Zong v Lin

Case •

[2022] NSWCA 136

•

02 August 2022

No judgment structure available for this case.

Court of Appeal


Supreme Court


New South Wales

Medium Neutral Citation: Zong v Lin [2022] NSWCA 136
Hearing dates: 20 July 2022
Date of orders: 2 August 2022
Decision date: 02 August 2022
Before: Gleeson JA at [1]
Leeming JA at [93]
Kirk JA at [94]
Decision:

(1)   Appeal dismissed.

(2)   Appellants to pay the respondents’ costs.

Catchwords:

DAMAGES – Quantum of compensation – overvalue purchase of boat – competing valuation evidence – whether judge had regard to extraneous material not in evidence – where judge questioned defendant’s expert about “publicly available information” relevant to perception of buyers – where judge’s reasons on the valuation issue unrelated to “publicly available information”

CORPORATIONS – Directors and officers – where real and substantial conflict between duty as director and interest as shareholder – where director paid company’s money to same solicitor retained by company and director in shareholder dispute – whether breach of fiduciary duty

PROCEDURE – whether breach of rule in Browne v Dunn – where affidavit evidence of defendant’s belief that solicitor retained in the ordinary course of company’s affairs and business – where out-of-court representations by the solicitor as to nature of work – where defendant paid company’s money to solicitor – absence of cross-examination of defendant regarding nature of work to which payments related – where fair notice given of plaintiffs’ case on timing of payments to solicitor

CORPORATIONS – Member’s rights and remedies – oppression – compulsory transfer order – transfer of oppressor’s shares to other shareholder without payment in return – where relief in derivative action did not fully address oppression – where defendant failed to contribute promised skill and goodwill to the company – where company did not commence its intended business – where compulsory transfer order in the nature of recission of shareholder agreement

Legislation Cited:

Corporations Act 2001 (Cth), ss 232, 233, 237

Uniform Civil Procedure Rules 2005 (NSW), r 42.1, Sch 7

Cases Cited:

Browne v Dunn (1893) 6 R 67

Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389

Ellis v Wallsend District Hospital (1989) 17 NSWLR 553

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

House v The King (1936) 55 CLR 419; [1936] HCA 40

International Finance Trust Co Ltd v New South Wales Crime Commission (2009) 240 CLR 319; [2009] HCA 49

In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 586

In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 636

Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382; [2009] NSWCA 234

Munstermann v Rayward [2017] NSWSC 133

Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342

Quinlan v Fiboze Pty Ltd (1998) 14 ACLR 312

Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136

Snell v Glatis (No 2) [2020] NSWCA 166

TAL Life Limited v Shuetrim; MetLife Insurance Limited v Shuetrim (2016) 91 NSWLR 439; [2016] NSWCA 68

Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152

West v Mead (2003) 13 BPR 24,431; [2003] NSWSC 161

Category:Principal judgment
Parties: Jason Zong (First appellant)
Zhenhua Tang (Second appellant)
J & G Holding Group Pty Limited (Third appellant)
Hui Lin (First respondent)
Australian International Yacht Club Pty Limited (Second respondent)
Representation:

Counsel:
M W Young SC (Appellants)
S A Lawrance SC (Respondents)

Solicitors:
Dixon Holmes Lawyers (Appellants)
WB Legal (Respondents)
File Number(s): 2021/186096
 Decision under appeal 
Court or tribunal:
In the Supreme Court of New South Wales
Jurisdiction:
Equity Division
Citation:

[2021] NSWSC 586; [2021] NSWSC 636

Date of Decision:
26 June 2021
Before:
Black J
File Number(s):
2019/181433

HEADNOTE

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

The first appellant, Mr Jason Zong, and the first respondent, Ms Hui Lin, established a company (Australian International Yacht Club Pty Ltd) to conduct a boat tourism business based in Sydney Harbour. Mr Zong and Ms Lin were both directors and shareholders, holding 45% and 55% of the shares in the company respectively. Under the shareholder agreement, Ms Lin was to contribute $550,000 in capital, which she did by 3 December 2018, and Mr Zong was to contribute his skills, business and goodwill. On 22 December 2018, Mr Zong purchased the ‘Dauphin’, a 12.6 metre Bayliner Avanti 4085 motor cruiser, from J & G Holding Group Pty Ltd (the third appellant), a company owned by Mr Zong’s wife, Ms Tang (the second appellant), for $315,200 (excluding GST). The boat was not configured for commercial use. On 11 January 2019, Mr Zong caused $220,800 to be transferred from the company’s bank account and later, $204,048 was transferred back to the company without accounting for the balance of $16,752. In March 2019, Mr Zong made transfers out of the company’s bank account, including payments totalling $20,584.01 to himself and $11,999 to his wife in respect of purported wages, and $55,000 to Mr Junn, a solicitor who acted for Mr Zong in the proceedings below and who was also then acting for the company in the dispute with Ms Lin.

In 2019, Ms Lin brought a statutory derivative action on behalf of the company with leave under s 237 of the Corporations Act 2001 (Cth) against Mr Zong for breach of director’s duties and a claim for oppression under s 232.

The primary judge held that Mr Zong had breached his fiduciary duty to the company in causing the company to purchase the Dauphin at overvalue and by making payments to himself, Ms Tang and Mr Junn’s firm. The loss suffered by the company in respect of the Dauphin’s purchase at overvalue was quantified at $205,200, being the difference between the purchase price and the Dauphin’s present realisable value. The primary judge upheld Ms Lin’s oppression claim and determined that the appropriate relief was an order under s 233 that Mr Zong be removed as director and his 4,500 shares in the company be transferred to Ms Lin.

The appeal raised three issues:

  1. the proper compensation in relation to the overvalue purchase of the Dauphin;

  2. whether the primary judge erred in rejecting Mr Zong’s evidence regarding the $55,000 paid to Mr Junn’s firm and in finding Mr Zong breached his fiduciary duty by this payment; and

  3. whether the primary judge erred in ordering the transfer of Mr Zong’s 4,500 shares to Ms Lin without any payment in return.

Held (per Gleeson JA, Leeming JA and Kirk JA agreeing), dismissing appeal:

As to issue 1:

A court is not entitled to take into account factual material not in evidence without notice to the parties: [31]. The appellants’ submission that this occurred in this case, given the primary judge’s reference to “publicly available information” in his questions of the defendants’ expert was rejected for three reasons: (1) his Honour’s questions were in response to evidence given by the plaintiffs’ expert as to the reputation of two comparable boats, and appropriately directed at the perception of buyers; (2) on a fair reading of his Honour’s reasons, it should not be inferred that in resolving the competing expert opinions his Honour had regard to the extraneous material; and (3) his Honour was entitled to accept the plaintiffs’ expert evidence in preference to the defendants’ expert witness: [32]-[36].

International Finance Trust Co Ltd v New South Wales Crime Commission (2009) 240 CLR 319; [2009] HCA 49 referred to.

As to issue 2:

Whether or not Mr Zong’s authority under the shareholders agreement to manage the day-to-day operations of the company extended to the retainer of solicitors, he could not deal with company assets in breach of his fiduciary duties: [47]. There was a real and substantial conflict between Mr Zong’s duty owed to the company and his personal interest in paying the company’s money to the same solicitor acting for the company and Mr Zong in the dispute with Ms Lin: [48].

The failure to cross-examine Mr Zong on his affidavit evidence as to the retainer of the solicitor was not a breach of the rule in Browne v Dunn, because Mr Zong had fair notice of Ms Lin’s case in the pleadings, opening submissions and Ms Lin’s affidavit: [49].

West v Mead (2003) 13 BPR 24,431; [2003] NSWSC 161; Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382; [2009] NSWCA 234; Ellis v Wallsend District Hospital (1989) 17 NSWLR 553; TAL Life Limited v Shuetrim; MetLife Insurance Limited v Shuetrim (2016) 91 NSWLR 439; Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 applied.

Browne v Dunn (1893) 6 R 67 referred to.

As to issue 3:

The court has a wide discretion as to remedy under s 233: [65]. In reviewing an exercise of discretion under s 233, the court is confined to the principles in House v The King: [75]. Accepting that a compulsory transfer order without any payment may be an unusual form of relief against oppression, the wide language of s 233 clearly permits the court to make such an order in an appropriate case: [77].

Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136; House v The King (1936) 55 CLR 419; [1936] HCA 40 referred to.

The primary judge was not obliged to address alternative forms of relief such as a compulsory purchase of shares at fair value, where Ms Lin did not seek such an order and no submissions were advanced by Mr Zong that such alternative relief was appropriate: [78].

The relief granted in the derivative action did not fully address the oppression suffered by Ms Lin: [81]. Mr Zong’s conduct justified his exclusion from the company on the basis that he should not share in the value of the company because he had failed to perform his promise to provide skill and goodwill in the establishment and conduct of the business, and the intended business never commenced operations: [82], [89].

The appropriate relief was in the nature of recission of the shareholder agreement to put the parties back in the position they were before the oppression occurred, which is achieved by a compulsory transfer order: [84].

Snell v Glatis (No 2) [2020] NSWCA 166; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25; Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; Munstermann v Rayward [2017] NSWSC 133 applied.

Judgment

  1. GLEESON JA: This appeal arises from part of the orders of Black J made on 4 June 2021 in a shareholder dispute.

Background

  1. The facts may be summarised as follows. Australian International Yacht Club Pty Ltd (the company) was established in 2018 to conduct a boat tourism business, transporting paying guests around Sydney Harbour for leisure purposes. The directors and shareholders of the company were the first appellant, Jason Zong (Zong) and the first respondent, Ms Hui Lin (Lin). The initial shareholdings in the company were held by Lin as to 60 percent and Zong as to 40 per cent. This was varied by a shareholder agreement dated 30 November 2018 which recited that Lin would hold 55 per cent of the shares and Zong would hold 45 per cent of the shares. It was also recited that Lin would provide $550,000 capital in cash to be paid into the company’s bank account and Zong would contribute his skills, business and goodwill. The change in shareholdings in the company was made on 17 December 2018. It was the intention of Lin, and her husband, Xiaonan Su (Su), that the business activity of the company would assist them to achieve their objective of obtaining permanent residency in Australia.

  2. Clause 1 of the shareholder agreement provided that Zong “shall respond for the daily/operate manage the business, however, [Lin] has the right to monitor, audit the Business”. The agreement provided that Zong was to be paid $2,292 per month as a director’s fee (which included superannuation and personal income tax withheld) and that Lin was not to be paid any wages, bonus or dividend (cl 4). Zong was to ensure that financial data in the 2020 financial year met specified criteria for a business visa for Lin, including turnover of more than $300,000 per annum (cl 6).

  3. By 3 December 2018, Lin had transferred a total of $550,000 to the company’s bank account. By 25 February 2019, transactions by Zong on the company’s bank account had reduced the credit balance to $611.19. The major expenditures by Zong were first, the purchase on 22 December 2018 of the “M.V. Dauphin” for $315,200 exclusive of GST, a 12.6 metre Bayliner Avanti 4085 motor cruiser built in 1997 from J & G Holding Group Pty Ltd (J & G), a company owned by Zong’s wife, Ms Zhenhau Tang (Tang). The boat was sold “as is” and without any warranty, other than as to title and that it was free from encumbrances; nor was it configured for commercial use.

  4. Second, on 11 January 2019, Zong caused $220,800 to be transferred from the company’s bank account into an account ending in the number 33664. His Honour rejected as plainly false Zong’s evidence that this account was the account of a boat broker who was to purchase a boat from China: at [42]. Later, in response to a letter of demand dated 15 March 2019 from Lin’s solicitors, Zong caused $204,048 to be transferred from the 33664 account into the company’s account on 22 March 2019. He failed to account to the company for the balance of $16,752.00.

  5. Third, Zong made other transfers out of the company’s account in March 2019. These included (a) on 25 March 2018, payments totalling $20,584.01 to himself and totalling $11,999 to Tang in respect of purported wages, and (b) on 27 and 28 March 2019, payments totalling $55,000 to Mr Donald Junn, a solicitor from Dixon Holmes Lawyers, who acted for Zong in the proceedings below and was also then acting for the company in the dispute with Lin.

  6. In 2019, Lin brought a statutory derivative action on behalf of the company with leave granted under s 237 of the Corporations Act 2001 (Cth) against Zong, for breach of director’s duties and against Tang and J & G, as accessories in equity and under statute for knowing assistance and knowing involvement in Zong’s breach of duty to the company. Lin and Su also brought personal claims which were unsuccessful, except for Lin’s oppression claim against Zong under s 232 of the Corporations Act.

The primary judge’s findings

  1. In his judgment delivered on 25 May 2021 (In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 586), the primary judge found that:

  • Zong breached his fiduciary duty to the company in causing the company to purchase the Dauphin (at [56]), and in making payments to himself and Tang and also to Mr Junn’s firm: at [70];

  • the loss suffered by the company in respect of the purchase of the Dauphin was $205,200, being the difference between the purchase price and the Dauphin’s present realisable value: at [57].

  • Zong’s breach of duty was dishonest in the relevant sense referred to in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22: at [82];

  • Tang was involved in the overvalue purchase of the Dauphin and the payments to Zong and herself, and her knowledge would at least indicate the facts of Zong’s breach of fiduciary duty to an honest and reasonable person, and that J & G knew all that Tang knew of those matters: at [82]; and

  • the oppression claim succeeded and that the appropriate relief was an order removing Zong as a director of the company and that his 4,500 shares in the company be transferred to Lin: at [128].

  1. In a supplementary judgment dealing with costs given on 4 June 2021 (In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 636), the primary judge made final orders:

1.   Judgment for the [company] against [Zong, Tang and J&G] jointly and severally in the sum of $254,535.

2.   Further judgment for the [company] against [Zong] in the sum of $55,000.

3.   Order that [Zong] be removed as a director of the [company].

4.   Order that [Zong] transfer his 4,500 shares in the [company] to [Lin], within 7 days.

5.   Order that [Zong, Tang and J&G] pay 50% of the Plaintiffs’ costs (including any costs incurred by them on behalf of the [company]) of and incidental to these proceedings as agreed or as assessed.

Grounds of appeal

  1. The issues raised by the grounds of appeal are:

  1. the value of the Dauphin at the time of purchase, and whether the proper compensation in relation to the overvalue purchase of the Dauphin was $95,200, as submitted by the appellants, and not $205,200, as found by the primary judge (grounds 1 and 2);

  2. whether the primary judge erred in rejecting Zong’s evidence concerning the payment of $55,000 to Mr Junn’s firm, and finding this payment was in breach of Zong’s duties to the company (grounds 3 and 4);

  3. whether the primary judge erred in ordering relief in relation to the oppression claim that Zong transfer his 4,500 shares in the company to Lin without any payment in return (grounds 5 and 10);

  4. what is the fair value of Zong’s 4,500 shares in the company (grounds 6, 7, 8 and 9)?

  1. The fourth issue only arises if Zong succeeds in establishing error in the relief ordered in respect of the compulsory transfer of Zong’s shares in the company to Lin.

Grounds 1 and 2: the value of the Dauphin and the quantum of compensation

  1. It is not in dispute, as the primary judge found, that the company is entitled to compensation in relation to the overvalue purchase of the Dauphin in the amount by which the purchase price exceeded the Dauphin’s present realisable value, as distinct from its then market value, given any diminution in value flowed from the fact that it was purchased in breach of duty: at [57].

The expert evidence

  1. At trial, two expert witnesses gave evidence in relation to the value of the Dauphin. Mr MacDonald, called by Lin, ascribed a value of $110,000 to the boat as at December 2018, whilst Mr Hunt, called by Zong, ascribed a value of $220,000 as at that date. Both were cross-examined.

  2. His Honour summarised the evidence of Mr MacDonald, a certified valuer and specialist in marine vessels at [16]-[17], and the evidence of Mr Hunt, a marine broker at [24]-[25]. Mr MacDonald valued the Dauphin as at 22 December 2018, based on an inspection performed on 16 October 2019, and noted that the boat presented in “above average condition” for a 1997 model. Mr MacDonald observed that no comparable Bayliner vessels were located in Australia, but the average asking price for comparable boats overseas with the diesel option was approximately AUD$119,000. He valued the boat at AUD$110,000 having regard to the discount which would likely be allowed to the asking price on a sale: at [16].

  3. The three overseas advertisements for Bayliner’s to which Mr MacDonald referred in his report were:

(1)   1997 Bayliner 4085 Avanti located in California USA with a price of $109,205;

(2)   2000 Bayliner 4042 Avanti Sport Express located in Trieste Italy with a price of $146,150; and

(3)   1997 Bayliner 4085 Avanti Express Cruiser with a price of US$69,000 location unspecified, but Mr MacDonald believed it to be somewhere in the USA.

  1. Although Mr MacDonald did not state in his report how he converted this last figure to Australian Dollars for the purposes of averaging and was unable in cross-examination to recall the rate he used, it can be inferred from Mr MacDonald’s calculations that, given the average was $119,333, the Australian Dollar value of the Bayliner 4085 was approximately $102,599, and the exchange rate would be about USD$0.67 to AU$1.

  2. Mr MacDonald acknowledged in cross-examination that the prices for overseas purchases of the Bayliners in question did not include any adjustment for shipping costs to Australia, which he admitted were very substantial, or Australian taxes or duty. He said that no rational purchaser of a boat of 21 years old would incur such costs.

  1. Mr MacDonald rejected the cross-examiner’s proposition that the Riviera 4000, another motor cruiser by a different manufacturer, is “very similar” to a Bayliner. He said that a Riviera 4000 is a “completely different style and type of boat” and disagreed that it was “very similar in all of its characteristics”. He said:

The Riviera 4000 is an Australian-built boat, it’s of similar size, but it’s of completely different quality than the Bayliner in my opinion. …

I believe it’s just a better built boat; it’s got a better reputation. If I was to use an analogy, I would say it’s like comparing a Hyundai to a Mercedes.

  1. In his report, Mr Hunt included photographs of two advertisements for a 1998 Riviera 4000, both listed at $229,000, of which he said:

As a direct comparison, this assessed range of value rests very comfortable with the style of the locally built Riviera 4000, which I use as a reference point.

In fact, the second of the advertisements in Mr Hunt’s report was listed as 45 feet (13.6 m), which was five foot greater in length than the Riviera 4000.

  1. In cross-examination, Mr Hunt said that he used the Riviera 4000 as a reference point for his valuation because “it’s perceived as the same – a similar style of boat”. He disagreed that the Riviera 4000 was more of a high-end boat than the Bayliner. He acknowledged that the Riviera is the most popular in “our market, and there are more of them sold, more of them built” and said that there was not “a huge difference between the two at all”.

  2. Mr Hunt was asked questions by the primary judge as to whether his evidence proceeded on the basis that the Riviera 4000 and the Bayliner would be perceived in the second-hand market as boats of an equivalent character and quality. Mr Hunt answered, “Of similar quality, a similar value dependent – on a boat of that age, it’s very dependent on the maintenance and the presentation”. His Honour then asked the following questions:

Q.   Yes. Well, Mr Hunt, if one were to review publicly available information, would one be likely to find that the Riviera is regarded in the second-hand market in Australia as a premium, if not the premium second-hand boat of this 30 character?

A.   Would it be regarded as the premium?    

Q.   I’m asking you about publicly available information.    

A.   Yes.

Q.   I take you are acquainted with publicly available information?

A.   Meaning anything that’s for sale currently?

Q.   No. Just one moment. By publicly available information I mean the literature that is available in the field in which you are giving expert evidence.

A.   I understand the gravity of what you’re asking me. I would suggest there are many, many more examples of the Riviera on the market, and that may, amongst the general public who don’t know boats, would give an impression that the Riviera was perhaps a more popular boat, because there are more of them.

However, I would suggest that if you had someone who actually knew boats, and understood boats, and knew what they would buying, would evaluate it on a different basis, and it would be done on the basis of presentation, what they offer. They’ve both got very similar diesels, they’ve both got very similar layouts. They’re both a sedan style boat. The buyer for a Riviera may be a slightly different buyer than the buyer for a Bayliner, but I don't believe it would be right to say that one is dramatically better than the other. (Emphasis added.)

  1. When asked by his Honour whether one would find the publicly available information expressed a different view from the view Mr Hunt had expressed, Mr Hunt responded, “That was a very difficult question, and I don’t believe that the Riviera is a better boat than the Bayliner”. His Honour then asked the following questions:

Q.   Now, if one reviewed publicly available information in the field, would one find that Bayliner is the low order brand of a mass market US manufacturer of which Sea Ray is the high order brand?

A.   Not in 1997, no.

Q.   When did that come to be?

A.   That changed in - after the GFC.

Q.   Do you wish to reflect on that answer?

A.   That it changed after the GFC?

Q.   No. I’m giving you an opportunity to qualify that answer if you wish to do so, having regard to publicly available information.

A.   No, I don't believe so. The marketing for Bayliner and Sea Ray were parallel up until it was a decision from the Brunswick Group to rationalise and decide which way they wanted their influence to go.

  1. His Honour also asked Mr Hunt whether he made any enquiries as to comparable new sale prices for the Riviera 4000 and the Bayliner. Mr Hunt said he did not. His Honour asked whether he made any enquiries about comparative depreciation rates, to which Mr Hunt responded that he formed his own opinion based on his extensive experience. His Honour then asked Mr Hunt whether he recollected the content of the expert witness code of conduct and understood his obligations in respect of qualifying his report as appropriate. Mr Hunt answered that he did and that he stood by his valuation.

The primary judge’s reasons

  1. His Honour found that Mr MacDonald presented as a knowledgeable and impressive witness and accepted his evidence that a comparison between sale prices for the Riviera 4000 and the Bayliner, on which the defendants relied, was analogous to comparing a second-hand premium vehicle (being the Riviera 4000) with a vehicle of a lesser quality produced in large volume (the Dauphin): at [17].

  2. His Honour also accepted Mr MacDonald’s evidence that the value assessed for the Dauphin should not be increased to include transport costs to import an overseas vessel of the same model as the Dauphin into Australia, giving the following reasons at [18]:

There seems to me to be no likelihood that a rational purchaser of a secondhand boat would incur such costs in order to import a 22 year old mass market American-manufactured boat into Australia, as distinct from purchasing any of the many other second hand mass market American-manufactured boats already available for sale in Australia.

  1. Addressing Mr Hunt’s report, his Honour observed that it was not apparent that Mr Hunt had any valuation qualifications, although he plainly had experience in boat sales as a marine broker for many years. His Honour said that Mr Hunt’s report fell somewhat short of compliance with the expert witness code of conduct. His Honour found that Mr Hunt relied on an unproved assertion that the maintenance work on the boat had not been required in December 2018, and he appeared to have concluded that the Dauphin was in a “very good condition” in December 2018 by reference only to two photographs of the exterior of the vessel: at [24].

  2. His Honour found that Mr Hunt’s opinion was of limited weight, giving the following reasons at [25]:

Mr Hunt assessed the value of the Dauphin in December 2018 as being between $195,000 and $240,000, with the fair market price of $220,000, and he appears to have relied on sale prices for the Australian built Riviera 4000 which was advertised for sale for a price of $229,000. He did not identify any rational basis for that comparison, which assumed, without explanation and contrary to Mr MacDonald’s evidence in cross-examination that those brands and models were of comparable quality. Mr Hunt neither identified any comparable prices for the same vessel in Australia or overseas, as Mr MacDonald had done; nor did he source prices of other mass market United States manufactured vessels of a similar age for sale in Australia. I am not persuaded that Mr Hunt’s evidence established a sufficient basis for his conclusion and I give limited weight to that evidence.

  1. In finding that the value of the Dauphin at the time of purchase or now does not exceed $110,000 and that the loss suffered by the company in this respect is $205,200, his Honour preferred Mr MacDonald’s evidence to that of Mr Hunt and, drew an inference in the absence of evidence from Zong, Tang and J & G of the price they paid to purchase the Dauphin, that their evidence would not have assisted in rebutting the case against them: at [57].

Submissions

  1. Whilst senior counsel for the appellants disclaimed any complaint of procedural fairness, counsel submitted by reference to the transcript of the questions asked by his Honour of Mr Hunt that his Honour had regard to extraneous information that was not in evidence. The appellants say that this was an error and that Court should decide the valuation question on the appeal which is by way of rehearing.

  2. Senior counsel for Lin submitted that on a fair reading of the transcript and his Honour’s reasons, no error has been demonstrated. Counsel said that his Honour did not have regard to extraneous material that was not in evidence, either in his questions of Mr Hunt or his reasons; that it was well-open on his Honour’s findings to prefer Mr MacDonald’s evidence to Mr Hunt’s evidence, and that conclusion was not based on any material not in evidence.

Decision

  1. A court is not entitled to take into account factual material not in evidence without notice to the parties. Many examples of this principle are given in International Finance Trust Co Ltd v New South Wales Crime Commission (2009) 240 CLR 319; [2009] HCA 49 at [146] in footnote 227. The appellants’ submission that this occurred in the present case should be rejected for three reasons.

  2. First, there is an entirely orthodox explanation for his Honour’s questions of Mr Hunt. As counsel for Lin submitted, his Honour’s questions of Mr Hunt followed upon evidence given by Mr MacDonald that the Riviera 4000 had a “better reputation” than the Bayliner. Given that context, his Honour’s questions of Mr Hunt were appropriately directed to the perception of buyers in the second-hand market as to whether the two boats were of an equivalent character and quality. Insofar as his Honour’s questions referred to “publicly available information”, he prefaced those questions of Mr Hunt by explaining that this expression was a reference to “literature that is available in the field in which you are giving expert evidence”. It is far from self-evident that his Honour was referring to extraneous material which he had searched out. That these questions were appropriate is also evident from the absence of any objection being taken by counsel for the appellants at trial.

  3. Second, on a fair reading of his Honour’s reasons it should not be inferred that in resolving the competing expert opinions his Honour had regard to extraneous information which was not in evidence. The reasons given at [17] for accepting Mr MacDonald’s evidence are unrelated to publicly available information. Similarly, the reasons given at [25] for giving limited weight to Mr Hunt’s evidence are not related to publicly available information. Those reasons included: that Mr Hunt did not have any valuation qualifications; that he relied on an unproven assumption that work had not been required in relation to the boat in December 2018; that his conclusion that the boat was in “very good condition” in December 2018 was by reference only to two photographs of the exterior of the vessel; and that his reliance on sale prices for the Australian-built Riviera 4000 did not identify any rational basis for that comparison which he assumed with the Bayliner.

  4. The remaining reason given by his Honour was that Mr Hunt’s report fell somewhat short of compliance with the expert witness code of conduct. Senior counsel for Lin correctly drew attention to the fact that Mr Hunt’s report did not include a declaration in terms of par [3(i)] of the expert witness code of conduct; relevantly, that the expert has made all enquiries that the expert considers are desirable and appropriate (save for any matters identified in the report): Sch 7 to the Uniform Civil Procedure Rules 2005 (NSW). Given the subject matter of the questions asked by his Honour referred to at [23] above concerned enquiries made by Mr Hunt in relation to comparable new sale prices for the Riviera 4000 and the Bayliner and comparative depreciation rates, that seems to be what his Honour had in mind.

  5. Third, it was well open to his Honour to accept the evidence of Mr MacDonald in preference to that of Mr Hunt for the reasons his Honour gave, which did not turn on his Honour’s questions of Mr Hunt concerning publicly available information.

  6. His Honour formed a favourable impression of Mr MacDonald as a witness; Mr Hunt accepted in his response to his Honour’s questions that a buyer of a Riviera 4000 may be a “slightly different buyer than the buyer for a Bayliner”; and both Mr MacDonald and Mr Hunt accepted there was some difference in buyer’s perception of the character and quality of the Riviera 4000 and the Bayliner, with the differences being a matter of degree. Mr MacDonald’s view was that the differences were significant as the Riviera 4000 had a “better reputation”, he explained his reasons for that view, including giving the analogy of a comparison between a Hyundai and a Mercedes. Mr Hunt’s view was that there was a slight difference between the buyer for a Riviera 4000 and a Bayliner.

  7. There was no error by his Honour in accepting the evidence of Mr MacDonald over that of Mr Hunt. These grounds should be rejected.

Grounds 3 and 4: $55,000 paid to Mr Junn

  1. The $55,000 paid out of the company’s account by Zong was paid by way of six separate transfers to Mr Junn’s firm, five on 27 March 2019 totalling $45,000 and one on 28 March 2019 of $10,000.

  2. Those payments occurred in the following context, which informed his Honour’s finding that the payments were made by Zong in breach of his duties as a director of the company:

  1. on 15 March 2019, Lin’s solicitors sent a letter of demand to Zong requiring production of receipts and records relating to the payments in relation to the Dauphin and the $220,800 payment on 11 January 2019 and foreshadowed commencing proceedings against Zong personally if a satisfactory response was not received by 4 pm, Friday, 22 March 2019;

  2. on 26 March 2019 at 5:37 pm, Mr Junn sent an email to Lin’s solicitors responding to the 15 March 2019 letter, stating that he was instructed to act for Zong and the Company and noting that he had only just returned from overseas earlier that day and had his first conference with “our client this afternoon”, and that he was still in the process of obtaining further instructions and would provide a fuller response within the next three days;

  3. on 27 March 2019, Lin’s solicitors sent a further letter of demand by post and by email to Mr Junn requiring, among other things, the balance of the monies, being $353,712.16 to be immediately returned back to the company’s bank account and confirming Lin’s instructions to commence immediate proceedings in the Supreme Court seeking leave to bring a derivative action on behalf of the company against Zong;

  4. 29 March 2019, Mr Junn replied asserting that the company was deadlocked as a consequence of Lin’s acts of repudiation (which it is unnecessary detail) and suggesting the parties should give serious consideration to an out-of-court settlement of the matter;

  5. on 29 April 2019, Mr Junn sent an email to Lin’s solicitors in response to their letter of 24 April 2019 in which he stated that the funds received by “our firm” from the company:

are for costs and disbursements incurred in the ordinary course of the Company’s business, not for acting for Mr Zong in his personal capacity as opposed to his capacity as a director of the Company giving him instructions in the Company’s affairs and business matters in the ordinary course and consistent with the provisions in the Shareholders Agreement;

  1. on 1 May 2019, Lin’s solicitors sent an email to Mr Junn contending that monies paid into “your firm’s trust account were paid in breach of Mr Zong’s fiduciary duties” and that the shareholders agreement did not authorise Zong to engage a solicitor to act on behalf of the company in relation to a dispute with the other director;

  2. on 3 May 2019, Mr Junn replied by email to Lin’s solicitors stating:

Mr Zong, in his capacity as a director of the Company and consistent with the duties, rights and requirements under the Shareholders Agreement, instructed our firm to:

1. Advise on Corporations Act matters arising from the management of the Company;

2.   Advise on leasing matters arising from the management of the Company;

3.   Advise on disputes with contractors in relation to boat maintenance services arising from the management of the Company.

  1. Zong gave unchallenged affidavit evidence (par [23]) that he instructed Dixon Holmes Lawyers “to act and advise in the ordinary course of AIYC’s affairs and business matters” which he believed “was and still is consistent with the “Shareholders Agreement”. This evidence of Zong’s belief was not the subject of an objection. Zong did not give any evidence as to the retainer of Mr Junn’s firm to which the payments related.

  2. Lin gave unchallenged affidavit evidence that no documents were produced by Mr Junn in response to a subpoena served on him on 9 October 2020. That subpoena had required the production, among others, of any costs disclosure and costs agreement with the company, copies of trust ledger and business accounts recording the details of receipt and use of the $55,000 paid on 27/28 March 2019, and tax invoices in respect of services provided to the company.

The primary judge’s reasons

  1. His Honour noted at [44]:

By letter dated 29 April 2019, Mr Junn stated that the $55,000 received was for “costs and disbursements incurred in the ordinary course of the Company’s business, not for acting for Mr Zong in his personal capacity” (emphasis added), but refused to provide any evidence or documentation in support of that claim to Ms Lin. Mr Zong has not led evidence to support that claim in these proceedings”.

  1. After finding at [65] that Lin was not consulted and did not consent to the appointment of Mr Junn as the company’s solicitor that there was no quorum of directors of the company at any meeting to appoint Mr Junn in that capacity and that Zong’s appointment of Mr Junn cannot have been made on behalf of the company, his Honour continued:

… [Counsel for Lin] submits, and I accept, that cl 1 of the Shareholder Agreement which provides that “[t]he Party B [Mr Zong] shall respond for the daily operate/manage the Business” is not sufficiently wide to authorise the appointment of a solicitor, and that point is stronger where that would involve a payment of some $55,000, which was hardly a matter of the “daily” or day to day operation of a yacht tourism business.

  1. After noting that Zong had led no evidence of the particular work done to seek to support the assertions as to its nature in Zong’s affidavit and Mr Junn’s email of 3 May 2019, his Honour found at [67]:

… I do not accept those assertions and I find, as a matter of inference from the timing of the payment, that it likely related to anticipated future costs of these proceedings, payment of which would benefit Mr Zong in his personal capacity.

  1. His Honour found at [70] that the breach of fiduciary duty claim was established in respect of the payments to Zong and Tang and Mr Junn’s firm, where those payments were authorised by Zong where he faced a real and substantial conflict between his duties to the company and his personal interest in advancing his and Tang’s position.

Submissions

  1. The appellants’ submissions in support of grounds 3 and 4 relied upon the following essential propositions:

  1. the primary judge’s reasoning at [65] is flawed because Zong had authority to retain solicitors on behalf of the company by virtue of cl 1 of the shareholder agreement;

  2. there was a breach of the rule in Browne v Dunn (1893) 6 R 67 because of the absence of cross-examination of Zong in relation to par [23] of his affidavit (see [41] above) and the out-of-court representations by Mr Junn in his 3 May 2019 email (see [40(7)] above); and

  1. there is an alternative inference available to be drawn as to the timing of the payments to Mr Junn.

Zong’s authority

  1. It is not necessary to determine whether the scope of the authority conferred on Zong by cl 1 of the shareholder agreement extended to the retainer of solicitors on behalf of the company. Whatever be the extent of Zong’s authority to manage the day-to-day operations of the company, Zong could not deal with the company’s assets in breach of his fiduciary duties. The primary judge found at [70] that Zong was in a position of conflict between his duties to the company and his personal interest in paying moneys of the company to Mr Junn’s firm. That finding is not challenged.

  2. Having retained the same solicitors to act for the company and Zong in the dispute with Lin (as confirmed by Mr Junn’s email of 26 March 2019 (see [40(2)] above), Zong obtained the personal benefit of the company’s money paid to Mr Junn’s firm for legal advice given by the solicitor who was also acting for the company in the dispute with Lin. Nor was it in the company’s interests to use its funds to retain Mr Junn as he could not possibly continue to act for both the company and Zong in the dispute with Lin, given the real and substantial conflict between the duties owed by Mr Junn to both Zong and the company. For this reason, the expenditure of the company’s funds was doomed to be wasted.

Failure to cross-examine Zong

  1. The trial below proceeded by way of pleadings and affidavits. Fair notice of Lin’s case on the payment to Mr Junn’s firm was given to Zong in the statement of claim (pars [31] and [42]) and Lin’s affidavit. In addition, Lin’s opening submissions gave notice that she would rely on the inference available from the timing of the payments to Mr Junn’s firm to prove that the payments were made in connection with the foreshadowed proceedings by Lin on behalf of the company against Zong.

  2. There was no obligation on Lin to cross-examine Zong on his affidavit evidence of his belief that the retainer of Mr Junn’s firm was “in the ordinary course of [the company’s] affairs and business matters”. That was a statement of subjective belief. Although that evidence was not objected to, as it could have been on the grounds of relevance and as a conclusion, the absence of an objection did not render the evidence relevant to the objective question of whether Zong was in a position of conflict of interest and duty in paying the company’s moneys to Mr Junn’s firm.

  3. Nor was it necessary for Lin to cross-examine Zong in relation to the out-of-court representations by Mr Junn in his 3 May 2019 email. Zong was on fair notice from the pleaded claim, Lin’s affidavit evidence in relation to the nil production of documents by Mr Junn in answer to the subpoena, and Lin’s opening submissions as to the timing of the payments to Mr Junn’s firm, that Lin’s case was that Zong was in the position of conflict when it came to using company funds to engage solicitors “in particular, in relation to the proceeding”.

  4. In these circumstances, the submission that Lin failed to observe the rule in Browne v Dunn at 70-71 (Lord Herschell LC) by not cross-examining Zong on the two matters referred to, cannot be accepted: West v Mead (2003) 13 BPR 24,431; [2003] NSWSC 161 at [94]-[99] (Campbell J); Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382; [2009] NSWCA 234 at 404-5 [105] (Campbell JA, Allsop P and Basten JA agreeing).

  5. Moreover, there is no rule of law that requires acceptance of unchallenged evidence: Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at 587-588; Masterton Homes Pty Ltd at 404-405 [105]; TAL Life Limited v Shuetrim; MetLife Insurance Limited v Shuetrim (2016) 91 NSWLR 439; [2016] NSWCA 68 at [198]. Here, the unchallenged evidence concerned Zong’s subjective belief. It was also conclusionary. Even if, contrary to my view, Zong’s evidence was relevant, it was of very little weight, given that Zong’s affidavit said nothing of the nature of the payment of $55,000 to Mr Junn’s firm on 27-28 March 2019 in terms of the work to be performed by Mr Junn.

  6. There is a further point arising from the fact that Mr Junn gave evidence in the proceedings by way of four affidavits verifying the translation of affidavits sworn by Zong and Tang. Zong was on notice of Lin’s case as referred to at [56] above. Notwithstanding the formal nature of those affidavits, Mr Junn was a witness in Zong’s case. He could be expected to be in a position to verify his out-of-court representations as to the nature of the work undertaken by his firm for the company, and to explain his nil production of documents in answer to the subpoena served by Lin. He did not do so.

  7. In the circumstances, no inference should be drawn favourable to Zong’s case based on the hearsay evidence in Mr Junn’s 3 May 2019 email, when no attempt was made by Zong to prove those matters by direct evidence from Mr Junn himself who gave affidavit evidence at trial: Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-419.

Alternative inference?

  1. Zong submitted in writing that a different inference is available to be drawn as to the timing of the payments to Mr Junn. According to the submission, it was important for the company to arrange to fund the solicitors acting for it in relation to “other matters” whilst the company still had the ability to do that and a reasonable person in Zong’s position would have anticipated that the company’s accounts would soon be paralysed in consequence.

  2. This submission was not mentioned in oral argument in this Court. It should be rejected, at least for some of the reasons identified by Lin. First, the suggested explanation was not advanced by Zong below.

  3. Second, neither Zong nor Mr Junn gave evidence that that was the purpose of the $55,000 payment.

  4. Third, the apparent premise of the alternative inference that Mr Junn’s firm was acting for the company in relation to “other matters”, is inconsistent with Mr Junn having only met Zong for the first time on 26 March 2019.

  5. Fourth, the alternative inference is inconsistent with Mr Junn’s nil production in response to the subpoena issued to him. Any monies paid to Mr Junn’s firm for acting for the company in “other matters” would have been trust monies held for the company and Mr Junn would have been required to keep trust records in respect of them. The failure of Mr Junn to produce documents in answer to the subpoena and the failure of Mr Junn to give evidence explaining the nil production is inconsistent with the suggested inference.

  6. Against the alternative inference, there are matters which amply support his Honour’s finding. First, Mr Junn only met Zong for the first time on 26 March 2019, following the 15 March 2019 letter of demand sent by Lin’s solicitors requiring Zong to explain, with receipts, how he had applied the company’s money and threatening proceedings against Zong. The reasonable inference is that the payments cannot have related to work that had already been done by Mr Junn.

  7. Second, given the timing of the payments on 27 and 28 March 2019, following the letter of demand on 15 March 2019, the second letter of demand on 27 March 2019 and the retainer by Zong on behalf of the company of Mr Junn’s firm as recorded in Mr Junn’s 27 March letter, the reasonable inference is that the payments related to the anticipated costs of the derivative proceedings that were later commenced by Lin against Zong.

  8. Third, the inference which his Honour drew from the timing of the payments to Mr Junn is strengthened by two further matters. One is that Mr Junn produced no documents in response to the subpoena requiring production of any cost agreement with the company and his tax invoices for the work done for the company. That is, the assertion by Zong that Mr Junn’s firm did work on “other matters” than the shareholder dispute with Lin, was unsupported by the evidence. The other is that Zong did not give evidence of the particular work done by Mr Junn to support his stated belief that he retained Mr Junn’s firm in the ordinary course of the company’s affairs. That is, there was no evidence from Zong himself of the so-called “other matters” than the shareholder dispute, for which the payment of $55,000 was made to Mr Junn’s firm.

  9. These grounds are not made out.

Grounds 5 and 10: transfer of Zong’s shares to Lin

  1. Once the discretion conferred by s 233 of the Act is enlivened by a finding of oppression under s 232, the Court has a wide discretion as to the remedy: Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136 at [70] (Wilcox, Marshall and Jacobson JJ). The available relief under s 233(1) includes an order:

(a)   that the company be wound up;

…

(c)   regulating the conduct of the company’s affairs in the future;

(d)   for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;

(e)   for the purchase of shares with an appropriate reduction of the company’s share capital;

…

(j) requiring a person to do a specified act.

  1. The orders identified in pars (a)-(j) are not an exhaustive list. Zong correctly accepted that the relief a court can give under s 233 is not limited in scope and could potentially encompass a coercive order compelling a shareholder to transfer his or her shares for no consideration. Zong said that such an order is not one the courts typically contemplate when granting relief. That the relief granted was unusual does not establish error.

  2. At trial, Lin did not seek a winding up order under s 233(1)(a), or an order that she purchase Zong’s shares in the company. Rather, the relief sought by Lin in the amended originating process filed 17 December 2020, relevantly, included an order pursuant to s 233(1)(c) removing Zong as a director of the company (par 6F(a)) and an order “pursuant to s 233(1)(e)” that “the 4,500 shares in the [company] held by [Zong] be transferred to [Lin]” (par 6F(b)).

  3. The relief sought by Lin in par 6F(b) was in the form of a compulsory transfer order in respect of Zong’s shares, not a compulsory purchase order. No point was taken by Zong on appeal based on the incorrect reference to s 233(1)(e) in par 6F(b) of the amended originating process. That reference to s 233(1)(e) was an obvious error.

  4. The language of par 6F(b) is inconsistent with Lin seeking an order under s 233(1)(e) for the company to buy out the shares of Zong with an appropriate reduction of the company’s share capital, which would have required the Court to take into account the effects of the order on creditors, and creditor consent: Quinlan v Fiboze Pty Ltd (1998) 14 ACLR 312. Nor did the written closing submissions of either party at trial approach the relief sought by Lin on that basis or on the basis of a compulsory purchase order; neither Lin nor Zong made any submissions below concerning the purchase of Zong’s shares at “fair value”.

  5. It is the absence of a price for the transfer of Zong’s shares to Lin at “fair value” that is the crux of Zong’s complaint on appeal.

The primary judge’s reasons

  1. Having observed at [127] that a judgment for damages against Zong will not necessarily address the issues arising from his management of the company’s affairs, his Honour found at [128] that Lin succeeded in her oppression claim, giving three reasons:

I am satisfied that the purchase of the Dauphin and the transfer of a substantial sum from the Company to the 33664 account and a failure by Mr Zong to contribute the any evident skill or business goodwill to the conduct of the Company’s affairs each involve “commercial unfairness” and involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play, and impose a disadvantage, disability or burden on Ms Lin who contributed the only monies to the Company and that, according to ordinary standards of reasonableness and fair dealing, is unfair. The Plaintiffs therefore succeed in their oppression claim.

  1. There is no challenge to the three reasons given for finding oppression, namely (a) the purchase of the Dauphin, (b) the transfer of a substantial sum from the company to the 33664 account, and (c) a failure by Mr Zong to contribute the any evident skill or business goodwill to the conduct of the company’s affairs.

  2. As to relief, his Honour found that orders should be made as sought by Lin removing Mr Zong as a director of the Company and that 4500 shares in the company be transferred to Lin, giving the following reasons at [128]:

I am satisfied that such an order should be made where Mr Zong has made no financial contribution to the Company; the conduct to which I have referred above does not amount to a contribution of skill or business goodwill to the Company; and a winding up without such an order would transfer to Mr Zong a part of the value of Ms Lin’s financial contribution to the Company, so far it is restored by orders for compensation against Mr Zong, Ms Tang and J&G.

  1. It can be seen from those reasons that his Honour made a compulsory transfer order, not a compulsory purchase order, and that the intention and effect of the relief granted as in effect rescission of the shareholders agreement.

Submissions

  1. This Court is confined by the principles in House v The King (1936) 55 CLR 419; [1936] HCA 40 in reviewing the primary judge’s exercise of discretion to make an order requiring the transfer of Zong’s shares to Lin: Snell v Glatis (No 2) [2020] NSWCA 166 at [37] (Leeming JA, Bell P and Meagher JA agreeing).

  2. Although Zong’s submissions did not expressly characterise the asserted errors relied upon as a House v The King error, Zong contended in effect that his Honour:

  1. failed to consider an alternative form of relief, namely a sale of shares at fair value;

  2. took into account an irrelevant consideration:

  1. by making an adjustment for a second time for the breaches of fiduciary duty by Zong and the accessorial liability of Tang and J & G in fixing the “fair value” of the shares; and

  2. by having regard to Zong’s alleged lack of skill and failure to contribute goodwill or cash, as these matters were not pleaded as part of his oppressive conduct that need to be compensated for in the s 233 remedy for oppression.

Failure to consider sale of shares at fair value

  1. Accepting that a compulsory transfer order without any payment may be an unusual form of relief against oppression, the wide language of s 233 clearly permits the court to make such an order in an appropriate case. This is consistent with what was said in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [178] about the power not being “hedged about by implied limitations”.

  2. That his Honour did not refer to the alternative form of relief of a sale of shares at fair value, was not an error. As mentioned, Lin did not seek an order for the purchase of Zong’s shares at fair value. Nor did the parties advance any submissions directed to such relief. His Honour was not obliged in those circumstances to address the alternative form of relief of a compulsory purchase of shares at fair value.

Whether duplication of relief in the derivative action

  1. When exercising the discretion under s 233(1), the purpose of relief is to end the effects of oppression, and the remedy chosen will depend on the conclusions drawn as to what the oppressive conduct was and the Court will choose the remedy which is least intrusive: Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 at 365 [125]; Munstermann v Rayward [2017] NSWSC 133 at [22(10)].

  2. Zong said that since the relief granted in the derivative action involved Zong, Tang and J & G having had to fully compensate the company for losses incurred through the overvalue purchase of the Dauphin and the wrongful removal of monies from the company’s account, the breaches of fiduciary duty and accessorial liability were already being made good by means of the judgment in the derivative action, and hence there was no need to make any adjustment for those matters a second time through fixing the “fair value” of Zong’s shares at a price that differed from their market value.

  3. There are two difficulties with this submission. One is that his Honour did not purport to fix a “fair value” for the purchase of Zong’s shares to Lin. For that reason, the premise of Zong’s submission is mistaken. The other is that there is no challenge to his Honour finding at [127] that the relief in the derivative action did not fully address the oppression suffered by Lin.

  4. This is not a case where a compulsory transfer of shares without payment of any consideration would be unfair to the oppressor, Zong, by depriving him of a share in the value of a company of which he is a member. Zong’s conduct justified his exclusion from the company on the basis that he should not share in the value of the company, even assuming that the company recovered the amounts the subject of the judgments in the derivative action. Zong did not relevantly participate in any material way in the formation of the company. He provided no financial contribution to the company and did not make his promised contribution to the establishment of the business by the exercise of his skill or business goodwill.

  5. The effect of the oppression by Zong was that he failed to establish the intended business activity of the company. Within a short space of three months, Zong caused the company to purchase the Dauphin at a significant overvalue, the boat was not fit for purpose as a commercial vessel, and the cost of converting the boat for commercial use was prohibitive. As Zong acknowledged in cross-examination, after obtaining a “valuation” by several experts (of the conversion costs), it was “out of my expectation”.

  6. In circumstances where Lin had performed her promise to provide the capital for the company’s intended business, Zong had failed to perform his promise to provide skill and goodwill in the establishment and conduct of the business, and the intended business never commenced operations, the appropriate relief to address the oppression was in the nature of recission of the shareholder agreement, to put the parties back in the position they were before the oppression occurred.

  7. That was achieved by the compulsory transfer order which recognised that it would be unfair to Lin if she was required to pay for a transfer of Zong’s shares, as that would make the oppression permanent, rather than bring it to an end. That is, having oppressed Lin on the three bases found by his Honour (see [72] above), it would be unfair to Lin that Zong receive 45 per cent of the value of whatever remained of Lin’s $550,000 contribution.

  8. It is not to the point that his Honour had rejected Lin’s alternative claim for relief based on alleged total failure of consideration under the shareholder agreement. The failure of that common law claim did not exclude a compulsory transfer order in the oppression claim. It can be accepted that such relief was unusual in an oppression claim, but it does not follow that it was inappropriate in all the circumstances of this case.

Pleading point

  1. There is no substance in the pleading point. The oppression claim, as pleaded in par 54 of the second further amended statement of claim, incorporated as one of “the circumstances detailed above” the allegation that the Dauphin was not a suitable boat for the business purpose (par 36).

  2. Whilst the pleaded claim that Zong had taken no steps towards developing the company’s business was part of the separate claim of total failure of consideration under the shareholder agreement, the essence of that alternative claim was the overvalue purchase of a boat not suitable for the business purpose, which was an issue in the oppression claim.

  1. Insofar as his Honour found that the grounds of the oppression included Zong’s failure to contribute any evident skill or business goodwill to the conduct of the company’s affairs, that encompassed the overvalue purchase of a boat which was not suitable for the business purpose. As indicated, the boat required conversion to a commercial vessel, the cost of which was financially prohibitive for the company, as Zong acknowledged in cross-examination. Zong was on notice of the case Lin was advancing in the oppression claim, which his Honour accepted had been established.

Grounds 6-9: valuation of shares

  1. Grounds 6-9 are derivative on the success of grounds 5 and 10, which have been rejected. Accordingly, it is not necessary to address the valuation issue raised by these grounds. If, contrary to my conclusion above, it was necessary to address this issue, then the appropriate order would have been for a remitter of this issue to the court below.

Conclusion and Orders

  1. The appeal has failed and there is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

  2. I propose the following orders:

  1. Appeal dismissed.

  2. Appellants to pay the respondents’ costs.

  1. LEEMING JA: I agree with Gleeson JA.

  2. KIRK JA: I agree with Gleeson JA.

**********

Decision last updated: 02 August 2022

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Cited Sections