Marcolongo v Chen & Anor

[2010] HCATrans 97

[2010] HCATrans 097

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S304 of 2009

B e t w e e n -

LEONILDA MARCOLONGO

Applicant

and

YU PO CHEN

First Respondent

LYM INTERNATIONAL PTY LIMITED

Second Respondent

Application for special leave to appeal

FRENCH CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 23 APRIL 2010, AT 9.38 AM

Copyright in the High Court of Australia

MR T.A. ALEXIS, SC:   May it please the Court, I appear with my learned friend, MR D.H. MITCHELL, for the applicant.  (instructed by Dunstan Legal)

MR T.S. HALE, SC:   If the Court pleases, I appear with my learned friend, MR S.A.S. WELLS, for the second respondent.  (instructed by Unsworth Legal Pty Ltd)

FRENCH CJ:   Thank you.  There is no appearance for the first respondent?

MR HALE:   That is correct, your Honour.

FRENCH CJ:   Yes.  I see an affidavit indicating attempts to serve the first respondent.

MR ALEXIS:   Yes, the affidavit was served and we understand it was to the Registrar’s satisfaction.

FRENCH CJ:   Yes.

MR ALEXIS: Your Honours, the issue on the application is whether a transfer of property with “intent to defraud creditors” within the meaning of section 37A of the Conveyancing Act (NSW) requires an actual dishonest intent or whether the section is satisfied by demonstrating, as we did before the primary judge, a real or actual intent to defeat, delay or hinder creditors.

FRENCH CJ:   Let us assume there is a significant issue of legal principle involved.  The proposition put against you really goes to the question of utility, does it not?

MR ALEXIS:   Yes.

FRENCH CJ:   Perhaps you could go straight to that?

MR ALEXIS: I will, your Honour. What our learned friend’s argument, with all respect to them, overlooks is firstly the very reason why the applicant brought the claim pursuant to section 37A against the second respondent in the first place and, importantly, why that claim was heard before the building case in the District Court proceeded to hearing. That important reason was to obtain a measure of control over the second respondent’s Australian property. Your Honours appreciate it was then a 15‑unit development on a site at Mona Vale on the northern beaches of Sydney that was then partially completed.

So she was seeking to obtain a measure of control over the property or, more importantly, the proceeds of sale of that property against which the result of her claim, if ultimately she was successful in the District Court proceedings, could be satisfied.  Of course, after the transaction occurred the second respondent had no assets at all against which that claim could be satisfied. 

In the results of the hearing of those proceedings before the District Court late last year the applicant was successful.  She obtained a judgment of nearly $400,000 and an order for costs which in relation to a building trial that went for many, many days the order for costs is substantial and I am instructed, your Honours, that the costs exceed the amount of the judgment by a factor of three.  Your Honour, the intent of the proceedings and the utility of this application is very much bound with the need to now, as a judgment creditor, seek to have that judgment satisfied.

I should take the Court to the regime that the primary judge ordered, having found that the transaction was one that was caught by section 37A. Your Honours will find the primary judge’s orders commencing at 73 of the application book, importantly, on pages 74 and 75. If I could draw attention to order 7 at about line 19 on 74, that was the injunction against the second defendant who on this application is the first respondent, Mr Chen. He was restrained by his Honour from further encumbering the units and in (b) your Honours see he was obliged to:

place the proceeds of sale . . . into a controlled moneys account . . . to abide the further order of the Court.

I can pass over subparagraph (c) which deals with a “refund of stamp duty”.  Of course, one of the features of this transaction was that the vendor pay the stamp duty.  Order 8 at line 39 is the injunction against the first defendant below who is the second respondent on the application, Lym International, and similarly it was restrained from “encumbering the Units”.  It was obliged to similarly “place the proceeds of the sale . . . in the controlled moneys account”.  In order 9 it was provided that “Orders 7 and 8 shall not prevent” either of the respondents from doing any of the matters set out in the subparagraphs at the top of page 75.

Importantly, we would say, in subparagraph (c) they were not prevented from “satisfying Orders 5 and 6 above” which relate to the applicant’s costs of the trial “and any judgment (including any order for costs)” in those proceedings “that the plaintiff obtains against the first defendant”, the second respondent in the application in the District Court proceedings. 

So your Honours can see the purport of the regime was to provide the applicant with a measure of control over the subject matter of the transaction so that her ultimate result in the District Court proceedings was not a hollow one.  Of course, the result of the decision of the New South Wales Court of Appeal was to set aside those orders.

Your Honours, it is for that reason that we respectfully submit that the appeal has real utility, particularly in light of the fact that, as your Honours now know, the applicant is a judgment creditor of the second respondent and has the benefit of a significant order for costs arising out of the District Court proceedings.

FRENCH CJ:   Yes, all right, thank you.

MR ALEXIS:   Thank you, your Honour.

FRENCH CJ:   Yes, Mr Hale?

MR HALE:   Your Honours, we contend that the leave should not be given for three reasons:  firstly, the utility reason which I will come back to; secondly, that there is no demonstrated departure from established principle; thirdly, the applicant failed on the facts to establish the requisite intent to defraud creditors.  Going to the question of utility, as your Honour may appreciate, there were two parallel sets of proceedings heard together. 

Firstly, there were the Lym proceedings brought against Mr Chen seeking the reconveying of the property back to Lym International, it being contended for and ultimately established that the property was conveyed by Lym to Chen in breach of fiduciary duty.  Then there were essentially the same relief being sought in the Marcolongo proceedings which are the ones brought under section 37A. Of course, my client, Lym International, was one of the parties and Chen was the other.

Justice Hamilton, the primary judge, found both causes of action established and as a consequence of which orders had to be made for the retransfer of the property back.  Obviously enough they had to match each other.  They had to mirror each other.  There could not be any inconsistencies.  That is what his Honour did and the particular passages of the orders to which your Honours have been taken in the Marcolongo proceedings are at application book 74 and 75.

Your Honours will see, if your Honours go to the judgment of the Court of Appeal at application book 159 and 160, particularly at the top of page 160, the orders in the Lym International proceedings were almost identical.  The consequence of the Court of Appeal decision was that the appeal was in large measure dismissed in the Lym International matter with the consequence that there are now orders for the retransfer of the property back to Lym International on slightly different terms. 

If leave were granted and the appeal was to be allowed, in our submission it is highly unlikely that on a remitter or otherwise the orders that would be made in the Marcolongo proceedings for the retransfer of the property would be in any real sense different from that which the Court of Appeal has already ordered.  It is in that sense we advance the proposition that there is little utility because the property will be reconveyed back to Lym International upon the fulfilment of the various conditions. 

At the moment the property is the subject of a mortgage to Westpac and there is some threat that Westpac will exercise its powers under the terms of that mortgage.  Therefore, the only real issue is one of costs.  If I could go now, if it is convenient to do so, to the second point which in our contention that there is no demonstrated departure from established principle ‑ ‑ ‑

FRENCH CJ:   Are you going to say anything about the costs question?

MR HALE:   The costs question – clearly there would be a significant sum of money at risk – at issue – in the costs issue were the appeal to be allowed, yes, it must be conceded.

FRENCH CJ:   Do you accept the order of magnitude to which Mr Alexis has referred, I think about $900,000 plus?

MR HALE:   I cannot say anything with respect to the District Court proceedings.  I simply do not know.  I cannot say anything about the magnitude of the costs orders in the Marcolongo proceedings.  However, the fact of the matter was it was a lengthy trial.

FRENCH CJ:   It was a 30‑day trial.

MR HALE:   It was a 30‑day trial and, of course, one also has to factor in the fact that we also obtained costs against Mr Chen.

FRENCH CJ:   Yes.

MR HALE:   It is not an insignificant sum. If I could now go to what we referred to as the second issue - no demonstrated departure from established principle. The judgment of the President was the subject of agreement on the issue of section 37A by Justice Giles. In our submission, the President’s approach to the questions was uncontroversial and applied established principle, namely, firstly, that the onus lies upon the appellant to establish actual intent at the time of his decision; secondly, that intent may be inferred from all the circumstances surrounding the alienation; and, thirdly, section 37A is not enlivened merely by showing that the disposition has reduced the assets available.

The President applied each of those principles.  The point of complaint is the reference to dishonesty but, in our submission, the requirement for dishonesty - if your Honours go to application book 97 ‑ ‑ ‑

FRENCH CJ:   Paragraph 17 of the judgment.

MR HALE:   Paragraph 17.  Your Honours will see that what the President was doing was to identify what was required in establishing the requisite intent and your Honours will see at paragraph 17 first by having referred to “Cannane” an element requires:

an element of dishonesty.  It is an actual intent to deprive creditors of their rights or the fruits of their rights.

That is the sense in which he used the word “dishonesty”.  He used it as part and parcel, as it were, of the requirement to establish fraud.

FRENCH CJ:   In the sense that the intent to defraud involves a consciousness that what is to be done will deprive somebody of something or impose some detriment upon them?

MR HALE:   Yes.  In a number of the cases – I think it is picked up in Cannane with Justice Dixon – refer to cheating creditors ‑ ‑ ‑

FRENCH CJ:   Hardie v Hanson, I think.

MR HALE:   Yes, it is in Hanson which is picked up in Cannane.  If your Honours go to paragraph 54 of Cannane in Justice Gummow’s judgment which picks up Hardie your Honours will see in the passage from the Chief Justice there is a reference to “intent” and as your Honours will see in the third line in the quote, “be cheated of their rights”.  Then, in the extract from Justice Kitto’s judgment in the fourth line, “An actual purpose, consciously pursued, of swindling creditors” ‑ ‑ ‑

FRENCH CJ:   But deceit is not a necessary element, is it, under 37A?

MR HALE:   No, there has to be – and that is I think what the President was saying – it has to be more than moral obtuseness, there has to be some element.

FRENCH CJ:   Perhaps it is simply looking to what is being done as intended to have the effect of depriving somebody of the property or of an entitlement which they might otherwise have.

MR HALE:   Yes, exactly so.  What the President was saying by using the words “an element of dishonesty” was giving content to the meaning of defraud creditors and he goes on to say:

Moral obtuseness will not save a disponor whose sate of mind is one which is intent upon removing assets . . . Fraud is not a superadded requirement –

When one looks at those passages and sees the reference to dishonesty it cannot be said that the way the President was using that term was in any way inconsistent with established principle.

FRENCH CJ:   Justice Young, in his judgment, if I might say so, …..dishonesty he kind of approached it and never quite got there as a proposition, how does his approach differ from that of the President?

MR HALE:   In a sense it is consistent because if your Honours go to application book 156 at 301 at the top of the page, he is not saying it is necessary to show dishonesty.  In fact he says almost to the contrary but he says:

in the “ordinary” case, it would almost always be the situation in a conveyance for consideration that some actual dishonesty in the wide sense at least would come into play.

Again, he is interpreting the words “intent to defraud” by suggesting there must be some element of dishonesty or cheating or matters of that sort.  Although, as I say, Justice Giles agreed with the President rather than Justice Young, as your Honour sees that at page 100 at paragraph 28. 

The third proposition is that the appellant failed simply on a question of fact.  It failed to establish the requisite intent and there is nothing demonstrated to indicate an error in the fact finding by the court.  In our written submissions, in our summary, your Honours will see at 207 at paragraph 22 and over to 208 the summary of the facts in which the President made certain findings of fact and otherwise agreed with Justice Young’s explanation.

Your Honours see those facts are summarised at a to e but one of the critical facts is this – which is referred to in the reasoning – that Ms Yang, the director of Lym, believed the property was being sold to Mr Chen for value.  She did not believe that Lym International was giving the property

away.  She was relying upon Mr Chen who had certain fiduciary obligations to her.  Secondly, she believed the sale would produce some financial benefit to her.  As it turns out, because of the way in which the contract was procured, there was not the benefit.  Your Honours will see those central findings by the President at application book 98.

FRENCH CJ:   What happened to the trial judge’s finding at 145, page 55 of the application book relating to:

Ms Yang’s preparedness to admit that avoidance of the $600,000 claim was a reason for her entering into the contract for sale ‑ ‑ ‑

MR HALE:   The trial judge relied at page 55, entirely, it would seem, on the passage in paragraph 143 of his judgment, which is also referred to in some detail in the President’s judgment.  The point about it is this, while it is the case that she was seeking, as it were, to protect some of her assets what the Court of Appeal concluded was, firstly, there were a number of reasons why she undertook this, referred to the trauma of the circumstances, the property holding, the problem of finance, the difficulty with her husband being imprisoned in China and so there were a number of considerations which drove her to follow the recommendations of Mr Chen but the other critical matter which was not referred to by the primary judge was the fact that she believed she was receiving consideration for the sale and converting the asset into liquid assets.

That is what the President, in particular, is referring to in his judgment at 98, particularly at paragraphs 19 and 20 and then in 22 deals with the trauma, as it were, the way it was described by Justice Young.  In Cannane one aspect that was clearly established that it is insufficient to establish the requisite intent by simply establishing an intention to put assets beyond the reach of potential creditors, there has to be something more than that.  In terms of inferences, that may very well be that the property is being transferred at a lower value or a lesser value and so forth.

That is what the Court of Appeal was saying that it was – from her point of view it was for value, and hence, in all of the circumstances, the requisite intent had not been established.  That, with respect, is a finding of fact which has not been demonstrated to be wrong.  They are our submissions.

FRENCH CJ:   Yes, thank you, Mr Hale.

We will not need to hear from you, Mr Alexis. There will be a grant of special leave in this matter.  A day would suffice, I would think?

MR ALEXIS:   Yes, your Honour.

FRENCH CJ:   Yes, all right.

AT 10.01 AM THE MATTER WAS CONCLUDED