Xiang v Ward (No 3)

[2016] NSWDC 86

District Court

New South Wales

Medium Neutral Citation:	Xiang v Ward (No 3) [2016] NSWDC 86
Hearing dates:	26, 27, 28 April; 2 and 3 May 2016
Date of orders:	04 May 2016
Decision date:	04 May 2016
Jurisdiction:	Civil
Before:	P Taylor SC DCJ
Decision:	(1)   Judgment for plaintiff in the sum of $727,812.71 inclusive of interest. (2)   Direct the parties within 7 days to provide to my associate a list of mutually convenient dates for an argument concerning costs.
Catchwords:	MISLEADING CONDUCT – oral representations – knowingly concerned – representations about a business to an investor – permanent residency application – employee sponsorship
Legislation Cited:	Australian Securities and Investments Commission Act 2001 (Cth), s 12GF, s 13DA Evidence Act 1995, s 128 Trade Practices Act 1974 (Cth), s 52, s 82
Cases Cited:	Gould v Vaggelas (1985) 157 CLR 215 at 236 Huntsman Chemical Co Australia Ltd v International Pools Australia Pty Ltd (1995) 36 NSWLR 242 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 109 ALR 638 Watson v Foxman (1995) 49 NSWLR 315
Category:	Principal judgment
Parties:	Youfa Xiang (plaintiff) Peter Luscombe Ward (defendant)
Representation:	Counsel: Mr M W Young SC (plaintiff) Mr M W E Maconachie (defendant)   Solicitors: Dixon Holmes Lawyers (plaintiff) Cappello Rowe Lawyers (defendant)
File Number(s):	2013/304886
Publication restriction:	None

Judgment

A. BACKGROUND

1. On 2 March 2010 the plaintiff, Youfa Xiang, paid $500,000 by way of a deposit into the bank account of Alternate Fuel Solutions Pty Ltd (“AFS”), a company owned by the defendant, Peter Ward. The payment was for the purchase of 10% of the shares in AFS pursuant to a share agreement between AFS and Mr Xiang, signed by the parties in February 2010 and was part of an arrangement with AFS which Mr Xiang hoped would secure him permanent residency in Australia.  The share agreement obliged the AFS accountant to issue a receipt for the funds and to adjust the shareholding register with the Australian Securities and Investments Commission (“ASIC”) upon receipt of the funds "to reflect the investment". It also entitled Mr Xiang to call upon AFS to buy back his shares for $450,000 after two years. 

2. No receipt was issued in respect of the payment and no notation of the ownership of Mr Xiang of shares was made either in the shareholding register with ASIC or otherwise. Beginning on the day after the deposit, and continuing over the next several months, deposited funds were transferred by Mr Ward to himself, into bank accounts in the name of a business owned and controlled by him so that by 17 November 2010 almost all of the $500,000 was no longer held by AFS.  No documents explained the transfer of those moneys although some financial statements of AFS refer to those transfers as a loan to Peter Ward.  In submissions, Mr Ward eschewed any suggestion that they constituted a payment for services.

3. Thus, Mr Ward retains the funds invested by Mr Xiang in AFS and it appears has no intention of parting with them. Mr Xiang unsuccessfully sought return of the funds.  In August 2013 AFS was deregistered as a result of Mr Ward having, as he conceded, “deliberately, knowingly and consciously had [a] declaration made to ASIC knowing that it was false”.

B. PROCEEDINGS

4. Mr Xiang commenced proceedings under s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (the "ASIC Act") and s 82 of the Trade Practices Act 1974 (Cth) (the "TPA") against Mr Ward for damages resulting from Mr Ward being involved in the misleading conduct of AFS in contravention of s 13DA of the ASIC Act and s 52 of the TPA respectively. The parties drew no relevant distinctions between the two provisions, and the element in the ASIC Act of the representations being "in relation to financial services" was conceded by Mr Ward.  Mr Ward made no submission that any representations were made other than "in trade or commerce". 

5. The alleged misleading conduct of Mr Ward comprised oral representations made by Mr Ward on behalf of AFS to Gary Knight, for the purpose of Mr Knight finding investors for AFS.  These representations were alleged to have occurred in mid-2008 and February 2010. The 2008 representations alleged were that:

(1) AFS already had $500,000 invested in it from an investor.

(2) AFS had developed and owned innovative fuel technology.

(3) AFS was in operation of a business.

(4) AFS was currently using the money already invested in it to commercialise its fuel technology.

6. The 2010 representations alleged were that:

(5) In addition to the $500,000 received from a previous investor AFS had attracted high level government support.

(6) AFS was continuing to commercialise innovative fuel technology that it owned.

(7) The business of AFS was operating well.

(8) An entity known as “Eagle Park Stud” with an annual turnover of more than $1,000,000 and which employed more than eight employees had acquired a controlling interest in AFS so that AFS could satisfy the requirements of the Department of Immigration and Citizenship to act as an employer sponsor for the plaintiff with respect to permanent residency in Australia.

(9) That if a further $500,000 was invested in AFS by the plaintiff then AFS would then be in a position to build, and would immediately proceed to build, a fuel technology plant.

7. These representations were allegedly conveyed by Mr Knight to Mr Xiang through an interpreter, Kai Zhu.

C. THE ISSUES

8. Mr Ward denied making the representations alleged to constitute the misleading conduct and denied that Mr Xiang relied upon any of the representations in deciding to invest the $500,000.

D. CREDIT

9. Insofar as demeanour is concerned, Mr Ward gave the appearance of a credible witness.  He was reasonably straightforward with his answers, if a little too eager to offer them prior to hearing the whole of the question. Mr Knight was a little less straightforward in his answers, perhaps reflecting an attempt to be confident with his evidence in circumstances where the lapse of time would inevitably have diminished his recollection.  In my view, little weight should be placed on this. Factors such as personality and mannerisms might impact on the appearance of a witness in the witness box without fairly reflecting the honesty or reliability of the witness.

10. Unsurprisingly, challenges were made to the credit of Mr Ward and to Mr Knight.

(a) The $50,000 finder’s fee 

11. Mr Knight was to receive $50,000 as a "finder's fee" in respect of the transaction.  Mr Zhu, a real estate agent who translated Mr Knight's communications to Mr Xiang, gave evidence that Mr Knight told him that if the employee sponsorship by AFS of Mr Xiang failed so that Mr Xiang did not achieve permanent residency, then Mr Knight would not receive his $50,000 finder's fee and Mr Xiang, when he redeemed his investment, would receive back the whole of the $500,000 and not merely $450,000.  Yet once the payment of the $500,000 was received, Mr Knight was immediately paid $50,000 plus GST, which was then provided to Mr Ward in respect of an existing debt owed by Mr Knight to Mr Ward relating to Eagle Park Stud. Thus, Mr Knight received his finder's fee immediately, not waiting until the success of Mr Xiang’s permanent residency application.

12. The significance of this transaction depends firstly on the credit of Mr Zhu. Mr Zhu gave no direct evidence of informing Mr Xiang about the terms of the $50,000 although he gave evidence of having conversations with Mr Xiang. 

13. Mr Xiang gave evidence that he was told by Mr Zhu that there was a cost to him of $50,000 if the permanent residency application was successful.  Thus his evidence provides some indirect support to Mr Zhu's evidence about his conversation with Mr Knight.  The conversation is also supported by the circumstance that it might be thought reasonable that a fee of $50,000 for obtaining permanent residency should only be payable if the permanent residency is achieved.

14. There were no glaring inconsistencies in Mr Xiang's or Mr Zhu's evidence and in general I accepted them as credible witnesses of truth. 

15. On the other hand, no explanation was sought from Mr Knight as to why he made use of the $50,000 (or $55,000 inclusive of GST) immediately. It was not suggested to him that his so doing was dishonest.  It may be that the arrangement only required him to refund the $50,000 subsequently and did not preclude him from use of those funds in the interim. 

16. Furthermore, the share agreement signed by Mr Xiang and Mr Ward on behalf of AFS provided for payment of the $500,000 investment and an entitlement in Mr Xiang to sell the shares back for $450,000.  It is silent about the refund of the $50,000 if the permanent residency application is unsuccessful. It thereby provides some support for Mr Knight's position. 

17. In these circumstances, I do not think Mr Knight's credit can be substantially diminished by the circumstance of him receiving the benefit of the $50,000 immediately.

(b) The $10,000 cash

18. Another challenge to Mr Knight's credit concerns the payment of $10,000 that he was to receive for preparing the contractual documents.  There was no evidence that Mr Knight had any legal training or particular experience in drafting contractual documents. He did not purport to be a solicitor nor a qualified migration agent. The content of the share agreement is hardly a fine example of contractual drafting. However, no submission was put that the receipt by Mr Knight of $10,000 cash for drafting the contractual documents was illegal even though it caused me some disquiet. 

19. Mr Knight paid the $10,000 cash he received from Mr Xiang to Mr Zhu for Mr Zhu's services, apparently also a "finder's fee".  The circumstances that Mr Knight used that particular $10,000 rather than paying Mr Zhu a proportion of the $50,000 Mr Knight was to receive does not seem significant. 

(c) The changes to Mr Knight’s affidavit

20. Mr Knight also changed his affidavit evidence. He deposed to having several conversations with Mr Ward about Mr Xiang being employed for three years with AFS acting as an employee sponsor of Mr Xiang’s permanent residency application. In oral evidence, he testified that the relevant period was two years, and that he had referred to two years in his conversations with Mr Ward. He gave no satisfactory explanation for the error.  That change must reflect adversely upon the accuracy of Mr Knight’s recollection in the years after the conversations and serve as a reason for caution in respect of his evidence.

(d) Changes to contracts 

21. There was evidence that Mr Knight made changes to an employment contract after the date it was allegedly signed. The significance of those disclosed changes on the credit of a witness is not so easy to discern. The changes were not hidden by Mr Knight. He told Mr Ward of them in an email. It may be that minor changes were contemplated or that the agreements did not contain all the terms that the parties might have discussed or intended. Mr Ward’s evidence was that the changed “contract” had not been signed in any event.

22. As an example that the documents might not have contained all the agreed obligations, Mr Ward was asked to, and did, make payments in respect of some expenses of Mr Knight relating to the sponsorship application although the contract did not appear to oblige him so to do.

(e) Mr Ward’s credit: his use of the investment monies

23. Mr Ward was confronted with significant challenges to his credit. Perhaps the most significant of these was his brazenness in taking the AFS investment from Mr Xiang for his own purposes without any documentary or other explanation and, by defending the proceedings, refusing to refund the money. 

24. Mr Ward sought to characterise Mr Xiang's loss of his investment as a consequence of the risks of investing. But it can hardly be said that Mr Xiang accepted the risk that his investment would be taken by Mr Ward and not used in any way for the business of AFS (assuming AFS had any business).

25. Mr Ward's treatment of Mr Xiang's investment was not consistent with that of an honest businessman and it diminishes his credit.

(f) Admission of dishonesty

26. A second credit problem for Mr Ward was his admission of deliberate dishonesty in respect of the lodgement with ASIC of the completed form deregistering AFS. Mr Ward initially suggested that this was done by Arthur Stedman his accountant and not on his instructions. But Mr Stedman was not called and there was no other evidence in support of this assertion. It cannot stand in the face of Mr Ward's clear concession, quoted in [3] above, that he deliberately made a false statement to ASIC. This admission was made immediately after Mr Ward had had an opportunity to receive advice from his counsel in relation to his rights under s 128 of the Evidence Act 1995 and after he was given a certificate under that provision.

27. The deception practised upon ASIC is clear. Deregistration required the lodgement of a form with ASIC containing assurances that the deregistration was agreed to by all the members and that AFS had less than $1,000 in assets. But the deregistration was not agreed to by all the members of AFS since it was not agreed to by Mr Xiang, who had an entitlement at that stage as a shareholder by reason of his investment.  Perhaps even more clearly, AFS did not have assets of less than $1,000 as the ASIC form stated.  On AFS' own financial statements it had assets of almost half a million dollars comprising the loans to Mr Ward. 

(g) Mr Ward’s recollection of conversations

28. As indicated above, in his affidavit Mr Ward denied a number of conversations with Mr Knight. Some of the contents of these conversations were later admitted by Mr Ward in cross-examination.  These admissions were thus inconsistent with the sworn testimony in his affidavit and tend also to provide some support for Mr Knight's credit since parts of the conversations Mr Knight asserted were accepted by Mr Ward.

(h) The employee sponsorship

29. Mr Ward denied any involvement in the lodgement and failure of the sponsorship application of Mr Xiang.  He retained a handwriting expert to give evidence that his signature on the employee sponsorship application form annexed to Mr Knight's affidavit was a signature copied from another document.  But the sample signature of Mr Ward provided by Mr Ward, for the handwriting expert's consideration to compare with the disputed document, was contained on another sponsorship application made by Mr Ward which, although the page containing Mr Xiang's name was left blank (and I make no finding about whether this blank page was always part of the document), could only have been in respect of Mr Xiang. Thus, the very evidence of Mr Ward used to dispute the signature on a sponsorship application for Mr Xiang proved that Mr Ward had signed a sponsorship application in respect of Mr Xiang.

30. Mr Ward's sworn evidence in his affidavit was "To my knowledge AFS never lodged an Employer Nominated Scheme application with the Department of Immigration in respect to Mr Xiang" and that "I don't know the fate of Mr Xiang's application for sponsorship". But in fact, as Mr Ward admitted, he had an employee send an email from Peter Ward to the Department withdrawing "Our employee nomination scheme application."

(i) Execution of documents 

31. The report of Andrea Devlin, the handwriting expert, is relevant in another way to the credit of Mr Knight and Mr Ward.  Ms Devlin concludes that the signatures on the employment agreement and on the particular application to the Department, annexed to Mr Knight's affidavit, were not "reproduction of two naturally written signatures on the original of those documents" but have their origin in the other departmental application referred to above.

32. This conclusion supports a finding that the employment agreement, at least the one annexed to Mr Knight's affidavit, was not signed and that two documents had been created, perhaps by Mr Knight, by signatures from other documents.  If Mr Knight has falsely manufactured documents by creating them from other signed documents it would be very damaging to his credit.  But Mr Ward did not put these matters in cross‑examination to Mr Knight and repeatedly and expressly declined to make any submission about Mr Knight's involvement in those disputed signatures.  In those circumstances, I cannot safely conclude that there was any deliberate conduct by Mr Knight in creating the false documents. 

33. As to whether an employment agreement was signed, Mr Xiang reminded me in submissions of evidence of correspondence from Mr Knight to Mr Ward on 4 March 2010, that:

"Tomorrow I intend to fix up the employment contract for you as I made an error in the name of the company.  This too will have to be signed and returned to me and I will get [Mr Xiang] to sign it tomorrow..."

34. Mr Xiang submitted that the reference to "too" may have indicated that the earlier employment contract was signed. I do not think it necessarily conveys that meaning.  It is equally consistent with the existing employment contract (with the wrongly named company) being an unsigned document, especially since by this stage the share agreement had been signed and thus may explain the reference to “too”.

35. In this regard, there was evidence of minutes of a meeting of Mr Ward with his accountants, where Mr Ward “tabled an employment contract which has not been executed by Youfa Xiang”. The minutes do not deny execution of an agreement by Mr Ward.

(j) Other matters 

36. In assessing credit I also take into account the principles in Watson v Foxman (1995) 49 NSWLR 315 and other decisions stressing the dangers of relying on recollections of conversations long ago which are uncorroborated by documentary material. I accept a need to be cautious in accepting what Mr Knight has deposed to about what Mr Ward said in circumstances where Mr Ward has denied the conversation and it is not corroborated in any document.

37. One document of significance is the share agreement. Both parties agree it was executed. It provided, amongst other things:

"Mr Xiang is the rightful owner of these shares and can trade in those shares at any time of his choosing with any party of his choosing. 

At the conclusion of a two year period from the date of this agreement ‑ should Mr Xiang still retain the shares ‑ Alternate Fuel Solutions Pty Ltd undertakes to repurchase those shares for the sum of $450,000, should Mr Xiang inform us in writing he wishes to divest himself of the shares back to the company.

The company undertakes to purchase those shares within 90 days of having received that correspondence from Mr Xiang."

38. Regarding the signing of the share agreement, Mr Ward deposes in his affidavit as follows:

"54 I pointed to the paragraph that commenced with the words 'At the conclusion of a two year period' and had an exchange with Mr Knight to the following effect: 

Me:  Gary, this paragraph is ridiculous. You know there is no way AFS being a start-up company can guarantee it will have the funds at the end of two years to pay Mr Xiang back the $450,000.  We are looking for investors, not short term finance. 

Knight:  It's all right Peter just sign the documents today and I will amend that paragraph to read something along the lines of 'AFS will assist Mr Xiang to divest himself of the shares’ and have you both sign amended version.

55 I was concerned that if I did not sign the Share Agreement Mr Xiang would be offended and feel that we were not serious, so I reluctantly signed it. 

56 Shortly after the meeting with Mr Xiang, Mr Knight and I walked down Regent Street towards George Street in Sydney and had a conversation to the following effect:

Me:  Gary I have to say I'm concerned with this notion of agreeing to assist Mr Xiang sell his shares in AFS after two years. This is not usual business practice. 

Knight:  Look, Peter, there are plenty of Chinese who wants visas to get their permanent residency in Australia.  Youfa will have no trouble finding a buyer for his shares if he wants to sell them.  All we have to do is facilitate the process and everyone will be happy. 

57 About a week later AFS had not received payment from Mr Xiang so I phoned Mr Knight and had a conversation in terms to the effect of the following. 

Me:  Hi Gary it’s Peter.  I’m just wondering when we can expect Mr Xiang to transfer the funds to AFS? 

Knight:  Sorry Peter, he is having some trouble getting the funds out of Hong Kong. They will be transferred to AFS within a week or so."

39. Although Mr Knight denied these conversations, they may be taken to be admissions by Mr Ward of his state of mind at and following execution of the share agreement. This evidence indicates that Mr Ward, even after signing, was not committed to the idea that AFS would repay Mr Xiang the $450,000. Mr Ward nevertheless signed the agreement, presumably because, as paragraph 57 indicates, he remained keen to receive the $500,000.

40. The lack of clear proof of an employment agreement raises another issue.  It seems unlikely that Mr Ward would wish to employ a person unknown to him, who could not speak English and was entirely unfamiliar with the fuel technology associated with AFS, on a salary of $185,000 per annum for two or three years, in return for AFS receiving the use of $450,000 ($500,000 less the amount payable to Mr Knight) for two years.  Such an arrangement, at least without more details about how Mr Xiang could bring a financial benefit to the company, appears to make no commercial sense.  If possible, it made even less sense in a context where AFS did not carry on a business immediately before, at the time of, or after the receipt of the funds, and where AFS was located in Orange and Mr Xiang intended to be with his family in Sydney where his children attended school.

41. In addition, Mr Xiang's initial complaints after the investment was made focus on the failure of AFS to provide supporting documents for the sponsorship application and hardly, if at all, on the failure by AFS to employ him.  This suggests that with or without a signed employment agreement, the parties might not have intended for Mr Xiang to be employed or be paid the contemplated salary.  One explanation for this may be that the employment agreement was just a sham to enable Mr Xiang to apply for permanent residency and for Mr Ward to secure $500,000 investment monies.  However, this suggestion was not raised by any evidence or in submissions by the parties and I cannot in those circumstances find it as a fact.  In any event, there is no doubt that the share agreement was not a sham: the $500,000 was provided and both parties accepted that it would operate as a stand-alone agreement, in Mr Ward's case because he claimed that it was the only agreement that he had signed.

42. Bearing all these matters in mind, I find Mr Ward to have been less than honest in respect of Mr Xiang’s sponsorship and in his dealings with the AFS funds and with ASIC. I have some concerns about Mr Knight and I am cautious about accepting his evidence but generally I prefer his evidence to that of Mr Ward. 

E. THE REPRESENTATIONS

43. Mr Knight met with Mr Ward in mid-2008.  The evidence concerning the nine representations can be summarised as follows:

1.  AFS already had $500,000 invested by an investor 

44. Mr Knight gave evidence that Mr Ward said, "I've already got one investor who invested half a million dollars."  Mr Ward denied making this statement.  Mr Ward did give evidence that one Mr Qiu was prepared to invest on equal terms to Mr Ward but Mr Ward said he had no money and that "in order to secure Mr Qiu's investment in AFS funding would need to be obtained".

45. Neither Mr Zhu nor Mr Xiang gave evidence of a figure of $500,000 in respect of another investor. Because I have a preference for Mr Knight's evidence and Mr Ward did give evidence that he had another interested investor in Mr Qiu, I am persuaded on balance that Mr Ward likely did make a reference to another investor.  However, I am not persuaded that Mr Ward made reference to that investor having already invested half a million dollars.

2.  AFS had developed and owned innovative technology 

46. Mr Knight gave evidence that Mr Ward had said, "My company has the technology to turn woody weed to pellets that burn longer and are ideal for powering generators". Mr Ward testified that he had "very little" or "[v]ery scant" knowledge of the work of AFS and thought the technology "was something about - algae". Mr Madden, he said, was the one that was driving it. Mr Ward said he had "No knowledge of the technical aspects of the company". However, he did concede that he had said, "My company has the technology to turn woody weed to pellets that burn longer and are ideal for powering generators", by answering "Presumably, yeah" to a question about whether he had said this.

47. Bearing in mind Mr Ward's concession, I accept that Mr Ward did make this representation about owning and having developed innovative fuel technology.

3.  AFS was in operation of a business 

48. Mr Knight gave evidence and Mr Ward accepted that Mr Ward inquired of Mr Knight about the requirements to qualify as a sponsor of an applicant for permanent residency and Mr Knight stated, "The most important thing is that the company has to carry on a genuine business; it has to have staff already employed in the regional and rural areas."  Mr Ward also recalled Mr Knight referring to the need for the sponsored person to be paid a salary of $150,000 for two years whereas Mr Knight's recollection was that his reference was to $180,000.  Mr Ward conceded that he might have said, "I see. I can make sure that my company satisfies all that," in reference to the requirements for sponsorship.  He denied saying, "My company will provide the sponsorship." 

49. Mr Knight gave evidence and Mr Ward conceded that Mr Knight may have said to Mr Ward in a meeting about a week or two later, "I cannot stress enough how important it is for an Asian investor that invests in your company that he is able to get an effective sponsorship out of your company for his migration application."  Mr Ward also accepted, as Mr Knight deposed, that Mr Knight might have referred to the Regional Skilled Migration Scheme and that Mr Knight handed Mr Ward a printout of the sponsorship requirements.

50. Although Mr Ward does not say these precise words about operating a business, they are implicit in his concessions about his assurance of AFS satisfying the sponsorship requirements, the most obvious of which was that the company carry on a genuine business.  Mr Ward's evidence (at T187/18) asserted that AFS was operating a business at the time. I find that this representation is established.

4.  AFS is currently using money already invested in it to commercialise its fuel technology 

51. Mr Knight gave evidence that Mr Ward stated in a conversation in 2008 or 2009 that:

"The business is travelling well. I have got serious interest shown by the majors in the mining business and support from the government, and we're building the prototype with the money from the first investor."

52. Mr Ward denied this conversation in his affidavit and the contrary was not suggested to him in cross‑examination.  Mr Ward did admit in his affidavit that from time‑to‑time he would ask Mr Knight how he was going finding investors for AFS. 

53. Mr Knight gave evidence that Mr Ward said to the Immigration Minister's advisor in Mr Knight's presence, "We need Asian investors with their deep pocket[s] to fund the commercialisation of the technology" although Mr Ward denied saying anything of substance at that meeting – he said that Mr Madden was present and did the talking.

54. As indicated in the reference above to the evidence, Mr Ward's statement, as deposed to by Mr Knight, spoke of a precondition to commercialisation of the technology, suggesting that the commercialisation was not then being undertaken.  In those circumstances, the evidence does not establish this representation.  Although there is reference to building a prototype, that was not put to Mr Ward and it is not at all clear to me that, "building a prototype" is equivalent to commercialising the technology. “Commercialising”, to my mind, seems more concerned with sales and trading rather than the sort of preliminary work suggested by “building a prototype”.

5.  In addition to the $500,000 received from the previous investor, AFS had attracted high level government support

55. Mr Knight gave evidence that Mr Ward stated, "We've been trying to build these prototypes with the first investor's money...We've got government support."  Mr Ward denied this conversation in his affidavit and in cross‑examination.

56. There is no reference in the evidence to, "high level" support.  I am not persuaded that government support is equivalent to, "high level" government support.  A question in any event would remain about whether such a representation could be considered misleading conduct given the generality of the phrase.

6.  AFS was continuing to commercialise innovative fuel technology that it owned 

57. Mr Knight gave evidence that Mr Ward said:

"AFS has been in operation for a little over a year now. We've been trying to build these prototypes with the first investor's money.  We've got few employees in the company. We've got...contracts in the pipeline from large publicly listed companies."

Mr Ward denied this conversation in his affidavit and in cross‑examination.

58. Mr Knight deposed to Mr Ward having said he is, "trying to build these prototypes" and having contracts, "in the pipeline". These representations are not evidence of current and continuing "commercialising" of the fuel technology. I am not satisfied that this representation was made, apart from confirming the representation about AFS owning innovative fuel technology.

7.  The business of AFS was operating well 

59. Mr Knight gave evidence that Mr Ward said, "AFS has been in operation for a little over a year now."  Mr Ward in cross‑examination did not recall saying that and denied the conversation in his affidavit.

60. Mr Ward denied this conversation in his affidavit but claimed, as I indicated earlier, that at least until 2010 AFS was operating a business.  I prefer the evidence of Mr Knight on this representation given Mr Ward's continued willingness to proceed with the sponsorship, a matter that depended on the existence of a genuine business being operated which would pay a substantial salary to a non‑resident employee.

8. An entity known as “Eagle Park Stud” with an annual turnover of more than $1,000,000 and employing more than eight employees had acquired a controlling interest in AFS so that AFS could satisfy the requirements of the Department of Immigration and Citizenship to act as an employer sponsor for the plaintiff with respect to permanent residency in Australia 

61. Mr Knight gave evidence that Mr Ward told him:

"Eagle Park has millions in turnover and has about eight employees currently.  It’s a lot more substantial than AFS.  If AFS on its own is not good enough for the sponsorship application, I will transfer the shares to Eagle Park to meet this requirement." 

Mr Knight also gave evidence that Mr Ward agreed in this conversation to transfer the shares in AFS to Eagle Park straight away.  Mr Ward denied this conversation in his affidavit although in cross‑examination he accepted that he had said that Eagle Park had about a million in turnover, that it had eight employees currently and that it was a lot more substantial than AFS. He did not think he used the words, "transfer of shares". He thought he said, "[W]e could use Eagle Park if that's what the requirement was for - Gary needed for the immigration department."

62. Bearing in mind Mr Ward's concessions, I find that Mr Ward did make a representation substantially to the effect of that pleaded in respect of Eagle Park Stud. 

9.  If a further $500,000 was invested in AFS by the plaintiff, then AFS would then be in a position to build and would immediately proceed to build a fuel technology plant

63. Mr Knight gave evidence that Mr Ward had stated in late 2008 that he needed, "Asian investors with their deep pocket[s] to fund the commercialisation of the technology," and that, "We've been trying to build these prototypes with the first investor's money". Mr Knight gave no evidence of the fuel technology plant or Mr Ward referring to using further investment funds to build a fuel technology plant.

64. No evidence was identified by the plaintiff as establishing the final representation. I do not find it was made. 

65. Thus, in general terms, I accept that Mr Ward made representations about a genuine business that was operating well and that Eagle Park was a substantial business with more than a million dollars in turnover and eight employees which could fulfil the sponsorship requirements if more than AFS was needed. I also accept that Mr Ward represented that AFS had developed and owned innovative fuel technology.

F. MISLEADING CONDUCT

66. As to the truth of these representations, I am not satisfied in early 2010 that AFS was a genuine business.  It expended no funds nor received any revenue in 2010.  Mr Madden, initially a crucial figure in AFS, had ceased being paid by late 2009.  Although he remained having some involvement in early 2010, there was no evidence of anything of substance done by him.

67. Mr Ward stated that AFS was operating a business "up and until Michael Allen and Mick Madden wound down". But this occurred from late 2009, when Mr Madden ceased being paid, and early 2010, when Mr Allen was appointed as a magistrate. 

68. Mr Ward also accepted that AFS did not own any fuel technology so the second representation is also misleading. 

69. As to the representation concerning Eagle Park Stud, the evidence shows that it was owned and controlled by Mr Ward or perhaps by him and his wife. Mr Ward did, at all times, have a controlling interest in AFS.  Eagle Park Stud did apparently have eight employees and a turnover of around a million dollars.  In these circumstances, Eagle Park Stud may have been able to satisfy the sponsorship requirements. I am not satisfied that the representation about Eagle Park Stud is misleading.

G. KNOWINGLY CONCERNED

70. Although not given a great deal of attention by the parties, the statutory provisions relied upon by Mr Xiang require involvement by Mr Ward in AFS' representations.  The requirement of involvement can occur in a number of ways including being knowingly concerned in the representation.  Of course, Mr Ward was concerned in the representation by being the voice of it. But the requirement of knowing concern requires that he be aware of the contravention.

71. I have found misleading representations about AFS operating a genuine business in 2010 and AFS owning fuel technology. Mr Ward conceded in evidence that the latter was false and being the sole owner and director of AFS was well aware of the circumstance of AFS not conducting a genuine business in early 2010, at the time when the 2010 representations were made.

72. Accordingly, I am satisfied that Mr Ward was aware that representations about AFS owning fuel technology and conducting a genuine business were known by him to be misleading.

H. CAUSATION

73. The evidence of Mr Xiang concerning what caused him to make the investment is brief.  He says at paragraph 16 of his affidavit:

"I would have never proceeded to enter into the Share Agreement if the promises about the ability to sponsor me for permanent resident were not made to me by Mr Ward." 

74. The Court is entitled to give consideration to the usual order of things in assessing causation and if Mr Ward’s representation was calculated to induce Mr Xiang to enter into the share agreement and make the investment, there arose an inference that he was so induced: Gould v Vaggelas (1985) 157 CLR 215 at 236. See also Huntsman Chemical Co Australia Ltd v International Pools Australia Pty Ltd (1995) 36 NSWLR 242 where the failure of the person to whom the representation was made to give direct evidence of reliance did not prevent the Court from drawing an inference of reliance.

75. While Mr Xiang was willing to forego $50,000 to receive permanent residency, there was no evidence or suggestion that he was prepared to forego $500,000 whether or not he obtained residency. By the terms of the share sale agreement, he was entitled to repayment of his investment or the bulk of his investment within two years. These matters suggest that Mr Xiang acted on a belief that AFS could properly sponsor his permanent residency application and would repay his investment. Both of these matters necessarily involved a belief in AFS being a genuine business otherwise the guaranteed buy back was worthless and the sponsorship requirements could not be satisfied. I find that Mr Xiang did believe that AFS was a genuine operating business able to provide sponsorship, that this belief was central to his decision to invest the amount of $500,000 and that the belief was caused by Mr Ward’s representations. 

76. Mr Xiang made no mention of the ownership of fuel technology in his affidavit and I do not accept that he was motivated by this representation in his decision to provide the investment, other than that comments about the nature of the business would tend to support, in his mind, his belief that the business was genuine.

77. The evidence of the conversations between Mr Knight and Mr Zhu and between Mr Zhu and Mr Xiang do not mirror precisely the words Mr Ward stated. This difference in recollection is to be expected. The evidence does, however, indicate a consistent reference to AFS being able to provide sponsorship. This necessitated it being a genuine operating business, of substance, able to pay a substantial salary to a non‑resident employee. I accept that Mr Ward's representation to Mr Knight about this feature of AFS was substantially conveyed through to Mr Xiang and relied on by him. 

78. Mr Xiang also put an alternative case. He submitted that it was Mr Knight who was relevantly misled and relied upon Mr Ward's representations and that Mr Knight recommended the investment to Mr Xiang, who acted on that recommendation. He submitted that this was sufficient to establish the entitlement to damages. There is some authority that reliance by the plaintiff is not an essential feature of every misleading conduct case, see, for example, the judgment of Lockhart J in Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 109 ALR 638 at 643. Further, it must be accepted that if Mr Knight did not believe that AFS could satisfy the requirements of sponsorship he would not have recommended the investment and it would not therefore have occurred. The fact that Mr Knight was aware of income projections referring to year 1, year 2 and year 3 is not, in my mind, evidence of a belief on his part that the business was not operating. Thus, I accept that Mr Knight did rely on Mr Ward’s representations and recommended the investment to Mr Xiang. However, as Mr Xiang has not given evidence about the impact upon him of any recommendation by Mr Knight, I prefer to base my decision on the impact on Mr Xiang of Mr Ward's representations about AFS being a genuine operating business.

I. DAMAGES

79. As Mr Xiang has invested $500,000, which he would not otherwise have done but for Mr Ward's representation, he is entitled to judgment of that sum plus interest.  Interest from 2 March 2010 to date is $227,812.71. 

80. No claim is made for the $10,000 cash paid to Mr Knight by Mr Xiang in respect of the preparation of contractual documents, which was ultimately paid to Mr Zhu, and therefore I do not propose to include that amount in any damages award.

J. COSTS

81. The parties have asked that I make no order in respect of costs pending further submissions.

K. ORDERS

82. Accordingly, the orders of the Court are:

1. Judgment for plaintiff in the sum of $727,812.71 inclusive of interest.

2. Direct the parties within 7 days to provide to my associate a list of mutually convenient dates for an argument concerning costs.

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Decision last updated: 26 May 2016