Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd

[2021] NSWSC 614

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2021] NSWSC 614

Hearing dates:

19 March 2021; further written submissions ending 26 March 2021

Date of orders:

31 May 2021

Decision date:

31 May 2021

Jurisdiction:

Equity

Before:

Parker J

Decision:

See [208]

Catchwords:

CIVIL PROCEDURE – judgments and orders – application to set aside consent judgment on the ground of illegality – dispute concerning loan agreement – where money originally came from China – where lender first transferred money to borrower in China – where borrower then used an internet business to transfer money to Australia – where internet business was not an approved foreign exchange bank in China – whether transfers to Australia were contrary to Chinese foreign exchange laws – consideration of principle in Foster v Driscoll and Regazzoni v KC Sethia – evidence did not establish a breach of Chinese law – transfer of money via internet business did not involve foreign exchange trading – transactions did not result in “serious” interference with market order – even if an offence had been committed, it was doubtful whether that meant the loan was illegal under Australian law – application was too late in any event – consent judgment had been regularly and legally entered by consent – application dismissed

Legislation Cited:

Uniform Civil Procedure Rules 2005 (NSW), rr 36.15, 36.16

Cases Cited:

Application of Rinehart: 2020/142504 (No 2) [2021] NSWSC 364

Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65

Burrell v R (2008) 238 CLR 218

Clone Pty Ltd v Players Pty Ltd (2018) 264 CLR 165

Emeraldian Ltd Partnership v Wellmix Shipping Ltd [2011] 1 Lloyd’s Rep 301

Foster v Driscoll [1929] 1 KB 470

Fullerton Nominees Pty Ltd v Darmago [2000] WASCA 4

Harvey v Phillips (1956) 95 CLR 235

Jones v Dunkel (1959) 101 CLR 298

Lewis v Combell Constructions Pty Ltd (1989) 18 NSWLR 528

Mahonia Ltd v JP Morgan Chase Bank (No 1) [2003] 2 Lloyd’s Rep 911

Mahonia Ltd v JP Morgan Chase Bank (No 2) [2004] EWHC 1938 (Comm)

McLachlan v Sydney Trains [2021] NSWSC 283

Ostrowski v Palmer (2004) 218 CLR 493

Owners-Strata Plan No 57,164 v Yau (2017) 96 NSWLR 587

Regazzoni v KC Sethia (1944) Ltd [1958] AC 301

Singh v Ali [1960] AC 167

Waugh v Morris (1873) LR 8 QB 202

Texts Cited:

Heydon, J D, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths)

Heydon, J D, Heydon on Contract: The General Part (5th ed, 2019, Lawbook Co.)

Category:

Procedural rulings

Parties:

GR Capital Group Pty Limited (Receivers and
Managers appointed) (Subject to Deed of
Company Arrangement) (First Applicant/Defendant)
The One Capital Group Pty Limited (Subject to Deed of Company Arrangement) (Second Applicant/Defendant)
Wensheng Liu (Third Applicant/Defendant)
Xinfeng Australia International Investment Pty Limited (First Respondent/Plaintiff)
Yuqing Liu (Second Respondent/Plaintiff)

Representation:

Counsel:
A Macauley (Applicants)

Solicitors:
Hugh & Associates Lawyers (Applicants)

File Number(s):

2018/244781

Publication restriction:

Nil

Judgment

1. Before the Court is an application by way of notice of motion. In October 2018, pursuant to consent orders, judgment was entered in favour of the plaintiffs against the defendants in the sum of $10 million. That judgment has not been enforced. The defendants move to set it aside on the ground of illegality.

2. The third defendant, Liu Wensheng, is a Chinese Australian businessman and property developer. He has been an Australian resident since 2002. He was a director, and apparently controlled the affairs, of the other two defendants, GR Capital Group Pty Limited (“GR Capital”, the first defendant) and The One Capital Group Pty Limited (“One Capital”, the second defendant).

3. The proceedings arise out of dealings between Liu Wensheng and the second plaintiff, Liu Yuqing. Liu Yuqing (no relation) is a Chinese businessman who is, or was at the relevant time, the chief executive of Tangshan Xinfeng Thermoelectric Group Limited (“Xinfeng Thermoelectric”), a substantial Chinese industrial company.

4. The first plaintiff, Xinfeng Australia International Investment Pty Limited (“Xinfeng Australia”) was incorporated in Australia in 2016, apparently for the purposes of the dealings which are the subject of the proceedings. Liu Yuqing is its sole shareholder and one of its directors. At all material times the company appears to have been under the control of Liu Yuqing or persons who reported to him.

5. As a result of the consent judgment, receivers were appointed to GR Capital and administrators were appointed to both GR Capital and One Capital. Deeds of company arrangement were executed for both companies, which satisfied the claims of creditors other than the plaintiffs in these proceedings, and Liu Wensheng has now resumed control of the companies.

Background and procedural history

6. In substance, the plaintiffs’ claim in the proceedings was to recover a series of payments, totalling just over 54 million Chinese yuan, made by Liu Yuqing to Liu Wensheng in 2016 (approximately $10 million at the then exchange rate). In this judgment I use ¥ to denote figures in Chinese yuan; the currency is also known as renminbi (RMB).

7. The payments in question represented part of intended investments in two property development projects at Hurstville in Sydney. The first project (referred to as “One Treacy”) involved the development of land at Treacy Street owned by GR Capital. The second involved the purchase and development by One Capital of property referred to as “Landmark Square”.

8. The ¥54 million was paid to Liu Wensheng in China who then “transferred” a similar amount to Australia in a series of payments. I use inverted commas around the word “transferred” because what Liu Wensheng actually did was to transfer the money, in yuan, to recipients in China, in exchange for having the equivalent monies made available to him in Australian dollars in Australia. One question in the proceedings, to which I refer in more detail below, is whether this involved a contravention of Chinese exchange control laws.

9. The payments from Liu Yuqing to Liu Wensheng took place between March and September 2016. They were the subject of a suite of loan and security documents executed in July of that year. The payments were documented as drawdowns of a $10 million loan from Xinfeng Australia to One Capital, guaranteed by GR Capital and Liu Wensheng personally (other securities were provided but it is not necessary for the purposes of this judgment to say any more about them).

10. The plaintiffs’ statement of claim was filed on 9 August 2018. The course of the proceedings was described by Ward CJ in Eq in an interlocutory judgment delivered in November 2019 (Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2019] NSWSC 1546) at [5]-[17]. The following summary is provided for the purpose of this judgment.

11. The defendants denied liability for the plaintiffs’ claim. They did not admit executing the loan documentation and said that the documents, if signed by them at all, were signed as drafts to help Liu Yuqing demonstrate to people in China that he had made investments in Australia. The defendants also cross-claimed on the basis that the true nature of the arrangement was a joint venture and only part of the monies promised by Liu Yuqing had been provided.

12. The matter was given an expedited trial, beginning on 18 October 2018. On that day, the Court was informed that the parties had settled. Orders were made by consent which provided, among other things, for the entry of judgment in favour of Xinfeng Australia against all of the defendants for the principal sum of $10 million, the dismissal of the cross-claim, and an order that the defendants pay the plaintiffs’ costs on an indemnity basis. The orders also allowed the plaintiffs to apply for a further judgment for interest on the loan amount.

13. The plaintiffs did not take any immediate steps to have their interest entitlement quantified. Over nine months later, in August 2019, the matter was re-listed for directions following an enquiry by the Court about whether the file could be closed. The re-listing apparently took place at the plaintiffs’ request, with the intention that they would pursue their claim for interest, but counsel for the defendants then foreshadowed the application to have the consent orders set aside on the ground of illegality.

14. The application has itself had a lengthy history. The original notice of motion was filed on 2 September 2019. I have already referred to the interlocutory judgment of the Chief Judge in November 2019, which resulted in an order that the defendants provide security in the sum of $120,000 for the costs of the application. The application later generated a further dispute about privilege over documents sought by a notice to produce. The Chief Judge determined that application in May last year: Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2020] NSWSC 620. That judgment resulted in an appeal to the Court of Appeal which was decided in October: GR Capital Group Pty Ltd v Xinfeng Australia International Investment Pty Ltd [2020] NSWCA 266.

15. At all stages of the litigation to that point the plaintiffs had been represented by solicitors and senior and junior counsel. But when, in November, the matter returned to the Chief Judge from the Court of Appeal, junior counsel for the plaintiffs indicated that his instructing solicitors would shortly cease to act and that the plaintiffs did not intend to appoint new solicitors. A few days later the solicitors filed a notice of ceasing to act.

16. Thereafter the plaintiffs did not take any further part in the application. They were not represented at the hearing before me.

Evidence

17. The lay evidence in support of the application consisted of:

1. affidavit evidence from three lay witnesses concerning the background to the transactions and Liu Wensheng’s dealings with Liu Yuqing;

2. evidence from the defendants’ solicitors dealing with procedural matters.

18. The three lay witnesses whose affidavits were read were Liu Wensheng, Elaine Tang and Yan Xin (also known as Chris Yan). Ms Tang was an associate of Liu Wensheng involved in managing the One Treacy Project, and an investor in the Landmark Square project. Mr Yan was another associate of Liu Wensheng who was made a director of Xinfeng Australia as I describe in more detail below.

19. The applicants’ evidence also included a report from Dr Jie (Jeanne) Huang, an expert on Chinese law. Dr Huang is currently an Associate Professor at the University of Sydney Law School specialising in private international law, Chinese law and dispute resolution. She is qualified as a lawyer in China and holds post-graduate degrees both from the Shanghai University of International Business and Economics in China and Duke University School of Law in the United States.

20. Dr Huang’s report first provided an introduction to the Chinese legal system generally. Then the report discussed the legal and regulatory framework applying to foreign exchange under Chinese law, and the effect, including liability to criminal sanctions, under Chinese law for breaching the relevant laws and regulations.

21. As the plaintiffs were unrepresented, there was no objection to any of this evidence and no application was made to cross-examine on it. Counsel for the defendants also tendered selected parts of affidavits of Liu Yuqing which had been filed or served in preparation for the October 2018 hearing.

Chinese foreign exchange laws

22. The regulation of foreign exchange transactions in China is handled by China’s central bank, the People’s Bank of China, and a government agency known as the State Administration of Foreign Exchange (“SAFE”). Official foreign exchange trading in China is controlled by the State. It takes place through an inter-bank system known as the China Foreign Exchange Trading System and through “foreign exchange banks” which are institutions approved by the People’s Bank of China to deal in foreign exchange.

23. Dr Huang referred to the existence in China of foreign exchange transactions taking place through “underground banks”. In her report she defined the term “underground bank” as any “currency trading venue” not authorised by the State.

24. Both individual Chinese nationals and Chinese enterprises are limited in transactions that are permitted to them through official channels. The regulations are complex and are described in some detail in Dr Huang’s report. In this judgment, I have referred only to what appeared to me to be the most important provisions.

25. For official purposes, Chinese nationals are subject to a foreign exchange transaction limit of USD50,000 per annum. There is also a specific regime which applies to loans (whether or not exceeding USD50,000).

26. The regime is based on an instrument entitled “Administrative Measures for Personal Foreign Exchange” issued by the People’s Bank of China. Dr Huang stated:

Article 21 provides that ‘[d]omestic individuals that offer loans to people overseas, borrow foreign debt, grant international guarantees or are directly involved in any transaction related to overseas commodity futures or financial derivative products, shall comply with the relevant provisions and undergo the registration formalities with the foreign exchange authorities.

27. Article 40 provides for the making of rules to implement the Measures. Pursuant to this article, SAFE issued “Implementing Rules of the Administrative Measures for Personal Foreign Exchange”.

28. Article 23 of the Implementing Rules stated that loan and borrowing transactions would be liberalised, with “specific measures” being formulated “separately”. But according to Dr Huang, no such specific measures had been promulgated by the end of 2016. Therefore at the relevant time there was no provision in Chinese law for individual citizens to transfer money to Australia for the purpose of a loan or investment.

29. Chinese nationals are entitled, under article 21 of the Measures, to transfer money overseas to establish a “special purpose company”. Such a company is an overseas enterprise directly established or indirectly controlled by that Chinese national for the purpose of investment or finance. But such a special purpose company must be registered with, and its establishment must receive prior approval from, SAFE.

30. Loans by Chinese enterprises are regulated separately. The applicable regulation is SAFE’s “Notice on Foreign Exchange Control Issues Concerning Overseas Lending by Domestic Enterprises”.

31. According to Dr Huang, the Notice permits the transfer of money from China to Australia for the purposes of a loan to an Australian enterprise wholly owned by the Chinese enterprise, or in which the Chinese enterprise is a shareholder. Approval from SAFE is required and criteria for approval, focusing in particular on demonstrating that the borrower is a good credit risk, are specified.

32. Article 9 provides:

After obtaining the approved quota for overseas lending at a SAFE local office, the lender may directly apply to a foreign exchange bank to open a special account for overseas lending. All funds lent overseas shall be transferred abroad through the special account for overseas lending and the principal and interest shall be repaid to such account.

33. The Notice contains no provision for a Chinese enterprise to transfer money from China to Australia for the purpose of a loan to an Australian enterprise in which the Chinese enterprise does not hold shares. Similarly, there is no provision for the transfer of money from China to Australia for the purpose of a loan to an Australian citizen. Dr Huang therefore concluded that at the relevant time such transactions were not permitted under Chinese law.

34. As with a Chinese national, a Chinese enterprise is permitted to make overseas investments. According to Dr Huang, such an investment requires approval by two government agencies, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”). Requiring two approvals from two different agencies for the same transaction seems strange, but the evidence did not go into detail about the fields of operation of the agencies in question and it is not necessary to consider the point further for the purposes of this judgment.

35. Once approval is obtained from NDRC and MOFCOM there are also regulations imposed by SAFE to be complied with. Those regulations require evidence of approval and registration of the relevant investment transaction. This results in the issue of a certificate which can be used to effect the transfer. The regulations were formerly administered by SAFE itself but have, since 2015, been administered at bank level.

Dealings between Liu Wensheng and Liu Yuqing

36. According to Liu Wensheng, he first met Liu Yuqing when Liu Yuqing visited Australia in March 2016. Liu Yuqing visited again in May, and was also in the country in July.

37. As already mentioned, the plaintiffs sued in these proceedings on loan and security agreements which formed part of the suite of documents executed in July 2016. These documents were preceded by three earlier agreements, which were in evidence before me on the application.

38. The first of the preceding agreements was a Chinese language document. It took the form of an agreement dated 18 March 2016. According to Liu Wensheng, it was prepared by his and Liu Yuqing’s associates, without the direct involvement of lawyers.

39. The agreement indicates that it was signed at Sydney, apparently during Liu Yuqing’s first visit. On the front page, below the words “Letter of Intent”, the following names appeared:

Chairman Yuqing Liu (Tangshan Xinfeng Thermoelectricity Co., Ltd.)

Liu Wensheng (The One Capital Group Pty Ltd)

40. Clause 1 dealt with the parties, which were identified as “Party A” and “Party B”. Party A was identified as “Yuqing Liu, the Chairman”. Party B was “Liu Wensheng (The One Capital Group Pty Ltd)”.

41. The agreement characterised the relationship between the parties as “the Cooperation”. Clause 2 identified six projects, or potential projects, as forming part of the Cooperation, including One Treacy and Landmark Square.

42. Clause 3 was headed “Cooperation Intention”. The clause relevantly provided:

Party A and Party B have entered into a letter of intent regarding the cooperation in the above-mentioned projects after a friendly discussion:

1)   Party A will invest 50 million Australian dollars in the One Treacy Project. At the completion of the project, Party A will be entitled to 24% of the net project profit and Party B will take the remaining net profit. The investment period is about 16-18 months.

2)   Party A will invest 80 million Australian dollars in the Landmark Square Project. At the completion of the project, Party A will be entitled to 75% of the net project profit and Party B will take the remaining net profit. The investment period is about 4-6 years. The project consists of three stages and the two parties will claim their profits in proportion to their shares at the completion of each stage. One of the buildings to be constructed by this project will be named as "Xinfeng".

…

9)   Party A and Party B will sign individual cooperation agreements regarding the above-mentioned projects (when visiting Tangshan city).

…

12)   Party A will invest not less than 50 million Australian dollars in Party B's projects so that Party A will be able to satisfy the immigration requirements for himself and the visa requirements for his team members, and to honour his investment commitment made to Hurstville Council.

43. Clause 5 was headed “The time when the investment is materialised”. It provided:

To establish a solid and stable foundation of cooperation for Party A and Party B, it is required that Party A pay two million Australian dollars or the equivalent amount of Renminbi to the Party B's designated bank account as a deposit before 31 March 2016.

Upon deposit payment, Party A will hold the exclusive investment right over The One Treacy Project and the Landmark Square Project.

Party A will make his investment as required by the individual cooperation agreement signed by both parties as soon as Party A gets approval by the Chinese authorities in relation to making overseas investment and transferring large amounts of fund to foreign banks.

The foreign exchange rate on the day of receiving the payment will be used for money conversion.

44. Clause 6 dealt with “initial preparation work”. It relevantly provided:

Party B will kick start the following preparation work after receiving the deposit:

1)   Complete the company registration in Australia for Party A within one week.

2)   Help Party A open a bank account for his company in Australia.

3)   Help Party A apply for Certificate of Investment by Overseas Companies issued by China's Ministry of Commerce. This certificate will entitle Party A to the permit issued by China Foreign Exchange Administration to transfer money overseas, securing the investment fund for these projects.

4)   Help Party A get approval from Foreign Investment Review Board (FIRB).

5)   Invite Party B's delegation to visit Party A's company in Tangshan and hold meetings with Party A's representatives. Party B will organise their team (including an immigration lawyer) to make the trip.

6)   Help Party A apply for a business visa and the permanent resident visa in Australia.

7)   Help Party A's working team apply for their working visas to Australia.

8)   Help Party A hire a driver, an interpreter and a cook.

To complete the work for Item 1, Item 5 and Item 6 above, Party A needs to organise his team to provide related information such as the (English) name of the company registered in Australia, share distribution proposal, candidates for the chairman and other private information.

45. Xinfeng Australia was registered on 21 April 2016. Its issued share capital consisted of one share owned by Liu Yuqing. The initial directors were Liu Yuqing and Mr Yan. According to Liu Wensheng, he suggested to Liu Yuqing that Mr Yan could be appointed if Liu Yuqing did not have anyone else available in Australia who was suitable to act.

46. The second and third preceding agreements were both dated 23 May 2016. They appear to have been signed during Liu Yuqing’s second visit to Australia. They were in both Chinese and English, and, like the Letter of Intent, do not appear to have been prepared by lawyers.

47. The first of the agreements related to the One Treacy project. Although apparently signed in Australia rather than Tangshan, it may have been intended as the “individual co-operation” agreement for that project foreshadowed in clause 3(9) of the Letter of Intent.

48. On the front page of the document appeared the description “Xinfeng The One Treacy Project Investment Agreement”. Underneath that description there appeared two names. The first was Liu Yuqing “Chairman of” Xinfeng Australia. The second was Liu Wensheng “of” One Capital. These corresponded with Party A and Party B as defined in clause 1.

49. Clause 2 was headed “Agreement Terms” and relevantly provided:

1.   The Project is renamed as Xinfeng The One Treacy.

2.   Yuqing LIU will be appointed as Chairman of the project.

3.   Party A will invest 10 million AUD which will be used for construction;

4.   The estimated construction expending [sic] will be 42 million AUD.

5.   As of 12th May of 2016, Party B has expended 18,393,731.19 AUD for the project.

6.   Upon receive [sic] the total 10 million from Party A, Party B will use 100% equity of GR Capital Group Pty Ltd as security for investment fund of Party A.

7.   Investment return will be fixed interest of 12% per annum. Calculation of interest will start on 15th June 2016.

8.   Investment period is 18 months.

9.   …

10.   After Party B uses 100% equity of GR Capital Group Ply Ltd as security for investment fund, the security agreement for 2 million AUD investment deposit which signed [sic] by both parties on 9th May of 2016 will be voided.

50. Clause 3 was headed “Investment Payment” and provided:

1.   28th March of 2016, Party B has received 1 million AUD from Party A.

2.   18th April of 2016, Party B has received 1 million AUD from Party A.

3.   Before 15th June of 2016, Party A should transfer 8 million AUD to Party B.

51. Clause 5 was headed “Rights and Responsibilities”. In general terms, it provided that Party A was not to be involved in the “management or operation” of the Project. Party B was to be responsible for construction, sales, and all expenses, and was to be “liable for all legal responsibility”.

52. The $2 million security agreement referred to in clause 2(10) said to have been signed by both parties on 9 May 2016 was not in evidence before me (or if it was, I was not referred to it).

53. The other agreement dated 23 May 2016 made corresponding provision for the Landmark Square project. The written structure of the agreement and the parties were the same. Clause 2 provided that the parties would enter into a joint venture agreement for the project, under which Party A would have a 60% share, and Party B a 40% share, of the joint venture.

54. Clause 3 provided:

After the approval from the Chinese Government is granted, Party A guarantee to transfer $32 million AUD which is approximately $160 million RMB into the trust account on or before 1st December 2016.

Investment payment details are as follow:

1.   After the approval from the Chinese Government is granted, Party A must transfer $3.6 million AUD into the trust account on or before 1st August 2016 to pay 10% deposit of total land price.

2.   After the approval from the Chinese Government is granted, Party A must transfer $34.7 million AUD into the trust account on or before 24th November 2016 to pay the balance total land price and stamp duty.

3.   After the approval from the Chinese Government is granted, Party A must transfer $41.7 million AUD into the trust account on or before 1st May 2016 [the translation appears to be an error; the Chinese language date appears to be 1 March 2017] to ensure that the Project can proceed smoothly.

The abovementioned fund will be transferred into the trust account and will be distributed by legal practitioners according to the JV.

55. Clause 4.1, which set out rights and responsibilities of Party A, included at (3):

Under the Party B’s assistant [sic], Party A apply the Certificate of Approval issued by Ministry of Commerce of China for investing overseas to have the approval of State Administration of Foreign Exchange of China for transferring fund into Australia.

56. The contractual instrument which formed the basis of the principal claim by the plaintiffs in these proceedings was an agreement (the “Facility Agreement”) between Xinfeng Australia (as Financier) and One Capital (as Borrower). The Agreement bore the date 23 July 2016 and the signatures, or purported signatures, of Liu Yuqing and Mr Yan for Xinfeng Australia, and of Liu Wensheng for One Capital.

57. Like the rest of the suite of loan documents signed in July 2016, the Facility Agreement was prepared by HWL Ebsworth. Apparently this was done on the instructions of Liu Yuqing, or persons reporting to him. The Agreement was governed by the law of New South Wales (clause 18.2). Unless otherwise specified, the currency of account under the Agreement was to be Australian dollars (referred to as the “Relevant Currency”).

58. The Agreement provided for Xinfeng Australia to make available the sum of $10 million by way of two tranches, described as Tranche A and Tranche B. So far as Tranche A was concerned, clause 2.2 provided:

As at the date of this Deed the Borrower acknowledges:

(a)   receiving $8,000,000 under the Tranche A Loan on 15 June 2016;

(b)   that this amount is the current amount of Principal Outstanding under the Tranche A Loan; and

(c)   that interest has accrued and capitalised (as relevant) on this Loan on and from the date it was provided, being 15 June 2016 and will continue to accrue and capitalised in accordance with clause 4.1.

59. Clause 2.3 provided, in conventional form, for the Tranche B loan ($2 million) to be made available by Xinfeng Australia upon the giving of a drawdown notice.

60. Clause 5 dealt with repayment and voluntary prepayment. Clause 5.1 required repayment of the loan amount (“Secured Money”) by the Termination Date. This was defined as the earlier of eighteen months from the date of the agreement (23 January 2018) or two months after practical completion of the One Treacy development. Repayment was to be made in the Relevant Currency to Xinfeng Australia by deposit to an account nominated by it (clause 9.1).

61. Clause 5.3 provided:

(a)   If any Change in Law or other event makes it illegal or impossible for a Financier to perform its obligations under the Finance Documents or fund or maintain its Commitment, the Financier may by notice to the Borrower:

(i)   suspend its obligations under the Finance Documents for the duration of the illegality; or

(ii)   by notice to the Borrower, cancel its Commitment and require the Borrower to repay the Secured Moneys in full on the date which is 50 Business Days after the date on which the Financier gives the notice or any earlier date required by, or to comply with, the applicable law, regulation, treaty, order or official directive.

(b)   A notice under clause 5.3(a)(ii) is irrevocable and the Borrower must, on the repayment date determined under clause 5.3(a)(ii), pay to the Financier the Secured Moneys in full.

62. The agreement contained further clauses which sought to ensure that the Obligors (including One Capital as Borrower and GR Capital and Liu Wensheng as Guarantors) would be liable to repay the loan even if there was some invalidity. Clause 16.6 provided:

Non-avoidance

If any payment by an Obligor to the Financier is avoided for any reason including any legal limitation, disability or incapacity of or affecting the Obligor or any other thing, and whether or not:

(a)   any transaction relating to the Secured Moneys was illegal, void or substantially avoided; or

(b)   any thing was or ought to have been within the knowledge of the Financier,

the Obligor:

(c)   as an additional, separate and independent obligation, indemnifies the Financier against that avoided payment; and

(d)   acknowledges that any liability of the Obligor under the Finance Documents and any right or remedy of the Financier under the Finance Documents is the same as if that payment had not been made.

63. Clause 18.3 provided:

Prohibition and enforceability

(a)   Any provision of, or the application of any provision of, any Finance Document or any Power which is prohibited in any jurisdiction is, in that jurisdiction, ineffective only to the extent of that prohibition.

(b)   Any provision of, or the application of any provision of, any Finance Document which is void, illegal or unenforceable in any jurisdiction does not affect the validity, legality or enforceability of that provision in any other jurisdiction or of the remaining provisions in that or any other jurisdiction.

64. The Agreement also contained an “entire agreement” clause. Clause 16.9 relevantly provided:

Each Obligor acknowledges and confirms that:

(a)   it has not entered into any Finance Document in reliance on any representation, warranty, promise, statement or conduct of any kind made by or on behalf of a Financier, a Related Entity of a Financier or their advisers;

(b)   in respect of the transactions evidenced by the Finance Documents, the Finance Parties have no obligations other than those expressly set out in the Finance Documents.

65. There were six relevant transfers from Liu Yuqing to Liu Wensheng in China. A slightly lesser sum was “transferred” to Australia over the same period by Liu Wensheng through a series of thirty-four payments. The payments in question are summarised in the table set out below:

Date	To Liu Wensheng		By Liu Wensheng
Amount ¥	Cumulative ¥	Amount ¥	Cumulative ¥	Amount $	Cumulative $
28/03/16	4,909,400	4,909,400
05/04/16	2,000,000	2,000,000	395,857.82	395,857.82
06/04/16	600,000	2,600,000	119,259.29	515,117.11
07/04/16	1,500,000	4,100,000	296,125.05	811,242.16
18/04/16	4,978,100	9,887,500
28/04/16	1,500,000	5,600,000	295,250.59	1,106,492.75
06/05/16	1,500,000	7,100,000	301,300.83	1,407,793.58
09/05/16	1,500,000	8,600,000	303,005.30	1,710,798.88
10/05/16	1,500,000	10,100,000	304,234.63	2,015,033.51
30/05/16	14,190,000	24,077,500
31/05/16	1,500,000	11,600,000	305,598.47	2,320,631.98
02/06/16	1,450,000	13,050,000	294,990.26	2,615,622.24
06/06/16	1,500,000	14,550,000	303,005.30	2,918,627.54
14/06/16	1,500,000	16,050,000	299,975.00	3,218,602.54
15/06/16	14,640,000	38,717,500
16/06/16	2,000,000	18,050,000	398,619.61	3,617,222.15
27/06/16	2,000,000	20,050,000	396,407.11	4,013,629.26
28/06/16	1,600,000	21,650,000	317,435.32	4,331,064.58
29/06/16	1,600,000	23,250,000	315,743.70	4,646,808.28
04/07/16	1,600,000	24,850,000	313,700.49	4,960,508.77
06/07/16	2,000,000	26,850,000	393,700.79	5,354,209.56
07/07/16	210,000	27,060,000	40,712.15	5,394,921.71
08/07/16	1,500,000	28,560,000	291,237.14	5,686,158.85
11/07/16	2,000,000	30,560,000	386,075.39	6,072,234.24
13/07/16	1,500,000	32,060,000	287,551.69	6,359,785.93
15/07/16	1,800,000	33,860,000	344,274.92	6,704,060.85
18/07/16	1,500,000	35,360,000	287,993.43	6,992,054.28
19/07/16	1,600,000	36,960,000	308,260.16	7,300,314.44
20/07/16	1,500,000	38,460,000	290,785.39	7,591,099.83
21/07/16	1,200,000	39,660,000	233,893.13	7,824,992.96
16/08/16	5,130,600	43,848,100
17/08/16	1,600,000	41,260,000	305,493.43	8,130,486.39
18/08/16	1,500,000	42,760,000	286,781.88	8,417,268.27
19/09/16	1,500,000	44,260,000	291,350.29	8,708,618.56
29/09/16	10,297,000	54,145,100
17/10/16	1,500,000	45,760,000	285,961.65	8,994,580.21
18/10/16	2,000,000	47,760,000	376,627.83	9,371,208.04
19/10/16	2,000,000	49,760,000	376,202.72	9,747,410.76
21/10/16	1,000,000	50,760,000	188,837.41	9,936,248.17
25/10/16	2,000,000	52,760,000	376,222.72	10,312,470.89

66. It will be recalled that under the Letter of Intent an initial sum of $2 million was to be paid by 31 March 2016. According to Liu Wensheng, he spoke to an accountant for Xinfeng Thermoelectric about the payment, and was told that there would be a delay because the money had to be transferred from Xinfeng Thermoelectric’s account to Liu Yuqing’s personal account.

67. The table shows that a total of ¥9.9 million was transferred by Liu Yuqing to Liu Wensheng in China by means of two payments on 28 March and 18 April. This was slightly more than $2 million at the then prevailing exchange rate. The corresponding transfers to Australia by Liu Wensheng totalled ¥10.1 million.

68. The May agreements required further payment of $8 million for the One Treacy project by 15 June, and $3.2 million for the Landmark Square project by 1 August. These equated to ¥39.4 million and ¥15.8 million at the May exchange rate.

69. As the table shows, ¥14.2 million (slightly less than $2.9 million) was paid on 30 May and ¥14.6 million (slightly more than $2.9 million) on 15 June. By that date Liu Yuqing had made four payments totalling ¥38.7 million. The corresponding payments by Liu Wensheng to Australia (up to 21 July) totalled ¥39.7 million ($7.8 million).

70. The 23 July Facility Agreement upon which the plaintiffs sue acknowledged the receipt on 15 June of $8 million. The Agreement required a further payment of $2 million. No drawdown notice is in evidence. The sum of ¥5.1 million ($1 million) was paid on 15 August with a further ¥10.3 million ($2 million) paid on 29 September.

71. The evidence before me did not explain the discrepancies between the figures in the Facility Agreement and the actual payments which had been, and were later, made. In the end, Liu Yuqing transferred ¥54.1 million to Liu Wensheng, and Liu Wensheng transferred ¥52.8 million ($10.3 million) to Australia. Exchange rates of course fluctuated over the period. But on any view, Liu Yuqing transferred to Liu Wensheng the equivalent of somewhat more than the $10 million required under the May agreement concerning the One Treacy project (and under the Facility Agreement), but less than the combined total of $13.2 million required under the two May project agreements.

72. In evidence is a foreign investment certificate issued by MOFCOM and dated 18 September 2016. The certificate was issued to Xinfeng Thermoelectric pursuant to the approval procedure earlier described. It specified the destination of the funds as being Xinfeng Australia, which was described as “mainly” engaged in the Landmark Square project. The amount approved was ¥410.45 million (about $80 million at the then exchange rate).

73. According to Liu Wensheng, by the end of August he was in urgent need of further funds in order to proceed with the development projects. In particular, the land for the Landmark Square project had been secured by option and it was necessary to make payment. Liu Wensheng stated that he obtained a number of extensions of time (at the price of paying several million dollars in further option fees). He was told by Liu Yuqing’s associates that the $80 million was coming in early October 2016.

74. Liu Wensheng stated that in October 2016 he was asked to go to China to assist with obtaining the necessary approvals. He travelled to China and met, along with associates of Liu Yuqing, with representatives of the Bank of China and SAFE. He was told by those officials that approval had been obtained, but the transfer of the monies required information to be provided to SAFE from Xinfeng Thermoelectric’s books of account. According to Liu Wensheng, he was told by Liu Yuqing that there was some difficulty with this, owing to the way in which the accounts had been kept.

75. It appears that the difficulty was not overcome. The $80 million was never actually provided. According to Liu Wensheng attempts were made by Liu Yuqing to find a replacement investor, but these came to nothing. The relationship between the parties broke down and Liu Yuqing asked for the return of the $10 million already paid. Liu Wensheng was unable to do this as the money had already been used to pay option extension fees and to repay the original contributions made by other investors for the Landmark Square project.

76. For more than a year no action appears to have been taken by Liu Yuquing to recover the money. Mr Yan remained a director of Xinfeng Australia until June 2018 when he was replaced by Yu Gensheng, an associate of Liu Yuqing. According to Mr Yan, he was not consulted about, or even notified in advance of, his removal. Nevertheless he accepted it. As already noted, the proceedings were begun on 9 August.

Consent orders

77. The plaintiffs’ solicitors in the proceedings were Lin Tang & Co (“LT”). The defendants were represented by Colin Biggers & Paisley (“CBP”).

78. On 17 October 2018, the day before the hearing was due to commence, Mr Gary Ying of LT sent a letter by email to Ms Leanne Walker of CBP. Mr Ying’s letter rejected an offer made earlier that day by Ms Walker (which does not appear to be in evidence) and put the following counter-offer:

Our clients make the following counter-offers available in the alternative for acceptance until 10am tomorrow 18 October 2018:

1.   Your clients provide our clients with a bank cheque for the sums itemised in your paragraph 1 (with costs on an indemnity basis) by 10am 18 October 2018, and the proceedings (both Amended Statement of Claim and Cross-claim) are dismissed with no order as to costs. Our clients will then also consent to the caveats and PPSR being removed, OR

2.   Our clients will accept judgment in their favour on the Amended Statement of Claim with an order for costs on an indemnity basis and with your clients' cross-claim being dismissed with costs on an indemnity basis, such orders to be made at 10am 18 October 2018.

79. Ms Walker replied:

We refer to the above matter and your letter of today's date.

We are instructed to accept your clients' offer made at paragraph 2 of that letter.

80. The consent orders made by the Court were based on short minutes of order with handwritten deletions and amendments. The evidence before me did not say anything about the process of preparing and agreeing the orders. In the form recorded by the Court, they were:

1.   Judgment for the First Plaintiff against all defendants for $10,000,000.00 principal.

1a.   Reserve for further consideration the entry of judgement for interest on the principal, and grant liberty to apply.

2.   Nil.

3.   Cross-claim dismissed.

4.   Order that the Defendants pay the costs of the Plaintiffs on an indemnity basis.

5.   Declare that:

(a)   The judgment referred to in Order 1 together with interest and costs on an indemnity basis is secured by the Mortgage and General Security Deed.

(b)   The Defendants are in default under the Mortgage and General Security Deed.

(c)   The First Plaintiff is entitled to exercise any and all power and remedies under the Mortgage and General Security Deed.

6.   Nil.

7.   Nil.

8.   These orders be taken out forthwith.

“Transfer” of monies to Australia via KVB Kunlun

81. The “transfers” of the monies from Liu Wensheng’s account in China to Australia, as shown in the table at [65] above, were arranged through an internet business known as “KVB Kunlun”. The corporate structure of this business is not clear from the evidence; it appears to operate in Australia through a company called KVB Global Markets Pty Limited. Until August 2016 the company was called KVB FX Pty Limited.

82. The starting point for such a “transfer” is that the customer obtains from KVB Kunlun a foreign exchange quote for the amount of money to be converted from Chinese yuan in China to Australian dollars in Australia. Upon acceptance of the quote, the sender receives from KVB Kunlun details of a Chinese bank account or bank accounts to which the sender’s yuan are to be transferred. When the transfer has been confirmed, the equivalent sum of money in Australian dollars is credited to the Australian bank account nominated by the sender.

83. It appears that the account or accounts to which the customer’s yuan are transferred in China are accounts operated by KVB Kunlun. They are accounts of other customers of KVB Kunlun who presumably wish to “transfer” money in the opposite direction. There was no evidence before me about the nature of the obligations (if any) undertaken by KVB Kunlun to ensure that customers who make payments in one country actually receive the promised proceeds in the other.

84. Under this system no money actually flows through the international banking system between China and Australia. The system operates effectively as a currency barter between buyers and sellers who are put into contact with each other on KVB Kunlun’s internet platform.

85. According to Liu Wensheng, he first learnt about KVB Kunlun when he met one of its founders, Ms Susan Sun, at a hotel in Beijing in 2008. In mid-2010 Liu Wensheng opened an account with KVB Kunlun at its office in the Central Business District of Sydney. He later used that account on a number of occasions to transfer money from China to Australia.

86. Liu Wensheng stated that during Liu Yuqing’s first visit to Australia in March 2016 they discussed the mechanics of transferring to Australia the monies to be provided by Liu Yuqing. In an affidavit made in September 2018 (for the purposes of the then impending trial), Liu Wensheng gave the following account of the discussion, which he stated took place during their second meeting:

Yuqing:   I want to invest $130-$150M, I need to submit it to the Chinese government for prior approval.

Wensheng:   How long will the process take to get Government approval?

Yuqing:   I am comfortable that it will be done by the end of 2016.

Wensheng:   I will need approximately $2M by the end of March 2016. I need approximately $6M to extend the option over the Landmark Square Properties to the end of 2016, and I need approximately $4M to pay the deposit for the land. We need at least $10M by the end of the year. This means you should have enough time to get the money in China.

Yuqing:   If we can't get approval to get the money out of China, I will transfer the equivalent amount in RMB from my account in China to your account in China.

I will transfer 200,000,000 RMB to your account in China to settle the land for Landmark Square if I do not get approval for overseas investment from the Chinese Government by the end of 2016.

Wensheng:   I need a deposit, I need $2M by the end of March 2016 to pay off the first option extension fees. There are other offers coming in, everyone is chasing me and I need to make a decision about which way to go.

Yuqing:   You don't need the other investors.

87. In a later affidavit made in October 2019 to support the present application, Liu Wensheng stated that during the first meeting there was a discussion to the following effect:

Yuqing:   I need to get Chinese Government approval before I can transfer the money to Australia.

Wensheng:   That will take too long. I need $2 million by the end of this month. You can open an account with KVB and transfer the money to Australia through them a lot quicker.

Yuqing:   I will have a think about it and get back to you.

88. Then, a few days later at the second meeting, Liu Yuqing said:

Yuqing:   If we can't get approval to get the money out of China, I will transfer the equivalent amount in RMB from my account in China to your account in China.

I will still transfer 200,000,000 RMB to your account in China to settle the land for Landmark Square if I do not get approval for overseas investment from the Chinese Government by the end of 2016.

89. According to Liu Wensheng, he specifically told Liu Yuqing on a number of occasions afterwards that the money being provided was being transferred to Sydney.

90. According to part of Liu Yuqing’s affidavit which was tendered, the following conversation occurred in Liu Wensheng’s office:

Yuqing:   How do I transfer the money to you before we sign the agreement?

Wensheng:   You can transfer money to my account in China. I have a company in China.

Yuqing:   This is fine as a temporarily [sic] solution because it may take some time to apply for government approval in China. But I don’t want to transfer money like this for a large sum investment. I want to get government approval and transfer any investment funds via proper and legal channels.

91. The Letter of Intent did refer to the obtaining of Chinese government approval for the amounts to be invested in the two projects. But it contained no provision dealing with the payment of the $2 million deposit. Nor did the July 2016 facility agreement upon which the plaintiffs sue contain any provision about payment of the then remaining loan drawdown of $2 million.

92. I have already referred to the terms of the May agreement concerning the Landmark Square project which dealt with the obtaining of approval for the investment. There was no equivalent provision in the May agreement concerning the One Treacy project. Instead, clause 4, which was headed “Method of transfer investment Fund”, provided:

Party A will transfer RMB which will be equivalent of AUD into party B's bank account in China. Party B will use KVB Kunlun to exchange RMB to AUD.

KVB Kunlun is an international financial services corporation which provides currency exchange services.

93. Liu Wensheng stated in his affidavit that throughout the period from 2010 (when he opened his KVB Kunlun account) and 2016 (when he undertook the transfers in question in these proceedings) he assumed that the operations of KVB Kunlun were lawful because KVB Kunlun had the appropriate approvals in place. He remained of that view at the date of the settlement which resulted in the consent orders. His affidavit stated that he did not appreciate that there might be a defence to the claim based on illegality, but gave no other details of any reasons why he offered, in effect, to capitulate to the plaintiffs’ claim.

94. Liu Wensheng stated that in December 2018 he became aware for the first time of a possible violation of Chinese exchange control laws. This was as a result of a Chinese article he obtained by means of a news feed on his phone. The article stated that SAFE had been notified of fifteen foreign exchange violation cases, the maximum penalty having been over ¥3 million. This caused him to wonder whether the transfer of money from China to Australia via KVB Kunlun was lawful. After this he engaged new Australian solicitors and obtained advice from four Chinese law firms. That advice was provided between May and July of 2019 and he gave instructions to make the present application in September 2019. As already noted, the application was formally made on 2 September.

Penalties and other consequences for breach of Chinese foreign exchange laws

95. In her report Dr Huang addressed the legal consequences, under Chinese law, of contravention of the foreign exchange regulations earlier summarised. She addressed the topic under three headings: administrative law, criminal law and civil law. In this section of the judgment, the quotations and paraphrases of the Chinese law provisions are taken from Dr Huang’s report.

96. Administrative law: The regulations to which I have referred contain provision for SAFE to impose various sanctions for violation. Those sanctions may include a warning; cancellation of the relevant approval, accompanied by orders requiring repatriation of the funds if they have already been sent overseas; and the imposition of fines. Violations may also attract sanctions in accordance with the criminal law (see below).

97. Another set of regulations, called Regulations on Foreign Exchange Control, confer powers (and obligations) on SAFE to issue sanctions against persons who are involved in certain types of violations of foreign exchange controls. Dr Huang referred first to article 39 (emphasis Dr Huang’s):

Article 39 of Regulations on Foreign Exchange Control provides that if a person commits any act of foreign exchange evasions, such as transfer of domestic capital out of China in fraudulent way, the SAFE shall order repatriation of the foreign exchange involved within a specified time limit and shall impose a fine of not more than 30% of the amount of the foreign exchange involved. In serious cases, SAFE shall impose a fine of more than 30% and less than the equivalent amount of the foreign exchange involved, and judicial authorities shall impose criminal liability if the act constitutes a criminal offence.

98. Dr Huang also referred to article 45 (emphasis Dr Huang’s):

Article 45 of Regulations on Foreign Exchange Control provides that if anyone trades foreign exchange in private or in a disguised way, or for a profiteering purpose, or illegally recommends the purchase and sale of foreign exchange of which the amount is relatively large, SAFE shall issue a warning, confiscate the illegal gains, and impose a fine of not more than 30% of the amount of foreign exchange involved in the illegal activities. ‘Relatively large amount’ means the amount involved in unauthorised trading, disguised trading or illegal trading of foreign exchange is equivalent to USD 1000 or more, or that the amount involved in the illegal referral or foreign exchange trading is equivalent to USD 50,000 or more. In serious cases, SAFE shall impose a fine of more than 30% and less than the equivalent of the amount of foreign exchange involved in the illegal activities; and judicial authorities shall impose criminal liability if the act constitutes a criminal offence.

99. Dr Huang gave illustrations of cases determined by SAFE under these Regulations. The cases were published on SAFE’s website. The case under article 45 involved a Chinese national depositing ¥18 million in a domestic account controlled by an underground bank and instructing the underground bank to exchange the money into a foreign exchange and transfer the money to the customer’s account overseas. SAFE treated this as a violation of article 45 and imposed a fine of ¥1.62 million on the customer.

100. Articles 39 and 45 are not the only provisions imposing sanctions. There may also be sanctions imposed under the different statutory regimes applicable to other regulatory bodies such as MOFCOM.

101. Criminal law: Dr Huang referred to article 225 of the Chinese Criminal Law enacted by the National People’s Congress (“NPC”) in 1997. That article provides:

Whoever, in violation of State regulations, commits any of the following illegal acts in business operation and disrupts market order, if the circumstances of disrupting market order are serious, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and shall also, or shall only, be fined not less than one time but not more than five times the amount of illegal gains, if the circumstances of disrupting market order are especially serious, he shall be sentenced to a fixed-term imprisonment of not less than five years and shall also be fined not less than one time but not more than five times the amount of illegal gains or be sentenced to confiscation of property:

(1)   without permission, dealing in goods that are designated by laws or administrative rules and regulations as goods to be dealt in or sold in a monopoly way or other goods that are restricted in trading.

(2)   buying or selling import or export licenses, import or export certificates of origin or other business licenses or approval papers required by laws or administrative rules and regulations.

. . .

(4)   other illegal operations that seriously disrupt market order.

102. On enactment, sub-article (4) was sub-article (3); a new sub-article (3), which is not relevant for the purposes of this judgment, was introduced in 1999. For convenience, I will refer throughout to the relevant sub-article as sub-article (4).

103. In August 1998, with effect from September, the Supreme People’s Court published an interpretative decision entitled “Interpretation on Several Issues Concerning the Application of Specific Laws in Trial of the Criminal Cases involving Purchasing Foreign Exchange by Fraud, Illegally Purchasing and Selling Foreign Exchange”. The Supreme People’s Court is the highest court in China and, according to Dr Huang, it has the power to issue authoritative interpretations of statute law.

104. Article 3 of the Interpretation stated:

The trading of foreign exchange in places other than the designated banks, the China Foreign Exchange Trading System and its branches, causing disruption to financial markets in any of the following circumstances, shall be convicted and punished in accordance with the provisions of Article 225(3) [now 225(4)] of the Criminal Law if:

(1)   The illegal trading foreign exchange [sic] to the value of over USD 200,000;

(2)   The amount of illegal gains [sic] to the value of over RMB 50,000.

105. Article 7 of the Interpretation stated:

The illegal gains through fraudulent foreign exchange purchases and illegal trading of foreign exchange shall be pursued and the funds used for fraudulent foreign exchange purchases and illegal trading of foreign exchange shall be confiscated and turned over to the state treasury in accordance with Article 64 of the Criminal Law.

106. A few months later, in December 1998, the Standing Committee of the NPC published a document called “Decision Concerning Punishment of Criminal Offence Involving Fraudulent Purchase, Evasion and Illegal Trading of Foreign Exchange”. According to Dr Huang the Standing Committee is the executive body of the NPC and it has power to enact and amend laws (except those of a type reserved for the NPC itself) or interpret them.

107. Article 4 of the Decision stated:

Serious offences of illegal trading of foreign exchange outside of the state-designated trading venues and disruptions of the market order shall be condemned and punished in accordance with Article 225 of the Criminal Law.

An organisation which commits the offences listed in the previous paragraph shall be punished in accordance with Article 231 of the Criminal Law.

108. Dr Huang referred to cases determined in the Chinese courts under article 225. One concerned a Chinese citizen, Huang, who had incurred gambling debts in Macau. Huang was asked by the casino to transfer money to the account of an underground bank in Shenzhen to pay the debt. He deposited ¥800 million into the account; the underground bank then exchanged that money into Hong Kong dollars and transferred it to Hong Kong (from where it presumably went on to Macau). Huang’s lawyer accepted that he had been aware that the money would be illegally transferred out of China, but argued that Huang himself had not engaged in any illegal foreign exchange transaction. This argument was rejected and Huang was convicted by the No 2 Beijing People’s Intermediate Court.

109. In a similar case involving a Chinese citizen called Liu, the result was the opposite. The decision was by an Intermediate People’s Court in Xianning City in Hubei Province. The Court accepted that there was no trading of foreign exchange by Liu for profit, and acquitted him for that reason. But Dr Huang comments that article 225 of Criminal Law and the relevant judicial interpretation did not expressly mention trading for profit. Dr Huang also observes that, as China is a civil law country, Chinese case law does not have precedential effect. Therefore the Huang decision has not been overruled.

110. Civil law: Dr Huang first referred to statute law:

According to Article 52 of the Chinese Contract Law, a contract shall be null and void if the contract is an attempt to conceal illegal objectives under the disguise of a legitimate form, if the contract undermines social and public interests, or if the contract violates mandatory provisions of laws and administrative regulations.

111. Dr Huang also referred to an interpretative decision of the Supreme People’s Court:

Article 13 of the Provisions of the Supreme People’s Court on Certain Issues Concerning Application of Law in Trial of Cases involving Private Lending provides that where the act of borrowing or lending of the borrower or the lender is suspected of a crime or is determined to constitute a crime by the effective judgment and a party concerned institutes a civil lawsuit, the contract of private lending may not necessarily be invalid. The people’s court should determine the validity of a contract of private lending by considering factors such as (1) whether the lender has or should have knowledge in advance that the borrower will use the borrowed funds for illegal or criminal activities; or (2) whether other violations of the compulsory provisions on validity under laws and administrative regulations have been committed by the lender or borrower.

112. It is clear from this decision that, as under our law of contract, the question whether a contract is rendered void for illegality requires specific reference to the facts and the nature of the prohibition in question. Dr Huang acknowledged this:

Therefore, more facts are required to determine the validity of the contract to transfer or loan funds from China to Australia without obtaining the requisite approval.

Application to set aside judgment

113. Counsel for the applicants relied on the principle that the court will, in certain circumstances, refuse to enforce a contract governed by Australian law which involves the violation of foreign law on foreign soil. The principle derives from two English decisions.

114. The first, Foster v Driscoll [1929] 1 KB 470, was a decision of the English Court of Appeal concerning a partnership or joint venture that was formed in Britain for the purposes of smuggling 7,500 cases of whisky into the United States of America in breach of prohibition laws. The parties to the venture included Lindsay, who provided the whisky, and Foster, who financed the venture. The parties entered into a written agreement providing for the sale of the whisky by Lindsay to other joint venture partners, secured by bills of exchange. The agreement was governed by the law of England. It said nothing about the purpose of the joint venture or the ultimate destination of the whisky.

113. The venture broke down, and the whisky never left Britain, ending up (it seems) in the hands of Foster. Three actions were brought between the various joint venture partners. Foster claimed rescission on the basis that the agreement had not been complied with. Lindsay claimed damages and sought to enforce the bills of exchange against the relevant joint venture partners. One of the partners raised a defence of illegality.

114. Scrutton LJ, who dissented, accepted an argument for Lindsay that, on the terms of the agreement, the partners might have contemplated that the whisky would be sold and transhipped in Canada or St Pierre (an island near Newfoundland which was a French colony) or on the high seas, and then smuggled by the purchaser into the United States. Such a sale would have been lawful if undertaken outside the United States. His Lordship therefore would have rejected the illegality defence.

115. But the majority of the Court (Lawrence and Sankey LLJ) upheld the defence and dismissed all parties’ claims. Lawrence LJ stated (at 510):

On principle … I am clearly of opinion that a partnership formed for the main purpose of deriving profit from the commission of a criminal offence in a foreign and friendly country is illegal, even although the parties have not succeeded in carrying out their enterprise, and no such criminal offence has in fact been committed; and none the less so because the parties may have contemplated that if they could not successfully arrange to commit the offence themselves they would instigate or aid and abet some other person [the purchaser, in the argument put forward by Lindsay] to commit it. The ground upon which I rest my judgment that such a partnership is illegal is that its recognition by our Courts would furnish a just cause for complaint by the United States Government against our Government (of which the partners are subjects), and would be contrary to our obligation of international comity as now understood and recognized, and therefore would offend against our notions of public morality.

118. Sankey LJ stated (at 521-522):

[I]n my view an English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in certain event, alternate modes or places of performing which permit the contract to be performed legally.

119. The decision was approved by the House of Lords in Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. In that case the defendant, an English company, entered into a contract for the sale of a large quantity of jute bags to the plaintiff, who was based in Switzerland. The contract provided for the bags to be shipped to Genoa in Italy. It was governed by English law.

120. At the time, the Indian Government had imposed an embargo on the export, directly or indirectly, of goods to South Africa, which had created a shortage of jute products there. Both parties knew of the embargo. Although the contract did not refer to where the bags were to come from, both parties knew that the quantity of bags specified in the contract could only have been obtained from India. Both parties were also aware that the buyer intended to resell the bags to a South African purchaser. Soon after the contract was signed, the seller repudiated it. The buyer claimed damages for breach.

121. The House of Lords held that the buyer’s action was barred, upholding and applying the decision in Foster. Lord Simonds stated (at 318-319):

It is…nothing else than comity which has influenced our courts to refuse as a matter of public policy to enforce, or to award damages for the breach of, a contract which involves the violation of foreign law on foreign soil… Just as public policy avoids contracts which offend against our own law, so it will avoid at least some contracts which violate the laws of a foreign State, and it will do so because public policy demands that deference to international comity.

122. The principle has been applied at intermediate appellate level in Australia in Fullerton Nominees Pty Ltd v Darmago [2000] WASCA 4, a case concerning a contract which contemplated a bribery of officials of the Indonesian government. The principle has not been considered at High Court level. I proceed on the basis that it is established in Australian law, although, as will be seen, there is room for debate about its precise scope.

123. For the purposes of the present application, the focus is on the July 2016 Facility Agreement. It was pursuant to that Agreement that the judgment in favour of Xinfeng Australia was entered. I will return later to the fact that judgment was also entered in favour of Liu Yuqing personally. For the moment I will concentrate on Xinfeng Australia’s claim under the Agreement.

124. Although there were two investments, or prospective investments, involved in the dealings between the parties, the Facility Agreement related to the One Treacy development only. It took the place of the May agreement concerning that development. Liu Wensheng may have received extra money attributable to the Landmark Square development, but if so, such monies were not the subject of the judgment.

125. I have earlier referred to the evidence about the steps taken to try to obtain approval for the $80 million investment in Landmark Square, and to the approval document obtained from MOFCOM. In her report, Dr Huang discussed that approval, pointing out that although a necessary step, it was not sufficient to entitle Xinfeng Thermoelectric to proceed with the investment. As no further monies were in fact provided, and the Landmark Square development is not relevant to the judgment, it is not necessary to consider the topic any further.

126. The applicants’ reliance on the principle in the present case gives rise to three specific issues:

1. whether there was conduct (or intended conduct) in China which violated Chinese law;

2. whether, if so, the principle applied so as to render the Facility Agreement unenforceable;

3. whether, if so, the judgment should be set aside.

Offence against Chinese law

127. The illegal activity which was identified by counsel in support of his argument was the transfer from Liu Yuqing to Liu Wensheng of the monies, which were then “transferred” to Australia by Liu Wensheng. The “transfers” were said to have involved the contravention of Chinese foreign exchange regulations as they were unauthorised, and thus to have constituted offences under article 225 of the Chinese Criminal Code. Counsel relied in particular on the decision of the Chinese court in the Huang case referred to at [108] above.

128. The evidence does not explain the reason for Liu Yuqing’s personal involvement in the making of payments to Liu Wensheng, when the money involved apparently came from Xinfeng Thermoelectric. If the transactions had happened in Australia, Liu Yuqing would probably be characterised as having acted as agent of, or as trustee for, Xinfeng Thermoelectric. It is unclear whether equivalent legal concepts exist under Chinese law and if so which of them would be applicable. On the view which I have formed it is not necessary to go further into this question for the purposes of deciding the application.

129. It should be emphasised that, on the applicants’ case, the payments from Liu Yuqing to Liu Wensheng did not of themselves violate any relevant Chinese law. It was the subsequent “transfers” by Liu Wensheng to Australia via KVB Kunlun which were said to have done so. Assuming for the moment that the necessary connection existed between those “transfers” and the prior payments by Liu Yuqing, the critical question is whether the “transfers” themselves violated article 225.

130. Xinfeng Australia was not a party either to the “transfers” or to the prior payments by Liu Yuqing. That does not prevent the principle from applying to the Facility Agreement if it was sufficiently related to transactions in China which violated Chinese law. But it is worth noting that on the applicants’ case, the foundational illegal acts were committed by Liu Wensheng himself.

131. Dr Huang described KVB Kunlun in her report as an “underground bank”. It may be accepted that KVB is not an approved “foreign exchange bank” in China (see [22] above). But Dr Huang’s characterisation of it as an “underground bank” does no more than reflect her use of the term to mean any institution which conducts “foreign exchange trading” (Dr Huang’s term) without being authorised to do so. It does not, so far as the evidence goes, reflect any specific provision of Chinese law.

132. Under KVB Kunlun’s business model, all a Chinese citizen who wishes to “transfer” money to Australia does in China is to transfer a sum of money, in Chinese currency, to another nominated Chinese bank account. No doubt when KVB accepts the “order” placed by the customer, it comes under obligations, express or implied, to ensure that monies transferred in China are matched by the promised equivalent receipt in Australian dollars. Thus KVB’s business may involve it engaging in a form of deposit-taking. But that is not the same thing as saying that the placement of an order by one of KVB’s customers involves a violation of article 225.

133. Counsel for the applicants relied by analogy on the decision of the Chinese court in Huang. An initial difficulty with this is Dr Huang’s evidence that Chinese law does not recognise any doctrine of precedent. Dr Huang referred to this in arguing that the Liu decision (see [109] above), which apparently conflicted with the Huang decision, had no precedential status. But that cuts both ways. The two decisions were given by courts which appear to be at the same level of the Chinese court hierarchy. The result, when different approaches appear to have been adopted by different courts, is to leave me uncertain what the content of Chinese law actually is in the relevant circumstances.

134. In any event, I think the Huang decision is not necessarily applicable to the present circumstances. It is true that, based on the facts recounted in the report, all Huang himself did was to pay Chinese currency to an “underground bank” in China. But it was always intended that Huang’s money would be converted into foreign currency and transferred out of China. That is not the way in which KVB Kunlun works.

135. As I have observed, the monies transferred by Liu Wensheng to the Chinese accounts nominated by KVB Kunlun did not actually flow out of China at all. The transaction was only a type of barter arrangement which saw an equivalent Australian sum change hands in Australia. I am not satisfied that this involved any contravention of article 225.

136. There is a further difficulty with counsel’s analysis. It concerns the language of the prohibition under article 225. That language requires entry into a transaction which “disrupts market order”. In fact, the language of sub-article 225(4), which is the relevant one, means that the transaction must be one which “seriously disrupts market order”.

137. Not every individual transaction involving the conversion of foreign exchange from one currency to another will be sufficiently significant so as to “disrupt” the “order” of the market as a whole, still less will it necessarily do so “seriously”. Not only must the disruption itself be serious, but the circumstances of disruption must also be “serious” or “especially serious” to attract criminal sanctions. It is far from clear that these open-ended terms would be satisfied by an individual customer of KVB making a “transfer”.

138. I do not think that the uncertainty is overcome by Article 3 of the Interpretation issued by Supreme People’s Court, quoted at [104] above. Article 3 requires conviction and punishment under article 225 when certain financial thresholds are met. Although it does not explicitly say so, the Interpretation could be read as a definitive specification that if those thresholds are exceeded, the relevant circumstances are at least “serious” for the purposes of article 225. But the Interpretation does not appear to address the other element of the offence created by article 225(4), namely that the operations in question “seriously disrupt market order”. Indeed, article 3 of the Interpretation itself contains a requirement of “disruption to financial markets” without containing any further definition of that term.

139. Article 4 of the NPC Standing Committee decision, quoted at [107] above, does not in my view provide any further clarification. The article does no more, for the purposes of the present case, than repeat that “serious” offences are to be “condemned and punished” in accordance with article 225. It does not contain any specification as to what “serious” offences are for this purpose.

140. In the result, I am left uncertain, on multiple grounds, that the “transfers” by Liu Wensheng via KVB Kunlun violated article 225. It follows that I cannot be satisfied that the prior transfers by Liu Yuqing to Liu Wensheng violated the article either.

141. I should note that the establishment of Xinfeng Australia (presumably with capital from China) and the advance of monies to One Capital via Liu Wensheng, without obtaining approval from the Chinese authorities, arguably constituted a breach of the rules on foreign investment and foreign lending which I have summarised at [26]-[35] above. But as I understood the argument by counsel for the applicants, he put his case on the basis of violation of article 225(4), arising from the “transfer” of the loan monies via KVB Kunlun, only. It is therefore unnecessary to consider whether offences under other Chinese laws were committed and if so by whom.

Effect of violation of Chinese law on Facility Agreement

142. On the conclusions I have reached, the applicants have failed to establish that there was a relevant offence committed in China under Chinese law. In deference however to counsel’s argument, I propose to consider whether, had such an offence been established, it would result in the invalidation of the Facility Agreement in accordance with the principle in Foster and Regazzoni.

143. There are a number of uncertainties about how far the principle extends. For the purpose of this application, I will refer to three of them: (1) whether the parties need to be aware of, or to intend, the relevant violation of foreign law; (2) the degree of connection required between that violation of foreign law and the obligation in suit in the proceedings; and (3) the relevance or otherwise of enforceability under foreign law.

144. Relevance of knowledge and intention: I have already referred to the unsuccessful argument in Foster that the written agreement in that case, on its face, could have been performed in a way which was not unlawful in the place of performance. The argument failed because the majority of the English Court of Appeal took the view that the parties had only recorded part of their bargain in the written agreement (see, in particular, Lawrence LJ at 501) and in fact it was part of their collective intention that the whisky would be smuggled into the United States. Similarly in Reggazoni both parties had been aware that the contract in question was part of a scheme to violate the Indian export embargo.

145. Counsel for the applicants in this case sought to take the principle further. Counsel argued that it could apply even if only one of the parties was aware of the violation of foreign law. Counsel relied on the decisions in the litigation in London following the collapse of the Enron group: Mahonia Ltd v JP Morgan Chase Bank (No 1) [2003] 2 Lloyd’s Rep 911; Mahonia Ltd v JP Morgan Chase Bank (No 2) [2004] EWHC 1938 (Comm).

146. The litigation concerned a letter of credit obtained from a bank allegedly as part of a scheme to present a false appearance for Enron’s accounts. Such a scheme would have been a violation of the securities laws of the United States, where Enron was headquartered. In the first decision (given on a strike-out application) Colman J held (at [15]-[24]) that the principle in Foster and Regazzoni was capable of applying even though the bank was not aware at the time of Enron’s purpose in obtaining the letter of credit. In the second decision, Cooke J took the same view (see at [426]-[429]), although that view was an obiter one, because his Lordship found on the facts that the letter of credit was not tainted with the illegal purpose alleged.

147. Counsel for the applicants pointed out that, on the unchallenged evidence, Liu Wensheng was not aware of any illegality in transferring money from China to Australia via KVB Kunlun at the time. But counsel noted that there was no comparable evidence from Liu Yuqing. Counsel invited me to draw a Jones v Dunkel inference against the respondents on this point.

148. I find this argument unrealistic. The evidence suggests that Liu Yuqing was in fact concerned to try to make the investment in a way which would comply with Chinese law. Furthermore, it was Liu Wensheng, not Liu Yuqing, who had previously used the services of KVB Kunlun. He would no doubt have been keen to obtain the money on offer. The suggestion of using KVB may well have come from him. Whether that is so or not, there is no reason to think that Liu Yuqing had any greater knowledge of any potential illegality with using this means of transfer than Liu Wensheng had.

149. It should be noted that in the Enron litigation, it was the innocent party, the bank, which was attempting to escape liability on the letter of credit. The conclusion of Colman J (endorsed by Cooke J) was that if Enron had obtained the letter of credit as part of a scheme to violate United States law, it would have been unable to enforce that letter of credit against the bank. It does not appear to have been suggested that, had the bank wished to do so, it would have been unable to enforce obligations under the letter of credit against Enron.

150. I see no reason to doubt the conclusion reached in the Enron case. But counsel’s argument based on that conclusion does not fit the facts of this case. I am not satisfied that Liu Yuqing or anyone else on Xinfeng Australia’s side of the transaction was aware of any illegality in using the services of KVB Kunlun, any more than Liu Wensheng was.

151. As I understood counsel’s argument, it was premised on a subjective appreciation on Liu Yuqing’s part that the transfer of funds using KVB Kunlun was contrary to Chinese law. It was not premised on a subjective intention simply to transfer the monies using KVB Kunlun, being a step which was in fact unlawful under Chinese law even if that was not appreciated at the time: cf Waugh v Morris (1873) LR 8 QB 202 at 208; see also, in a different context, Ostrowski v Palmer (2004) 218 CLR 493. In view of the other conclusions I have reached I do not need to pursue this idea any further.

152. Connection between violation of foreign law and obligation being enforced: The starting point is to consider the terms of the Facility Agreement, which was the source of the judgment in favour of Xinfeng Australia. By the Agreement two things happened. First, One Capital acknowledged already having received $8 million from Xinfeng Australia, which it promised to repay. Second, Xinfeng Australia undertook to advance a further $2 million to One Capital if asked to do so.

153. Thus, as to the $8 million, the Agreement proceeded on the basis that the money was already in Australia. The mechanism which had been used to transfer it was irrelevant.

154. Furthermore the Agreement contained no provisions dealing with how the remaining $2 million was to be paid. The Agreement was one between two Australian entities, relating to an investment in Australia. It was clearly implicit in the Agreement that Xinfeng Australia’s obligation was to provide the $2 million to One Capital in Australia and to do so in Australian currency, the money of account under the Agreement.

142. Subjectively the parties might have assumed that the $2 million would be paid to Liu Wensheng in China for him to “transfer” to Australia as had been done with the previous monies (and as in fact happened). But there was no obligation to do so. Had a potential illegality with KVB Kunlun been recognised by the parties after they had entered into the Agreement, it would have been Xinfeng Australia’s problem to get the money to Australia so as to comply with its obligations (subject to its right to cancel the transaction under clause 5.3).

143. It is of course true that the May agreement expressly provided that the $8 million which at that stage remained to be provided would be paid over in China and then transferred via KVB Kunlun to Australia. But the Facility Agreement was designed as a stand-alone contractual arrangement, which replaced all that had occurred before. So much was made express in the “entire agreement” clause (see [64] above). It is also significant that the Agreement expressly made provision, to the extent possible, that One Capital’s repayment obligation would be unaffected by any illegality (see [61]-[63] above).

144. In passing, it should be noted that at the time the May agreement was signed, the initial $2 million had already been received. That $2 million was paid pursuant to the March agreement, which provided that it was to be a “deposit”, not a loan. Moreover that agreement was made, and the $2 million paid, before Xinfeng Australia had even been incorporated.

145. Of course, this would not be important if the evidence showed, as in Foster, that the Facility Agreement represented only part of the parties’ contract. But there is no evidence that that was so.

146. The sequence of events suggests that after the $2 million was paid as a deposit on an investment, it was decided to convert those monies and future payments to a loan. The May agreement reflected that decision, and expressly referred to the provision of money. Then in July the parties decided to re-state the loan arrangement in a detailed form, prepared by Australian lawyers, which did not refer to the provision of monies via KVB Kunlun.

147. Thus, although the parties may have contemplated that the monies would be provided via KVB Kunlun, they did not so provide in the Facility Agreement. If they had intended to make that a term of their bargain, there would have been no reason to leave it out, as the possible problem with the legality of using KVB Kunlun had not yet emerged. In short, there is no reason to doubt that the Facility Agreement contained an authentic and complete record of the parties’ bargain at the time.

148. In Regazzoni, Lord Keith of Avonholm ([1958] AC at 328) referred to some of the cases where “goods or money had been acquired and brought into this country in breach of some foreign law” but a subsequent contract was not treated as being unenforceable for illegality. His Lordship suggested that the result in these cases, or some of them, might be justified on the ground that:

the illegality had been exhausted and new rights and liabilities had emerged which did not call for any recognition of the illegality.

162. It is notable that his Lordship spoke of goods or money being brought illegally into the jurisdiction. What he said has direct application to the Facility Agreement insofar as that Agreement contained an acknowledgement and covenant to repay the $8 million already received.

163. His Lordship’s suggestion also lines up with the rule of domestic law that illegality in acquiring an asset is not an answer to a claim which is based on the plaintiff’s title to the asset or can be framed in some other way which does not depend upon the plaintiff’s unlawful conduct in acquiring it: Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65; Singh v Ali [1960] AC 167. In Mahonia (No 1) Colman J emphasised that the rule does not allow direct enforcement of a contract having an illegal purpose, but accepted that the rule does permit the collateral enforcement of proprietary rights: see [2003] 2 Lloyds Rep 911 at [25]-[27].

164. The idea that illegality in bringing the money to Australia would be no answer to a claim to recover that money does not apply to the remaining $2 million, which at the time of the Facility Agreement had not been paid over. But if the obligation to lend that further sum was infected by an intention to transfer the monies via KVB Kunlun, another point comes into play.

165. Both in Foster and in Regazzoni, the illegality was central to the contract in question. Indeed the existence of the foreign prohibition and the economic incentive it created were the whole raison d’etre of the scheme.

166. The present case is different. It is true that ultimately Xinfeng Thermoelectric seems to have been unable to obtain permission to invest the $80 million required for the Landmark Square development offshore. But there was no evidence that it would have been impossible to obtain permission for the much smaller sum required for the One Treacy loan, if that had been thought necessary.

167. In any event, lending the money and obtaining repayment were clearly the most important considerations, rather than how the money was transferred. I was not referred to any authority in which the principle in Foster and Reggazoni has been applied to an incidental illegality, even if intended by the parties. This point is related to the next issue, to which I now turn.

168. Enforceability under foreign law: As Dr Huang expressly noted, the evidence before me does not establish that, under Chinese law, monies are irrecoverable if advanced by way of foreign transfer in violation of article 225 of the Criminal Code. It might be asked whether in those circumstances an Australian court should go further.

169. A similar point, also involving Chinese law, was considered by Teare J in Emeraldian Ltd Partnership v Wellmix Shipping Ltd [2011] 1 Lloyd’s Rep 301. That case concerned a charterparty for shipment of iron ore from Brazil to China. A Chinese corporation (GIS) guaranteed the charterer’s obligations under the charterparty. The guarantee was found to be governed by English law.

170. The evidence before his Lordship established that under Chinese law a Chinese corporation such as GIS required the prior permission of SAFE to issue a guarantee overseas. Contravention could result in a penalty of up to 30% of the value of the guarantee. The guarantee was also void under Chinese law, but nevertheless civil liability could be imposed on the guarantor “according to fault”. If both creditor and guarantor were at fault a maximum liability of 50% could be imposed.

171. The guarantor sought to invoke the principle in Foster and Regazzoni. But his Lordship, after noting that the guarantee still gave rise to some civil liability under Chinese law, said:

In these circumstances it does not appear to me that English public policy requires the court to refuse to enforce a guarantee governed by English law which was issued in China in breach of the local law. If Chinese law does not regard the civil liability otherwise arising from the guarantee to be unenforceable there is no reason why English law should so regard it.

172. This conclusion was not necessary to his Lordship’s decision. Counsel for the applicants argued that it was not correct. Counsel contended that the civil enforceability or otherwise of the relevant contract under foreign law has not been identified as a relevant factor in any other decided case. Counsel submitted that the Foster and Regazzoni principle is one of local law and foreign civil law is therefore irrelevant.

173. I do not accept these submissions. While the judgments do not expressly say so, it is obvious that the agreement in Foster would have been void for illegality under United States law. No doubt the contract in Regazzoni would likewise have been unenforceable in India if made under Indian law.

174. It may be accepted that the principle in Foster and Regazzoni is one of local civil law, so that foreign civil law consequences do not apply directly. But that does not make them irrelevant. The principle is ultimately based on comity. The idea is that enforcement of a contract which contravenes the law of a foreign country is in some way an infringement of that country’s sovereignty. It seems strange to see a step which the foreign country’s own courts would themselves take in like circumstances as such an infringement.

175. Accepting the argument for the applicants would have the result that a Chinese citizen who transferred money abroad pursuant to an arrangement with a foreign citizen which contravened Chinese foreign exchange rules could be robbed of that money with impunity. I would not assume that allowing the citizen to recover would be seen by China as a violation of its sovereignty unless that was unmistakably clear.

176. The sanctions contemplated by the Regulations on Foreign Exchange Control referred to at [96]-[98] above include, as one might expect, repatriation of the funds concerned, fines and in some cases confiscation. Article 7 of the Interpretative Decision of the Supreme People’s Court provides in the case of violation of article 225(4) of the Chinese Criminal Law that the monies used in the transaction should be forfeited to the state. None of this is consistent with the idea that a foreign borrower under an unlawful transaction should be able to escape scot-free.

177. In the Emeraldian case, there was evidence that the relevant contravention of Chinese law reduced, but did not eliminate, the guarantor’s liability under Chinese law. In the present case there is no evidence that, if Chinese law were applicable, the alleged illegality would have any impact whatsoever on the lender’s obligation to repay. On the evidence, I see no justification for denying recovery, least of all on the basis of international comity. Even if I had concluded that an offence had been committed against Chinese law, I would not have applied the principle from Foster and Regazzoni in the present case.

Power to set judgment aside

178. Although I am not satisfied on the evidence that there has been a breach of any relevant provision of Chinese law, the evidence on that subject was not exhaustive and the expert evidence did not address all of the issues to which I have referred. There is at least a possibility that if the judgment were set aside, the defendants would have an arguable defence of illegality. For this reason, as well as out of deference to the argument of counsel, I propose to address counsel’s arguments concerning the Court’s power to set aside the judgment.

179. Before doing so, I should note an amendment made to the application shortly before it was heard. The defendants amended their notice of motion so as to seek, apparently as primary relief, an order that execution of the judgment be permanently stayed.

180. I am not sure that the Court has power to make such an order in the circumstances of this case. To do so would be more favourable to the defendants than setting aside the judgment, which would result in the proceedings being revived, carrying with it the possibility that the defendants might ultimately be unsuccessful. If I make an order permanently staying the enforcement of the judgment, the plaintiffs will never be able to enforce it. By the same token, the defendants will never be able to obtain a judgment in their favour. The claim will remain in suspended animation forever.

181. Even if I had power to make such an order, I would only do so if the defence of illegality was certain to succeed. For the reasons I have given, the defendants have fallen short of establishing that in the present case. I therefore do not propose to consider the application for a permanent stay on the enforcement of the judgment any further.

182. Counsel put the application to set aside the judgment on three bases. It is convenient to deal first with counsel’s reliance on the following passage from the judgment of the High Court in Harvey v Phillips (1956) 95 CLR 235 (at 243-244):

The question whether the compromise is to be set aside depends upon the existence of a ground which would suffice to render a simple contract void or voidable or to entitle the party to equitable relief against it, grounds for example such as illegality, misrepresentation, non-disclosure of a material fact where disclosure is required, duress, mistake, undue influence, abuse of confidence or the like.

183. I referred to Harvey v Phillips in some detail in McLachlan v Sydney Trains [2021] NSWSC 283, a case of alleged mistake, and will not repeat what I there said. As the language of the passage upon which counsel relied makes clear, that particular passage refers to the Court’s general law powers concerning the validity of contracts. Specifically, the passage is a reference to the grant of equitable relief by way of rescission in aid of common law rights: see generally J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5^th ed, 2015, LexisNexis Butterworths) at [25-075]-[25-090].

184. As counsel pointed out, the passage expressly refers to illegality. Counsel accepted that the High Court spoke in terms of relief against contracts, but submitted that where the contract resulted in a judgment then the power extended to setting aside the judgment as well: see Owners-Strata Plan No 57,164 v Yau (2017) 96 NSWLR 587 at [68]-[80].

185. If a party is sued on a contract which is illegal at law, the party may of course simply defend the proceedings on the ground that the contract is void and has no legal effect. But there is no doubt that equity will grant relief by way of rescission where legal rights and immunities are inadequate. The full panoply of equitable relief is available. This may include, in a proper case, the making of a declaration or an order for delivery up and cancellation of documents. If property has been conferred pursuant to the contract in question the Court can order reconveyance (provided that restitutio in integrum is possible).

186. It may be that the Court’s equitable powers extends to ordering a party with the benefit of a judgment to consenting to the judgment being set aside. Whether the Court has power to order the setting aside directly, in a case not covered by the Rules (or the Court’s inherent power if it exists), does not need to be decided.

187. In my view the fundamental difficulty with the applicants’ reliance on the passage from Harvey v Phillips is that the judgment in the present case is only indirectly and remotely based on an allegedly illegal agreement. The judgment itself reflects the settlement agreement made between the parties in October 2018. There was nothing illegal in that agreement. A compromise in which the defendant agrees to pay a sum to settle proceedings is binding and effective, so long as the plaintiff believes in good faith that the claim is viable, even if in fact it is invalid: J D Heydon, Heydon on Contract: The General Part (5^th ed, 2019, Lawbook Co.) at [5.380].

188. The difficulty with the defendants’ position is illustrated by other procedural considerations.

189. In the present case the defendants did not even raise illegality as a defence to the plaintiffs’ claims. Had they done so, and then later compromised the proceedings by submitting to judgment, they plainly could not have later sought to impeach the compromise. It would be wrong for the Court to allow them to be in a better position by not raising the illegality ground in the first place.

190. Furthermore the defendants are for present purposes relying on principles of substantive law. It cannot be enough for them to point to an arguable case. They must establish a legal entitlement to rescission on a final basis. For reasons I have given, their evidence falls short of doing so.

191. Finally, the defendants’ application is not merely to set aside the monetary judgment in favour of the plaintiffs. The defendants seek the setting aside of all of the consent orders made on 18 October 2018. These include the order dismissing the cross-claim and the order for costs in favour of the plaintiffs.

192. I should note that counsel for the defendants proposed that, in the event of the Court setting aside the judgment, the defendants would notify the plaintiffs and, if the plaintiffs took no further action, the defendants would apply to have the proceedings dismissed. Then the defendants would discontinue the cross-claim. But I think this makes no difference to the point that I have made. If the consent orders are set aside the defendants will have a right to pursue the cross-claim, contrary to an order made against them by consent. The fact that they may choose not to do so does not alter that fact. Similarly the defendants will escape a costs liability which they voluntarily agreed to bear.

193. The second basis for the application identified by counsel does not give rise to these substantive law complications. Counsel relied on a specific procedural power concerning judgments in the form of r 36.15(1) of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) which provides:

A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith.

194. As counsel observed, this rule specifically applies where a judgment has been entered “illegally”. Unlike other provisions of the Rules (see, for example, UCPR, r 36.16(1) and (3A)), there is no time limit on the making of an application under r 36.15(1). Counsel submitted that if the provisions of the Facility Agreement on which Xinfeng Australia relied were illegal, then so too was a judgment which would have the effect of enforcing those obligations.

195. Counsel was unable to refer me to any authority on the meaning of the term “illegally” in the Rule. I must therefore deal with counsel’s submission as a matter of principle.

196. In Application of Rinehart: 2020/142504 (No 2) [2021] NSWSC 364 at [98] I referred to the principles which applied in the territory now occupied by UCPR, r 36.15(1) before the introduction of the Judicature system. As the High Court described in Clone Pty Ltd v Players Pty Ltd (2018) 264 CLR 165 at 192 [54], among the circumstances in which a decree might be set aside in equity was where the decree was obtained in circumstances of “surprise” and “underhand dealings”.

197. UCPR, r 36.15(1) applies to all judgments, not merely equitable decrees. It also applies to judgments obtained “irregularly, illegally or contrary to good faith” which would cover the same ground as the old equitable jurisdiction but arguably expands beyond it. The rule must however still be applied so as not to intrude too much on the fundamental principle that, except for limited and clearly defined exceptions, judgments are final: Burrell v R (2008) 238 CLR 218 at 223 [15].

198. If counsel’s argument is correct, there would indeed be a severe intrusion. Defendants could apply to have the judgment against them set aside whenever they could allege that the judgment had been based, directly or indirectly, on a contractual obligation which arguably involved illegality. As in the present case, they could do so years after the judgment has been given, and when the judgment had actually been given by consent. The disruptive consequence tells powerfully against counsel’s argument.

199. In my view it would be going too far to allow a judgment, regularly and properly obtained and entered, to be challenged on such a basis. I think that for a judgment to have been obtained “illegally” for the purpose of r 36.15(1), its entry must itself have involved some form of illegality. For the reasons I have given, that is not the case here.

200. Finally, counsel relied on what he described as the Court’s “inherent power” to set aside the judgment in question. But I think that reference to “inherent power” in the current context may mislead. In support of counsel’s argument under this head, counsel referred to the judgment of Finlay J in Lewis v Combell Constructions Pty Ltd (1989) 18 NSWLR 528. I set out the facts of that case in McLachlan. It was also a mistake case.

194. As I observed in more detail in McLachlan at [73]-[111], the basis or bases on which the courts intervene in such cases is complex. In particular, there is, in mistake cases, the possibility of relying on what the learned authors of Meagher, Gummow and Lehane called an “ancient and shadowy jurisdiction” to review contracts of compromise on the basis of mistake.

195. As counsel for the defendants conceded, in Lewis v Combell judgment had not been entered and accordingly the principle of finality did not come into play. For that reason alone Finlay J’s decision does not apply in the present case. And to the extent that his Honour contemplated that a perfected judgment might be set aside, principles derived from the law of mistake cannot necessarily be applied to cases of alleged illegality.

196. Furthermore, as I pointed out in Rinehart (No 2) at [99], it may be that the term “inherent power” is a misnomer for other reasons. It may be that the Court’s powers are now codified in the Rules and no such inherent power exists. Even if it does, I think that considerations such as those which I have already discussed in the context of UCPR, r 36.15(1) mean that it is not available in the present case.

Conclusions

204. For these reasons, I am not satisfied that the defendants have established any illegality which would be a defence to the claim. Nor am I satisfied that an arguable case of illegality should entitle the defendants to have the judgment set aside and the matter restored to the list.

205. The reasoning which underpins these conclusions is based on the judgment in favour of Xinfeng Australia based on its debt claim under the Facility Agreement. As already noted, there was also a consent judgment in the same amount in favour of Liu Yuqing personally.

206. It is not clear that Liu Yuqing had any independent right of action. That, however, does not avail the defendants in this application. Rather the reverse.

207. The judgment was given by consent. There is nothing to stop a defendant from agreeing to a judgment in favour of a party to whom that defendant is not indebted. All the existence of the judgment in favour of Liu Yuqing does is to underline the point I have already made that the agreement to settle the proceedings was a separate and distinct contract which cannot be impeached even if the underlying claim by the plaintiffs was arguably invalid.

Orders

208. The order of the Court is:

Notice of motion dated 2 September 2019 (as amended)

1. Order that the motion be dismissed.

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Amendments

31 May 2021 - Amend quote indentations

31 May 2021 - Amend cover page