Zhao v AST Investments Pty Ltd - [2019] SASC 166

Supreme Court of South Australia
(Civil)
ZHAO & ORS v AST INVESTMENTS PTY LTD & ORS
[2019] SASC 166
Judgment of The Honourable Justice Doyle (ex tempore)
23 September 2019
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - DETENTION, INSPECTION AND PRESERVATION - RECEIVERS - APPOINTMENT OF RECEIVER
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - DETENTION, INSPECTION AND PRESERVATION - FREEZING ORDERS
These proceedings involve allegations by the plaintiffs that the second and third defendants, with the involvement of the other defendants to varying extents and in varying ways, fraudulently misappropriated funds advanced to them by the plaintiffs in relation to the purchase of three Adelaide properties. One of the three properties is located at 9-11 Dequetteville Terrace, Kent Town (the Kent Town property).
Freezing and restraining orders were made in April 2018. The freezing orders cover the Kent Town property.
Two applications were made in relation to the Kent Town property. The first was brought by the defendants (other than the sixth to eighth defendants), and sought a variation of the freezing orders to permit the acceptance of an offer to purchase the Kent Town property for an amount of $6.1 million. The second application was brought by the plaintiffs and sought the appointment of a receiver to take possession of, and sell, the Kent Town property.
Held (per Doyle J):
1. The defendants’ application is dismissed.
2. The plaintiffs’ application is allowed and Mr Duncan of Duncan Powell is appointed as receiver to take possession of, and sell, the Kent Town property.
Supreme Court Act 1935 (SA) s 29; Supreme Court Civil Rules 2006 (SA) r 253; Corporations Act 2001 (Cth) s 1323, referred to.

ZHAO & ORS v AST INVESTMENTS PTY LTD & ORS
[2019] SASC 166
Civil

DOYLE J (ex tempore): The background to these proceedings is set out in the pleadings and in the previous interlocutory decisions that I have made, and need not be repeated in any detail.
At a very general level, the proceedings involve allegations by the plaintiffs that the second and third defendants, Mr Du and Mr Ong, with the involvement of the other defendants to varying extents and in varying ways, fraudulently misappropriated funds advanced to them by the plaintiffs in relation to the purchase of three Adelaide properties.
Relevantly for today's purposes, these three properties include the property at 9-11 Dequetteville Terrace, Kent Town (the Kent Town property), purchased through DKT Development No.1 Pty Ltd (DKT), the seventh defendant in these proceedings. The Kent Town property was acquired by DKT for $6.5 million. The acquisition was made through the payment in March 2015 of an option fee of $500,000, which option was subsequently exercised for the price of $6 million in 2017. DKT remains the registered proprietor of the Kent Town property.
There is a dispute between the parties as to the control and ownership of DKT, and hence the Kent Town property. While ASIC records suggest that Mr Ong is the sole director of DKT, and that Mr Du and Mr Ong are the ultimate shareholders in that company through their corporate entities, the plaintiffs contend that they are entitled to the majority of the shares in DKT, and hence control over and a majority beneficial interest in that company and the Kent Town property. The plaintiffs have accordingly lodged caveats over the Kent Town property.
In April 2018, at an early stage in the proceedings, Judge Bochner made freezing and restraining orders (the freezing orders). Throughout late 2018 I conducted various hearings which culminated in me making a suite of orders on 6 November 2018, including an order that there be a general stay of the proceedings, essentially so as to ensure that Mr Du's and Mr Ong's privilege against self-incrimination was protected pending determination of the criminal proceedings in relation to their alleged misappropriations.
However, in order to ensure that there was some protection of the interests of the plaintiffs during the period of the stay, the stay was made conditional upon not only the continuation of the freezing orders, as amended and updated by me in various respects, but also subject to various further conditions. The freezing orders cover the Kent Town property and broadly speaking prevent any of the defendants dealing with, or disposing of, that property.
In the period since I made these orders a number of issues have arisen in relation to the compliance of the defendants, particularly Mr Ong, with the freezing orders. One of those issues has been in relation to attempts by Mr Ong to arrange for the refinancing of a $3.9 million facility held by DKT with the NAB (the NAB facility), which is secured by a first mortgage over the Kent Town property.
I am today confronted with two applications in relation to the Kent Town property.
The first of these applications was brought by the defendants other than the sixth to eighth defendants on 13 September 2019, and seeks a variation of the freezing orders to permit Mr Ong, in his capacity as the sole director of DKT, to accept an offer dated 10 September 2019 from APD Building Group Pty Ltd to purchase the Kent Town property for an amount of $6.1 million. The offer was initially expressed to be open until 17 September 2019, but has been extended until 24 September 2019, which is tomorrow.
The second of these applications was brought by the plaintiffs on 20 September 2019 and seeks the appointment of a receiver to take possession of, and sell, the Kent Town property pursuant to s 29 of the Supreme Court Act 1935 (SA), s 1323 of the Corporations Act 2001 (Cth), and rule 253 of the Supreme Court Civil Rules 2006 (SA).
While the two applications involve different mechanisms for selling the Kent Town property, it is significant that all parties accept that the property should be sold and that the balance of the proceeds of that sale, after paying out the NAB facility, should be paid into Court pending the outcome of these proceedings.
In support of their application the defendants rely upon the following matters.
While the NAB facility has been extended on several occasions (including on 24 December 2018, 28 February 2019, 8 April 2019 and most recently on 29 July 2019 until 30 August 2019), the NAB has indicated that it considers that DKT recently fell into default and it has declined to provide any further extension. In the face of these difficulties in relation to the NAB facility, in around July 2019, Mr Ong authorised Mr Du to see if any of his business contacts might be prepared to purchase the Kent Town property.
Inquiries made by Mr Du resulted in the 10 September 2019 offer for $6.1 million being received. The defendants point out that this purchase price is consistent with two recent valuations of the Kent Town property, obtained from M3 Property Strategists as at July 2017 and Knight Frank as at June 2019, both of which valued the property at $6 million.
The plaintiffs, on the other hand, oppose any variation of the freezing orders to permit Mr Ong to accept the 10 September 2019 offer and contend that the Court should instead make orders in terms of their application. The plaintiffs point to their claimed interest in DKT and the Kent Town property, and while accepting that it is appropriate that the property be sold they do not accept that it would be in the best interest of DKT to accept the offer for $6.1 million.
In support of this position the plaintiffs complain about the lack of transparency on the part of Mr Ong in relation to his dealings with the NAB since the freezing orders have been in place, and the related lack of information in relation to the NAB's attitude to both the 10 September 2019 offer and the plaintiff's counter-proposal that the Kent Town property be sold by a receiver.
The plaintiffs point out that to sell the Kent Town property for $6.1 million would involve making a capital loss of $400,000, given that DKT purchased the property for a total consideration of $6.5 million. They contend that the evidence does not establish that $6.1 million represents the market value of the Kent Town property, let alone the best available value. The plaintiffs point in this respect to the absence of any evidence to suggest a deterioration in the Adelaide commercial property market in the period between 2015 and 2019, and to the limited efforts made by Mr Du to test the market for the property.
They also point to the sales proposal from Savills relied upon by Mr Ong earlier in these proceedings which valued the Kent Town property at between $7.5 million and $8.5 million. I note in relation to this proposal document that in arriving at their valuation, Savills expressed a level of optimism about the likely market for this property. Indeed, in their market overview, Savills state that there are a significant number of “cashed-up” buyers with active investment/development requirements, that the development site market is a “most active sub-market”, that the buyer profile for this asset class consists primarily of developers, local and interstate, and resident and offshore Asian investors, and that record low interest rates are continuing to drive significant demand. As to price expectations, the report states that Savills “expect to generate very high interest in this site, culminating in multiple parties submitting offers to purchase and resulting in a strong result.” To similar effect, I also note the reference in the Knight Frank valuation to their belief that “there would be good interest in the subject property if it was placed on the market for sale.”
The plaintiffs also question whether the purchaser is truly independent, or at arm's length from the defendants. They point out that the potential purchaser, APD Building Group, is controlled by two men, Mr Richardson and Mr Xu, the latter of whom is a business contact of Mr Du, and that there is no evidence of any process of negotiation or even counter-offer in respect of the price in the 10 September 2019 offer.
Based on all of the above, the plaintiffs contend that there is a real prospect that the Kent Town property will realise materially more than $6.1 million if it is sold via an open, competitive and independent process.
To this end the plaintiffs contend that the preferable approach would be to appoint a receiver to take possession of, and sell, the Kent Town property. The plaintiffs have filed evidence to the effect that Mr Duncan of Duncan Powell has consented to acting as receiver and has indicated he will cap his fees for that process at $20,000.
In my view, there is merit in the plaintiffs' submissions and approach, and in particular that it is just and convenient that a receiver be appointed, and that to do so would strike the best balance in terms of doing what is in DKT's best interests and hence also in protecting the interests or potential interests of all parties in that company and in the Kent Town property.
In opposing this course, the defendants contend that I should attach no weight to the plaintiffs' allegations of wrongdoing by Mr Ong, both in relation to his dealings with the NAB and in relation to the freezing orders more generally, and that the paramount consideration should be the best interests of DKT. I agree with this submission, and in particular that the best interests of DKT should guide my approach to both applications. I have not attached any weight to the plaintiffs' allegations of wrongdoing, and in particular have not in any sense approached my consideration of whether to appoint a receiver on the basis that it would in some way be appropriate to do so to punish Mr Ong for his alleged wrongdoing.
The defendants contend that permitting them to accept the 10 September 2019 offer will provide certainty and remove the risk of the Kent Town property being sold for some lower value or not at all. It would also avoid the expense and delay associated with the sale by a receiver.
While there is some merit in this contention I am not persuaded that it should carry the day. Even accepting the offer would provide a degree of certainty, there is no evidence before the court about the wherewithal of the offeror and the extent of any risk associated with it being in a position to settle. I note in this respect that the offer to purchase is conditional in various respects, including being subject to finance, due diligence and a building inspection. While there is no positive evidence that the proposed purchaser, APD Building Group, would extend its offer so that it would be available to a receiver appointed by the Court, at the same time there is no positive evidence to the effect that this opportunity would be lost were I to accede to the plaintiffs' application rather than the defendants' application. Indeed, assuming APD Building Group is an independent arm's length purchaser, there is no reason to think that it is likely that the opportunity will be lost.
It is also true that the valuation evidence relied upon by the defendants suggests that the offer is at, or indeed slightly above, the current market value of the Kent Town property. The plaintiffs challenge this evidence on the basis that it does not take account of the occupancy by Workquarters Pty Ltd and the subleases it has arranged. However, it would appear from the evidence that this would not have affected the valuations obtained given the basis upon which they were prepared.
It does seem to me that there is a real prospect that the Kent Town property might realise a sum greater than $6.1 million. While the evidence does not permit me to find that the proposed sale is not to a relevantly independent and arm's length purchaser, at the same time it does suggest that there have been only very limited attempts by Mr Du to test the market.
Given the price at which the Kent Town property was purchased by DKT only a few years ago, the suggestion in the evidence of a relatively strong Adelaide commercial property market, and Savills' relatively recent suggestion that the property might bring as much as $7.5 million to $8.5 million, I consider it appropriate that there be a proper testing of the market for the property before it is sold.
This is of course not to say that a sale price greater than $6.1 million will be achieved. My conclusion is simply that it is appropriate that the market be properly tested before the property is sold, and in my view given the level of distrust between the parties in these proceedings, it is appropriate that this testing be carried out by an independent person with relevant commercial expertise and experience and who is answerable to the Court. I am not satisfied that the parties will be capable of agreeing or jointly overseeing some less formal process for testing the market, either efficiently or indeed at all.
There is some analogy in the present circumstances with the appointment of a receiver as an independent person to oversee the sale of disputed assets in circumstances of a shareholder dispute and consequential management deadlock.
In reaching the conclusion that it is appropriate that I appoint a receiver, I have not overlooked the defendants' submission that any sale by a receiver will come with some additional cost and delay, and also the risk of the market value being weakened by the circumstances of the sale.
As to the additional cost and delay, it seems that these will be modest in the scheme of things. Mr Duncan has agreed to cap his costs and thus even including other sales and marketing costs the overall costs are likely to be modest relative to the value of the property and indeed the potential upside in the sale value. I am also not satisfied that a delay of a few months will be significant, particularly in circumstances where even the 10 September 2019 offer contemplates a 120 day settlement period.
As for the forced circumstances of the sale, I am not persuaded this is a particularly significant consideration given that the current offer was obtained in circumstances where, on the defendants' own evidence, it is already widely known in the property development industry that the defendants are embroiled in the present proceedings with the plaintiffs.
I have also not overlooked that whatever order is made, there remains the possibility that the NAB will intervene and exercise its rights as mortgagee. But as that possibly exists regardless of which way I proceed, I consider it to be an essentially neutral consideration in the present context.
Finally, I mention also that even if I were to accede to the defendants' application and permit them to accept the offer there would remain the difficulty associated with the plaintiffs' caveats. I am not persuaded that I could order that they be removed without forming some view as to the plaintiffs' underlying claims against the defendants in these proceedings. I am not presently in a position to undertake any assessment of those claims, beyond repeating the earlier general view that I reached in the context of my November 2018 orders, namely that there is at least arguable merit in the plaintiffs' allegations - albeit I acknowledge that this assessment focused upon their claims more generally, rather than upon the more precise issue of the plaintiffs having a caveatable interest.
I accept there is some force in the defendants' submissions this morning that for today's purposes, if I were persuaded that it was appropriate to permit the defendants to pursue the 10 September 2019 offer, then there may well be balance of convenience considerations that would favour the removal of the caveats in due course in any event. I thus do not think that the plaintiffs' caveats are a necessary obstacle to the defendants' application.
However, for all the reasons that I have set out, I am not persuaded it is appropriate to grant the defendants' application. I accept the submission that it does not necessarily follow that I must then grant the plaintiffs' application, and that I might at least consider the alternative course of permitting the defendants a further opportunity to test the market themselves and continue to negotiate with the NAB. However, for the reasons that I have given, I consider that it is appropriate to grant the plaintiffs' application, and that the appointment of a receiver is just and convenient in that it would strike the best balance in terms of doing what is in DKT's best interests and hence in protecting the interests, or potential interests, of all parties in that company and the Kent Town property.
I thus propose to make orders broadly in the terms sought by the plaintiffs in their application, and to dismiss the defendants' application. I will hear the parties further as to the precise terms of those orders, including as to an undertaking as to damages on behalf of the plaintiffs supported by appropriate security.