Sunnya Pty Ltd v He

[2025] NSWCA 79

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Sunnya Pty Ltd v He [2025] NSWCA 79

Hearing dates:

25 and 26 November 2024

Date of orders:

24 April 2025

Decision date:

24 April 2025

Before:

Bell CJ at [1];
Leeming JA at [2];
Basten AJA at [3]

Decision:

(1)   As to the commercial invoices and under-value sales:

(a)   Declare that Mr He and Ms Lu –

(i) contravened s 181(1)(b) of the Corporations Act in causing Sunnya to adopt the practice of issuing commercial invoices; and

(ii)   contravened the Corporations Act, s 181(1)(a) and (b) and s 182, and breached their fiduciary duties to Sunnya, by causing or permitting Sunnya in April 2021 to engage in the under-value sales.

(b)   Declare that GNT –

(i) was involved in Mr He and Ms Lu’s contraventions referred to in (a) above within s 79 of the Corporations Act;

(ii)   knowingly assisted the breaches of fiduciary duty by Mr He and Ms Lu referred to in (a)(ii) above.

(c)   In respect of the breaches identified at (a) and (b) above, order that each of Mr He, Ms Lu and GNT

(i)   pay compensation to Sunnya pursuant to of the of the Corporations Act, s 1317H, in an amount to be determined, or

(ii)   account to Sunnya for any benefit or gain obtained,

at the election of Sunnya.

(2)   As to the Neurio product sales:

(a)   Declare that Mr He and Ms Lu breached fiduciary duties owed to Sunnya in relation to the Neurio product sales.

(b)   Order that Mr He and Ms Lu:

(i)   pay equitable compensation to Sunnya for loss suffered by reason of Mr He and Ms Lu’s breaches of fiduciary duty in relation to the Neurio product sales, in an amount to be determined; or

(ii)   account to Sunnya for any benefit or gain, obtained or received, by Mr He and Ms Lu by reason of their breaches of fiduciary duty in relation to the Neurio product sales,

at the election of Sunnya.

(c)   Declare that each of GABT, GNT, Supermega and Megadairy knowingly assisted the breaches of fiduciary duty by Mr He and Ms Lu in relation to the Neurio product sales.

(d)   Order that each of GABT, GNT, Supermega and Megadairy:

(i)   pay equitable compensation to Sunnya for loss suffered by reason of their knowing assistance in the breaches of fiduciary duty in relation to the Neurio product sales, in an amount to be determined; or

(ii)   account to Sunnya for any benefit or gain, obtained or received, by reason of their knowing assistance in the breaches of fiduciary duty in relation to the Neurio product sales,

at the election of Sunnya.

(3)   As to the Neurio/NRIO sales:

(a)   Declare that GNT knowingly assisted the breaches of fiduciary duty by Mr He and Ms Lu referred to in orders (22) and (26) made by the trial judge.

(b)   Order that GNT:

(i)   pay equitable compensation to Sunnya for the loss suffered by it by reason of those breaches of duty, in an amount to be determined; or

(ii)   account to Sunnya for any benefit or gain, obtained or received, by reason of GNT’s knowing assistance in the breaches of duty,

at the election of Sunnya.

(4)   As to costs, order that:

(a)   the first and second respondents pay the appellants’ costs of the appeal;

(b)   the NZ parties be jointly and severally liable with the first and second respondents for 20% of the appellants’ costs of the appeal;

(c)   Order 1 of the orders made by Williams J in proceeding 2022/329426 on 5 June 2024 be set aside;

(d)   Order 4(a) of the orders made by Williams J in proceeding 2022/329426 on 5 June 2024 be varied to add the words “the fourth defendant (GNT)” after the words “the third defendant (GABT)”.

(5)   Liberty to all parties to apply by notice of motion for variation of these orders within 28 days of this judgment.

(6)   Direct that these orders not be entered for 28 days.

Catchwords:

CORPORATIONS – directors and officers – directors’ duties – directors causing company to engage in fraudulent and unlawful practice – directors causing company to engage in commercial agreements and practices detrimental to company and beneficial to third parties in which directors had an interest – directors apprehending loss of control diverted business to third parties in which directors had an interest – whether directors breached obligations under Corporations Act 2001 (Cth), ss 181 and 182 – whether third parties involved in breach of ss 181 and 182 within the terms of s 79 – whether directors breached fiduciary duties

CORPORATIONS – statutory construction – Corporations Act 2001 (Cth), ss 181, 182 – improper purpose need not be achieved – not necessary that director acts dishonestly – honest belief as to purpose only satisfied where belief is rational – unlawful conduct necessarily improper

EQUITY – fiduciary duties – knowing assistance – liability of third parties under second limb of rule in Barnes v Addy – third parties owned or controlled by family members of fiduciaries – appropriate inferences as to knowledge of dishonest conduct of fiduciaries in absence of evidence to the contrary – no requirement of belief on part of the third party that conduct of fiduciaries was dishonest and fraudulent design – whether third parties operated independently of actions of fiduciaries

Legislation Cited:

Companies (Western Australia) Code, s 229

Corporations Act 2001 (Cth), ss 79, 180, 181, 182, 184

Cases Cited:

Ansett v Butler Air Transport (No 1) (1957) 75 WN (NSW) 299

Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; 336 ALR 209

Barnes v Addy (1874) LR 9 Ch App 244

BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597

Chew v The Queen (1991) 4 WAR 21

Chew v The Queen (1992) 173 CLR 626; [1992] HCA 18

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

In the matter of IW4U Pty Ltd (in liq) [2021] NSWSC 40; 150 ACSR 146

Supermega Market Ltd v Sunnya Pty Ltd [2025] NSWCA 78

The Queen v Byrnes (1995) 183 CLR 501

Xiao v BCEG International (Australia) Pty Ltd (2023) 111 NSWLR 132; [2023] NSWCA 48

Texts Cited:

Gower, The Principles of Modern Company Law (2nd ed, 1957, Stevens & Sons)

Category:

Principal judgment

Parties:

Sunnya Pty Ltd (First Appellant)
Jatcorp Pty Ltd (Second Appellant)
Yinghan He (First Respondent)
Yanxia Lu (Second Respondent)
Guangzhou Aotea Biological Technology Pte Ltd (Third Respondent)
Niuruiyou (Guangzhou) Trading Co Ltd (Fourth Respondent)
HWL Investments Pty Ltd (Fifth Respondent)
Supermega Market Ltd (NZ) (Sixth Respondent)
Megadairy Ltd (Seventh Respondent)
NZFDA Ltd (Eighth Respondent)

Representation:

Counsel:
R Foreman SC / M R Davis / G Gee (Appellants)
Dr S Baron Levi (First and Second Respondents)
D Zhang (Sixth, Seventh and Eighth Respondents)

Solicitors:
Vincent Zhi - Qing Zhu, Auyeung Hencent & Day Lawyers (Applicants)
Wilson Shen, Shen’s Lawyers (First and Second Respondents)
Chang Yan Zhao, Chang Construction Legal (Sixth, Seventh and Eighth Respondents)

File Number(s):

2024/183502

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity – Corporations List

Citation:

[2024] NSWSC 403; [2024] NSWSC 686

Date of Decision:

19 April 2024

Before:

Williams J

File Number(s):

2022/329426

HEADNOTE

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

In 2014, Mr He and Ms Lu (together, the He parties) incorporated Sunnya Pty Ltd and were its majority shareholders and directors. Sunnya’s business involved the export and sale of formulated milk powder products from Australia and New Zealand to the People’s Republic of China under the brand name “Neurio”. As part of this business, Sunnya contracted with Guangzhou Aotea Biological Technology Pte Ltd (GABT) and Guangzhou Niurui Trading Co Ltd (GNT) to distribute milk powder products in China. GNT and GABT were owned at various times by either the He parties or their family members. Sunnya also contracted with two New Zealand companies, Megadairy Ltd and Supermega Market Ltd, for the supply and manufacture of milk powder products.

GNT acted as import agent for Sunnya in China and was responsible for paying custom fees, collecting and labelling the products and delivering them to distributors. GNT was entitled to a service fee for these services. After April 2019, to facilitate the calculation of lower customs duties, taxes or fees, Sunnya issued fraudulent commercial invoices which incorrectly recorded an export price which was lower than the purchase price paid by distributors in China (the commercial invoice practice). On 12 March 2021, the Chinese Customs Service served a notice of inspection on GNT. In April 2021, Sunnya changed its practice and commenced selling products to GNT which on-sold to the distributors. Thereafter, to conform with its previous documentation practices, the export price which had been shown on commercial invoices issued to GNT was recorded as a sale to GNT at the export price (the under-value sales practice). The sale prices paid by GNT to Sunnya were significantly lower than the amounts that been remitted to Sunnya prior to the change in practice.

Between 2 March 2022 and 8 November 2022, Supermega entered into 17 contracts with one or both of GABT and Shanghai Gainful Industrial Co Ltd, a related company. The effect of the contracts was to deprive Sunnya of a major part of its supply of Neurio-branded products which were then exported to China and sold by GABT. The He parties resigned as directors of Sunnya on 25 November 2022. The same day, they negotiated contracts between GABT and Supermega, and during the period between 7 December 2022 to 12 January 2023, contracts between GNT and Supermega. Coinciding with those contracts, on 25 November 2022, Sunlife, a company controlled by Mr He and Ms Lu’s daughter, sought to register NRIO as a trademark in Australia and New Zealand. On 6 December 2022, GABT registered that trademark in China. GABT subsequently sold products in China using both the Neurio trademark and the newly registered NRIO trademark.

The principal issues on appeal were whether:

1. the He parties breached their fiduciary duties and duties under Corporations Act, ss 181 and 182 by causing Sunnya to adopt the under-value sales and commercial invoices practices;

2. GNT knowingly assisted in the breaches of fiduciary duty by the He parties and/or was involved in those breaches within Corporations Act, s 79;

3. the He parties breached their fiduciary duties and duties under Corporations Act, ss 181 and 182 by their conduct after 25 November 2022 in encouraging or endorsing Megadairy and Supermega to supply Neurio-branded products to GABT and GNT;

4. GABT, GNT, Supermega and Megadairy, knowingly assisted in those breaches, and

5. GNT knowingly assisted the He parties’ breach of fiduciary duties from 25 November 2022 in exporting and selling Neurio/NRIO branded products in China

The Court (Basten AJA, Bell CJ and Leeming JA agreeing), allowing the appeal, held:

As to (i) (under-value sales and commercial invoices practices):

1. Section 181 imposes an affirmative obligation on company directors to act in good faith – to act in honest pursuit of the company’s best interests – and for a proper purpose. A contravention may occur even if an improper purpose is not achieved. The section should be read coherently with the surrounding provisions (ss 180, 182 and 184). Doing so suggests that an honest belief as to purpose will only be satisfied where that belief is rational and that dishonesty is distinct from an absence of good faith; a director may act in the firm belief that particular conduct is in the best interest of the company but be pursuing an improper purpose: [24]-[36].

   Chew v The Queen (1991) 4 WAR 21; Chew v The Queen (1992) 173 CLR 626; [1992] HCA 18; The Queen v Byrnes (1995) 183 CLR 501; [1995] HCA 1; In the matter of IW4U Pty Ltd (in liq) [2021] NSWSC 40; 150 ACSR 146, applied; BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 59; Ansett v Butler Air Transport (No 1) (1957) 75 WN (NSW) 299; Duncan v Independent Commission Against Corruption [2016] NSWCA 143 discussed.

2. The requirement that a corporation act lawfully limits the proper conduct of its directors and officers, and what can be in the best interests of the corporation: [35]-[36].

   Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; 336 ALR 209; Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52, considered; Vrisakis v Australian Securities and Investments Commission (1993) 9 WAR 395; (1993) 11 ACSR 162, applied.

3. The under-value sales practice was immediately financially disadvantageous to Sunnya and had the effect of diverting financial benefits from Sunnya to companies of which the He parties were directors and controllers, and to a company owned by family members of one of them. This was sufficient to demonstrate an improper purpose, unless otherwise explained. The commercial invoice practice was unlawful and created a financial risk to Sunnya; it could not be relied upon to justify an arrangement which entailed continuing losses for the foreseeable future: [38]-[46].

4. Impropriety under s 182 is to be determined objectively. It is not necessary that the improper purpose be achieved: the focus is on the purpose, not the outcome. The purpose of the under-value sale invoicing and commercial invoice practices (benefiting an unrelated entity at the expense of Sunnya) was improper. A foreseeable consequence of the fraudulent practice of rendering under-value invoices was that Sunnya would be required to make good any loss to the Chinese Customs Service and give some form of undertaking not to engage in similar conduct in the future. That risk should have been apparent to reasonable businesspeople in the position of the He parties. In the absence of evidence from the He parties, an inference may be drawn from their voluntary actions that they intended to engage in the fraudulent scheme, the results of which were detrimental to Sunnya: [47]-[66].

   Chew v The Queen (1992) 173 CLR 626; [1992] HCA 18, applied.

5. The under-value sales and commercial invoicing practices constituted a breach of the He parties’ fiduciary duties and duties under s 181(1) and s 182 of the Corporations Act: [69].

As to (ii) (knowing assistance of GNT):

1. GNT was the recipient of the notice of inspection and was assisted by the He parties in responding to the Customs Service investigation. Absent evidence to the contrary, the proper inference is that GNT was both the beneficiary of the changed arrangements from April 2021, and had a detailed knowledge of the circumstances in which they were made, including the involvement of Mr He and Ms Lu as directors of Sunnya, so as to be aware that benefits which previously flowed to Sunnya were now obtained by GNT. GNT knowingly assisted in the breaches the subject of issue (i): [70]-[71].

   Barnes v Addy (1874) LR 9 Ch App 244, applied.

As to (iii) (supply of Neurio-branded products to GABT and GNT):

1. The finding at trial that the He parties were not involved in dishonest conduct intended to divert Sunnya’s business to GABT was inconsistent with other findings that the purpose of the He parties was to transfer Sunnya’s Neurio business to companies from which the He parties could benefit, having lost, or being about to lose, control of Sunnya. The He parties breached their fiduciary duties and duties under Corporations Act, ss 181 and 182: [81]-[82]

As to (iv) (knowing assistance to He parties’ breaches):

1. The evidence that led to findings at trial that GABT and GNT had worked with the He parties to divert Sunnya’s business in the period between December 2022 and 10 March 2023 should have led to the same conclusion with respect to the “transition” period after the He parties resigned as directors on 25 November 2022. GABT and GNT did not operate independently of influence by the He parties. Both GABT and GNT knowingly assisted in the breaches of the ongoing fiduciary duties owed by the He parties with respect to the Neurio product claims. Further, Mr Wu, and therefore Supermega and Megadairy, had sufficient knowledge with respect to the Neurio-branded products to have knowingly assisted in the relevant breaches of fiduciary duty: [83]-[90].

As to (v) (knowing assistance by GNT from 25 November 2022):

1. The principle of “knowing assistance” relates to giving assistance in respect of a dishonest or fraudulent design on the part of a fiduciary. Knowledge that the fiduciaries were acting in a dishonest and fraudulent design does not require a belief on the part of the party assisting that their conduct should be so described. It is implausible, having regard to the wider context, that GNT did not have knowledge of the activities of the He parties, which constituted dishonest conduct on their part as directors of Sunnya. Having that knowledge, for GNT to enter into contracts for the supply of Neurio- or NRIO-branded products from New Zealand companies other than Sunnya involved knowing assistance in the dishonest conduct of the He parties: [96]-[104].

   Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, applied.

JUDGMENT

1. BELL CJ: I agree with Basten AJA.

2. LEEMING JA: I agree with Basten AJA.

3. BASTEN AJA: This judgment is to be read in conjunction with the companion judgment arising out of the same proceedings and delivered at the same time: Supermega Market Ltd v Sunnya Pty Ltd [2025] NSWCA 78 (“Supermega judgment”). Both appeals concern a judgment of Williams J in the Equity Division delivered on 19 April 2024. ^[1] Much of the background of the dispute between the parties involved in preparing and exporting milk powder from New Zealand to the People’s Republic of China are set out by the Chief Justice in the Supermega judgment. The factual background will only be repeated to the extent necessary to explain the issues raised by this appeal. The abbreviations for the names of the parties used in that matter are adopted here.

1. Background

   1. In the matter of Sunnya Pty Ltd [2024] NSWSC 403 (Primary judgment).

4. Although Sunnya was largely successful in the proceedings in the Equity Division, the trial judge, Williams J, rejected claims by Sunnya Pty Ltd and its related company, Jatcorp Ltd, in respect of four matters. By a further amended notice of appeal, Sunnya and Jatcorp (hereafter “Sunnya”) appealed from those aspects of that judgment, being claims described as:

1. Under-value sales;

2. Commercial invoices;

3. Neurio product sales, and

4. GNT’s involvement in use of Neurio/NRIO trade marks.

5. It is convenient to refer to the respondents by their names (or abbreviated names). No orders were sought by Sunnya against the fifth respondent (HLW Investments Pty Ltd) or the eighth respondent (NZFDA Ltd). Further, GNT did not appear on the appeal, but the evidence demonstrated that it had been served with the relevant documents and the appeal proceeded against it in its absence.

6. Both (a), the under-value sales claim (grounds 1 and 2) and (b), the commercial invoices claim (grounds 2A and 2B), concerned the conduct of the respondents Mr He, Ms Lu and one of two Sunnya agents in China, GNT. That conduct occurred prior to the resignations of Mr He and Ms Lu as directors of Sunnya on 25 November 2022. As to (c), the improper involvement in Neurio products sales (grounds 3 and 4), the affected respondents were again Mr He, Ms Lu and GNT, together with GABT (another Sunnya agent in China), Megadairy and Supermega, the last two being the producers of milk powder in New Zealand. Finally, as to (d), the improper use of Neurio/NRIO trademarks (ground 5), the only affected respondent was GNT. Both (c) and (d) related to conduct which occurred at about the time of the resignations on 25 November 2022.

7. There is no doubt that the claim based on undervalue sales is significant to Sunnya in financial terms, if it succeeds. However, the commercial invoices claim chronologically precedes, and is relevant to, the undervalue sales claim. Although the commercial invoices claim was pursued at trial as an alternative if the undervalue sales claim failed, it is convenient to treat them together. Both involved conduct by Mr He and Ms Lu when they were in control of Sunnya.

5. At the material time in 2021/2022, Jatcorp held a majority shareholding in Sunnya. Following a general meeting of Sunnya on 31 October 2022, newly appointed directors became aware that Mr He and Ms Lu had taken steps to cause the registered ownership of the Neurio trademarks in Australia and New Zealand to be transferred to GABT. At a board meeting held on 2 November 2022 it was resolved to remove them from their positions with Sunnya. They resigned as directors of Sunnya on 25 November 2022 and from their employment with Sunnya on 7 December 2022. The third issue raised by the Sunnya appeal concerned steps taken by Ms Lu and Mr He at the time of and following their resignation as directors to divert business involving the Neurio trademark to other entities associated with them and their families. The fourth matter concerns GNT’s knowing involvement in those activities. Accordingly, matters (c) and (d) may be dealt with together.

1. Under-value sales and Commercial invoices: grounds 1, 2A

Factual background

9. Sunnya adopted a number of mechanisms for selling milk products in China. Relevantly for present purposes, there were two channels, known as “the general trade channel” and “the cross-border channel”. In relation to the latter, the trial judge explained:

“[125]   In the cross-border channel, Sunnya sold its Neurio-branded products to distributors in China, and shipped those products directly to the distributors. Each distributor paid the agreed sale price directly to Sunnya.”

10. Apart from providing a baseline for Sunnya’s prices, this mechanism was not relevant to the current issue. The alternative mechanism was described by the trial judge as follows:

“[126]   Products sold through the general trade channel were sold by Sunnya to a distributor in China. However, Sunnya shipped those products to its import agent in China, rather than shipping them directly to the distributor. After facilitating the clearance of the products through the Customs Service in China, Sunnya’s import agent delivered them to the distributor, which then sold the products to retail consumers in China.”

11. Prior to April 2019, Sunnya’s import agent had been GABT; thereafter that role was played by GNT. Products were delivered to GNT which was responsible for paying customs fees, collecting goods which had been cleared by customs, placing a Chinese language label on the tins and delivering them to the distributor. GNT collected a price from the distributor and remitted moneys to Sunnya. GNT was entitled to a 2% service fee calculated on the “import contract value”, which it deducted from the price paid by the distributor before remitting the balance to Sunnya. ^[2]

    2. Primary judgment at [128].

12. That practice operated until April 2021. There were two elements of that arrangement which were presently significant. The trial judge stated the issue succinctly in the following terms:

“[130]    GNT did not purchase Neurio-branded products from Sunnya under the import agency arrangement …. Nevertheless, consistently with its previous practices, Sunnya issued commercial invoices to GNT ‘for customs purposes’, which stipulated an ‘export price’ for Sunnya’s Neurio-branded products exported to China through GNT. GNT did not pay the export price to Sunnya. The export prices shown on commercial invoices issued to GNT were less than the prices for which Sunnya sold the products to its distributors …. I infer that the commercial invoices were issued for the purpose of GNT presenting them to the Customs Service for the assessment of duties and taxes (or ‘customs fees’, to use Ms Lu’s term) payable on the importation of the products into China, and that the ‘customs purpose’ of the export price was to facilitate the calculation of those duties, taxes or fees based on the lower export price shown on the commercial invoice rather than based on the higher price that Sunnya charged the distributor for the imported products.”

13. The trial judge adopted a collective term “the He parties” to refer to a group having common representation, which, for present purposes, included Mr He and Ms Lu. That group used the anodyne term “commercial invoices” to refer to the practice described above of understating the export prices for customs purposes in China. It is convenient to continue use of that term.

14. In April 2021 the arrangement changed so that, instead of selling to the distributors, Sunnya sold products to GNT which on-sold to the distributor. Thereafter, the export price which had been shown on commercial invoices when processed by GNT through the agency arrangement was recorded in the commercial invoices as a sale to GNT at the export price. ^[3]

    3. Primary judgment at [141].

15. There was expert evidence before the trial judge as to the price differential resulting from the change which was effected in April 2021. The difference between the experts for Sunnya, on the one hand, and the respondents on the other, was not resolved by the trial judge because she dismissed the claim for compensation on the basis that liability was not established. That finding was the subject of the present appeal: it is common ground that if the appeal succeeds, the matter will need to return to the Equity Division for the calculation of compensation. The general finding, however, was expressed in the following terms:

“[150]   Notwithstanding these differences in methodology, each of the experts calculated that the weighted average effective price of Neurio Blue Tin, Neurio White Tin, and Neurio Gold products sold by Sunnya to its general trade channel distributors in the quarter prior to the April 2021 change was higher than the weighted average effective price for which Sunnya sold those same products to GNT in the quarter immediately after the April 2021 change.”

16. Before turning to the reasoning of the trial judge with respect to liability, it is necessary to identify the relationship between GNT and the respondents, Mr He and Ms Lu. For that purpose, it is necessary first to have regard to the structure of GABT, which performed the functions of import agent for Sunnya products until April 2019.

17. GABT had been registered in August 2007 in China, with Ms Lu as its major shareholder and her brother, Yancheng Lu, as the company’s chief executive. In March 2012 Ms Lu ceased to hold shares in GABT and thereafter the sole shareholders in the company were her brother and her sister, Yanping Lu. The trial judge recorded the changes in ownership, ^[4] namely that, “[o]n or about 5 March 2021, Mr Yancheng Lu and Ms Yanping Lu transferred 95% of the shares in GABT to Mr He. Mr Yancheng Lu held the remaining 5% of the shares”.

    4. Primary judgment at [6].

18. GABT was and remains the registered owner of Neurio trademarks in China. Since October 2015 it was also the registered owner of the domain name neurio.com.cn. ^[5]

    5. Primary judgment at [7].

19. GNT was registered in China in November 2010 and, until August 2019, Ms Lu was a shareholder. The trial judge did not record further details as at April 2019 and April 2021, but did record that, at the time of the trial, the principal shareholder was Ms Aiping Zhang who is married to Yancheng Lu and is therefore Ms Lu’s sister in law. Ms Yanping Lu (Ms Lu’s sister) is also a shareholder. Ms Aiping Zhang was identified as the “ultimate beneficiary” and “actual controlling person” in the company records.

Contravention of Corporations Act, s 181(1)

20. In essence, Sunnya’s claim involved two steps. First, the arrangement with respect to the commercial invoices adopted in April 2019 involved a deception of Chinese Customs and placed Sunnya at risk of, at least, investigation and action detrimental to its business in China. Secondly, when the deception was discovered, or at risk of discovery, the under-value price was adopted as the sale price to GNT, resulting in a reduction in the value of Sunnya’s revenue. Thus, Sunnya then invoiced GNT for a price significantly below the distribution price which GNT obtained in China, and which Sunnya had previously obtained, subject to payment for the costs of services provided by GNT as import agent. The new arrangement was detrimental to the financial interests of Sunnya and advantageous to GNT, a company controlled and ultimately owned by relatives of Ms Lu.

21. In its statement of claim, Sunnya alleged that the arrangement, organised by Mr He and Ms Lu, involved breaches by them of their obligations under ss 181(1) and 182 of the Corporations Act 2001 (Cth). Further, it pleaded that, to the extent that the under-value invoices issued by Sunnya to GNT reduced the customs duty payable on Sunnya’s products, the conduct risked Sunnya suffering penalties in China and possible exclusion from Chinese markets. ^[6] On both bases, the conduct was not in Sunnya’s best interests.

    6. Third further amended statement of claim, 1 November 2023, par 74K.

22. A declaration that Mr He and Ms Lu had contravened s 181 or s 182 of the Corporations Act would amount to a finding of breach of a civil penalty provision, entitling Sunnya to compensation for loss suffered, pursuant to s 1317H of the Corporations Act. It is necessary to identify the relevant principles derived from these provisions. However, as the Full Court of the Federal Court observed in BCI Finances Pty Ltd (in liq) v Binetter,^[7] referring to the 2nd (1957) edition of Gower, ^[8] the statutory provisions reflect well-established principles governing the fiduciary duties of company directors, and are not a code as to the operation of those principles.

Legal obligations of the directors

7. [2018] FCAFC 189; (2018) 362 ALR 597 at [596] (Allsop CJ, Moshinsky and Colvin JJ).

8. Gower, The Principles of Modern Company Law (2nd ed, 1957, Stevens & Sons) at p 474.

23. Section 181 of the Corporations Act provides:

181    Good faith—civil obligations

Good faith—directors and other officers

(1)   A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)   in good faith in the best interests of the corporation; and

(b)   for a proper purpose.

Note 1: This subsection is a civil penalty provision (see section 1317E).

….

(2)   A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: This subsection is a civil penalty provision (see section 1317E).

24. This provision imposes an affirmative obligation on company directors and other officers. ^[9] To act in good faith must be understood as to act in honest pursuit of those best interests. Usually, the “proper purpose” will also involve pursuit of the best interests of the company, but will be subject to constraints imposed on fiduciaries, such as avoidance of conflicts of interest. Both par (a) and par (b) have a subjective element, namely either acting honestly, or the existence of a purpose being pursued by the director. Often that element will be derived from surrounding circumstances. Those circumstances may contradict a director’s statement as to his or her subjective intentions.

    9. The term “proscriptive” would be appropriate if not so fraught: see Xiao v BCEG International (Australia) Pty Ltd (2023) 111 NSWLR 132; [2023] NSWCA 48 at [111]-[114] (Gleeson JA).

25. Relevantly in this case, the section is directed to the exercise of powers or discharge of a duty as a director of the company. Acting, whilst a director of one company, as agent for another company, albeit not in the best interests of the first company, may not contravene s 181(1). As will be seen, Ms Lu negotiated contracts with Supermega for the supply of milk products to GABT, as agent for GABT, which were inimical to the interests of Sunnya, but did not breach s 181(1) because she was not acting as a director of Sunnya.

26. Two further observations should be made in relation to the construction of s 181. First, it should be read coherently with surrounding provisions. Each provision in Part 2D.1 of the Corporations Act has its own function and the structure owes much to history. ^[10] Nevertheless, coherence is important. In that context, reference may first be made to s 180, which relevantly provides:

    10. Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52 at [126]ff (Greenwood J).

180   Care and diligence—civil obligation only

Care and diligence—directors and other officers

(1)   A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)   were a director or officer of a corporation in the corporation’s circumstances; and

(b)   occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note:    This subsection is a civil penalty provision (see section 1317E).

Business judgment rule

(2)   A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a)   make the judgment in good faith for a proper purpose; and

(b)   do not have a material personal interest in the subject matter of the judgment; and

(c)   inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)   rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note:    This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)—it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3)   In this section:

business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

27. Because s 180(2) only applies to business judgments, it will not encompass all powers and duties of a director. Nevertheless, conduct in the best interests of the company will often involve a business judgment. Secondly, the distinction in s 180(2)(a) and (d) between making a judgment in good faith for a proper purpose and rationally believing that the judgment is in the best interests of the corporation supports the view that an honest belief as to purpose under s 181 will only be satisfied where that belief is rational.

28. By way of contrast, s 184(1), creating criminal offences (as opposed to civil penalties), places a different emphasis on the mental element involved:

184   Good faith, use of position and use of information—criminal offences

Good faith—directors and other officers

(1)   A director or other officer of a corporation commits an offence if they:

(a)    are reckless; or

(b)    are dishonest;

and fail to exercise their powers and discharge their duties:

(c)    in good faith in the best interests of the corporation; or

(d)    for a proper purpose.

29. To constitute a criminal offence one of the mental elements in pars (a) and (b) must be added to a failure to act in accordance with (c) or (d). The section adds to the language of s 181(1) an element of recklessness or dishonesty. When s 181(1) is read with s 184 it is clear that dishonesty is distinct from an absence of good faith; and an additional element is required for an affirmative finding of dishonesty. Understood in this context, the use of the labels “subjective” and “objective” in relation to s 181 is unhelpful and distracting. The repeated references in judgments to an unresolved issue suggests that the labels suppose a false dichotomy. ^[11] The statutory language does not use them.

    11. In the matter of Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [420] (Black J).

30. The term “subjective” may refer to a state of mind, but the statute identifies several states of mind. Further, proof of a state of mind (or its absence) often depends on inferences drawn from “objective” facts and circumstances. The term “objective”, however, is not used here to refer to facts, external to the individual, but to a standard imposed by law, primarily elements of the duty owed by a fiduciary. These were identified by Malcolm CJ in Chew v The Queen ^[12] in the following terms:

“No authority is required for the proposition that the duty to act honestly involves a duty to act in good faith. Directors are required to act in good faith in the interests of and for the benefit of a company as a whole: see Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 135, per Latham CJ. … It follows that the duty of honesty or good faith has a number of aspects under the general law. First, the directors must exercise their powers in the interests of the company, they must not misuse or abuse their powers. Secondly, they must avoid conflict between their personal interests and those of the company. Thirdly, they should not take advantage of their position to make secret profits. Fourthly, they should not misappropriate the company’s assets for themselves.”

12. (1991) 4 WAR 21 at 49.

31. On appeal, the High Court ^[13] observed that a contravention might occur if the director had acted for an improper purpose, regardless of whether that purpose was achieved. The requirement for a purpose was described as “the equivalent of a specific intention”. ^[14] The point was reiterated in The Queen v Byrnes, ^[15] where the Court repeated and adopted an observation of Dawson J in Chew: ^[16]

“It is clear enough that the director of a company may act improperly with no intention of acting dishonestly or otherwise than in the best interests of the company as a whole.”

13. Chew v The Queen (1992) 173 CLR 626 at 633 (Mason CJ, Brennan, Gaudron and McHugh JJ); [1992] HCA 18.

14. Chew at 633.

15. (1995) 183 CLR 501 at 512 (Brennan, Deane, Toohey and Guadron JJ); [1995] HCA 1.

16. Chew at 640; Byrnes at 514.

32. The joint reasons in Byrnes continued: ^[17]

“Impropriety does not depend on an alleged offender’s consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. When impropriety is said to consist in an abuse of power, the state of mind of the alleged offender is important …. But impropriety is not restricted to abuse of power. It may consist in the doing of an act which a director or officer knows or ought to know that he has no authority to do.”

17. Byrnes at 514-515.

33. The distinction between acting in good faith in the best interests of the corporation and acting for a proper purpose may be illustrated by the following statement by Myers J in Ansett v Butler Air Transport (No 1): ^[18]

“Whether the directors believed that policy to be the best or not, and whether their policy was in fact the best or not, I am satisfied that their only purpose in issuing the shares was to ensure that there would always be a majority in the company agreeable to carrying out the policy which the directors thought would be best. This is precisely what directors cannot do.”

18. (1957) 75 WN (NSW) 299 at 303.

34. That good faith imports a subjective element of honesty, but its absence does not demonstrate a contravention of s 184, which will only arise where conscious dishonesty has been established, was noted in Duncan v Independent Commission Against Corruption. ^[19] Further, a director may act in the firm belief that particular conduct is in the best interests of the company, but be pursuing a purpose for which the power was not intended. In In the matter of IW4U Pty Ltd (in liq) ^[20] Gleeson J (sitting in the Equity Division) stated:

“30 Sections 181(1)(a) and (b) are the statutory expression of two separate duties owed at general law. Putting to one side the debate as to whether these duties are objective or subjective, the standards imposed are those that “would be expected of a person in that position by reasonable persons with knowledge of the duties, power and authority of the position”: Downer EDI Ltd v Gillies [2012] NSWCA 333; (2012) 92 ACSR 373 at [76] (Allsop P). In Chew v R (1991) 4 WAR 21; (1991) 5 ACSR 473 at 499, Malcolm CJ said that the duty of honesty or good faith has a number of aspects under the general law, being that directors (1) must exercise their powers in the interests of the company; (2) must avoid conflict between their personal interests and those of the company; (3) should not take advantage of their position to make secret profits; and (4) should not misappropriate the company’s assets for themselves.

…

34   … A director will be acting in breach of duty if he or she incorporates a new entity for the purpose of continuing to trade the business of the company without the new entity acquiring the business of the first company in an arm’s length transaction for value …. Honest or altruistic behaviour by directors will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose: Permanent Building Society Pty Ltd (in liq) v Wheeler (1994) 11 WAR 187 at 218; (1994) 14 ACSR 109 at 137 (Ipp J, Malcolm CJ and Seaman J agreeing).”

19. Compare the requirement of recklessness or intentional dishonesty for a breach of the obligation in s 181, leading to a criminal offence under s 184(1): [2016] NSWCA 143 at [430] (Bathurst CJ); ([636] in my reasons).

20. [2021] NSWSC 40; 150 ACSR 146.

35. To these considerations should be added that there is a prior requirement that a corporation act lawfully – a consideration which limits the proper conduct of its directors and officers, and an assessment of what can be in the best interests of the corporation. Edelman J observed in Australian Securities and Investments Commission v Cassimatis (No 8): ^[21]

“[482]   There is a strong indication that the scope of possible harm to the corporation contemplated by Ipp J [in Vrisakis v Australian Securities and Investments Commission ^[22] ] was not limited to pecuniary loss and might extend to unlawful conduct which can cause non-pecuniary consequences for a corporation. Immediately before the passage about foreseeable risk of harm, Ipp J referred to the lack of intention by the legislature to ‘dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity’ …. A corporation has a real and substantial interest in the lawful or legitimate conduct of its activity independently of whether the illegitimacy of that conduct will be detected or would cause loss. One reason for that interest is the corporation’s reputation. Corporations have reputations, independently of any financial concerns, just as individuals do. Another is that the corporation itself exists as a vehicle for lawful activity. For instance, it would be hard to imagine examples where it could be in a corporation’s interests for the corporation to engage in serious unlawful conduct even if that serious unlawful conduct was highly profitable and was reasonably considered by the director to be virtually undetectable during a limitation period for liability.”

21. [2016] FCA 1023; 336 ALR 209 (emphasis by Edelman J); see also, as to the nature of the corporation’s interests, at [539]-[540].

22. (1993) 9 WAR 395; (1993) 11 ACSR 162.

36. The references to a corporation having “a real and substantial interest in the lawful or legitimate conduct of its activity independently of whether the illegitimacy of that conduct will be detected or would cause loss” and existing “as a vehicle for lawful activity” were quoted with apparent approval by Greenwood J on appeal. ^[23]

    23. Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52 at [86]; see also Thawley J at [426(3)].

Application of principles

37. As has been noted, the first two matters involved conduct by Mr He and Ms Lu as directors of Sunnya. The under-value invoices commenced in April 2019, at which time the import agent, GNT, continued to remit to Sunnya receipts from its distributors for the full amount of Sunnya’s price, less the agreed commission of 2%. It may be inferred that the arrangement was financially beneficial to Sunnya to the extent that customs duty was charged by the Chinese Customs Service on a reduced value and not the true value at which the produce was sold by Sunnya within China. At that point, there was no immediate financial detriment to Sunnya, although the conduct was unlawful and, Sunnya submitted, therefore improper, and placed Sunnya at risk of action being taken by the Chinese Customs Service. Further, the steps were taken in the knowledge that, in December 2018, the Chinese Customs Service had commenced an investigation into the importation of Sunnya’s milk products, by notice to GNT.

38. What happened in April 2021 was immediately financially disadvantageous to Sunnya. At that point, GNT ceased to be an import agent for Sunnya and became the purchaser of the Sunnya products, which it then distributed within China. It purchased the products at the prices established by the under-value invoices. The money remitted to Sunnya was thereafter a significantly lower amount per item than the amount which had been paid by the Chinese distributors to Sunnya and was now to be paid by the Chinese distributors to GNT. The reduction, the quantum of which was not agreed and remains unresolved, was said to be “significant” after taking into account the higher import duty which would have been paid had the true cost of the product to the Chinese distributors been the price declared by GNT on its import of the products.

39. The first and second respondents justified the change in arrangements in April 2021 as necessary to resolve the disclosure of the unlawful existing arrangement resulting in the customs investigation. The only available alternative was to concede the falsity of the invoicing practice from April 2019.

40. The trial judge opened her analysis of the issue in the following terms:

“[610]    Assuming that the only two courses of action available to Sunnya in the context of the Customs Investigation in April 2021 were to change its documentation going forward to conform with the substance of its general trade channel sales and distribution transactions since April 2019 (as the Plaintiffs contend would have been the appropriate course), or to change its general trade channel sales and distribution arrangements going forward to bring it into conformity with its past documentation practices (being the course that was in fact taken in April 2021), the limited evidence before the Court does not provide a sufficient basis for any finding on the balance of probabilities that one of those two courses was preferable to the other in April 2021, having regard to Sunnya’s best interests at the time, objectively assessed. Assuming (without deciding) that the course propounded by the Plaintiffs would have overcome the profit smuggling allegation or concern, it would have revealed Sunnya’s past practice of presenting false information to the Customs Service in order to reduce the duties, taxes, or fees payable by Sunnya on the importation of its Neurio products into China. There is no evidence about the potential consequences for Sunnya of such a revelation.”

41. Why the outcome in fact adopted would have been foreseen as likely to involve, but “overcome”, such a revelation was not explained: nor did the evidence support an inference that it in fact did. Although the judge commenced by “assuming” that only two courses of action were available, that was the way the case was run and no basis was identified for inferring that some other course of action might have been available. But on the assumption that the allegation would have been “overcome”, the lack of evidence as to “potential consequences” seems immaterial. In the absence of evidence of possible adverse consequences to Sunnya, either from GNT (which did not defend the proceedings) or from Mr He and Ms Lu (who did not give evidence), the counterfactual should not have resulted in an assumption that there would have been potential adverse consequences, beyond, perhaps, payment of unpaid duty and a possible penalty. More importantly, what was absent was any evidence of a belief on the part of the respondents that such adverse consequences would be severe and warranted the course taken on Sunnya’s behalf. If the difference between the price paid to Sunnya was $10 less per tin and the duty was 10%, then the duty saved was $1 and Sunnya’s loss was $9 (or 90%) under the new arrangement for the indefinite future, subject to an allowance for the $1 undercharging for the past two years.

42. The challenge raised by Sunnya to the reasoning of the trial judge was that it failed to take into account that the cause of the situation was the attempt to defraud the Chinese government of customs duty. If that conduct lacked a proper purpose within the terms of s 181(1)(b), it was unlawful and created a financial risk to the company, including that which eventuated; it could not be relied upon to justify an arrangement which entailed continuing losses for the foreseeable future. Further, being unlawful, the course of issuing under-value invoices was not in the best interests of the company, applying the reasoning in Vrisakis and Cassimatis. Being deliberately undertaken over a two year period by Mr He and Ms Lu, they cannot have been acting in good faith. Accordingly, contraventions of par (a) and par (b) of s 181(1) were established.

43. As to the financial effects of the April 2021 changes, the judge appeared ambivalent. The judgment at [611] commenced:

“It is plain that the April 2021 changes to Sunnya’s general trade channel sales and distribution arrangements reduced Sunnya’s sales revenue. I infer that those changes resulted in a corresponding increase in GNT’s sales revenue.”

After noting that there was an absence of evidence on that issue, the judge stated that:

“For present purposes, I assume (without deciding) that this is so.”

However, the judge continued:

“Contrary to the assumption implicit in the pleadings and submissions of the Plaintiffs, it does not inevitably follow that Mr He and Ms Lu caused or permitted the April 2021 changes with the intention or purpose of increasing GNT’s sales revenue and profits at the expense of Sunnya.”

44. The question was not whether the inference was inevitable, but whether it should have been drawn on the balance of probabilities. On the assumption made, it was the undeniable and undenied effect of the change. Funds were diverted from Sunnya to a company controlled by relatives of Ms Lu.

45. The trial judge then found that the evidence did not establish that Mr He or Ms Lu “stood to benefit personally from any increase in GNT’s profitability”: at [612]. An actual financial benefit, however, is not necessary in order to identify a conflict of interest or an improper purpose. Conduct which had the effect of diverting financial benefits from the corporation of which the first and second respondents were directors and controllers, to a family company owned by family members of one of them, was sufficient to demonstrate an improper purpose, unless otherwise explained.

46. The contravention of s 181(1) was established with respect to the under-value invoice claim.

Contravention of Corporations Act, s 182

47. Sunnya separately contended that the conduct constituted a contravention of s 182 of the Corporations Act, which provides:

182    Use of position—civil obligations

Use of position—directors, other officers and employees

(1)   A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)   gain an advantage for themselves or someone else; or

(b)   cause detriment to the corporation.

Note:   This subsection is a civil penalty provision (see section 1317E)

(2)   A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: This subsection is a civil penalty provision (see section 1317E).

48. With respect to Sunnya’s reliance on s 182, the trial judge stated:

“[621] The pleaded contravention of s 182 of the Corporations Act identified increased sales revenue and profits of GNT, and decreased sales revenue and profits of Sunnya, as the effect or consequence of the April 2021 changes. The pleading in relation to s 182 did not identify this as the purpose of Mr He and Ms Lu in causing or permitting those changes to Sunnya’s general trade channel sales and distribution arrangements. I reject the He Parties’ submission that this pleading deficiency is fatal to the under value sales claims under s 182 of the Corporations Act. The Plaintiffs’ allegations as to the purpose of the impugned conduct are clear from the pleading of the under value sales claims read as a whole, particularly the pleading of the alleged dishonest and fraudulent scheme referred to at [587] above. However, it is fatal to the under value sales claims under s 182 that the Plaintiffs have failed to discharge their onus of proving that, in causing or permitting the April 2021 changes to Sunnya’s general trade channel sales and distribution arrangements, Mr He and Ms Lu acted with the subjective purpose of increasing GNT’s sales revenue and profits at Sunnya’s expense.”

49. When Chew was decided in the High Court, the equivalent provision, s 229(4) of the Companies (Western Australia) Code did not divide the provision up in the way that s 182(1) now does. Rather, it read:

“An officer or employee of a corporation shall not make improper use of his position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation.”

50. In Chew, the comma after “employee” (considered in the light of the legislative history) was construed as a prohibition on an improper use of position “in order to” cause a particular outcome or result. The joint reasons concluded: ^[24]

“It is a corollary of the interpretation which we favour that the accrual of an advantage or the suffering of a detriment is not an element of the offence. …

… Once one concludes that there is a purposive element in the offence, it is necessary to establish not merely that the accused intended that a result should ensue, but also that the accused believed that the intended result would be an advantage for himself or herself or for some other person or a detriment to the corporation.”

24. Chew at 633.

51. The joint reasons in Chew continued: ^[25]

“The accused’s state of mind is relevant not only to the requirement of purpose but also to the element of improper use of his or her position. If, for example, an accused person reasonably but mistakenly believed that a particular transaction which he or she authorized was genuinely for the benefit of the corporation, that belief may, in an appropriate case, be material in determining whether the accused person can be held criminally responsible for using his or her position in a manner which would objectively be seen to be improper.”

25. Chew at 634.

52. The last statement concerned a criminal prosecution, which is not the subject of s 182. It is, nevertheless, clear that impropriety is to be determined objectively. Bearing those considerations in mind, the purpose (benefiting an unrelated entity at the expense of the corporation) was improper. Further, it is difficult to understand how, the outcome being an inevitable consequence of the conduct, and the conduct being voluntarily undertaken, the directors who undertook the conduct did not intend that outcome. The conclusion that that was their purpose is strengthened by the fact that the entity benefited was controlled by Ms Lu’s family.

53. The absence of any evidence from Mr He and Ms Lu on this issue was significant. The judge drew the inference that nothing they could have said would have assisted them. But the judge continued, as she had in relation to the under-value invoice claim, that the absence of evidence “does not fill this evidentiary gap in the Plaintiffs’ case”. ^[26] However, with respect, the question was whether appropriate inferences were available from the objective circumstances. In criminal proceedings, there is rarely direct evidence of the intention of the accused, nor can any inference be drawn from the failure of an accused to give evidence. Nevertheless, criminal convictions commonly rely on an intention inferred from the voluntary conduct having a particular result. The willingness to reach such a conclusion should be heightened in a case where the relevant burden of proof is the balance of probabilities and the absence of evidence from defendants can give rise to an inference that what evidence they could have given would not have assisted them.

    26. Primary judgment at [636].

54. The appellants took issue with the suggestion that the course taken in April 2021 could be in the best interests of Sunnya in circumstances where it deprived Sunnya of a significant part of its revenue and diverted it to another entity. The justification, namely that it was a necessary result to avoid sanctions from the Chinese Customs Service, merely took the analysis back one step to the introduction of the under-value invoices, in April 2019, creating a real risk which materialised in 2021. That in itself was said to involve a breach of duty to act in the company’s best interest.

55. The issues were succinctly identified by the trial judge in the following terms:

“[632]   The following contentions underpin each of the Plaintiffs’ causes of action in respect of the commercial invoices claims:

(1)    the practice of issuing the commercial invoices for the purpose of presenting a price to the Customs Service in China that was not the genuine sale price exposed Sunnya to a reasonably foreseeable risk of the following kinds of harm:

(a)   the risk of becoming subject to investigation by relevant government authorities;

(b)   the risk of being banned from importing goods into China; and

(c)   the risk of Sunnya only being entitled to charge the export price recorded in the commercial invoices;

(2)   the risk of an investigation by government authorities materialised;

(3)   the Customs Investigation necessitated the April 2021 changes to Sunnya’s general trade channel sales and distribution arrangements, with the result that Sunnya only charged GNT the export price recorded in the commercial invoices; and

(4)   the April 2021 changes caused financial loss to Sunnya.

[633]   I have found that Mr He and Ms Lu caused Sunnya to adopt the commercial invoices practice, and to maintain that practice during the whole of the period from April 2019, when GNT was engaged as Sunnya’s import agent, until April 2021. I have also found that the purpose of the commercial invoices practice was to reduce the import taxes or duties, or ‘customs fees’, that were payable on the importation of Sunnya’s Neurio-branded products into China.”

56. The judge was not satisfied as to consequence (b), namely the risk of being banned from importing goods into China. She was, however, satisfied as to consequence (a), namely the investigation, and as to the matters raised in (2) and (3). Thus, putting to one side the question of loss raised by (4), the critical issue became (1)(c), namely the risk of Sunnya being restricted to charge the export price recorded in the invoices. In rejecting that contention, the judge reasoned as follows:

“[636]   The He Parties admit that the Customs Investigation – which I have found was a foreseeable risk of the commercial invoices practice – necessitated the April 2021 changes to Sunnya’s general trade channel sales and distribution arrangements pursuant to which Sunnya only charged GNT the export price recorded in the commercial invoices. However, it does not follow that there was a reasonably foreseeable risk of this outcome from April 2019, or at any time before the Customs Investigation commenced in March 2021, and before the course of the investigation caused Mr Yao and Mr He to identify a risk that Sunnya would be fined or found to have engaged in ‘smuggling’ because GNT had remitted to Sunnya the proceeds of sale of Neurio-branded products sold to general trade channel distributors in China. The evidence does not provide a sufficient basis to draw such an inference, and the failure of Mr He and Ms Lu to give evidence does not fill this evidentiary gap in the Plaintiffs’ case.”

57. In order to understand this reasoning, it is necessary to refer back to earlier passages relied upon by the trial judge by way of cross-references. Thus, a footnote to the first sentence (as to the He parties’ admissions) referred back to the following passage:

“[603]   The He Parties’ plead that, as a result of the Customs Investigation: (1) Sunnya was required to sell its Neurio-branded products to GNT, and could not distribute those products through GNT to ‘sub-agents’ in China; (2) Sunnya was not permitted to receive more than the ‘import price’ and was not permitted to take profits to GNT out of China; and (3) Sunnya’s ability to set the price for the Neurio-branded products that it exported to GNT in China was ‘impended’.” ^[27]

27. Although the judge, no doubt in the absence of evidence, did not explain the word “impended”, it seems to be a typographical error for “impeded”.

58. For the purposes of this part of the argument, the appellants accepted and relied upon those admissions: [628]. What is less clear is why the judge did not accept that the provision of under-value invoices was itself “a dishonest and fraudulent scheme because the commercial invoices were used to commence false sales information to a government authority”: [629]. That inference, which was certainly open, would have led to the further inference that there was a risk of being required to pay unpaid duty and to ensure that the information provided in the future did not involve under-value invoicing. In other words, item 1(c) should have been accepted, with the result that (4) should also have been accepted, namely that the April 2021 changes were both unjustifiable and caused financial loss to Sunnya.

59. The reasoning for rejecting those inferences, set out in the second part of [636], was, purportedly, an absence of evidence from which to draw the inferences. A footnoted reference to the second sentence drew attention to the reasoning at [596]-[602]. At [596], the judge accepted a submission by the He parties that “the broad scope of the investigation extended to all of GNT’s importing activities during the whole of the time since April 2019 that GNT had been acting as Sunnya’s import agent” and that “the Customs Service had been asking questions about the dealings between Sunnya and GNT even before issuing the Notice of Inspection on 12 March 2021”.

60. The matters which were not in dispute were as follows:

“[598]   It is not in dispute that:

(1)    Sunnya changed the way in which its Neurio-branded products were sold and distributed in China through the general trade channel in April 2021, approximately one month after the commencement of the Customs Investigation;

(2)    as a result of those changes, Sunnya sold its Neurio-branded products to GNT, rather than to Sunnya’s general trade channel distributors in China, from April 2021;

(3)    the prices at which Sunnya sold those products to GNT from April 2021 was less than the prices at which Sunnya had been selling those products to its general trade channel distributors immediately prior to April 2021;

(4)    GNT entered into sale contracts with those distributors, which replaced the contracts that had been on foot immediately prior to April 2021 between Sunnya and the distributors;

(5)    under those new sales contracts, GNT agreed to sell Sunnya’s Neurio-branded products to the general trade channel distributors at or about the same prices for which Sunnya had previously contracted to sell the same products to those distributors;

(6)    from April 2021, those prices were payable by the distributors to GNT, rather than to Sunnya; and

(7)    from April 2021, GNT no longer remitted to Sunnya the payments that it collected from the general trade channel distributors for Sunnya’s Neurio-branded products.

[599]   The effect of those changes was that GNT was no longer collecting from general trade channel distributors in China, and remitting to Sunnya in Australia payment for goods at prices that had been determined by Sunnya in Australia. In other words, the changes addressed the concern that Mr Yao had expressed in his WeChat messages referred to above.”

61. The judge then dealt in some detail with an email by Mr He on 11 June 2021 indicating that the Customs Service had raised the possibility that “the practice of GNT collecting and remitting the sale price to Sunnya constituted Sunnya collecting and ‘smuggling’ profits that belonged to GNT, and that Sunnya could only charge GNT ‘the purchase price’”. However, that material tended to support the characterisation of Sunnya’s conduct as a fraudulent attempt to reduce Chinese import duties, which self-evidently carried the risks identified by the appellants. On a number of occasions, the judge referred to the lack of evidence as to “relevant Chinese customs, laws, regulations and practices”, but nevertheless “inferred that the commercial invoices practice, which involved the presentation of false information to the Customs Service in China, involved some departure from those laws, regulations and/or practices”. What the judge was not inclined to address were the consequences and potential gravity of that conduct. ^[28]

    28. Primary judgment at [633], [595].

62. With respect, the judge should have accepted on the balance of probabilities that one foreseeable consequence of indulging in a fraudulent scheme of rendering under-value invoices was that Sunnya would be required to make good any loss to the Chinese Customs Service and give some form of undertaking not to engage in similar conduct in the future. That risk should have been apparent to reasonable business people in the position of Mr He and Ms Lu at the time they initiated the practice in April 2019. This was not a case of directors monitoring compliance by a corporation of its legal obligations; it was a case of directors creating and implementing a fraudulent scheme. Nor was it a question of characterising the gravity or seriousness of the misconduct: it was merely a question of being satisfied that the misrepresentations might be discovered and that the company might suffer adverse financial consequences as a result. Inferences as to those risks should be drawn.

63. The consequence of drawing those inferences is that the contention that Mr He and Ms Lu were acting in the best interests of the company in April 2021 fails because the financial impact on Sunnya was a direct consequence of their improper conduct in April 2019. The improper conduct in April 2019 led directly to the loss of part of the revenue flow to Sunnya which materialised in April 2021. That reasoning, in turn, suggests that condition (4) identified at [55] above (namely that the April 2021 changes caused financial loss to Sunnya) should have been satisfied. However, it is appropriate to refer to the judge’s reasoning for not making that finding.

64. After addressing (1)(c), and noting that the second and third contentions were not in dispute, the trial judge continued:

“[639]   As counsel for the He Parties submitted, Sunnya’s loss in the period after April 2021 of the revenue and/or profits of the magnitude that it had earned from general trade channel sales prior to April 2021 under the commercial invoices practice that the Plaintiffs allege was instigated and directed by Mr He and Ms Lu in breach of their statutory and fiduciary duties, is not a loss that flowed from any such breaches of duty. The relevant counterfactual, which was neither pleaded nor articulated in the Plaintiffs’ closing submissions, required a comparison between: (1) Sunnya’s actual financial position derived from its general trade channel sales and distribution arrangements including the commercial invoices practice during the period from April 2019 to April 2021, including any savings on import duties and taxes, or “customs fees”, that flowed from the commercial invoices practice, together with Sunnya’s actual financial position derived from its changed general trade channel sales and distribution arrangements from April 2021; and (2) the financial position of Sunnya in the hypothetical counterfactual scenario where it had not followed the commercial invoices practice during the period from April 2019 to April 2021. That counterfactual directs attention to matters that include the relevant customs laws and regulations in China during the period from April 2019 to April 2021, the practices that Sunnya could have adopted in compliance with those laws and regulations instead of the commercial invoices practice, and the probable impact of such alternative practices on Sunnya’s revenue and profits from its general trade channel sales. The Plaintiffs did not adduce any evidence about those matters.”

65. Why it was necessary to establish a loss, at least for the purposes of finding a breach of s 182, was not explained. If the reasoning of the High Court in Chew v The Queen set out at [50] above is applied, neither the accrual of an advantage, nor the suffering of a detriment is an element of the civil penalty provision. While the structure of s 182 is not identical to that of the provision considered in Chew, no different result should obtain. Thus, in Chew, there was a comma after the reference to the employee, and before the first of the objects, namely “to gain”. That structure led the High Court to conclude that “to” identified the purpose, and was equivalent to “in order to”. The punctuation now comes after the word “to” (in the form of a colon) but, if anything, the construction preferred by the High Court is strengthened rather than undermined. That is, it is the purpose, not the outcome, which constitutes the element of the prohibition. For that reason, Sunnya was required neither to plead nor to demonstrate a loss.

66. On the other hand, for reasons explained above, the diversion of part of Sunnya’s revenue to GNT demonstrated both the impropriety of the purpose and, almost inevitably, the loss.

67. A consequence of the reasoning with respect to breaches by Mr He and Ms Lu is that the judge was not required to (and did not) address the question as to whether GNT was knowingly involved in those breaches.

68. One other aspect of the reasoning should be noted. In identifying the “counterfactual” against which the actual financial position of Sunnya was to be compared, the judge noted that it depended upon “relevant customs, laws and regulations in China” as to which Sunnya did not adduce any evidence. Whether or not that was a proper statement of the counterfactual, the need for evidence of Chinese law and practice for this purpose suggests that evidence of Chinese law with respect to trademarks was required to maintain the primary aspects of the He and Lu appeal. It was by no means obvious why, in principle, the usual assumption that foreign law reflected local law should apply with respect to trademarks, but not with respect to customs. Of course, it goes without saying that if Sunnya is to obtain a compensation order under s 131ZH, it will be necessary for it to demonstrate “damage suffered” resulting from the contravention.

69. Accordingly, the appellants’ claim that the under-value sales invoicing constituted a breach of s 181(1) and s 182 of the Corporations Act should be accepted. As has been noted, the consequential need to address the claim for compensation pursuant to s 1317H of the Corporations Act must be determined by remittal to the Equity Division.

1. Involvement of GNT: grounds 2, 2B

70. Having dismissed Sunnya’s claims against Mr He and Ms Lu with respect to the undervalue sales, the trial judge did not need to address any involvement that GNT might have had in the contraventions by Sunnya’s directors, and did not in fact do so. ^[29] Ground 2 in Sunnya’s appeal challenged that failure to make a finding with respect to GNT.

    29. Primary judgment at [625].

71. In support of a finding against GNT, Sunnya relied upon the factual matters summarised by the judge and set out at [60] above. The legal, basis of the claim rested upon the application of s 79 of the Corporations Act, and the second limb of Barnes v Addy. ^[30] Sunnya submitted that GNT’s involvement in the new arrangements, by which it became a major beneficiary through the undervalue sales, involved it having been, in the language of s 79, “in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention” by Mr He and Ms Lu. From April 2019, GNT was the recipient of the “commercial invoices” and was aware that they were false. GNT was the recipient of the Chinese Customs’ notice of inspection and was assisted by Mr He and Ms Lu in responding to the investigation. There was evidence of Ms Lu’s direct involvement in the investigation including, it was inferred, meeting with Customs officials in China. ^[31]

    30. (1874) LR 9 Ch App 244 at 252 (Lord Selborne LC).

    31. Primary judgment at [162].

72. Absent some persuasive evidence to the contrary, the proper inference is that GNT was not merely the beneficiary of the changed arrangements from April 2021, but had a detailed knowledge of the circumstances in which the arrangements were made, including the involvement of Mr He and Ms Lu as directors of Sunnya, so as to be fully aware that benefits which previously flowed to Sunnya were now to be obtained by GNT. GNT had entered into contracts directly with the Chinese distributors, at the same prices as those formerly paid by the distributors to Sunnya, so as to obtain the financial benefits. There was no contrary evidence, GNT not having appeared in the proceedings, nor proffered a defence. In those circumstances, Sunnya’s submissions should be accepted and a finding made that GNT knowingly assisted in the breaches of fiduciary duty by Mr He and Ms Lu, and was involved in those breaches, within s 79 of the Corporations Act.

1. Neurio product claims: grounds 3 and 4

73. Ground 3 alleged error on the part of the trial judge in failing to find that Mr He and Ms Lu breached fiduciary duties which they continued to owe to Sunnya following their resignation as directors on 25 November 2022. Their conduct involved negotiating contracts between GABT and Supermega on 25 November 2022, and between GNT and Supermega during the period from 7 December 2022 to 12 January 2023.

74. Ground 4 alleged error in failing to find that GABT, GNT, Supermega and its related company, Megadairy, knowingly assisted in Mr He and Ms Lu in breach of their ongoing fiduciary duty. Both grounds cover the same evidence and findings and will be addressed together.

Factual background

75. From May 2020, Supermega had been the sole supplier to Sunnya of its Neurio- branded products for export to China. The products themselves were manufactured by Megadairy, on behalf of Supermega, a related company. ^[32] The “improper Neurio products claim” related to 17 contracts entered into between 2 March 2022 and 8 November 2022 by Supermega and one or both of two Chinese companies, GABT and Shanghai Gainful Industrial Co Ltd. ^[33] Throughout that period, both Mr He and Ms Lu were directors of Sunnya. Sunnya held the registered Neurio trademark in New Zealand. The effect of the contracts was to deprive Sunnya of a major part of its supply of Neurio-branded products, which were then exported to China and sold by GABT.

    32. Primary judgment at [122], [209].

    33. Primary judgment at [210].

76. As has been noted above, GABT was a Chinese registered company established in August 2007. From March 2021, Mr He held 95% of the shares in GABT. Ms Lu’s brother, Mr Yancheng Lu, held the remaining 5%. ^[34] In a company extract dated 1 November 2022, Mr He was identified as “the actual controlling person” of the company. On 10 March 2023, his shareholding was transferred to Ms Lu’s brother.

    34. Primary judgment at [6].

77. There was no evidence referred to by the trial judge, nor on appeal, of the corporate details of Shanghai Gainful. However, in circumstances identified below, the trial judge accepted that it was an import agent used by Ms Lu to avoid revealing the identity of the purchaser, namely GABT. ^[35]

    35. Primary judgment at [785], [786].

78. Before explaining in further detail the nature of the claims with respect to the contracts entered into in the period from March to early November 2022, it is necessary, by way of context, to refer to the subsequent contractual arrangements entered into after Ms Lu and Mr He resigned as directors of Sunnya. These are directly relevant to ground 5, dealing with the accessorial liability of GNT, but are also relevant, indirectly, in understanding the arrangements with respect to the earlier set of 17 contracts.

Findings of a dishonest scheme: plans A and B

79. The overall scheme relied on by Sunnya as the dishonest diversion of its business of exporting milk products to China was identified in the following terms by the trial judge:

“[759]   I have found that the actions described at [693]-[708] were intended to divert Sunnya’s business to GABT by terminating the cooperation relationship between GABT and Sunnya and transferring the registered ownership of the Australian and New Zealand Neurio trade marks to GABT, thereby arming GABT to be able to manufacture Neurio-branded products in Australia and New Zealand for export and sale in China without any involvement of Sunnya and without any benefit passing to Sunnya. The Plaintiffs refer to this as the He Parties’ ‘Plan A’.

[760]   The interim orders made in the Sunnya proceedings during the period from 3 November to 10 November 2022 required GABT to transfer the Australian Neurio trade marks back to Sunnya, and precluded Mr He, Ms Lu and GABT from taking any further steps to transfer the New Zealand and Indonesian Neurio trade marks to GABT. Plan A therefore failed.

[761]   The Plaintiffs’ Neurio/NRIO claims arise out of what the Plaintiffs refer to as ‘Plan B’ – the resignation of Mr He and Ms Lu as directors of Sunnya at the same time as Sunlife applied to register the NRIO trade mark in Australia and New Zealand, and the manufacture of NRIO-branded formulated milk powder sachets by Megadairy in New Zealand which were exported to China, where they were packaged in tins bearing both the Neurio and NRIO brands and distributed for sale to retail consumers, with notices published on GABT’s website informing consumers that the Neurio label had been ‘upgraded’ to include the NRIO label. The Plaintiffs allege that Plan B was a diversion to GABT of Sunnya’s business of exporting and selling Neurio-branded products, or alternatively the diversion to GABT of a business opportunity for Sunnya to continue exporting and selling those products also using the NRIO brand. Sunnya received no payment or other benefit from the distribution and sale of Neurio/NRIO-branded formulated milk power under Plan B.

[762] The Plaintiffs allege that Mr He contravened s 181(1) and s 182(1) of the Corporations Act and breached his fiduciary duties as a director of Sunnya by his involvement in preparing Sunlife’s applications for registration of the NRIO trade mark in Australia and New Zealand that were lodged on 25 November 2022, being the same date on which Mr He resigned as a director of Sunnya.

[763]   The Plaintiffs allege that each of Mr He and Ms Lu breached (and continue to breach) ongoing fiduciary duties that they owed to Sunnya after their resignation as directors on 25 November 2022 by their actions comprising Plan B, which the Plaintiffs allege was a dishonest and fraudulent scheme.

[764]   …

[765]   The Plaintiffs allege that each of GABT and GNT knowingly assisted (and continue to assist) the breaches of fiduciary duties allegedly committed by Mr He and Ms Lu as part of the allegedly dishonest and fraudulent Plan B scheme, and were knowing recipients of (and continue to receive) the Neurio/NRIO-branded tins by which Sunnya’s business in China has been diverted. The Plaintiffs contend that each of GABT and GNT had the requisite knowledge of the essential matters comprising the allegedly dishonest and fraudulent scheme because, inter alia, each of GABT and GNT was deployed as the corporate creature, vehicle or alter ego of Mr He and Ms Lu.”

[795]   On the basis of all of those matters, considered as a whole, I find that Mr He procured Sunlife’s application to register the NRIO trade mark in Australia and New Zealand to create an alternative trade mark to Neurio that could be used for the manufacture of formulated milk powder products in Australia and New Zealand without the knowledge or consent of Sunnya, with the intention that such products would be manufactured for GABT, and packaged, marketed and sold by GABT in China using both the established Neurio trade mark of which GABT was the registered owner in China, and the new NRIO trade mark in respect of which GABT was shortly to apply for registration in China. I further find that Ms Lu negotiated for the benefit of GABT the two contracts that Supermega entered into on 7 December 2022 to manufacture and supply NRIO-branded sachets for formulated milk powder products to the buyer named as Shanghai Gainful. I find that the intention and purpose of Mr He and Ms Lu was to divert to GABT Sunnya’s business of selling Australian and New Zealand-manufactured Neurio-branded products in China [280] by creating a new trade mark to be used to manufacture the products in New Zealand, and to be used in conjunction with the Neurio trade mark for the marketing and sale of the products in China as ‘new’ or ‘upgraded’ versions of the established Neurio product lines. That intention and purpose was carried into effect by GABT’s marketing of the ‘new’ or ‘upgraded’ products from about April 2023, as evidenced in the notices published on GABT’s website … and similar notices published on e-commerce platforms …. That use of the NRIO trade mark registered by Sunlife in Australia and New Zealand had the obvious effect of removing any need for GABT to procure the consent or cooperation of Sunnya in manufacturing the products, in circumstances where Mr He and Ms Lu had failed in their previous efforts to achieve that outcome by transferring Sunnya’s Neurio trade marks to GABT for no consideration. For the reasons explained above, I have found that Mr He and Ms Lu encouraged or endorsed GABT’s marketing of the NRIO sachets as ‘new’ or ‘upgraded’ Neurio products, and I infer that Mr He and Ms Lu intended to achieve that obvious effect. Indeed, this Plan B was really a continuation of Plan A, adjusted in response to the failure of the attempts made by Mr He and Ms Lu to arrange for the transfer of Sunnya’s registered Australian and New Zealand Neurio trade marks to GABT.

[796]   I infer from the co-ordinated nature of their actions, which were directed to facilitating the supply to GABT of formulated milk powder products bearing the new NRIO trade mark, that Mr He and Ms Lu were each aware of the conduct of the other, and that they encouraged or endorsed one another’s conduct. The obvious effect of their conduct, was to ensure a supply of products to GABT that could be sold, and was sold, by GABT in China capitalising on the established Neurio brand, being profits that had previously been earned by Sunnya in selling Australian and New Zealand-manufactured Neurio-branded products in China with the cooperation of GABT. As I have observed earlier in these reasons, Mr He would benefit directly, and Ms Lu would benefit indirectly, from such profits earned by GABT to a greater extent than they would have benefitted if such profits had been earned by Sunnya. I infer that Mr He and Ms Lu intended to achieve the obvious effect of their conduct, for their own benefit and to the detriment of Sunnya.”

93. In terms of the causes of action, the trial judge was satisfied that both Mr He and Ms Lu breached their fiduciary duties to Sunnya, both during their service, and after their resignation, as directors. She also found that “the conduct of Mr He and Ms Lu transgressed ordinary standards of honest behaviour, and that those breaches of duty were therefore a dishonest and fraudulent scheme for the purpose of the second limb of Barnes v Addy”. ^[40]

    40. Primary judgment at [804].

94. As to the involvement of GABT, having rejected a suggestion that GABT was merely the alter ego of Mr He, or Mr He and Ms Lu, the trial judge continued:

“[822]   … At the time of the impugned conduct of Mr He, Ms Lu and GABT, each of them stood to benefit from diverting to GABT the whole of the business of selling Australian and New Zealand-manufactured Neurio-branded formulated milk powder products in China, which Sunnya had carried on with GABT’s cooperation and which Sunnya was endeavouring to continue without GABT’s cooperation by adding the JAT logo to its Neurio products that were then distributed and marketed for sale in China. The interests of GABT and the interests of Mr He and Ms Lu, were separate, but aligned. The evidence does not provide a sufficient basis for concluding that Mr He directed (as opposed to encouraged and endorsed) GABT’s conduct, or that his mind was GABT’s mind in relation to that conduct. However, the diversion of that business to GABT, which Mr He, Ms Lu and GABT worked to achieve by their co-ordinated actions described above, was to the mutual benefit of GABT and of Mr He and Ms Lu by reason of Mr He’s 95 per cent shareholding in GABT, until Mr He divested himself of those shares on 10 March 2023. Having acted in concert with Mr He and Ms Lu to achieve that mutual benefit in the period up to 10 March 2023, GABT is jointly and severally liable with Mr He and Ms Lu in respect of their breaches of fiduciary duty, as the Plaintiffs submitted.”

95. The judge did not, however, accept that similar findings could be made with respect to GNT. The judge made some findings in favour of Sunnya’s claim:

“[826]   The Plaintiffs submitted that GNT participated in the dishonest and fraudulent breaches of fiduciary duty by Mr He and Ms Lu because GNT was the distributor of the Neurio/NRIO-branded products in China, and because those products were sold by GNT and GABT. The evidence referred to … above establishes that GNT acted as the distributor for at least some of those Neurio/NRIO-branded products, and I so find. On the basis of the evidence concerning distribution arrangements generally in the Chinese market for formulated milk powder products …, and in the absence of any evidence to the contrary, I infer that GNT’s role as distributor of the Neurio/NRIO products included GNT selling those products to other distributors or to retail consumers.”

96. Then, having rejected the contention that GNT was the alter ego of Mr He and Ms Lu, the judge continued:

“[829]   In the alternative to their alter ego contention, the Plaintiffs rely on the following matters in support of their knowing assistance claim against GNT: (1) the position of Ms Aiping Zhang – Ms Lu’s sister-in-law – as the actual controlling person, major shareholder and ultimate beneficiary of GNT; (2) GNT’s role as distributor of Neurio/NRIO-branded products to which I have referred above; (3) Ms Lu’s involvement in the negotiation of the two contracts dated 7 December 2022 pursuant to which Supermega manufactured and supplied the NRIO-branded sachets; (4) GNT’s placement of orders with Supermega for Neurio products during the period from 7 December 2022 to 12 January 2023 … and (5) the absence of any evidence from GNT explaining any of these matters.

[830]   I do not consider that those matters, individually or taken together, support an inference that GNT had knowledge of the essential elements of the breaches of fiduciary duty by Mr He and Ms Lu, and of the dishonesty of those breaches. As to (1) above, the familial links between Ms Lu and Ms Aiping Zhang do not provide a sufficient basis to infer such knowledge on the part of Ms Zhang or GNT. As to (2) above, the Plaintiffs’ submissions failed to articulate what knowledge should be inferred from GNT’s role as a distributor of the Neurio/NRIO products. The Plaintiffs did not identify any evidence that would support an inference that, by reason of that role, GNT knew that Mr He had arranged for Sunlife to register the NRIO trade mark that had been used to manufacture the NRIO-branded sachets that GNT was distributing in the Neurio/NRIO branded tins. As to (3) above, Ms Lu’s conduct does not, without more, support an inference that GNT had knowledge of that conduct. The Plaintiffs’ submissions failed to articulate how (4) above supports an inference that GNT had knowledge of the essential elements of Mr He and Ms Lu’s breaches of fiduciary duty in respect of Neurio/NRIO branded products. As to (5) above, the absence of evidence from GNT does not, by itself, provide a sufficient basis to make the findings of knowledge for which the Plaintiffs contend against GNT.”

97. On appeal, Sunnya did not so much challenge the judge’s reasoning, but rather sought to rely on a more complete statement of the circumstances with respect to the involvement of GNT. Before turning to that evidence, two points should be made in relation to the concept of “knowing assistance”. First, the principle relates to giving assistance in respect of a dishonest or fraudulent design on the part of a fiduciary. The trial judge found that Mr He and Ms Lu were engaged in such a dishonest and fraudulent scheme in seeking to divest Sunnya of the benefits of the business of importing Neurio-branded New Zealand milk products into China. Their conduct was dishonest according to an objective standard. Whether they believed it to be so was not determinative of their liability. Secondly, the knowledge of the assisting party must be assessed by the refence to the conduct of the fiduciaries. Again, knowledge that the fiduciaries were acting in a dishonest and fraudulent design does not require a belief on the part of the party assisting that their conduct should be so described. It is sufficient to have “knowledge of circumstances which would indicate the facts to an honest and reasonable [person]”, being category (iv) approved in Farah Constructions Pty Ltd v Say-Dee Pty Ltd. ^[41]

    41. (2007) 230 CLR 89; [2007] HCA 22 at [173]-[174].

98. What then did GNT know about the conduct of Mr He and Ms Lu by early December 2022?

99. First, GNT knew about the false commercial invoice scheme introduced in April 2019, to which it had been a party when importing milk products into China as agent of Sunnya. Secondly, it was fully aware of the circumstances in which the arrangement changed so as to benefit GNT at the expense of Sunnya, in April 2021. Thirdly, when Mr Yancheng Lu, Ms Lu’s brother, wrote on behalf of GABT to give notice to Sunnya that the “Trade Mark Authorisation Agreement” was terminated, he identified himself in an accompanying letter of 21 October 2022 as “Manager” of GABT and GNT. That step was taken on the day following a notice of an extraordinary general meeting given by Sunnya, which included a proposal to appoint directors who, working together, would have taken control of Sunnya from Mr He and Ms Lu.

100. Fourthly, the extraordinary general meeting was duly held and, on 22 November 2022, Sunnya’s lawyers wrote to GNT noting that an investigation had revealed that (i) Sunnya had been supplying GNT with “its products at significant underprice”, (ii) GNT appeared to be a “related party” to Mr He and Ms Lu, and (iii) “on 21 October 2022 [GNT] demanded Sunnya to transfer an amount of AUD $950,000 to [GNT] as a refund of certain deposits, but yet [GNT] directed Sunnya to transfer those funds to a company wholly controlled by Ms Lu”. ^[42] The letter continued, asserting that Sunnya believed that “its interest might have been harmed by the conduct of its directors who have acted in a breach of legal duties arising under Australian law, and that [GNT] has been involved in that breach”. GNT did not respond to the letter. ^[43]

     42. Primary judgment at [311].

     43. Primary judgment at [312].

101. Fifthly, Sunnya filed a statement of claim on 5 December 2022 naming GNT as the fourth defendant. ^[44]

     44. Primary judgment at [314].

102. Two days later, on 7 December 2022, GNT entered into five contracts with Supermega for the supply of Neurio-branded products. On the same day, Supermega entered into two further contracts with Shanghai Gainful, on behalf of GABT, for the manufacture and supply of NRIO-branded products. The trial judge found that Ms Lu was the agent for GABT in arranging those latter contracts.

103. The fact that the nominal controller of GNT was Ms Lu’s sister-in-law may well not have been sufficient to draw the relevant inferences. However, the knowledge and conduct of her brother, as manager of both GABT and GNT, provides a somewhat different picture. Further, the attempt to terminate Sunnya’s right to use the Neurio trade mark relied upon two documents purportedly executed on 16 December 2014, which the trial judge found to be false:

“[555]   I find that the Trademark Registration Authorization Agreement and Trademark Usage Authorisation Agreement, each bearing the date 16 December 2014, are not genuine agreements entered into between GABT and Sunnya on or about that date, and were created by the He Parties for the purpose of manufacturing a false basis for Sunnya to transfer the Australian and New Zealand Neurio trade marks to GABT in late October and early November 2022, so as to assist the He Parties’ defence of the Sunnya proceedings and the prosecution of the All168 proceedings.”

It is implausible, having regard to the wider context, that GNT did not have knowledge of the activities of Mr He and Ms Lu, which constituted dishonest conduct on their part as directors of Sunnya. Having that knowledge, for GNT to enter into contracts for the supply of Neurio- or NRIO-branded products from New Zealand companies other than Sunnya involved knowing assistance in the dishonest conduct of the fiduciaries.

104. The judge’s reasoning to the contrary appeared to be based upon a failure of Sunnya to explain adequately the basis upon which it now relies to assert knowing assistance on the part of GNT. That issue was not explored, in the absence of GNT. However, the relevant material relied upon above was all available by reference to findings of fact made by the trial judge. In the absence of any claim of procedural unfairness (and it is clear that the material facts were pleaded and referred to in submissions), it is neither necessary nor appropriate for this Court to explore the extent to which the matter was not addressed in oral or written submissions before the trial judge in a manner in which it has been presented (albeit briefly) on appeal. The appeal being by way of rehearing, and there being no new material relied upon, it is open to Sunnya to present the matter in the way that it has.

105. It follows that ground 5 should be upheld and there should be a finding that GNT was liable by way of knowing assistance in relation to the conduct of Mr He and Ms Lu from no later than 30 October 2022.

1. Conclusions

Formulation of orders

106. Each of the seven grounds raised by Sunnya on its appeal having been upheld, it will be necessary for those findings of liability to be considered in the second part of the hearing, dealing with compensation. The first stage of the proceedings involved determining liability and making declarations. Where Sunnya was successful, the trial judge made orders by way of declaration of entitlement, orders for compensation and injunctive relief. Orders made by the trial judge on 19 April 2024 were entered on 20 September 2024. The cause of the delay in entering the orders is not known; although the orders envisaged further proceedings and submissions on costs, the time for those steps had expired long before the orders were entered.

107. Consistently with the approach adopted above and dealing with certain grounds together, Sunnya sought orders on the appeal first, with respect to grounds 1 and 2, and secondly, with respect to grounds 3 and 4. With respect to ground 5, a variation was sought of orders (22) and (26). Order (70) provided that Sunnya’s claim for final relief was otherwise dismissed. As some claims remain unsuccessful, that order should stand.

108. None of the respondents to Sunnya’s appeal took issue with the formulation of the orders proposed by Sunnya in its amended notice of appeal. However, the proposed orders contained internal references to Sunnya’s “prayers for relief”. Further, Sunnya sought orders for payment of compensation to be assessed at the subsequent hearing, or payments by way of an account for profits, at Sunnya’s election. While orders in that form may be made, the content of the relief was not debated during the appeal and will be determined by the judge dealing with the second stage of the proceedings.

109. Further, it is desirable that, so far as reasonably possible, the orders should be self-explanatory without reference to the reasons for judgment: the form of the orders sought has required redrafting. To that end, defined terms should be used to identify the conduct in question.

Costs

110. As to costs, Sunnya sought an order that “the respondents” pay its costs of its appeal. That may not be an appropriate order in the circumstances where two respondents against whom orders are to be made did not appear on the appeal and others, such as the NZ parties, played a relatively minor role. The costs order should be proportionate to the success or otherwise of the parties and their degree of involvement in the appeals. There was also a significant degree of overlap between the appeals brought by the He parties and the NZ parties and what was, in effect, a form of cross-appeal brought by Sunnya. Subject to the right of the parties to seek a variation of the orders, it is proposed that costs be dealt with globally with respect to the two days of hearing of the three appeals.

111. Further, Sunnya sought an order that the respondents pay its costs of the trial. Although the orders entered in September envisaged a further stage for dealing with costs, that had in fact already happened. In a judgment handed down on 5 June 2024 ^[45] (to which no reference was made in submissions) the judge made the following orders in relation to the Sunnya proceedings: ^[46]

     45. In the matter of Sunnya Pty Ltd [2024] NSWSC 686.

     46. Orders entered on 5 June 2024.

1. Order that the plaintiffs are to pay the costs of the first and second defendants (Mr He and Ms Lu) in respect of the undervalue sales claims and the commercial invoices claims referred to in the principal judgment at [459] and [586]-[648] on the ordinary basis, as agreed or assessed.

2. Order that there be no order as to the costs of the fourth defendant (GNT), which did not enter an appearance in the proceedings.

3. Order that the plaintiffs are to pay the costs of the sixth defendant (Ms He) in respect of the plaintiffs’ claims against her.

4. Order that the plaintiffs’ costs of their claims that are not the subject of orders (1) to (3) above be paid by the following defendants jointly and severally and on the following bases:

1. the first and second defendants (Mr He and Ms Lu), the third defendant (GABT), the seventh defendant (HLW) and the eighth to tenth defendants (Supermega, Megadairy and NZFDA), on an indemnity basis, as agreed or assessed; and

2. the fifth defendant (Sunlife) on the ordinary basis, as agreed or assessed.

5. Order in relation to the first cross-claim that the cross-claimant (GABT) is to pay the costs of the cross-defendant (Sunnya) on an indemnity basis, as agreed or assessed.

6. Order in relation to the second cross-claim that the cross claimants (Mr He and Ms Lu) are to pay the costs of the cross-defendant (Sunnya) on the ordinary basis, as agreed or assessed.

7. Order that the plaintiffs are not to recover any component of their costs of these proceedings twice under orders (4) to (6) above.

8. Order that the net costs payable by each party to each other party under orders (1) to (6) above, after offsetting any costs payable by the second party to the first party under those orders, are payable forthwith.

112. Order (1) should be set aside. It is appropriate to vary order (4): while order (2) should stand, there is no reason why, GNT having been found to have knowingly assisted Mr He and Ms Lu, Sunnya’s costs of pursuing GNT should be severed and excluded from the liabilities under order (4). The offsetting provided in order (8) is now unnecessary, but the order should stand. The other orders should not be varied.

113. These observations require that the parties have liberty to apply with respect to the orders set out below, a liberty which should be exercised within 28 days of the delivery of judgment.

Orders

114. The Court makes the following orders:

Note:   In these orders:

The parties are referred to by the abbreviations adopted in the judgment.

“commercial invoices” refers to the practice introduced in April 2019 by which Sunnya invoiced its import agent in China (GNT) for Neurio-branded products to be sold and distributed through its general trade channel at a price below the price paid by the purchasers in China;

“under-value sales” refers to practice introduced in April 2021 by which Sunnya sold and distributed Neurio-branded products in China through its general trade channel, by selling to GNT at the prices adopted in the commercial invoices;

“Neurio product sales” refers to steps taken by Mr He and Ms Lu after their resignations as directors on 25 November 2022 to encourage or endorse Megadairy to manufacture, and Supermega to supply the Neurio-branded products the subject of the contracts entered into by Supermega (as seller) and GABT (as buyer) on 25 November 2022 and GNT (as buyer) between 7 December 2022 and 12 January 2023;

“Neurio/NRIO trademark sales” refers to the conduct of Mr He and Ms Lu after their resignations as directors on 25 November 2022 in exporting and selling Neurio/NRIO branded products in China.

1. As to the commercial invoices and under-value sales:

1. Declare that Mr He and Ms Lu –

1. contravened s 181(1)(b) of the Corporations Act in causing Sunnya to adopt the practice of issuing commercial invoices; and

2. contravened the Corporations Act, s 181(1)(a) and (b) and s 182, and breached their fiduciary duties to Sunnya, by causing or permitting Sunnya in April 2021 to engage in the under-value sales.

2. Declare that GNT –

1. was involved in Mr He and Ms Lu’s contraventions referred to in (a) above within s 79 of the Corporations Act;

2. knowingly assisted the breaches of fiduciary duty by Mr He and Ms Lu referred to in (a)(ii) above.

3. In respect of the breaches identified at (a) and (b) above, order that each of Mr He, Ms Lu and GNT:

1. pay compensation to Sunnya pursuant to s 1317H of the Corporations Act in an amount to be determined, or

2. account to Sunnya for any benefit or gain obtained,

at the election of Sunnya.

2. As to the Neurio product sales:

1. Declare that Mr He and Ms Lu breached fiduciary duties owed to Sunnya in relation to the Neurio product sales.

2. Order that Mr He and Ms Lu:

1. pay equitable compensation to Sunnya for loss suffered by reason of Mr He and Ms Lu’s breaches of fiduciary duty in relation to the Neurio product sales, in an amount to be determined; or

2. account to Sunnya for any benefit or gain, obtained or received, by Mr He and Ms Lu by reason of their breaches of fiduciary duty in relation to the Neurio product sales,

at the election of Sunnya.

3. Declare that each of GABT, GNT, Supermega and Megadairy knowingly assisted the breaches of fiduciary duty by Mr He and Ms Lu in relation to the Neurio product sales.

4. Order that each of GABT, GNT, Supermega and Megadairy:

1. pay equitable compensation to Sunnya for loss suffered by reason of their knowing assistance in the breaches of fiduciary duty in relation to the Neurio product sales, in an amount to be determined; or

2. account to Sunnya for any benefit or gain, obtained or received, by reason of their knowing assistance in the breaches of fiduciary duty in relation to the Neurio product sales,

at the election of Sunnya.

3. As to the Neurio/NRIO trade mark sales:

1. Declare that GNT knowingly assisted the breaches of fiduciary duty by Mr He and Ms Lu referred to in orders (22) and (26) made by the trial judge.

2. Order that GNT:

1. pay equitable compensation to Sunnya for the loss suffered by it by reason of those breaches of duty, in an amount to be determined; or

2. account to Sunnya for any benefit or gain, obtained or received, by reason of GNT’s knowing assistance in the breaches of duty,

at the election of Sunnya.

4. As to costs, order that:

1. the first and second respondents pay the appellants’ costs of the appeal;

2. the NZ parties be jointly and severally liable with the first and second respondents for 20% of the appellants’ costs of the appeal.

5. Liberty to all parties to apply by notice of motion for variation of these orders within 28 days of this judgment.

6. Direct that these orders not be entered for 28 days.

ADDENDUM OF 30 MAY 2025

115. THE COURT:  Pursuant to the leave granted by order 5, the appellants applied by motion filed on 22 May 2025 to vary the orders, so as to add:

4(c) Order 1 of the orders made by Williams J in proceeding 2022/329426 on 5 June 2024 be set aside.

4(d) Order 4(a) of the orders made by Williams J in proceeding 2022/329426 on 5 June 2024 be varied to add the words “the fourth defendant (GNT)” after the words “the third defendant (GABT)”.

116. The proposed further orders reflect, as the appellants submit, what was stated in the first and second sentences of [112]. The proposed orders were unopposed, and appropriate, and will be made. The orders made on 24 April 2025, as supplemented by orders 4(c) and 4(d), will also now be entered.

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Endnotes

Amendments

24 April 2025 - M R Davis added as Counsel for the Appellants

Name of the Solicitor for Appellants corrected

30 May 2025 - addendum inserted at [115]-[116] determining notice of motion.

Decision last updated: 30 May 2025