Yongzhong Australia Pty Ltd v Me Property Development Pty Ltd
[2024] VCC 1576
•15 October 2024
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-22-02628
| YONGZHONG AUSTRALIA PTY LTD (ACN 605 853 478) | First Plaintiff |
| SHIBIAO GU | Second Plaintiff |
| V | |
| ME PROPERTY DEVELOPMENT PTY LTD (IN LIQUIDATION) (ACN 140 874 737) and ORS (according to the attached schedule) | Defendants |
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JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4-5, 19 September 2023 and 24 October 2023 | |
DATE OF JUDGMENT: | 15 October 2024 | |
CASE MAY BE CITED AS: | Yongzhong Australia Pty Ltd & Anor v ME Property Development Pty Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2024] VCC 1576 | |
REASONS FOR JUDGMENT
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Subject:CONTRACT, AGENCY, GUARANTEE AND INDEMNITY
Catchwords: Contract construction – privity – whether the first plaintiff is party to an investment agreement as a disclosed principal by way of agency or otherwise – alternatively, can the plaintiff seek declaratory relief – rectification – discretionary factors when the first defendant is in liquidation – construction of share sale agreement – whether plaintiffs hold an equitable charge over student apartments owned by the first defendant – whether guarantee given by the second defendant is enforceable
Legislation Cited: Corporations Act 2001 (Cth); Instruments Act 1958; Property Law Act 1958; Supreme Court Act1986; Evidence Act 2008; Penalty Interest Rates Act 1983
Cases Cited:Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201; AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985; Allcott Hire Pty Ltd v Silk [2016] NSWSC 1135; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101; Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54; Australia and New Zealand Banking Group Ltd v Beneficial Finance Corporation Ltd 1983] 1 NSWLR 199; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; Australian Trade Commission v Goodman Fielder Industries Limited (1992) 36 FCR 517; AVCO Financial Services Ltd v White [1977] VR 561; Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2005) 55 ACSR ; Bahr v Nicolay (No 2) (1988) 164 CLR 604; Bennett v Strauss (2016) 341 ALR 141; Bird v Trustees Executors & Agency Co Ltd [1957] VR 619; Blakely v CGU Insurance Ltd [2017] VSCA 378; Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552; Bridges & Salmon v The ‘Swan’ (Owner) [1968] 1 Lloyd’s Rep 5; Byrnes v Kendle (2011) 243 CLR 253; Canty v Paperlinx Australia Pty Ltd [2014] NSWCA 309; Carminco Gold & Resources Limited v Findlay & Co Stockbrokers (Underwriters) Pty Limited (2007) 243 ALR 472; Celthene Pty Ltd v W K J Hauliers Pty Ltd [1981] 1 NSWLR 606; Central Coast Council v Norcross Pictorial Calendars Pty Ltd (2021) 391 ALR 157; Clarence City Council v Commonwealth (2020) 280 FCR 265; Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd & Ors (1985) 155 CLR 541; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; Dennis Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 91 ALJR 486; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; Evans v Advertising Department Pty Ltd [2009] VSC 587; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; Garrett v Handley (1825) 4 B & C 664; GE Commercial Corporation (Australia) Pty Ltd v Future Network (Albury) Pty Ltd [2013] NSWSC 1228; Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14,551; GHM Nominees Pty Ltd v Wallace Jackson Pty Ltd [2022] VSCA 230; Goldsmith v Macquarie Leasing Pty Ltd [2013] VSC 332; Harburg India Rubber Comb Company v Martin [1902] 1 KB 778; HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; HNA Irish Nominee Ltd v Kinghorn (2010) 78 ACSR 553; Hobart International Airport Pty Ltd v Clarence City Council (2022) 399 ALR 214; James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850; JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (1987) 12 ACLR 1; Jones v Bartlett (2000) 205 CLR 166; Jones v Peters [1948] VLR 331; Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; Kingstream Steel Ltd v Stemcor UK Ltd [2001] WASCA 138; Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; Masters v Cameron (1954) 91 CLR 353; Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd [2016] VSC 131; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd (2008) 73 NSWLR 53; Meehan v Jones (1982) 149 CLR 571; Melbourne Property Group Investments (MPGI) Pty Ltd as trustee for the MPGI Trust v Knight 43 Martin Street Pty Ltd [2022] VSC 41; Melbourne Property Group Pty Ltd v SC Australia Pty Ltd [2013] VSC 701; Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1925) 35 CLR 449; Montgomerie v United Kingdom Mutual Steamship Association Limited [1891] 1 QB 370; Moschi v Lep Air Services Ltd; Lep Air Services Ltd v Rolloswin [1973] AC 331; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Murphy v Wright [1992] NSWCA 168; National Australia Bank Ltd v Clowes [2013] NSWCA 179; New South Wales Land and Housing Corporation v Australia and New Zealand Banking Group Ltd [2015] NSWSC 176; Northstate Carpet Mills Pty Ltd v BR Industries Pty Ltd [2006] NSWSC 1057; Ogilvie v Adams [1981] VR 1041; Osborne v Drive Park Pty Ltd [2004] SASC 261; Perpetual Ltd v Myer Pty Ltd [2019] VSCA 98;; Prime Capital Securities Pty Ltd v Gore Hill Transport Pty Ltd (2021) 150 ACSR 625; Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1) [2017] VSC 499; Re Sirrah Pty Limited (In Liquidation) [2021] NSWSC 1274; Recce Pharmaceuticals Ltd v Brown [2022] WASCA 66; Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323; Reindel & Ors v Confreight Pty Ltd & Ors (No 1) [2022] VSC 163; Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134; Rosser v Austral Wine & Spirit Co Pty Ltd [1980] VR 313; Rossiter v Miller (1878) 3 App Cas 1124; Sancterra Pty Ltd v Selby St Pty Ltd (In Liq) [2020] WASC 321; Saraceni v Mentha [No 2] [2012] WASC 336; Schmaltz v Avery (1851) 16 QB 655; Scott v Davis (2000) 204 CLR 333; Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; Shawyer v Amberday P/L (in liq) [2001] NSWSC 399; Sim Development Pty Ltd v Greenvale Property Group Pty Ltd [2017] VSC 335; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; Siu v Eastern Insurance Co Ltd [1994] 2 AC 199; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245; Sutton v Grey [1894] 1 QB 285; Theodore v Mistford Pty Ltd (2005) 221 CLR 612; Tonna v Mendonca [2019] NSWSC 1849; Toohey v Gunther (1928) 41 CLR 181; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; TW Timber Treatment Pty Ltd v Giddings [2021] VSCA 147; VL Finance Pty Ltd v Legudi [2003] VSC 57; Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1955) 95 CLR 43; Xu v Natarelli [2018] VSC 759; Yeoman Credit Ltd v Latter [1961] 1 WLR 828
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APPEARANCES: | Counsel | Solicitors |
| For the First and Second Plaintiffs | Mr S Clement | Macpherson Kelley |
| For the Liquidator of the First Defendant | Mr B Fry | Mills Oakley |
| For the Second Defendant | Mr P Miller | Wisewould Mahony |
| For the Third Defendant | No appearance |
TABLE OF CONTENTS
A. Introduction and summary
B. Factual narrative
C. Witnesses
D. Issues for determination
The “May 2015 investment agreement”
The “March 2019 Share Sale and Purchase Agreement”
Calculation of debt
E. Relevant contractual provisions
F. Legal principles of construction
G. Consideration of issues
Issue 1: Did Yongzhong (alternatively Gu) pay the sum of $2,500,000 to ME Property pursuant to the investment agreement?
Issue 2(a): Is Yongzhong a party to the agreement (including pursuant to principles of agency)?
I. Agency
II. Proper Construction of the Agreements
III. Declaratory relief
IV. Party can enforce third-party benefit
V. Trusts
Issue 2(b) – Does Yongzhong (alternatively Gu) have an equitable charge or like security interest in the student apartments pursuant to the investment agreement?
Issue 2(c) – Did Wang give a personal guarantee for repayment of the $2.5 million loan?
Issue 2(d) – Is the guarantee supported by sufficient consideration?
Issue 2(e) – Should the investment agreement and/or supplementary agreement be rectified?
Issue 2(f) – Is the first plaintiff (alternatively, the second plaintiff) entitled to interest on the advance on the terms specified in the agreement?
Issue 3 – If the answer to Issue 1 is no, then on what terms was the $2.5 million paid?
Issue 4(a) – Do the annexures to the agreement form an enforceable part of the share agreement?
Issue 4(b) – Does Yongzhong (alternatively Gu) have an equitable charge or other security interest in the student apartments pursuant to the share agreement?
Issue 5 – What interest is owing pursuant to the loan?
Issue 6 – What is the total amount owed by ME Property and by Wang?
H. Disposition
HER HONOUR:
A. Introduction and summary
1The second plaintiff (‘Gu’) is a Chinese citizen. In around 2012, Gu sought migration advice about obtaining a resident business visa so that he and his family could reside in Australia.
2The second defendant (‘Wang’) is the general manager of a Shanghai-based migration agency and a registered migration agent. Her agency put forward various proposals to Gu regarding potential investments in Australia, being a requirement for the grant of a resident business visa.
3Gu was introduced to Wang in December 2014. At that time, Wang was also a director of the first defendant (‘ME Property’). ME Property is a property developer. It owns 81 student apartments in Burwood known as the ‘Mosaic Apartments’.[1] ME Property was placed into liquidation on 10 August 2023.
[1]Annexure A to the Writ sets out the title details of the 81 apartments situated at 386 Burwood Highway, Burwood, Victoria. (The development originally comprised 136 apartments but a number of these were sold)
4On 26 May 2015, Gu and ME Property executed an investment agreement. Under the terms of that agreement, Gu agreed to invest the sum of $2.5 million in ME Property through a company to be established by him. As security for the loan, a charge was given over ME Property’s assets, equivalent to at least 10 of the Mosaic Apartments. On the same day, Wang, Gu and ME Property signed a supplementary agreement whereby Wang gave a guarantee for the loan to be advanced to ME Property.
5Gu caused the first plaintiff (‘Yongzhong’) to invest $2.5 million in ME Property in the form of a shareholder’s loan. ME Property failed to repay the loan and accrued interest by 9 August 2018, being the due date for repayment.
6The parties subsequently agreed to extend the time for repayment of the loan. They signed a share sale and purchase agreement dated 19 March 2019 (“share sale agreement’) which provided additional rights to recover the loan. This agreement was executed by Yongzhong, ME Property and Effulgence Real Estate Development Pty, a company associated with Wang. Despite the extension granted, it is common ground that ME Property did not make any repayments.
7Accepting that Yongzhong is not expressly named as a party to the investment agreement, the plaintiffs argue, nevertheless, that Yongzhong is a party to this agreement. This is so either as a matter of construction or as a principal by way of agency. In the alternative, Gu and/or Yongzhong are entitled to sue for the benefit of the contract and hold security under the equitable charge contained in the investment agreement. Additionally, the plaintiffs argue that Yongzhong and/or Gu holds a secured interest under the terms of the subsequent share sale agreement. If the Court finds that Yongzhong holds no secured interest, then it will rank alongside numerous other unsecured creditors in the liquidation of ME Property.[2]
[2]The liquidator of ME Property provided details of the secured and unsecured creditors in his affidavits sworn 23 and 25 August 2023 (Court Book “CB” 874 and 1224)
8ME Property concedes it is indebted to Yongzhong for the sum of $2.5 million. It contends that Yongzhong holds no secured interest by way of an equitable charge because Yongzhong is not a party to the investment agreement. Although Gu is a party to the investment agreement, he holds no secured interest as he did not advance any funds to ME Property. Further, Gu is not a party to the share sale agreement so he cannot claim any secured interest under that agreement. ME Property also argues that Yongzhong holds no security under the share sale agreement due to the uncertainty of the terms of that agreement.
9Wang accepts the lender is Yongzhong but says the loan was undocumented. The personal guarantee given by Wang under the supplementary agreement was only to Gu. Yongzhong is not a party to the supplementary agreement. As Gu did not advance any funds to ME Property, it follows that Wang has no liability under the guarantee. Assuming the debt is owed to Yongzhong, there is no evidence of any surety contract between Wang and Yongzhong. In addition, there is no guarantee evidenced in writing in favour of Yongzhong, as required under s126 of the Instruments Act 1958.
10The resolution of this dispute turns largely upon construction of the agreements in question. All the parties acknowledged these documents were poorly drafted. So much is obvious from even a cursory review.
11For the reasons given below, I have reached the following conclusions:
(a) Yongzhong is entitled to judgment against ME Property in the sum of $2,500,000, together with interest at the rate of 5 per cent under the investment agreement to the date the writ was filed and statutory interest thereafter;
(b) Yongzhong is entitled to a declaration that it holds an equitable charge over the Mosaic Apartments, being the properties listed in Annexure A to the amended statement of claim; and
(c) the guarantee given by Wang is enforceable against her by Yongzhong. This follows as a matter of construction of the investment agreement and the supplementary agreement when read together.
B. Factual narrative
12ME Property was incorporated on 1 December 2009. Jianfei Lu (“Lu”) is currently the sole director of ME Property. Wang was a director from 1 December 2009 up until 17 December 2019.
13In 2012, Gu received a call from a Chinese company associated with Wang known as Shanghai Donghu Border Crossing Services Co Ltd (“Donghu”), offering migration assistance. Gu and his wife (“Zhang”) subsequently met with a sales representative of Donghu, Xinzhi Zhuang (“Zhuang”), and discussed the proposed visa application. They were told that a Visa Subclass 132 might be available for their family.
14Gu said he was advised by the migration agent from Donghu that the proposed visa was for businesspersons to operate a new or existing business in Australia. It also required a substantial monetary investment be made to qualify for the visa. His evidence was that he was told to set up a company in Australia which would make the required investment.
15On 7 June 2012, Gu signed a migration services agreement with Donghu. Zhuang signed the agreement on behalf of Donghu.
16On 7 January 2014, ME Property became the registered proprietor of the Mosaic Apartments.
17On 23 September 2014, Zhuang sent an email to Zhang attaching a draft investment agreement proposing a $2.5 million investment in a new company to be incorporated, ‘ABC Company’, as part of a joint venture with Donghu Group Investment Pty Ltd. Gu did not proceed with this proposal.
18On or around 25 November 2014, Gu was granted a permanent residency visa known as Business Talent (Permanent) Visa (Subclass 132). The visa was subject to a two-year monitoring period by the Australian Immigration Department.
19Gu and his wife subsequently met Wang in December 2014, who was introduced to them as the boss of Donghu. They discussed the development at the Mosaic Apartments. Gu’s evidence was that Wang advised him and his wife about the investment requirements and proposed an investment in ME Property.
20A second proposal was sent to Zhang on 16 December 2014 by Zhuang. This proposal did refer to Gu by name and outlined a proposed investment in ME Property in the sum of $2.5 million. The investment was to be made by way of a shareholders loan which would be guaranteed by the company’s assets, equivalent to 9 or 10 student apartments. Gu did not accept this proposal.
21Between 12 and 14 May 2015, Gu and Zhang met with Wang and Lu in Melbourne to discuss the proposed investment in ME Property for the purposes of Gu’s visa obligations.
22Gu and his wife met Wang at her offices in Melbourne on or about 12 May 2015. Wang told them the two main visa requirements in relation to the investment were to invest $2.5 million and have a 16 per cent shareholding. Over the next few days, Wang continued to advise them of the visa requirements in relation to the investment in ME Property.
23Wang told Gu he would need to invest in ME Property in order to fulfil the supervision period of the visa. He was not told how the $2.5 million would be used by ME Property. Wang told Gu told he would need to visit Australia occasionally and sign some documents that would be provided to him from time to time. Wang said he could sign any documents remotely from China.
24Gu and his wife’s evidence in chief was that Wang told them during their trip to Melbourne in May 2015:
a) they would need to set up a company in Australia for the purposes of Gu’s visa and any investment to be made;
b) investment money should be paid by Gu to his new company in Australia and his new company should then pay the investment to ME Property; and
c) as Gu had an existing company in China called ‘Yongzhong’, he could create an Australian company with the same name for continuity.
25Zhang and Gu told Wang they would agree to set up an Australian ‘Yongzhong’ company. Wang said she would arrange for the incorporation of their new company.
26Lu took Gu and Zhang on an inspection of the Mosaic Apartments in Burwood on 12 May 2015. Lu also drove Gu and his wife to the NAB bank in Box Hill on around 12 May 2015 so that they could open a bank account in the name of Yongzhong.
27There is a factual dispute between the parties regarding the exact involvement of Wang in the May 2015 meetings in Melbourne. The plaintiffs contend that Wang advised them on the incorporation of the Yongzhong as Wang was a registered migration agent and the general manager of the migration agency assisting Gu. They say that Wang was present at the inspection of the Mosaic Apartments on 12 May 2015 and at a meeting to discuss the agreements held on 14 May 2015. In cross-examination, Gu was adamant that the discussions held in May 2015 regarding the investment were coordinated or led by Wang. He confirmed that Wang arranged for her subordinates to carry out the registration of Yongzhong.
28The defendants dispute this and claim that only Lu met Gu and Zhang at the student apartments on 12 May 2015, and again on 14 May 2015, when they discussed the investment.
29Wang’s oral evidence was that she arrived in Melbourne on 13 May 2015, a day after Gu and his wife arrived. She denied discussing the terms of the investment with them as she was the migration agent and wanted to avoid any conflict of interest. She recalled meeting Gu and his wife at the office in Melbourne on 14 May 2015. She said she knew was what happening roughly but that was all. She denied advising Gu that he should make his investment using an Australian company.
30Wang was aware, however, that Gu was going to establish a company. She said that Lu told her on 12 May 2015, when Wang was still in China, that Gu would like to register a company in Australia. Lu gave oral evidence that she told Gu he could use ME Property’s address for Yongzhong as he did not have any address in Australia. She confirmed this with Wang.
31Lu said the terms of the investment agreement were discussed between her and Gu. She said that Gu asked Wang to provide a personal guarantee. The terms of the supplementary agreement were discussed with Gu and Wang on or around 14 May 2015.
32Gu asked Wang to give a personal guarantee. In his oral evidence, he said he made this request on 15 May 2015 after he and his wife returned to Shanghai. Wang discussed this request with Lu. Wang agreed to give a personal guarantee to Gu. Wang gave evidence in cross-examination that she had discussions with Gu regarding the supplementary agreement. She said she was very happy to do so and that is why there are three conditions set out in the supplementary agreement, but the guarantee condition was just one part of this agreement.
33Yongzhong was incorporated on 15 May 2015. Wang’s evidence was that she referred Gu to an accounting firm to assist with the incorporation of Yongzhong. Gu is the sole director, secretary and a 50 per cent shareholder in Yongzhong. The registered office of Yongzhong at incorporation was Suite 801, 488 Bourke Street, Melbourne, being a property owned by Wang at the time. It was also then the address for ME Property.
34Lu drafted the investment agreement and the supplementary agreement and signed the documents on behalf of ME Property on around 17 May 2015. The documents were written in Chinese.[3]
[3]Certified translations of the agreements were provided in the Court Book
35Wang left for China on 17 May 2015 and took the documents signed by Lu with her.
36Gu’s evidence was that he and his wife met with Wang and another employee of Donghu at Donghu’s offices in Shanghai to discuss the investment and sign the paperwork. After he and his wife were given the documents, Wang explained the content of them. She said the documents recorded their earlier oral discussions about the investment to be made for the purpose of his visa requirements. Zhang asked why the documents described the investment as a loan agreement but also that their company was obtaining shares in ME Property. Wang said words to the effect that the shareholding was to comply with the visa requirements and the loan agreement would make repayment more secure.
37Gu said that Wang provided them with a copy of the constitution for ME Property in her offices in Shanghai when they signed the investment agreement and supplementary agreement. Zhang’s evidence was that Wang gave her a copy of the constitution which she then gave to her husband. The version which the plaintiffs say was handed over is dated 2 December 2009 and signed by Lu and Wang amongst others.[4] Wang said she did not recall providing Zhang with a copy of this version of the constitution. In her third witness statement,[5] she went further and said the version relied upon by the plaintiffs is not the correct version. She also claimed that the signature on this document that appears on page 214 of the Court Book above her name, is not her signature.
[4]CB 203-214
[5]Exhibit “D1”
38There is a dispute on the evidence as to which version of the constitution was given to Gu and his wife at this time. The defendants say that the version of the constitution which was handed over is the one that appears at Court Book pages 165 to 175 dated 1 December 2009. This version is not signed.
39The significance of this evidence is that Wang relies upon this document, in particular, clause 18(2), to argue that the loan to Yongzhong is not recoverable from ME Property because there was no valid resolution passed by ME Property’s shareholders to approve repayment, as was required. The signed version that the plaintiffs say was handed to them contains different wording in clause 18 and does not include the requirement for a shareholders’ resolution.
40This defence about the constitution is not raised by ME Property. The liquidator says it is no part of his case that the loan is not presently repayable and Gu is entitled to lodge a proof of debt.[6]
[6]Transcript (“T”) 83
41During the meetings held in Shanghai in May 2015, Wang further explained that shareholders would not receive a dividend if the company made no profit, but the loan would be a debt that would be repaid. If the company could not pay the loan, then there were the student apartments that could be used to repay the debt. Wang then produced a bundle of title searches and showed them to Zhang, being title searches for the Mosaic Apartments[7], and said they were security for the $2.5 million loan. Wang provided the title searches to Zhang on or about 20 May 2015. Wang’s evidence was that she did not recall providing the title searches to either Gu or Zhang but did not deny she had done so.
[7]CB 237-285
42Gu executed the investment and supplementary agreements on 26 May 2015 in Shanghai at Wang’s Donghu office. Wang signed the supplementary agreement.
43After the documents were signed, Wang said Gu asked her to assist him open an Australian business banking account in the name of Yongzhong. Wang then sent an email dated 26 May 2015 to Zhang attaching bank application forms for Gu to sign, to enable him to pay money from his personal bank account to Yongzhong, and then from Yongzhong to ME Property.
44On or around 29 May 2015, Wang completed a share transfer form to effect the transfer of 16 shares in ME Property held by Effulgence Real Estate Development Pty Ltd to Yongzhong for a price of $16. Wang is a director and shareholder of Effulgence. Wang accepted in cross-examination that at least by 29 May 2015, she understood that Yongzhong was paying the money to ME Property.
45Gu was a director of ME Property between 8 August 2015 and 1 December 2019.
46Between May 2015 and 28 May 2016, Yongzhong paid four amounts to ME Property totalling $2,500,000 as follows:
a) $600,000 on 29 May 2015;
b) $600,000 on 23 October 2014;
c) $600,000 on 4 February 2016; and
d) $700,000 on 28 May 2016.
47Lu gave oral evidence that the funds advanced by Yongzhong were used in another project in Lonsdale Street, Melbourne which was owned by a company called Aurumstone Pty Ltd. Wang is the director of this company which is in liquidation.[8] Gu and Zhang said Wang told them in around February 2019 that the loan funds of $2.5 million had been invested in a project at 388 Lonsdale Street, Melbourne and the loan would be returned after this project was completed. In around December 2021, Wang and Lei Wang, another director of ME Property, told Gu and Zhang that the Lonsdale Street project had been sold at a loss and they could not repay the loan and interest at that time.
[8]See company search at CB 575. Mr Bolwell, the liquidator of ME Property is also the liquidator to this company
48Under the terms of the investment agreement, the loan was due and payable within six months after the end of a 24-month monitoring period of Gu’s business by the Australian Immigration Department.
49On 9 February 2018, the Australian Immigration Department ceased the 24-month monitoring period of Gu’s business for his visa requirements. This resulted in the loan becoming due and payable by 9 August 2018.
50On around 11 February 2019, Gu and Zhang met with Wang and Lei Wang at ME Property’s offices in Melbourne. Wang and Lei Wang put forward a proposed repayment plan of the outstanding loan and interest. Wang denies this meeting occurred. Neither she nor ME Property called Lei Wang to give evidence. The plaintiff argue that the failure to call Lei Wang gives rise to a Jones v Dunkel inference. He is involved around this time and signed the board resolution referred to in the next paragraph. Lei Wang also signed the share sale agreement in his capacity as a director of ME Property. He was certainly a potential witness in the defendants’ camp. No explanation was given as to why he was not called. In the absence of any explanation, I draw the inference that Lei Wang’s evidence may not have assisted the defendants’ defence of the plaintiffs’ claim.
51On 11 February 2019, the directors of ME Property passed a resolution that:
“1. The company will repay the principle of AUD2.5million and its associated interests to Yongzhong Australia Pty Ltd by the following payment schedule.
31st May 2019
30th September 2019
31st December 2019
AUD1million
AUD1million
AUD0.5million+interest
2. Mr GU Shibiao with Passport No.____________, has sole discretion right to sell student apartments of the Company to cover any unpaid amount listed in the above table from the Company to Yongzhong Australia Pty Ltd. If the Company fails to pay Yongzhong Australia Pty Ltd the amount on the listed date, Mr GU is able to register titles of those student apartments with value no less than unpaid amount as first rank mortgage until they are sold.” [sic][9]
[9]CB 399. Annexure C to the share sale and purchase agreement contains similar wording relating to repayment and lists the third payment as $500,000 + interest (CB 459)
52The resolution referred to above was signed on 21 March 2019 by Lu, Wang and Lei Wang.[10] Wang alleges this resolution was not validly passed for reasons set out in paragraph 15 of her defence, being the constitution point referred to earlier in these reasons. In cross examination, Lu claimed for the first time that the resolution attached to the share sale agreement was invalid because all of ME Property’s shareholders had not agreed, despite the company directors having signed the document.
[10]The signed version is at CB 463
53On 21 March 2019, the plaintiffs, ME Property and Effulgence Real Estate Development Pty Ltd, executed the share sale agreement to provide further rights to the plaintiffs to recover the loan. Wang gave evidence that she had drafted earlier versions of this agreement which she had sent to Zhang. Wang admitted signing the share sale agreement but argued it was invalid. The agreement was signed at Donghu’s office in Shanghai at a meeting between Gu, Zhang, Wang and Lei Wang.
54The share sale agreement provides that the loan of $2.5 million and interest will be paid back to Yongzhong in accordance with loan pay back schedule contained in Annexure C to the agreement. The loan pay back schedule is also referred to in clause 1 in the definition of “Shareholder Loan Pay Back Date” and clause 3.2 of the share sale agreement. The wording of Annexure C mirrors that of the board resolution dated 21 March 2019. The final instalment was due on 31 December 2019.
55ME Property failed to make any repayments in accordance with the loan pay back schedule or at all.
56In March 2020, ME Property entered into a loan facility with the third defendant (“Judo Bank”) to borrow $6 million, secured by the Mosaic Apartments.
57The plaintiffs’ solicitors sent a letter of demand on 20 January 2022.
58This proceeding was commenced by writ filed on 8 July 2022. The sum claimed in the writ comprised the principal sum of $2,500,000 together with interest of $821,671.23, bringing it to a total of $3,321,671.23. Interest is continuing to accrue with the current indebtedness now in excess of $3,500,000.
59On 7 July 2023, Craig Ivor Bolwell (‘Bolwell’) was appointed administrator of ME Property under a creditors’ voluntary liquidation. He was subsequently appointed as liquidator on 10 August 2023. By order of the Supreme Court of Victoria dated 24 August 2023, leave was granted to the plaintiffs to proceed against ME Property pursuant to s500(2) of the Corporations Act 2001 (Cth).[11] Bolwell was given leave by the Supreme Court to defend the proceeding save for an estoppel defence pleaded.[12] At trial, counsel for Wang confirmed that his client would also not press the estoppel defence.[13]
[11]CB 833
[12]See Re ME Property Development Pty Ltd (in liq) [2023] VSC 520, reasons of Lyons J dated 1 September 2023
[13]T166.29-30
60The liquidator retained counsel to appear on his behalf at the trial.
61Judo Bank holds a first registered mortgage dated 4 March 2020 over the Mosaic Apartments, being the properties identified in Annexure A to the plaintiffs’ statement of claim. The bank did not appear at the trial. No relief was sought against the bank by the plaintiffs. The bank was joined as a necessary party given the orders sought, which included a judicial sale of the Mosaic Apartments.
62By email dated 27 July 2022, Judo Bank informed the plaintiffs’ solicitors that it did not intend to play an active role in the substantive dispute in the proceeding. Despite this, the bank said it wished to be heard on the matter of relief in the event that the plaintiffs’ claim is successful.[14] A copy of these reasons will be forwarded to Judo Bank before final orders are made. The bank can then address the Court on the form of orders should it wish to do so.
[14]As noted in “Other Matters” in the order made by Judicial Registrar Bennett dated 31 August 2022 (CB 182)
63At trial, the plaintiffs informed the Court they no longer sought any orders for judicial sale given the recent appointment of the liquidator to ME Property. The plaintiffs now seek the following orders:
(a) judgment against ME Property in the sum of $2.5 million, plus interest pursuant to the investment agreement and interest pursuant to the Supreme Court Act1986 (“the Act”) since the commencement of the proceedings;
(b) a declaration that Yongzhong (alternatively Gu) has a security interest in the form of an equitable charge over all of the student apartments owned by ME Property (listed in Annexure A to the amended statement of claim) to the value of the judgment in subparagraph (a) above; and
(c) judgment against Wang in the amount of $2.5 million, plus interest pursuant to the Act.
C. Witnesses
64The plaintiffs called Gu and Zhang.
65The defendants called Lu and Wang. Wang gave evidence by way of video link from Macau.
66The four witnesses adopted their witness statements as their evidence-in-chief and were cross-examined.
67I had some reservations regarding Wang’s evidence. I found her to be evasive at times and gave answers that best served her own cause rather than answering questions directly. She repeatedly gave non-responsive answers to many of the questions she was asked in cross-examination. Wang denied having various conversations and meetings with Gu and Zhang. To the extent that there are differences in the accounts of what transpired between her and Gu and his wife, I have no hesitation in accepting and preferring their evidence ahead of Wang’s.
68Lu is a certified practising accountant in Australia and has been a director of ME Property since its inception. She could read English and clearly understood the questions posed to her in English in the witness box but chose to answer in Chinese. I formed the view that Lu often tailored her answers in an attempt to better advance her own case. By way of example, she gave unprompted oral evidence repeatedly that the share sale agreement was invalid, which she had not stated before in her witness statements. When asked why not, she said no one mentioned it to her. I have therefore treated her evidence with a degree of caution in the absence of any documentary evidence.
69Gu was a truthful witness in my view and readily made concessions. But I also consider that he had some trouble understanding the questions put to him in part because of translation difficulties. Zhang appeared as a credible witness. She was subject to limited cross-examination such that there was no reason not to accept her evidence-in-chief which was contained in her witness statements.
70The defendants raised a number of objections to Gu’s witness statement. Most of these were resolved by agreement save for two remaining objections. The parties were content for me to make a ruling on these objections in the course of these reasons.
71The remaining objections were set out in what was described as a master list of objections to evidence produced on the final day of the hearing. The two remaining objections were to two sentences made by Gu in his first witness statement dated 7 July 2023. Counsel for Wang acknowledged that the matters complained of were matters going to weight.[15]
[15]T144
72The first sentence of paragraph 30 of Gu’s first witness was objected to on the basis it was a conclusion and expressed a legal opinion which was a matter for submission. This sentence reads that Gu had signed the investment agreement and supplementary agreement in his own capacity and as agent for Yongzhong. In the alternative, the defendants argued the evidence could be limited under s136(1) of the Evidence Act2008 to the witness’s belief as to the nature and effect of the agreement. Under s136, the Court has a general discretion to limit the use of evidence if there is a danger that particular use of the evidence might be unfairly prejudicial to a party.
73The plaintiffs’ response was that this was evidence which the witness could give, being about the capacity in which he signed a document.
74I accept that Gu can give evidence about why he signed the document. But his subjective belief that he did so as agent for Yongzhong is inadmissible for the purpose of construing the terms of the investment agreement. Whether he did sign as agent for Yongzhong is a matter to be determined objectively having regard to the surrounding circumstances. I will permit the sentence to remain in the witness statement, but will attach little weight to it to the extent that it purports to be a legal conclusion. I am not persuaded that the evidence is so unfairly prejudicial that I should exercise my discretion to limit its use under s136.
75The next objection was in respect to the third sentence in paragraph 33 of Gu’s first witness statement. It reads as follows:
“The company (Yongzhong) was created for the purposes of the $2.5m loan and investment agreement which is the subject of this proceeding.”[16]
[16]CB 113
76The same objection is taken as to the first objection. I do not regard this evidence as being inadmissible as Gu can give evidence about why he incorporated the company. As events turned out, Yongzhong was the corporate entity through which the investment was made in ME Property. Gu was thoroughly challenged on this issue in cross-examination, in particular, about his lack of awareness of Yongzhong’s existence at the time he signed the investment agreement. Having been cross examined on the topic, the evidence has already been led. I accept the submissions made by the plaintiffs’ counsel in closing that the issue for both sentences goes to weight rather than inadmissibility. I do not consider there is any need to limit the use of this sentence under s136 of the Evidence Act2008.
D. Issues for determination
77The parties provided a joint statement of issues for determination, being the following:
The “May 2015 investment agreement”
Issue 1. Did Yongzhong (alternatively, Gu) pay the sum of $2,500,000 to ME Property pursuant to the investment agreement?
Issue 2. If the answer to question 1 is yes, then what is the proper construction of the investment agreement. Specifically:
(a)Is Yongzhong a party to the investment agreement (including pursuant to principles of agency)?
(b)Does Yongzhong (alternatively Gu) have an equitable mortgage, equitable charge or other security interest in the student apartments comprising the Mosaic Apartments?
(c)Did Wang give a personal guarantee to Yongzhong (alternatively Gu) for ME Property’s obligation to repay the $2,500,000 loan?
(d)Is the guarantee supported by sufficient consideration?
(e)Should the agreement and/or guarantee be rectified in the manner contended for by the plaintiffs?
(f)Is Yongzhong (alternatively Gu) entitled to interest on the advance on the terms specified in the investment agreement?
Issue 3. If the answer to issue 1 is no, then on what terms did Yongzhong (alternatively Gu) pay the sum of $2,500,000 to ME Property and what relief (if any) ought to be ordered?
The “March 2019 Share Sale and Purchase Agreement”
Issue 4. What is the proper construction of the March 2019 Share Sale and Purchase Agreement. Specifically:
(a)Do the annexures to the agreement form an enforceable part of the agreement?
(b)Does Yongzhong (alternatively Gu) have an equitable mortgage, equitable charge or other security interest in the student apartments comprising the Mosaic Apartments pursuant to this agreement?
Calculation of debt
Issue 5. What interest is owing to Yongzhong (alternatively Gu)?
Issue 6. What is the total amount owed to Yongzhong (alternatively Gu) by ME Property? And is that debt also owed by Wang?
E. Relevant contractual provisions
78The relevant provisions of the investment agreement are as follows:
Party A: GU SHIBIAO [together with Gu’s passport number]
Party B: ME PROPERTY DEVELOPMENT PTY LTD (CAN 140 874 737)
Party A is an Australian business investment visa 132 holder, planning to invest 2.5 million Australian dollars in Australia to run business, in order to fulfil the requirements set by the Australian Immigration Department in relation to the 132 Visa, under which an applicant is to establish a new business or continuing to operate an existing business in Australia for 2 years after the grant of the 132 Visa.
Party B is a company incorporated in Melbourne, Australia, whose main business is real estate development and property management in Australia. Party A has had a friendly negotiation with Party B on how to invest 2.5 million Australian dollars in a business in Australia, and the parties will collaborate to meet the conditions of Party A’s 132 Visa.
The 136 units of student apartments developed by Party B in BURWOOD have been constructed and some of them have been sold. Now Party B needs to seek a partner for the property management and intends to enter the Chinese market as its long-term brand building effort, while seeking other real estate development in management project opportunities. The current market assessed value of the student apartment project is about AUD 28 million. At present, the student apartment asset owned by Party B is worth AUD 15 million.
In the interest of fairness and justice, both parties have reached the following consensus in relation to the management of and collaboration in the project.
1. Party A will establish a company in Australia with a registered capital of AUD 1200, and Party A owns 100% of the shares in this company. All funds from Party A will be injected into this company in the form of shareholder loans.
2.Party A intends to invest in Party B and manage the student apartment project developed by Party B. The investment amount is AUD 2.5 million, and at the same time, it will pay AUD 160 to become a shareholder of Party B holding 16% of the shares. The AUD 2.5 million that Party A’s company intends to invest in Party B the company will be given to Party B in the form of shareholder’s loans, and the AUD 2.5 million is guaranteed by the assets of Party A’s company (equivalent to the asset value of 10 student apartments). The interest of the shareholder’s loan is 5% per annum, calculated once every 12 months from the actual date when each sum of fund arrives at Party B’s company account…
3.Both Party A and Party B have agreed that Party A’s Australian company will invest 2.5 million Australian dollars into Party B in four loan instalments. Party A promises that Party A’s Australian company will transfer the first instalment of AUD 600,000 to Party B’s account before May 30th, 2015. The due date by which the second instalment of AUD 600,000 will arrive at Party B’s account is September 30, 2015. The due day by which the third instalment of AUD 600,000 will arrive at Party B’s account is January 31, 2016, and the due date for the fourth instalment of AUD 700,000 to arrive at Party B’s account is May 30, 2016.
4. …The annual interest of the loan is 5%, and the interest will be paid to Party A’s company account every 12 months…
5.After Party A completes the first instalment of investment, Party B will immediately assist Party A’s immigration agent to prepare materials for the 132-visa monitoring…
6.Party A undertakes to have its Australian company investing 2.5 million Australian dollars in Party B, which shall not be withdrawn from Party B within half a year after Party B receives the lifting of the 2-year monitoring conditions in relation to the Immigration Department’s grant of the 132 visa.
7. Within 6 months after the end of the 2-year monitoring period of Party A’s 132 visa, Party B shall return the 2.5 million Australian dollars to Party A’s company. If Party B fails to return the AUD 2.5 million to Party A’s company, Party A’s company has the right to sell the 10 student apartments that are used as securities for the AUD 2.5 million. If the sale price is lower than AUD 2.5 million, Party A’s company has the right to pursue Party B’s other assets until Party B pays back the unrepaid portion of AUD 2.5 million to Party A’s company.
…
[Above the signing block]
… If there are additional matters, both parties can conduct friendly negotiations and sign supplementary agreement. Any supplementary agreement signed by both parties thereafter shall have the same legal effect as this agreement.
[sic]
79The relevant provisions of the supplementary agreement read as follows:
Party A: GU SHIBIAO [together with Gu’s identifying details]
Party B: ME PROPERTY DEVELOPMENT PTY LTD (ABN 28 162 207 454)
Party C: WANG JINHUA [together with Wang’s identifying details]
After friendly negotiation, and in the interest of fairness and justice, the three parties A, B and C agree to the following terms and conditions.
Party A, as the owner of 16% shares of Party B lends Party B AUD 2.5 million in the form of shareholders’ loans. The annual interest of the loans is 5%, and payable every 12 months. The loan period starts from the arrival of the money at Party B’s account and ends 6 months after the end of the 2 year monitoring period of Party A’s 132 visa.
Party A participates in Party B’s decision-making and management, but Party A promises to forego the right to receive dividends arising out of the 16% shares held by Party A’s company, and therefore Party A does not need to be responsible for any external debts and losses of Party B. Any external debts and losses of Party B will be borne by other shareholders of Party B.
Party C provides personal guarantee for the loan of 2.5 million Australian dollars lent by Party A to Party B until Party B returns the 2.5 million Australian dollars to Party A. If Party B fails to return the 2.5 million Australian dollars to Party A within 6 months after the expiry of the 2-year monitoring period under Party A's 132 Visa, Party C shall bear the repayment responsibility of the 2.5 million Australian dollars, otherwise Party A has the right to pursue Party C’s assets up to an equivalent value.
[sic]
F. Legal principles of construction
80The principles relating to the construction of contracts are well known and summarised in cases such as Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[17] and Blakely v CGU Insurance Ltd.[18] These principles were summarised by the Court of Appeal more recently in Adaz Nominees Pty Ltd v Castleway Pty Ltd and are set out below: [19]
[17](2015) 256 CLR 104 at [46]-[51]
[18][2017] VSCA 378 at [166]
[19][2020] VSCA 201 at [70] per Whelan and McLeish JJA and Riordan AJA
the Court asks ‘what a reasonable businessperson would have understood those terms to mean.’ To answer that question, ‘the reasonable businessperson [is] placed in the position of the parties,’ and the Court applies the following principles:
(ll) The terms are construed objectively, and the subjective intentions of the parties are irrelevant.
(mm) The objective approach requires reference to the text and its ordinary meaning, together with:
(i) the context, being the entire text of the contract including matters referred to in the text; and
(ii) the purpose.
These matters will ordinarily be identified by reference to the contract alone, but evidence of mutually known objective background circumstances relevant to the purpose is admissible ‘no matter how clear the “ordinary meaning” of the words.’ Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.
(nn) Unless a contrary intention appears in the contract, the court is entitled to approach the task of interpretation on the assumption that the parties intended to produce a commercial result, and should construe it so as to avoid a commercial nonsense. However, the court does not weigh the commerciality of the agreement, and business common sense is a topic on which reasonable minds may differ.
(oo) If, after completion of this process, the language used in the contract ‘is ambiguous or susceptible of more than one meaning,’ then evidence of surrounding circumstances external to the contract is admissible to assist with interpretation of the language in question.
(pp) However, ‘evidence of the parties’ statements and actions reflecting their actual intentions and expectations’ is inadmissible. Although evidence of prior negotiations is admissible to establish objective background facts known to both parties and the subject matter of the contract, evidence of negotiations reflective of actual intentions and expectations is not receivable.
(qq) Post-contractual conduct is inadmissible to construe the terms of the contract. However, the parties’ subsequent communications may be relevant to determine whether the parties intended to enter into a binding contract.
G. Consideration of issues
Issue 1: Did Yongzhong (alternatively Gu) pay the sum of $2,500,000 to ME Property pursuant to the investment agreement?
Plaintiffs’ submissions
81The plaintiffs contend the only logical reason for advancing the loan is pursuant to the investment agreement, in the circumstances shown by the evidence. There is no other possible explanation and the defendants do not even advance one.
82The plaintiffs argue their position is overwhelmingly supported by the following matters:
a) There were several oral discussions between Gu and Zhang, and Wang and Lu, on behalf of ME Property, to the effect that the loan to ME Property was because of Gu’s visa requirement and would be paid by his company. This was recorded in the investment agreement.
b) The parties signed the investment agreement following the oral discussions about how the loan should be paid and by whom. The investment agreement provided for payment to be made by Gu’s company, which was advanced immediately following the signing by all parties to the investment agreement.
c) The investment agreement explicitly provides for Gu’s company to invest by way of the loan to ME Property, which is what transpired.
d) The four instalments advanced comprising the loan mirrors the instalments prescribed by the investment agreement. The defendants deny that these were advanced under any agreement but do not submit any alternative explanation. Under cross-examination, Wang conceded that there was no other reason for Yongzhong to pay $2.5 million to ME Property.
e) Wang signed the share transfer certificate to give effect to a transfer of shareholding to Yongzhong pursuant to the investment agreement.
f) After the loan fell due for repayment in August 2018, Wang negotiated and communicated with Zhang about the repayment of the loan, including to prepare the share sale agreement and entered into a resolution of ME Property’s Board of Directors dated 21 March 2019. Wang also prepared a table calculating the interest owing in accordance with the investment agreement and advances paid under it.
83For these reasons, the plaintiffs submit the Court should find that the loan was paid to ME Property pursuant to the investment agreement.
ME Property’s submissions
84ME Property says Gu was the lender pursuant to the investment agreement, given he was the beneficial owner of the funds to be advanced that were ultimately advanced to ME Property.
85Yongzhong never had any real interest in the funds which passed through its bank account for the following reasons:
a) the proposal for the investment agreement was for the purpose of Gu satisfying his visa requirements;
b) the pre-contractual discussions indicate that Gu was to perform his investment in ME Property by incorporating a company, and by paying the investment funds to ME Property using his company as a conduit; and
c) there is no evidence of any contract or other documented arrangement between Gu and Yongzhong as to the terms on which the funds were advanced from Gu to Yongzhong.
86For these reasons, the Court should find that Yongzhong did not advance the loan pursuant to the investment agreement because it was not a contracting party in accordance with the express terms.
Wang’s submissions
87Wang submits all the evidence is consistent with Yongzhong being the lender, in particular:
a) Gu gave evidence that in discussions preceding the investment agreement, it was discussed that “the funds should be paid by Yongzhong to ME Property;”
b) all the witnesses agree that Yongzhong is the lender;
c) ME Property provided acknowledgement of receipt of the loan payments from Yongzhong;
d) all financial records of ME Property, including the financial records created, recorded Yongzhong as the lender; and
e) Gu paid the money to Yongzhong before Yongzhong paid the money to ME Property.
88However, Wang submits that the loan was not pursuant to the investment agreement because:
a) Yongzhong is not a party to the investment agreement;
b) the investment agreement does not refer to Yongzhong despite it having been incorporated at the time of signing;
c) Lu and Wang both gave evidence that at the time of entering the investment agreement, neither Gu nor Zhang said that either of them had intended for Yongzhong to advance the loan;
d) Gu could have simply inserted Yongzhong’s name in the investment agreement rather than inserting “Party A’s company;”
e) Gu conceded in cross-examination that he was not aware that Yongzhong had existed at the time of signing the investment agreement and supplementary agreement;
f) the investment agreement contemplates that Gu will incorporate a company (with registered capital of $1,200 AUD) and for that company to make a shareholder loan to ME Property; and
g) the terms of the investment agreement are inconsistent with Yongzhong being the company indicated as “Party A’s company” for the following reasons:
i.Yongzhong had already been incorporated at the time; and
ii.Yongzhong has a registered capital of $100, not the contemplated $1,200 AUD.
89For all these reasons, Wang submits Yongzhong is the lender but the advancements were not made pursuant to the investment agreement. The loan is presumed to be repayable instanter[20] given that it was undocumented.
[20]Ogilvie v Adams [1981] VR 1041 at 1043 (Fullagar J); VL Finance Pty Ltd v Legudi [2003] VSC 57; GHM Nominees Pty Ltd v Wallace Jackson Pty Ltd [2022] VSCA 230 at [1] (Ferguson CJ, Sifris and Macaulay JJA)
Analysis
90In my view, the plaintiffs’ submissions on this issue should be accepted ahead of the defendants’ submissions for the following reasons. The parties were always aware that Gu was going to make the investment in ME Property through a company. I accept his and Zhang’s evidence that Wang told them Gu needed to establish a company in Australia to make the investment which was required for his business visa.
91Lu and Wang were agreeable that Yongzhong could use ME Property’s address as its registered address. Both of them knew before Gu signed the investment agreement that he intended to make the investment through his Australian company, in keeping with the advice given to him. Wang also knew that Gu was intending to register an Australian company in the name of Yongzhong, being the same name as Gu’s existing company in China. She, in fact, suggested that he use Yongzhong as the name for his Australian company. Wang put in place arrangements for Yongzhong to be incorporated on or around 14 May 2015. Yongzhong was incorporated on the following day.
92When Gu signed the investment agreement on 26 May 2015, he had not been told that Yongzhong was incorporated on 15 May 2015. He said in cross-examination he regarded himself and the company as one and the same. The minor mismatch in share capital relied upon by the defendants to argue that the company in question could not be Yongzhong was aligned up in documents sent to Zhang on 26 May 2015, shortly after the signing of the investment agreement.
93The investment agreement signed by Lu on 14 May 2015 clearly states that the investment is to be made by Party A (Gu)’s company which is in fact what then occurred. The defendants could not posit any other reason why Yongzhong would make this payment to ME Property. Wang conceded in cross-examination that there was no other explanation for Yongzhong to pay $2.5 million to ME Property.
94Wang assisted with the documentation required to facilitate the payment from Gu to Yongzhong and then on to ME Property. Self-evidently, this payment was made in order to comply with the terms of the investment agreement. Yongzhong paid the instalments in accordance with the terms of the investment agreement. When subsequent negotiations regarding an extension for repayment took place between Wang and Zhang, Wang made calculations of the interest repayable in a table which was referrable to the terms of the investment agreement.
95Having regard to all these matters, the answer to this issue is yes – namely, Yongzhong paid $2.5 million to ME Property pursuant to the investment agreement.
Issue 2(a): Is Yongzhong a party to the agreement (including pursuant to principles of agency)?
96The plaintiffs accept Yongzhong is not explicitly named in either the investment agreement or the supplementary agreement. Despite this, they contend there are a number of cascading alternative approaches which circumvent the issue of privity. These are:
a) agency;
b) proper construction of the agreements;
c) third parties seeking declaratory relief;
d) a party to the agreement can enforce a third party’s benefit; and
e) Yongzhong is entitled to relief because the benefit of the agreement is held on trust for it by Gu.
I. Agency
Plaintiffs’ submissions
97The plaintiffs argue that Gu entered into the investment agreement and supplementary agreement as an agent of Yongzhong.
98Where an agent contracts with a third party on behalf of its principal, then the principal is taken to be the contracting party, and the principal may sue the third party on that contract.[21]
[21]Scott v Davis (2000) 204 CLR 333 at 408-9 [228] (Gummow J)
99The two elements of an agency relationship are:[22]
a) consent (or assent) of the principal and agent; and
b) the authority of the agent to act on the principal’s behalf.
[22]Tonna v Mendonca [2019] NSWSC 1849 at [377] (Ward CJ in Eq)
100The relevant inquiry is whether the parties’ actions evidence an intention to create a relationship reflecting what the law defines as an agency (and not whether the parties have the relevant intention).[23] This does not require that the parties use special words or even appreciate the legal concept of an agency if what they have done is best reflected by that concept.[24] The plaintiffs contend that Gu’s subjective intention is immaterial. The agency is evidenced from their conduct and the documents themselves. As Yongzhong’s sole director, Gu had the necessary authority to consent or assent to the agency, whether the objective intent was to contract as agent for his Australian company, being Yongzhong.
Agency as at the date of signing
[23]Law of Agency, (4th ed, 2020), LexisNexis Australia, at [4.4] and [4.5] and the authorities cited therein
[24]Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 at 587 (Lord Wilberforce): “… while agency must ultimately derive from consent, the consent need not be to the relationship of principal and agent itself … but may be to a state of fact upon which the law imposes the consequences which result from agency.”
101The Court must take account of the commercial circumstances in determining whether Gu entered the agreement as agent for Yongzhong.[25]
[25]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 193-4 [81] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ)
102The evidence demonstrates that Gu entered into the agreements as an agent of Yongzhong for the following reasons:
a) The investment agreement provides that Gu would incorporate a company that would advance the loan, earn interest upon it, receive shares in ME Property, and receive rights to sell ME Property assets. The words “Party A’s company” used throughout the agreements must have some work to do.
b) The commercial explanation and purpose of the words used in the agreement provides further context. In the pre-contractual discussions and noted by the agreement itself, Gu was advised to create an Australian company and use it as the investment vehicle. Further, Wang and Lu give evidence that they were aware Gu entered this agreement for the purpose of his visa requirements.
c) Gu was the sole director of Yongzhong. This company was incorporated only 11 days earlier for the specific purpose of making the loan.
d) Gu gave evidence that he entered into the agreement as an agent for Yongzhong. His evidence was that he considered himself and the company one and the same. It is immaterial whether Gu subjectively intended to act as agent because the legal characterisation of agency is determined objectively from the parties’ actions.
e) It is irrelevant whether Gu told ME Property or Wang that he was acting as agent for Yongzhong. By application of the doctrine of undisclosed principal, either the principal or agent may sue upon the contract entered on behalf of the principal.[26] It is not an exception to privity of contract but rather an ordinary application of the laws of agency.[27]
f) The identity of Gu’s company was not material to ME Property’s reason for contracting. The contract referred to the existence of Gu’s imminent Australian company, and ME Property and Wang were content to enter the agreement.[28] They knew that Gu had taken steps to incorporate Yongzhong, (which they had facilitated) including giving their assent to using ME Property’s office as Yongzhong’s registered address.
g) A person can sign a contract in dual capacities: acting personally and as director (that is, agent) for their company.[29] This is a matter for construction in all of the circumstances where, on proper construction of the agreements, it is consistent that Yongzhong is a party to the agreements as principal.
[26]Siu v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207. See also Pico Holdings Inc v Wave Vistas Pty Ltd & Anor [2003] QCA 204 at [69]-[70] (Mullins J)
[27]Heydon on Contract, (2019), Thomson Reuters, at [12.340]. See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 189-194 [69]-[82] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ)
[28]Schmaltz v Avery (1851) 16 QB 655 at 662 (Patteson J)
[29]Law of Agency (4th ed, 2020), LexisNexis Australia, at [23.28]
103For these reasons, the Court should find Gu entered into the agreements as agent for Yongzhong notwithstanding Gu was unaware of Yongzhong’s incorporation when he signed the investment agreement.
Agency established by conduct subsequent to signing the agreement
104The plaintiffs further contend that agency is established on the evidence on the basis of ratification.
105The effect of ratification is that the actions of the agent are treated as if they were authorised at the time with retrospective effect, such that the principal can sue upon the contract.[30] Ratification does not require a pre-existing agency relationship and can operate to create an agency relationship.[31] It is not necessary for a contract to state the putative principal’s name but rather sufficient to provide a reasonable description of the person intended to be bound as principal or the means to identify or ascertain that person.
[30]Jones v Peters [1948] VLR 331 at 335 (Herring CJ). See also Davison v Vickery’s Motors Ltd (in liq) (1925) 37 CLR 1 at 19 (Isaacs J)
[31]Bennett v Strauss (2016) 341 ALR 141 at 151-2 [55] (Barrett AJA)
106As to companies not yet incorporated at the time of contracting, s131 of the Corporations Act 2001 (Cth) provides that a company becomes bound by and entitled to the benefit of a pre-incorporation contract if the company, or a company reasonable identifiable with it, comes into existence and ratifies the contract within a reasonable time of the contract being executed. The plaintiffs refer to this section by way of analogy but concede the situation here is different. Yongzhong was registered on 15 May 2015, being after the document was drafted and signed by ME Property, but prior to Gu signing it.
107Acts which constitute ratification need not be express words but can include conduct that is an outwardly manifestation to other parties to the contract or by behaviour otherwise unmistakeably referable to the company being a party to the contract.[32] Ratification may be implied from acts which one cannot logically analyse without imputing such approval by the principal of the underlying transaction.
[32]Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2005) 55 ACSR 1 at 11 [29] (Bryson JA)
108The plaintiffs argue the following are unequivocal acts of ratification by Yongzhong, to the full knowledge of ME Property and Wang:
a) immediately after signing (on 26 May 2015), Gu asked Wang for assistance to open an Australian business account in the name of Yongzhong so that it could make payment of the first instalment due under the agreement;
b) later on 26 May 2015, Wang procured, and Gu signed, banking documents for the payment of money from Gu’s bank account to Yongzhong’s bank account in Australia, and also for payment then from Yongzhong to ME Property, being payment of the first instalment due under the investment agreement;
c) Wang concedes that she knew by 27 or 28 May 2015, that Yongzhong was the entity making the payments pursuant to the agreement;
d) Yongzhong made payment of the $2.5 million loan to ME Property, plus a further $16 for 16 per cent of the shareholding in ME Property, as provided by the investment agreement;
e) on 29 May 2015, Gu signed a share transfer form on behalf of Yongzhong for its receipt of 16 shares in ME Property, which Wang also signed;
f) a share certificate dated 29 May 2015 issued by ME Property records Yongzhong as the registered holder of 16 shares in that company;
g) receipts were given by ME Property to Yongzhong for each of the four instalments of the $2.5 million loan, which payments correlate to the investment agreement; and
h) upon the loan falling due under the terms of the investment agreement in August 2018, ME Property and Wang negotiated with Yongzhong about repayment, culminating in the share sale agreement in March 2019.
109Consequently. a conclusion of agency via ratification applies, despite Gu’s evidence that he was not yet aware Yongzhong had been incorporated when he signed the investment agreement.
110Ratification can also occur by a party’s pleadings.[33] By commencing this proceeding, Yongzhong further and additionally ratifies the agreement by positively pleading that it was both the contracting party and that Gu acted as its agent.
[33]Celthene Pty Ltd v W K J Hauliers Pty Ltd [1981] 1 NSWLR 606 at 614 (Yeldham J)
Liquidator for ME Property’s submissions
111ME Property’s core response to the plaintiffs arguments relating to privity are twofold:
a) firstly, the objective circumstances at the time the parties entered into the investment agreement include the fact that Gu then had no knowledge of the incorporation or existence of Yongzhong; and
b) secondly, that matter is expressly reflected in clause 1 of the investment agreement, which required Gu to establish a company, and cause a sum of $2.5m to be paid to that company in the form of shareholder loans.
112Where a person is an agent for a principal, and the fact of the agency is disclosed to the other party to the contract (whether or not the name of the principal is disclosed), then depending on the proper construction of the contract, there may be a contract between: the other party and the principal; the other party and the agent; or between the other party and both the principal and agent.[34] Where the agent does not represent that that they were contracting as agent, and where the contract contains terms that would have been inappropriate if the agent had been acting for itself and an undisclosed principal, a contract with the alleged undisclosed principal is unlikely to be found.[35]
[34]Montgomerie v United Kingdom Mutual Steamship Association Limited [1891] 1 QB 370 at 372 per Wright J; Australian Trade Commission v Goodman Fielder Industries Limited (1992) 36 FCR 517 at 522, per Beaumont, Gummow and Einfeld JJ
[35]Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd & Ors (1985) 155 CLR 541
113Irrespective of an agency relationship, Yongzhong is not a party to the investment agreement as a principal, disclosed or otherwise, for the following reasons:
a) The investment agreement does not name Yongzhong as a party nor does the signature page contain any qualifying words that refer to an agency relationship.[36]
b) Although there are references to “Party A’s Company”, that is in the context of obligations requiring Gu to first incorporate a company, then use it as an investment vehicle to satisfy his visa requirements. Given that Yongzhong was incorporated prior to signing the investment agreement, it is inconsistent with the express terms of the agreement.
c) Gu is the principal lender/investor as he had at all times, beneficial interest in the funds to be advanced.[37]
d) The contemporaneous supplementary document also identifies Gu as the principal lender.
e) Gu had no knowledge of the incorporation and existence of Yongzhong at the time he entered into the investment agreement.
[36]See discussion in G E Dal Pont, Law of Agency (3rd ed, 2014, LexisNexis Butterworths) (Dal Pont, Law of Agency) at [23.3], citing Cooke v Wilson [1856] Eng R 883; (1856) 1 CBNS 153 at 164
[37]See for example, Bridges & Salmon v The ‘Swan’ (Owner) [1968] 1 Lloyd’s Rep 5 at 13, per Brandon J, cited in Del Pont, Law of Agency at [23.25]
114The Court should disallow the ratification claim as it is inconsistent with the case advanced at trial.[38] The plaintiffs’ primary and alternative claims were put on the basis that Gu entered the investment agreement as agent for Yongzhong with authority. Therefore, the Court should hold the plaintiffs to their pleaded claims.
[38]Paragraph [35] of closing submissions
Wang’s submissions
115Wang notes there are two essential elements of an agency relationship: first, the consent or assent of both principal and agent, and second, the authority given to the agent by the principal to act on the principal’s behalf.[39] The principal must intend that the agent will act for him or her and the agent must intend to accept the authority and act on it.[40] Intention can be implied from the circumstances.[41]
[39]Tonna v Mendonca [2019] NSWSC 1849 at [377]
[40]Ibid at [378]
[41]Ibid at [379]
116An agency relationship can be disclosed, or undisclosed, to the other contracting party. The position of an agent for a disclosed principal is different than that of an agent for an undisclosed principal.
117Gu confirmed in his evidence that he did not intend to refer to Yongzhong in the investment agreement because in his understanding, Yongzhong had not been incorporated at that time.[42] As such, Gu cannot be found to have had the required intention to enter into the investment agreement on behalf of Yongzhong.
[42]T124.11 to T125.7
118This evidence is consistent with the terms of the investment agreement. First, Yongzhong is not referred to in the investment agreement. Second, the investment agreement referred to a company to be incorporated in the future, with a registered share capital of $1,200 AUD.
119Further, Yongzhong can only act through Gu. Gu, as the sole director of Yongzhong, is its controlling mind and will. Yongzhong cannot have provided Gu with authority to enter into the investment agreement as agent at the relevant time. Gu’s state of mind at the time was that Yongzhong did not exist.
120Wang contends that Gu did not enter the investment agreement as an agent of Yongzhong because the required intention did not exist. Gu confirmed in his evidence that he did not intend to refer to Yongzhong in the investment agreement because in his understanding, Yongzhong had not been incorporated. This is consistent with the terms of the investment agreement because Yongzhong is not referred to and it refers to a company to be incorporated in the future with a registered share capital of AUD$1,200.
121Alternatively, if the Court finds that Gu had the required intention, Wang submits that Yongzhong was a disclosed principal and only Yongzhong has the ability to sue.
122It is immaterial whether the identity of the principal is disclosed. To be a disclosed principal, what is required is that an agency relationship was disclosed. This agency relationship was disclosed for the following reasons:
a) Given that Gu is the sole director of Yongzhong, an agency relationship exists between director and company.
b) Despite Gu not expressly telling Lu and Wang that he was acting as agent for Yongzhong, they were aware that Gu intended to incorporate a company, and that it was possible for the company to be the entity advancing the loan.
c) The investment agreement contains various terms that refer to a company that Gu will incorporate, being a future tense.
d) Gu’s evidence is that he discussed with Wang that he would incorporate a company called Yongzhong and use it to advance the loan. Wang contests the accuracy of this evidence. The plaintiffs cannot advance a case that Yongzhong was an undisclosed principal given the inconsistency with Gu’s own evidence.
123Wang does not respond to the plaintiffs’ ratification claim because it was not pleaded, referred to in opening, or described in the joint statement of issues.
Analysis
124I am of the view that Gu was acting as agent for Yongzhong as a disclosed principal when he signed the investment agreement for the following reasons.
125As the investment agreement makes clear, the investment in ME Property was to made by Party A’s company. This company would in turn receive shares and the right to sell ME Property’s assets. The investment agreement imposed a number of contractual rights and obligations upon Party A’s company. The only company in the contemplation of the parties at the time was Yongzhong. As the background circumstances makes clear, the parties’ objective intention was that Yongzhong would be the corporate vehicle through which the loan was to be made. This was known to Wang and Lu. They had arranged for the incorporation of Yongzhong to take place which occurred on 15 May 2015. Wang had also recommended to Gu and Zhang that this name be used for their Australian company, being consistent with the name of their existing company in China.
126The defendants rely heavily upon the fact that Gu said he did not know that Yongzhong had been incorporated when he signed the investment agreement as proof he could not have had the subjective intention to act as Yongzhong’s agent. He did not know about the incorporation at the time because he was not told about it by Wang or Lu. Nor did Wang or Lu seek to amend the documents signed on 14 May 2015 to substitute Party A’s company for Yongzhong when they documents came to be signed by Gu on 26 May 2015. By then, they knew Yongzhong had been incorporated following their advice to Gu to do so, as being the appropriate entity to make the investment in ME Property. But as the plaintiffs point out, it is the objective assessment of what were the parties’ intentions which has to be assessed - not whether Gu knew a company has been incorporated or not.
127Gu is the sole director of Yongzhong. He repeatedly gave evidence that he regarded himself and Yongzhong as being one and the same. He signed the investment agreement personally, but he was also able to do so in the capacity of an agent on behalf of his principal. In my view, the purpose of investment agreement, as the name suggests, was to govern the rights and obligations relating to the investment to be made by Party A’s company, which the parties knew would be Yongzhong.
128Both defendants objected to the plaintiffs seeking to rely upon ratification to establish agency when this topic had not been pleaded, referred to in opening or listed in the joint statement of issues. The liquidator for ME Property also argued that it was a new case which was inconsistent with the way the case was pleaded and run at trial. The case said to be run at trial was that Gu had executed the documents with the authority of his principal.
129The plaintiffs’ response is that the issue of ratification did not need to be specifically pleaded.[43] The parties were aware that agency was an issue. Ratification simply flows from the evidence led at trial and relating back to the original authority. The plaintiff said the argument raised was not inconsistent with the way the case had been run – it was a legal conclusion based on the evidence led at trial. There was no temporal limitation to the plaintiffs’ pleading about Gu’s authority. The conduct of Yongzhong after 26 May 2015 was more than enough to constitute adoption of the investment agreement and ratify it.
[43] Relying upon the decisions referred to in the plaintiffs’ written reply submissions at [22]
130Whilst it may have been desirable for this issue to have been expressly raised in the issues for determination, I do not consider the plaintiffs should be shut out from arguing ratification. It is an argument available to them on the basis of the evidence given at trial. Whether the acts relied upon amount to ratification is a legal conclusion. Nor do I regard the stance taken as being inconsistent with the case as pleaded. The case pleaded was that agency arose because Yongzhong should be regarded as a principal. The fact that it authorised Gu to act as its agent is supported by the steps it took following the execution of the investment agreement. I do not regard these matters as being mutually inconsistent.
360In Melbourne Property Group Investments (MPGI) Pty Ltd as trustee for the MPGI Trust v Knight 43 Martin Street Pty Ltd,[215] the guarantee referred to the beneficiary of the guarantee as “Borrower,” when self-evidently, it ought to have referred to the “Lender”. The mistaken reference to the “Borrower” was “a result of a drafting slip”.[216] Garde J found that there had been an intention to provide a guarantee to the “Lender”[217] and ordered rectification.[218]
[215][2022] VSC 41
[216][2022] VSC 41, [441]
[217]Ibid at [407], [441]
[218]Ibid at [400]-[441]
361In the present case, the second defendant submits that Wang did not intend to give a guarantee to Yongzhong. There is no evidence that Gu even requested a guarantee to be provided to Yongzhong. Neither Wang nor Gu intended to refer to Yongzhong in the supplementary agreement as the beneficiary of the guarantee.
362As such, Wang concludes that the plaintiffs cannot establish the fundamental elements necessary for rectification, being a common intention and a common mistake. Furthermore, the cases referred to above are all cases involving obvious drafting errors. That is not the case here. The plaintiffs seek to redraft the supplementary agreement by inserting a completely new party.
363In these circumstances, the plaintiffs’ claim for rectification of the supplementary agreement should be refused.
Analysis
364As counsel for the plaintiffs pointed out, rectification was the remedy of last resort in the event that the preceding arguments relating to the capacity to sue fell away.
365I have already found that Gu is entitled to sue for specific performance of the promise given by ME Property to repay the loan made by his company and to enforce the equitable charge granted. I have also found that Yongzhong has standing to sue as a disclosed principal and as a third party to enforce the benefits conferred upon it under the terms of the investment agreement. In addition, I have found, as a matter of construction, that Wang is liable to Yongzhong under the terms of the supplementary agreement when read together with the investment agreement. That being so, it is unnecessary to determine whether these documents should be rectified in the manner sought in the alternative to the plaintiffs’ other claims.
366Had it been necessary to do so, I would have found that the evidence did establish a common intention sufficient to found a claim for rectification and that the documents contained mistakes which should be rectified. To that end, I would have accepted the plaintiffs’ submissions on this point in their totality. The liquidator referred to discretionary factors that could lead to the refusal of such an order, in particular, the potential effect on other unsecured creditors in the liquidation. To some extent, the liquidator was a contradictor on their behalf as he opposed the order sought granting a secured interest to the plaintiffs. However, it is ultimately not necessary to resolve this point as I have found that the plaintiffs did not need to resort to rectification in order to establish their claims.
Issue 2(f) – Is the first plaintiff (alternatively, the second plaintiff) entitled to interest on the advance on the terms specified in the agreement?
367The liquidator for ME Property and Wang did not make any submissions on this issue in closing.
368The investment agreement provides that interest accrues on each advance at the rate of 5% of annum for the date of each payment. Having found that Yongzhong is the lender under the terms of the investment agreement, it follows that Yongzhong is entitled to claim interest in accordance with the terms of that agreement. The parties will be directed to confer on the amounts of interest payable.
Issue 3 – If the answer to Issue 1 is no, then on what terms was the $2.5 million paid?
Plaintiffs’ submissions
369The defences allege that the $2.5 million paid to ME Property was not paid pursuant to the investment agreement and that the amount is not presently due and repayable. That position was largely reliant upon an estoppel defence added on the eve of a summary judgment hearing in November 2022. It is no longer pressed by any defendant. ME Property opened its case on the basis that it now accepts that $2.5 million is due.[219]
[219]See, eg, T83:20-84:19, at least regarding Gu but presumably alternatively also to Yongzhong
370The law provides that “when A lends money to B with nothing all said as to repayment, the money is repayable immediately”.[220] It would follow that ME Property was liable to repay, as a debt, the $2.5 million loan made by Yongzhong as and when they were received. There is no real defence to the plaintiffs’ alternative claim for money had and received.[221]
[220]GHM Nominees Pty Ltd v Wallace Jackson Pty Ltd [2022] VSCA 230 at [1] (Ferguson CJ, Sifris and Macaulay JJA)
[221]ASOC, [22]
371It also would follow, pursuant to s58 of the Act, that interest accrued on that debt at a rate not exceeding the rate for the time being fixed under s2 of the Penalty Interest Rates Act 1983 from the time when the debt or sum was payable or, if payable otherwise, then from the time when demand of payment was made.[222] The plaintiffs seek interest from the date of each advance or, alternatively, from the date of a demand for payment (being 20 January 2022).
[222]A formal demand was made by letter to ME Property dated 20 January 2022: CB 502
372ME Property and Wang did not address this specific issue in their final written submissions.
Analysis
373As I have answered yes to issue 1, issue 3 does not fall for determination. But, assuming I was wrong and the funds paid were not advanced pursuant to the investment agreement, the liquidator has now conceded that Yongzhong is entitled to lodge a proof of debt for the sum of $2.5 million, together with interest and costs.
Issue 4 – What is the proper construction of the March 2019 Share Sale and Purchase Agreement?
374Issue 4 relates to the construction and effect of the share sale agreement. Two questions are identified, namely:
(a) Do the annexures to the agreement form an enforceable part of the share agreement?
(b) Does Yongzhong (alternatively Gu) have an equitable mortgage, equitable charge or other security interest in the student apartments comprising the Mosaic Apartments pursuant to this agreement?
Relevant terms of the share sale agreement
375Clause 1.1 is the definitions clause of the share sale agreement . It contains the following defined terms:
Shareholder Loan means the loan of AUD2.5m from the seller [Yongzhong] to the Company [ME Property] with 5% interest rate per year till the full amount of loan is paid back from the Company to the seller together with share transferring to other shareholder of the Company.
Shareholder Loan Pay Back Date means the date no later than 31/12/2019 with pay back schedule in Annexure C agreed by both the seller and the Company.
Shareholder Loan Security means at least 10 student apartments of the Company with the accumulative value no less than AUD$2,5m and together with interest occurred. The asset for security shall be taken over by the seller if the full amount of loan with the relevant interest are not paid back from the Company. (sic)
376Clause 1.2 deals with general interpretation. Clause 1.2(b) states:
a reference to a document includes any agreement or other legally enforceable arrangement created by it (whether the document is in the form of an agreement, deed or otherwise;
377Clause 3 deals with payment of the purchase price for the shares. Clause 3.2 states:
Shareholder Loan
The Shareholder Loan needs to pay back from the Company to the seller at the date while the share transfers from the seller to the buyer [Efflugence]. The seller and the Company may discuss the shareholder loan payment schedule, however, the full amount of the loan together with the interest occurred shall be paid back to the seller no later than the Shareholder Loan Pay Back Date. For every AUD0.5m shareholder loan payback from the Company, the buyer shall purchase 3.2% share according to 3.1.
378Annexure C to the share sale agreement provides:
31 May 2019
30 Sept 2019
31 Dec 2019
AUD1,000,000
AUD1,000,000
AUD500,000 + interest
Mr Gu Shibiao has sole discretion right to sell student apartments of the Company to cover any unpaid amount listed in the above table from the Company to Yongzhong Australia Pty Ltd. If the Company fails to pay Yongzhong Australia Pty Ltd the amount on the listed date, Mr Gu is able to register titles of those student apartments with value no less than unpaid amount as first rank mortgage until they are sold.
Plaintiffs’ submissions
379The share sale agreement provides for the recognition of the $2.5m loan debt owed to Yongzhong, together with interest, and re-affirms or otherwise grants a further security interest to Yongzhong in the form of an equitable mortgage (alternatively, equitable charge) over all of the student apartments owned by ME Property.
380The share sale agreement discloses a common intention of the parties that the student apartments owned by ME Property constitute a security with respect to any unpaid moneys owed to Yongzhong (alternatively Gu) because:
a) “Shareholder Loan Security” is defined to mean “at least 10 student apartments”;
b) the value of the security interest is specified as no less than $2.5 million plus interest;
c) the definition provides that the student apartments “shall be taken over by Yongzhong” if the full amount of the loan and interest is not repaid by ME Property;
d) ME Property simultaneously made a resolution via its Board of Directors to the same effect as Annexure C, which resolution followed negotiations in February and March 2019 about the repayment of the loan and the share agreement. It is an agreement captured by clause 1.2(a) of the share agreement;
e) In any event, the effect of clause 1.2(a) of the share agreement is to incorporate Annexure C, being that Annexure C records the true agreement that was reached between the parties;[223] and
f) The stipulation allowing registering mortgages on title set out in Annexure C and the board resolution could not be a clearer indication of an intention to create a security interest. Read in conjunction with the definition of “Shareholder Loan Security” providing a right to “take over”, the properties, the intention of the parties is sufficiently objectively clear to create the security interest alleged.
[223]See, e.g., T242.12-18
381Those matters are consistent only with an intention to create an equitable mortgage or equitable charge over all of the student apartments to secure the undisputed debt. Counsel for the Liquidator of ME Property reasonably acknowledged as much in opening, stating that the language used in this agreement is “… probably a bit better in terms of satisfying the requirements of an equitable charge.”[224]
[224]T97:11-17. For the avoidance of doubt, the Liquidator says that this charge is given to Gu, however, and so it submits that it is not enforceable by Yongzhong (despite Gu being that company’s sole director)
382The first and second defendants’ defences allege at [17(e)(iv)] that Annexure C is invalid because the addresses or specific title references of the student apartments is not stated. That position is not maintainable for two reasons:
a) First, it is clear what is meant by the phrase “student apartments” in context. There are no other student apartments. They are the student apartments inspected by Gu on 12 May 2015, those properties recorded in the title searches handed over on 26 May 2015, and the only real properties recorded in ME Property’s financial reports, which are incorporated by Annexure B into the agreement. It is disingenuous to suggest that the properties being referred to is somehow void for uncertainty.
b) Second, security is given in all of those apartments, therefore there is no need to identify which of them with any additional specificity.[225] The absence of particulars of title does not matter.[226] That was also the case in Prime Capital Securities Pty Ltd v Gore Hill Transport Pty Ltd,[227] in which the relevant clause provided a charge over “all present and after acquired property”. The Court made declarations that the clause provided for an equitable charge over a specific real property located in Artarmon, NSW. The Court rejected the defence that the “extremely wide language” failed to capture that property because it did not specifically identify the property. It was held that even when so widely drawn, a charge over all property is not void for uncertainty and can later be enforced against any property if at that later time the property can be identified.
[225]Evans v Advertising Department Pty Ltd [2009] VSC 587 at [30] (Vickery J).
[226]As it did not matter in Reindel & Ors v Confreight Pty Ltd & Ors (No 1) [2022] VSC 163 at [72] (Daly AsJ)
[227](2021) 150 ACSR 625 at 637-8 [57]-[61] (Darke J)
383The intention of the parties in creating by their contract certain rights and liabilities is to be ascertained objectively, having regard to the surrounding circumstances known to the parties and facilitated by an understanding of the genesis of the transaction, its background, and its context.[228] That requires the Court to construe the document as a whole and to consider each and every part of it.[229] Likewise, in Metropolitan Gas Co v Federated Gas Employees’ Industrial Union, Isaacs and Rich JJ said:[230]
It is a received canon of interpretation that every passage in a document must be read, not as if it were entirely divorced from its context, but as part of the whole instrument… In construing an instrument “every part of it should be brought into action, in order to collect from the whole one uniform and consistent sense, if that may be done; or, in other words, the construction must be made upon the entire instrument, and not merely upon disjointed parts of it; the whole context must be considered, in endeavouring to collect the intention of the parties, although the immediate object of inquiry be the meaning of an isolated clause.
[228]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-7 [35] (French CJ, Hayne, Crennan and Kiefel JJ)
[229]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (Gibbs J)
[230](1925) 35 CLR 449 at 455
384Some parts of the share agreement appear somewhat disjointed in the lay drafted agreement. However, that does not mean that the Court should disregard them and pay them no mind. Rather, the above core principles of construction require the Court to construe the document as a whole, including the definitions and annexures, and in light of the object and commercial context underlying the agreement.[231]
[231]See, Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 695 [380] and 699 [392] (Campbell JA) and Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 72 (Mason J) and 103 (Aickin J)
385Specifically, the Court should find that the parties included the definitions of “Shareholder Loan”, “Shareholder Loan Pay Back Date” and “Shareholder Loan Security” and included all of the words in Annexure C with an intention to give effect to them. To ignore or give no weight to the words used by the parties would fail to construe the whole of the document and give best effect to the parties’ intentions.
386The plaintiffs submit that the agreement’s referral to Gu having those powers and not Yongzhong is not fatal. Gu is the sole director and human agent of Yongzhong. The context of all the agreements demonstrates the parties’ interchangeable references to Gu and his company, and the only common sense and rational construction of that phrasing is a reference to him in his capacity as director of Yongzhong, such that the granting of the security interest is to Yongzhong. To construe the agreement otherwise gives rise to an unsound construction.
387As to the distinction between an equitable mortgage or equitable charge, the distinction in the context of a borrower in liquidation is likely immaterial. Nevertheless, in contrast to the investment agreement, the share sale agreement does provide for Yongzhong to register mortgages on title and to “take over” the properties could evince an intention of either an equitable mortgage or, at worst, an equitable charge.
388The defendants allege that Annexure C is incomplete and invalid because of the lack of a shareholders’ resolution and the poor drafting of the share agreement generally.
389The plaintiffs submit that it is incorrect for the defendants to asserts that the share agreement does not include Annexure C.
390The principle against redundancy in the interpretation of a contract also strongly points against the submission that Annexure C was originally agreed to by parties, included in the share agreement, recorded in a company resolution by ME Property but not included as part of the share agreement. It follows that the annexures form part of the Share Sale and Purchase Agreement.
391Determining the objective intention of the parties requires consideration of the surrounding circumstances known to the parties.[232] It is therefore permissible to look at other documents to discern that intention.[233] That would include ME Property’s financial report referred to at Annexure B to the Share Sale and Purchase Agreement,[234] and also the board resolution of the same date as the agreement.[235]
[232]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-7 [35] (French CJ, Hayne, Crennan and Kiefel JJ)
[233]See, eg, Trevor David Nudd v The Official Trustee in Bankruptcy [2002] NSWSC 399 at [20]-[43] (Bergin J) and Baloglow v Konstanidis & Ors [2001] NSWCA 451 at [99] (Priestley JA)
[234]Annexure B is at CB 460. The financial reports referred to are at CB 387 at 393.
[235]Being CB 462
392For the same reasons in relation to the investment agreement, the evidence discloses that the parties spoke of, and intended for, the student apartments owned by ME Property to be used as security for the loan transaction. Indeed, the documents use the word “security”.
Liquidator for ME Property’s submissions
393The liquidator accepts that the share sale agreement is a more formal document than either the investment agreement or supplementary agreement. It identifies the parties to it: Yongzhong (the Seller); Effulgence Real Estate Development Pty Ltd (the Buyer); and ME Property (the Company). The document contains a detailed signature panel that, relevantly, confirms the agreement was executed by Gu in his capacity as Yongzhong’s director, and pursuant to section 127(1) of the Corporations Act 2001 (Cth). There is no separate signature panel for Gu in his personal capacity, or other qualifying words. There is nothing to suggest that Gu executed the document in any capacity other than as agent for Yongzhong. Accordingly, there is no basis for finding that Gu was a party to the share sale agreement or that the pursuant to its terms, ME Property granted a security in favour of Gu.
394The defined term, ‘Shareholder Loan Security’ in clause 1.1 is not used elsewhere in the agreement.
395In Red Hill Iron,[236] Beech J stated (emphasis added):
[127]As mentioned earlier in s 2, both the Farm-in Agreement and Joint Venture Agreement make extensive use of defined terms. Definitions do not have substantive effect. They are not to be construed in isolation from the operative provision(s) in which a defined term is used. Rather, the operative provision is to be read by inserting the definition into the provision: Kelly v R [2004] HCA 12; (2004) 218 CLR 216 [84], [103]; Epic Energy (Pilbara Pipeline) Pty Ltd v Cmr of State Revenue [2011] WASCA 228 [62], [150], [218]. Those cases dealt with statutory interpretation; the same principle applies in interpreting contracts: Vincent Nominees Pty Ltd v Western Australian Planning Commission [25].
[236]Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323; see also Thera Agri Capital No 2 Pty Ltd v BCC Trade Credit Pty Ltd t/as the Bond & Credit Co [2022] NSWSC 669, per Rees J at [145]-[147] (upheld on appeal)
396The “Shareholder Loan Security” definition is of no effect in the absence of the use of that term in the operative provisions of the share sale agreement. There are also difficulties with the description of the relevant land. The agreement fails to specifically identity the relevant parcels of land.
397There are three reasons why the purported right of sale set out in Annexure C of the share sale agreement is unenforceable by the plaintiffs and, in particular, Gu.
398Firstly, the company resolution, if valid, did not create any enforceable agreement or contractual rights as between Gu and ME Property. To the extent the company resolution is incorporated into the share sale agreement by operation of clauses 1.2(c) and 3.2, and the definition of “Shareholder Loan Payback Date”, it does not extend to the purported security, or right of sale, in favour of Gu.
399Secondly, the reference in Annexure C to Gu, should not be read as meaning Yongzhong. Yongzhong is clearly defined in the share sale agreement as the seller. For the reasons set out above in relation to the investment agreement, a person who is not a party to a contract cannot sue to enforce the benefits it contains.
400Thirdly, the reference to “student apartments” should be read consistently with the definition of Shareholder Loan Security. The failure to specifically identify the relevant parcels of land means the clause is uncertain.
401Wang made no submissions on issue 4.
Analysis
402The share sale agreement attaches Annexure C, being the loan pay back schedule, Annexure C is referred to in the definition of Shareholder Loan Pay Back Date in clause 1.1. The loan payment schedule is also referred to in the definition of Shareholder Loan.
403The board resolution dated 21 March 2019 was attached as the final page of the agreement. There appears to be no express reference to this document in the body of the share sale agreement. The plaintiffs argue it is captured by clause 1.2(b). However, this clause provides that a reference to a document includes any agreement or other legally enforceable arrangement created by it.
404The liquidator argues that the resolution in and of itself is not a legally enforceable agreement or arrangement so that clause 1.2(b) does not apply. I accept this submission, namely, that the resolution by itself does not create an agreement or other legally enforceable arrangement. The other difficulty is that there is no reference to it in the share sale agreement so that the opening words of clause 1.2(b) are not engaged. Consequently, I find that the resolution is not an enforceable part of the share sale agreement as a matter of construction of that document.
405The position with Annexure C is quite different and it is expressly referred to in the share sale agreement. The fact that the reference is in the definition section only and not elsewhere does not mean that it can therefore be ignored all together, contrary to the liquidator’s submission. The document must be construed as a whole.[237] Although this document is more formal than the investment agreement and the supplementary agreement, it still suffers from a number of drafting deficiencies. Despite this, I am satisfied that Annexure C forms part of the share sale agreement and that the wording contained in Annexure C is sufficient to create an equitable charge over the Mosaic Apartments owned by ME Property. When read together with the definition of Shareholder Loan Security this means at least 10 student apartments of ME Property. This clause also states that the asset for security shall be taken over by Yongzhong if the full amount of the loan and interest is not repaid by ME Property.
[237] Lewison, The Interpretation of Contracts – Australian Lawbook Co, 2012, at [5.11]
406I accept the submission put that the reference to Gu in Annexure C is not fatal – Gu was the agent for Yongzhong and its sole director. He signed the document on behalf of Yongzhong. Gu and Yongzhong are used interchangeably by the parties in the documents signed by the parties. It is also beyond doubt when this document was signed that Yongzhong was the actual lender and therefore, the party to whom security was to be provided. In my view, a reasonable businessperson would have understood that the security provided under the terms of the share sale agreement was given in favour of the party who advanced the loan, namely, Yongzhong. It makes no commercial sense to give the security to Gu when he did not advance the loan to ME Property.
407The argument raised as to the identity of the student apartments being uncertain goes nowhere. As an objective fact, the parties were always aware that the student apartments in question were the Mosaic Apartments. I reject the argument put that this agreement did not create a secured interest because the identity of the security in question was uncertain.
408For all these reasons, I find that the share sale agreement provided Yongzhong with a further entitlement to claim an equitable charge over the Mosaic Apartments.
Issue 5 – What interest is owing pursuant to the loan?
409The calculation of interest depends on the assessment of which debt claim succeeds.
410The plaintiffs submit the investment agreement provides that interest accrues on each advance at the rate of 5 per cent per annum from the date of each payment. Interest therefore accrues at that rate until the commencement of proceedings, for each payment. The amount of interest payable under the investment agreement is $821,671.23 up to the date of commencement of proceedings.
411Pursuant to s 60 of the Act, interest should accrue at the penalty interest rate from the commencement of the proceeding to the date of judgment. The plaintiffs claim the sum of $3,321,671.23 (being the principal advance of $2.5 million plus interest as at the date of commencement) together with interest at the statutory rate of 10 per cent up to the date of judgment.
412The plaintiffs advance an alternative money had and received claim. Pursuant to s58 of the Act interest at the penalty interest rate may accrue on that debt from the time when the debt or sum was payable or, alternatively, from the time when the demand of payment was made.
413ME Property and Wang did not address the calculation of interest issue in their written closing submissions.
Analysis
414I am satisfied that Yongzhong is entitled to interest on the loan at the rate of 5 per cent, being a term of the investment agreement up to the commencement of the proceeding. After the commencement of proceedings, Yongzhong is entitled to the statutory rate under s60 of the Act which I will allow up to the date of judgment.
415Had the loan not been made pursuant to the investment agreement, interest on the moneys advanced by Yongzhong to ME Property would otherwise have been recoverable under s58 of the Act as a debt.
Issue 6 – What is the total amount owed by ME Property and by Wang?
Plaintiffs’ submissions
416The debt owed by ME Property depends on the assessment of which debt claim succeeds for the same reasons set out in Issue 5.
417Wang provided a guarantee for the repayment of the $2.5 million loan and, on the terms of the supplementary agreement, she bears repayment responsibility of the $2.5 million, plus interest, pursuant to statute (but not interest pursuant to the agreements) running from the date that the debt was due (9 August 2018). Alternatively and at the latest, from the date of commencement of the proceedings.
418ME Property and Wang did not address this issue in closing submissions - no doubt, because any sums due and payable by the defendants could only be calculated once findings were made in these reasons.
H. Disposition
419In summary, my conclusions in relation to each issue are:
1. Yes. Yongzhong advanced the loan to ME property in accordance with the terms of the investment agreement.
2(a). Yongzhong is not expressly named as party to the investment agreement, but is a party as a matter of construction. In the alternative, it is a disclosed principal and therefore, can sue upon the investment agreement in that capacity. Yongzhong also has standing as a third party to sue for the benefit of the contract and to seek the declaratory relief sought. Gu is a named party. He can sue under the investment agreement to seek specific performance of the contractual promise given by ME Property to repay the lender, Yongzhong and to enforce the equitable charge granted as security for the loan.
2(b). Yes. Yongzhong holds an equitable charge over the Mosaic Apartments, being the properties identified in Annexure A to the amended statement of claim.
2(c). Yes. The guarantee given by Wang is enforceable by Yongzhong against her as a matter of construction of the investment agreement and supplementary agreement when read together.
2(d). No longer applicable.
2(e). No, because rectification is unnecessary given the findings made under issue 2(a).
2(f).Yes. Yongzhong is entitled to interest at the rate of 5 per cent in accordance with the investment agreement.
3.Not applicable. But if the loan was not made pursuant to the investment agreement, the liquidator for ME Property concedes the loan of $2.5 million is presently repayable as a debt, together with interest and costs.
4(a)Yes. Annexure C is an enforceable part of the share sale agreement but not the board resolution dated 21 March 2019.
4(b) Yes. Yongzhong holds an equitable charge over the Mosaic Apartments under the terms of the share sale agreement.
5.Interest is payable to Yongzhong as the lender to be calculated under the terms of the investment agreement.
6.The parties are directed to confer on the amounts payable to Yongzhong by ME Property and Wang, including interest, to give effect to these reasons.
420I will make orders in the following terms.
(1)There will be judgment for Yongzhong against ME Property in the amount of $2,500,000, together with interest at the rate of 5 per cent under the investment agreement up to the issue of the writ. Thereafter, there will be interest payable at the statutory rate.
(2)The Court will make a declaration that Yongzhong has a security interest in the form of an equitable charge over all of the student apartments owned by ME Property, being the properties listed in Annexure A to the amended statement of claim, to the value of the judgment in the preceding paragraph.
(3) Yongzhong is entitled to judgment against Wang in the amount of $2,500,000, together with interest under statute.
421Counsel for the liquidator for ME Property informed the Court that the liquidator’s costs of this proceeding are to be costs in the liquidation.[238]
[238]T31.5-7
422Subject to hearing from the parties, I propose ordering the defendants pay the plaintiffs’ costs of and incidental to the proceeding on the standard basis, to be taxed in default of agreement.
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Certificate
I certify that these 114 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 15 October 2024.
Dated: 15 October 2024
Associate to Her Honour Judge A Ryan
SCHEDULE OF PARTIES
BETWEEN
| Yongzhong Australia Pty Ltd (ACN 605 853 478) | First plaintiff |
| and | |
| Shibiao Gu | Second plaintiff |
| and | |
| ME Property Development Pty Ltd (in liquidation) (ACN 140 874 737) | First defendant |
| and | |
| Jinhua Wang | Second defendant |
| and | |
| Judo Bank Pty Ltd (ACN 615 995 581) | Third defendant |
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