Xiao v BCEG International (Australia) Pty Ltd

[2023] NSWCA 48

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Xiao v BCEG International (Australia) Pty Ltd [2023] NSWCA 48

Hearing dates:

6 February 2023

Date of orders:

23 March 2023

Decision date:

23 March 2023

Before:

Gleeson JA at [1]
Mitchelmore JA at [163]
Griffiths AJA at [164]

Decision:

(1)   Appeal allowed on ground 4 and is otherwise dismissed.

(2)   Set aside orders 2, 7, 8, 9 and 15 made by the primary judge on 22 July 2022 and orders 1, 2 and 4 made by the primary judge on 17 August 2022.

(3)   Direct the parties to bring in short minutes of order in respect of the amount of monetary judgment in order 1 made on 22 July 2022, together with compound interest (such judgment to take effect on 17 August 2022).

(4)   In the absence of agreement as to costs in this Court and below, direct the appellants to file and serve short written submissions on the question of costs in this Court and below within 14 days, the respondent to file and serve its response within a further 14 days and the appellants to file and serve any reply within a further 7 days. Any such submissions are not to exceed 3 pages.

(5)   Note that the question of costs will be determined on the papers.

Catchwords:

EQUITY — Equitable remedies — Whether claimant entitled to make “split election” seeking different remedies against different wrongdoers (defaulting fiduciary and accessories) — Where directors dissipated company’s monies — Where knowing receipt by corporate accessories — Whether knowing recipients liable for an account of profits and fiduciaries liable for equitable compensation

EQUITY — Fiduciary duties — Breach — Causation — Whether positive fiduciary duty to obtain informed consent to conflict of interest and duty — Whether failure to disclose to company the dissipation of company’s monies was causative of later losses on subsequent transaction

APPEALS — Procedural fairness — Whether appellants denied procedural fairness — Where primary judge assessed account of profits at trial rather than in post-judgment inquiry — Where appellants on notice of the claim for profits and claimant’s evidence — Where appellants did not file any responsive evidence

Legislation Cited:

Corporations Act 2001 (Cth), s 1305(1)

Evidence Act 2005 (NSW), s 69

Cases Cited:

Alliance Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43

Bagnall v Carlton [1877] LR 6 Ch D 371

Baxter v Obacelo Pty Limited (2001) 205 CLR 635; [2001] HCA 66

BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972

BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102

BCEG International (Australia) Pty Ltd v Xiao (No 3) [2022] NSWSC 1221

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

Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 276 ALR 646

Blackwood v Borrowes (1843) 4 Dr & War 441; (1843) 65 RR 729

BLB Corporation of Australia Establishment v Jacobsen (1974) 48 ALJR 372

Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118

Breen v Williams (1996) 186 CLR 71; [1996] HCA 57

Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2012] WASC 425

Canson Enterprises Ltd v Boughton (1991) 85 DLR 4th 129

Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161

Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99

Chan v Zacharia (1984) 154 CLR 178 at 204-205; [1984] HCA 36

Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25; [1968] HCA 50

Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312

Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524

Cornerstone Property & Developments Pty Ltd v Suellen Properties Pty Ltd [2015] Qd R 75; [2014] QSC 6

Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101; [1993] HCA 54

Davies v Ford [2021] EWHC 2550 (Ch)

De Vitre v Betts (1873) LR 6 HL 319

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

Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81

FM Partners Ltd v Marino [2018] EWHC 2905 (Comm)

FM Partners Ltd v Marino [2020] EWCA Civ 245

Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21

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

Gunasegaram v Blue Visions Management Pty Ltd; Blue Visions Management Pty Ltd v Chidiac [2018] NSWCA 179; [2018] 129 ACSR 265

Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL (1968) 121 CLR 483; [1968] HCA 37

Hill v Rose (1990) VR 129

Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154

Howard v Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21

Jacobus Marler Estates Ltd v Marler (1913) 114 LT 640

Jameson v Central Electricity Generating Board [1998] QB 323

King of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574

Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23

Mahesan S/O Thambiah v Malaysia Government Officers’ Co-operative Housing Society Limited [1979] AC 374

Michael Wilson & Partners Ltd v Emmott [2021] NSWCA 315

Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; [2011] HCA 48

National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd [1998] FCA 564

Neilson v Betts (1871) LR 5 HL 1

Nocton v Lord Ashburton [1914] AC 932

Novoship (UK) Limited v Yuri Nikitin [2014] EWCA Civ 908

O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262

Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31

Prest v Petrodel Resources Ltd [2013] 2 AC 415; [2013] UKSC 34

Stead v State Government Insurance Commission (1986) 161 CLR 141

Tang Man Sit v Capacious Investments Limited [1996] AC 514

Target Holdings Ltd v Redferns [1996] 1 AC 421

The Electric Furnace Co v Selas Corporation of America [1987] RPC 23

The Mayor, Aldermen, and Burgesses of the Borough of Salford v Lever [1891] 1 QB 168

Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574

Tracy v Mandalay Pty Ltd (1953) 88 CLR 215; [1953] HCA 9

United Australia Ltd v Barclays Bank Ltd [1941] AC 1

United Dominions Corporation v Brian Pty Ltd (1985) 157 CLR 1

Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102; [1995] HCA 14

Walden Properties Ltd v Beaver Properties Ltd (1973) 2 NSWLR 815

Warman International Limited v Dwyer (1995) 182 CLR 544; [1995] HCA 18

Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48

Wright v Lemon (as executor of estate of Wright) [2021] WASC 159

Yarrawonga Earthmoving & Garden Supplies Pty Ltd v Clem Court Pty Ltd [2014] VSC 439

Youyang Pty Limited v Minter Elllison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15

Texts Cited:

Meagher, Gummow and Lehane’s Equity: Doctrine and Remedies (5th Ed, 2015, Lexis Nexis Butterworths)

Category:

Principal judgment

Parties:

Yu Xiao (First appellant)
Yan Ying Chen (Second appellant)
Interlink Laboratory Pty Ltd (Third appellant)
Interlink Wagga Central Pty Ltd (Fourth appellant)
West Wyalong Marketplace Pty ltd (Fifth appellant)
BCEG International (Australia) Pty Ltd (Respondent)

Representation:

Counsel:
J C Giles SC / B Le Plastrier (Appellants)
D L Williams SC / N D Riordan (Respondent)

Solicitors:
HWL Ebsworth Lawyers (Appellants)
Thomson Geer (Respondent)

File Number(s):

2022/243445

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Civil

Citation:

[2022] NSWSC 972

Date of Decision:

22 July 2022

Before:

Rees J

File Number(s):

2019/310768

HEADNOTE

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

The respondent (BCEG) was engaged in two property development projects: the Varsity Lakes project and the Wagga project. The first and second appellants (Mr Xiao and Ms Chen, respectively) were the Australian-based directors of BCEG, and also engaged in their own development at West Wyalong (the West Wyalong project), which was conducted through one of their companies, the fifth appellant (WWM). BCEG received US$35m in finance for the Varsity Lakes project by way of an on-lending arrangement from its foreign parent company. Without the authorisation of BCEG, Mr Xiao and Ms Chen caused $3.4m of these monies to be diverted to WWM to fund the West Wyalong project (some of these funds were later repaid to BCEG). BCEG engaged Trojjan Constructions Pty Ltd (Trojjan) to build the Wagga project on land owned by the fourth appellant (IWC), which were both companies controlled by Mr Xiao and Ms Chen.

The primary judge found that Mr Xiao and Ms Chen breached their fiduciary duties owed to BCEG by diverting some of the Varsity Lakes funds to WWM and were liable for $2.52m together with compound interest as equitable compensation for these unauthorised payments. The primary judge also found that WWM was a knowing recipient of these payments and liable to account to BCEG for $2.94m in profits together with compound interest derived from the West Wyalong project, comprising rental income and capital gain. The primary judge further held that if BCEG had known that Mr Xiao and Ms Chen had diverted funding for the Varsity Lakes project to the West Wyalong project, then BCEG would not have entered into subsequent transactions in relation to the Wagga project with IWC and Trojjan. The primary judge awarded BCEG equitable compensation from Mr Xiao and Ms Chen in respect of BCEG’s losses on the Wagga project and ordered an account of profits from IWC in respect of the Wagga project. The quantum of equitable compensation awarded against Mr Xiao and Ms Chen for BCEG’s losses in respect of the Wagga project was assessed by reference to sums contained in financial statements of BCEG.

The main issues on appeal were:

whether BCEG was entitled to recover both equitable compensation from Mr Xiao and Ms Chen and an account of profits from WWM in relation to the West Wyalong project, and equitable compensation from Mr Xiao and Ms Chen and an account of profits from IWC in relation to the Wagga project;

whether the appellants were denied procedural fairness because the primary judge proceeded to assess the account of profits from the WWM;

whether there was a sufficient causal connection between the fiduciary defaults of Mr Xiao and Ms Chen in diverting some of BCEG’s Varsity Lakes funds to the West Wyalong project and the loss suffered by BCEG in later advancing funds to IWC and Trojjan for the Wagga project; and

whether the primary judge erred in relying upon BCEG’s financial statements as sufficient evidence of the quantum of its loss on the Wagga project.

The Court held (Gleeson JA, Mitchelmore JA and Griffiths AJA agreeing), allowing the appeal in part on the causation issue and otherwise dismissing the appeal:

BCEG was entitled to make a “split election” seeking equitable compensation from the defaulting fiduciaries and an account of profits by the knowing recipients. The principle that a plaintiff cannot obtain equitable compensation and an account of profits from a single defendant has no application to multiple wrongdoers whose liabilities differ in nature and extent. A gain-based remedy against the knowing recipient (who profited from its own misconduct) is not inconsistent with a compensation remedy against the defaulting fiduciary (who made no profit from the default): [68]–[70], [84].

Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161, applied. Tang Man Sit v Capacious Investments Limited [1996] AC 514, explained.

The appellants were not denied procedural fairness by the primary judge undertaking the account of profits at the trial stage. Having regard to the pleadings, evidence and conduct of the trial, the appellants were on fair notice of BCEG’s quantification of the claim for profits and made a forensic choice not to deal with the quantum aspect of BCEG’s claim: [102]–[105].

As to causation, disclosure by a fiduciary of a conflict of interest is not a positive obligation, but rather a defence to what would otherwise be a breach of duty. Hence, the failure by Mr Xiao and Ms Chen to obtain the informed consent from BCEG in relation to the Varsity Lakes payments diverted to the West Wyalong project did not constitute a breach of fiduciary duty. The breach of fiduciary was the dissipation by Mr Xiao and Ms Chen of BCEG’s funds to the West Wyalong project in circumstances where there was a conflict between their personal interests through their interests in WWM and their duties to BCEG. The primary judge erred in finding a causative connection between the breaches of fiduciary duty by Mr Xiao and Ms Chen and the later losses suffered by BCEG on the Wagga project, based on evidence of BCEG’s China-based directors that if they had known of the diversion of funds from the Varsity Lakes project they would not have entered into later transactions with BCEG and Trojjan in relation to the West Wyalong project: [144]–[145].

Maguire v Makaronis (1997) 188 CLR 449; Blackmagic Design Pty Ltd v Overliese (2011) 276 ALR 646; Gunasegaram v Blue Visions Management Pty Ltd; Blue Visions Management Pty Ltd v Chidiac [2018] NSWCA 179; [2018] 129 ACSR 265 at [153]; Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 at [122], applied.

Although not necessary to decide, the primary judge did not err in relying upon the financial statements of BCEG as sufficient evidence of BCEG’s loss on the Wagga project, if that loss had been recoverable, because it was the best evidence of the loss: [154]–[160].

Judgment

1. GLEESON JA: The primary question raised by this appeal is whether a plaintiff is entitled to make a “split election” seeking different remedies against different defendants being defaulting fiduciaries or knowing recipients of property the subject of the breach of fiduciary duty. The other issues on the appeal concern some elements of the relief granted against the appellants. These issues turn on questions of how the trial was run below, causation in equity and proof of quantum.

Nature of the case

2. The respondent, BCEG International (Australia) Pty Ltd (BCEG) is the Australian subsidiary of BCEG International Investment Co Ltd (BCEG China). From 2010 to 2017, the business of BCEG was run by Mr Yu Xiao and his wife, Ms Yan Ying Chen. The other directors of BCEG resided in China. During that period, BCEG was engaged in two development projects in Australia, one on the Gold Coast commencing in mid-2010 referred to as the Varsity Lakes project and the other in Wagga Wagga commencing in mid-2012 (the Wagga project). Mr Xiao and Ms Chen were also engaged in their own development at West Wyalong commencing in mid-2010 (the West Wyalong project).

3. BCEG brought proceedings against Mr Xiao and Ms Chen, and their companies, Interlink Laboratory Pty Ltd (IL), Interlink Wagga Central Pty Ltd (IWC) and West Wyalong Marketplace Pty Ltd (WWM) claiming equitable compensation or an account of profits in respect of alleged breach of fiduciary duties owed by Mr Xiao and Ms Chen as directors of BCEG and knowing assistance in those breaches and knowing receipt of BCEG’s property by IWC and WWM. BCEG also brought a money claim against IL.

4. The Varsity Lakes project involved the development of a private hospital on land owned by IL on the Gold Coast using US$35 million finance provided by the Export-Import Bank of China to BCEG China, pursuant to a facility dated 25 August 2010. Those monies were on-lent by BCEG China to BCEG on condition that the monies were to be used only for the purpose of the Varsity Lakes project. Between September 2010 and September 2012, BCEG received drawdowns under its facility with BCEG China. BCEG engaged Trojjan (BCEG) Pty Ltd (Trojjan) as the builder. Trojjan was controlled by Mr Xiao and Ms Chen.

5. The Wagga project involved a commercial and residential development on land owned by IWC at Wagga. On 1 July 2012, BCEG entered a contract with IWC to design and construct the Wagga project on a cost-plus basis with a budget estimate of $34 million, using bank finance from National Australia Bank (NAB). On 25 February 2013, BCEG entered a head construction contract with Trojjan (BCEG) Constructions Pty Ltd (Trojjan Constructions) by which Trojjan Constructions agreed to build the works for the Wagga project for a fixed sum of $25,454,667.50. Due to delays in the provision of finance from NAB, US$3.9 million was provided by BCEG China to BCEG in March 2013 and used by BCEG for the Wagga project. BCEG claimed that it paid a total of about $8.24 million to IWC in connection with the Wagga project.

6. The West Wyalong project involved a shopping centre and medical centre development on land owned by WWM in West Wyalong. This project commenced in mid-2010. Mr Xiao and Ms Chen paid the construction costs for the West Wyalong project by diverting some $3.4 million of the Varsity Lakes loan facility between October 2010 and July 2012. They did so dishonestly in two related ways. One was that when applying for certain drawdowns by BCEG of the Varsity Lakes facility, Mr Xiao and Ms Chen justified upcoming construction costs by reference to sham subcontracts between Trojjan and purported subcontractors (the sham subcontracts). The other was by causing the builder, Trojjan, to render false invoices to BCEG – ostensibly for the Varsity Lakes project but in fact for the West Wyalong project – which Ms Chen approved and paid using the Varsity Lakes facility (the West Wyalong payments).

7. In addition, between March and August 2103 Mr Xiao and Ms Chen transferred $1.7 million from BCEG to Beijing Dragon Pty Ltd (Beijing Dragon), another company associated with Mr Xiao for no apparent, legitimate purpose. On 25 August 2107, Mr Xiao ceased to be a director of BCEG, and Ms Chen ceased to be secretary of that company. Mr Xiao gave evidence at trial; Ms Chen did not.

8. In closing submissions at trial, BCEG submitted that it was entitled to make a split election, seeking different remedies against the defendants as defaulting fiduciaries or knowing recipients. Reference was made to the decision of Bergin J in King of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 (King Network). The appellants did not argue to the contrary. BCEG made that election in its closing submissions by claiming: (1) equitable compensation from Mr Xiao and Ms Chen in relation to the unauthorised dissipation of monies from the Varsity Lakes facility and an account of profits from WWM in respect of the use of those monies for the West Wyalong project, together with compound interest, and; (2) equitable compensation from Mr Xiao and Ms Chen in relation to loss suffered in advancing funds in respect of the Wagga project and an account of profits from IWC in respect of the Wagga project together with compound interest.

9. In her principal judgment, BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972 (principal judgment or PJ), the primary judge concluded that:

• Mr Xiao and Ms Chen breached their fiduciary duties as a director and de facto director respectively of BCEG in relation to the sham subcontracts/West Wyalong payments and the Beijing Dragon payments. There is no challenge to those findings or the finding that the breaches were dishonest.

• IWC and WWM were liable for being knowingly involved in those dishonest breaches by Mr Xiao and Ms Chen, and knowingly receiving the proceeds of these dishonest breaches, being the West Wyalong payments.

• if BCEG had known that Mr Xiao and Ms Chen had diverted the Varsity Lakes funding to the West Wyalong project using the fake invoices and sham sub-contracts, then BCEG would not have entered into the subsequent transactions with IWC and Trojjan in relation to the Wagga project.

10. As varied by her Honour’s second judgment, BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102 (supplementary judgment or SJ), the primary judge granted the following relief:

• judgment was entered against Mr Xiao and Ms Chen in the sum of $17,110,541.23 as equitable compensation comprising the principal sum of $11,681,333.15, together with compound interest of $5,429,208.08 in respect of (a) the unauthorised payments from the Varsity Lakes facility – $2,528,949.42; (b) the Beijing Dragon payments – $902,409.73; and (c) the loss on the Wagga project – $8,249,974,000;

(It is common ground that the compound interest relating to the principal sum of $2,528,949.42 in respect of the unauthorised payments from the Varsity Lakes facility is $528,942.99.)

• a declaration that BCEG was entitled to a constructive trust in respect of the profits derived by WWM from the West Wyalong project, and after assessing those profits as $2,944,632.72 comprising $1,710,000 for capital gain and $1,234,632.72 for rental income, together with compound interest, judgment was entered against WWM in the sum of $3,731,547.75;

• an account of profits was ordered in respect of the profits derived by IWC from the Wagga project;

• judgment was entered against IL in the sum of $6,937,929.17 on BCEG’s money claim (which is not the subject of appeal).

11. In a further judgment delivered on 12 September 2022, the primary judge ordered the appellants to pay BCEG’s costs on an indemnity basis: BCEG International (Australia) Pty Ltd v Xiao (No 3) [2022] NSWSC 1221.

The appeal

12. The appellants challenge the relief granted to BCEG on six grounds. Grounds 1, 2 and 5 contend that the primary judge erred in holding that BCEG is entitled to both equitable compensation from Mr Xiao and Ms Chen and an account of profits from WWM in relation to the West Wyalong project and IWC in relation to the Wagga project. The appellants say that permitting BCEG to make a “split election”, seeking different remedies against different defendants, is wrong in principle.

13. Ground 3 contends that WWM was denied procedural fairness because the primary judge proceeded to assess the account of profits from WWM in circumstances where the trial was conducted on the basis that there would be an inquiry after judgment on the liability issues, if BCEG elected to claim an account of profits against any of the defendants. Importantly, other than this complaint and the split election issue, there is no ground of appeal challenging the amount of the judgment against WWM for profits relating to the West Wyalong project.

14. Ground 4 contends that there is no causal link between the breaches of fiduciary duty by Mr Xiao and Ms Chen in relation to the unauthorised dissipation of monies from the Varsity Lakes facility and the loss suffered by BCEG in advancing funds in respect of the Wagga project.

15. Ground 6 contends, in the alternative to ground 4, that BCEG failed to prove the quantum of its loss in relation to the Wagga project was $8,248,974.

16. Thus, the issues raised in the appeal fall under four general headings: (1) the issue of split election; (2) procedural fairness; (3) causation in respect of the Wagga project; and (4) quantum of loss in respect of the Wagga project. As will be apparent, some of these issues are dependent on the outcome of earlier issues.

Summary of conclusions

17. For the reasons which follow, the causation argument raised by ground 4 should be upheld and the appeal allowed in part. The relief granted against Mr Xiao and Ms Chen and IWC relating to the Wagga project should be set aside. In the view I take, ground 6 relating to quantum of loss on the Wagga project does not arise. Grounds 1, 2 and 5 relating to split election should be dismissed. Having regard to the mixed outcome on appeal, the parties should be given an opportunity to make further submissions on costs in this Court and below.

The key findings of the primary judge

18. Given the absence of challenge to the findings on liability, except for the causation finding in relation to the loss on the Wagga project, it is convenient to outline the relevant facts by reference to her Honour’s unchallenged findings.

19. Mr Xiao became a director of BCEG on 11 June 2010 and ceased to be a director on 25 August 2017: PJ [298]. The China based directors of BCEG were Tieshan Ma, Qing Xing and Yan Xing. Ms Chen was a secretary of BCEG from 15 June 2011 to 25 August 2017: PJ [329]. Her Honour found that Ms Chen also acted in the position of a director of BCEG and owed duties to the company as such: PJ [344].

20. Mr Xiao and Ms Chen were the architects of the arrangement in respect of each of the West Wyalong payments in causing Trojjan to issue false invoices to BCEG, which purported to be in respect of the Varsity Lakes project but, in fact, concerned the West Wyalong project: PJ [350]-[351], [354]-[355]. Mr Xiao and Ms Chen were also active participants in the creation and dissemination of the sham subcontracts between Trojjan and the purported subcontractors in relation to the Varsity Lakes project: PJ [360]-[362].

21. To the extent that BCEG also sought relief in relation to the diversion of $1.28 million from the first drawdown of the Varsity Lakes facility and $2.05 million from the second drawdown, her Honour found that BCEG was not entitled to seek relief in respect of these additional allegations as they were not pleaded: PJ [376]. Her Honour further found at PJ [377]:

Further, to the extent that BCEG already sought an account of profits in respect of the Wagga project, the findings of fact which I have made in respect of the $2.05 million continue to apply in that exercise, being that the funds were provided by BCEG and not the defendants. BCEG is not however entitled to any findings that these payments amounted to a breach of directors’ duties nor specific relief in respect of these payments.

West Wyalong payments / sham sub-contracts

22. Her Honour found that the “best” evidence of the amount of the Varsity Lakes facility diverted to the West Wyalong project was recorded in BCEG’s 2014 financial statements, presumably on instruction of Mr Xiao and Ms Chen, and the figure of $3,423,739 (the West Wyalong payments) provided a “starting point” for quantifying the appropriate compensation against Mr Xiao and Ms Chen, but it was not the end of the matter: PJ [401]. Given that the West Wyalong payments were added to BCEG’s indebtedness to BCEG China under the Varsity Lakes facility but by the time of the trial that indebtedness had been reduced by the appellants’ repayments, her Honour found that the only evidence of a balance owing under the Varsity Lakes facility was BCEG’s financial statements or, more recently, the 2017 agreement between BCEG and BCEG China where “the outstanding principal of the private hospital project” was agreed to be $2,528,949.42: PJ [402].

23. Her Honour continued at PJ [407]:

After the 2013 financial statements, it will be recalled that Mr Xiao and Ms Chen brought the West Wyalong project onto the balance sheet in January 2015, merged BCEG China’s loans in respect of the Varsity Lakes project and the Wagga project and then apportioned BCEG China’s loans across five projects including the Varsity Lakes, Wagga and West Wyalong projects. The position was now as clear as mud. But nor did BCEG China adduce evidence of the funds which it said remained owing from BCEG in respect of the Varsity Lakes facility, where one would think such a record would be readily available to BCEG China.

24. The reference by her Honour to the West Wyalong project being brought onto the balance sheet of BCEG in January 2015 is a reference to BCEG’s June 2014 financial report which was signed by the directors, including Mr Xiao, on 21 January 2015.

25. Her Honour found that the amount of equitable compensation which would restore BCEG to the position it would have been in had there been no breach of Mr Xiao’s and Ms Chen’s equitable obligations is to require them to pay compensation sufficient to discharge BCEG’s remaining indebtedness to BCEG China under the Varsity Lakes facility, which the parties had agreed, in the 2017 agreement was $2,528,949.42. To this amount was added compound interest: PJ [411].

26. Her Honour observed at PJ [412] that equitable compensation in respect of the sham subcontracts overlapped with equitable compensation in respect of the West Wyalong payments. It is common ground on appeal that the false invoices the subject of the West Wyalong payments and the sham subcontracts were two sides of the same dishonest diversion of money from BCEG to the West Wyalong project.

27. Her Honour found that WWM received the benefit of the West Wyalong payments with actual or constructive knowledge of Mr Xiao’s breaches of his fiduciary obligations owed to BCEG, which led to the payments; WWM was liable as a knowing recipient of property in breach of fiduciary duty; the West Wyalong project constituted the traceable proceeds of the West Wyalong payments made in consequence of WWM’s knowing receipt; and WWM held the West Wyalong project on constructive trust for BCEG and was liable to account for the benefits obtained since completion of the project: PJ [430].

28. In the principal judgment at PJ [432] and order 11 made on 22 July 2022, her Honour took the view that the West Wyalong payments should be regarded as having been repaid (in part) by the defendants and that must also have consequences for the profit for which an account must be given because:

if the defendants have already repaid the West Wyalong payments, then these payments should be deducted from the profit as having been, effectively, made by the defendants. Where the sum of the capital gain and rental income is $3,244,632.70, before interest is added, then it may be that there is nothing left after accounting for the West Wyalong payments. I will wait to hear from the plaintiff in this regard, once the relevant interest calculations have been done.

29. Having reconsidered this approach to the assessment of profits derived by WWM, her Honour found in the supplementary judgment that there was no evidence that WWM paid for the construction of the West Wyalong project and there should be no set-off of the repayments made to BCEG in respect of the West Wyalong payments because such repayments were made by IL not WWM: at SJ [17]-[18]. Accordingly, her Honour varied order 11 made on 22 July 2022 and assessed the profits derived by WWM from the West Wyalong project as $1,710,000 for capital gain and $1,234,632.72 for rental income, together with compound interest. Judgment was entered against WWM in the sum of $3,731,547.75.

Wagga project

30. Addressing the claim for relief against Mr Xiao and Ms Chen in relation to monies totalling $8.249 million advanced by BCEG to IWC and the builder of the Wagga project, her Honour found at PJ [413]-[415]:

If BCEG had known that Mr Xiao and Ms Chen had diverted the Varsity Lakes funding to the West Wyalong project by rendering false invoices from Trojjan to BCEG, or known of the sham sub-contracts, then BCEG would not have entered into contracts with Interlink Wagga Central and Trojjan Constructions in respect of the Wagga project; BCEG would not have been willing to commit to an ongoing commercial relationship with entities associated with the couple. This is an unremarkable proposition and it was not suggested to BCEG’s witnesses that they would have proceeded otherwise. BCEG was ignorant of the fraud at the time it approved the Wagga project in November 2011 and continued to be so at the time it assumed contractual liabilities in connection with the project between July 2012 and February 2013.

BCEG advanced amounts to Trojjan or Trojjan Constructions that it would not otherwise have been required to advance, but for the breaches of duty committed by Mr Xiao and Ms Chen. The best evidence of the sums advanced in connection with the Wagga project is contained in the 2014 financial statements, which record the value of the ‘Working Capital The Mill Resid’ as $8,249,974. (The defendants also relied on this figure.) BCEG sought equitable compensation of $8,249,974, together with compound interest or, alternatively, a taking of accounts and an account of profits in respect of the Wagga project.

The defendants submitted that there was no evidence of any loss suffered by BCEG in relation to the Wagga project. While BCEG identified an amount stated in the 2014 financial statements for working capital of $8,249,974, it ignored the sum stated in the 30 June 2014 financial report of $3,241,526 as income received from that project. This, with respect, made no sense. Figures appearing in a profit and loss statement cannot be readily offset against balance sheet items. It does appear that, as at 31 December 2014, some $8.25 million had been used on the Wagga project. Further, it was said that this was a ‘no transaction’ case and there was no pleaded claim for relief in the form of a taking of accounts. That is incorrect. BCEG clearly sought equitable compensation or, alternatively, an order for the taking of accounts and an account of profits in respect of the Wagga project.

31. Her Honour found that IWC holds the profits of the Wagga project on constructive trust for BCEG and is liable to account to BCEG for these profits and that there should be an inquiry necessary to ascertain the profits that IWC in fact derived in connection with its liability as a knowing recipient: PJ [439].

Grounds 1, 2 and 5: split election

32. As indicated, the appellants did not object at trial to the split election by BCEG. In this Court, the appellants submit that in principle the plaintiff must make the same election as to remedy against the knowing recipient as the defaulting fiduciary, otherwise the order for compensation ceases to be compensatory, and there is an inconsistency in claiming different relief against different defendants. The appellants say that a plaintiff “cannot on the one hand condone the wrongful conduct of the knowing recipient by taking an account of profits, and on the other hand condemn the conduct of the fiduciary which was central to the liability of the knowing recipient by asking for equitable compensation from the fiduciary”.

33. Although these grounds raise a new point on appeal, other than reserving its position on costs if the new point was upheld, BCEG did not suggest that the point is one that could have been met by further evidence at the trial such that it is not open to the appellants to raise it on appeal: Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48 at [51].

The issue

34. Applied to the facts of this case, the essential question is whether BCEG can obtain cumulative remedies against different defendants: equitable compensation (including compound interest) from Mr Xiao and Ms Chen of $3,057,892.41 in relation to the dissipation of monies from the Varsity Lakes facility and an account of profits from WWM in relation to the West Wyalong project of $3,731,547.75.

35. The appellants say that an election by BCEG for equitable compensation from Ms Xiao and Ms Chen has the consequence that BCEG can only obtain the same remedy against WWM, not an account of profits from WWM in relation to the dissipation of monies from the Varsity Lakes facility. Conversely, the appellants say (subject to ground 3) that an election by BCEG for an account of profits from WWM has the consequence that BCEG can only obtain the same remedy from Mr Xiao and Ms Chen and since Mr Xiao and Ms Chen did not personally derive any profits from their breaches of duty, no profits can be recovered from them.

36. Subject to the causation and quantum issues raised by grounds 4 and 6, the same issue arises in relation to the award of equitable compensation from Mr Xiao and Ms Chen for loss in respect of the Wagga project of $8.249 million (not including compound interest), and the order for an inquiry as to the profits derived by IWC in respect of the Wagga project.

37. If correct, the appellants’ submission would place a significant limitation on the available equitable remedies against different defendants who are defaulting fiduciaries or knowing recipients or assistants of the unauthorised dissipation of company assets. The appellants say that the result for which they contend is not only justified but is required as a matter of principle because the same reasoning which applies to the need for election against a single wrongdoer applies equally to claims against multiple wrongdoers. BCEG says that it is entitled to obtain cumulative remedies of equitable compensation.

38. Before considering the issues raised by these grounds, it should be noted that none of the appellants make a claim for contribution against the other. Nor do the appellants challenge the decision of this Court in Michael Wilson & Partners Ltd v Emmott [2021] NSWCA 315 concerning the limitations on contribution between knowing assistants and the defaulting fiduciary, or that such limitations also apply to knowing recipients.

Relevant principles: the contrast between inconsistent remedies and cumulative remedies

39. Equitable compensation and an account of profits are both personal remedies: WarmanInternational Limited v Dwyer (1995) 182 CLR 544 at 557; [1995] HCA 18. As Gummow J said in Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 at 135:

Where the breach of duty produces not a gain to the fiduciary but a loss to the party to whom the fiduciary duty was owed, then the judgments of Viscount Haldane LC in Nocton v Lord Ashburton ([1914] AC 932 at 935) and of Sir Owen Dixon in McKenzie v McDonald ([1927] VLR 134 at 146-148) show that there is an obligation to account for the loss by provision of equitable compensation.

40. Speaking generally, the remedy of an account looks to the gain made by the party in breach (or by the knowing recipient or knowing assistant) while the remedy of equitable compensation looks rather to the loss suffered by the plaintiff.

41. The aim of equitable compensation is to restore the plaintiff, as nearly as possible, to the position the plaintiff would be in had no equitable breach occurred: Nocton v Lord Ashburton [1914] AC 932 at 952; O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272-273; Hill v Rose (1990) VR 129 at 143; Target Holdings Ltd v Redferns [1996] 1 AC 421 at 432, 439. The aim of an account of profits is to strip from the party in breach the gains made by reason of the breach (or by reason of their knowing receipt or knowing assistance): Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32 (Windeyer J); [1968] HCA 50.

42. Like all equitable remedies, an account of profits is within the discretion of the Court to be granted or withheld in accordance with settled principles: Warman at 368 referring to equitable defences such as estoppel, laches, acquiescence and delay, and approving the comments of Deane J in Chan v Zacharia (1984) 154 CLR 178 at 204-205; [1984] HCA 36, including that the liability to account would not arise where it would be “unconscientious to assert it”. See also Novoship (UK) Limited v Yuri Nikitin [2014] EWCA Civ 908 at [119], where it was said that an account of profits could be refused if “disproportionate in relation to the particular form and extent of the wrongdoing”.

43. An account of profits is an alternative to an award of equitable compensation: Warman at 559. The rationale for an election to receive compensation or alternatively an account of profits was stated by Lord Westbury in Neilson v Betts (1871) LR 5 HL 1 at 22, as follows: “[t]he two things are hardly reconcilable, for if you take an account of profits, you condone the infringement”. This principle was reaffirmed by the House of Lords at a subsequent hearing of the same case: De Vitre v Betts (1873) LR 6 HL 319 at 321, 324-325. Neilson was a patent infringement case. The passage from the speech of Lord Westbury has been cited with approval in other intellectual property cases, including by Windeyer J in Colbeam at 32 and by Mason CJ, Deane, Dawson and Toohey JJ in their joint judgment in Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 110; [1993] HCA 54.

40. The principle of election between inconsistent remedies of compensation or account of profits is of general application. It applies equally to breaches of trust (Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514 at 521) and breaches of fiduciary duty (Warman at 559). The joint judgment in Warman said at 559:

Of course, if the loss suffered by the plaintiff exceeds the profits made by the fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary. That election will bind the plaintiff. (Citation omitted.)

45. Although it was said in Dart Industries at 111 that the purpose of an account of profits was not to punish the defendant but to prevent their unjust enrichment, in Warman this rationale for an account of profits was restricted to the context of patent infringement, noting that “the liability of a fiduciary to account differs from that of an infringer in an intellectual property case” as the liability of a fiduciary rests on “the stringent rule that the fiduciary cannot profit from his trust”: at 557.

46. The election will generally only be irrevocable after one remedy is fully satisfied by the entry of judgment: Alliance Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38 at [64] (Kiefel CJ, Edelman, Steward, and Gleeson JJ).

The authorities

Warman

47. In support of split election, BCEG pointed to the statement in Warman at 569-570, that it was “arguable” that it would have been open to the plaintiff to have obtained equitable compensation against Dwyer, the fiduciary, and an account of profits against BTA and ETA, two corporate knowing assistants. However, given the way in which the parties ran the case in the Courts below, it was common ground in Warman that orders of the same nature should be made against all three defendants. Whilst these remarks in Warman are consistent with split election, they do not have the status of “seriously considered dicta” of a majority of the High Court: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [158].

Tang Man Sit v Capacious Investments Limited

48. In Tang Man Sit v Capacious Investments Limited at 522, Lord Nicholls of Birkenhead, delivering the judgment of the Privy Council, said, concerning cumulative remedies:

Faced with alternative and inconsistent remedies a plaintiff must choose between them. Faced with cumulative remedies a plaintiff is not required to choose. He may have both remedies. He may pursue one remedy or the other remedy or both remedies, just as he wishes. It is a matter for him. He may obtain judgment for both remedies and enforce both judgments. When the remedies are against two different people, he may sue both persons. He may do so concurrently, and obtain judgment against both. Damages to the full value of goods which have been converted may be awarded against two persons for successive conversions of the same goods. Or the plaintiff may sue the two persons successively. He may obtain judgment against one, and take steps to enforce the judgment. This does not preclude him from then suing the other. There are limitations to this freedom. One limitation is the so called rule in Henderson v. Henderson (1843) 3 Hare 100. In the interests of fairness and finality a plaintiff is required to bring forward his whole case against a defendant in one action. Another limitation is that the court has power to ensure that, when fairness so requires, claims against more than one person shall all be tried and decided together. A third limitation is that a plaintiff cannot recover in the aggregate from one or more defendants an amount in excess of his loss. Part satisfaction of a judgment against one person does not operate as a bar to the plaintiff thereafter bringing an action against another who is also liable, but it does operate to reduce the amount recoverable in the second action. However, once a plaintiff has fully recouped his loss, of necessity he cannot thereafter pursue any other remedy he might have and which he might have pursued earlier. Having recouped the whole of his loss, any further proceedings would lack a subject matter. This principle of full satisfaction prevents double recovery.

49. This passage was cited with approval in Baxter v Obacelo Pty Limited (2001) 205 CLR 635; [2001] HCA 66 at [39] (Gleeson CJ and Callinan J), where the clients had settled their negligence claim against the solicitor and the negligence claim against an employee of a solicitor was not barred by the defence of double satisfaction. Gleeson CJ and Callinan J said at [47], concerning the principle of double satisfaction:

If there has been a judicial assessment of the whole of the plaintiff's loss or damage, resulting in an award of damages by way of judgment in that amount against one tortfeasor, satisfaction of the judgment by that tortfeasor will put an end to any claim, or possible claim, against another tortfeasor, whether a joint tortfeasor or one of several concurrent tortfeasors, for two reasons. First, the damage, as assessed by judicial decision, has been fully recouped and the claim against another tortfeasor lacks a subject matter. Where, as here, damage is an essential element of the cause of action, that element will have gone. Secondly, it would be inequitable to permit additional recovery.

50. Gummow and Hayne JJ were to similar effect, accepting at [56] as a correct statement of the law in Australia, the following passage by Auld LJ in the English Court of Appeal in Jameson v Central Electricity Generating Board [1998] QB 323 at 338, concerning distinct causes of action in respect of the one loss:

The defence of satisfaction, in the sense of full satisfaction of a wrong or liability, is different from that of accord and satisfaction. First, it must be full satisfaction and, second, it must be given, executed. Its basis is the simple one that a claimant should not receive more than is necessary to compensate him for the wrong or wrongs done to him or in respect of the liability or liabilities owed to him. Where accord and satisfaction cannot be relied upon, as where a claimant settles with only one of two concurrent tortfeasors, the tortfeasor facing a claim will nevertheless have a defence if the plaintiff's settlement with the other has fully compensated him for the separate wrongs done to him.

51. It follows from Tang Man Sit and Baxter that if BCEG is entitled to cumulative remedies, the rule or principle of double satisfaction is no reason to refuse to enter separate judgments against Mr Xiao and Ms Chen for compensation and against WWM for profits. Insofar as the appellants submit that the separate judgments against Mr Xiao and Ms Chen for compensation and against WWM for profits overcompensate BCEG because of the double satisfaction principle, this is addressed at [72] below.

Cassaniti

52. Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161 does not assist the appellants’ argument. In that case, the Court distinguished the effect in equity of a release of one of several trustees and the type of circumstance in Blackwood v Borrowes (1843) 4 Dr & War 441; (1843) 65 RR 729 where the beneficiary elected to accept an investment in securities the making of which was the breach of trust complained of. The Court (Gleeson, Leeming and Mitchelmore JJA) observed at [97]:

… It is one thing for a beneficiary to release one of a number of trustees, and another thing entirely for the beneficiary to adopt, or ratify, or accept the conduct which was a breach of trust. It seems plain enough that a beneficiary who had accepted, and taken the benefit of, conduct which is in breach of fiduciary duty cannot thereafter sue an accessory for knowing assistance in the breach. That is not because of the release, but because the plaintiff would be approbating and reprobating, or adopting inconsistent stances in relation to the same wrongful conduct.

53. Contrary to the appellants’ submission that the language in Cassaniti of adoption, acceptance, and ratification of the trustee’s breach of duty echoes that used in Neilson when discussing the effect of electing for an account of profits, there is no analogy with the present case. BCEG has not adopted, accepted, and ratified the breaches of fiduciary duty by electing for equitable compensation from Mr Xiao and Ms Chen (who made no profit from the default). Nor has BCEG condoned the wrongful conduct of WWM by electing for an account of profits from WWM (who profited from its own misconduct). The gain-based remedy of an account of profits strips the ill-gotten gains from WWM.

54. Further, the appellants’ submissions overlooked that Cassaniti accepted, by reference to Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106] and Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [557], that the beneficiary may choose to require the fiduciary to account for the property misapplied and for the accessory to account for profits. The Court said at [102]-[103]:

Some differences reflected the range of remedies available in equity. The clearest position is where a fiduciary and an accessory each make profits from a breach of trust. There is no reason for the profits for which the fiduciary must account to be equal to the profits for which the accessory must account. Alternatively, the beneficiary may choose to require the fiduciary to account for the property misapplied, and for the accessory to account for profits the accessory has derived. Those are examples of what the High Court contemplated when it said in Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106] that:

“the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ”.

In Grimaldi v Chameleon Mining NL (No 2) at [557] the Full Court said that:

“the fiduciary and the third party will ordinarily be only severally liable for the profits each makes in consequence of the breach of fiduciary duty or breach of trust in which it participated/was a recipient”

and that “Each is not responsible for the other’s profits”.

Michael Wilson

55. Michael Wilson involved separate actions by MWP against the fiduciary Mr Emmott, being arbitration proceedings in London, and against the alleged knowing assistants, Mr Nicholls and Mr Slater in New South Wales proceedings. The joint judgment (Gummow ACJ, Hayne, Crennan and Bell JJ) summarised the procedural history at [20]-[21]:

MWP alleged that Mr Emmott had acted in breach of contractual and fiduciary obligations he owed to MWP. It claimed, in the London arbitration, an account of the profits Mr Emmott had made from what it characterised as clients and work he had diverted from MWP to his own benefit. MWP claimed damages for breach of contract, and compensation for the loss occasioned to it by Mr Emmott's breach of fiduciary duties. It appears likely that at some point in the London arbitration MWP also claimed that there should be a general accounting between it and Mr Emmott (in effect, an accounting as between partners) but on the basis of wilful default by Mr Emmott. That was the relief the arbitrators granted.

In the New South Wales proceedings, MWP alleged that Messrs Nicholls and Slater had acted in breach of their contractual and fiduciary obligations and had knowingly assisted Mr Emmott in his breaches of his fiduciary obligations. MWP claimed (amongst other relief) damages, compensation and an account of profits.

56. In the New South Wales proceedings, Mr Nicholls and Mr Slater were each found liable as knowing assistants in Mr Emmott’s breaches of fiduciary duty and held jointly and severally liable to pay to Michael Wilson various sums as compensation. In the London arbitration, an interim award held that Mr Emmott was liable to MWP in some but not all of the respects in which Einstein J had found Mr Nicholls and Mr Slater liable to MWP for knowingly assisting in Mr Emmott’s breaches of his fiduciary obligations.

57. An appeal was allowed by the Court of Appeal on the ground that there had been a reasonable apprehension of bias by the trial judge. The Court stayed a new trial on the ground of abuse of process given the relationship between the claims made in the New South Wales proceedings and those made in the London arbitration. An appeal to the High Court was allowed. It is only necessary to refer to the reasoning by which the High Court rejected the abuse of process argument.

58. The joint judgment (Gummow ACJ, Hayne, Crennan and Bell JJ) considered the issue of the liability of a knowing assistant, noting the argument that the liability of the respondents to MWP for knowing assistance was no more than “ancillary or coordinate” with that of the defaulting fiduciary: at [100]. The joint judgment rejected that understanding of the relationship between the liabilities of a defaulting fiduciary and a knowing assistant of the fiduciary's breach; and, rejected as inaccurate the argument that the liability of the respondents was “necessarily confined by the extent of [the defaulting fiduciary’s] liability” or that the respondents’ liability to the principal was no more than accessorial to the principal wrongdoing of the defaulting fiduciary: at [105]. The joint judgment (with which Heydon J agreed on this issue at [119]), continued at [106]:

As MWP rightly pointed out, this Court has held that liability to account as a constructive trustee is imposed directly upon a person who knowingly assists in a breach of fiduciary duty. The reference to the liability of a knowing assistant as an “accessorial” liability does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another. It follows, as MWP submitted, that the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ. It follows that neither the nature nor the extent of any liability of the respondents to MWP for knowingly assisting Mr Emmott in a breach or breaches of his fiduciary obligations depends upon the nature or extent of the relief that MWP obtained in the arbitration against Mr Emmott. (Emphasis added.)

59. The joint judgment acknowledged at [107] that the liability of the respondents as knowing assistants to a breach of fiduciary duty depends upon proof, in proceedings against them, of a relevant breach of fiduciary duty by the defaulting fiduciary, but emphasised at [109]:

As already explained, the common starting point for all of the arguments that there was or would be an abuse of the process of the Supreme Court was that MWP's claims against the respondents in the Supreme Court were limited by the nature and extent of the relief it sought and obtained in the arbitration of its claims against Mr Emmott. That premise is flawed.

60. The parties diverged as to the proper reading of [106] in Michael Wilson. The appellants’ submission that the word “may” was used in the sense of “either/or” should be rejected. That is a misreading of [106]. It ignores the statement in the preceding sentence of [106], which was emphasised in [109], that the relief awarded against the defaulting fiduciary and the knowing assistant will not necessarily coincide in either nature or quantum. The word “may”, read together with the word “and” in the italicised passage above in [106], makes plain that a plaintiff is entitled to cumulative remedies being a compensatory remedy against the fiduciary (who made no profit from the default) and a gain-based remedy of an account of profits against the knowing assistant (who profited from his or her own misconduct).

Possible exceptions to the several liability of knowing recipients

61. Michael Wilson establishes that the liability of a knowing assistant for loss suffered by the principal is several only: at [106]. See also Meagher, Gummow and Lehane’s Equity: Doctrine and Remedies (5^th Ed, 2015, LexisNexis Butterworths) at [23-555], footnote 419.

62. There seems to be no reason in principle for distinguishing the liability of a knowing assistant or knowing recipient. Recipient liability is also fault-based and gives rise to a personal liability to the claimant which is separate and distinct from that of the fiduciary: Grimaldi at [267], [557]; Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81 at [44]; Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118 at [113].

63. In the present case, the claims by BCEG against IWC and WWM founded on recipient liability were for an account of profits. As noted in Cassaniti at [103], it was accepted in Grimaldi at [557] that the third party’s liability to an account of profits is generally a several liability, and only in respect of the profits derived by the third party. Grimaldi identified two exceptions to this principle: the “alter ego” exception, and the “acting in concert” exception.

“alter ego” exception

64. The “alter ego” exception, as accepted and applied in Grimaldi, was described at [556] as:

… where the advantage of a fiduciary’s/trustee’s wrongdoing accrues to a third party (whether as a knowing recipient or an assistant) and the third party is the alter ego/‘nominee’ (usually corporate) of the fiduciary, its liabilities will be joint and several with the fiduciary’s: Green v Bestobell at 40; see Gencor ACP Ltd v Dalby (where the action was against the fiduciary for commission payments ‘diverted into his own creature company’ and for which both the company and the fiduciary were held accountable).

“acting in concert” exception

65. The “acting in concert” exception as identified but not decided in Grimaldi, was described at [558] as:

… if the fiduciary and the third party assistant or recipient act in concert to secure a mutual benefit, be this to misappropriate trust property for a particular mutually beneficial purpose or to participate in a breach of fiduciary duty to secure a mutual advantage (eg a business opportunity), they are jointly and severally liable to the wronged beneficiary/principal to restore the trust or to account for the profits made. In CMS Dolphin, directors were held equally liable with the corporate vehicle they formed to take unlawful advantage of business opportunities they provided to it: ‘[T]he reason is that they have jointly participated in the breach of trust’: at [103] emphasis added; Green v Bestobell; see also the facts in Macdonald v Hauer, above; but cf the criticism in Ultraframe (UK), at [1561]-[1576]. One can readily understand why, when wrongdoers so entangle their affairs, that the law as a matter of legal policy might wish to make it their responsibility – and not a claimant’s – to untangle them for accountability purposes.

66. It is not necessary to address either exception or their possible implications for a split election in this case. No case was pleaded or run at trial by the appellants that either exception applied here. Nor was it argued by the appellants on appeal that Mr Xiao and Ms Chen were jointly and severally liable with WWM for an account of profits in relation to the West Wyalong project, with the consequence that BCEG must make the same election between remedies against both Mr Xiao and Ms Chen on the one hand and WWM on the other.

135. Blackmagic has also been followed in decisions of this Court: Gunasegaram v Blue Visions Management Pty Ltd; Blue Visions Management Pty Ltd v Chidiac [2018] NSWCA 179; [2018] 129 ACSR 265 at [153]; Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 at [122].

136. For completeness, I will briefly address the three cases referred to by Besanko J at [107]: see [132] above. Tracy v Mandalay was a promotors case. The joint judgment of Dixon CJ, Williams and Taylor JJ stated at 240:

Promoters may sell their property to the new company but they are under a fiduciary duty to disclose to the new company that they are doing so and under a duty to place it in a proper position to decide whether to accept the offer or not by appointing an independent board and fully disclosing the whole position to that board.

138. This statement is consistent with the well-established principle in Kisch which was accepted in United Dominions Corporation v Brian Pty Ltd, referred to at [113] above. It has no application to the present case.

139. BLB Corporation takes the matter no further. As Lindgren J noted in Citibank, the reasoning in BLB Corporation demonstrates the way in which disclosure, if made, operates as a defence to a claim of breach of fiduciary duty.

140. The facts in Walden Properties are conveniently summarised by Lindgren J in Citibank at page 28 as follows:

… B was held to owe fiduciary duties to W in negotiating for the purchase of shares in which W was, provisionally, to take a 1/3 interest. B was, in effect, a self-appointed agent of W. It was said that B's duties included a duty to make full disclosure of material circumstances concerning the negotiations, the shares and their value: at 833D, 835F, per Hope JA, Kerr CJ concurring. However, (at 836) this duty was clearly related to the "unauthorised profit rule" and seen as a duty arising where an agent is buying property from, or selling property to, his or her principal. In that case it was apparently considered that B was purchasing the shares and then on-selling the one third interest to W. The effect of this was that all information relating to the shares being sold had to be disclosed to W in order for the apparent conflict or the breach of the profit rule to be excused.

141. Hope JA considered that B owed W “a fiduciary obligation, albeit of a limited character” arising from a relationship of agency: Walden Properties at 833C, 834E. The duties on B were described by Hope JA as being limited to (at 833D):

carrying on the negotiations with due regard to Walden's interests, giving Walden a reasonable opportunity to make a final decision whether to join in the purchase agreement, and making a full disclosure to Walden of all material circumstances concerning the negotiations, the shares and their value.

142. Later, Hope JA characterised B’s fiduciary obligation (at 835G) in the following terms:

it required Beaver Properties to make full disclosure to Walden of all material information which it had in respect of the shares the subject of the offer, and any fact would be material which would be relevant or necessary for Walden to consider in deciding whether to accept the offer.

143. In support of this proposition, Hope JA cited Jacobus Marler Estates Ltd v Marler (1913) 114 LT 640 to the effect that fiduciary law dictates that, without the fully informed consent of the principal, an agent must not assume a position where his or her own interests conflict with the duty to the principal, or retain a profit acquired in transactions within the scope of the agency arrangement. This formulation of the relevance of disclosure, and Hope JA’s treatment of the issue, ultimately go no further than the orthodox position that disclosure is only a means of avoiding a breach.

Conclusion

144. There is no reason to doubt Maguire v Makaronis or the subsequent intermediate appellate decisions, including of this Court, that disclosure by a fiduciary of a conflict of interest (or duty) is not a positive obligation, but rather a defence to what would otherwise be a breach of duty. Her Honour’s causation finding cannot be sustained in the manner contended for by BCEG.

145. The finding which should be made is that if the breach of duty by Mr Xiao and Ms Chen in relation to the dissipation of monies from the Varsity Lakes facility had not occurred, BCEG would still have entered into the Wagga project which was ultimately loss making. Accordingly, ground 4 should be upheld.

Ground 6: Quantum of loss on Wagga project

146. The findings of the primary judge in relation to quantum at PJ [414]-[415] are set out at [30] above.

147. The appellants submit that BCEG failed to prove the quantum of its loss in relation to equitable compensation awarded against Mr Xiao and Ms Chen in respect of the Wagga project. The appellants say that her Honour erred in relying upon the figure of $8,249,974 as constituting sufficient evidence of the quantum of the loss, or alternatively, by not reducing that amount by $3,241,526. The appellants point to the observation by the primary judge at PJ [407], which is set out at [23] above, that the position in relation to BCEG’s China loans to BCEG as recorded in BCEG’s 2014 financial statements “was now clear as mud”.

148. In their reply submissions, the appellants raised a new argument by reference to the 31 December 2016 financial report of BCEG, that the correct figure is $6,954,780.

149. Given the conclusion in relation to ground 4, the quantum issue does not arise. Nevertheless, I will briefly indicate my views.

150. The appellants’ submission that BCEG led no evidence of the quantum of its loss for the equitable compensation claim should be rejected. At trial, BCEG relied upon the 2014 financial statements of BCEG signed by its directors, including Mr Xiao, which recorded the apportionment of the previous BCEG China loans across five projects, including the Varsity Lakes, Wagga and West Wyalong projects. The non-current liability shown as “working capital The Mill resid” of $8,249,974 as at June 2014 represented the amount of BCEG’s borrowings from BCEG China which had been advanced to the builders in connection with the Wagga project.

151. The 2014 financial statements of BCEG were business records of the company within s 69 of the Evidence Act 2005 (NSW). Moreover, by s 1305(1) of the Corporations Act, the financial statements of BCEG were prima facie evidence of any matter stated or recorded in the accounts which was a book kept by BCEG under the requirements of the Corporations Act.

152. Next, the appellants complain that her Honour’s language in PJ [414] referring to the “best evidence” of the sums advanced in connection with the Wagga project is that contained in the 2014 financial statements of BCEG which record the value of the “working capital of The Mill” as $8,249,974, was not a finding on the balance of probabilities of what BCEG had proved, but involved a search to aid BCEG appropriate to “a case where a plaintiff cannot adduce precise evidence of what has been lost”. That submission should be rejected.

153. On a fair reading of her Honour’s reasons, the reference to “best evidence” means what it says. BCEG had drawn down money from BCEG China which it had paid to Trojjan as the builder of the Wagga project. In BCEG’s 2014 financial report, this amount was recorded as $8,249,974.

154. The appellants further submit that insofar as the profit and loss statement in BCEG’s 2014 financial report recorded income received from the Wagga project of $3,241,526, this casts doubt over the figure in the balance sheet of $8,249,947. That is because, the submission continued, the liability of some $8 million should be set off against income of some $3 million. There are several difficulties with this submission.

155. First, it conflates an item recorded on the revenue account being an amount of income received over a financial period with an item recorded in the balance sheet which records the amount of the liability of BCEG to BCEG China as at the end of the financial period.

156. Second, her Honour’s rejection of the appellants’ setoff argument was consistent with the principles of double-entry accounting. Applying those principles, the proper inference is that the corresponding debit entry to the credit entry in respect of income received of $3.241 million was either an increase in assets or a decrease in liabilities which would already have been reflected in the balance sheet position at the end of the 2014 financial period.

157. Third, there was no error by her Honour in not reducing the figure of $8,249,974 by $3,241,526 since the appellants did not lead any evidence that the figure of some $8.25 million in the 2014 balance sheet was inaccurate, let alone by reason of the amount of income received from the Wagga project during the financial year, as recorded in the 2014 profit and loss statement.

158. Turning to the appellants’ new argument raised in their reply submissions relying on BCEG’s December 2016 financial report, the appellants say that there is no consistent accounting treatment over five financial reports, and it was not open to her Honour to select the figure in the June 2014 financial report instead of the December 2016 financial report, which records an amount of $6,954,780 as the non-current liability in respect of the Wagga project loan. Again, this submission should be rejected for several reasons.

159. First, the figure of $8,249,974 appears consistently as a non-current liability in the 30 June 2014, 31 December 2014, 30 June 2015, and 31 December 2015 financial reports of BCEG. Second, the December 2016 financial report which contains the lesser figure of $6,954,780 was not signed by Mr Xiao. Third, Mr Xiao gave no evidence explaining the reduction in figures between the December 2015 financial report and the unsigned December 2016 financial report, or why the latter figure should be taken to be correct.

160. If it were unnecessary to determine the quantum issue, in my view, ground 6 should be rejected.

Conclusion and Orders

161. The appeal has succeeded in part on the causation issue (ground 4). In my view, ground 6 does not arise and the other grounds have not been made out. Given the mixed outcome on appeal, the parties should be afforded an opportunity to make submissions as to the appropriate costs orders in this Court and below. The issue of costs should be decided on the papers.

162. I propose the following orders:

1. Appeal allowed on ground 4 and is otherwise dismissed.

2. Set aside orders 2, 7, 8, 9 and 15 made by the primary judge on 22 July 2022 and orders 1, 2 and 4 made by the primary judge on 17 August 2022.

3. Direct the parties to bring in short minutes of order in respect of the amount of monetary judgment in order 1 made on 22 July 2022, together with compound interest (such judgment to take effect on 17 August 2022).

4. In the absence of agreement as to costs in this Court and below, direct the appellants to file and serve short written submissions on the question of costs in this Court and below within 14 days, the respondent to file and serve its response within a further 14 days and the appellants to file and serve any reply within a further 7 days. Any such submissions are not to exceed 3 pages.

5. Note that the question of costs will be determined on the papers.

163. MITCHELMORE JA: I agree with Gleeson JA.

164. GRIFFITHS AJA: I agree with Gleeson JA.

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Amendments

23 March 2023 - Typographical amendments made to decision.

Decision last updated: 23 March 2023