Siu v Smartlink Corporation Pty Ltd (ACN 168 187 933) (in Liq) - [2021] WASC 405

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   SIU -v- SMARTLINK CORPORATION PTY LTD (ACN 168 187 933) (IN LIQ) [2021] WASC 405
CORAM:   MASTER SANDERSON
HEARD:   2 NOVEMBER 2021
DELIVERED          :   22 NOVEMBER 2021
FILE NO/S:   COR 6 of 2019
BETWEEN:   CHIFAN SIU
Plaintiff

AND

SMARTLINK CORPORATION PTY LTD (ACN 168 187 933) (IN LIQ)
SHAUN WILLIAM BOYLE as liquidator of SMARTLINK CORPORATION (ACN 168 187 933)
First Defendants

XIAO HE
Second Defendant

JIANQING GU
Third Defendant

SHAUN BOYLE IN HIS CAPACITY as liquidator of SMARTLINK CORPORATION PTY LTD (IN LIQ.) (ACN 168 187 933)
Fourth Defendant

Catchwords:

Corporations Law - Appeal against liquidator's rejection of proof of debt - Turns on own facts

Legislation:

Corporations Act 2002 (Cth)

Result:

Appeal dismissed

Category: B

Representation:

Counsel:

Plaintiff	:	No Appearance
First Defendants	:	No Appearance
Second Defendant	:	M D Cuerden SC & J L Winton
Third Defendant	:	M G S Crowley
Fourth Defendant	:	J E Scovell

Solicitors:

Plaintiff	:	Torrens Legal
First Defendants	:	In Person
Second Defendant	:	Williams & Hughes
Third Defendant	:	Tan & Tan Lawyers
Fourth Defendant	:	Murfett Legal

Case(s) referred to in decision(s):

MASTER SANDERSON:

This is an appeal against a liquidator's rejection of a proof of debt. Procedurally it has a somewhat unusual history - a history which is of no real concern to the primary issue and which does not need recounting. It is sufficient to say that the fourth defendant, as the liquidator of the first defendant, rejected the third defendant's proof of debt. Ordinarily then, the issue would be joined between the third defendant and the fourth defendant. However, the second defendant who is also a creditor of the first defendant, was joined as a party to these proceedings by order of Acting Master Strk made 8 June 2021. The second and third defendants are in dispute and it seems to have been agreed between the parties that the outcome of this application may be relevant to that dispute. In any event, this application was conducted on the basis the third defendant was appealing against the fourth defendant's decision to reject the third defendant's proof of debt and the second defendant supported the fourth defendant's position.
At the outset of the hearing, counsel for the third defendant did raise as an issue the standing of the second defendant to participate in the application. The third defendant's answer to that claim was to point out the second defendant had been joined by consent. As a party to the proceedings, he was entitled to make submissions. In any event, if the second defendant was excluded from the hearing or removed as a party to the action, identical submissions would have been made by the fourth defendant. I was satisfied the second defendant was a proper party to the proceedings and that he had the right to be heard. The matter proceeded on that basis.
For the sake of completeness, I should note the fourth defendant filed an interlocutory process on 6 September 2021 seeking effectively judicial directions to the effect he was justified in rejecting the third defendant's proof of debt. Doubtless, the fourth defendant took this step to ensure that the procedure undertaken was regular. The application itself required no separate submissions and did not add to or subtract from the central issue between the parties.
For ease of reference, in these reasons I refer to the second defendant as Mr He and the third defendant as Mr Gu. I will refer to the fourth defendant as the liquidator and I will refer to the first defendant as the company. The plaintiff does not figure in this application and had no role to play in the determination of the issues.
Shortly stated, the position is this. Mr Gu says that he lent $1.5 million to the company and he is a creditor for that amount. It is on that basis he sought to prove in the insolvency. The liquidator and Mr He say that Mr Gu's contribution was not a loan but was capital contributed to the business. Save in one respect, which I will come to later in these reasons, the background facts which led to Mr Gu's investment, however it is characterised, are not relevant. It is written instruments entered into by the parties which determine the status of Mr Gu. Mr Gu says there are two broad questions to be answered. In written submissions, Mr He's counsel framed these as follows:
Mr Gu says:
(1)was the company (Smartlink) obligated to pay Mr Gu the sum of $1.5 million (plus interest) under clause 3 of the 'Deed for the Agreement of Profit Sharing and Executive Directorship Payment for Smartlink Corporation Pty Ltd' dated 31 July 2015 (the PSED); and
(2)if so, was that obligation extinguished by the subsequent 'Share and Unit Holders' Agreement' dated 2016 (referred to as the SUHA).
Mr Gu says under the PSED, it is clear his contribution was a loan and not capital investment. He says further the SUHA was of no force and effect because it was not supported by consideration. Mr He says the SUHA makes it plain Mr Gu investment was a capital investment and not a loan. As that document was later in time, it superseded the PSED and the PSED is of no force and effect. Even if that argument is wrong, Mr He says the PSED is ambiguous, meaning that external evidence is admissible as to the background of the PSED. Once the background facts are considered, it is clear the investment was capital and not a loan. In my view, Mr He's argument is correct and Mr Gu's investment was as a shareholder.
The starting point is a Deed of Transfer entered into between a Mr Peter Burke and Mr Gu pursuant to which Mr Burke was to transfer to Mr Gu a 30% interest in the company. At the time, Mr Burke held 95% of the shares with Mr He holding the remaining 5%. The consideration for this transfer was that Mr Gu would pay $500,000 on 31 July 2015 and the balance of $1 million on or before 30 April 2016. On the face of it then, Mr Gu became a shareholder in the company. However, the money was not actually paid to Mr Burke - it was paid to the company. It is really on that basis Mr Gu argues he is not a shareholder but a creditor.
The SUHA is an agreement which was made between Mr Burke, Mr Gu and Mr He. Mr Gu and Mr He are described in the SUHA as each being a 'Shareholder'. By cl 5 of the agreement, Mr Gu was to be appointed Executive Director of the company and was entitled to participate at a senior level in the management of the day to day affairs of the company, even when absent from Australia. By cl 6(a), each Shareholder agreed to make 'the relevant contribution' to the business set out in Item 3 of Schedule 1 on the date of agreement which was 31 July 2015. In the case of Mr Gu, this amount was stated to be a 'maximum of $1.5 m' for his 30% shareholding in the company.
By cl 13(b), it was agreed the company would declare and pay dividends in accordance with Item 5 of Schedule 1. Item 5 which is headed 'Dividends and order of Disbursement' provides that these would be declared and paid 'As agreed by the Shareholders and the Company annually either during or after the completion of the Project and as resolved by the Board'. Item 5 makes clear that it would be agreed between the Shareholders as to how the profits would be divided among them, including questions of priority.
By cl 14(a)(iv), each of the parties agreed to ensure the company would carry on business in a lawful, proper and efficient manner in accordance with the provisions of the Corporations Act 2001 (Cth). Counsel for Mr He in his written submissions, notes this anticipates compliance with s 254T of the Corporations Act restricting the circumstances in which share capital could be reduced. In other words, dividends which were to be paid to the Shareholders were to be paid out of profits. They were not to be paid out of capital which would contravene the provisions of the Corporations Act. That it is said, makes clear Mr Gu was a Shareholder.
Most importantly, cl 2(a) of the SUHA is to the effect that each of the parties expressly acknowledged and agreed that any Shareholders Agreement previously entered into by them (or any other agreement of substantially similar scope and purpose to the SUHA) was terminated as at the Commencement Date - that is in 2016. It is Mr He's position that no other agreements could continue to apply after the Commencement Date. That means whatever rights Mr Gu may have had under the said agreement were extinguished.
In my view, that position is unanswerable. In fact, counsel for Mr Gu did not actually argue the interpretation of the SUHA propounded by Mr He was wrong. Rather, it was said there was no consideration for entering into the SUHA and it was therefore ineffective.
With respect, that argument cannot be right. The parties entered into the SUHA with a view to adjusting their rights as Shareholders. There was give and take on both sides. For instance, Mr Gu was to be appointed as managing director. That was an advantage he gained by entering into the agreement. The parties set out their rights with respect to dividends. All of this was an agreement which affected their rights. As such, it is clear there was consideration passing between the parties, such that the SUHA was clearly a binding agreement upon them.
In all the circumstances, I am satisfied the SUHA makes it plain Mr Gu's investment was as a shareholder and he can not properly be regarded as a creditor of the company.
The parties spent considerable time grappling with the proper interpretation of the PSED. This document was not drawn by lawyers. It is a difficult document to interpret and, in my view, it is without question ambiguous. For some reason, the PSED designates Mr Burke as 'Director A' Mr Gu as 'Director B' and Mr He as 'Director C'. Clause 3 which is entitled 'Profit Share' is then in the following terms:
(a)Director A and Director C and the Company agree to offer a fixed Return on Investment to Director B described as the Profit Share.
(b)Director A and Director C and the Company agree to pay the Profit Share to Director B on or before the Date of Payment.
(c)Director A and Director C and the Company acknowledge the Shareholders Agreement dated on 31^st July 2015 and the amount of $1,500,000 invested in the Company by Director B.
(d)Director A and Director C and the Company agree to pay the Capital amount of $1,500,000 to Director B on or before the Date of Payment.
The term 'Profit Share' is defined in cl 1 to mean 'the amount described in Item 2 of the Schedule'. The Schedule refers to 'Profit Share' and defines that to mean '8% return per annum on investment amount'. The term 'Profit' usually means the amount the company makes (if any) after payment of expenses. The clause might mean that Mr Gu was to be paid 8% of $1.5 million as a first charge on any profits made by the company. That possible interpretation is by no means clear. It is certainly not apparent on the face of the clause that Mr Gu was to be paid 8% interest per annum on a loan of $1.5 million. If that interpretation of the clause is open - and I am by no means sure that it is - it could not be accepted without further evidence. In other words, the clause is ambiguous. The difficulty is compounded by the use of the term 'Capital amount' in cl 3(d). That term is not defined in cl 1. Furthermore, the term 'Date of Payment' is said to be the date 'described in Item 5 of the Schedule'. There is no Item 5 in the Schedule. Item 4 is 'Date of Payment'. That date is 1 May 2018. Even assuming the reference to Item 5 ought be a reference to Item 4, the position is completely unclear.
Once that point is reached, it is permissible to look at the relevant background facts which might aid in determining the meaning of the contract. Here, Mr He focused on two matters. The first was the fact that Mr Gu was in Australia under what is known as a 132 Visa. Without going into details, that Visa requires a resident to invest at least $1.5 million in an Australian business. That was said to be compelling evidence that Mr Gu, to comply with his legal obligations under the Visa regime, was a shareholder in the company and not simply an investor. Further, the accounts of the company do not show Mr Gu as a lender to the company. As the accounts are prima facie evidence of the true position of the company, it is said these accounts are sufficient to demonstrate the true position was Mr Gu was a shareholder and not a creditor.
The submissions put by Mr He on this question ought be accepted. The background facts make it plain Mr Gu acquired shares. He did not loan money to the company. In fact, nothing in the background facts supports the interpretation Mr Gu would place on the PSED. On the other hand, the evidence clearly supports the interpretation Mr He would place on the PSED. So if then the SUHA did not determine the rights of the parties, I would still conclude Mr Gu was a shareholder and not a creditor. Accordingly, the proof of debt was correctly rejected by the liquidator.
The question then remains as to what order is appropriate to make. It would seem to me making orders in terms of the liquidator's interlocutory process may be the proper course. However, this was not the subject of argument and I will allow the parties to consider the position. Subject to any party filing submissions within seven days on the question of costs, the costs of Mr He and the costs of the liquidator ought be paid by Mr Gu.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AH
Associate to Master Sanderson
22 NOVEMBER 2021