Shun Sheng Pty Ltd v Lei (No 5)

[2024] NSWSC 1109

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Shun Sheng Pty Ltd v Lei (No 5) [2024] NSWSC 1109

Hearing dates:

5, 6, 19 August 2024; further written submissions ending 28 August 2024

Date of orders:

29 August 2024

Decision date:

29 August 2024

Jurisdiction:

Equity

Before:

Parker J

Decision:

See [154]

Catchwords:

CONTRACTS — interpretation — business premises lease agreement between partnership and lessor — whether subject to annual CPI increase — notice requirements

LIMITATION OF ACTIONS — contract and debt — where lessor claims unpaid rent from partnership — where partner promised to account to other partner for her share of unpaid rent — where promise to account was not made to the lessor — whether partner confirmed the cause of action — whether partnership renewed the rent agreement with lessor

EQUITY — fiduciary duties — breach — rule in Barnes v Addy — where partner in partnership appropriated partnership assets to company of which she was a director — whether company knowingly received partnership property in breach of partner’s fiduciary duty — whether company knowingly participated in a dishonest and fraudulent design — whether partnership could be compensated for value of appropriated partnership assets

Legislation Cited:

Conveyancing Act 1919 (NSW)

Electronic Transactions Act 2000 (NSW)

Limitation Act 1969 (NSW)

Real Property Act 1900 (NSW)

Cases Cited:

Anderson v Anderson [2017] NSWCA 131

Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151

Barnes v Addy (1874) LR 9 Ch App 244

Beasley v D’Arcy (1805) 1 Sch & Lef 403

Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296

Irwin v Pamplin (No 5) [2024] NSWSC 484

Jones v Dunkel (1959) 101 CLR 298

Mao v Bao (2023) 113 NSWLR 26

Shun Sheng Pty Ltd v Lei [2023] NSWSC 1176

Shun Sheng Pty Ltd v Lei [2024] NSWCA 43

Shun Sheng Pty Ltd v Lei (No 2) [2023] NSWSC 1623

Shun Sheng Pty Ltd v Lei (No 2) [2024] NSWCA 105

Shun Sheng Pty Ltd v Lei (No 3) [2024] NSWSC 72

Shun Sheng Pty Ltd v Lei (No 4) [2024] NSWSC 635

Super 1000 v Pacific General Securities [2008] NSWSC 1222

United Scientific Holdings Ltd v BurnleyBorough Council [1978] AC 904

Texts Cited:

S R Derham, Derham on the law of set-off (4th ed, 2010, Oxford University Press)

The Conveyancer: Implied Covenants in Leases (1937) 10 ALJ 356

Category:

Principal judgment

Parties:

Statement of Claim
Shun Sheng Pty Limited (First Plaintiff)
Sunshine Island (Aust) Pty Limited (Second Plaintiff)
Xue Feng Wei (Third Plaintiff)
Jun Lei (First Defendant)
Theo Kitsos (Second Defendant)

Cross-Claim
Jun Lei (First Cross-Claimant)
Theo Kitsos (Second Cross-Claimant)
Shun Sheng Pty Limited (First Cross-Defendant)
Xue Feng Wei (Second Cross-Defendant)

Representation:

Counsel:
D McGovern SC / D Allen (Plaintiffs/Cross-Defendants)
M S White SC / B Adam (First Defendant/Cross-Claimant)

Solicitors:
Du & Associates Lawyers (Plaintiffs/Cross-Defendants)
Lloyd & Lloyd Solicitors (First Defendant/Cross-Claimant)

File Number(s):

2021/365823

Publication restriction:

Nil

JUDGMENT

Reissued on 8 October 2024 following corrections to the orders made under the Slip Rule

1. These are complicated proceedings involving claims and cross-claims between two individuals who were formerly in partnership, and parties associated with them. The partnership business was a brothel at Guildford (also referred to in the evidence as being located at Smithfield) which the partners opened in June 2008. The relationship between the parties broke down in October 2021, and the proceedings were begun two months later, in December.

2. The following judgments have already been delivered at first instance and on appeal:

• 29 September 2023: Shun Sheng Pty Ltd v Lei [2023] NSWSC 1176 (“J1”);

• 19 December 2023: Shun Sheng Pty Ltd v Lei (No 2) [2023] NSWSC 1623 (“J2”);

• 8 February 2024: Shun Sheng Pty Ltd v Lei (No 3) [2024] NSWSC 72 (“J3”);

• 29 February 2024: Shun Sheng Pty Ltd v Lei [2024] NSWCA 43 (“CA1”);

• 9 May 2024: Shun Sheng Pty Ltd v Lei (No 2) [2024] NSWCA 105 (“CA2”);

• 27 May 2024: Shun Sheng Pty Ltd v Lei (No 4) [2024] NSWSC 635 (“J4”).

3. J1 was my principal judgment. It followed a four-day trial in August last year. I dismissed most of the plaintiffs’ claims and made a declaration fixing the date of dissolution of the partnership as having been 18 October 2021 (the plaintiffs had contended for an earlier date). I appointed Mr Alan Hayes (“the Receiver”) as the receiver of the partnership for the purpose of winding it up. In December, I made supplementary orders, including orders for account against various parties.

4. Those orders did not, however, resolve all of the claims between the parties and the proceedings continued for the purpose of dealing with those remaining claims, and costs. J2, J3 and J4 all dealt with interlocutory questions which arose in the course of those further proceedings.

5. Meanwhile, the plaintiffs brought an appeal against last year’s judgment. CA1 was an interlocutory judgment in the Court of Appeal. CA2 was the Court of Appeal’s judgment on the merits of the appeal. It was dismissed.

6. The parties to the proceedings are identified at J1 [15]-[16]. The relevant parties for present purposes are as follows:

1. Xue Feng Wei was one of the two partners. She is the third plaintiff and second cross-defendant.

2. Jun Lei was the other partner. She is the first defendant and first cross-claimant.

3. Sunshine Island (Aust) Pty Limited (“Sunshine Island”) is the second plaintiff. It is a company owned and controlled by Ms Wei. Sunshine Island was (and remained until recently) the owner of the Guildford premises. The partnership business was operated at those premises pursuant to a written, but unregistered, lease agreement between Sunshine Island, as landlord, and Ms Wei and Ms Lei, as tenants.

4. Shun Sheng Pty Limited (“Shun Sheng”) is a company which was incorporated in October 2021. Ms Wei owns 75% of the shares in the company and is one of the two directors. Soon after its incorporation, the company was granted a registered lease of the Guildford premises by Sunshine Island, and the conduct of the brothel at those premises has since been carried out in its name. It was initially named as the first plaintiff in the action but its claim as plaintiff was settled before trial. It remains, however, the second cross-defendant in the cross-action and it is in that capacity that it is a party to the present dispute.

7. Reference should also be made to three other companies which were used to hold some of the partnership assets and as a conduit for some of the partnership income and expenses: see J1 [8]-[9]. The companies in question were: Yin Yang Relaxation Centre Pty Limited (“Yin Yang”), from 2008 to 2015; Shan Xi Pty Limited (“Shan Xi”) from 2015 to 2019; and Shuang Pty Limited (“Shuang”), from about April 2019 to 2021. I will refer to these companies collectively as the “Partnership Companies”.

Claims for determination

8. At J4 [4]-[11], I summarised the remaining claims for determination in the proceedings. There are two substantive claims. The first is a claim by Sunshine Island against Ms Lei for unpaid rent on the Guildford premises (the claim is made against Ms Lei alone, but she has cross-claimed against Ms Wei for contribution). The other is a claim by Ms Lei to have Shun Sheng and Ms Wei account to the partnership for the assets of the brothel business. The same solicitors and counsel acted for Ms Wei, Sunshine Island and Shun Sheng. For simplicity, I will refer to them as the solicitors and counsel for Ms Wei.

9. Following a false, start which is described at J4 [14]-[26], the proceedings came on for hearing before me on 5 August. It was agreed that the evidence from last year’s hearing would be in evidence at the hearing, as supplemented by further evidence. In particular, further testimonial evidence was given, in both affidavit and oral form, by both Ms Wei and Ms Lei.

Rent claim

10. The agreement between Ms Wei and Ms Lei, as tenants, and Sunshine Island, as landlord, was a contract styled “Business Premises Leasing Tenancy Agreement” dated 19 June 2008. The contract was later replaced by a further agreement dated 9 April 2009. For simplicity, I will refer to both contracts collectively as the “Tenancy Agreement” but will refer only to the terms of the second agreement.

11. I have described the terms of the Tenancy Agreement at J1 [12]-[14]. For present purposes, it is enough to say that the lease term was 25 years, commencing on 19 June 2008, with an option to renew for a further period of 10 years. Rent was specified as $1200 plus GST ($1320 in total) per week. Clause 10, quoted at [15] below, provided for rental increases to be limited to the annual consumer price index (“CPI”).

12. Shun Sheng became the registered lessee of the Guildford premises in October 2021 and, from this point, Sunshine Island treated the Tenancy Agreement as having been terminated. As will be discussed in more detail below, there was a debate between the parties about whether Sunshine Island was entitled to terminate the Agreement for non-payment of rent. But it was common ground that, on any view, the obligation on the part of Ms Wei and Ms Lei to pay rent ceased once the new lease had been granted to Shun Sheng.

13. At $1200 per week plus GST, annual rent was $62,400 plus GST ($68,640 in total). Over the period from 19 June 2008 to 18 October 2021, rent would have amounted to $915,263. Adjusted for CPI, the total would have been $1,051,103.

14. In submissions at the trial, Sunshine Island acknowledged rent receipts totalling $273,710. The claim was that the remaining $788,103 (assuming that the rent was indexed annually for CPI, otherwise $643,080) had not been paid. Judgment was sought against Ms Lei for half of this amount, together with interest down to judgment. Counsel submitted that the calculation was “not without complexity” and should be worked out once judgment had been delivered on Ms Lei’s principal liability.

CPI indexation

15. Clause 10 of the Tenancy Agreement provided:

The annual rental increase must not exceed the annual CPI rate.

16. The Tenancy Agreement contained no other provision dealing with rent increases, either annually or upon exercise of the option. There was no written evidence of any such review having been carried out or formally notified by Sunshine Island to the tenants, Ms Wei and Ms Lei.

17. Ms Wei gave evidence that “[d]uring the course of the lease” she “recorded the rent paid by the partnership by writing details of the rental payments down” and annexed to an affidavit she made in November 2023 a rental statement which purported to record, in summary form, the rent owing and received over the period in question. She added that she “applied rental increases of 6% per annum when [she] made these records”.

18. In cross-examination, Ms Wei was challenged on whether the schedule was prepared contemporaneously. Counsel for Ms Lei pointed out that it appeared to have been written up on a single occasion and it had not been produced prior to last year’s hearing. Counsel suggested that it was in fact prepared in recent months, from Sunshine Island’s bank statements, for the purpose of the present hearing. Ms Wei denied this, but did say that the schedule was prepared “in 2021” so as to “reconcile the account with the other party”, presumably referring to Ms Lei. She also said that it was prepared from, or checked against, other records, but those records were not produced. In the end, it was clear that the schedule was not contemporaneous and I was left in doubt as to whether it was prepared at some point in 2021 or later.

19. It seems that no formal rent statements were issued by Sunshine Island during the lifetime of the Tenancy Agreement. Nor were any financial statements or tax returns of Sunshine Island, which presumably would have recorded annual rent receipts, in evidence. However, copies of some of the Partnership Companies’ tax returns, recording annual payments of rent to Sunshine Island, were in evidence, but only for six financial years. Those tax returns record the rent payments purportedly made by the Partnership Companies (exclusive of GST) as follows:

1. 2007/2008: Ying Yang $2,052 (equating to 12 days – the period from the inception of the Tenancy Agreement to 30 June 2008 – at approximately $1200 per week);

2. 2008/2009: Ying Yang $62,400 (equating to 52 weeks at $1200 per week);

3. 2009/2010: Yin Yang $64,272 (equating to 52 weeks at $1236 per week);

4. 2010/2011: Yin Yang $66,218 (equating to 52 weeks at approximately $1273 per week);

5. 2019/2020: Shuang $104,000 (equating to 52 weeks at $2000 per week); and

6. 2020/2021: Shuang $104,000 (equating to 52 weeks at $2000 per week).

20. As I recorded at J1 [47], Ms Wei was generally responsible for the administration of the partnership business, including accounting matters. Sunshine Island was her company. Payment of the rent and other tasks associated with administering the lease (including the determination and notification of any rent increases) would have been her responsibility on both sides of the record.

21. There was no evidence from Ms Wei of any formal rent review, or even decision on the part of Sunshine Island to increase the rent. Nor was there any evidence from Ms Lei that she was ever told of any rental increase.

22. Counsel for Ms Wei submitted that cl 10 provided, by implication, that rent was to be indexed each year according to CPI unless a lesser figure was specified by Sunshine Island. This implication was said to be a reasonable one as a matter of business commonsense, especially given the long duration of the Agreement: see the comments on rent review clauses in United Scientific Holdings Ltd v BurnleyBorough Council [1978] AC 904 at 948, 958-959.

23. Counsel for Ms Lei submitted that, on its true interpretation, cl 10 required that any increase in rent had to be notified. As this had not occurred, Sunshine Island was not entitled to any increase.

24. In reply, counsel for Ms Wei submitted that there was no requirement of notice implicit in cl 10, or that, alternatively, notice could be given at a later point. In this regard, counsel relied on Ms Wei’s rental schedule.

25. Although the Tenancy Agreement did not in terms provide for rental reviews, cl 10 did refer to the “rental increase”, which suggests a mutual understanding that reviews could take place and an increase could be imposed. Equally clearly, however, the clause provided that the rent might be increased by an amount less than CPI. I therefore do not accept that there was a further implication that the rent would increase by CPI unless Sunshine Island indicated to the contrary. Such an implication would not sit comfortably with the language used. In my view, the natural implication was that Sunshine Island had the power to increase the rent annually, but by not more than the CPI.

26. I also think that it was implicit in cl 10 that the rent could not be increased until after some formal notification of the increase had been given to the tenants. The tenants needed to know, at any particular time, how much they were obliged to pay. I think that the suggestion that Sunshine Island might increase the rent simply by making up its own mind to do so, and without giving any formal notification to the tenants, clearly fails the test of business commonsense. So too does the suggestion that Sunshine Island might increase the rent retrospectively by later giving a notice. Moreover, any such power would, on any view, have ceased when the Tenancy Agreement came to an end.

27. As already mentioned, there is no direct contemporaneous documentary evidence of any rent review having taken place under the Tenancy Agreement. As will be seen below, the payments which the parties agree to have been rental payments were not regular weekly payments. It was not suggested that I could deduce from those payments that a particular weekly rental amount had been adopted by the parties at the time.

28. The Yin Yang tax returns do show the annual rent payable under the Tenancy Agreement being increased by 3% for the second full year of the Agreement and by a further 3% (approximately) for the third. But counsel for Ms Wei did not rely upon this. It was of course inconsistent with Ms Wei’s 6% annual increase figure. Furthermore, as will be seen below, Ms Wei’s contention was that the tax returns were not, in any event, a reliable guide to the amount of rent paid for the years in question. I have therefore not checked whether the increases would have exceeded the CPI increases for the years in question. The rent figures in the Shuang returns are, on any view, considerably more than what would have been payable under the Tenancy Agreement even if that rent had been indexed.

29. The tax returns therefore do not assist Sunshine Island’s case. But even if they did, they would be insufficient. There is no evidence that any rental increase, even if decided upon by Ms Wei on behalf of Sunshine Island, was notified to Ms Lei before it was put into effect. For all the Court knows, the figures in the tax returns are based on instructions given by Ms Wei to the Partnership Companies’ accountants after the end of the financial years in question.

30. Nor does Ms Wei’s rental schedule assist Sunshine Island’s case. It was not contemporaneous and I cannot even be satisfied that it was prepared before the end of the Tenancy Agreement. In any event it was not notified to Ms Lei until well after the obligation to pay rent had ceased. The claim for CPI increments fails.

Quantum unpaid

31. Various bank statements were in evidence. These included statements covering the period from 9 May 2012 onwards for certain accounts of Sunshine Island, which, it seems, were produced on subpoena (none were available before that date, presumably because they had not been retained by the banks). Bank statements were also in evidence from the Partnership Companies: Ying Yang (17 June 2008 to 7 December 2016), Shan Xi (6 March 2015 to 31 March 2019) and Shuang (3 July 2019 to 30 June 2021).

32. Although I was not taken to the bank statements in detail, the parties agreed that they showed rental payments by the Partnership Companies to Sunshine Island as follows: Yin Yang $3,000 (two payments in July 2012); Shan Xi $114,000 (eight payments between May 2016 and June 2017); and Shuang $40,000 (two payments in September 2020 and May 2021).

33. In addition, it is common ground that payments of rent were made to Sunshine Island by Ms Wei personally. Sunshine Island’s points of claim acknowledged payments totalling $116,710 from her between 1 July 2012 to 30 June 2019. In their closing submissions, counsel for Ms Wei stated that the amount shown in the bank statements for the period between April 2015 until October 2017 was actually $106,000 but did not seek to vary the acknowledgement in Sunshine Island’s points of claim. Counsel indicated that the point would be pursued through the accounting process.

34. It was therefore common ground at the hearing that rent payments totalling at least $273,710 were made to Sunshine Island.

35. As already noted, some tax returns for the Partnership Companies (Yin Yang 2007/2008 to 2010/2011 and Shuang 2019/2020 to 2020/2021) were in evidence. But the payments recorded in those returns did not accord with the list of agreed rental payments based on the bank statements in evidence. The agreed payments did not include any payments in the period covered by Yin Yang’s returns (which showed rent totalling $194,942 exclusive of GST), and the figures in Shuang’s returns (totalling $208,000 exclusive of GST) exceeded the agreed payments by $188,800 (once GST is factored in).

36. There were no tax returns for the Partnership Companies for 2011/2012 to 2018/2019 or for 2021/2022. Despite the issue of further notices to produce, no further returns or financial statements from any Partnership Companies were produced. Nor were any of Sunshine Island’s tax returns or financial statements produced at all.

31. I have already referred to the rental schedule which was put forward in Ms Wei’s affidavits to quantify the rent claim, and how it was prepared in 2021 or later. It seems that the schedule was prepared from the bank statements which were in evidence before me. Ms Wei, by way of affidavit dated 5 August 2024, “set out what has been produced in relation to Sunshine Island” and detailed the 10 bank accounts for which bank statements were produced.

32. Ms Wei’s explanation for the figures in the Yin Yang and Shuang tax returns was:

In relation to Yin Yang…and Shuang’s tax returns…at the time I instructed the Partnership’s accountant to prepare these tax returns, and used anticipated rent payable for these business as opposed to actual rent paid.

…These tax returns do not represent how much rent Yin Yang, Shan Xi and Shuang each paid Sunshine on behalf of the Partnership.

…Sunshine did not receive rental income from Yin Yang, Shan Xi and Shuang in the amount set out in their respective tax returns.

39. Ms Wei maintained in cross-examination that she “arranged for these companies [Yin Yang and Shuang] to claim tax deductions for rent paid even though they didn’t pay the actual rent figure included in the tax return”.

40. When cross-examined on her failure to produce Shan Xi’s tax returns, Ms Wei’s evidence was that:

I don’t – I really don’t know if I still have them…I have asked the tax agent for the records, but the tax agent said that they could not find it.

41. She could not remember if she had contacted the Australian Taxation Office or the director of Shan Xi, Feng Lei, to obtain copies of its tax returns.

42. When cross-examined on her failure to produce Sunshine Island’s tax returns, Ms Wei said that she did not have copies of the tax returns in her possession and that she had “already…asked the relevant tax agents” to do so and that she did not know why they had not been produced.

43. In their submissions, counsel for Ms Wei urged me to accept that no more than the acknowledged sum of $273,710 had been paid to Sunshine Island. Counsel acknowledged the additional payments recorded in the tax returns but submitted that the returns were only secondary evidence. Counsel argued that the bank statements represented the best evidence of what had been received.

44. In evaluating this submission, the starting point is that the onus lay squarely on Sunshine Island, as plaintiff, to establish that the amounts due by way of rent had not been paid. As already noted, this was an aspect of the administration of the partnership which was under the control of Ms Wei. One would expect that it would be a matter of record.

45. There does not seem to be any rhyme or reason to the payments in the bank statements which the parties agree were payments of rent. The payments were not made on a weekly basis as required by the terms of the Tenancy Agreement. Instead, larger sums of money, some in the tens of thousands, were paid at irregular intervals. There is no evidence of any contemporaneous reconciliation of these amounts with the partners’ obligations under the Agreement. There is no explanation from Ms Wei for why the payments were made when they were and what steps, if any, she undertook to keep track of the amount of rent outstanding from time to time.

46. It is therefore a large understatement to say that the calculation of interest, which would first require a statement showing the outstanding balance from week to week, was “not without its complexity”. On the evidence before me, no rental statement was ever prepared during the lifetime of the Tenancy Agreement. Indeed, even now, no such statement has been prepared on behalf of Sunshine Island.

47. Against this background, I think there are four points of significance. The first is that the agreed payments in the bank statements overwhelmingly come from the period from April 2015 onwards. There are no payments before then for a period of almost seven years going back to the inception of the Tenancy Agreement in June 2008, apart from $3,000 in July 2012. Over that period, the rent payable under the Tenancy Agreement was more than $450,000. It seems highly unlikely that Ms Wei, on behalf of Sunshine Island, would have tolerated that degree of non-payment over that period of time.

48. Second, it is not clear that the bank statements in evidence actually represent a complete record of all relevant receipts and payments over the whole period of the Tenancy Agreement. As counsel for Ms Lei pointed out, all Ms Wei did in her affidavit was to identify the bank statements produced on subpoena and state that all of the rental payments recorded in those statements had been taken into account. She did not actually state that all relevant bank statements had been produced. Nor did she address the possibility of payments having been made to Sunshine Island in cash (bearing in mind large amounts of cash passed through the hands of the partnership over its lifetime, not all of which was necessarily appropriated by Ms Lei: see J1 [229]), or by book entry.

49. Third, there are the rental figures in the tax returns in evidence, which are higher than the agreed rental figures derived from the bank statements. On the face of it, the Court is entitled to proceed on the basis that the returns were accurate. It is true that one would expect the figures to have been derived from primary accounting records. But the fact that those figures exceed the figures derived from the bank statements does not establish that they are incorrect in circumstances where I cannot be satisfied that the statements form a complete record of rent receipts. Some better reason would be required for the Court to ignore them.

50. Ms Wei’s explanation for the disparity was, in substance, that the tax return figures represented the sums due, but those sums were not actually paid, or paid in full, in particular because of interruptions in trading caused by renovations. That approach might plausibly have been adopted if there were periodic liquidity shortfalls (although one would expect such shortfalls to have been made up later), but it would hardly have been justifiable if there was a complete failure to pay rent extending over periods of years. And while there were renovations at various times (see J1 [37] and [40]-[42]), they were hardly continuous. Ms Wei’s explanation was not corroborated by any evidence from the accountant who prepared the returns, and I do not find it credible.

51. The fourth point is that, for many years of the partnership’s operations, no tax returns have been produced at all. The failure to produce any tax returns for Sunshine Island is particularly glaring. Again, this was something which required explanation, and, again, Mr Wei’s evidence fell short. There is no reason to think that returns were not lodged. The accountant was not called, and all the Court has is the uncorroborated assertion from Ms Wei that requests were made which have inexplicably not been complied with. The principles in Jones v Dunkel (1959) 101 CLR 298 allow for the drawing of an adverse inference from the failure to produce documents in a party’s possession, custody or power, just as they apply to the failure to call a witness in the party’s camp. Counsel for Ms Wei accepted this. I think I can infer that the returns would not have assisted Sunshine Island’s case. At the very least, I should not draw any inference in Sunshine Island’s favour on the issue.

52. In all of these circumstances, I find myself in a state of uncertainty. The evidence is incomplete and raises more questions than it answers. I see no reason to try to fill the gaps and reconcile the inconsistencies by inference, or, more likely, speculation.

53. Sunshine Island has therefore not satisfied me that the sum it claims, or any other sum, is actually outstanding. Its rent claim fails for that reason alone. But in deference to the arguments of the parties, I will go on and consider the further defences raised by Ms Lei to the claim.

54. In further written submissions filed after the hearing, counsel for Ms Wei submitted that only $154,000 in rent was received by Sunshine Island from 24 December 2015. Counsel suggested that the parties had not agreed on the contributions made by Ms Wei personally (see [33] above). That is not the impression that Ms Wei’s closing submissions left on me but given the views which I have formed it makes no difference to the outcome and I will say nothing more about it.

Limitation

55. Ms Lei’s defence relied upon the statutory bars created by ss 14 and 24(1) of the Limitation Act 1969 (“LA”). Both ss 14 and 24(1) impose a limitation period of six years from the date on which the cause of action first accrues to the plaintiff: in the case of an action on a contract under s 14(1)(a); and in the case of an action on arrears of income (which includes rent) under s 24(1). Ms Lei also relied on LA s 63, which provides that once a limitation period under the Act expires, the right and title underlying the action is extinguished. Although there was some debate about the fact that the points of claim were not filed until after the proceedings were commenced (and indeed not until after the delivery of last year’s judgment), in the end, counsel for Ms Lei only relied on limitation as a defence to claims for rent accruing six years before the date of commencement of the proceedings, which was 24 December 2015.

56. In reply to the defence, Ms Wei alleged that Ms Lei had made various promises to pay the outstanding rent which were independent of the original obligation in the Tenancy Agreement. These alleged promises were canvassed in the evidence presented at last year’s hearing, although there was further affidavit evidence and cross examination about some of them before me. For the purposes of this judgment, only a summary description is required.

57. Ms Wei alleged that at the time of the establishment of the partnership in 2008, there had been specific discussion about the payment of rent. In the course of the discussion, according to Ms Wei, it was agreed that the rent would be paid out of the Partnership Company’s account, and Ms Lei undertook not to draw on the monies in that account (or, allegedly, on the cash takings) until the rent had been paid (see J1 [80]).

58. Next, Ms Wei alleged that a series of conversations took place between her and Ms Lei between early and mid 2019 about the conduct of the partnership. Allegedly, Ms Wei complained to Ms Lei that she (Ms Lei) was using drugs, appropriating cash from the partnership takings and pestering the sex workers to lend money to her as well as supplying some of them with drugs herself. According to Ms Wei, Ms Lei promised that this conduct would not continue, and that she would account to Ms Wei for the monies which she had taken from the partnership together with “my share of the rent” (see J1 [86]-[87]).

59. Next, in October 2020, Ms Lei signed an IOU prepared by Ms Wei which confirmed that she (Ms Lei) would pay Ms Wei the amount found to be due on completion of an account (J1 [163]-[166]) According to counsel for Ms Wei, it was clear from the context that the account would include unpaid rent.

60. Finally, Ms Wei alleged that further conversations took place in October 2021, shortly before the relationship between the parties finally broke down. WeChat messages between the parties (see J1 [198]-[200]) show such conversations occurring at the time the account was under way. One of Ms Wei’s messages reminded Ms Lei that the account was to go back ten years. Again, according to counsel for Ms Wei, it was clear that the account was to include unpaid rent.

61. Counsel submitted that the 2019 and 2021 conversations and the 2020 IOU amounted to fresh agreements by Ms Lei to pay whatever amount was found due to Sunshine Island by way of unpaid rent on the completion of the account. Counsel further submitted that this agreement could be sued upon, going right back to the beginning of the Tenancy Agreement, without infringing any of the statutory bars relied upon by Ms Lei. Alternatively, counsel contended that the promises amounted to confirmations for the purposes of LA s 54, with the result that the limitation period restarted.

62. There was no dispute that Ms Lei accepted that she was obliged to pay whatever amount was found due to Ms Wei on the completion of accounts, or that this would include her share of any unpaid rent.

63. As to confirmation, LA s 54 requires that the confirmation be before the relevant limitation period has expired. A confirmation given after expiry is not effective to revive the previous cause of action. Thus, even if the alleged promises made in October 2020 and October 2021 amounted to confirmations, that would, at best, push the limitation bar back only from December 2015 to October 2014.

64. LA s 54 also requires that a confirmation be in writing and signed by the person to be charged. On no view, therefore, could the alleged promises in 2019 qualify. The October 2020 IOU was signed by Ms Lei, and counsel for Ms Wei submitted, by reference to s 9 of the Electronic Transactions Act 2000, that the October 2021 WeChat messages sent by Ms Lei were also signed by her. On the view I take, it is not necessary to decide this issue, and I will pass over it.

65. According to Ms Lei’s affidavit of 27 November 2023, it was agreed at the outset that Ms Wei would manage the accounts for the partnership, including the payment of rent. Ms Lei stated:

My understanding was that Sunshine received rental payments, in the form of electronic payments from partnership corporate vehicles and by receiving Eftpos payments that were due to the Partnership. Nancy [Ms Wei] and I had a discussion about this arrangement in around May 2008. This conversation is set out in paragraph 10 of her affidavit affirmed 7 December 2022, where Nancy says:

‘The Partnership will need to pay rent to my company that owns the property, which will be considered part of the expense of the Partnership. I will manage the accounts, and I will reconcile the accounts at the end of each month and split the profit each month.’

66. There was some debate before me following last year’s hearing about whether the 2019 conversations alleged by Ms Wei were actually denied by Ms Lei: see J1 [165]-[166]. But it is not necessary to go into this question any further for present purposes. Despite the protest of counsel for Ms Lei, who contended that the issue had been determined in her favour by my previous judgment, I permitted counsel for Ms Wei to cross-examine Ms Lei about the alleged conversations. At one point she gave the following evidence:

COUNSEL:    At the time that you had, I suggest, this conversation, you were fully aware of the fact that as a partner, you had a responsibility yourself to pay for rent. Didn’t you?

LEI (via Interpreter):   I – I do have the responsibility to pay rent, but Ms Wei told me she will withdraw or make a transaction for the rent to come from our company’s bank account and I don’t need to worry about it, plus all these years, she didn’t ask me for money for rent.

67. Ms Lei’s description of the initial arrangement between the parties concerning the payment of rent is plausible given Ms Wei’s responsibility for administration (see [20] above). On the evidence before me, Ms Lei’s allegation that Ms Wei told her that she would deal with the rent, and that she did not thereafter seek payment, is also plausible. But again it is unnecessary to reach a final conclusion on the factual issues, if any.

68. I accept, and it is not actually in dispute, that Ms Lei promised to account to Ms Wei for any monies owed to the partnership, and this would have included a half share of any unpaid rent owing to Sunshine Island. But that obligation to account was an obligation as between Ms Lei and Ms Wei. Rent may have been mentioned but it was only one component of the account as a whole, and the only obligation was to account for a half share.

69. The present claim is of quite a different character. It is a claim by Sunshine Island, not by Ms Wei, and it is a claim against Ms Lei for the whole amount allegedly due from the partnership, on the footing that she is jointly and severally liable for that amount. Sunshine Island cannot, by claiming only half the amount found to be due, unilaterally alter the nature of Ms Lei’s alleged liability and convert it into a separate liability for half the outstanding amount.

70. Even on Ms Wei’s version of events, there is no evidence of any promise by Ms Lei to pay any particular amount, or even the unpaid balance when determined, to Sunshine Island. At most, there was a promise to pay Ms Lei’s “share” of the rent. For these reasons, even if Ms Wei’s version of events was accepted, it could not amount to a fresh agreement between the partnership and Sunshine Island concerning the payment of the partnership’s rent. Similarly, it could not amount to a confirmation of the partnership’s rent liability to Sunshine Island.

71. Accordingly, Ms Lei’s limitation defence is made out and, if I had found that the partnership was liable to Sunshine Island for unpaid rent, that liability would be limited to rent which accrued after 24 December 2015.

Estoppel

72. This defence was based on an alleged promise by Ms Wei, arising out of conversations between Ms Wei and Ms Lei in May 2008 and again in June 2009 during which, according to Ms Lei, Ms Wei undertook to ensure that she would make the arrangements necessary to pay the rent. Counsel for Ms Lei characterised the alleged statement as an undertaking by Ms Wei to arrange for payment of the rent. Counsel contended that Sunshine Island was party to, and bound by, that undertaking. In counsel’s submission, this gave rise to an “estoppel by conduct, representation or acquiescence” which resulted in Ms Lei assuming that the rent was being paid and that she would not be required to make any such payment.

73. For reasons given above, the context of the discussions between Ms Wei and Ms Lei concerned their liabilities inter se as partners. Sunshine Island may have been Ms Wei’s company but that did not make it a necessary party to any understanding they had as between themselves as to how the partnership liabilities were to be satisfied. Indeed, the conversation presupposes an ongoing partnership liability to pay the rent. Whatever complaint Ms Lei might be entitled to make against Ms Wei, the alleged understanding could give her no rights against Sunshine Island.

74. Furthermore, it is hard to see what detriment there would have been. All Ms Lei seems to have done was not to have paid rent. There was no relevant change of position making it inequitable for Sunshine Island to pursue its claim. Had Sunshine Island established the existence of an outstanding rent liability, the estoppel defence would not have been an answer to it.

Set-off

75. As noted in J1 [107]-[108], at some point during the partnership, EFTPOS machines were configured so that monies paid by customers by card were deposited automatically into Sunshine Island’s bank accounts. Among the supplementary accounting orders which I made in December last year was an order that Sunshine Island account to the partnership for these receipts. On Ms Lei’s behalf, it was contended that Sunshine Island’s obligation to repay these monies should be set off against any liability to Sunshine Island for unpaid rent. Ms Lei relied upon the principles of equitable set off, recently considered by the Court of Appeal in Mao v Bao (2023) 113 NSWLR 26.

76. Pursuant to the order for account which I made last December, in August this year Sunshine Island served its statement of account in which it acknowledged receipt of $207,663 through the partnership’s EFTPOS machines. But in the hearing before me, counsel for Ms Lei pointed out that these acknowledged receipts came from accounts held by Sunshine Island with the Australian and New Zealand Banking Group Limited (“ANZ”) and the Commonwealth Bank of Australia (“CBA”). A further bank account of Sunshine Island, held with National Australia Bank (“NAB”) was said to have received $422,407 in EFTPOS payments. Counsel for Ms Lei submitted that the total amount, $630,705, was more than enough to extinguish any rent claim.

75. Counsel for Ms Wei did not engage with this contention on a factual level. No admission was made that Sunshine Island was liable for the additional $422,407 received into the NAB bank account but no contrary argument was presented either. The position taken by counsel was that the Court has already made an order for a separate account and Sunshine Island’s liability would be determined in those accounting proceedings. Counsel submitted that for at least two reasons no equitable set-off was available.

76. Counsel’s first point concerned mutuality. Counsel emphasised that in the present proceedings Sunshine Island was only seeking a judgment against Ms Lei for her “half share” of the rent. Counsel submitted that this made the claim a personal one, which could not be set off against Sunshine Island’s liability to the partnership to refund the EFTPOS monies.

77. In my opinion, the attempt to avoid the possible application of a set-off by confining Sunshine Island’s claim was not effective. It is of course open to Sunshine Island to seek judgment for less than the amount which the evidence indicates it is entitled to. But, as I have already pointed out, that cannot alter the nature of the liability in suit. Ms Lei is jointly, as well as severally, liable to Sunshine Island for any unpaid rent. If Sunshine Island obtains a judgment and it is discharged by Ms Lei, then Ms Wei will also be discharged. The rent claim is a partnership claim and mutuality between it and Sunshine Island’s liability to account to the partnership with respect to the EFTPOS monies is clear: see S R Derham, Derham on the law of set-off (4^th ed, 2010, Oxford University Press) at 4.03.

78. The remaining point taken by counsel for Ms Wei was that the requirements of an equitable set-off were not satisfied, in that Sunshine Island’s obligation to repay the EFTPOS monies did not relevantly impeach its entitlement to sue for and recover the allegedly unpaid rent in full. Counsel pointed out that the two liabilities did not arise out of the same transaction and were not in any relevant sense interdependent (cf Mao v Bao at [66], [69]).

79. In reply, counsel for Ms Lei submitted that the necessary relationship between the two claims was established. Counsel relied on the decision in Beasley v D’Arcy (1805) 1 Sch & Lef 403, where a landlord who had cut down and taken away timber growing on land that he had leased to the tenant (which was a trespass) was required to set off his liability for damages against rent due to him under the lease. Counsel suggested that the proper interpretation of the decision was that, by removing the timber, the landlord had reduced the income earning potential of the leased land, and this provided the necessary impeachment of the entitlement to claim rent. Counsel suggested that the present case was the same, on the ground that the diversion of EFTPOS monies had made it impossible to meet the claim for rent.

80. As already noted, in the course of Ms Wei’s evidence, there was some suggestion that, at least for some periods of time, the partnership lacked available funds to meet the rental payments. Given that Ms Wei was acting, in effect, for Sunshine Island as landlord and for the partnership as the tenant, it would not necessarily have been wrongful for her to agree for monies owing to Sunshine Island (if there were any) for rent to be paid directly by means of EFTPOS. This would have given rise to a set-off, but it would have been a set-off at law arising by contract (Ms Wei being, in effect, authorised by both parties). But for reasons I have already given, I simply cannot say whether any rent was outstanding at the relevant time.

81. Whether, had I found that there was rent outstanding, such rent would have been subject to an equitable set-off, is therefore not a question which arises for decision. As the question is one of law, I see no point in expressing any conclusion on it. The issue can be debated on appeal if that becomes necessary.

Contribution from Ms Wei

84. Counsel for Ms Wei submitted that no contribution should be ordered against her because Sunshine Island was only claiming Ms Lei’s share of the rent. For reasons I have given, the attempt to change the nature of the claim by seeking judgment for only half the amount outstanding is ineffective. Ms Lei would have a clear right of contribution, on the basis of coordinate liability, towards any judgment given against her. But as Sunshine Island has failed to satisfy me that there is any liability for unpaid rent, making an order for contribution against Ms Wei does not arise.

Business appropriation claim

85. The background to this claim is set out at J1 [286]-[287]:

On the face of it, Shun Sheng has received the benefit of the transfer of the partnership business, including goodwill, and the other assets used in that business, for no consideration. It seems that in her role as director and majority shareholder of Shun Sheng, Ms Wei simply continued to operate the business using a new operating company. If that is so, then, on the face of it, Shun Sheng would be liable to account to the partnership for the assets appropriated to it by Ms Wei, and the income derived from the partnership business since then.

Counsel for Ms Wei submitted that it had not been pleaded that Shun Sheng was a recipient, with notice, of partnership assets (or that it had received the assets as a volunteer, for that matter). In the end, counsel for Ms Lei asked me not to make any orders at this stage. I am content to reserve further consideration of Shun Sheng’s liability to account, to see whether it can conveniently be dealt with by way of supplement to this judgment. In any event, of course, it will be open to the receiver to pursue a claim against Shun Sheng, either in these proceedings or in separate proceedings, by way of direct claim on behalf of the partnership.

86. As presented before me, the central allegation in the claim was that Ms Wei had appropriated the partnership’s business to Shun Sheng in breach of her partnership duties. The claim against Shun Sheng was put on the basis of both limbs of Barnes v Addy (1874) LR 9 Ch App 244, namely knowing receipt of property transferred in breach of fiduciary duty and knowing participation in a dishonest and fraudulent design on the part of a defaulting fiduciary (Ms Wei).

87. Success on the claim against Shun Sheng would entitle Ms Lei to have the Court impose a constructive trust over the business assets in Shun Sheng’s hands. In turn, that might have allowed Ms Lei to require Shun Sheng to transfer the business assets, including the benefit of the lease of the Guildford premises, to the Receiver, or to account to the Receiver for the business profits made by Shun Sheng since October 2021, or some combination of both.

88. But counsel for Ms Lei made it clear that she was not seeking proprietary relief of this kind. Instead, she sought monetary compensation for the partnership, to be calculated by reference to the value of the assets appropriated to Shun Sheng in October 2021. That would include, in particular, the goodwill of the business as at that date. Declaratory relief was sought in Ms Lei’s points of claim, but in the course of final submissions, her counsel accepted that a declaration was unnecessary and the proper remedy was simply an order for an account: cf Irwin v Pamplin (No 5) [2024] NSWSC 484 at [68].

89. It is convenient to deal with the claim against Ms Wei before dealing with the accessorial claims against Shun Sheng. But first I will address the relevant evidence.

Analysis of evidence

90. Shun Sheng was incorporated on 8 October 2021. That was a Friday. From the following Monday, 11 October, the Covid lockdown was to be eased to allow most businesses to reopen, including, it seems, brothels.

91. The company’s initial share capital was 100 x $1 shares. Ms Wei was allocated 75 of these, and Ms Lei Wang the other 25. Ms Wang, was then, and had been since about July 2019, the receptionist at the brothel. In that role she was responsible for coordinating the sex workers, a task previously undertaken by Ms Lei. Ms Wang is in fact Ms Lei’s niece.

92. The application filed with ASIC for the incorporation of Shun Sheng was in evidence. It was signed by Ms Wang. There was no other documentary evidence about the arrangements between Ms Wei and Ms Wang which led to Shun Sheng’s incorporation.

93. The new lease from Sunshine Island to Shun Sheng was dated, and expressed to commence, on the same day, 8 October 2021. The evidence does not indicate when the lease was actually registered, or whether it was actually signed on 8 October.

94. The approval under which the brothel was operated by the partnership, which had been granted in 2008 following Land and Environment Court proceedings, authorised it to be conducted at the Guildford premises, subject to compliance with various conditions (see J1 [34]). The terms of the approval did not nominate any particular operator, and it was common ground before me that possession of the premises carried with it the entitlement to operate a brothel there in accordance with the terms of the approval. The grant of the lease to Shun Sheng thus effectively carried with it the entitlement to continue to operate the existing business.

95. In her evidence, Ms Wei did not say anything of substance about the circumstances which led to Shun Sheng being incorporated and a fresh lease being granted by Sunshine Island to the newly incorporated company. In cross-examination, she agreed that Shun Sheng did not pay the partnership any money for the taking over of the brothel business.

96. In cross-examination, Ms Wei was asked about the preparation of the new lease. She said that it was drawn up and registered by her current solicitor, Ms Dianna Du. There were “at least two to three” meetings with Ms Du, which were attended both by Ms Wei and Ms Wang, which Ms Wei thought took place before 8 October, although she conceded “I can’t remember it clearly”.

97. The brothel duly reopened on Monday 11 October and the locks were changed on that day or shortly thereafter. It seems that when the brothel re-opened, the EFTPOS machines there were set up so that EFTPOS payments were credited to an account in the name of the then Partnership Company, Shuang. According to Ms Wei, it took a few days for those machines to be replaced or reconfigured so that payments went to Shun Sheng, but this had been organised by the end of the week.

98. Although there was no direct evidence about this, I would infer that the furniture and other existing fixed assets of the partnership were taken over by Shun Sheng and continued to be used in the operation of the brothel. There was no evidence of any of these assets being discarded or sold for the benefit of the partners whose property they legally were. Similarly, I infer that the partnership’s contractual arrangements with its employees were taken over by Shun Sheng. There is nothing to indicate that there was any wholesale change of personnel when the brothel’s operations resumed on 11 October.

99. Under the partnership, the brothel traded under several business names (see J1 [6]) and used several websites to promote its services. Ms Wei’s evidence was that the brothel is now using different business names and websites, although there was some debate about that. In any event, the evidence suggests that there was no review of the brothel’s websites until about December 2023, over two years after its operations resumed in October 2021. I infer that when Shun Sheng took over, the existing business names and websites continued to be used for trading and promotional purposes.

100. In short, the evidence as it has been presented confirms that supposition set out at J1 [286]. For practical purposes, the business previously operated by the partnership was taken over by Shun Sheng upon the incorporation of that company in October 2021. If it matters, I think the evidence also shows that the business currently being conducted by Shun Sheng is substantially the same as the former partnership business.

101. I am also satisfied that the effective transfer of the partnership business to Shun Sheng was the result of decisions and actions of Ms Wei. She was in effective control of the partnership’s operations and evidently remained in effective control of the business in the hands of Shun Sheng. There is no evidence of any change when the transfer took place. No payment was made by Shun Sheng and no significant investment, on the evidence, was made by Ms Wang.

102. Ms Wang did not give evidence. It was faintly suggested in written submissions by counsel for Ms Wei that a Jones v Dunkel inference should be drawn against Ms Lei, on account of her failure to call her niece, Ms Wang, as a witness. But I think that the inference runs the other way. Ms Wang is a shareholder and director of Shun Sheng. On the face of it, she is squarely within Shun Sheng’s camp for relevant purposes. If she had played some independent role in incorporating Shun Sheng and taking over the assets of the former partnership business, she would have been the person to tell the Court about it. In my view, the evidence on this question is all one way, but if I had entertained any doubt about it, I would readily have drawn the conclusion that Ms Wang’s evidence would not have assisted Shun Sheng on the issue.

103. The transfer of the business happened without any prior consultation with, or warning to, Ms Lei. Indeed, up to only a few days beforehand, Ms Wei had been dealing with Ms Lei on the basis that they were engaged in an accounting process which would eventually result in Ms Lei resuming an active role in the business: see J1 [238]-[239]. This makes it difficult to accept, and it was not asserted, that Ms Wei thought she was entitled to remove Ms Lei summarily from the partnership on the basis of her prior alleged misconduct. Furthermore, there was no suggestion that Ms Wei had given any consideration to the terms of the partnership agreement concerning dissolution. I think it is clear that Ms Wei simply decided to take over Ms Lei’s share of the business for her own benefit.

Claim against Ms Wei

104. As already noted, Ms Lei’s claim was that Ms Wei had alienated the partnership business by transferring it to Shun Sheng. This was said to be a plain breach of her fiduciary duties as partner, which required her to maintain and operate the business to the best advantage of both partners. Counsel for Ms Wei did not dispute that Ms Wei was subject to fiduciary obligations in her dealings with partnership property in general, and the partnership business in particular. Counsel advanced two arguments in response to the claim. The first was based on a pleading point. The second concerned the scope of Ms Wei’s fiduciary duties as a partner in the business.

105. Pleading point: Counsel’s argument fastened on the way in which the partnership property was identified in Ms Lei’s points of claim. The argument began with [11], which alleged:

Since 8 October 2021, Shun Sheng and Ms Wei have conducted the Business previously operated by the Partnership, using the assets owned at law or in equity by the Partnership, at the Premises, to the exclusion of Ms Lei.

Particulars

a.   the leasehold interest in the Premises;

b.   the 2021 Lease, at least insofar as the 2021 Lease covers the period of the tenancy under the Tenancy Agreement;

c.   the renovations carried out to the Premises between 2008 and 2021;

d.   the brothel business operating under one or more of the business names referred to in f. below, or from the premise at 1/181 McCredie Rd, Smithfield NSW (the Business);

e.   the goodwill and intellectual property of the Business; and

f.   the business names ‘Gentleman’s Club No 1/181’, ‘No 181 Smithfield’, ‘Amazing Lady’, ‘Guildford Brothel’, ‘181 Smith Brothel’ and ‘181 Smithfield Brothel’,

(together, the Partnership Assets).

g.    by 18 October 2021 Shun Sheng and Ms Wei had arranged for the locks of the Premises to be changed, preventing Ms Lei having access to the Premises, the Business and the Partnership Assets.

h.   since 18 October 2021 Shun Sheng and Ms Wei have received the income from the Business without accounting in any way to Ms Lei for that income.

106. The prayers for relief in the points of claim, which specified the form of accounts sought by Ms Lei, were also relevant to counsel’s argument. They were prayers 4, 5 and 6:

4.   An order that Shun Sheng account to the Receiver for the Partnership Assets and for the income or profit derived therefrom since 18 October 2021 as part of the account ordered by the Court on 10 November 2023 to be conducted by the Receiver.

5.   An order that, in the event that, and to the extent that, Shun Sheng is unable to fully account to the Receiver pursuant to order 4 above, Ms Wei is to account to the Receiver for the income or profits received by Shun Sheng from the Partnership Assets since 18 October 2021.

6.   An order that Ms Wei account to the Receiver for any income or profit she has received from the use of the Partnership Assets, directly, or via Shun Sheng, since 18 October 2021.

107. Counsel for Ms Wei argued that, as a matter of grammar, Ms Lei’s pleaded claim was limited to the “Partnership Assets”, namely the items of property specified in the first six particulars to [11]. If no case could be sustained under those particulars, so the argument ran, Ms Lei could not succeed.

108. The next step in counsel’s argument was that none of the assets listed in the particulars had any continuing existence, or at least any continuing value, in the hands of Shun Sheng. Counsel submitted that the partnership’s leasehold interest in the premises (particular (a)) ceased to exist once Shun Sheng’s lease was registered; Shun Sheng’s business was carried on under that lease. The new lease was a new asset which could not be equated with the former partnership lease, its terms being different in material respects and imposing obligations as well as benefits. Counsel further submitted that the renovations (particular (c)), as fixtures, belonged in law to the landlord, Sunshine Island, and the partnership had no rights to those fixtures independent of the lease which conferred no rights on the partnership to remove them.

109. I did not understand counsel to dispute that, in principle, there might have been goodwill associated with the conduct of the partnership business. But counsel pointed out that such goodwill had to be distinguished from goodwill associated with the premises themselves, which, in counsel’s submission, was an asset associated with the lease rather than the partnership. Counsel submitted that the evidence did not establish that there was any distinct goodwill associated with the partnership itself.

110. Counsel acknowledged that, on the approach advocated by counsel for Ms Lei, the Court would simply make an order for an account and the question of the value of any goodwill would be determined in the course of any later accounting proceedings, but contended that this was impermissible. In counsel’s submission, the Court could not make an order for an account without first being satisfied that the property the subject of the account existed and had value.

111. The first difficulty with this argument is that it relies too heavily on the wording of the particulars to [11]. Under the rules of pleading (commonly disregarded as they may be), allegations of material fact should appear in the paragraphs of the pleading itself. The function of particulars is to provide subordinate detail to enable the relevant allegation to be properly understood. That is why one does not plead to particulars.

112. In the present case, the pleaded allegation in [11] is, relevantly, that Shun Sheng has “conducted the Business [that is, the brothel] previously operated by the Partnership, using the assets owned at law or in equity by the Partnership, at the Premises”. That is what Ms Lei, in her points of claim, offered to prove, and that allegation defined the issue between the parties. The allegation being denied, particulars could not limit the resulting issue for determination, and, with the benefit of hindsight, the allegation probably did not need to be particularised at all.

107. It is also relevant to refer to [8A] of Ms Lei’s points of claim, which was likewise denied by Ms Wei, which states:

On or immediately before 8 October 2021 Ms Wei formulated a dishonest and fraudulent design to exclude Ms Lei from the assets of the Partnership, including the leasehold interest in the Premises, and appropriate them to Shun Sheng.

114. Admittedly, the prayers for relief seek an account expressed in terms of the Partnership Assets”, which is a defined term derived from the particulars to [11]. But I do not think that this prevents the Court from making an order in the form now sought by counsel for Ms Lei, which would require an account of the value of the partnership assets appropriated by Ms Wei. Again, this is a consequence of the rules of pleading.

115. Except to avoid surprise (which is not suggested in the present case), a pleading party has no obligation to allege anything more than the facts upon which that party relies in order to claim relief. If facts falling within the pleaded scope are established, then the party is not obliged to plead the legal consequences of those facts. The party is entitled to ask the Court to make whatever orders properly follow from the facts proved.

116. A fortiori this applies to the form of relief claimed. While it is good practice for pleadings to state the orders sought in the form in which the Court will be asked to make them, failure to do so does not deprive the Court of the power, nor the responsibility, to make orders in the form the law requires, having regard to the facts proved.

117. In my view, the rules of pleading do not require Ms Lei to establish that each and every one of the “Partnership Assets”, as defined in the particulars to [11], was a pre-existing partnership asset which was transferred to Shun Sheng in October 2021. The pleaded allegation was that, at Ms Wei’s behest, Shun Sheng took over “the assets owned at law or in equity” by the partners. That was what had to be proved.

118. Nor was it necessary, if Ms Lei was to obtain relief, for her to prove that all such assets were taken over by Shun Sheng. If the evidence established only that some of those assets were taken over, a claim for an account for the value of those assets would have been squarely within Ms Lei’s pleading.

119. Nor do I accept that the claim for goodwill in some way excluded the benefit of possession of the premises. In Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605 at [23], the High Court defined goodwill as:

…an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes ‘the attractive force which brings in custom’. Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it.

(Footnotes omitted.)

120. In the present case, the essential “legal right or privilege”, without which the business could not have been conducted, was the authorisation to conduct a brothel from the Guildford premises. As already noted, the authorisation derived from possession of the premises. It does not matter that the lease was not transferred but rather replaced by a fresh lease. The thrust of Ms Lei’s complaint (no doubt encompassed by the phrase “leasehold interest” used in [8A] and, in particular, (a) to [11]) is that the right to occupy the premises, and therefore operate the brothel, had been appropriated from the partnership to Shun Sheng.

121. Finally, for reasons given in Irwin v Pamplin (No 5), at [83], I do not accept that Ms Lei has to prove that an account will result in a monetary judgment in her favour before the Court can order one. It is open to the Court to make an order in general terms requiring Ms Wei to account for partnership assets appropriated by her. If there is a dispute about whether a particular asset so appropriated was a partnership asset, that dispute may, if the Court sees fit, be resolved by a declaration. But otherwise, the identification of the partnership assets will be addressed as part of the accounting process, as will any issues about the value of the assets in question.

122. Scope of fiduciary duty: Counsel for Ms Wei emphasised that the grant of the fresh lease to Shun Sheng was not her personal act, but the corporate act of Sunshine Island. Counsel did not dispute that, in her capacity as a partner, Ms Wei owed fiduciary obligations to Ms Lei, but counsel emphasised that to say that Ms Wei owed fiduciary obligations was only the beginning of the analysis: it was necessary to identify, among other things, the scope of those duties. In counsel’s submission, Ms Wei had been entitled, on behalf of Sunshine Island, to terminate the Tenancy Agreement in favour of the partnership, and grant a fresh lease to Shun Sheng, and her fiduciary duties as partner did not prevent her from doing so.

123. So far as termination was concerned, counsel relied upon the provisions of s 85(1) of the Conveyancing Act 1919 (“CA”). That section creates implied powers in every lease to which it applies, entitling the landlord, among other things, to terminate the lease, without prior notice, for non-payment of rent (s 85(1)(d)). Neither party considered whether CA s 85(1) applied to the Tenancy Agreement, which was not a deed: cf CA s 74; “The Conveyancer: Implied Covenants in Leases” (1937) 10 ALJ 356. But, in any event, I am not satisfied that Ms Wei’s actions on behalf of Sunshine Island can be justified on this basis. There was no evidence of any formal taking of possession of the premises, or any other action to effect the formal termination of the Tenancy Agreement. In any event, for reasons which I have given, I am not satisfied that in fact there were arrears of rent outstanding at the time.

124. Counsel for Ms Lei referred to cl 5 of the business partnership agreement, which provided:

Both parties have realized and understood that the current business premise is owned by [Sunshine Island] which is also owned by Party A [Ms Wei], who is as well one of the joint Lessees of the business premises. In case the business premises/property has to be sold, Party B [Ms Lei] shall have the first priority to consider purchasing the premise. While Party B shall be given at most 6 months to make the decision on whether to buy the premises or not, Party A must offer a very reasonable price for the premises, basically close to the valuation price. Also, as long as Party A still owns the business premise, the premises must be rented to run the said partnership business for as long as the lease prescribes.

125. Counsel for Ms Wei drew attention to the words, “so long as the lease prescribes” in cl 5. In counsel’s submission, this indicated that cl 5 was “subordinate” to the terms of the Tenancy Agreement. It may be accepted that Sunshine Island was not a party to the business partnership agreement and was not itself bound by the terms of that agreement. But if counsel’s submission was intended to mean that Ms Wei had no obligations, as partner, with respect to the lease, then I am not sure that I agree. Such a reading would give cl 5 no practical effect. I am of the view that the clause did impose an obligation on Ms Wei to procure Sunshine Island to abide by its terms. Breach of that obligation would not only be a breach of the partnership agreement but a breach of fiduciary duty. However, it is not necessary to decide this finally.

126. It may be accepted that Ms Wei’s duties as partner did not directly extend to actions as office holder or agent of Sunshine Island. But that is not an answer to the claim for breach of fiduciary duty in acquiescence, in her capacity as a partner, in the transfer of possession from the partnership to Shun Sheng. The lease was, for reasons already given, the critical asset of the partnership. Ms Wei was obliged to deploy the knowledge which she had of Sunshine Island’s proposed actions for the benefit of the partnership. If it had been established that there were arrears of rent which had accrued at the time, giving Sunshine Island the ability to terminate, and that Sunshine Island was contemplating doing so, Ms Wei’s obligation would have been to use all reasonable endeavours to ensure that the rental arrears were cleared, thus depriving Sunshine Island of the ability to forfeit the lease.

127. It is not necessary to consider whether Ms Wei would have been obliged to pay such arrears out of her own pocket or what would have occurred if she had asked Ms Lei to contribute to making the payment. Her obligations extended, at least, to deploying assets of the partnership so as to protect its business. In this context, the assets of the partnership included not only such liquid funds as the partnership may have possessed, but the right to recoup the EFTPOS payments from Sunshine Island for which Ms Wei herself had been responsible.

128. Conclusion: For these reasons, I am satisfied that the transfer of the partnership business to Shun Sheng represented a breach by Ms Wei of her fiduciary obligations as partner and that she should be ordered to account to the partnership for the assets so appropriated.

Claim against Shun Sheng

129. As already noted, the claim against Shun Sheng was advanced on two bases. There is a first limb claim based on receipt of partnership assets and a second limb claim alleging knowing participation in a dishonest and fraudulent scheme on the part of Ms Wei.

130. There is no doubt that at least some of the partnership assets, both tangible and intangible, were transferred to Shun Sheng. These assets were received by Shun Sheng as a volunteer, and, for reasons already given, the transfer of the assets to Shun Sheng was a breach by Ms Wei of her partnership obligations. Subject to the question of knowledge, therefore, a first limb claim is made out.

131. As to the second limb claim, on the evidence Shun Sheng’s corporate conduct involved active participation in the transfer of the partnership assets by Ms Wei. In particular, Shun Sheng assumed the partnership’s entitlements and obligations under the existing contracts with the sex workers, and accepted the fresh lease of the partnership premises from Sunshine Island.

132. The remaining question is whether Ms Wei’s conduct should be classified as a “dishonest and fraudulent scheme”. For this purpose, it is not necessary to establish that Ms Wei subjectively realised that she was acting dishonestly and fraudulently; it is sufficient if a reasonable person in Ms Wei’s position should have appreciated that this was so: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [177]-[178].

133. In substance, Ms Wei gave away partnership assets to a company in which she had a majority interest. She did so for the purpose of depriving Ms Lei of any ongoing interest in those assets and the business income which could be derived from them. Even if Ms Wei believed (as was argued at last year’s hearing) that she was entitled to terminate the partnership, she would still have been obliged to realise its assets to the best advantage of both partners, so that the proceeds, after payment of partnership liabilities, could be divided equally between them. Although Ms Wei claimed that Ms Lei had surrendered any interest in the partnership, I rejected that allegation in last year’s judgment: J1 [241].

134. Ms Wei did not allege that she had received any legal advice that she was justified in what she was doing. On my findings, there would have been no objective justification for any claim of right. In my view, Ms Wei’s conduct is properly characterised as having been dishonest and fraudulent in the relevant sense.

135. Knowledge: The argument put forward by counsel for Ms Wei on this issue also sought to confine Ms Lei’s case by reference to her points of claim. Paragraph 17 of the points of claim alleged:

By reason of the matters alleged in paragraph 7, Shun Sheng was Ms Wei's alter ego and knew of the matters alleged in paragraphs 2, 4-10 and 12-16 above at the time it entered into the 2021 Lease and occupied the Premises and commenced conducting the Business with the Partnership Assets.

136. Counsel’s argument fastened on the allegation that Shun Sheng was Ms Wei’s “alter ego”. Counsel submitted that, while that might have been so if Ms Wei had been the sole director and secretary of Shun Sheng, it was not a correct description of a company with two shareholders and two directors. The company was not, or at least had not been proved to have been, simply a corporate extension of Ms Wei, and there was no justification for “piercing the corporate veil”. It followed, so the submission ran, that the allegation of knowledge, as pleaded, failed.

137. I acknowledge that the term “alter ego” has been used as a touchstone for third party liability for breach of fiduciary duty in some cases, as described, in particular, in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [243]. But in my respectful view, the term is not always a helpful one in the present context. Indeed, as the Full Federal Court noted, treating “alter ego” liability as a form of Barnes v Addy liability can be “rather artificial”.

138. The present case is one of Barnes v Addy liability, and the issue is whether the knowledge which Ms Wei had should be attributed to Shun Sheng. This depends on various factors including: the facts known to Ms Wei; how that knowledge was acquired; and the relationship between Ms Wei and Shun Sheng. Labelling Shun Sheng as an “alter ego” of Ms Wei did nothing to advance the analysis. It was simply a statement of a conclusion (probably a legal conclusion) based on unstated facts.

139. It follows, in my view, that the allegation that Shun Sheng was Ms Wei’s “alter ego” in [17] of the points of claim had no certain factual content. But given the clear allegations of Barnes v Addy liability in the points of claim, it would be absurd to reject Ms Lei’s claim for that reason. The proper course, I think, is to determine the question of attribution of knowledge by reference to the applicable legal principles, having regard to the evidence before the Court on the question (none of which was the subject of objection on the ground that it was outside the pleadings).

140. Counsel for Ms Wei did suggest that, “had the case been pleaded outside of the alter ego argument”, Ms Wang might have been called, but it was not squarely asserted that she would have been. But there was no definite assertion that Ms Wei’s legal advisors actually understood the points of claim in the restricted way for which counsel contended, or actually refrained from calling Ms Wang on that account. Thus, there was no clear assertion of actual prejudice.

141. Of the two directors of Shun Sheng, Ms Wang apparently played no part in the transfer of the partnership assets to the company. As she held no role in the partnership, she would not have had any entitlement to affect the transfer in any event. It was solely done through Ms Wei’s agency. In my view, this is the critical factor in the attribution of knowledge. It is only reasonable that Shun Sheng should be fixed with the knowledge of the director who was responsible for the transactions which benefitted the company and which are the subject of the claim against it: Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151 at [247]-[250].

142. It has been suggested by some that, for the purposes of a claim under the first limb of Barnes v Addy, the question is whether the recipient is a bona fide purchaser for value without notice, and the onus of demonstrating this lies on the recipient. On that view, Shun Sheng, as a volunteer, could never discharge the onus and the first limb claim would succeed without the need to prove knowledge. It is not necessary to go this far in the present case. I have found that Ms Wei’s conduct amounted to a dishonest and fraudulent scheme and her knowledge of that conduct, once attributed to Shun Sheng is sufficient to satisfy the knowledge required under either limb of Barnes v Addy.

143. Indefeasibility of title: Finally, counsel pointed out that Shun Sheng, as registered lessee, had the benefit of an indefeasible leasehold interest in the property subject to the terms of s 42 of the Real Property Act 1900 (NSW) (“RPA”). As I understood counsel’s submission, this meant that the claim against Shun Sheng could not be sustained.

144. Counsel for Ms Lei questioned whether indefeasibility was relevant in the present context. Counsel pointed out that Ms Lei was not seeking to have a constructive trust imposed on Shun Sheng’s leasehold interest in the Guildford property. She was only seeking compensation for the value of the business appropriated to Shun Sheng.

145. I do not find it necessary to consider authorities on the application of principles of indefeasibility to claims under the first limb of Barnes v Addy: see Farah Constructions at [190]-[198] and Andersonv Anderson (2017) NSWLR 591 at [63]; see also Super 1000 v Pacific General Securities [2008] NSWSC 1222 at [217]-[237]. I am satisfied that liability under the second limb is established. Under that limb, Ms Lei is entitled to compensation for assets appropriated from the partnership, quite independently of the value, if any, of what was received. It seems to me that a claim for an account on this basis does not involve any challenge to indefeasibility. But if it does, it falls squarely within the exception for fraud under RPA s 42.

Form of account

146. As already noted, in the points of claim, the prayers for relief sought an account against Shun Sheng with Ms Wei to be liable to pay only to the extent that Shun Sheng was unable to meet its obligations. But I have already explained why I do not consider that this is binding on the Court.

147. The form of the account in the prayers for relief appears to reflect the form of the earlier accounting orders made in December last year. In making those orders, I was concerned to ensure that the primary liability should fall on the party who had received assets from the partnership, but on reflection I do not think that it is necessarily required to make orders in the same form in the present situation.

148. I have found that both Ms Wei and Shun Sheng are liable. Ms Wei is liable for breaches of fiduciary duty which amounted to a dishonest and fraudulent scheme, and Shun Sheng is liable as a knowing participant in that scheme.

149. Neither of these bases for liability is limited to receipt of property from the partnership. Obviously, that is so in Ms Wei’s case: she is liable for the loss caused to the partnership by her breaches. But I think the same is so for Shun Sheng, which, quite independently of receipt of partnership property, has been found to have participated in Ms Wei’s loss-causing conduct.

150. The difference between the two forms of liability can be illustrated by reference to the facts of the present case. In calculating the value of any goodwill associated with a partnership business, it will usually be necessary to look to the maintainable profits of the business. These will take into account the rent payable by the partnership. In the present case, goodwill will be calculated by reference to the rent payable under the Tenancy Agreement, which was applicable to the partnership and would have continued if the business had been transferred by Shun Sheng. Even if Shun Sheng is paying higher rent under its new lease, and, to that extent, is making a lesser profit, that is not material.

151. In these circumstances, I think that the proper order is that Ms Wei and Shun Sheng should be jointly and severally liable to account to the partnership for the value of the partnership business as it was when the business was appropriated to Shun Sheng. Of course, to the extent that monies are recovered from Shun Sheng, Ms Wei’s obligation to account to the partnership will be reduced pro tanto, and Ms Wei may have contribution rights against Shun Sheng, but this should not affect her liability to the partnership. In the light of the arguments dealt with at [119]-[120] above, the order for account will specifically refer to the goodwill of the partnership business as a partnership asset.

Conclusions and orders

152. I have concluded that Sunshine Island’s rent claim fails, and Ms Lei’s business appropriation claim succeeds. The rent claim will be dismissed. On Ms Lei’s cross-claim, Ms Wei and Shun Sheng will be ordered to account for the value of the partnership assets appropriated by Ms Wei to Shun Sheng.

153. It remains to determine liability for costs. I will adjourn the proceedings to allow the parties to consider this question. If they are unable to agree on the costs orders to be made, I will hear further argument.

154. The orders of the Court are (as amended under the Slip Rule on 8 October 2024):

1. Order that the third plaintiff’s claim against the first defendant for unpaid rent be dismissed.

2. Order that the first and second cross-defendants account to the partnership for the value of the assets of the partnership between the second cross-defendant and the first cross-claimant (as described in declaration (2) made by the Court on 29 September 2023) appropriated in or after October 2021 by the first cross-defendant to the second cross-defendant, including the goodwill of the partnership business immediately prior to that appropriation.

3. Adjourn the proceedings to 9:30am on 12 September 2024 or such other time as may be arranged with my Associate.

4. Direct that the parties confer on the costs orders to be made, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.

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Amendments

08 October 2024 - Amendments to orders made 8 October 2024

Decision last updated: 08 October 2024