies referred to by s 23, the legal remedy in s 15 was obsolete. The result is that there is no textual limitation whatever in the Act to applying the doctrine of analogy under s 15.

356. Interpreting s 15 in this way causes no difficulty with the established principles governing specific breaches of trust, or specific breaches of fiduciary duty by non-trustee fiduciaries. Instead a six year limitation period is entirely consistent with the general limitation period by s 48 with respect to such claims. Indeed, to allow a plaintiff who is unable to pursue a specific claim for breach of trust (say for an innocent breach) to pursue the same claim through an account would be completely unsatisfactory.

357. Nor is there any difficulty with a plaintiff being shut out of claims for fraudulent breaches of trust, or appropriation by the trustee of trust property. Because of the way s 47 is drafted, the limitation period prescribed by that section applies to such claims even if other provisions of the Act also apply. If the plaintiff can prove a specific breach of trust falling within s 47, it may still be pursued individually.

358. For these reasons, if s 15 does not apply directly to Mr Bao’s claim for an account, I think it applies by analogy.

359. These conclusions are contrary to the views expressed (in obiter) by Cohen J in Manufacturers Mutual Insurance. But I do not think those views are now persuasive. His Honour’s approach to the application of s 15 has been overtaken by the decision of the Court of Appeal in Sze Tu. And in any event, the reasoning by Megarry V-C in Tito upon which his Honour relied now appears questionable, at least in this country.

360. The reasoning in Tito was later considered by the Western Australian Court of Appeal in Wheatley v Bower [2001] WASCA 293. The Court (which was considering a statutory provision more closely modelled on the 1939 UK Act than the NSW Act) decided not to follow that reasoning. The same conclusion has been reached in Victoria: Feiglin v Ainsworth [2011] VSC 454 at [33].

361. Even more fundamentally, in adopting the Tito reasoning, Cohen J did not refer to the Law Reform Commission report. That report shows that the Commission was alive to the problem later discussed by Megarry V-C and took steps in formulating s 15 to deal with it. As the report itself states, the intention was that, in the exclusive jurisdiction, s 15 would apply by analogy. The historical analysis by Watson to which I have referred underlines how unsatisfactory it would be to decline to apply the statute by analogy (if it does not apply directly) in the present case.

362. Relation back: The next question is whether, in the exercise of my discretion, I should limit the relation back of the claim for an account to the date on which it was introduced by filing the relevant pleadings, that is, September 2020. Two separate types of relation back are in issue.

363. The first stems from the procedural rule that an amended pleading is deemed to relate back to the pleading which it replaces. If that relation back is applied, the account claim will be taken to have been made when the original cross-claim was filed, on 16 November 2018.

364. The second type of relation back comes from s 74 of the NSW Act. That section provides that for limitation purposes, a cross-claim back against the plaintiff is deemed to have been made at the time the plaintiff’s action was commenced. Prima facie this has the result that Mr Bao’s cross-claim relates back to when Mr Mao’s statement of claim was filed, on 29 December 2016.

365. The procedural rule that a pleading relates back to the date of its predecessor means that a plaintiff can, by amendment, introduce a cause of action which has expired since the proceedings were begun, and that newly introduced cause of action will be deemed to have been brought within the limitation period. This was thought unsatisfactory and resulted in the rule in Weldon v Neal (1887) 19 QB 394. That rule was that the court would not permit an amendment which would have the effect of introducing, by means of relation back, a statute barred cause of action.

339. A similar rule was adopted when considering whether to permit a defendant to raise a claim by way of defence or counter-claim. A rigid distinction was drawn between set-off and a counter-claim. If the claim was purely defensive, and put forward by way of set-off, then it did not involve the introduction of any new claim against the plaintiff and was permitted. But a plaintiff would not be permitted to bring a separate cause of action by way of counter-claim if the limitation period had expired: McDonnell & East Ltd v McGregor (1936) 56 CLR 50 at 57.

340. The counter-claim rule was reversed by s 28 of the 1939 UK Act. The equivalent provision in the NSW Act is s 74(1):

Set off etc

1. Where, in an action (in this section called the principal action), a claim is made by way of set off, counterclaim or cross action, the claim, for the purposes of this Act—

   (a)   is a separate action, and

   (b)   is, as against a person against whom the claim is made, brought on the only or earlier of such of the following dates as are applicable—

   (i)   the date on which the person becomes a party to the principal action, and

   (ii)   the date on which the person becomes a party to the claim.

   368. The rule in Weldon v Neal has now been displaced as it applied to amendments as well. This first occurred in this State with rules of Court which were introduced in 1970: see McGee v Yeomans [1977] 1 NSWLR 273. Those rules are now reflected in CPA, s 65, which relevantly provides:

Amendment of originating process after expiry of limitation period

…

1. At any time after the expiration of the relevant limitation period, the plaintiff in any such proceedings may, with the leave of the court under section 64 (1) (b), amend the originating process so as—

   …

   (c)   to add or substitute a new cause of action, together with a claim for relief on the new cause of action, being a new cause of action that, in the court’s opinion, arises from the same (or substantially the same) facts as those giving rise to an existing cause of action and claim for relief set out in the originating process.

2. Unless the court otherwise orders, an amendment made under this section is taken to have had effect as from the date on which the proceedings were commenced.

   369. But the power in s 65 to make an amendment which relates back is expressly made subject to a discretionary power to order otherwise under s 65(3). In the present case it was likewise accepted that a term might be imposed on the grant of leave to make an amendment under the court’s general power in s 64 limiting the relation back of the amendments so made. It was also accepted that a similar term could be imposed as a condition for the grant of leave to file a cross-claim out of time.

   370. I will deal first with the relation back of the amendments to the cross-claim introducing a claim for an account. The initial version of the cross-claim included specific claims of breach of duty on Mr Mao’s part. The new “cause of action” depends on proof of facts making Mr Mao liable to provide a full account of administration. Those facts had already been pleaded in the course of pleading the specific claims of breach of contract and breach of duty. The amendments thus fall within s 65(2)(c).

   371. It would be contrary to the evident purpose of s 65 to exercise the power in s 65(3) merely because the amendment introduces a statute barred cause of action. For reasons I have given, there is no sufficient prejudice to Mr Mao to refuse the amendment on that ground. Furthermore, in a general sense the amendment has been opened up by Mr Mao’s defence to the original cross-claim, in which he contended that payments for Mr Bao’s benefit should be taken into account in reduction of any compensation awarded (see [18] above). I see no reason to order otherwise under s 65(3).

   372. The second question is whether the institution of the cross-claim should relate back in accordance with the ordinary operation of s 74. I was not referred to any authority on the exercise of this particular discretion, and must deal with it as a question of principle.

   373. It seems to me that the considerations at play are somewhat different from those which apply to relation back by way of amending an existing pleading. Section 74 deals with claims back against the plaintiff. Limitation may be seen as a means of preserving the peace by preventing stale claims. It is one thing to prevent a plaintiff from introducing a stale claim by amending the statement of claim to include a claim which has hitherto not been pursued, and has become statute barred in the meantime. But arguably, a counter-claim is belatedly made back against the plaintiff should not cause the same concern. After all the plaintiff has chosen to launch the proceedings in the first place. Although this is not stated in the report of the Law Revision Committee it seems that the rationale behind s 28 of the 1939 Act was (and thus the rationale behind s 74 is) that in such a situation there is no injustice to the plaintiff in allowing the defendant to bring any cross-claim back against the plaintiff that was in existence at the time the plaintiff began his action.

   374. When he commenced the proceedings in December 2016, Mr Mao would have been well aware that he had borrowed money for his own purposes on the security of the Vaucluse property and that he had received the benefit of a partial discharge of that liability out of the proceeds of sale of the property in May 2014. Mr Mao could not have complained if, having brought a claim against Mr Bao, he was held to account for that gain. While Mr Bao’s delay in making a cross-claim may have led Mr Mao to hope that he would not, after all, be required to do so, he suffered no significant prejudice as a result. I see no reason to limit the relation back effect of s 74.

   375. Accrual of cause of action: Counsel for Mr Bao submitted that his right to an account did not accrue until the Vaucluse property was sold, which was in March 2014. According to counsel’s submission, if the claim was brought within six years of that date, Mr Bao was entitled to an account going back to the beginning of the financial relationship between the two men, in 2004.

   376. For their part, counsel for Mao relied upon what was said by Sifris J in Jane v Bob Jane Corporation Pty Ltd [2013] VSC 406. The plaintiff in that case, Bob Jane, had been the founder of the business conducted by the defendant and had been accustomed to depositing money with the defendant, BJC, and then drawing on the money for personal expenditure. The relevant dealings between the parties took place between 1 July 2001 and 30 June 2008. In March 2012 the plaintiff brought a claim for an account. BJC contended that any “matter” pre-dating March 2006 was statute barred under s 5(2) of the Victorian Limitation of Actions Act 1958 (the wording of which was equivalent of s 2(2) of the 1939 Act).

   377. The passage upon which counsel relied was at [78]:

The accrual of the cause of action for account occurs when the accounting party receives money or property in respect of which he is liable to account. Relevantly, the first cause of action for an account accrued when Bob Jane’s loan account was first credited. Each time that BJC received money by way of a credit to Bob Jane’s loan account, a new cause of action accrued in respect of that credit.

378. I have already concluded that Mr Bao is not on any view entitled to an account for the period up to 31 January 2010. I have also concluded that s 15 applies from six years prior to the commencement of Mr Mao’s proceedings, namely 29 December 2010. The issue is therefore confined to the period from 1 February to 28 December 2010.

379. In the end, I do not find it necessary to decide between the parties’ submissions on this issue. That is for two reasons.

380. First, I think that Mr Mao’s reconciliation of 6 July 2011 implicitly undertook to provide an account of the same type as had been provided for the period up to 31 January 2010 (see [182] above). Arguably that was a written acknowledgement which set the limitation period running again: NSW Act, s 54. If so, the claim is wholly within time.

381. The second point is that, even if the right to an account was statute barred from 29 December 2010, for practical purposes it would still be necessary to determine the account balance at that date. This would require reference back to the previous transactions.

382. The point arose in How v Earl Winterton [1896] 2 Ch 626. The defendant was the trustee of a trust established under the will of a testatrix who died in 1875. A claim of breach of trust was made against him in August 1895. The claim was successful, but the defendant was held entitled to rely on the six year period of limitation under the 1888 Act.

383. Lindley LJ said (at 640):

In the present case the action is maintainable in respect of the defendant’s receipts since August 9, 1889, and in respect of rents then in his hands which he ought to have accumulated. It is said that the amount of what he then had cannot be ascertained without taking an account from the death of the testatrix. This, however, is not so. What the defendant had in his hands in 1889 can be ascertained by an inquiry. It is a mere question of fact to be ascertained by evidence, and in particular by the examination of the defendant on oath, and the production of his earlier accounts, which, of course, are evidence against him. But to take an account of his receipts and payments from 1875 is quite another matter. That involves the disallowance of every payment which the defendant cannot now prove that he is entitled to have allowed as against the plaintiff. Such an account is necessary to ascertain what the defendant ought to have had on August 9, 1889; but it is not necessary to ascertain what in fact he then had.

384. On this view the account against Mr Mao would, strictly speaking, be limited to the period from 29 December 2010 onwards, but the balance as at that date would be determined by an enquiry going back to 31 January 2010. Although, for the reasons given by Lindley LJ, there is a distinction between an inquiry and a full account, in the circumstances of this case there is likely to be little if any practical difference.

385. The acknowledgement point I have outlined above was not pleaded. On the face of it, there would seem to be no relevant prejudice to Mr Mao, but I will entertain supplementary submissions from counsel on the point if they consider it worthwhile.

386. Other bases for claim: These conclusions on the application of s 15 make it unnecessary to consider whether Mr Bao could have made individual claims concerning specific remittances or rent receipts which attract the longer limitation period under s 47. It was unclear to me whether any restitution claim was pursued if the contract claim failed, as it has, but even if so, it would also be unnecessary to consider that claim.

Conclusions and orders

387. I have concluded that:

1. 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 of that year), together with interest at 2% per month, succeeds;

2. Mr Bao’s cross-claim, to the extent based on an alleged agreement by Mr Mao to buy Mr Bao out of the Vaucluse property, fails;

3. Mr Bao’s claim for an account of the KVB Kunlun remittances, or for equitable compensation for the $480,000 paid out by Ms Zhang, fails;

4. Mr Bao is entitled to an account incorporating the net proceeds of the Vaucluse property when it was sold in May 2014, the rent received from Mr Eaton, 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).

388. As a result of conclusion (1) it will be necessary to calculate the amount to which Mr Mao is entitled on the ¥11 million loan. The original payment was made in yuan and the repayment was made in Australian dollars, albeit that it was then converted to yuan. It will be necessary for the purpose of entering judgment to convert one or other of these payments into the other currency. The view I have expressed that the currency of account for the loan was yuan is a tentative one and either party is at liberty to make further submissions on that question. It will also be necessary to calculate the interest due.

389. As a result of conclusion (4), it will be necessary to proceed with the taking of the account (or account and enquiry) to which I have found that Mr Bao is entitled. The parties will need to consider what further procedural steps, and what further evidence, will be required. If the task appears to be a fairly limited one I may be able to undertake it.

390. I will adjourn these proceedings for a short period to allow the parties to consider the judgment and address these procedural issues. It will also be necessary to consider whether costs should be dealt with at this stage or should await the outcome of the account.

391. The orders of the Court are:

1. Adjourn the proceedings to 9.15 am on 14 September 2021 or such other time as may be arranged with my Associate.

2. Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.

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Decision last updated: 31 August 2021