Xu v Cao & Du Management Pty Ltd

[2025] NSWSC 1077

Supreme Court

New South Wales

Medium Neutral Citation:

Xu v Cao & Du Management Pty Ltd [2025] NSWSC 1077

Hearing dates:

1 - 5, 9 -10 September 2025

Date of orders:

22 September 2025

Decision date:

22 September 2025

Jurisdiction:

Common Law

Before:

Elkaim AJ

Decision:

1. Judgment for the plaintiff against the first defendant in the sum of $21,984,458.90.

2. The first defendant is to pay the plaintiff’s costs of the proceedings.

3. It is noted that the claim against the second defendant and the cross-claims have been stayed by reason of the Bankruptcy Act 1966 (Cth).

4. The parties have liberty to make further submissions in respect of costs, interest, the final judgment sum, and the future conduct of the stayed claims.

Catchwords:

CONTRACTS — Loan agreement — Whether representations were made as to enforceability of the agreement — Whether plaintiff operated through agents — Effect of credit on existence of the representations — Whether default interest clause constituted a penalty — Where rate of interest upon default is 3% per month, compounding — Whether the interest provisions could be applied in part or were void ab-initio

BANKRUPTCY — Cross-claim previously commenced by a debtor subject to a personal insolvency agreement under the Bankruptcy Act 1966 (Cth) — Effect of Bankruptcy Act 1966 (Cth) on the proceedings — Resulting stays of parts of the proceedings -— Cross-claims and action against second defendant stayed

Legislation Cited:

Australian Securities and Investments Commission Act 2001 (Cth)

Bankruptcy Act 1966 (Cth), Pt X, ss 60, 189, 229, 231

Contracts Review Act 1980 (NSW), ss 6, 52

Civil Procedure Act 2005 (NSW), s 100

Cases Cited:

Abi-Rizk v BB Dundas Pty Ltd atf the BB Dundas Trust (No 2) [2025] NSWSC 950

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30

Aquamore Credit Equity Pty Ltd v Hung; First on First Development Pty Ltd v Aquamore Credit Equity Pty Ltd [2021] NSWSC 1681

Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328

Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373

Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 801

Huynh v Ledinh Sovereign Super Pty Ltd [2024] NSWCA 78

International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644; [1958] HCA 16

John v Neiman Holdings Pty Ltd (1986) 84 FLR 84

John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451

Ledinh Sovereign Super Pty Ltd v CT Stone Pty Ltd [2023] NSWSC 1079

Neighbourhood Association NA 285249 v Watson [2007] NSWLEC 729

Paciocco v Australia and New Zealand Banking Group Limited (2016) 258 CLR 525; [2016] HCA 28

Watson v Foxman (1995) 49 NSWLR 315

Category:

Principal judgment

Parties:

Jiaqing Xu (Plaintiff)
Cao & Du Management Pty Ltd (First Defendant)
Howard Hao Ting Cao (Second Defendant)
Xue Yang c/- Sunfield Chambers (Interested Party 1)
Thyge Trafford-Zhao (Interested Party 2)

Representation:

Counsel:
A J McInerney SC (Plaintiff)
Dr J R Hudson (Plaintiff)
A Rizk (Defendants)
Solicitors:
Juris Cor Legal (Plaintiff)
Tzovaras Legal (Australia) Pty Ltd (Defendants)

File Number(s):

2022/78620

Publication restriction:

No

JUDGMENT

1. The plaintiff is a Chinese resident and national. His case is simple. He says that on 17 October 2016 he entered into an agreement with the first defendant to lend the first defendant $3,300,000, which was to be repaid on 31 October 2018. The loan, which is encompassed in a written agreement, was guaranteed by the second defendant.

2. Under clause 4 of the agreement the first defendant was obliged to use the $3.3 million to purchase “Units”, defined in clause 1.1 as “units in the Option Greenacre Investment Trust”. The proceeds of the purchase of the units were to be used by the trustee of the just mentioned trust to “acquire Greenacre Units”. Notably, at this stage, nowhere in the agreement is it suggested that the plaintiff would acquire a beneficial interest in the Greenacre Units.

3. The amount to be repaid on 31 October 2018 was $6,600,000. This figure represented the principal amount of the loan plus interest over the two years of the loan.

4. The $6,600,000 was not repaid on 31 October 2018, nor at any other time, other than $300,000 on 1 April 2019. These proceedings are the plaintiff’s claim for recovery of the loan together with interest assessed pursuant to the agreement. Applying the interest provisions of the agreement the amount outstanding as at 8 September 2025 was $71,585,500.55.

5. The defence denied the simplicity of the plaintiff’s claim and instead described the loan agreement as a sham. It was a sham because the intent of the agreement was to shield the plaintiff (or his agents) from capital gains tax. If it was not a sham, then the defendants asserted that the agreement was not enforceable because of an ancillary agreement to that effect. If still unsuccessful, the defendants said the interest provisions were unconscionable, illegal, or in the nature of a penalty.

6. By the end of the evidence the sham defence was abandoned, and it was conceded that the plaintiff had lent $3,300,000 to the first defendant. This left, as far as the first defendant was concerned, enforceability and the interest provisions in issue. The enforceability point was described by the defendants’ counsel in this way in opening written submissions:

“3. The primary defence raised by the defendants is that they have no liability under the Loan Agreement on the basis that:

(a) (abandoned)

(b) (abandoned)

(c) there were representations made by agents of the plaintiff, being Henry and Daniel, that the terms of the Loan Agreement would not be enforced or relied upon, which induced the defendants to execute the agreement.”

7. In respect of the second defendant, his defences were aimed at relief from his obligations under the guarantee.

8. Other than the plaintiff, the main persons involved in the case were the second defendant, Mr Cao (often referred to as Howard), Mr Kai-Bun Wong (referred to as Henry) and Mr Kai-Ming Wong (referred to as Daniel). I will, without any disrespect, continue the use of the names, Henry and Daniel. They are brothers. Daniel is the plaintiff’s son-in-law.

9. This is an appropriate point to deal with limitations which have been imposed on my reasons. I was told that Mr Cao had entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth), which, following a meeting of creditors on 29 August 2025, had not been set aside (s 189 of the Bankruptcy Act). This circumstance brought into play ss 60, 229 and 231 of the Bankruptcy Act.

10. The plaintiff has commenced the process of setting aside the personal insolvency agreement through Federal Court proceedings, but these proceedings are unlikely to be heard for some months. It would not be appropriate for me to await the result of the proceedings.

11. The immediate effect of the above Bankruptcy Act provisions is to stay the cross claims brought by both defendants. This was agreed and is consistent with the decision of Young J in John v Neiman Holdings Pty Ltd (1986) 84 FLR 84 and, perhaps more directly, the decision of Biscoe J in Neighbourhood Association NA 285249 v Watson [2007] NSWLEC 729 at [3] and [6].

12. There was initially some debate about any judgment I gave in respect of the second defendant. After discussion, the parties agreed on the following in respect of the whole of the proceedings:

1. The plaintiff’s claim against the first defendant could proceed to judgment without any limitation. There was no restriction on making findings concerning the second defendant to the extent he said or did things which were ingredients of, or referable to, this claim. There was no issue that the second defendant was the first defendant’s ‘controlling mind and will’.

2. The plaintiff’s claim against the second defendant was stayed. In line with the decision of Bennett J in Abi-Rizk v BB Dundas Pty Ltd atf the BB Dundas Trust (No 2) [2025] NSWSC 950, at [58], I should not take any step which “advances the proceeding towards judgment”. The effect is that I would not make any findings on the guarantee or on the defence arising from the Contracts Review Act1980 (NSW) (CRA). This includes not deciding about the second defendant’s capacity to rely on the CRA, in particular having regard to s 6(2) of this Act.

3. The cross claims were stayed, and again I was not to take any step which “advances the proceeding towards judgment”.

13. I note here, in respect of the CRA, that it has no application in respect of the case against the first defendant because s 6(1) states “…a corporation may not be granted relief under this Act”.

14. One of the results of the cross-claim being stayed, and of the concessions made by the first defendant as to the existence of the loan (and there being no sham agreement), was that the involvement of one of the cross-defendants, namely Tung Chit Real Estate Investment Australia Pty Ltd (Tung Chit), became less important and perhaps even irrelevant.

15. Reflecting the asserted simplicity of his case, the plaintiff’s evidence was entirely documentary and did not include the affidavits of the plaintiff Henry and Daniel. Some affidavits that had been filed and served on behalf of the plaintiff did come into evidence after portions of the affidavits were tendered, as admissions, by the first defendant.

16. I have already stated, that after concessions made by the first defendant, the remaining issues concerned the alleged misrepresentations made as to enforceability, and the arguments about the interest provisions in the agreement. I will deal with each in turn, but before doing so I will discuss the credit, and reliability, of the two witnesses who gave oral evidence.

17. The two witnesses were Mr Cao and Mr Yuan Zhao. I do not accept Mr Cao as either a truthful or reliable witness. I do not accept Mr Zhao as a reliable witness. My reasons follow.

Mr Cao

18. The second defendant, Mr Cao, gave oral evidence. Two matters became clear early in his cross-examination:

1. He had a good deal of experience in finance, especially in relation to property. In 2002, Mr Cao graduated with a bachelor’s degree in commerce from Macquarie University. His first job was with Australian Mortgage Brokers in Kensington. He started off, in about 2004, in a junior position, but did well to the extent that he was offered shares in the company. In 2015, Mr Cao had his own mortgage brokerage company called Option Finance. This business still exists although his involvement is more managerial than having client contact. Mr Cao also became involved in property development, from about 2011, initially through a company called Rich Sea International. The first project, in 2011, was called the Magenta Project, which is ongoing. In addition, Mr Cao has run a real estate agency since 2008.

2. Although Mr Cao asserted that his verification of the defence was correct, it is obvious that a number of the assertions are not correct. For example, in paragraph 52 it states that the defendants were not given the opportunity to obtain legal or financial advice; did not receive any legal or financial advice; they had no ability to negotiate the terms of the loan agreement, and there was no negotiation as to the terms. These assertions are unquestionably incorrect. The agreement was prepared by solicitors, there was ‘to-ing and fro-ing’ about its terms and the defendants had every opportunity to, and did, obtain legal and financial advice.

19. At the end of cross-examination Mr Cao gave this evidence:

“Q. But you accept that you are a very sophisticated man of business?

A. Yes.

Q. Entirely capable of protecting your own interests in respect to the loan agreement?

A. Yes.

Q. And entirely capable of making an informed commercial decision about whether to enter into the loan agreement?

A. Yes.

Q. And entirely capable of making an informed assessment about the default rate of interest in the loan agreement, correct?

A. Yes.”

20. The particulars given to support the CRA claim endeavour to paint a picture of inequality of bargaining power, lack of legal advice and being overborn. There is an air of the classic CRA case of an unsophisticated person being bullied or bluffed into an agreement or guarantee. There is nothing about Mr Cao which would permit such an assessment.

21. Although the defendants ultimately conceded that Mr Cao had received legal advice, the evidence concerning legal advice nevertheless remains important in the assessment of Mr Cao’s credit. The evidence about legal advice was overwhelming both as to its contents and its nature. It is important not only to Mr Cao’s credit but also to the likelihood of the representations he asserts were made by Henry and Daniel. As will be seen below, the asserted representations are fundamentally implausible set against the background of having received legal advice and the subject of the representations concerning matters that had been well settled at least two weeks earlier.

22. Mr Cao’s solicitors at the time were MinterEllison, a well-known and large legal firm. The evidence is to the effect that MinterEllison corresponded closely with Mr Cao and his Chief Operating Officer, Ms Hu, about the contents of the agreement and their opinion as to changes that ought to be made. Draft agreements were exchanged between the parties. The suggestion that no legal advice had been given was bordering on ludicrous.

23. For example, on 2 October 2016, Ms Nicola Clayton from MinterEllison, apparently working on a Sunday, sent a long email to Ms Hu going through a list of changes that had been previously recommended, but rejected by the plaintiff, and which Ms Clayton regarded as “critical”.

24. Another element of the legal advice evidence was that Mr Cao said that MinterEllison had ceased acting for him on 2 October 2016. The documents produced by MinterEllison are to the contrary. A tax invoice addressed to Option Funds Management Ltd dated 30 November 2016 contains an entry for 7 October 2016 charging for a telephone call with Ms Hu regarding “amendments to Jiaquing Xu loan agreement”.

25. Mr Cao persisted in his unlikely position until taken through the many documents that contradicted him, ultimately leading to the concessions made at the conclusion of the evidence. The concessions should in fact have gone further because the entire allegation of an ‘uneven playing field’ never had any substance.

26. As far as Mr Cao’s credit is concerned, it should by now be evident that by the end of cross-examination his credit had been so battered as to leave any suggestion that any of his uncorroborated evidence might be accepted as most unlikely.

27. Notwithstanding that Daniel and Henry were not cross examined, because their affidavit evidence was not read, I nevertheless do not accept Mr Cao’s version of the conversations he says he had with Daniel on 4 and 5 October 2016, and with Henry, on the telephone, on 7 October 2016.

28. It is not an easy conclusion to reach, that a conversation where only one of the two participants gives evidence, that the person who gave evidence should not be accepted. My conclusion on Mr Cao’s credit is such however, that I do not accept his evidence. In addition to my assessment of his credit, the conversations are simply at odds with the overall picture presented by the documentary evidence and by the WeChat evidence. This is not to say that I prefer any alternative version of the conversations, simply that I do not accept Mr Cao’s versions.

29. Another subject concerning credit relates to his apparent breaches of freezing orders. There are perhaps many, but, exemplified by gambling at the Sydney Crown Casino and Mr Cao’s apparent manipulation of the first defendant’s structure by share transfers and the appointment of his mother as a director of related companies.

30. When cross-examined about the gambling Mr Cao gave this evidence:

“Q. Well, this is the evidence you’re giving, Mr Cao. You said, (1) I got it from my mother, (2) it was a loan from my mother. That was your answer, correct?

A. Yes.

Q. And my proposition to you was, wherever the money came from, once you’ve received it, it’s your money. You understand that? It’s an asset of yours. Do you agree?

A. I don’t agree.

HIS HONOUR

Q. Let the just ask you this. Is it your position that because the money you used for gambling came from your mother, you were not in breach of the freezing order which was concerned with your money? That’s your position?

A. Yes, that’s my position.”

31. This is not dissimilar to Mr Cao’s evidence before Lonergan J on 26 August 2025, when her Honour was dealing with a notice of motion seeking freezing orders. The following questions and answers are on p 36 of the transcript:

“Q. What was the source of your money to undertake that gambling?

A. Borrowed.

Q. Who did you borrow it from?

A. My mum.” (X)

32. The answers given before me and before Lonergan J, make it clear that the money to be used for gambling came into Mr Cao’s possession in order for him to facilitate the gambling. His suggestion that because the money came from his mother and therefore effectively bypassed him, and in turn was therefore not a breach of the freezing order, is untenable.

33. In fairness to Mr Cao, but having no effect on his credit, I should add that although the evidence referred to $30 million being gambled, that was a reflection of money going into and out (withdrawals and deposits) of his gambling account at the casino and not a total of the amount he had spent. He estimated the amount he had spent was closer to $2 million.

34. On 9 May 2025 Mr Cao transferred his two shares in the first defendant to his mother’s company (CHT Aus Holdings Pty Ltd) and his mother (Ms Su) was made a director of the first defendant. On 15 May 2025, Mr Cao transferred 100 of CHT’s shares in Option Wealth Pty Ltd (Option Wealth) to Jiahong Gu for $100 and then on 12 June 2025 Ms Su transferred Jiahong Gu’s 100 shares in Option Wealth to CHT for $100. Mr Cao was a director and shareholder in Option Wealth from 2014 – 15 May 2025 when Ms Su was appointed a director. Mr Jiahong Gu is a former director of Option Wealth.

35. On 25 August 2025 CHT transferred shares in the first defendant to Mr Cao. There is a strong inference that the various share transfers and the appointment of Ms Su as a director of the first defendant were ‘manipulations’ designed to circumvent the freezing orders.

36. The result of the above is that I think the plaintiff succeeded in so demolishing Mr Cao’s credit that he should not be believed unless independently corroborated.

37. Mr Rizk, on behalf of Mr Cao, valiantly submitted that no matter what impact the cross-examination had on Mr Cao he nevertheless ought to be accepted on his evidence about the misrepresentations because of his consistency on the topic:

“RIZK: … But the one thing that he was resolute on is that he executed that agreement because they had told him they would not enforce. The one defining feature of where he was consistent in his evidence was that specific point.

So, at its core point, my submission is that, even if your Honour doesn’t accept his evidence on other matters, on that point is where your Honour will find his evidence was the strongest and most consistent. One can look at the commerciality of entering into this agreement and, of course, some judges are always reluctant to try and assess the rationality of any decision. But Mr Cao’s evidence consistently was that that is what ultimately induced him to sign this agreement. It’s been said that really, at least it was put in cross-examination, it’s not as prevalent in the written closing, is that he was desperate for the money. And that is why he effectively signed the terms, because they needed to settle. But the WeChat messages suggest settlement for this property was due early September. The funds, of course, don’t get advanced till a month later. And again, the WeChat messages, the contemporaneous records, and all of these other agreements, show that Mr Cao had access to funds elsewhere.”

38. But as also recognised by counsel, the representations are essentially made in the conversations in the meetings on 4 and 5 October 2016 and the telephone call on 7 October 2016, all of which rely entirely on the word of Mr Cao. The WeChat messages do not corroborate the asserted representations, nor do the exchanges with MinterEllison, nor do the emails involving Ms Hu, and there is no independent reliable corroboration of the representations.

39. Mr Cao may have been consistent in what he said about enforcement, but it is to be remembered that he also verified a defence alleging a sham agreement, a position entirely different to an acceptance of a loan agreement, whatever might be said of its enforcement.

Mr Zhao

40. The defendant relied on an affidavit of Mr Yuan Zhao dated 21 February 2025. Mr Zhao was cross-examined. The primary purpose of his affidavit was to bring into evidence a conversation that he said occurred on about 8 October 2016 at a Chinese restaurant in Haymarket, attended by himself, Mr Cao, Daniel, and Henry.

41. The restaurant was either the Golden Century or the Emperor.

42. The conversation occurred in Mandarin. The version in the affidavit is Mr Zhao’s English interpretation. The alleged conversation was:

“Daniel:   Howard, how confident are you about the return I am expected to receive from the project at Greenacre?

Howard:   Your return on the investment you made in Greenacre is going to be 100% once the project is finished.

…

Mr Zhao:   Hey, Howard, 100% return on investment in two years, is that right?

Howard:   By my calculations, investors should get a 100% return. There are no guarantees. Once the Greenacre Project is done, hopefully in two years, I plan to return the initial investment to people like Kai-Ming Wong (Daniel), along with any extra benefits based on their investment.

Mr Zhao   Ah, I see.

Mr Zhao:   Daniel, wow 100% return on investment? How much did you put in?

Daniel:   I used my father-in-law’s name to invest in Greenacre and put in around $3.3million.

Mr Zhao:   Good luck and all the best.”

43. Before examining the likelihood of the conversation being remembered, two points emerge:

1. The ultimate admission that there had been a loan is contrary to the existence of an investment.

2. There is no mention at all of Tung Chit, which was supposed to be the vehicle utilised for the investment.

44. The possibility of Mr Zhao recalling the conversation was attacked. The following factors emerged:

1. Mr Zhao and Mr Cao have been friends since about 2010.

2. Mr Zhao currently owed Mr Cao approximately $3 million. He had borrowed $3 million in 2014 and up to 2017 had paid $1.1 million in interest.

3. Mr Cao had contacted Mr Zhao in 2025 to ask if he remembered the conversation. Between the conversation in 2016 and Mr Cao’s call in 2025 Mr Zhao had no reason to recall the conversation.

4. The dinner had taken about three hours during which one or two bottles of cognac had been consumed.

5. Mr Zhao worked out the date of the dinner (about 8 October 2016) based on his recollection of Daniel travelling to Australia regularly about this time of the year for a child’s birthday in early October. The dinner was not however a birthday celebration.

6. Mr Zhao could not remember what he did, or where he was, on the day before or the day after or the weekend after the dinner.

45. Mr Zhao rejected the suggestion that he had no recollection of the conversation but had made it up, or been prompted by Mr Cao, because of their friendship and the fact that he owed Mr Cao about $3 million.

46. Mr Zhao said he could not comment on the possibility that Mr Cao and Daniel were not in Australia on 8 October 2016. There is evidence to suggest Mr Zhao may have been at a dinner on 5 October 2016 at the Golden Century restaurant. However, in the WeChat message in Exhibit M on 2 October 2016 at 14:48 Daniel says “ask Yuan Zhou to come after we have finished talking. If there are any issues with the contract that need to be discussed, lets discuss them first by then”. This entry would suggest Mr Zhao was not party to any conversation about the agreement.

47. The meeting at the restaurant is to be contrasted with the evidence of Mr Cao. On his version, Henry’s wife and son were also at the meeting. They were celebrating Henry’s son’s birthday. They at least agreed that cognac was the preferred beverage, and one or two bottles were consumed.

48. I find it very difficult to accept Mr Zhao’s evidence about the conversation. While there was a dinner at which the four nominated persons were present, but there may have been others as well, I am not satisfied that he has an accurate memory of what was said, when it was said or even where it was said. I reject his evidence as assisting the first defendant. On the most benign assessment his evidence falls within the description given by McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319:

“… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

The misrepresentation defence

49. There will necessarily be a good deal of overlap with the discussion on Mr Cao’s credit.

50. The misrepresentation defence has two elements:

1. Was the plaintiff acting through agents?

2. If yes, did the agents represent to the first defendant, in essence Mr Cao, that the agreement would not be enforced or perhaps would only be enforced in certain circumstances.

51. The asserted agents are Henry and Daniel, allegedly acting on behalf of the plaintiff. In my view the existence of an agency with the plaintiff’s principal and Henry and Daniel as agents has strong evidentiary backing. I am not taking into account that the funds may not have come from the plaintiff himself, rather that he as lender acted exclusively through the agency of Henry and Daniel in the preparation of the loan agreement. My reasons, in short form, follow. They are in short form because, even if they were agents, I do not accept the representations they allegedly made were made, certainly not in the form and with the content asserted by Mr Cao.

52. It was common ground that throughout the negotiations leading up to the execution of the loan agreement, the plaintiff had not taken any part. He had not communicated with Mr Cao, either through emails, WeChat, or the telephone. All of the negotiations, other than those conducted by the retained respective solicitors, were conducted by Henry and, or Daniel.

53. There is no doubt that Henry and Daniel were acting on behalf of the plaintiff. Nevertheless, the plaintiff submitted that Henry and Daniel were not his agents. A classic definition of agency is to be found in International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644; [1958] HCA 16 at 652:

“Agency is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties. But in the business world its significance is by no means thus restricted ...”

54. The plaintiff submitted that two ingredients were necessary to establish an agency relationship. They were “(a) the consent or assent of both principal and agent; and (b) the conferral of authority on the agent to act on the principal’s behalf”.

55. The plaintiff submitted that it was a substantial factor against the existence of an agency that the plaintiff had signed the loan agreement and it had not been signed on his behalf by either Henry or Daniel.

56. The first defendant, besides highlighting the fact that there had been no involvement of the plaintiff in any negotiations, also referred to these factors:

1. Daniel had suggested that the plaintiff should be the lender.

2. Other than communications with solicitors, all relevant communications were between Mr Cao and Henry or Daniel.

3. There is no evidence of the solicitors acting for the plaintiff receiving instructions directly from the plaintiff. The instructions seem to have come from Daniel or Henry and perhaps Henry’s wife.

57. The plaintiff submitted that even if an authority to communicate with Mr Cao did exist, the agency lacked the scope suggested by the first defendant. In particular, the agency did not extend to making representations that the agreement would not be enforced. I disagree. The plaintiff placed the negotiation of the loan within the authority given to Daniel and Henry. Enforcement is an intricate part of a loan agreement, and its negotiation would naturally include questions of enforcement.

58. I am therefore satisfied that Henry and Daniel were the plaintiff’s agents and that they had authority in all matters concerning the creation, ingredients, and enforcement of the loan.

59. Turning now to the question of representations made by Henry and Daniel, the only allegation of a misrepresentation ultimately relied upon was that described in paragraph 32(d) of the defence:

“The provisions within the Loan Agreement referring to the payment of interest and to there being a guarantee and indemnity from the Second Defendant are not real, genuine or binding provisions and those clauses are not enforceable and would never be enforced or attempted to be enforced.”

60. In closing written submissions, the first defendant expressed the representations in this way:

“Those representations were to the effect that:

(a) The two-year loan term and the default interest terms were to put pressure on the Defendants.

(b) The default interest term was only for extreme circumstances such as where the project went bankrupt.

(c) If the repayment had simply been delayed, the Plaintiff would not hold the Defendants liable for anything under the agreement.

(d) The Plaintiff only wanted the return of the principal sum and the 100% return (i.e. $6.6 million) and would not enforce any of the terms of the agreement, including the default interest term.”

61. The plaintiff submitted that the just quoted expression of the misrepresentations fell outside the scope of paragraph 32(d) in the defence and should not be considered. The plaintiff stressed that the first defendant should be held to the confines of its pleading. I think that the alleged representations do fall within paragraph 32(d) of the defence, perhaps at its edges, but nevertheless sufficiently to be considered by me.

62. The representations were primarily described in Mr Cao’s affidavit dated 19 June 2024, from paragraph 77.

63. On 4 October 2016 Mr Cao met with Daniel and Henry in a unit at the Swissotel. Mr Cao’s English translation of the conversation is as follows:

“HC:

The version of the agreement that your lawyer has proposed was ridiculous. I never planned to borrow from a loan shark or a high interest loan from anyone.

My purpose to contemplate an agreement with you was to help you minimise tax and to have the return of equity be shown as interest payments. But I am not looking to set any arrangement up into it being a high interest loan if the project does not complete on time.

KM Wong:

The version of the loan agreement was what our lawyers suggested and was prepared by the solicitors to protect us. At the end of the day we are not participating in the actual development of this project and we don't know how long it will take. We want peace of mind. We are putting x amount of money in and want to get y amount of money out in a relatively certain period.

HC:

The return and time period provided as of today is an estimation, provided everything goes well as planned. I am unsure if that estimate will be the actual time. However, until it really happens, nothing is one hundred percent.

An agreement like this is holding me liable for a huge amount of penalty interest if the project doesn't finish on time. I have turned away other investors because of you wanting to invest. But because we are close to the settlement date, all these new terms in the proposed document are making me feel nervous.

KM Wong:

Okay, I understand where you are coming from. I will speak to our lawyer about the default interest and the other terms. Let's catch up tomorrow before I leave so we can finalise them.”

64. The next day Mr Cao says he met again with Henry and Daniel. After having lunch together, they went to The Peak Apartments in Haymarket where a conversation occurred. Again, using Mr Cao’s English version:

“KM Wong:

We spoke to our lawyer and had a discussion. The lawyer still suggests that we leave the default interest provision. The default interest is to act as a threat so that you do not delay payment of the capital. It puts pressure on you. The lawyer also suggests we still leave the term at 2 years.

But however, between you and me, those two terms are for if something goes completely wrong such as there are extreme circumstances and there can be no return of the investment capital, or for example if the entity in the project goes bankrupt and so we cannot recover our capital. If the payment has simply been delayed for example, we will not hold you liable for anything under the agreement. But those two terms need to stay in the document in writing. You just need to trust me.

HC:

Okay, I trust your word. We are business partners. I will go back and sign the document on this basis.”

65. Mr Cao says he had a telephone conversation with Henry on 7 October 2016. The English translation is:

“HC:

I have some real concerns about the draft agreement that is being sent around. I am concerned about how it refers to the return of your investment is now becoming a 50% p.a interest rate loan.

As you and Kai Ming know, I am not after a loan shark. I agreed to leave a default interest and fix term in the agreement from our last meeting purely because you and your bother (sic) guaranteed me that you will not pursue if the project is delayed or over budget, it will only protect your benefit if the whole thing went extremely bad or entity is facing winding up risk. If I was after a loan I would just go to the bank or another lender and borrow on normal terms.

I initially put this investment opportunity to Kai Ming because we are all partners in Magenta. I am willing to go into agreement with you in this new project as partners and as an investment, but not as what is being proposed in this draft document.

KB Wong:

The agreement is purely what our lawyer prepared.

You know us. We are not going to enforce this agreement. Our lawyer prepared this to protect our position. All that we are after is the return of our investment in the project and the 100% return on that investment that has been estimated by you.

You should not be worried that we will enforce any of the other terms of the agreement or seek any other interest or other amounts.

This is not our way of doing business. We are partners and you are aware of our way of doing business.”

66. In relation to acting upon, and relying upon, the representations, Mr Cao said at paragraph 95 of his affidavit:

“Following the call that I had with Kai-Bun Wong on 7 October 2016 and the further assurances that he gave me during that call that are set out in paragraphs 91 to 92 above, together with the assurances and promises that were given to me during the meetings on 4 and 5 October 2016 with Kai-Ming Wong and Kai-Bun Wong as set out in paragraphs 76 to 77 and 82 to 83 above, I was of the belief and was satisfied at that time based on what had been said to me by Kai-Ming Wong on 4 and 5 October 2016 and then by Kai Bun-Wong on 7 October 2016 that Cao & Du Management and I could not be held liable for anything under the ‘loan agreement’ besides the requirement for Cao & Du Management to pay $6,600,000.00 upon the completion of the Greenacre Project. With that belief and being satisfied of those matters, on 7 October 2016 I told Nicole Hu to finalise the ‘loan agreement’. I was of the belief that the terms of the ‘loan agreement’ once finalised would not be binding and were not genuine.”

67. The general scheme of the defence was therefore that Mr Cao had been told that, other than the $6.6 million, the agreement would not be enforced and therefore, relying upon these assurances, he went on to finalise the agreement.

68. The first thing to be noticed about Mr Cao’s assertion in paragraph 95 of his affidavit (quoted above) is his belief that the loan agreement was “not genuine”. This sentiment was abandoned by Mr Cao in the course of the hearing together with the acknowledgement of a loan and the retraction of the sham agreement allegation. It is difficult to separate, if Mr Cao is to be accepted, his now made distinction between the nature of the agreement (a sham) and its enforceability as a genuine agreement. The two concepts simply do not sit together, in particular if Mr Cao is to be regarded as a reliable historian.

69. Mr Cao accepted he had verified the defence. He was taken through the contents of paragraphs 31 and 32 to establish the basis upon which he had asserted the facts stated in these paragraphs. The verified facts are a recollection of the representations allegedly made by Daniel and Henry. Mr Cao was asked to recall the words that had been used which led to the formulation of his assertions. It became clear that he had generally relied on memory because he had not, at the time of verification, had access to the WeChat record of communications between him and Henry or Daniel.

70. Clearly, some of the technical assertions in the WeChat messages may not have been specifically translated from Mandarin, but Mr Cao did confirm that certain topics or words would have been used. For example, he agreed that words and phrases like “property fund”, “trustee of the fund”, and Option Greenacre would have been mentioned in exchanges with Daniel or Henry.

71. There were some words, such as “binding” that may not have been specifically used but words to a similar effect, but in Mandarin, would have been used.

72. In respect of paragraph 32(d) Mr Cao said that there might have been circumstances in which the Loan Agreement was enforceable. This exchange occurred:

“A. So they were telling me because I raised the issue about the 100% return, what if project delays, you know, things got dragged on and they told me that they’re just going to go with actual return. That’s what I put in here.

Q. What words at the time you came to verify this defence did you recall as having been said to you orally or in text message in September and October 2016 that the provisions within the loan agreement referring to the payment of interest were not real, genuine and binding?

A. The word they’re using they will go with the actual return.

Q. So did you just say they said they would go with the actual return?

A. Yes.

Q. So are you saying that there were not words said to you that the provisions within the loan agreement referring to the payment of interest were not real, genuine and binding?

A. Yes.

Q. Now there’s a further part to this representation at paragraph 32d you say, ‘The provisions within the loan agreement referring to the payment of interest were not enforceable and would never be enforced or attempted to be enforced.’ Do you see those words?

A. Yes.

Q. And in these conversations in September and October 2016 as you were remembering them when you verified the defence, what words did you recall we used in Mandarin orally or in text message to suggest that the provisions within the loan agreement referring to the payment of interest were not enforceable and would never be enforced or attempted to be enforced?

A. It’s the same answer they said they will go with actual return.

Q. So the only words you had in mind when you verified this defence or paragraph 32d in respect of interest was that they would go with the actual return?

A. Yes.

…

Q. Well, when you came to verify the defence, what words did you recall at that time?

A. Well, this is my understanding what the representation is, you know, my understanding by them saying they’re not going to enforce this agreement against my company, that also means myself. We don’t use company or you as, you know, when we had a conversation, as two very distinguished, you know, entity or nature. So whatever they say, you, they refer to me, both me and my entity.

Q. Are you saying that when you verified the defence, the guarantee and indemnity you had given was not mentioned in any of the discussions?

A. Whether it’s me or my company, they always use the word you, as you refer to both, myself in personal capacity, as well as in, you know, in a company capacity.

Q. And at the time you verified the defence, are you saying that words were not said to you which referred to the guarantee and indemnity never being enforceable?

A. They didn’t mention particular word, as in guarantee or indemnity will be enforced, or will not be enforced.”

73. The importance of the above questions and answers lies in both the apparent concessions of there always having been a loan agreement (the sham allegation being a later invention) and the nebulous and uncertain recollection of the actual representations.

74. Mr Cao was taken to the WeChat exchanges which are in Exhibit M. Exhibit M was produced after Mr Cao was given the opportunity to go through the messages to check the accuracy of the translation and the identity of the ‘speaker’.

75. The messages are important because Mr Cao asserts that they are the background to the formation of the agreement, including the representations that the agreement would never be enforced. On this basis, as suggested in the cross-examination of Mr Cao, one would have expected references to the ingredients of the sham agreement. For example, there would at the very least be a reference to capital gains tax. There are references to tax, but these are to a foreign resident interest withholding tax, with no suggestion of any evasion or subterfuge.

76. The tax evasion and ‘no enforceability’ do not appear in the messages. However, conversations consistent with a loan, and the negotiations of a loan agreement, do exist. I will give some examples from the WeChat exchanges.

77. On 8 September 2016, at 13:23, Daniel said:

“Mr Cao, please hurry up with your contract. Then I read it and showed it to the lawyer. In fact, there is no security but your personal guarantee, so your contract must be more detailed. For example, on September 15th I will send you the money, and you must pay back the principal and interest to this account before 10 September 2018. I will send you an account number then and you should also send me your account number and make it clear in the contract.”

78. On 14 September 2016, this message came from Mr Cao after he had received a copy of the loan agreement from Henry:

“Qiming, Qibin just sent me the loan agreement prepared by your lawyer. I read it and there are roughly three issues. The first is about the interest. It is written in percentage, 50%, the principal is 3.3 million, the interest is 50% for one year, and then calculated on a daily basis, and accrued. It follows the compound interest calculation and, in this way, the interest in two years will not be 3.3 million. My opinion is that the principal is 330, the interest shall be written as 3.3 million instead of in percentage point. Then I will repay you 660 to make it clear. Second, it is about the term and penalty interest, as we agreed on two years, but I hope while writing down two years as the term, but ...

in two years, if there is a delay in construction period owing to weather, or whatever, we should sit down, and you have the unilateral right to sit down with me to discuss whether extension is possible and for how long. As the penalty interest written down is calculated on a monthly basis at 5% per month; it didn’t clarify that it is calculated based on the principal of 3.3 million at 5% per month or a total of 660 at 5% per month. If this is the case, if I have a delay in building and, for example, repay you 6 months late or in 2.5 years, the interest for the six months will add up to more than 3 million Yuan. I will end up repaying you nearly 10 million

The last point is about fees and taxes. It says that all expenses on your side, lawyer fees, taxes, any expenses will be paid by me. I believe we should each pay the lawyer fees, respectively. Regarding taxes, I will withhold 10% as overseas interest income tax for you, and then I will give you the tax payment certificate and that’s it. Any taxes or expenses overseas should have nothing to do with me.”

79. One wonders why Mr Cao was concerned about interest and other terms if the agreement was never going to be enforced. Daniel replied to Mr Cao’s message and the following day there was an exchange of messages again seeking to negotiate terms of the agreement. Included in the message sent by Mr Cao on 17 September 2016 is this sentence:

“Anyway, just ask the lawyer to add one that should I breach the contract on that day, you have every right to ask me to repay you, no matter what method you use and that would be it.”

80. On 19 September 2016, through WeChat, Mr Cao complained about the proposed 5% compounding interest rate. He suggested 1% because 5% was “too scary”. 5% is ‘scary’ but should not have been a concern to Mr Cao if the agreement was never going to be enforced. Ultimately and importantly, 3% was agreed upon.

81. Mr Cao tried through his affidavit to suggest Tung Chit was one of a number of investors. At paragraph 53 he listed the terms that were offered to each potential investor. Then at paragraphs 113 and 114 he listed the investors that had come on board in 2016, 2017 and 2018. In paragraph 113 Tung Chit is listed as an investor, of $3,300,000, in units in the Option Greenacre Investment Trust. He goes on to note that these funds would end up as purchasing Greenacre Units, in other words providing a beneficial interest in the Greenacre Project to Tung Chit.

82. Mr Cao goes on to say, at paragraph 115, that the exhibit to his affidavit contains the agreements with the investors that he has listed. Firstly, there is no agreement with Tung Chit in the agreements contained in the exhibit. Secondly, and perhaps more importantly, the agreements that are exhibited are “Loan agreements” and do not suggest the use of the borrowed funds to purchase a beneficial interest in the Greenacre Project or any other project. Mr Cao pointed to the “Interest Rate” clause as suggesting the existence of a beneficial interest in Greenacre Units, but the clause is no more than a measure of how interest is to be calculated.

83. For all intents and purposes the loan agreements are, as described, loan agreements.

84. After the plaintiff closed his case the first defendant tendered some portions of the plaintiff’s affidavit evidence and then closed its case. This was when counsel for the defendants told me the following:

1. The ‘sham’ defence was acknowledged to be incapable of succeeding.

2. The written submission that “the plaintiff never in fact lent anything to the defendants under the Loan Agreement” was abandoned.

3. In respect of the CRA defence, the allegations in clauses 52(a) and (b) were demoted to a “relatively nuanced point” and “limited more to a submission as to influence”. Other than its relevance to Mr Cao’s credit the CRA defence was part of the case that has been stayed.

4. Clauses 52(c)(d)(f)(g)(p) and (q) were not pressed.

85. The major problems with the existence of the representations are:

1. There is no independent corroboration of the representations. There is no note, no WeChat message, and no email correspondence to substantiate them.

2. The attack on Mr Cao’s credit was successful to the extent that his word alone carries little weight.

3. The representations are completely inconsistent with the position that had been arrived at well before 4, 5 and 7 October 2016.

4. Similar to point (3), the matters seemingly discussed through the representations had already been settled between the parties by 19 September 2016 and possibly earlier.

86. The first defendant is effectively seeking, through the representations, to establish an oral agreement ancillary to the loan agreement. In John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, Hammerschlag J (now Chief Judge in Equity) said the following, at [94]:

“Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the court which means that the court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (1995) 49 NSWLR 315 at 319.”

87. Having regard to my findings on Mr Cao’s credit and the absence of any corroborating evidence, I find it impossible to “feel an actual persuasion” that the representations were made in the form suggested by Mr Cao. I am not saying that the meetings and telephone call did not take place, simply that I am not satisfied that they were in the form alleged by Mr Cao.

88. In respect of the admissions said to have been made by the plaintiff, and by Henry and Daniel, when one looks at the qualifying evidence, I am not satisfied that the passages in their affidavits relied upon, are in fact admissions or otherwise contrary to the plaintiff’s case. I will deal with each of the passages tendered by the first defendant.

89. Starting with the plaintiff’s affidavit dated 17 May 2023; paragraph 3 does no more than say that the plaintiff’s sole means of communication is in Mandarin. As shown in the WeChat messages, Mr Cao and Henry and Daniel generally conversed in Mandarin. The plaintiff’s unfamiliarity with English is immaterial. In final written submissions counsel for the first defendant, in respect of this affidavit said only:

“As for the Affidavit of Jiaqing Xu affirmed 17 May 2023, there are no qualifying statements in respect of [3].”

90. It is difficult to know what this submission means especially as paragraphs 7 to 11 and 20 to 23 were tendered as qualifying statements.

91. Turning to the plaintiff’s affidavit affirmed on 19 November 2024, the asserted admission in paragraph 10 “is that Daniel guaranteed any sum of money lent by the Plaintiff”. If there is an element of an admission in this paragraph it can only go to the original defence alleging a sham agreement. That defence has been abandoned. The same may be said of paragraphs 13, 14 and 17. It would not matter if the plaintiff’s funds used for the loan came from Daniel; the fact remains that, as now admitted, the plaintiff made a loan to the first defendant.

92. The most that can be taken from paragraph 18 is that it supports the assertion that Daniel and Henry acted as agents of the plaintiff. I have already found that to be the case and see no other relevance to the paragraph.

93. The next affidavit said to contain admissions is that of Kai-Bun Wong (Henry) affirmed on 19 November 2024. Paragraphs 17 to 20 are said to be an admission that “instructions to the lawyer were provided by Henry and his wife (not by the Plaintiff)”. Paragraph 23 concerns the signing of the agreement. Again, the most that can be taken from these paragraphs relates to the agency issue which I have decided in favour of the first defendant.

94. Finally, on the asserted admissions, is the affidavit of Kai-Ming Wong (Daniel) affirmed on 19 November 2024. Paragraph 18 of this affidavit goes to some extent to the agency question but mostly to the cross claims, in particular involving Tung Chit. The cross-claims have been stayed so I will treat paragraph 18 as not relevant to any issue at hand.

95. In summary, the admissions relied upon by the first defendant are of no assistance to the first defendant.

96. I will now deal with the plausibility, or lack of it, of the representations being made on 4, 5 and 7 October 2016. These facts are important:

1. The first version of the loan agreement was referred to as a term sheet which Mr Cao signed, it would appear on about 8 September 2016. The document refers to a 50% per annum simple interest rate and came to form the basis of the $3.3 million becoming $6.6 million after two years in the final loan agreement. With this background, Mr Cao saying on 7 October 2016 “I am concerned about how it refers to the return of your investment is now becoming a 50% p.a. interest rate loan” is not believable.

2. Similarly, “I agreed to leave a default interest and fix term in the agreement from our last meeting purely because you and your brother guaranteed me that you will not pursue if the project is delayed or over budget … ” (presumably referring to the 5 October 2016 meeting), seems to have been agreed by about 19 September 2016 following the exchanges between Daniel and Mr Cao in which the former was advocating for a default rate of 5% whereas Mr Cao was proposing 1%. They then ‘settled’ on 3%, effectively resolving the issue and making it unlikely to be the subject of discussion on 5 or 7 October 2016.

3. Also at the meeting on 5 October 2016, Mr Cao states that Daniel said, “The lawyer still suggests that we leave the default interest provision.” Once again, the default interest position had been agreed at least two weeks earlier. The proof that the default interest provision was no longer ‘at large’ can be seen in the letter from MinterEllison on 2 October 2016, raising 14 important issues but not including the default interest clause.

4. Talking about enforceability, and in particular about the two interest terms (simple interest of 50%, and then compounding interest), Daniel allegedly says: “But however, between you and me, those two terms are for if something goes completely wrong such as there are extreme circumstances and there can be no return of the investment capital, or for example if the entity in the project goes bankrupt and so we cannot recover our capital. If the payment has simply been delayed for example, we will not hold you liable for anything under the agreement. But those two terms need to stay in the document in writing. You just need to trust me.”

5. Yet again one wonders why this would be a topic of conversation after these terms had already been agreed.

6. In respect of the conversation on 4 October 2016, it is notable that this is the same day that Ms Nicole Hu sent the email to CKSD Lawyers (acting for the plaintiff), setting out the 14 points that she wished to raise in respect of the proposed agreement. Mr Cao says that he said to Daniel “I never planned to borrow from a loan shark or a high interest loan from anyone”. I repeat the above point, that by 4 October 2016 the interest provisions were well and truly resolved and not the subject of continuing discussion. Mr Cao is correct that there was a high interest component, but it is a component that he had long agreed could be included in the agreement and was no longer the subject of communication between the parties or their lawyers.

7. As far as the agreement being to “minimise tax”, that is a component of the sham agreement which was originally alleged but abandoned. If there was a loan and there was no sham agreement there could not have been a discussion about the content of a sham agreement.

8. Daniel is alleged to have said: “The version of the loan agreement was what our lawyers suggested and was prepared by the solicitors to protect us. At the end of the day we are not participating in the actual development of this project and we don’t know how long it will take. We want peace of mind. We are putting x amount of money in and want to get y amount of money out in a relatively certain period.” This statement is entirely consistent with the existence of a loan agreement and ‘stern’ provisions to ensure early repayment.

9. Mr Cao said to Daniel; “An agreement like this is holding me liable for a huge amount of penalty interest if the project doesn’t finish on time. I have turned away other investors because of you wanting to invest. But because we are close to the settlement date, all these new terms in the proposed document are making me feel nervous.” Mr Cao, if he made this statement, was very justified in being nervous because he had agreed to the terms of the loan notwithstanding the possibility of him paying very large amounts of interest.

10. Daniel is said to have ended the conversation stating: “Okay, I understand where you are coming from. I will speak to our lawyer about the default interest and the other terms. Let’s catch up tomorrow before I leave so we can finalise them.” By this time the default interest provisions, as I have said a number of times above, were well settled and there would have been no reason for Daniel to speak to his lawyer. Again, it is to be recalled that the default interest rate had been negotiated to 3% after the respective wishes for 1% as against 5%.

97. In the previous paragraph I have referred to some statements which might well have been said by Daniel, but those statements are not representations as to enforceability or the implementation of the default interest rate. My findings on Mr Cao’s credit would suggest that the conversations were entirely made up. However, because Daniel may well have said certain of the statements attributed to him, I think the most likely explanation is that the conversations are a reconstruction by Mr Cao, unsupported by independent evidence, and perhaps subconsciously made in support of the case he was putting. At the same time it must be remembered that Mr Cao had verified a defence suggesting a sham agreement, and clearly his backtracking on that assertion takes down with it the veracity and detail of the conversations he has alleged.

98. I have accepted that Daniel and Henry were the plaintiff’s agents, but have not accepted that they made representations as asserted by Mr Cao. Accordingly, the misrepresentation defence must fail.

99. The result is, as conceded by the first defendant, that there will be a judgment for the plaintiff for $3.3 million plus interest.

Interest

100. As against the first defendant, the attack on interest had two limbs: it was unconscionable under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), and it was an unenforceable penalty.

101. The first defendant, because it had ultimately acknowledged the loan of $3.3 million (subject to the question of enforceability), said that any final judgment should be based on this amount plus pre-judgment interest (pursuant to s 100 of the Civil Procedure Act 2005 (NSW)), but taking into account the $300,000 that had been repaid.

100. Applying interest in accordance with clauses 1.1 and 3 of the agreement the resulting total judgment figure would be over $71 million. The progress of $6.6m to over $71m over seven years because of interest is staggering. Staggering of course, is not the test.

101. I think it necessary to set out the relevant portions of the above clauses:

“1.1 In this Agreement, unless otherwise indicated by the context:

…

(c) Default Rate means the rate of 3% per calendar month;

…

(e) Expiry Date means 31 October 2018;

…

(h) Money Owing means all moneys which are or which hereafter become owing or payable by the Borrower to the Lender under or pursuant to this Agreement including, but not limited to, the Repayment Amount, documentation negotiation, preparation, stamping and registration costs and any other monies owing in accordance with the terms hereof;

(i) Principal Sum means the sum of $3,300,000.00;

(j) Repayment Amount means the sum of $6,600,000.00, comprising the Principal Sum plus interest of $3,300,000.00.

…

3.1. The Borrower must pay Default Rate on the Money Owing for the period from (and including) the date on which an event of default occurs until (and including) the date on which the event of default is remedied to the satisfaction of the Lender.

3.2. Interest under this clause is accrued on a monthly basis.”

104. It was agreed between the parties that the primary ‘culprit’ in the above clauses is the definition of “Money Owing” because its effect is to change a simple interest rate of 3% per month (or 36% per annum) to a compound interest rate of 3% per month. By way of illustration of the difference between a simple and a compound interest rate, the former, levied on $6,600,000 (and taking into account the $300,000 paid back) would result in an interest figure owing, as at 8 September 2025 of $15,597,567. Applying the compound interest rate, the interest figure would be over $65 million.

105. My initial impression, shared by counsel for the first defendant, on reading paragraphs 194, 228, 229, 234 and 269 of the plaintiff’s closing written submissions was that there was a concession that the interest rate was a penalty. I was informed by senior counsel for the plaintiff, and of course accept, that this was not the intent of the above paragraphs. Rather the concession made by the plaintiff was that the rate, at a certain stage in the trajectory of compounding interest, became unconscionable under the ASIC Act.

106. The plaintiff submitted that once the rate was found to be unconscionable, there was no need to proceed any further to examine whether it was also a penalty.

107. The first defendant agreed that the interest provisions were unconscionable, but said they also amounted to a penalty and that a finding to this effect should be made.

108. The important difference between the interest clauses being unconscionable and being a penalty concerns the effect of the particular finding. If the clauses were unconscionable then, submitted the plaintiff, they were susceptible to being rewritten, so as to achieve a ‘conscionable’ interest regime. The plaintiff then put forward a cascading series of interest calculations.

109. The options put forward were designed to reflect “a genuine pre-estimate of Mr Xu’s loss … .” The one most favoured is Option (a) which is interest on $3.3 million from 1 November 2018 to 8 September 2025 at a simple interest rate of 140% per annum. This would make the total amount payable by the defendants to be $35,275,397.30, made up of the original loan of $3.3 million, less the $300,000 already paid, the interest to 31 October 2018 of $3.3 million and the continuing interest to date.

110. The suggested options then graduate downwards with the lowest being a figure of $16,648,356.17, made up of $3 million principal, $3.3 million in interest up to 31 October 2018 and then $10,348,356.17 based on 50% simple interest per annum from 1 November 2018 to 8 September 2025.

111. Final options, but certainly not favoured, put forward by the plaintiff were simple interest of 36% per annum on $3.3 million (producing a final figure as at 8 September 2025 of $10,450,816) or 36% per annum on $6.6 million (producing a final figure as at 8 September 2025 of $21,897,567).

112. The first defendant submitted that if the interest clauses were found to be a penalty, then there could not be any rewriting of interest, and the plaintiff would only be entitled to damages flowing from breach of the agreement. As there was no evidence of the damages, let alone that the loaned funds had actually come from the plaintiff, the result was that the plaintiff’s only entitlement was to pre-judgment interest under the Civil Procedure Act.

113. There is no doubt that the defence asserts that the interest clauses amount to a penalty. I disagree with the plaintiff that the enquiry should stop at the unconscionability level.

114. However, it is also necessary to examine the extent of the first defendant’s complaint. It’s closing written submissions state:

“Having regard to the principles set out in DS1, the Court would conclude that the default interest clause is void or unenforceable as a penalty.”

115. It follows from what I have just quoted that the first defendant is concerned about default interest. Under clause 1.1(c) the default rate is 3% per calendar month and, as seen above, the interest regime is to apply a compounding rate of 3% on the repayment amount. The repayment amount (clause 1.1(j)) is $6,600,000 which has come about through the application of a simple interest rate of 50% being applied to the principal sum of $3,300,000. The point I am endeavouring to emphasise is that the first defendant’s case is limited to the default interest being applied to the $6,600,000 and not to the simple interest which was levied on the $3,300,000.

116. A consequence of this conclusion is that, if interest is to be given to the plaintiff, whether under the Civil Procedure Act or otherwise as suggested by the plaintiff, it will be interest on $6,600,000 and not on $3,300,000. Further the interest calculation will commence on 1 November 2018 which is the day after the expiry date (clause 1.1(e)) in the agreement). The repayment of $300,000 on 1 April 2029 also needs to be taken into account.

Are the interest clauses a penalty?

117. The starting point for identifying a penalty was discussed by the High Court in Paciocco v Australia and New Zealand Banking Group Limited (2016) 258 CLR 525; [2016] HCA 28. Quoting from Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 and from Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373, Keane J said at [270]:

“In Andrews, this Court summarised the ‘critical issue’ as being ‘whether the sum agreed was commensurate with the interest protected by the bargain.’ This Court's discussion in Andrews of the decision in Dunlop focused upon the reasons of Lord Atkinson, who accepted that an agreed payment upon breach should not be unenforceable where, though it ‘appeared imprecise as a pre-estimate of damage, it protected the [seller's] interest in preventing undercutting, which would disorganise its trading system’. Accordingly, the question to be addressed in order to distinguish a penalty from a provision protective of a legitimate interest is:

‘whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract’." (footnotes omitted)

118. In Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328 McDougall J said, at [105]:

“Of course, the penalty doctrine is an exception to freedom of contract. That was recognised in Paciocco. But its very existence as an exception was seen to underline the need for, not mere disproportion, but extravagant or unconscionable disproportion, before it could be concluded that a particular stipulation was punitive, or penal, in character.”

119. And then at [110]:

“… It seems to be reasonably clear that if a contractual stipulation is, regarded objectively, a genuine pre-estimate of loss then it cannot be a penalty. It does not follow that because the parties did not attempt to pre-estimate the loss to one of them caused by breach on the part of the other, that a stipulation dealing with the consequences of breach must be a penalty … .”

120. There is no evidence in this case that the compounding interest rate was a pre-estimate of loss, genuine or otherwise, suffered by the plaintiff. To the extent that it was submitted that the interest was justified because the loan, not being secured, was risky, the guarantee from Mr Cao was specifically designed to lessen the risk.

121. In my view the effect of the compounding interest rate was “not mere disproportion, but extravagant or unconscionable disproportion”. The plaintiff accepted the unconscionability of the interest provision but only after a certain point in time. I do not think that approach is valid. I think the compounding interest must be viewed from the start of its application.

122. It may be that if the assessment of interest was made shortly after 1 November 2018, the interest would not appear extravagant, but it would be an impossible task to identify when the interest becomes unacceptable. I think the penal or unconscionable nature of the interest must be looked at as a product of a particular provision in the agreement and not on the basis of a moving chart leading to an arbitrary decision of when the interest becomes unconscionable (or penal).

123. Because of my conclusion that the interest is penal, the next question is what to do about it. I think the first step is to identify the provision in the contract that renders the interest a penalty. This is the definition in clause 1.1(h) of Money Owing. As I have said above, without this sub-clause the applicable interest rate would be 3% per month (or 36% per annum) on a simple interest basis. The first defendant’s approach, as I have already said, was to render the whole of the interest provisions void as a penalty. The first defendant submitted that if there was a finding of penalty interest, all of the interest clauses would be void to the extent that the maximum the plaintiff could recover was $3.3 million plus interest at pre-judgment rates from the date of the loan to date. It was never submitted that a simple interest rate of 36% was a penalty.

124. Even 36% as a simple interest rate might be viewed as very high, but it is to be remembered that the loan was designed to be for a short term and was made without security other than the guarantee provided by Mr Cao.

125. The plaintiff submitted that I should effectively rewrite the interest provisions to achieve one of the cascading results put forward by the plaintiff. The submission was based on a finding of unconscionability which might permit a rewriting.

126. The first defendant relied upon the decision of Meagher JA in Aquamore Credit Equity Pty Ltd v Hung; First on First Development Pty Ltd v Aquamore Credit Equity Pty Ltd [2021] NSWSC 1681 for the proposition that the finding of a penalty should render the interest clauses as void. I think his Honour’s decision favours a different approach, namely that it is the specific clause which creates the penalty that is to become void, as opposed to the whole of the interest provisions.

127. In Aquamore the mortgage had a lower rate of interest of 2.5% per month but which graduated to 5% in the event of a default. The higher rate was incorporated in clause 7.1 of the relevant agreement. In summarising his conclusions, his Honour stated, relevantly, at [147]:

“That cl 7.1 of the Facility Agreement is unenforceable as a penalty. Accordingly no interest was recoverable at the Higher Rate as a result of either of the defaults (previously identified).”

128. Clearly, his Honour was concerned to make only the offending clause unenforceable, leaving the lower rate interest clause available to be implemented. This is the approach that I think is appropriate in the present case. It is not dissimilar to the approach taken by Davies J in Ledinh Sovereign Super Pty Ltd v CT Stone Pty Ltd [2023] NSWSC 1079, where his Honour said at [78]:

“Accordingly, the contract constituted by the mortgage must be varied to the extent that those parts of it, particularly cl 5, which provide for the compounding or capitalising of interest should be deleted.”

129. Although dealing with a CRA claim, the NSW Court of Appeal in Huynh v Ledinh Sovereign Super Pty Ltd [2024] NSWCA 78 dismissed an appeal from the above decision of Davies J, finding that it was permissible to apply an interest-rate on the basis that it was changed from a compounding to a simple rate.

130. The clauses relevant to interest can be viewed separately so that if the compound interest clause (clause 1.1(h)) was read so as not to create a compound interest result, this would achieve the result of voiding the penalty. The balance of the interest provisions remain in place, allowing interest to be calculated, without a compounding element, at 36% per annum.

131. This is the approach that I will adopt leading to a finding that clause 1.1(h) should be interpreted as not creating a compound interest requirement. This means the Money Owing in clause 3.1 will now be seen as applying a simple interest rate of 36% per annum on $6.6 million.

132. The result is that the plaintiff is entitled to a judgment reflecting the sum of $6.6 million plus interest from 1 November 2018 to the date of judgment calculated at a simple interest rate of 36% per annum but factoring in the repayment of $300,000 on 1 April 2019. My calculation of this figure is $21,984,458.90 based on the updating of the calculations handed up by the plaintiff (which I will mark as MFI 5). I will give the parties leave to seek a correction of this figure.

Costs

133. The plaintiff submitted that he should receive costs on an indemnity basis because of the contractual right to such costs under the agreement. In addition, submitted the plaintiff, indemnity costs were justified because the first defendant had made allegations of fraud, not only without evidence to that effect, but also because the fraud allegation was abandoned in the course of the hearing. In Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] SCA 801 Sheppard J said, at [233]:

“Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud … .”

134. Unfortunately, the first defendant did not deal with costs in oral or written submissions and should be given an opportunity to oppose indemnity costs. I will make the normal order for costs but give the parties leave to seek an amendment to the order.

Orders

135. I make the following orders:

1. Judgment for the plaintiff against the first defendant in the sum of $21,984,458.90.

2. The first defendant is to pay the plaintiff’s costs of the proceedings.

3. It is noted that the claim against the second defendant and the cross-claims have been stayed by reason of the Bankruptcy Act 1966 (Cth).

4. The parties have liberty to make further submissions in respect of costs, interest, the final judgment sum, and the future conduct of the stayed claims.

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Decision last updated: 22 September 2025