VicBeef Holdings Pty Ltd v Chen
[2021] VSC 546
•3 September 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2019 05565
| VICBEEF HOLDINGS PTY LTD (ACN 168 281 454) | First Plaintiff/First Defendant by Counterclaim |
| and | |
| VICBEEF MEAT PTY LTD (formerly known as TABRO MEAT PTY LTD) (ACN 005 517 019) | Second Plaintiff/Second Defendant by Counterclaim |
| v | |
| YANGYOU CHEN | First Defendant/Third Defendant by Counterclaim |
| and | |
| LAIYIN CAI | Second Defendant/Plaintiff by Counterclaim |
---
JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 4, 5, 6, 7, 10, 11, 12, 13 and 25 May 2021 |
DATE OF JUDGMENT: | 3 September 2021 |
CASE MAY BE CITED AS: | VicBeef Holdings Pty Ltd & Anor v Chen & Anor |
MEDIUM NEUTRAL CITATION: | [2021] VSC 546 |
---
DIRECTOR’S AND OFFICER’S DUTIES – Sections 180, 181 and 182 of the Corporations Act 2001 (Cth) – Fiduciary Duties – Duties of company directors – Duty to act in good faith in the best interests of the company – Whether subjective or objective test to be applied – Duty to act for a proper purpose – Duty to not improperly use position – No conflict rule – Relevance of a group context – Whether defendant director breached duties by providing security to a creditor over company assets - Whether entities sufficiently related for grant of security to be considered in interest of the company - Whether director considered interests of wider group of companies or specific interests of the company concerned – Equitable rescission – Whether counterparty a bona fide purchaser without notice – Whether entitlement to rescission dependent on Baden categories 1 to 4 – Knowledge of matters giving rise to breaches of fiduciary duties – United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324 - Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 - Charterbridge Corporation Ltd v Lloyds Bank Ltd & Anor [1970] Ch 62 - Walker v Wimborne & Ors (1976) 137 CLR 1 - Howard Smith Ltd v Ampol Petroleum Ltd (1974) 1 NSWLR 68 - Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 - Hindle v John Cotton Ltd (1919) 56 SLR 625 - ANZ Executors & Trustee Company Ltd v Qintex Australia Ltd (Receivers and Managers Appointed) [1991] 2 Qd R 360 - The Bell Group Limited (in liq) & Ors v Westpac Banking Corporation & Ors (No 2) (2008) 225 FLR 1 - Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 225 CLR 507 - Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 270 FLR 1 - Australian Securities and Investments Commission v Flugge (2016) 342 ALR 1 - Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (2011) 86 ACSR 277- Great Investments Ltd v Warner (2016) 243 FCR 516 - Baden v Societe Generale pour Favoriser le Developpement du Commerce et de L’Industrie en France SA [1993] 1 WLR 509.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | M P Costello A G Batrouney | Herbert Smith Freehills |
| For the Second Defendant | C T Moller X Teo | Wisewould Mahony |
HIS HONOUR:
Introduction
VicBeef Meat Pty Ltd, formerly Tabro Meat Pty Ltd (‘Tabro’),[1] owns and operates an abattoir in Lance Creek, Victoria (‘the Abattoir’). Tabro is a wholly owned subsidiary of VicBeef Holdings Pty Ltd (‘VicBeef’).[2]
[1]Tabro is now known as ‘VicBeef Meat Pty Ltd’, having changed its name on 6 February 2020. In these reasons it will be referred to as ‘Tabro’.
[2]VicBeef was known as ‘HY Aust Holdings Pty Ltd’ until 28 May 2018. In these reasons it is referred to as ‘VicBeef’.
VicBeef and Tabro were party to security agreements with the National Australia Bank (‘NAB’). On or about 3 February 2015, Tabro and NAB entered into a loan agreement (‘the NAB Loan Agreement’). VicBeef guaranteed Tabro’s obligations under the NAB Loan Agreement (‘the NAB Guarantee’). Pursuant to the NAB Loan Agreement and the NAB Guarantee, VicBeef and Tabro provided security in favour of NAB, namely: a general security agreement granted by VicBeef (entitled ‘fixed and floating charge’) in favour of NAB (‘the VicBeef NAB GSA’); a general security agreement granted by Tabro in favour of NAB (entitled ‘fixed and floating charge’) (‘the Tabro NAB GSA’); and a registered mortgage granted by Tabro over the Abattoir in favour of NAB (‘the Tabro NAB Mortgage’) (collectively, ‘the NAB Security Agreements’).
The terms of the VicBeef NAB GSA provided:
(a) without NAB’s consent, VicBeef may not grant further encumbrances in connection with its personal or other property,[3] other than as arising in the ordinary course of business;
(b) VicBeef would be in default if, amongst other things, it did something it agreed not to do under the VicBeef NAB GSA, or if any security interests granted by VicBeef to a third party were enforced or became enforceable; and
(c) if VicBeef was in default for more than one day, NAB could treat the amount owing as immediately due and payable, sue VicBeef for the amount owing, or appoint a receiver.
[3]Which included its shareholding in Tabro.
The Tabro NAB GSA and the NAB mortgage contained equivalent terms.
As of November 2017, VicBeef and Tabro were also party to an agreement with, inter alia, Harmony Agriculture and Food Company Pty Ltd (‘Harmony’). In broad terms, the agreement involved the effective sale of a share in VicBeef and Tabro’s business to Harmony (‘the Harmony Agreement’; its intended effect ‘the Harmony Restructure’). The Harmony Restructure involved the incorporation of a new entity to which the assets of Tabro would be transferred and in which shares would be issued to Harmony, VicBeef, and/or related interests of those companies. This process was to take some time and had not been effected as of June 2018, when the below events took place.
On or about 28 December 2017, the second defendant/plaintiff by counterclaim, Laiyin Cai, (‘Mr Cai’) entered into a loan agreement with Shenzhen Shangheng Guantong Investment Enterprises (Limited Partnership) (‘SSIE’), a limited partnership incorporated in China (‘the SSIE Loan Agreement’). Pursuant to the SSIE Loan Agreement, Mr Cai agreed to loan up to RMB 100 million to SSIE. The purpose of the loan was described as the ‘turnover of working capital’.[4]
[4]In fact, RMB 70 million was advanced.
SSIE’s obligations under the SSIE Loan Agreement were guaranteed by, among others, Sundiro Holding Co Ltd (‘Sundiro’); Heilongjiang Hengyang Cattle Industry Co Ltd (‘HHCIC’); Nehe New Hengyang Biochemical Products Co (‘NNHBP’); Yangyou Chen (‘Mr Chen’) the first defendant, a shareholder and general partner/legal representative of SSIE, and a chairman of Sundiro; Mr Chen’s wife Ruiyi Liu (‘Ms Liu’); and Shumao Xu (‘Mr Xu’), the president of Sundiro.
In addition to his role and relationship with SSIE and Sundiro, Mr Chen was also one of three directors of Tabro and VicBeef; the remaining two directors were the Chinese based, Lei Li (‘Mr Lei Li’), and Xiaotong Yang (‘Ms Tong Yang’). Ms Tong Yang[5] is based in Australia.
[5]In addition to being a director, Ms Tong Yang was an employee accountant at Tabro, where she reported to Minnie Yang who was Tabro’s finance manager. Ms Tong Yang had been hired to work by Mr Chen. It seems clear that she was appointed as a director because of the need to find and Australian based director. She remains an employee and director.
The first interest payment under the SSIE Loan Agreement was due on 14 February 2018. It was not paid. In March 2018, Mr Chen proposed revised timelines for the payment of the interest instalments and the repayment of the RMB 70 million principal. The first instalment of the principal repayment (RMB 15 million) was to be made on 4 April 2018; the second instalment of RMB 15 million on 12 April 2018; and the third instalment of RMB 20 million on 30 April 2021. They were not paid.
Duchen Hong (‘Mr Hong’) is Mr Cai’s brother. The brothers own a group of companies known as the Dongzi group of companies, whose principal business is the sale of shrimp and seafood products. Mr Hong had the effective carriage of the SSIE Loan Agreement on Mr Cai’s behalf. On 26 April 2018, Mr Chen told Mr Hong that further security could be provided by the Australian abattoir business with which Mr Chen was associated.[6]
[6]As later became clear, this was a reference to VicBeef and Tabro.
In the result, on about 7 June 2018 VicBeef and Tabro entered into security agreements in favour of Mr Cai (‘the Cai Security Agreements’).
Those Cai Security Agreements entered into by VicBeef comprised:
(a) a guarantee and indemnity granted by VicBeef, Tabro and Mr Chen in favour of Mr Cai in respect of Mr Cai’s entitlements under the SSIE Loan Agreement (‘Guarantee and Indemnity’);
(b) a general security charge granted by VicBeef in favour of Mr Cai (‘VicBeef Charge’);
(c) a share transfer form effecting a transfer of 40% of the ordinary shares held in Tabro by VicBeef to Mr Cai (‘Share Transfer Form’); and
(d) an authority deed granted by VicBeef, Tabro and Mr Chen in favour of Mr Cai (‘Authority Deed’).
Those Cai Security Agreements entered into by Tabro comprised:
(a) a mortgage granted by Tabro in favour of Mr Cai in respect of the Abattoir (‘Tabro Mortgage’);
(b) a general security charge granted by Tabro in favour of Mr Cai (‘Tabro Charge’);
(c) the Guarantee and Indemnity referred to above; and
(d) The Authority Deed referred to above.
By the Guarantee and Indemnity, VicBeef, Tabro and Mr Chen unconditionally and irrevocably guaranteed the due and punctual payment to Mr Cai of all money which at any time was actually or contingently owing or remained unpaid, or might because of a then-existing arrangement or circumstance become actually or contingently owing in the future to Mr Cai by SSIE (‘the Guaranteed Money’). The maximum liability owed by VicBeef, Tabro and Mr Chen under the Guarantee and Indemnity was AU$14,999,999.99.[7]
[7]This maximum liability was apparently set to comply with Foreign Investment Review Board (‘FIRB’) considerations.
The terms of the Authority Deed conferred upon Mr Cai and his nominated legal representatives authorisation to insert information that they considered necessary into the Cai Security Agreements after they had been executed.
The terms of the VicBeef Charge included a definition of ‘charged property’ as all of VicBeef’s ordinary shares present and future in Tabro, though limited to 40% of the total ordinary issued shares in Tabro. Consistently with the Harmony Agreement referred to above, special condition 1 of the VicBeef Charge provided that Mr Cai would not unreasonably withhold his consent to VicBeef assigning its shares in Tabro or permitting Tabro to issue further shares to Harmony,[8] on condition that Mr Cai was granted appropriate security in return for the secured money (‘special condition 1’). ‘Secured money’ was defined to include all debts and liabilities of VicBeef and SSIE to Mr Cai (‘secured money’).
[8]As discussed below, at the time of entry into the Cai Security Agreements, VicBeef and Tabro were engaged in a restructure arrangement with Harmony.
The terms of the Tabro Charge were relevantly similar. The definition of ‘Secured Money’ extended to all debts and liabilities owing by Tabro and SSIE to Mr Cai; the definition of ‘charged property’ included all future and present real property which necessarily included the Abattoir. Special Condition 1 provided that Mr Cai would not unreasonably withhold his consent to Tabro transferring all its assets to Lance Creek Operations Pty Ltd (‘Lance Creek Operations’),[9] provided that Mr Cai received adequate security over Lance Creek Operations.
[9]Referred to from time to time below as NewCo.
By the terms of the Tabro Mortgage, Tabro mortgaged the estate and/or interest in the Abattoir to Mr Cai as security for the secured money. The secured money included, among other things, all amounts that were or may have become owing to Mr Cai under any agreement between Mr Cai and Tabro, or under any deed (including any security) provided by Tabro in favour of Mr Cai.
VicBeef and Tabro did not seek NAB’s consent to enter into the Cai Security Agreements. It is not disputed that by entering into the Cai Security Agreements, VicBeef was in default under the VicBeef NAB GSA and Tabro was in default of the Tabro NAB GSA and the Tabro NAB Mortgage; that is, entry into the Cai Security Agreements was a breach of the NAB Security Agreements.
In this proceeding VicBeef[10] and Tabro assert that the Cai Security Agreements were entered into in a breach by Mr Chen of obligations owed by VicBeef and Tabro to:
[10]Subsequent to the grant of the Cai Security Agreements, there has been a change in control of VicBeef and Tabro. Of the 3 directors at the time of the entering into of the Cai Security Agreements, only Ms Tong Yang remains.
(a) exercise his powers and discharge his duties with the degree of care and diligence that a reasonable director would exercise in the circumstances pursuant to the general law and s 180(1) of the Corporations Act 2001 (Cth) (‘Corporations Act’) (‘the duty of care and diligence’);
(b) exercise his powers and discharge his duties in connection with each company in good faith in the best interests of each company pursuant to the general law and s 181(1)(a) of the Corporations Act (‘the duty to act in good faith and in the best interests of the company’);
(c) exercise his powers and discharge his duties for a proper purpose pursuant to the general law and s 181(1)(b) of the Corporations Act (‘the duty to act for a proper purpose’);
(d) not improperly use his position to gain an advantage for himself or someone else pursuant to the general law and s 182(1) of the Corporations Act (‘the duty to not improperly use position’); and
(e) avoid conflict or a real or substantial possibility of conflict between his personal interests and the interests of each company pursuant to the general law (‘the conflict rule’).
As a result of the alleged breaches of duty by Mr Chen in procuring the Cai Security Agreements, VicBeef and Tabro seek, inter alia, orders for rescission of those agreements and related relief.
In order to determine whether VicBeef and Tabro are entitled to such relief, it is necessary to examine the events which led to the execution of the Cai Security Agreements in some detail.
Background
Negotiations for the provision of security by VicBeef and Tabro began on 28 April 2018 and culminated in the execution of the Cai Security Agreements on 7 June 2018. In addition to Mr Chen and Mr Cai, the participants in the negotiations included the following:
Mr Chen’s representatives:
·Michael Wang (aka Wang Lei) (‘Mr Michael Wang’) – the director/general manager of the overseas development department of HHCIC from November 2015 to September 2017. From September 2017, Mr Wang was a chairman of Sundiro (along with Mr Chen).
·Peter Wang (aka Wang Yi) (‘Mr Peter Wang’) – a lawyer from Dentons based in China.
·Mr Xu (aka Heng Yang) - the president of Sundiro.
Mr Cai’s representatives:
·Mr Hong – the brother of Mr Cai and his business partner.
·George Sun (aka Liping Sun) (‘Mr Sun’) - a partner in the Chinese law firm known as Guandong United Intellectus Law Firm.
·Patrick Chong (‘Mr Chong’) - a partner at the Melbourne law firm Stamford Laywers (‘Stamford’).
·Patricia Chong (‘Ms Chong’) - Mr Chong’s wife who assisted in communications between Mr Chong and Mr Cai’s representatives.
·Ella Leung (‘Ms Leung’) - a former general manager of Stamford now involved in the distribution of healthcare products, who introduced Stamford to Mr Sun and who assisted in the communications between Mr Sun and Mr Chong.
·Zhang Yang (‘Ms Zhang Yang’) – and employee of Mr Cai.
Tabro/VicBeef representatives:
·Ms Tong Yang – a director of VicBeef and Tabro at the time the SSIE Loan Agreement was executed along with Mr Chen and Mr Lei Li.[11]
·Minnie Yang (‘Ms Minnie Yang’) – the finance manager of Tabro and VicBeef.
Advisors to Tabro/VicBeef:
·Andrea Lucas (‘Ms Lucas’) – solicitor at Nevile & Co Lawyers, a law firm in Melbourne.
·Michael Shaw (‘Mr Shaw’) – corporate adviser at the corporate advisory firm BlueMount Capital.
[11]Mr Lei Li was also a director of Sundiro.
The negotiations are evidenced in conversations on the WeChat messaging platform[12] as well as in emails principally from Ms Leung to Mr Sun. The WeChat messaging platform allows users to create conversation groups, in which invited participants can view and respond to messages. Many of the messages evidencing the negotiations were sent in such conversation groups.
[12]WeChat is a popular messaging platform in China.
In addition, each of Mr Cai, Mr Hong, Mr Sun, Mr Chong, Ms Leung, Ms Tong Yang and Ms Lucas gave evidence in the proceeding. Their evidence in chief was given by witness statement. All were cross examined,[13] save for Ms Leung, whose attendance for cross examination was not required. Each of Mr Cai, Mr Hong, Mr Chong, Ms Tong Yang and Ms Lucas gave credible and honest evidence and generally sought to assist the Court. I was less impressed with Mr Sun, who was at times prone to giving long and non-responsive answers with a view to assisting the interests of Mr Cai. Little turns on this however, as the critical events are evidenced by indisputable objective facts or evidenced in emails or in the WeChat messages.
[13]Mr Cai, Mr Hong and Mr Sun required the assistance of a translator.
The WeChat messages were sent in Mandarin, and English translations both certified and uncertified were tendered and accepted by both parties as accurate. The nature of the messaging platform and the need for translations on occasions presents some difficulty in understanding exactly what transpired, but overall the events are clear enough and are shown in the documentary record.
One key player who did not give evidence was Mr Chen. Mr Chen was both the first defendant and a defendant to the counterclaim issued by Mr Cai to enforce the Cai Security Agreements. Mr Chen was represented in the proceeding by solicitors until April 2021. His solicitors ceased to act on 19 April 2021 and advised that Mr Chen did not intend to participate in the trial. This meant that the argument that the execution of the Cai Security Agreements as not a product of a breach of directors’ duties was not advanced by Mr Chen (or indeed the other director who executed the agreement on behalf of the companies, Ms Tong Yang) but by the party who obtained benefit from their execution, Mr Cai.
Relevantly, on 27 April 2018 two separate WeChat conversations were established; the ‘Hong WeChat’ and the ‘Cai WeChat’.
The participants in the Hong WeChat included Mr Hong, Ms Zhang Yang, Mr Michael Wang, Mr Peter Wang Mr Xu and Ms Tong Yang. The participants in the Cai WeChat included Mr Cai, Mr Hong, Mr Sun, Ms Zhang Yang (all acting in Mr Cai’s interests) and Mr Michael Wang and Mr Peter Wang who were acting in Mr Chen’s interest. Ms Tong Yang was invited to join the Cai WeChat on 17 May 2018.
In the Hong WeChat, the other participants sought information from Ms Tong Yang about VicBeef and Tabro. Ms Tong Yang uploaded various documents to the group in response. The documents were subsequently uploaded, without Ms Tong Yang’s knowledge, into the Cai WeChat of which she was not a participant until 17 May 2018.
The principal negotiations as to the nature and the terms of the proposed security occurred in the Cai WeChat.
Another WeChat group was established between Ms Leung and Mr Sun on 18 May 2018 (‘the Leung and Sun WeChat’). Outside of the Leung and Sun WeChat, Ms Leung and Mr Sun regularly communicated via email.
The Harmony Agreement and Restructure
In November 2017, Tabro ceased operations due to cash flow issues. As a result of these financial difficulties, Tabro’s assets were to be sold. BlueMount Capital was appointed to advise Tabro on the sale. Mr Shaw of BlueMount Capital was the lead advisor on the sales process. The negotiations for the Cai Security Agreements occurred against the background of these financial difficulties, and the consequent efforts to sell Tabro’s assets.
As mentioned above, BlueMount Capital had apparently brokered a transaction with Harmony, evidenced initially in a memorandum of understanding between Tabro and Harmony entered into on or about 6 November 2017 (‘the Harmony MOU’) which was signed by Ms Tong Yang on Tabro’s behalf. The Harmony MOU was entitled ‘Collaboration Proposal – Memorandum of Understanding’. The Harmony MOU, among other things, refers to Tabro’s intent to realise part of its interest in the Abattoir in a sale to or joint venture transaction with Harmony. The Harmony MOU also recorded Harmony’s intent to enter into a partnership relationship with an entity which could process Harmony’s expanding herd of cattle in Australia and which could enhance its direct access to Chinese export markets, Australian import markets, and other appropriate international markets.
The Harmony MOU referred to initial conversations between Tabro and Harmony about collaboration options for utilising the Abattoir and its extensive licences and existing supply chain channels, as well as those channels accessible in conjunction with Tabro and the Heilongjiang Hengyang group of companies (‘the Hengyang Group’) (formerly known as the ‘Foresun’ group of companies).
As part of the asset sale/joint venture transaction, the Harmony MOU contemplated the incorporation of a new entity, ‘NewCo’,[14] as a wholly owned subsidiary of VicBeef. After NewCo’s incorporation, Tabro’s assets would then be transferred to and held by NewCo. Subsequently, VicBeef was to sell a portion of its shares in NewCo to Harmony. Broadly, the effect of these transactions was to give Harmony an ownership interest in the Abattoir and its associated business. The Harmony MOU contemplated an initial shareholding by Harmony in NewCo of between 51% to 60% of issued shares.
[14]Ultimately, NewCo came to be known as Lance Creek Operations Pty Ltd (‘Lance Creek Operations’).
The Harmony MOU also referred to a joint assumption that ‘contemporaneously’ (presumably with the acquisition of Harmony’s shares in NewCo) Tabro and the Hengyang Group were to establish access to additional supply chains within China and other international markets for Harmony’s products.
The Harmony MOU contemplated the establishment of a ‘data room’ and noted the parties’ best efforts to complete on or before 15 December 2017.
The Harmony MOU proceeded on the basis of a value being ascribed to the Abattoir (and the associated land) of AU$66 million.
On 1 April 2018, VicBeef, Tabro, HY Cattle Holdings Limited (‘HY Cattle Holdings’), HY Moe Meat Pty Ltd (‘HY Moe Meat’), Harmony and Dalian Hesheng Holding Group Co Ltd (‘Dalian’),[15] and its affiliates executed a document entitled ‘binding term sheet – investment in Tabro Meat Pty Ltd’ (‘the BTS’). The BTS was a further, more developed form of the transaction contemplated by the Harmony MOU. By the BTS, the parties:
[15]Dalian is the holding company of Harmony. Throughout their negotiations, the parties often referred to Dalian and Harmony interchangeably; this is reflected in the evidence.
(a) agreed that VicBeef[16] would issue and Harmony would subscribe for 60% of the expanded capital to be issued in VicBeef;
[16]VicBeef was to be the holding company; Tabro’s assets were to be transferred to NewCo (Lance Creek Operations).
(b) proposed that pursuant to a restructure plan, the remaining 40% would be held by HY Moe Meat;
(c) agreed that Harmony would, in return for its 60% shareholding in VicBeef, provide consideration including:
(i) AU$25.2 million cash for subscribed shares; and
(ii) AU$7.8 million via a loan to VicBeef, or other structure as agreed between the parties to be treated as subordinated debt of VicBeef; and
(d) agreed that Harmony would initially pay to Tabro up to AU$3 million as a down payment against its requirement to pay the AU$25.2 million for the subscribed shares.
The AU$3 million was paid to Tabro and deployed as working capital. The BTS made provisions for the further payment of AU$22.2 million in respect of the subscribed shares by Harmony to VicBeef.
The negotiations for the Cai Security Agreements
As mentioned above, the first interest repayment under the SSIE Loan Agreement due on 14 February 2018 had not been paid and a revised timeline of 4 April 2018 had been set for a principal repayment of RMB 15 million. The revised timeline of 4 April 2018 was also not met. Consequently, Mr Hong called Mr Xu to follow up the outstanding payments. Mr Xu noted that Mr Chen was working in Shanghai and proposed that Mr Chen meet with Mr Hong there. Accordingly, on 10 April 2018 Mr Hong travelled to Shanghai and met with Mr Chen.
Mr Hong gave evidence that during the resulting meeting, Mr Chen said, inter alia, that his group of companies was in discussions with the Zheng Da Group from Thailand to organise a restructure of both groups, and that Mr Chen was aiming to have the Zheng Da Group acquire Sundiro (‘the Zheng Da restructure’). He told Mr Hong that the Abattoir in Australia was not in operation, but that the Uruguay abattoirs[17] were operating. Mr Chen also said that Tabro was about to transfer its shares to Dalian (‘the Dalian share transfer’).[18] According to Mr Hong, Mr Chen said that VicBeef and Tabro could meet their payment obligations under the SSIE Loan Agreement once the Dalian share transfer and the Zheng Da restructure had taken place.[19]
[17]The Uruguayan abattoirs were owned by Rondatel S.A. and Lirtix S.A.
[18]Clearly Mr Chen was referring to the Harmony Agreement and Harmony Restructure.
[19]Ultimately, it would appear that the Zheng Da restructure did not go ahead.
Mr Hong said that Mr Chen assured him that interest payments would be made within two weeks of that meeting; if that was not done, Mr Chen agreed to sell his house to ensure repayment.
Two weeks after Mr Hong’s meeting with Mr Chen, the promised interest payment had not been made. Mr Hong called Mr Xu to request payment. Mr Xu arranged for Mr Hong to meet once again with Mr Chen at the offices of Mr Michael Wang. Mr Xu explained that Mr Michael Wang was the chairman of Sundiro. Mr Hong said that he understood that Mr Chen was the ultimate owner of the major shareholder in Sundiro.[20]
[20]SSIE was in fact the major shareholder in Sundiro (10.99%); Mr Chen was Sundiro’s chairman and legal representative, and was also SSIE’s founder and legal representative.
On 26 April 2018, Mr Hong met with Mr Chen and Mr Xu at Sundiro’s offices in Shanghai. Mr Hong said to Mr Chen and Mr Xu that in light of the repeated failures to repay the loan, Mr Cai and Mr Hong would initiate litigation. Mr Hong gave evidence that Mr Chen then said, ‘if that be so, then I will let you get the remaining 40% of shares in the Australian abattoir business as the pledging guarantor’. Mr Chen explained that he could not let Mr Hong and Mr Cai have 100% because the other 60% of shares in the Abattoir[21] had already been sold to Dalian.[22]
[21]In light of the impending Harmony Restructure, throughout the negotiations the parties often did not precisely distinguish between shares in Tabro, as the present owner of the Abattoir, and shares in NewCo, as the anticipated owner of the Abattoir. This ambiguity should be borne in mind for subsequent references to the abattoir or its business.
[22]As noted above, by the Harmony Agreement the 60% interest in the Abattoir (via NewCo) had in fact been sold to Harmony. As mentioned above, Dalian is the holding company of Harmony and this was likely the intended meaning of Mr Chen.
Mr Hong also gave evidence that he had heard Mr Chen instruct Mr Michael Wang to prepare security documents pledging 40% of the interest in the Abattoir as security in favour of Mr Cai. As a result, Mr Hong called Mr Sun, a lawyer, and requested that he assist in the negotiations with respect to the provision of security.
On 27 April 2018, a number of documents relating to VicBeef and Tabro were uploaded to the Cai WeChat by Ms Zhang Yang, who had obtained the documents from Ms Tong Yang in the Hong WeChat. The documents uploaded including a company search of Tabro and its articles of association; as well as like information for VicBeef. Also uploaded was a document titled ‘Ownership Structure - Current’ (‘the ownership structure document’), which is inset below.
HY Australia Holdings Pty Ltd was later renamed as VicBeef, and is referred to throughout in these reasons as VicBeef.
One of the sibling entities of China Beef Products Holdings Limited is HHCIC,[23] which was a guarantor of the SSIE Loan Agreement.
[23]HHCIC is referred to in the document as Hengyang Cattle Limited.
There is another version of the corporate chart, which is identical save that it refers to two additional Uruguayan companies Rondatel S.A. and Lirtix S.A., which appear in the diagram above Pacific Ocean Cattle Holdings Limited (however, the chart does not suggest that these entities were the holding companies of Pacific Ocean Cattle Holdings Limited). The Uruguayan companies owned abattoirs in Uruguay which were acquired in 2016. In April 2016, entities associated with Mr Chen also acquired abattoirs and a feedlot in Argentina. The companies involved in that acquisition were Prosper Well Enterprises Ltd (‘Prosper Well’), Bamboo Enterprises S.A and Chrysan Taw Enterprises S.A. The security provided to finance that acquisition included security provided by VicBeef’s parent, HY Cattle Holdings, in the form of its shareholding in VicBeef.[24]
[24]It was the exercise of the rights conferred on the lender by that security which led to the change in control of VicBeef and Tabro which in turn led to VicBeef and Tabro bringing this proceeding in which it seeks to have the Cai Security Agreements entered into by it set aside.
In 2017 Sundiro acquired the assets of Rondatel S.A. and Lirtix S.A. from HHCIC.
On 30 April 2018, having apparently considered the information provided to him, Mr Sun noted in the Cai WeChat that VicBeef[25] owned 100% of the shares in Tabro and that the Board members of VicBeef comprised Mr Chen, Mr Lei Li and Ms Tong Yang. Mr Sun suggested that VicBeef should provide a director and shareholders’ resolution approving 40% of the shares in Tabro being pledged to Mr Cai.
[25]Then known as HY Australia Holdings.
On 13 May 2018, Mr Hong uploaded a Word document described as ‘Equity Assignment Agreement’ (‘the Equity Assignment Agreement’) onto the Cai WeChat. Unfortunately, this document was not able to be obtained and was not in evidence.
Mr Sun identified some problems with the Equity Assignment Agreement but noted that, based on his analysis of the ownership structure document:
(a) Tabro was wholly owned by VicBeef;
(b) VicBeef was wholly owned by HY Cattle Holdings Limited (BVI);
(c) HY Cattle Holdings Limited (BVI) was wholly owned by China Beef Holdings Limited (Cayman);
(d) China Beef Holdings Limited (Cayman) was a partly owned subsidiary of CDH Grand Cattle Holdings Limited (BVI); and
(e) CDH Grand Cattle Holdings Limited (BVI) was wholly owned by CDH Fund (Cayman) (‘CDH Fund’).
Mr Sun correctly identified CDH Fund as the ultimate controller of VicBeef. Mr Sun had apparently ascertained, or at least believed, that Mr Chen personally held shares in CDH Fund.
In a WeChat message, Mr Sun proposed that the most direct strategy to effect the provision of security was to pass a resolution of the ‘board of shareholders’ (sic) and the board of directors of VicBeef pledging 40% of the equity in Tabro to Mr Hong; alternatively, Mr Chen could pledge his shares held in CDH Fund to Mr Hong.
Mr Sun also advised that Mr Chen could only dispose of his own shares in the ‘top Cayman company’ (presumably CDH Fund) and that Mr Chen personally could not promise to pledge the shares in Tabro or otherwise use them to offset his personally guaranteed debt under the SSIE Loan Agreement. Mr Sun also said that only the ‘board of shareholders (sic)’ and the board of directors of VicBeef had the right to pledge the equity in Tabro.
Through discussions in the Leung and Sun WeChat, Mr Chong of Stamford was engaged to act as the Australian lawyer representing Mr Cai’s interests.
Mr Sun gave evidence that on 16 May 2018, a security agreement was uploaded into the Cai WeChat by Mr Hong. The draft security agreement was between VicBeef and Mr Hong and provided for Mr Hong to receive security in the form of 40% of the ordinary shares in Tabro held by VicBeef, which security would be exercisable by Mr Hong in the event of a failure by Mr Chen (described as the borrower) to repay in full the sums due under the loan agreement with Mr Hong.[26] Mr Peter Wang posted a message in the Cai WeChat that the pledge of Tabro equity requires the consent of the NAB and that it would be difficult to obtain such consent in such a short time; his message concluded “therefore it is still uncertain whether this agreement can be finally signed according to the solution of pledging Tabro equity’.
[26]The document bears the insignia of Nevile & Co Lawyers; this is curious as there is no other reference in the evidence as to any involvement of Nevile & Co Lawyers at this stage, much less of any means by which Mr Hong obtained the document. In any event, this curiosity was not explored in the evidence.
Also on 17 May 2018, Ms Zhang Yang uploaded into the Cai WeChat:
(a) a NAB letter of offer that named Tabro as a guarantor dated 14 September 2010;
(b) the NAB Loan Agreement of 3 February 2015;
(c) the BTS; and
(d) screenshots of an email from BlueMount Capital’s Mr Shaw to Ms Tong Yang, Mr Michael Wang and Mr Peter Wang.
The email from Mr Shaw noted that following the Harmony Restructure the value of the Abattoir would lie in VicBeef (that is, through its interest in NewCo); and that consequently Tabro would have no assets. In that context Mr Sun pointed to the unsuitability of the security agreement as drafted, which pledged security in the form of 40% of the ordinary shares of Tabro.
The security agreement also contained a covenant on the part of the secured party (that is, Mr Hong) to the effect that the secured party would release the charge over the security interest if it was notified that such act became necessary for the purpose of completing the sale of the assets to NewCo and the Harmony Restructure.
The difficulties in reconciling the proposed equity pledge of 40% of the shares in Tabro with the proposed Harmony Restructure vexed the negotiators. On 16 May 2018, Mr Sun asked for a meeting to be arranged with Dalian. On 17 May 2018, after Ms Tong Yang had been added to the Cai WeChat, Mr Sun posted a message to the effect that Tabro’s board of directors needed to resolve that Tabro should undertake a guaranteed repayment for the balance of the total debts owed by Mr Chen to Mr Cai. Ms Tong Yang confirmed that the directors of Tabro were herself, Mr Lei Li and Mr Chen.
Mr Michael Wang enquired as to the need to meet with Dalian in connection with the proposed Cai Security Agreements,[27] and Mr Sun asked for contact details and later requested that he be introduced to Dalian so that he could ‘go through the details’. However, Mr Michael Wang posted a message in the Cai WeChat stating that although the company was bearing Mr Chen’s personal liability, Mr Michael Wang did not anticipate that would be a problem because the security was confined to 40% of the equity.[28] Mr Michael Wang acknowledged that if the Harmony Restructure was to conflict with the Cai Security Agreements, it may be impossible to complete the transaction; presumably, ‘the transaction’ meant completion of the Cai Security Agreements or alternatively repayment of the moneys due to Mr Cai under the SSIE Loan Agreement. On 17 May 2018, Mr Sun was provided with a copy of the BTS.
[27]As mentioned above, Dalian was the holding company of Harmony.
[28]The remaining 60% being transferred to Harmony.
Mr Sun emphasised that the equity pledge was a transitional document and could be withdrawn.
On 17 May 2018, Mr Michael Wang, in response to Mr Sun’s message that the negotiations were going around in circles, noted that ‘once you meet the Dalian side, they will know what has happened. I’m worried the progress of reorganisation will be affected’. His message concluded ‘I can only manipulate the assets and shares belonging to Manager Chen. I can’t use others as a guarantee for Manager Chen’.
On 17 May 2018, Mr Peter Wang informed Mr Sun in the Cai WeChat that even a transitional pledge of Tabro (‘transitional’ presumably meaning pending completion of the Harmony Restructure) required the consent of NAB, and that a local financial adviser was working on obtaining this consent.[29] The next day, Mr Peter Wang informed Mr Sun that he had received an email from Mr Shaw of BlueMount Capital confirming that, pursuant to the NAB Security Agreements, Tabro’s equity could not be directly pledged to a third party. He otherwise informed Mr Sun in the Cai WeChat that according to the requirements of the Harmony Restructure, Tabro was to be deregistered later, and that all its assets would then be under the control of VicBeef (that is, through VicBeef’s interest in NewCo). In response to a subsequent query by Mr Sun, Mr Michael Wang confirmed that the proposed Harmony Restructure contemplated the transfer of Tabro’s assets to NewCo, with VicBeef then to hold the entirety of the shares in NewCo and subsequently to transfer 60% of those shares to Dalian.
[29]It seems clear that in fact this was not the case.
On 18 May 2018, Mr Sun left a voice message for Ms Leung saying that he did not want to consider the standpoint of NAB or Dalian; he just wanted documents prepared that would allow for the 40% shareholding of VicBeef in Tabro to be secured to Mr Cai, and that arrangements be made for the directors of VicBeef to sign the necessary documents.
On 22 May 2018 Mr Chong from Stamford received a translation of information apparently provided by Mr Sun which set out the background to what was described as an asset equity pledge. The email read as follows:
1Shenzhen Heng Guan Tong Investment Co., Ltd. controlled by Mr. Chen Yangyou (Mr Chen) borrowed RMB100 million from Mr. CAI Laiyi (Mr Cai) on 28/12/2017. The maturity date is 27/06/2018. As the interest has not been paid and the outstanding principal is RMB70 million, Mr. Cai requires the borrower and its actual controller, Mr Chen, to provide the guarantee collateral;
2Mr Chen holds TABRO MEAT PTY LTD through HY CATTLE HOLDINGS LTD (a company registered in BVI), and HY AUSTRALIA HOLDINGS PTY LTD;
3TABRO MEAT PTY LTD currently owes NAB and some supplier debts of approximately A$10 million and requires debt restructuring. The debt restructuring financial adviser is BLUEMOUNT CAPITAL;
4HY AUSTRALIA HOLDINGS PTY LTD is currently bringing in approximately A$20 million to invest IN DALIAN HESHENG HOLDING GROUP Co. Ltd,[30] an Australian related company HARMONY AGRICULTURE AND FOOD COMPANY PTY LTD, to repay TABRO’s bank loans, suppliers’ arrears and future working capital. Accordingly, HARMONY will hold 60% of HY AUSTRALIA HOLDINGS in the future, and the remaining 40% will be held by HY CATTLE HOLDINGS;
5All the assets held by TABRO after the reorganisation will be transferred to LANCE CREEK OPERATION PTY LTD.[31] HY AUSTRALIA HOLDINGS will hold 100% of LANCE CREEK and HY AUSTRALIA HOLDINGS will be changed to VICBEEF PTY LTD.
6In order to protect creditor Mr Cai’s unrecovered creditor’s rights, it is necessary to LODGE CAVEAT for the assets held by TABRO[32] and to set up a pledge against the 40% stake in HY AUSTRALIA HOLDINGS and LANCE GREEK; in which DUCHEN Hong will take the pledge on behalf of Mr Cai.
7The parties will reach an agreement under the conditions of the pledge. Mr. Cai and DUCHEN Hong will try their best endeavour to transfer the assets under TABRO to LANCE CREEK.
[30]Clearly this was a mistranslation, or misunderstanding as Mr Chong noted. Dalian was investing the money in HY Australia/VicBeef, not the other way around.
[31]ie, NewCo (see n 14).
[32]ie, the Abattoir.
On 23 May 2018, Mr Chong forwarded title searches for the Abattoir along with ASIC searches for VicBeef and Tabro to Ms Leung, who forwarded those documents to Mr Sun. In the Leung and Sun WeChat, Mr Sun stressed the urgency of concluding an agreement, noting that Mr Chen’s listed company[33] might collapse at any time and that ‘if it collapses the other party [Mr Chen] will not cooperate with Australia’s asset and equity arrangements and my client [Mr Cai] will lose all his money’.
[33]Presumably Sundiro.
On 24 May 2018 Mr Chong sent the Cai Security Agreements to Ms Leung to forward to Mr Sun. The Tabro Charge included special conditions that the secured party would not unreasonably withhold its consent to Tabro transferring all its assets to Lance Creek Operations,[34] subject to the secured party receiving adequate security, in its discretion, over Lance Creek Operations; it further contained an acknowledgement by Tabro that the secured party was taking additional security by a charge over 40% of VicBeef’s shares in Tabro. Tabro agreed that if the secured party enforced the security over the shares and submitted share transfers signed by VicBeef for the shares, Tabro would register the share transfer and issue new share certificates to the secured party equivalent to 40% of VicBeef’s shares in Tabro.
[34]ie, NewCo (see n 14).
The Cai Security Agreements required execution by Mr Cai, Mr Chen, both personally and in his capacity as a director of VicBeef and Tabro, and another director of VicBeef and Tabro. In a voice message left by Mr Sun with Ms Leung in the Leung Sun WeChat, Mr Sun suggested that Mr Lei Li could sign the Cai Security Agreements as the other director of VicBeef and Tabro.[35]
[35]Given that Mr Chen and Mr Cai were both based in China, execution by Mr Lei Li who was also based in China had obvious practical advantages.
By 24 May 2018 however, it was apparent that Mr Lei Li had reservations about signing the Cai Security Agreements. As a result, Mr Sun sought confirmation that signatures of two out of the three directors of Tabro and VicBeef would be sufficient. Mr Sun suggested that Ms Tong Yang sign the Cai Security Agreements at Mr Chong’s offices.
After having consulted with Mr Chong, Ms Leung said that Mr Chen should sign the documents first and that the documents should then be couriered to Stamford’s offices where arrangements could then be made for Ms Tong Yang to sign them in her capacity as second director of VicBeef and Tabro. Mr Chen signed the documents on 28 May 2018, and Mr Cai shortly thereafter. Mr Sun then arranged for the documents to be sent to Mr Chong in Australia for signature by Ms Tong Yang.
Ms Tong Yang and the events of 4 - 7 June 2018
On 4 June 2018, Ms Tong Yang received an email from Stamford attaching the Cai Security Agreements, now signed by Mr Chen and Mr Cai. The cover email read, ‘as discussed I confirm you will attend our office tomorrow to sign your part of the documents’. Ms Tong Yang gave unchallenged evidence that she did not have any discussion with Stamford before receiving this email. She also gave unchallenged evidence that this was the first time that she became aware of the existence of the Cai Security Agreements. Ms Tong Yang said that she had not been previously involved in negotiating the Cai Security Agreements or preparing them, aside from her limited and passive participation from 17 May 2018, when she was added to the Cai WeChat group by Mr Michael Wang.
Ms Tong Yang acknowledged that at the time she received the Cai Security Agreements, she was aware that Mr Chen had interests in offshore companies in China. However, Ms Tong Yang maintained that she did not know any details of those interests. Ms Tong Yang gave evidence that until she received the Cai Security Agreements, she had never heard of SSIE nor that a loan agreement had been entered into between Mr Cai and SSIE in December 2017. Ms Tong Yang was aware that Mr Chen held shares in Sundiro, but her understanding was that Sundiro did not have any commercial or legal relationship with Tabro or VicBeef.
Ms Tong Yang gave evidence that she was concerned at that time about the impact of executing the Cai Security Agreements on the proposed Harmony Restructure. She sent the Cai Security Agreements to Mr Shaw, informing him that Mr Michael Wang had asked her to sign the documents. She asked Mr Shaw if he could look over the documents. Mr Shaw in turn forwarded the documents to Ms Lucas from Nevile & Co Lawyers.
Some 20 minutes or so afterwards, Mr Shaw telephoned Ms Lucas and explained his views on the Cai Security Agreements. Ms Lucas asked Mr Shaw to speak to Ms Tong Yang as well as Mr Michael Wang or Mr Peter Wang, both of whom Ms Lucas understood to be representing Mr Chen.
On 5 June 2018, during Ms Lucas’ second telephone conversation with Mr Shaw, Ms Lucas said that Ms Tong Yang could not sign the Cai Security Agreements as there were a number of legal problems associated with them, and as they would affect the Harmony Restructure. Mr Shaw told Ms Tong Yang of Ms Lucas’ advice and told her additionally that Tabro could not grant a mortgage over the Abattoir because, under the terms of NAB Security Agreement, NAB would not allow it. Ms Lucas’s file note records her notation ‘[Good]; She [Ms Tong Yang] needs [to understand the position] she is in’. According to Ms Lucas, Mr Shaw said words to the effect that if Mr Chen were to pay out the debt under the SSIE Loan Agreement before the date of settlement of the Harmony Agreement,[36] the Cai Security Agreements may be unproblematic; but if not, it was an issue. Mr Shaw said that Harmony would not enter into the Harmony Agreement if Lance Creek Operations[37] or its assets were encumbered by a mortgage or security.
[36]Of course, it was the settlement of the Harmony deal which Mr Chen was planning on to provide him with the money to pay out Mr Cai.
[37]By this point in time, ‘NewCo’ appears to have been renamed ‘Lance Creek Operations’ (see n 14).
After her telephone call with Mr Shaw, Ms Lucas sent an email to Mr Shaw. The email read:
Further to our telephone conversations of even date, I write to confirm our position in relation to Tong[38] potentially signing the Mortgage and Charge documents provided to her as Director of the Grantor entities therein.
As discussed, to do so on behalf of Tabro would not only be a breach of the covenants made to NAB and the agreements currently in place with HAAFCO, but would risk being viewed as deceptive and/or fraudulent conduct.
In the circumstances, it is clear that entering such arrangements would not be in the best interests of Tabro and/or the proposed Lance Creek Operations and as such is contrary to Tong's clear duties as a Director of Tabro. At a personal level, doing so also puts Tong in an invidious position.
Given the above, we fully support the position put by you to Tong this morning in your telephone call with her.
We note that Tong will relay these concerns/issues to Michael Wang and seek clarification as to the need to involve Tabro and Lance Creek Operations at all in the arrangement.
As previously agreed, any such security arrangements are best made at the HY Australia Holdings Pty Ltd (or VicBeef Holdings Pty Ltd as it is now known) level, noting that such arrangements would still create a disclosure issue for our mutual client in relation to its sale of shares to HAAFCO.
[38]Ms Tong Yang.
Shortly afterwards, Ms Lucas sent an email to Ms Yang in substantially identical terms.
Some two and a half hours later, Ms Lucas received a telephone call from Ms Tong Yang. During that call Ms Tong Yang said that she had received Ms Lucas’ email and that she understood the issues involved. Ms Lucas gave evidence that Ms Tong Yang said words to the effect that Mr Chen ‘really needs’ the money and that was why she was being pushed to sign the Cai Security Agreements. Ms Tong Yang told her that Mr Peter Wang had not reviewed the documents at that time and that to her knowledge he was not aware of the Cai Security Agreements. Ms Tong Yang said that she would talk to Mr Michael Wang and see if there was an alternative option available.
On 6 June 2018, Ms Lucas attended a meeting with Mr Shaw and Ms Tong Yang at the offices of Nevile & Co Lawyers. Ms Lucas gave evidence that Ms Tong Yang said words to the effect that Mr Chen had said that if Tabro could not provide security, he (Mr Chen) may go to jail. Ms Lucas said that Ms Tong Yang was frequently receiving messages from Mr Michael Wang urging her to sign the Cai Security Agreements. Ms Lucas gave evidence that Mr Shaw had passed on statements made to him by Mr Chong and Mr Michael Wang to the effect that if the Cai Security Agreements were not signed by 6:00pm that day, the lender (Mr Cai) would take legal action against Mr Chen and would not negotiate.
Also on 6 June 2018, at 12:30pm Mr Shaw, Ms Tong Yang and Ms Lucas called Mr Peter Wang. Ms Lucas recalls Mr Shaw saying words to the effect that ‘Tabro’ could not sign the Cai Security Agreements; Mr Shaw suggested that Ms Tong Yang, Ms Lucas and himself meet with Stamford to explain the issues with the proposed arrangements and propose an alternative way forward. She says that Mr Peter Wang agreed to this course but said words to the effect that they were threatening legal action if Ms Tong Yang did not sign the Cai Security Agreements by 6:00pm and that this timeframe should be borne in mind.
At 12:47pm Mr Shaw, Ms Tong Yang and Ms Lucas called Mr Chong of Stamford. According to Ms Lucas, she and Mr Shaw explained the reasons why Tabro could not provide the security sought in the Cai Security Agreements. Mr Shaw said that signing the Cai Security Agreements would breach covenants agreed with NAB and under the Harmony Agreement. Ms Lucas said that she also raised to Ms Yang the problems she would face personally in signing the Security Agreements as a director of Tabro. Ms Lucas also stated that it would be a breach of Ms Tong Yang’s directors’ duties to sign them.[39]
[39]This is disputed by Mr Chong.
The evidence reveals that Ms Lucas kept expansive file notes of the discussions and meetings in which she participated. However, her account of the conversation with Mr Chong on 6 June 2018 as recorded in her file note is not as expansive as her version of the conversation given in her witness statement. The file note records Mr Shaw as saying ‘unable to provide the [security] you are [requesting]; [would] like to meet [with] you to discuss issues – Want to give [security] but cannot do way want [sic] – Meet 3pm at [your office]’. It does not mention any statement to the effect that signing the Cai Security Agreements would be a breach of directors’ duties by Ms Tong Yang.
Later on 6 June 2018, at 1:20pm, Mr Shaw and Ms Lucas had a further telephone conversation with Mr Chong, the details of which are recorded in a file note of Ms Lucas’. That file note records that Mr Chong advised that he had spoken with Mr Cai and that he was not willing to discuss any changes to the Cai Security Agreements. Mr Chong further advised that the Cai Security Agreements needed to be signed by 6:00pm that day. Ms Lucas’s file note records Mr Shaw as saying that Ms Tong Yang could not sign the Cai Security Agreements, as to do so would be a breach of the NAB Security Agreement and the terms of the BTS. The file note also records that Mr Chong had said he would pass on this message to Mr Cai, and advised that he was not part of the dealings in China and that he was only acting as an agent. Ms Lucas’s file note records Mr Chong as saying, ‘why not legal?’, but does not record a response from her. Mr Shaw proposed that they should still meet at 3:00pm.
At 3:00pm, Mr Shaw, Ms Tong Yang and Ms Lucas attended a meeting with Mr Chong and his colleague, Rebecca Leviston (‘Ms Leviston’), at Stamford’s offices. Mr Shaw commenced the meeting by outlining the problems posed to the Cai Security Agreements by the NAB Security Agreement and the Harmony Agreement, and said that in light of those agreements, security could not be given over Tabro. Ms Lucas gave evidence that Mr Shaw had said words to the effect that if Tabro, pursuant to the Cai Security Agreements, gave security to Mr Cai over itself or its assets, this would breach the covenants in the NAB Security Agreement as well as the Harmony Agreement. According to Ms Lucas, Mr Shaw had said words to the effect that NAB had been promised a concluded sale for some time and wanted repayment in full via completion of the Harmony Agreement as Tabro was significantly in arrears. He said that NAB would not consider other options such as delayed repayment.
Ms Lucas also gave evidence that she had said that it would not only be a breach of directors’ duties for Ms Tong Yang to sign the Cai Security Agreements, and that there was a risk that to sign the Cai Security Agreements would be viewed as fraudulent and/or deceptive conduct.[40] She also gave evidence that ‘we’ (presumably meaning herself and Mr Shaw) had said that Tabro and VicBeef were not the relevant parties to provide the security.
[40]That Ms Lucas said both these things is disputed by Mr Chong. Mr Chong had a generally poor recollection of events but recalls being told of an issue with the NAB and some issue with Harmony
but denies being told of the breach of directors duties or that the execution of the agreements could be viewed as fraudulent and or misleading.
According to Ms Lucas, Mr Chong then asked questions about the other assets available in Australia to secure the Cai Security Agreement, and ultimately said that the problem was one of timing. Ms Lucas said that Mr Shaw offered alternative security to be provided to Mr Cai in the form of:
(a) a negative pledge by VicBeef that it would not transfer the assets of Tabro to any entity other than Lance Creek Operations;
(b) security over 40% of VicBeef’s shares in HY Moe Meat;
(c) a share transfer form signed by HY Moe Meat in favour of Mr Cai for 40% of the shares owned by VicBeef, to be held in escrow pending payment of the loan; and
(d) copies of the executed contract of sale of real estate and sale of assets agreement entered into between Tabro and Lance Creek Operations.
(‘the alternative security offer’).
According to Ms Lucas, Mr Chong asked if the issues surrounding the grant and enforcement of the Cai Security Agreement had been communicated to Mr Chen and Mr Cai. Ms Lucas said that Mr Shaw said that he understood they had but he did not know who in fact was giving instructions to Mr Chong. Again according to Ms Lucas, Mr Chong said that Ms Tong Yang should speak to Mr Chen, and that although in his view the alternative security offer was unsuitable he would in any event pass on the details of the alternative security offer to Mr Cai.
At 5:49pm, Ms Lucas returned a telephone call made by Mr Chong.[41] Mr Chong said that he had been informed that Ms Tong Yang would not sign the Cai Security Agreements. Mr Chong asked Ms Lucas if it was true that another director would be signing them. Ms Lucas said she had no instructions about this.
[41]This is evidenced in a file note.
At 6:13pm, Ms Lucas returned another call to Mr Chong. During that call Mr Chong said that Ms Tong Yang had called him directly and asked for an extension of the deadline to sign the Cai Security Agreements, to 12:00pm on 7 June 2018.
Mr Chong subsequently sent an email stating that Mr Cai had agreed to Ms Tong Yang’s request to extend the deadline to sign the Security Agreements to 12:00pm on 7 June 2018. At 6:33pm on 6 June 2018, Ms Lucas emailed Ms Tong Yang referring to their attendance at Stamford’s offices. The email confirmed the matters discussed at the meeting between Ms Lucas, Mr Shaw and Mr Chong, including the existing NAB Agreements including covenants, mortgage and general securities, the Harmony Agreement, and the Harmony Restructure. Ms Lucas confirmed that at the meeting it had been reiterated that Ms Tong Yang was unable to sign the Cai Security Agreements or otherwise to provide the securities requested by Mr Cai.
Ms Lucas’s email then set out the details of the alternative security offer.
Some 12 or so minutes later, Ms Lucas emailed Ms Tong Yang advising her that she had received a call from Mr Chong to the effect that Mr Cai had agreed to the extension of the deadline to 12pm on 7 June 2018. Ms Lucas’s email concluded by reiterating her earlier advice to Ms Tong Yang that the directors of Tabro would be in serious breach of the Harmony Agreement and the NAB Agreements if they proceeded with the Cai Security Agreements; that they would be in breach of their duties under the Corporations Act; as well as potentially liable for deceptive, misleading and/or fraudulent conduct. Her email concluded ‘it is very important that, if you have not already done so, you send this email and our email to you of 5 June 2018 to your fellow Directors’.
Ms Tong Yang had meanwhile been participating in further WeChat conversations between Mr Sun, Mr Peter Wang and Mr Michael Wang. Mr Sun had set the same deadline in the Cai WeChat; saying that if Ms Tong Yang did not sign by 6:00pm, Australian time, Mr Cai would not wait any longer and would commence legal proceedings. In response, Peter Wang asked whether Tabro’s equity was the subject of the pledge at present.[42] Michael Wang responded, ‘let’s sign the contractual arrangement, they won’t disclose anyway. Within two months, the money will have to be paid back anyway’. Mr Sun responded, ‘All details won’t be discussed anymore!’.
[42]It will be recalled that on 17 May 2018, Mr Peter Wang had noted that the pledge of the Tabro equity required the NAB’s consent; see [67] above.
Peter Wang posted in response that the main problem was that NAB would not agree to the Cai Security Agreements. Ms Tong Yang sought to assuage Mr Sun’s anxieties by stating that what they were proposing (that is, the alternative security offer) was a ‘better solution’. She explained that as VicBeef was the then-current holding company of Tabro and the future holding company of Lance Creek Operations, the best way to provide the security sought by Mr Cai would be to pledge VicBeef’s shares, rather than those of Tabro.
Michael Wang posted in the Cai WeChat that Mr Peter Wang and Ms Tong Yang had talked to Mr Chen; Mr Chen ‘and the other party’ had agreed not to disclose the Cai Security Agreements to NAB. Mr Michael Wang posted in the Cai WeChat, in evident reference to the signing of the Cai Security Agreements, ‘lets get it done, there’s not much room for negotiation’.
Ms Tong Yang was also a participant in a separate WeChat group on 6 June 2018 with Mr Michael Wang and Mr Peter Wang (‘the Yang, Wang and Wang WeChat’). Between 12:24pm and 6:16pm, Ms Tong Yang repeatedly expressed her concerns in that group about the proposed Cai Security Agreements including that the transaction had not been disclosed to NAB, and that ‘they’ (presumably Mr Cai) would not be able to take security over Tabro without the consent of NAB. Ms Tong Yang said that even though the directors of Tabro had agreed not to disclose the Cai Security Agreements to NAB, ‘they’ (presumably NAB) could still take action if Tabro did not repay before the deadline. Mr Michael Wang concluded the chat by posting ‘basically there’s no room for renegotiation. We owe them money in China. They said if you refuse to sign they will commence litigation in China on the next day’.
Following the meeting at Stamford’s offices with Mr Chong at 3pm on 6 June 2018, Mr Chong’s associate, Ms Leviston, prepared a typed note of the meeting (‘the Stamford file note’). Relevantly, the Stamford file note stated:
If mortgages were to be accepted over the properties owned by Tabro Meats, this would trigger arrangements already in place with NAB (mortgage) and Harmony (purchaser of 60% of Tabro)
…
NAB mortgage (2015) – Facility originally [AU]$21.6m – down to [AU]$8m.
•NAB has a large list of securities through their mortgage against land. If a second mortgage is granted, they will likely implement a Manager to sell the properties.
•To enter a second mortgage would be a breach of this NAB mortgage.
•NAB are aware of the corporate restructure.
•They are currently in repayment plan with NAB.
•NAB will receive [AU]$4.5m from the [AU]$7m payment from Harmony.
•NAB not aware of debt owing to Mr Cai.
In relation to the Harmony deal, the Stamford file note stated, inter alia, that:
• The second mortgage would likely stop the Harmony agreement.
•Harmony have already paid [AU]$3m – this has already been distributed.
• [AU]$7m payment from Harmony:
• [AU]$450,000 to 8 weeks of unpaid wages;
• [AU]$4.5m to NAB;
• [AU]$1m to works needed for fire insurance; and
• [AU]$800,000 to unpaid creditors;
• The full transaction should be settled end of July/start of August.
•Harmony believe they are getting a ‘clean skin’ company so they are not aware of debt owing to Mr Cai.
Issues with second mortgage
•Will be a breach of the NAB mortgage;
•Will be a breach of the Harmony agreement.
PC raised concerns for if Harmony decide to pull out of agreement. Blue Mount said if deal falls over they can re-visit discussions with us, but have already have other purchasers lined up.
PC said Cai wants security now. AL said that they won’t get what they want through the mortgage anyway, because NAB will trigger mortgagee’s rights of re-sale and security may not be claimed by Cai.
On 6 June 2018 at 4:50pm, Mr Chong sent an email addressed to Ms Chong and copied to Ms Leung, requesting that the Stamford file note be forwarded to Mr Sun. Later that night Ms Leung separately uploaded the Stamford file note into the Leung and Sun WeChat and said, ‘lawyer Sun, above documents sent by lawyer Chong this afternoon’. Mr Sun replied ‘Okay, I will look at it tomorrow’. Ms Leung replied, ‘file note is the summary of today’s meeting’. Mr Sun replied ‘OK’.
The next day, on 7 June 2018 at 3:22pm, Ms Lucas received an email from Mr Chong forwarding signed security pages of the Cai Security Agreements that Ms Tong Yang had emailed Mr Chong at 2:54pm that day. In his email Mr Chong advised Ms Lucas that Ms Tong Yang was on her way to Stamford’s office to sign the original documents of the Cai Security Agreements and that Mr Cai had been communicating with Ms Tong Yang directly. Ms Lucas said that until this time she had not been aware that Ms Tong Yang had decided to sign the Cai Security Agreements.
Also on 7 June 2018, Ms Lucas said that she telephoned Ms Tong Yang to ask her why she had decided to sign the Cai Security Agreements, reiterating the legal issues involved. Ms Lucas’ evidence was that Ms Tong Yang seemed very stressed and upset. According to Ms Lucas, Ms Tong Yang said that she did not want to go against Ms Lucas’ advice and did not want to sign the Cai Security Agreements, but she believed that she did not have any choice as Mr Chen could be imprisoned.
Ms Tong Yang gave evidence to substantially similar effect. At 4:02pm, Ms Lucas emailed Mr Chong, advising that she had been instructed by Ms Tong Yang that despite Ms Lucas’s strong recommendation, Ms Tong Yang intended to sign the Cai Security Agreements at Stamford’s office that afternoon. At 5:55pm Ms Lucas emailed Ms Tong Yang stating:
We note your instructions this afternoon that, against our advice not to do so, you and Mr Chen as Directors of Tabro Meats Pty Ltd executed security documentation providing for a further mortgage over the real property and financial charge over the shares and assets of Tabro Meats Pty Ltd.
Pursuant to the Corporations Act granting of security over the assets of the company by Directors can only occur following the passing of a resolution by the Board to do so.
Please provide us with a signed copy of the minutes of the meeting of all of the Directors of the company at which this resolution was passed.
On 7 June 2018, Ms Leung notified Mr Chong via WeChat that she had provided the Stamford file note to Mr Sun the previous night. Mr Chong replied, ‘he already received the docs and file note yesterday evening’. Mr Sun acknowledged in evidence that he had received the Stamford file note.
The Cai Security Agreements were executed by Ms Tong Yang at Stamford’s offices and thereby took effect.
Directors’ duties – an introduction
The duty of care and diligence: Corporations Act s 180(1)
Section 180(1) of the Corporations Act requires directors of a corporation to 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) occupy the office held by and had the same responsibilities within the corporation as a director or officer.
The relevant principles were recently summarised by Elliott J in United Petroleum Australia Pty Ltd v Herbert Smith Freehills (‘United Petroleum’):[43]
[43](2018) 128 ACSR 324 [609]-[19] (‘United Petroleum’), cited with approval in Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693 (Connock J) (‘Oliana’).
(a) the standard of care required by s 180(1) is objective, but account must be taken of the circumstances of the company and of the particular director involved;[44]
(b) the Court enquires as to what an ordinary person, with the knowledge and experience of the director (or officer) could be expected to have done in the circumstances if he or she was acting on his own behalf;[45] and
(c) the corporation’s circumstances include the type of company, size and nature of its business, provisions of its constitution, composition of the board and distribution of the work between the board and officers.[46]
[44]United Petroleum (n 43) [609].
[45]Ibid.
[46]Ibid [617].
In Australian Securities Investments Commission v Cassimatis & Another (No 8),[47] Edelman J held that:
[47](2016) 336 ALR 209.
(a) the question of whether a director has exercised reasonable care and diligence was to be answered by balancing the foreseeable risk of harm against the potential benefits which could be expected to accrue to the company from the conduct in question;[48]
[48]Ibid [480].
(b) the balancing of risk against potential benefits should be carried out in a way which is similar to the negligence calculus discussed by Mason J in Wyong Shire Council v Shirt;[49]
(c) the exercise is ‘forward looking’ as to what a reasonable person would have done, not backward looking at what would have avoided the injury;[50] and
(d) the foreseeable risk of harm relevant to an alleged breach of s 180(1) is not confined to financial harm but includes harm to all of the interests of the company, including its reputation;[51]
[49]Ibid [486]; (1980) 146 CLR 40.
[50]Ibid [487].
[51]Ibid [483].
Additionally, contravention can be established without providing damage to the corporation; the requirement is that it was reasonably foreseeable that harm to the interests of the company might be caused by the defendant’s act or omission.[52] The authorities recognise that ‘special vigilance’ and ‘scrupulous concern’ are required where a director is in a position of potential conflict.[53]
The duty to act in good faith in the best interests of the company; section 181(1)(a) of the Corporations Act
[52]Ibid [465] citing Vrisakisv Australian Securities Commission (1993) 9 WAR 395, 449–50 (Ipp J).
[53]Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (Receivers and Managers appointed) (in liq) (Controllers appointed) (No 3) [2013] FCA 1342 [600] (Murphy J); Strategic Management Australia AFL Pty Ltd v Precision Sports and Entertainment Group Pty Ltd (2016) 114 ACSR 1 [79] (Sifris J).
Section 181(1) of the Corporations Act comprises two duties.[54] Section 181(1)(a) requires directors to exercise their powers and discharge their duties in good faith in the best interests of the company. The common law duties and the statutory duties are of similar character.[55]
[54]United Petroleum Australia Pty Ltd v Hudson [2020] VSCA 14 [90] (Whelan, McLeish and Niall JJA) (‘Hudson’).
[55]Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451 [142] (Spigelman CJ).
A director’s judgment as to what is in the best interests of the corporation, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.[56]
[56]United Petroleum (n 43)[627]-[9], citing Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, 493 (Barwick CJ, McTiernan and Kitto JJ), and Bell IXL Investments Ltd v Life Therapeutics Ltd (2008) 68 ACSR 154, [32]-[7] (Middleton J).
The law is not settled on whether the duty to act ‘in good faith’ applies a subjective, objective or combined standard. In United Petroleum Australia Pty Ltd v Hudson (‘Hudson’),[57] the Court of Appeal acknowledged the trial judge’s discussion of whether ‘in good faith’ applies a subjective, objective or combined standard, but ultimately found that it was not then necessary to identify or resolve that divergent authority.
[57]Hudson (n 54) [91].
It is unnecessary to show actual loss to establish liability under s 181 (or s 182) of the Corporations Act.[58]
[58]Gerard Cassegrain & Co Pty Ltd v Felicity Cassegrain [2013] NSWCA 453 [47]-[48] (Beazley P).
The duty to act for a proper purpose; section 181(1)(b) of the Corporations Act
Section 181(1)(b) of the Corporations Act requires directors to exercise their powers and discharge their duties for a proper purpose. The principles applicable to determining whether directors have acted for an improper purpose were explained in Permanent Building Society (in liq) v Wheeler.[59]Those principles as summarised by Ipp J are:[60]
(a)Fiduciary powers and duties of directors may be exercised only for the purposes for which they were conferred and not for any collateral, or improper purpose.
(b)It must be shown that the substantial purpose of the directors was improper or collateral to their duties as directors of the company. The issue is not whether a management decision was good or bad; it is whether the directors acted in breach of their fiduciary duties.
(c)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. Whether acts were performed in good faith and in the interest of the company is to be objectively determined, although statements by directors about their subjective intentions or beliefs will be relevant to that inquiry.
(d)The court must determine whether but for the improper or collateral purpose the directors would have performed the act impugned.
[59](1994) 11 WAR 187, 218 (Ipp J) (‘Permanent Building Society’); see also United Petroleum (n 43) [640]-[643] cited in Oliana (n 43) [399] (Connock J).
[60]Permanent Building Society (n 59), 218 (Ipp J).
In order to establish a breach, the starting point is to identify the relevant power in question. Having done that, it is necessary to determine the purpose for which the power was exercised and then assess whether that identified purpose was proper.
Duty not to improperly use position; s 182 of the Corporations Act
Section 182 of the Corporations Act imposes a duty on directors not to improperly use their position to gain an advantage for themselves or someone else, or cause detriment to the corporation. Conflicts of interest may give rise to an improper use of position.[61]
[61]R v Byrnes (1995) 183 CLR 501, 517 (Brennan, Deane, Toohey and Gaudron JJ).
In United Petroleum, Elliott J observed that:[62]
Section 182 requires a director not to have a proscribed purpose: to gain an advantage or to cause a detriment. It is not necessary that an advantage has in fact been gained by the director or other person or the detriment has in fact been caused to the corporation. Further, in ascertaining whether a director had one or other of the proscribed purposes in mind when she or he made use of her or his position, it is relevant to consider the particular duties and responsibilities of the director and her or his appreciation of the circumstances at the relevant time.
The test is whether the conduct would breach the standards of conduct that would be expected of a person in the directors’ position by a reasonable person with knowledge of the duties, powers and authority of her or his position as director and of the circumstances of the case including the commercial context. A directors’ appreciation of the relevant circumstances might be relevant to analysis of the propriety of the use the director made of her or his position in acting as he or she did.
In this court, it has been held that impropriety requires ‘behaviour [that] breached the norm of conduct thought necessary for the proper conduct of commercial life so that people have confidence that the running of the marketplace is in safe hands’.[63]
[62]United Petroluem (n 43) [644]-[6], cited in Oliana (n 43) [373] (Connock J).
[63]Griffiths v Beerens Pty Ltd (2008) 66 ACSR 472, 489 [54] (Pagone J).
The conflict rule
Allied to, but not subsumed by, s 182 of the Corporations Act is the equitable rule that restricts fiduciaries from exercising powers where there is a conflict of interest. It is well established that a director is a fiduciary and thus under an obligation not to place themselves in a position of conflict where there is a real or substantial possibility of conflict between the director’s interests and the director’s duty to the company.[64]
[64]Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd (2016) 340 ALR 580 [3] (Bathurst CJ) (‘Australian Careers Institute’); Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 [78]-[9] (McHugh, Gummow, Hayne and Callinan JJ); Howard v Commissioner of Taxation (2014) 253 CLR 83 [33]-[4], [59], [91], [110]-[111] (French CJ and Keane J); Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 [17] (Finn, Stone and Perram JJ) (‘Grimaldi’).
The test for whether there is a real or substantial possibility of a conflict between a director’s personal interests and their duties as a director is objective,[65] and is to be determined from the standpoint of an observer with knowledge of all the material facts and circumstances.[66]
[65]Australian Careers Institute (n 64) [132] (Sackville AJA).
[66]Ibid.
The conflict rule applies to an actual or possible conflict between the director’s duty to the company and their personal interest. It also applies where a conflict arises between the director’s duty to the company and their duty to someone else – for example, to another company of which they are a director, or to a trust of which they are a trustee.[67]
[67]Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488 (Astbury J, Lord Cozens-Hardy MR, Swinfen Eady and Pickford LJJ).
VicBeef and Tabro’s case on breach of directors’ duties
VicBeef and Tabro allege that by procuring the entering into and signing of the Cai Security Agreements, Mr Chen breached his directors’ duties in three key respects. First, they submit that the SSIE Loan Agreement conferred no benefit on VicBeef or Tabro. By contrast, they contend that the benefit of the Cai Security Agreements was derived by both SSIE, as the counterparty to the SSIE Loan Agreement, and those persons who had guaranteed SSIE’s obligations under that loan agreement which included Mr Chen and his wife, Ms Liu.
Secondly, and related to the first breach, VicBeef and Tabro contend that the entering into of the Cai Security Agreements conferred a substantial personal benefit on Mr Chen; his wife Ms Liu; and on SSIE, which was a company in which Mr Chen had a substantial interest.
Thirdly, VicBeef and Tabro complain that the entering into of the Cai Security Agreements gave rise to a breach by VicBeef and Tabro of the NAB Security Agreements.
The first two matters are alleged to give rise to breaches of the duty of care and diligence; the duty to act in good faith in the interests of the company; the duty to act for a proper purpose; the duty not to improperly use position; and the conflict rule.
The third matter, that the Cai Security Agreements gave rise to a breach of the NAB Security Agreements, is alleged to give rise to a breach of the duty of care and diligence and the duty to act in good faith in the interests of the company.
Mr Cai’s case on breach of directors’ duties
Mr Cai submits that VicBeef and Tabro’s focus is artificially narrow; is based too heavily on Ms Tong Yang’s incomplete understanding of the Hengyang Group; and ignores the commercial context in which VicBeef and Tabro operated as part of the Hengyang Group. He further submits that VicBeef and Tabro have placed undue focus on the personal benefit to Mr Chen as one of the guarantors of the SSIE Loan Agreement rather than considering the identical position of Mr Chen’s co-guarantors, which included HHCIC which was part of the Hengyang Group, and Sundiro, which was commercially associated with that group.
Mr Cai submits that VicBeef and Tabro have not discharged the onus borne by them in establishing to the requisite standard of proof that the relevant purpose of entering into the Cai Security Agreements was not in part to benefit HHCIC and Sundiro, and thereby to confer advantage on the Hengyang Group of companies of which VicBeef and Tabro form part.
Mr Chen was a shareholder of SSIE.[68] SSIE was the largest shareholder in Sundiro, owning 9–10% of its total shareholding. Other shareholders in SSIE included the Heilongjiang Hengyang Agricultural Group Co Ltd (‘Heilongjiang Hengyang Agricultural Group’) which had a 42.85% interest. The Heilongjiang Hengyang Agricultural Group was, according to Mr Cai, also part of the Hengyang Group; HHCIC, a guarantor of the SSIE Loan Agreement, was also part of the Hengyang Group.
[68]As at 8 December 2017 it appears that Mr Chen had a 14.3% interest.
On 20 November 2017 the Heilongjiang Hengyang Agricultural Group entered into a memorandum of understanding (‘the Hengyang-Tabro MOU’) with Tabro. The Hengyang-Tabro MOU was provided by Ms Tong Yang to BlueMount Capital’s Mr Shaw on 1 December 2017 by an email which described the documents as the ‘signed MOU between Foresun and Tabro Meat’.[69]
[69]The Hengyang Group was formerly referred to as Foresun, as mentioned at [35] above.
The Hengyang-Tabro MOU records that the Heilongjiang Hengyang Agricultural Group cooperated with ‘world famous investment institutions’ and had acquired eight beef processing enterprises in Australia, Uruguay, Argentina and other countries. It records that the Hengyang Group possessed multiple brands such as Foresun and Tabro. The principal clause of the Hengyang-Tabro MOU provided for co-operation to promote sales of Tabro beef in China:
Hengyang Group will make full use of the resources and advantages of Tabro Meat to build an Australian beef brand in China and promote the beef produced by Tabro Meat to thousands of households. At the same time, Hengyang Group will make full use of the existing meat distribution stores, Australian beef experience halls and other online platforms to support Tabro’s brand promotion and sales in China. Through complementary advantages and cooperation in their respective fields, both parties will establish a comprehensive strategic partnership to create a new chapter for Australian beef in China.
To the extent to which anything is to be made of knowledge exclusively held by Mr Hong, then I consider that VicBeef and Tabro can rely on such knowledge. Mr Hong was called as a witness by Mr Cai and he gave evidence in chief as to his participation in the WeChat groups. Mr Cai also gave evidence and when cross examined, his evidence was to the effect that Mr Hong had full authority to handle the matter after SSIE’s default and that he expected Mr Hong to take care of all the details in connection with the security to be obtained from VicBeef and Tabro.
Whilst the pleadings and particulars will ordinarily serve to define the issues at trial, it is still necessary to consider the manner in which the trial itself was conducted. Here, the evidence of Mr Hong’s role and state of mind was given at trial without objection, and he was called as a witness by Mr Cai, whose evidence was that he entrusted Mr Hong to handle the matter on his behalf.[185] There is no injustice to Mr Cai in allowing Mr Hong’s knowledge to be imputed to him.
[185]Prior to the amendment, Mr Cai did not intend to call Mr Chong or Ms Leung as witnesses but did so after the amendment.
Accordingly, it is appropriate to have regard to the knowledge of Messrs Cai, Hong, Sun and Chong in order to resolve the question of the enforceability of the Cai Security Agreements against Mr Cai. That assessment is to be carried out in light of my conclusions as to the entering into those agreements of having been a product of breaches by Mr Chen of his duty to act in good faith in the interests of the company, his duty to act for a proper purpose, his duty not to improperly use his position and his breach of the conflict rule, and that the key elements of such breaches were the fact that the Cai Security Agreements conferred benefits on SSIE and the guarantors including Mr Chen and his wife Ms Liu but conferred no benefit on VicBeef and Tabro and gave rise to a breach by VicBeef and Tabro of the NAB Security Agreements.
Mr Cai and Mr Hong were aware that SSIE had defaulted under the SSIE Loan Agreement as and from 14 February 2018. This knowledge extended to knowledge that SSIE had also failed to perform the revised payment terms nominated by Mr Chen and agreed to by Mr Hong in March 2018.[186] Necessarily, Mr Cai as a party to the SSIE Loan Agreement knew that SSIE’s obligations had been guaranteed by Mr Chen, Mr Xu, Sundiro and HHCIC.[187]
[186]See [9] and [42] above.
[187]As well as NNHBP.
Messrs Cai, Hong, Sun, and Chong knew that by their very terms the Cai Security Agreements conferred no direct benefit on VicBeef and Tabro; in contrast, the offer of new security over the assets of Tabro and VicBeef in the form of the Cai Security Agreements conferred a benefit on the parties to the SSIE Loan Agreement by obtaining a further indulgence from Mr Cai in relation to the enforcement action against the SSIE Loan Agreement counterparties, including Mr Chen, that Mr Cai would otherwise take as a result of the loan default.
Mr Sun knew that SSIE and Sundiro were in a separate corporate group from those entities that are said to form part of the Hengyang Group. He also understood that SSIE or Sundiro were not shareholders in VicBeef and Tabro.
Mr Sun knew that if Tabro (and by parity of reasoning VicBeef) was required to enter into the Cai Security Agreements, it would be necessary for the directors of those companies to provide the requisite authorisation and to execute the Cai Security Agreements.
By 24 May 2018, Messrs Sun, Hong and Cai knew that one of the three directors of VicBeef and Tabro, Mr Lei Li, had reservations in signing the Cai Security Agreements on behalf of VicBeef and Tabro.[188]
[188]See [73] above.
By 2018, Messrs Sun and Chong knew that one of the other of the directors of VicBeef and Tabro, Ms Tong Yang had reservations about signing the Cai Security Agreements; she had instead proposed the alternative security offer, which she believed did not have the problems that she perceived lay with the execution of the Cai Security Agreements.[189]
[189]See [98] above.
By at the very latest, 6 June 2018,[190] Mr Chong and Mr Sun knew that:
[190]From the terms of the Stamford File Note.
(a) the entering into of the Cai Security Agreements would be a breach of the NAB mortgage entered into between the NAB and Tabro;
(b) NAB were not aware of the debt owing by SSIE (and Mr Chen and the other guarantors) to Mr Cai;
(c) Ms Lucas had informed Ms Tong Yang that entering into the Cai Security Agreements in a form which included the mortgage over the Abattoir would affect the Harmony Agreement; that Harmony believed that they were getting a cleanskin company;[191] and that Harmony was not aware of any debt owing to Mr Cai;
(d) NAB was aware of the corporate restructure consequent upon completion of the Harmony Agreement and was to receive AU$4.5 million of a further payment of AU$7 million due from Harmony; that Harmony was currently providing working capital to, among other things, meet VicBeef and Tabro’s existing payment needs; and
(e) the director, Ms Tong Yang, had received advice from Ms Lucas, a solicitor, that in light of the matters in (a) to (d), she should not execute the Cai Security Agreements on behalf of VicBeef and Tabro.
[191]That is, a company whose assets were not encumbered by securities such as those proposed by the Cai Security Agreements.
VicBeef and Tabro also submit that Mr Chong and thereby Mr Cai knew that it would be a breach by Ms Tong Yang of her directors’ duties for her to sign the Cai Security Agreements. Both Ms Lucas and Ms Tong Yang gave evidence to the effect that Mr Chong was told this during the meeting at his office at 3pm on 6 June 2018.[192] Ms Lucas maintained that she had also said this to Mr Chong during two phone calls on 6 June 2018 at 12:47pm and 1:20pm in addition to at that meeting.[193]
[192]See [89] above.
[193]See [85] and [87] above.
Mr Chong in contrast says that he does not recall that anyone told him that signing the Cai Security Agreements would be a breach of Ms Tong Yang’s directors’ duty.
Both Ms Lucas and Ms Tong Yang were impressive witnesses. Each professed to have (and I find did have) a good recollection of the critical events. Each presented as an honest witness. Mr Chong was also an honest witness. Ms Lucas was able to produce contemporaneous handwritten file notes which were relatively comprehensive in nature. Mr Chong’s file has been misplaced and he was only able to produce documents that were otherwise obtainable from other electronic records, which relevantly included the Stamford file note.
Notwithstanding that Mr Chong was an honest witness, his recollection of events was very limited. Mr Chong did not have any independent recollection of the telephone calls that preceded the meeting at his office on 6 June 2018 and his recollection of the meeting itself was very limited. Mr Chong’s recollection of matters was not significantly assisted by his reading of Ms Lucas’s witness statement and contemporaneous file note. Mr Chong had only a general recollection of the issues that were discussed at the meeting on 6 June 2018, namely that the security would breach the existing agreements with NAB, that the security may affect the Harmony Agreement, and that there was a discussion in relation to the provision of alternative security.
Importantly, however, and notwithstanding Ms Lucas’s overall good recollection of events and the fact that she took file notes at the relevant meetings, none of her contemporaneous notes explicitly refer to her telling Mr Chong that Ms Tong Yang would be in breach of her directors’ duties if she signed the Cai Security Agreements.
Mr Cai’s submissions acknowledge that Ms Lucas (and Ms Tong Yang) were both honest witnesses. His submissions also accept that the question as to whether the execution of the Cai Security Agreements gave rise to a breach of Ms Tong Yang’s directors’ duties was a matter canvassed fully between Ms Lucas and Ms Tong Yang. Mr Cai submitted, however, that absent corroboration in the form of a file note, the Court could not be satisfied that Mr Chong (and thereby Mr Cai) knew that execution of the Cai Security Agreements by Ms Tong Yang could give rise to a breach by Ms Tong Yang of her directors’ duties, given Mr Chong’s evidence which is that he does not recall being so told (and that he believes that he would have recalled had he been told).
Not much turns on this. Strictly speaking, had the matter been communicated by Ms Lucas to Mr Chong, it would not have amounted to Mr Chong acquiring knowledge of the fact that execution of the Cai Security Agreements would have given rise to a breach of directors’ duties. All that Mr Chong would have been told was that Ms Lucas believed that the execution of the Cai Security Agreements by Ms Tong Yang would give rise to a breach of her directors’ duties.
Moreover, it is not disputed, including because of the Stamford file note, that Mr Chong (in addition to Mr Sun, and thereby Mr Cai) knew that:
(a) the solicitors who were advising VicBeef and Tabro believed that the execution of the Cai Security Agreements would breach the existing NAB security arrangements;
(b) the execution of the Cai Security Agreements may affect the Harmony Agreement;
(c) the debt under the SSIE Loan Agreement was not a debt of VicBeef and Tabro and was not known to NAB nor Harmony; and
(d) two of the three directors of the companies were, as at 6 June 2018, unwilling to execute the Cai Security Agreements on behalf of VicBeef and Tabro.
The only director who was willing to execute those documents was Mr Chen whose self-interested position was well known by Messrs Chong, Sun, Hong and Cai.
The fact that execution of the Cai Security Agreements in such circumstances may have also been apprehended to place the director who executes the agreements in breach of a duty that they owed to the company adds little more to the analysis.
On balance, to the extent that it matters and notwithstanding the absence of a direct reference in Ms Lucas’s file note, I am satisfied that Ms Lucas conveyed that matter to Mr Chong and necessarily that Mr Chong and thereby Mr Cai knew that this was Ms Lucas’s view, and that this was the advice that Ms Tong Yang, as the non-self-interested director called upon to execute the Cai Security Agreements, had received.
Ms Lucas’s file note of her telephone call with Mr Chong at 1:20pm records ‘MS – TY cannot as in breach of NAB loan terms and BTS; not legal’. A further statement in the note records the words ‘why not legal?’, reflecting an enquiry from Mr Chong.
Ms Lucas gave evidence that she informed Mr Chong that it would be a breach of Ms Tong Yang’s directors’ duties for her to sign the Cai Security Agreements when Mr Chong asked why it was not legal. I accept this evidence; it is theoretically possible that Ms Lucas’s file note is inaccurate and Mr Chong never asked the question ‘why not legal?’; it is also theoretically possible that Ms Lucas failed to answer. Neither of those possibilities was put, understandably because they are inherently unlikely. If those possibilities are discounted then Ms Lucas said that Ms Tong Yang could not sign the agreements because they would breach the NAB Loan terms and the BTS and signing was ‘not legal’. The reference to ‘not legal’ could not have been a reference to the breach of the existing NAB loan terms or the agreement with Harmony (the BTS) which had earlier been disclosed to Mr Chong. The statement then prompted him to ask ‘why not legal?’. It makes no sense for ‘not legal’ to be explicable with reference only to the fact of breach of the NAB loan terms or the BTS, because those matters had already been disclosed.
In my view, the reason why it was not legal, most likely reflects Ms Lucas statement to Mr Chong as to Ms Tong Yang’s inability to sign the Cai Security Agreements without thereby breaching her directors’ duties. Therefore, on balance, I accept Ms Lucas’ evidence that she told Mr Chong that Ms Lucas could not sign because it was not legal for her to do so, given that it would place her in breach of her directors’ duties.
I am therefore satisfied that Ms Lucas informed Mr Chong that signing the Cai Security Agreements would be a breach of Ms Tong Yang’s directors’ duties, at least during the telephone conversation at 1:20pm on 6 June 2018.
In those circumstances, the combination of the knowledge of Messrs Cai, Hong, Sun and Chong is such that Mr Cai had knowledge within Baden categories 1 and 2, and if not 1 and 2, then 3 and 4, such as to entitle VicBeef and Tabro for orders in the nature of equitable rescission with respect to the Cai Security Agreements, at least on the basis that entering into those agreements gave rise to breaches of obligations of a fiduciary nature to the effect that there was a breach of the duty to act for a proper purpose; a breach of the duty not to improperly use a position; and the execution of the Cai Security Agreements occurred in circumstances where Mr Chen had a real and substantial conflict of interests between his duties as a director of VicBeef and Tabro and his personal interests.
In simple terms, Mr Cai knew, principally by way of the knowledge of Mr Sun and Mr Chong, that the Cai Security Agreements were to be provided by VicBeef and Tabro for the purpose of conferring benefit on the parties to the SSIE Loan Agreement which included Mr Chen and his wife Ms Liu, by delaying the commencement of legal proceedings arising as a result of the default under the SSIE Loan Agreement. The Cai Security Agreements conferred no benefit on VicBeef and Tabro and no interlocutor ever said that they did. Mr Sun and Mr Chong both knew that the Cai Security Agreements breached the NAB Security Agreements.
Mr Cai gambled that the Harmony Agreement would complete, that the NAB debt would be retired and that Mr Chen would receive from the proceeds of completion sufficient to clear the debt under the SSIE Loan Agreement. Had that occurred, none of the breaches would have mattered. But the gamble did not succeed; the Harmony Agreement fell over.[194]
[194]The reason why was not explored in the evidence.
A party who seeks equitable relief in the nature of an order for rescission must do equity. In appropriate circumstances, the order for rescission may be conditioned upon the party seeking such relief making counter-restitution of the benefits provided under the contract sought to be rescinded.[195] In the present circumstances, there is no countervailing equitable requirement. VicBeef and Tabro did not receive any benefit from Mr Cai as a consequence of the entry into of the Cai Security Agreements. As such, VicBeef and Tabro are entitled to an order rescinding the Cai Security Agreements ab initio.
[195]See, eg, Maguire v Makaronis (1997) 188 CLR 449 (Brennan CJ, Gaudron, McHugh, Gummow and Kirby JJ).
VicBeef and Tabro also seek injunctive relief under the Corporations Act against Mr Cai restraining enforcement of the Cai Security Agreements on the basis that Mr Cai was a person involved in the relevant statutory breaches by Mr Chen. My conclusions as to Mr Cai’s knowledge for the purposes of the rescission analysis also mean that he was a person involved in the statutory contraventions for the purposes of the Corporations Act. I will hear the parties as to whether it is necessary or appropriate however to make any orders such as declarations or injunctions in addition to the primary orders for rescission; my tentative view is that there may be no need.
Remaining matters
In the circumstances, it is not necessary for me to address two further matters raised by VicBeef and Tabro. However, given that the matters were argued, and in case I am wrong with respect to my conclusions as to breach of duty and the availability of relief to VicBeef and Tabro to the effect set out above, I will now address those matters.
The first concerns the question of whether there was in fact any money provided by Mr Cai to SSIE pursuant to the SSIE Loan Agreement. VicBeef and Tabro contend that there was not and, as such, there is no ‘secured money’ as defined in the VicBeef Charge, the Tabro Charge or the Tabro Mortgage and there is no Guaranteed Money owing under the Guarantee and Indemnity.
Foundational to each definition is the question of moneys owing by SSIE to Mr Cai. The SSIE Loan Agreement provided for an advance of funds by Mr Cai to SSIE. In fact, on 11 January 2018, three entities, Shenzhen Zhengtian Jiatai Trading Co Ltd, Shenzhen Shengjiahe Commercial and Trading Co Ltd and Shenzhen Baiying Trading Co Ltd, paid a total of RMB 70 million to SSIE.
Mr Cai and Mr Hong said that these companies were part of the ‘Dongzi group’ and that these entities were family companies that held funds belonging to Mr Cai and his brother, Mr Hong, but that the funds transferred to SSIE on 11 January 2018 belonged to Mr Cai personally. Mr Hong in his evidence-in-chief confirmed that Mr Cai was named as lender on the SSIE Loan Agreement because the source of funds for the loan was his. Mr Cai relied upon a document signed on 20 January 2020 headed ‘statement on lending to SSIE on behalf of Mr Cai Laiyen’. The statement was signed purportedly by the legal representatives of each company (who were also shareholders of each company) which included Mr Cai’s nephew, Shengle Jiang (‘Mr Jiang’), who gave evidence and was cross-examined.
Mr Jiang also gave evidence that in about early January 2018 his uncle, Mr Cai, asked him and his cousin, Xiaohang Cai, to transfer funds from the bank accounts of the three companies into the bank account of SSIE, which they did on 11 January 2018. His evidence in that respect was corroborated by Mr Cai who gave evidence to relevantly identical effect.
Mr Hong’s evidence-in-chief notwithstanding, in oral evidence Mr Hong referred to the money as variously ‘his money’ or money owned by him and his brother. In the circumstances, including the obvious self-serving nature of the statement of lending documents, VicBeef and Tabro submit that the evidence does not prove to the necessary standard of proof that the funds advanced to SSIE were in fact advanced by Mr Cai. They argue that in such circumstances the necessary elements of the proofs required to establish ownership of the funds on behalf of Mr Cai would include primary books and records of the three companies.
Mr Cai submits that the evidence-in-chief of Messrs Cai, Hong and Jiang, as well as the statement of lending, are sufficient in the circumstances to discharge the necessary evidentiary onus. In addition, Mr Cai relies upon the fact that courts in China have now entered judgment in favour of Mr Cai against SSIE and the guarantors presumably having been satisfied that the money loaned was Mr Cai’s.
Mr Cai submits, in effect, that the transferor companies in effect held the money as an agent for Mr Cai and advanced the funds in that capacity. On balance, I accept Mr Cai’s submissions. Although the evidence in cross-examination was somewhat vaguer than the evidence-in-chief, each of Messrs Cai, Hong and Jiang gave evidence in chief[196] that the funds were Mr Cai’s and none of them were specifically challenged in terms on that evidence.
[196]Albeit in the form of the tender of a witness statement adopted by them in the witness box.
Moreover, it was contemplated in the SSIE Loan Agreement that the release of funds under the loan by Mr Cai to SSIE could occur either by a wire transfer from Mr Cai’s personal bank account to the stipulated account of SSIE, or by authorising a third party to wire transfer to the stipulated account of SSIE.
Even if the funds in the accounts of the three companies were not Mr Cai’s funds (which I do not accept), then Mr Cai authorised the three companies as third parties to wire funds to SSIE’s account which authorisation and transfer gave rise to the making of an advance by Mr Cai to SSIE under the terms of the SSIE Loan Agreement.
The judgment in China and its effect on any enforcement by Mr Cai
VicBeef and Tabro argue that the Court ought not make orders as sought by Mr Cai in his counterclaim because on 20 November 2020 the Shenzhen Intermediate People’s Court (‘SIPC’) found in favour of Mr Cai against SSIE, Mr Chen, Sundiro and the other SSIE guarantors including HHCIC, Ms Liu and Mr Xu. Sundiro has appealed against that decision, but no hearing date for the appeal has been set.
VicBeef and Tabro argue that if Mr Cai is successful in the appeal and recovers money from SSIE and the 2017 SSIE guarantors in China, there would be no debt or liabilities owed by SSIE to Mr Cai and therefore the definitions in the Cai Security Agreements would not be met. In addition, they argue that if Mr Cai is successful both in his appeal in the SIPC and also in these proceedings, Mr Cai would have the ability to recover twice the amount owed to him. As such, they argue that it is not appropriate for the Court to make orders sought by Mr Cai in his counterclaim.
In oral submissions, VicBeef and Tabro advanced a more nuanced argument arguing that the Court should stay execution of any orders obtained in the proceedings pending resolution of the appeal in China.
There has in fact been no recovery under the Chinese judgment. Given the absence of recovery, there is in my view no basis for either declining to make any orders at all, or otherwise staying the execution of any judgment pending resolution of the appeal in China. Whilst VicBeef and Tabro would at common law be entitled to maintain an action for contribution against the guarantors notwithstanding that their liabilities arise under a separate instrument, the action for contribution at common law cannot be maintained in advance of actual payment. Whilst equity may in an appropriate instance act quia timet where an apprehended overpayment appears sufficiently imminent, I am not persuaded in the present case that it is appropriate to grant a stay or an equitable injunction restraining the enforcement of any judgment on the counterclaim against VicBeef or Tabro, had I formed the view, which I have not, that the counterclaim should succeed.
Conclusion
In the circumstances, VicBeef and Tabro will be entitled to orders rescinding the Cai Security Agreements ab initio. The counterclaim will be dismissed. I shall hear the parties on the appropriate form of orders having regard to these reasons.
3
16
0