Xiao v BCEG International (Australia) Pty Ltd

1. [1]

   GLEESON JA: The primary question raised by this appeal is whether a plaintiff is entitled to make a “split election” seeking different remedies against different defendants being defaulting fiduciaries or knowing recipients of property the subject of the breach of fiduciary duty. The other issues on the appeal concern some elements of the relief granted against the appellants. These issues turn on questions of how the trial was run below, causation in equity and proof of quantum.

Nature of the case

1. [2]

   The respondent, BCEG International (Australia) Pty Ltd (BCEG) is the Australian subsidiary of BCEG International Investment Co Ltd (BCEG China). From 2010 to 2017, the business of BCEG was run by Mr Yu Xiao and his wife, Ms Yan Ying Chen. The other directors of BCEG resided in China. During that period, BCEG was engaged in two development projects in Australia, one on the Gold Coast commencing in mid-2010 referred to as the Varsity Lakes project and the other in Wagga Wagga commencing in mid-2012 (the Wagga project). Mr Xiao and Ms Chen were also engaged in their own development at West Wyalong commencing in mid-2010 (the West Wyalong project).

2. [3]

   BCEG brought proceedings against Mr Xiao and Ms Chen, and their companies, Interlink Laboratory Pty Ltd (IL), Interlink Wagga Central Pty Ltd (IWC) and West Wyalong Marketplace Pty Ltd (WWM) claiming equitable compensation or an account of profits in respect of alleged breach of fiduciary duties owed by Mr Xiao and Ms Chen as directors of BCEG and knowing assistance in those breaches and knowing receipt of BCEG’s property by IWC and WWM. BCEG also brought a money claim against IL.

3. [4]

   The Varsity Lakes project involved the development of a private hospital on land owned by IL on the Gold Coast using US$35 million finance provided by the Export-Import Bank of China to BCEG China, pursuant to a facility dated 25 August 2010. Those monies were on-lent by BCEG China to BCEG on condition that the monies were to be used only for the purpose of the Varsity Lakes project. Between September 2010 and September 2012, BCEG received drawdowns under its facility with BCEG China. BCEG engaged Trojjan (BCEG) Pty Ltd (Trojjan) as the builder. Trojjan was controlled by Mr Xiao and Ms Chen.

4. [5]

   The Wagga project involved a commercial and residential development on land owned by IWC at Wagga. On 1 July 2012, BCEG entered a contract with IWC to design and construct the Wagga project on a cost-plus basis with a budget estimate of $34 million, using bank finance from National Australia Bank (NAB). On 25 February 2013, BCEG entered a head construction contract with Trojjan (BCEG) Constructions Pty Ltd (Trojjan Constructions) by which Trojjan Constructions agreed to build the works for the Wagga project for a fixed sum of $25,454,667.50. Due to delays in the provision of finance from NAB, US$3.9 million was provided by BCEG China to BCEG in March 2013 and used by BCEG for the Wagga project. BCEG claimed that it paid a total of about $8.24 million to IWC in connection with the Wagga project.

5. [6]

   The West Wyalong project involved a shopping centre and medical centre development on land owned by WWM in West Wyalong. This project commenced in mid-2010. Mr Xiao and Ms Chen paid the construction costs for the West Wyalong project by diverting some $3.4 million of the Varsity Lakes loan facility between October 2010 and July 2012. They did so dishonestly in two related ways. One was that when applying for certain drawdowns by BCEG of the Varsity Lakes facility, Mr Xiao and Ms Chen justified upcoming construction costs by reference to sham subcontracts between Trojjan and purported subcontractors (the sham subcontracts). The other was by causing the builder, Trojjan, to render false invoices to BCEG – ostensibly for the Varsity Lakes project but in fact for the West Wyalong project – which Ms Chen approved and paid using the Varsity Lakes facility (the West Wyalong payments).

6. [7]

   In addition, between March and August 2103 Mr Xiao and Ms Chen transferred $1.7 million from BCEG to Beijing Dragon Pty Ltd (Beijing Dragon), another company associated with Mr Xiao for no apparent, legitimate purpose. On 25 August 2107, Mr Xiao ceased to be a director of BCEG, and Ms Chen ceased to be secretary of that company. Mr Xiao gave evidence at trial; Ms Chen did not.

7. [8]

   In closing submissions at trial, BCEG submitted that it was entitled to make a split election, seeking different remedies against the defendants as defaulting fiduciaries or knowing recipients. Reference was made to the decision of Bergin J in King of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 (King Network). The appellants did not argue to the contrary. BCEG made that election in its closing submissions by claiming: (1) equitable compensation from Mr Xiao and Ms Chen in relation to the unauthorised dissipation of monies from the Varsity Lakes facility and an account of profits from WWM in respect of the use of those monies for the West Wyalong project, together with compound interest, and; (2) equitable compensation from Mr Xiao and Ms Chen in relation to loss suffered in advancing funds in respect of the Wagga project and an account of profits from IWC in respect of the Wagga project together with compound interest.

8. [9]

   In her principal judgment, BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972 (principal judgment or PJ), the primary judge concluded that:

9. [10]

   As varied by her Honour’s second judgment, BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102 (supplementary judgment or SJ), the primary judge granted the following relief:

10. [11]

    In a further judgment delivered on 12 September 2022, the primary judge ordered the appellants to pay BCEG’s costs on an indemnity basis: BCEG International (Australia) Pty Ltd v Xiao (No 3) [2022] NSWSC 1221.

The appeal

1. [12]

   The appellants challenge the relief granted to BCEG on six grounds. Grounds 1, 2 and 5 contend that the primary judge erred in holding that BCEG is entitled to both equitable compensation from Mr Xiao and Ms Chen and an account of profits from WWM in relation to the West Wyalong project and IWC in relation to the Wagga project. The appellants say that permitting BCEG to make a “split election”, seeking different remedies against different defendants, is wrong in principle.

2. [13]

   Ground 3 contends that WWM was denied procedural fairness because the primary judge proceeded to assess the account of profits from WWM in circumstances where the trial was conducted on the basis that there would be an inquiry after judgment on the liability issues, if BCEG elected to claim an account of profits against any of the defendants. Importantly, other than this complaint and the split election issue, there is no ground of appeal challenging the amount of the judgment against WWM for profits relating to the West Wyalong project.

3. [14]

   Ground 4 contends that there is no causal link between the breaches of fiduciary duty by Mr Xiao and Ms Chen in relation to the unauthorised dissipation of monies from the Varsity Lakes facility and the loss suffered by BCEG in advancing funds in respect of the Wagga project.

4. [15]

   Ground 6 contends, in the alternative to ground 4, that BCEG failed to prove the quantum of its loss in relation to the Wagga project was $8,248,974.

5. [16]

   Thus, the issues raised in the appeal fall under four general headings: (1) the issue of split election; (2) procedural fairness; (3) causation in respect of the Wagga project; and (4) quantum of loss in respect of the Wagga project. As will be apparent, some of these issues are dependent on the outcome of earlier issues.

6. [17]

   For the reasons which follow, the causation argument raised by ground 4 should be upheld and the appeal allowed in part. The relief granted against Mr Xiao and Ms Chen and IWC relating to the Wagga project should be set aside. In the view I take, ground 6 relating to quantum of loss on the Wagga project does not arise. Grounds 1, 2 and 5 relating to split election should be dismissed. Having regard to the mixed outcome on appeal, the parties should be given an opportunity to make further submissions on costs in this Court and below.

The key findings of the primary judge

1. [18]

   Given the absence of challenge to the findings on liability, except for the causation finding in relation to the loss on the Wagga project, it is convenient to outline the relevant facts by reference to her Honour’s unchallenged findings.

2. [19]

   Mr Xiao became a director of BCEG on 11 June 2010 and ceased to be a director on 25 August 2017: PJ [298]. The China based directors of BCEG were Tieshan Ma, Qing Xing and Yan Xing. Ms Chen was a secretary of BCEG from 15 June 2011 to 25 August 2017: PJ [329]. Her Honour found that Ms Chen also acted in the position of a director of BCEG and owed duties to the company as such: PJ [344].

3. [20]

   Mr Xiao and Ms Chen were the architects of the arrangement in respect of each of the West Wyalong payments in causing Trojjan to issue false invoices to BCEG, which purported to be in respect of the Varsity Lakes project but, in fact, concerned the West Wyalong project: PJ [350]-[351], [354]-[355]. Mr Xiao and Ms Chen were also active participants in the creation and dissemination of the sham subcontracts between Trojjan and the purported subcontractors in relation to the Varsity Lakes project: PJ [360]-[362].

4. [21]

   To the extent that BCEG also sought relief in relation to the diversion of $1.28 million from the first drawdown of the Varsity Lakes facility and $2.05 million from the second drawdown, her Honour found that BCEG was not entitled to seek relief in respect of these additional allegations as they were not pleaded: PJ [376]. Her Honour further found at PJ [377]:

5. [22]

   Her Honour found that the “best” evidence of the amount of the Varsity Lakes facility diverted to the West Wyalong project was recorded in BCEG’s 2014 financial statements, presumably on instruction of Mr Xiao and Ms Chen, and the figure of $3,423,739 (the West Wyalong payments) provided a “starting point” for quantifying the appropriate compensation against Mr Xiao and Ms Chen, but it was not the end of the matter: PJ [401]. Given that the West Wyalong payments were added to BCEG’s indebtedness to BCEG China under the Varsity Lakes facility but by the time of the trial that indebtedness had been reduced by the appellants’ repayments, her Honour found that the only evidence of a balance owing under the Varsity Lakes facility was BCEG’s financial statements or, more recently, the 2017 agreement between BCEG and BCEG China where “the outstanding principal of the private hospital project” was agreed to be $2,528,949.42: PJ [402].

6. [23]

   Her Honour continued at PJ [407]:

7. [24]

   The reference by her Honour to the West Wyalong project being brought onto the balance sheet of BCEG in January 2015 is a reference to BCEG’s June 2014 financial report which was signed by the directors, including Mr Xiao, on 21 January 2015.

8. [25]

   Her Honour found that the amount of equitable compensation which would restore BCEG to the position it would have been in had there been no breach of Mr Xiao’s and Ms Chen’s equitable obligations is to require them to pay compensation sufficient to discharge BCEG’s remaining indebtedness to BCEG China under the Varsity Lakes facility, which the parties had agreed, in the 2017 agreement was $2,528,949.42. To this amount was added compound interest: PJ [411].

9. [26]

   Her Honour observed at PJ [412] that equitable compensation in respect of the sham subcontracts overlapped with equitable compensation in respect of the West Wyalong payments. It is common ground on appeal that the false invoices the subject of the West Wyalong payments and the sham subcontracts were two sides of the same dishonest diversion of money from BCEG to the West Wyalong project.

10. [27]

    Her Honour found that WWM received the benefit of the West Wyalong payments with actual or constructive knowledge of Mr Xiao’s breaches of his fiduciary obligations owed to BCEG, which led to the payments; WWM was liable as a knowing recipient of property in breach of fiduciary duty; the West Wyalong project constituted the traceable proceeds of the West Wyalong payments made in consequence of WWM’s knowing receipt; and WWM held the West Wyalong project on constructive trust for BCEG and was liable to account for the benefits obtained since completion of the project: PJ [430].

11. [28]

    In the principal judgment at PJ [432] and order 11 made on 22 July 2022, her Honour took the view that the West Wyalong payments should be regarded as having been repaid (in part) by the defendants and that must also have consequences for the profit for which an account must be given because:

12. [29]

    Having reconsidered this approach to the assessment of profits derived by WWM, her Honour found in the supplementary judgment that there was no evidence that WWM paid for the construction of the West Wyalong project and there should be no set-off of the repayments made to BCEG in respect of the West Wyalong payments because such repayments were made by IL not WWM: at SJ [17]-[18]. Accordingly, her Honour varied order 11 made on 22 July 2022 and assessed the profits derived by WWM from the West Wyalong project as $1,710,000 for capital gain and $1,234,632.72 for rental income, together with compound interest. Judgment was entered against WWM in the sum of $3,731,547.75.

13. [30]

    Addressing the claim for relief against Mr Xiao and Ms Chen in relation to monies totalling $8.249 million advanced by BCEG to IWC and the builder of the Wagga project, her Honour found at PJ [413]-[415]:

14. [31]

    Her Honour found that IWC holds the profits of the Wagga project on constructive trust for BCEG and is liable to account to BCEG for these profits and that there should be an inquiry necessary to ascertain the profits that IWC in fact derived in connection with its liability as a knowing recipient: PJ [439].

15. [32]

    As indicated, the appellants did not object at trial to the split election by BCEG. In this Court, the appellants submit that in principle the plaintiff must make the same election as to remedy against the knowing recipient as the defaulting fiduciary, otherwise the order for compensation ceases to be compensatory, and there is an inconsistency in claiming different relief against different defendants. The appellants say that a plaintiff “cannot on the one hand condone the wrongful conduct of the knowing recipient by taking an account of profits, and on the other hand condemn the conduct of the fiduciary which was central to the liability of the knowing recipient by asking for equitable compensation from the fiduciary”.

16. [33]

    Although these grounds raise a new point on appeal, other than reserving its position on costs if the new point was upheld, BCEG did not suggest that the point is one that could have been met by further evidence at the trial such that it is not open to the appellants to raise it on appeal: Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48 at [51].

The issue

1. [34]

   Applied to the facts of this case, the essential question is whether BCEG can obtain cumulative remedies against different defendants: equitable compensation (including compound interest) from Mr Xiao and Ms Chen of $3,057,892.41 in relation to the dissipation of monies from the Varsity Lakes facility and an account of profits from WWM in relation to the West Wyalong project of $3,731,547.75.

2. [35]

   The appellants say that an election by BCEG for equitable compensation from Ms Xiao and Ms Chen has the consequence that BCEG can only obtain the same remedy against WWM, not an account of profits from WWM in relation to the dissipation of monies from the Varsity Lakes facility. Conversely, the appellants say (subject to ground 3) that an election by BCEG for an account of profits from WWM has the consequence that BCEG can only obtain the same remedy from Mr Xiao and Ms Chen and since Mr Xiao and Ms Chen did not personally derive any profits from their breaches of duty, no profits can be recovered from them.

3. [36]

   Subject to the causation and quantum issues raised by grounds 4 and 6, the same issue arises in relation to the award of equitable compensation from Mr Xiao and Ms Chen for loss in respect of the Wagga project of $8.249 million (not including compound interest), and the order for an inquiry as to the profits derived by IWC in respect of the Wagga project.

4. [37]

   If correct, the appellants’ submission would place a significant limitation on the available equitable remedies against different defendants who are defaulting fiduciaries or knowing recipients or assistants of the unauthorised dissipation of company assets. The appellants say that the result for which they contend is not only justified but is required as a matter of principle because the same reasoning which applies to the need for election against a single wrongdoer applies equally to claims against multiple wrongdoers. BCEG says that it is entitled to obtain cumulative remedies of equitable compensation.

5. [38]

   Before considering the issues raised by these grounds, it should be noted that none of the appellants make a claim for contribution against the other. Nor do the appellants challenge the decision of this Court in Michael Wilson & Partners Ltd v Emmott [2021] NSWCA 315 concerning the limitations on contribution between knowing assistants and the defaulting fiduciary, or that such limitations also apply to knowing recipients.

Relevant principles: the contrast between inconsistent remedies and cumulative remedies

1. [39]

   Equitable compensation and an account of profits are both personal remedies: Warman International Limited v Dwyer (1995) 182 CLR 544 at 557; [1995] HCA 18. As Gummow J said in Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 at 135:

2. [40]

   Speaking generally, the remedy of an account looks to the gain made by the party in breach (or by the knowing recipient or knowing assistant) while the remedy of equitable compensation looks rather to the loss suffered by the plaintiff.

3. [41]

   The aim of equitable compensation is to restore the plaintiff, as nearly as possible, to the position the plaintiff would be in had no equitable breach occurred: Nocton v Lord Ashburton [1914] AC 932 at 952; O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272-273; Hill v Rose (1990) VR 129 at 143; Target Holdings Ltd v Redferns [1996] 1 AC 421 at 432, 439. The aim of an account of profits is to strip from the party in breach the gains made by reason of the breach (or by reason of their knowing receipt or knowing assistance): Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32 (Windeyer J); [1968] HCA 50.

4. [42]

   Like all equitable remedies, an account of profits is within the discretion of the Court to be granted or withheld in accordance with settled principles: Warman at 368 referring to equitable defences such as estoppel, laches, acquiescence and delay, and approving the comments of Deane J in Chan v Zacharia (1984) 154 CLR 178 at 204-205; [1984] HCA 36, including that the liability to account would not arise where it would be “unconscientious to assert it”. See also Novoship (UK) Limited v Yuri Nikitin [2014] EWCA Civ 908 at [119], where it was said that an account of profits could be refused if “disproportionate in relation to the particular form and extent of the wrongdoing”.

5. [43]

   An account of profits is an alternative to an award of equitable compensation: Warman at 559. The rationale for an election to receive compensation or alternatively an account of profits was stated by Lord Westbury in Neilson v Betts (1871) LR 5 HL 1 at 22, as follows: “[t]he two things are hardly reconcilable, for if you take an account of profits, you condone the infringement”. This principle was reaffirmed by the House of Lords at a subsequent hearing of the same case: De Vitre v Betts (1873) LR 6 HL 319 at 321, 324-325. Neilson was a patent infringement case. The passage from the speech of Lord Westbury has been cited with approval in other intellectual property cases, including by Windeyer J in Colbeam at 32 and by Mason CJ, Deane, Dawson and Toohey JJ in their joint judgment in Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 110; [1993] HCA 54.

6. [44]

   The principle of election between inconsistent remedies of compensation or account of profits is of general application. It applies equally to breaches of trust (Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514 at 521) and breaches of fiduciary duty (Warman at 559). The joint judgment in Warman said at 559:

7. [45]

   Although it was said in Dart Industries at 111 that the purpose of an account of profits was not to punish the defendant but to prevent their unjust enrichment, in Warman this rationale for an account of profits was restricted to the context of patent infringement, noting that “the liability of a fiduciary to account differs from that of an infringer in an intellectual property case” as the liability of a fiduciary rests on “the stringent rule that the fiduciary cannot profit from his trust”: at 557.

8. [46]

   The election will generally only be irrevocable after one remedy is fully satisfied by the entry of judgment: Alliance Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38 at [64] (Kiefel CJ, Edelman, Steward, and Gleeson JJ).

The authorities

1. [47]

   In support of split election, BCEG pointed to the statement in Warman at 569-570, that it was “arguable” that it would have been open to the plaintiff to have obtained equitable compensation against Dwyer, the fiduciary, and an account of profits against BTA and ETA, two corporate knowing assistants. However, given the way in which the parties ran the case in the Courts below, it was common ground in Warman that orders of the same nature should be made against all three defendants. Whilst these remarks in Warman are consistent with split election, they do not have the status of “seriously considered dicta” of a majority of the High Court: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [158].

2. [48]

   In Tang Man Sit v Capacious Investments Limited at 522, Lord Nicholls of Birkenhead, delivering the judgment of the Privy Council, said, concerning cumulative remedies:

3. [49]

   This passage was cited with approval in Baxter v Obacelo Pty Limited (2001) 205 CLR 635; [2001] HCA 66 at [39] (Gleeson CJ and Callinan J), where the clients had settled their negligence claim against the solicitor and the negligence claim against an employee of a solicitor was not barred by the defence of double satisfaction. Gleeson CJ and Callinan J said at [47], concerning the principle of double satisfaction:

4. [50]

   Gummow and Hayne JJ were to similar effect, accepting at [56] as a correct statement of the law in Australia, the following passage by Auld LJ in the English Court of Appeal in Jameson v Central Electricity Generating Board [1998] QB 323 at 338, concerning distinct causes of action in respect of the one loss:

5. [51]

   It follows from Tang Man Sit and Baxter that if BCEG is entitled to cumulative remedies, the rule or principle of double satisfaction is no reason to refuse to enter separate judgments against Mr Xiao and Ms Chen for compensation and against WWM for profits. Insofar as the appellants submit that the separate judgments against Mr Xiao and Ms Chen for compensation and against WWM for profits overcompensate BCEG because of the double satisfaction principle, this is addressed at [72] below.

6. [52]

   Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161 does not assist the appellants’ argument. In that case, the Court distinguished the effect in equity of a release of one of several trustees and the type of circumstance in Blackwood v Borrowes (1843) 4 Dr & War 441; (1843) 65 RR 729 where the beneficiary elected to accept an investment in securities the making of which was the breach of trust complained of. The Court (Gleeson, Leeming and Mitchelmore JJA) observed at [97]:

7. [53]

   Contrary to the appellants’ submission that the language in Cassaniti of adoption, acceptance, and ratification of the trustee’s breach of duty echoes that used in Neilson when discussing the effect of electing for an account of profits, there is no analogy with the present case. BCEG has not adopted, accepted, and ratified the breaches of fiduciary duty by electing for equitable compensation from Mr Xiao and Ms Chen (who made no profit from the default). Nor has BCEG condoned the wrongful conduct of WWM by electing for an account of profits from WWM (who profited from its own misconduct). The gain-based remedy of an account of profits strips the ill-gotten gains from WWM.

8. [54]

   Further, the appellants’ submissions overlooked that Cassaniti accepted, by reference to Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106] and Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [557], that the beneficiary may choose to require the fiduciary to account for the property misapplied and for the accessory to account for profits. The Court said at [102]-[103]:

9. [55]

   Michael Wilson involved separate actions by MWP against the fiduciary Mr Emmott, being arbitration proceedings in London, and against the alleged knowing assistants, Mr Nicholls and Mr Slater in New South Wales proceedings. The joint judgment (Gummow ACJ, Hayne, Crennan and Bell JJ) summarised the procedural history at [20]-[21]:

10. [56]

    In the New South Wales proceedings, Mr Nicholls and Mr Slater were each found liable as knowing assistants in Mr Emmott’s breaches of fiduciary duty and held jointly and severally liable to pay to Michael Wilson various sums as compensation. In the London arbitration, an interim award held that Mr Emmott was liable to MWP in some but not all of the respects in which Einstein J had found Mr Nicholls and Mr Slater liable to MWP for knowingly assisting in Mr Emmott’s breaches of his fiduciary obligations.

11. [57]

    An appeal was allowed by the Court of Appeal on the ground that there had been a reasonable apprehension of bias by the trial judge. The Court stayed a new trial on the ground of abuse of process given the relationship between the claims made in the New South Wales proceedings and those made in the London arbitration. An appeal to the High Court was allowed. It is only necessary to refer to the reasoning by which the High Court rejected the abuse of process argument.

12. [58]

    The joint judgment (Gummow ACJ, Hayne, Crennan and Bell JJ) considered the issue of the liability of a knowing assistant, noting the argument that the liability of the respondents to MWP for knowing assistance was no more than “ancillary or coordinate” with that of the defaulting fiduciary: at [100]. The joint judgment rejected that understanding of the relationship between the liabilities of a defaulting fiduciary and a knowing assistant of the fiduciary's breach; and, rejected as inaccurate the argument that the liability of the respondents was “necessarily confined by the extent of [the defaulting fiduciary’s] liability” or that the respondents’ liability to the principal was no more than accessorial to the principal wrongdoing of the defaulting fiduciary: at [105]. The joint judgment (with which Heydon J agreed on this issue at [119]), continued at [106]:

13. [59]

    The joint judgment acknowledged at [107] that the liability of the respondents as knowing assistants to a breach of fiduciary duty depends upon proof, in proceedings against them, of a relevant breach of fiduciary duty by the defaulting fiduciary, but emphasised at [109]:

14. [60]

    The parties diverged as to the proper reading of [106] in Michael Wilson. The appellants’ submission that the word “may” was used in the sense of “either/or” should be rejected. That is a misreading of [106]. It ignores the statement in the preceding sentence of [106], which was emphasised in [109], that the relief awarded against the defaulting fiduciary and the knowing assistant will not necessarily coincide in either nature or quantum. The word “may”, read together with the word “and” in the italicised passage above in [106], makes plain that a plaintiff is entitled to cumulative remedies being a compensatory remedy against the fiduciary (who made no profit from the default) and a gain-based remedy of an account of profits against the knowing assistant (who profited from his or her own misconduct).

15. [61]

    Michael Wilson establishes that the liability of a knowing assistant for loss suffered by the principal is several only: at [106]. See also Meagher, Gummow and Lehane’s Equity: Doctrine and Remedies (5th Ed, 2015, LexisNexis Butterworths) at [23-555], footnote 419.

16. [62]

    There seems to be no reason in principle for distinguishing the liability of a knowing assistant or knowing recipient. Recipient liability is also fault-based and gives rise to a personal liability to the claimant which is separate and distinct from that of the fiduciary: Grimaldi at [267], [557]; Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81 at [44]; Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118 at [113].

17. [63]

    In the present case, the claims by BCEG against IWC and WWM founded on recipient liability were for an account of profits. As noted in Cassaniti at [103], it was accepted in Grimaldi at [557] that the third party’s liability to an account of profits is generally a several liability, and only in respect of the profits derived by the third party. Grimaldi identified two exceptions to this principle: the “alter ego” exception, and the “acting in concert” exception.

18. [64]

    The “alter ego” exception, as accepted and applied in Grimaldi, was described at [556] as:

19. [65]

    The “acting in concert” exception as identified but not decided in Grimaldi, was described at [558] as:

20. [66]

    It is not necessary to address either exception or their possible implications for a split election in this case. No case was pleaded or run at trial by the appellants that either exception applied here. Nor was it argued by the appellants on appeal that Mr Xiao and Ms Chen were jointly and severally liable with WWM for an account of profits in relation to the West Wyalong project, with the consequence that BCEG must make the same election between remedies against both Mr Xiao and Ms Chen on the one hand and WWM on the other.

21. [67]

    Even if the appellants had sought to rely on the alter-ego exception in the present case, it would have been necessary for them to confront the contrary view that the liability of the fiduciary and the corporate accessory controlled by the fiduciary are distinct, and different remedies can be obtained against each of them. See, for example, Prest v Petrodel Resources Ltd [2013] 2 AC 415; [2013] UKSC 34 where Lord Sumption at [31]-[33] and Lord Neuberger at [80]-[81] preferred the view that companies associated with defaulting fiduciaries were true, separate third parties; see also the discussion by Jackson J in Cornerstone Property & Developments Pty Ltd v Suellen Properties Pty Ltd [2015] Qd R 75; [2014] QSC 65 at [97]-[103].

22. [68]

    A plaintiff cannot obtain both equitable compensation and an account of profits from a single defendant because the liability of the defendant founding the availability of relief is the same. As against a single defendant the plaintiff must choose between compensation or an account of profits, recognising that an account of profits is a discretionary remedy.

23. [69]

    The reasoning in Neilson has no application to a split election against multiple wrongdoers. As against the fiduciary, a plaintiff does not condone the fiduciary’s breach of duty by seeking a gain-based remedy of an account of profits from the knowing recipient (who profited from its own misconduct by the increased value in the property received or income from such property). The liability of the knowing recipient is different in nature and extent to the liability of the fiduciary, including that the knowing recipient does not owe a duty of loyalty to the principal. A gain-based remedy against the knowing recipient is not inconsistent with a compensation remedy against the defaulting fiduciary (who made no profit from the default): Michael Wilson at [106]; Cassaniti at [102].

24. [70]

    This flexibility in the award of different remedies against different defendants reflects the “cardinal principle of equity” referred to in Warman at 559 “that the remedy must be fashioned to fit the nature of the case and the particular facts”. Given the authority of Michael Wilson, and the point of distinction from Neilson in cases involving multiple defendants whose liability is both personal and independent, Bergin J was correct to conclude in King Network that there was no obstacle to the plaintiff making a split election in that case. It is otherwise unnecessary to address the appellants’ criticisms of the reasoning of Bergin J. The position is now settled by Michael Wilson.

25. [71]

    The conclusion that a split election between remedies is available against different defendants is consistent with the views expressed in a number of English authorities: see The Electric Furnace Co v Selas Corporation of America [1987] RPC 23 at [33] (Slade LJ; Croom-Johnson LJ and Sir John Megaw agreeing), which involved an application for leave to serve proceedings out of the jurisdiction; FM Partners Ltd v Marino [2018] EWHC 2905 (Comm) at [90]-[92], not challenged on appeal in FM Partners Ltd v Marino [2020] EWCA Civ 245 at [19]; Davies v Ford [2021] EWHC 2550 (Ch) at [229].

26. [72]

    The appellants say, by reference to the rule or principle of double satisfaction (referred to at [48]f above), that the separate judgments against Mr Xiao and Ms Chen for compensation and against WWM for profits overcompensate BCEG for its loss as a result of the dissipation of monies from the Varsity Lakes facility. Although this issue does not arise on any of the grounds of appeal or the claims for relief in the amended notice of appeal, I will indicate my views why this submission should be rejected.

27. [73]

    One difficulty is that no application was made by the appellants in this Court for relief by way of an injunction to prevent enforcement of a judgment against any of them where to do so would lead to double recovery: Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 at 608 (Gummow J). Such a claim would be for equitable relief. An injunction would not be ordered unless either Mr Xiao and/or Ms Chen or WWM had paid so much of the judgment against them which represented the liability of the other under a separate judgment for the same loss, or else if it was established that Mr Xiao and/or Ms Chen or WWM were ready, willing, and able to pay so much of the judgment against them which represented the liability of the other under a separate judgment for the same loss. There was no such evidence here.

28. [74]

    Another difficulty is that the premise of this submission – that the separate judgements are in respect of the same loss – is incorrect. The cumulative remedies do not result in overcompensation to BCEG, as the appellants suggested. BCEG is entitled to cumulative remedies because there are two distinct wrongs. WWM received property of BCEG the subject of the breach of fiduciary duty, and although the liability of the knowing recipient is dependent upon there being a breach of fiduciary duty, and to that extent the two wrongs are linked, the liability of the knowing recipient is for its own wrong, not the wrong committed by the fiduciary. The remedies are cumulative, rather than in the alternative, as the account of profits against WWM represents the gain by WWM from its own misconduct, not loss to BCEG, and as indicated, the account of profits is discretionary.

29. [75]

    Further, there is no ground of appeal contending that the primary judge erred by not either declining to order an account of profits from WWM or limiting its liability to account in some unspecified manner, because it was unconscientious for BCEG to assert it: Chan v Zacharia at 204-205 (Deane J).

30. [76]

    Next, since Mr Xiao and Ms Chen on the one hand and WWM on the other are not liable to pay a common demand, the present case is distinguishable from Michael Wilson where the joint judgment at [101] acknowledged that Mr Nicholls and Mr Slater (and Mr Emmott) would have an equity to prevent enforcement of an award or judgment against them where to do so would lead to double recovery, insofar as the obligations of Mr Emmott and Mr Nicholls and Mr Slater to pay compensation to MWP were to some extent in respect of the same loss.

31. [77]

    The present case is also distinguishable from the “same” loss cases referred to in Tang Man Sit v Capricious Investments at 522-524, such as United Australia Ltd v Barclays Bank Ltd [1941] AC 1 and Mahesan S/O Thambiah v Malaysian Government Officers’ Co-operative Housing Society Ltd [1979] AC 374.

32. [78]

    United Australia Ltd addressed the question of whether satisfaction of judgment against one defendant constituted satisfaction pro tanto of the claim for damages in the cause of action against another tortfeasor for the same loss: Viscount Simon LC at 20 and 21, Lord Atkin at 31, Lord Porter at 50. As explained by the Privy Council in Mahesan S/O Thambiah v Malaysian Government Officers’ Co-operative Housing Society Ltd [1979] AC 374 at 382, the House of Lords held in United Australia Ltd that:

33. [79]

    United Australia Ltd involved cumulative remedies for the same loss, whereas this case involved cumulative remedies for separate and distinct wrongs being the loss suffered by BCEG and the profit derived by the knowing recipient.

34. [80]

    Nor do the bribery cases, such as Mahesan assist the appellants. There the question was whether the principal could obtain cumulative remedies against the agent bribed for moneys had and received (or damages for tort), and against the briber for damages for tort for any loss sustained by reason of the principal entering into the contract with the briber. Such relief had been granted by the English Court of Appeal in The Mayor, Aldermen, and Burgesses of the Borough of Salford v Lever [1891] 1 QB 168 against the briber in circumstances where the principal had settled its claim against the bribed agent. In Salford v Lever the cause of action against the briber was stated to be fraud and since the agent was necessarily a party to the bribery, it follows that the tort was a joint tort of briber and agent for which either or both could be sued. In Bagnall v Carlton [1877] LR 6 Ch D 371 it was held that the compromise of the principal’s action against the briber did not affect the principal’s action against the bribed agent.

35. [81]

    Applying the reasoning in United Australia Ltd, in the passage extracted at [78] above, the Privy Council concluded in Mahesan at 383:

36. [82]

    In Mahesan, the Privy Council was critical of Salford v Lever that no regard was taken of the fact that the actual loss sustained by the principal was reduced by the amount recovered by the agent, observing at 381:

37. [83]

    By contrast in the present case, the judgment for profits against WWM would not be satisfied pro tanto by any recovery of the judgement against Mr Xiao and Ms Chen for the loss BCEG sustained by reason of the West Wyalong payments, as reduced by the repayments made by IL to BCEG. Conversely, the judgment against Mr Xiao and Ms Chen for the loss sustained by BCEG would not be satisfied pro tanto by any recovery of the judgment for profits against WWM, calculated without regard to either the West Wyalong payments or the repayments made by IL to BCEG. Accordingly, the appellants’ reference to the double satisfaction principle does not assist their argument against a split election.

38. [84]

    Grounds 1, 2 and 5 should be rejected.

39. [85]

    Having found that WWM was a knowing recipient and liable to account for the benefits obtained since completion of the West Wyalong project (PJ [430]), her Honour accepted BCEG’s submission that she should calculate the profit derived by WWM by reference to the capital gain on the sale of the West Wyalong property in February 2019 and the rental income received by WWM: PJ [431].

40. [86]

    As to capital gain, her Honour found at PJ [432]:

41. [87]

    As to rent, her Honour found that rent totalling $1,234,632.72 was received by WWM from July 2012 until the sale of the property: PJ [433].

42. [88]

    Her Honour rejected WWM’s submission that the calculation of the capital gain omitted the costs of construction paid by WWM, and the claim for rent did not include evidence that the rents had been paid nor the costs of leasing, finding that the costs of construction had been paid by BCEG, and the appellants had simply omitted to put on evidence to reduce the profits WWM should be ordered to pay: PJ [434].

43. [89]

    At PJ [435], after observing that BCEG’s calculation of the profits “is certainly simple”, her Honour found that it is a reasonable calculation of the full value of the advantage obtained by WWM as a consequence of Mr Xiao’s breach of fiduciary duties; that no evidence had been adduced by the defendants to reduce either figure; and, “in the absence of such evidence, BCEG is entitled to the amount calculated, together with interest”. As indicated, there is no challenge to her Honour’s finding in the supplementary judgment that there was no evidence that WWM paid for the construction of the project and there should be no set-off of the repayments made to BCEG in respect of the West Wyalong payments because such repayments were made by IL, not WWM: SJ [18].

44. [90]

    The appellants say that her Honour should not have undertaken an account of profits at the trial stage for two-related reasons. First, the trial had been conducted on the basis that if an account of profits was sought then an inquiry would be ordered, and no assessment of the amount had been sought prior to the trial or in BCEG’s opening.

45. [91]

    Second, by reference to the operation of the onus described in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [13] and [14], there was evidence to call and submissions to be made in discharge of the appellants’ onus of proving that the total amount of the profits should not be disgorged. The appellants say that the capital gain assessed by her Honour makes no allowance for holding costs, costs of acquisition, costs of sale, and the rental income assessed by her Honour makes no allowance for costs relating to owning and leasing a property.

Determination

1. [92]

   The asserted denial of procedural fairness directs attention to the pleadings, the evidence, and the way the case was run at trial.

2. [93]

   As to the pleadings in the further amended commercial list statement, the accessorial liability claim pleaded that WWM was liable as a knowing recipient of property of BCEG which Mr Xiao caused to be paid to WWM in breach of his fiduciary duty to BCEG, that WWM held the West Wyalong project on constructive trust for BCEG, and is further liable to account to BCEG for the benefits it has obtained by reason of its exploitation of the West Wyalong project since its completion, including any proceeds of sale of the development.

3. [94]

   In the amended summons, the relief claimed against WWM was equitable compensation, or alternatively a declaration and an order that WWM account for the benefits, profits or traceable proceeds it derived or received in connection with the West Wyalong project as were occasioned by breaches of fiduciary duties admitted by Mr Xiao and Ms Chen in respect of which it was a knowing recipient.

4. [95]

   By their amended commercial list response, the appellants defended the claim on the basis that Mr Xiao did not breach his fiduciary duty to BCEG because of an agreement made with Quing Wang that the funds made available to BCEG by BCEG China, whether through the Varsity Lakes facility or otherwise, were available for the pursuit of other projects, including the West Wyalong project; that BCEG China was aware of this agreement; and that the financial reports, books and records of BCEG noted the interests of BCEG in the West Wyalong project. The appellants did not plead by way of defence any claim for just allowances or expenses or other amounts which should be offset against the claim for an account of profits on the West Wyalong project.

5. [96]

   As to evidence, the appellants did not serve any evidence in response to BCEG’s documentary evidence served in November 2020 of the capital gain made by WWM on the sale of the West Wyalong property and the rent payable to WWM in respect of the 10-year lease of that property.

6. [97]

   As to the conduct of the case, there was no order for a split trial on liability and damages. BCEG’s written opening noted that the appellants had not led any evidence to establish why the full value of the advantage represented by the capital gain of $1,710,000 should not be disgorged and particularised the rental payments received by WWM totalling $1,234,632.72. BCEG also sought an inquiry into any profits or gains derived relevantly by WWM in connection with the breaches of fiduciary duties committed by Mr Xiao and Ms Chen relating to the West Wyalong project beyond the capital gain and rental income. The submissions noted, alternatively, that BCEG would seek equitable compensation, together with interest in respect of the monies that were misapplied in breach of fiduciary duties and identified, by reference to an expert report, transactions amounting to $3,033,053 as having been misapplied for the benefit of WWM at the expense of BCEG. The opening submissions continued (at par 194):

7. [98]

   The appellants’ opening written submissions did not engage with the equitable relief sought by BCEG against WWM.

8. [99]

   In closing written submissions, BCEG made an election to seek an account of the profits against WWM for its receipt of the benefits of BCEG’s funds that were wrongly paid to Trojjan to meet its expenses on the West Wyalong project, claiming the capital gain and rental proceeds referred to above. BCEG reserved its position in the event that additional benefits or profits may be revealed upon an inquiry and the taking of accounts.

9. [100]

   The appellants’ closing written submissions took the position that it would be precipitate to make any award until an inquiry and account of profits had been completed and BCEG was not entitled to seek an order for “partial” compensation “as it does”. That was a reference to BCEG’s written closing submission seeking an account of profit in respect of the capital gain and rental income and an inquiry and taking of accounts to ascertain whether any additional profits beyond those identified had been made by WWM. The appellants also submitted that the claims for capital gain and rental income were superficial and unsustainable because the calculation of the capital gain omitted reference to the cost of construction work for the West Wyalong project, and there was no evidence that the nominated rents in the lease were paid or as to the costs of leasing.

10. [101]

    In oral closing argument, BCEG responded to the appellants’ complaint that it was seeking an order for “partial” compensation by abandoning its claim for an account of profits beyond the capital gain and rental income.

11. [102]

    Given the issues raised on the pleadings, the absence of any order for a split trial, and the failure by the appellants to serve any evidence challenging the evidence served by BCEG in November 2020 relating to the capital gain and rental income that WWM derived from the West Wyalong project, the reasonable inference is that the appellants made a forensic choice not to deal with the quantum aspect of BCEG’s case and were content to rely on their defence to the breach of fiduciary duty claim.

12. [103]

    The appellants were on fair notice of BCEG’s case against WWM for an account of the profits represented by the capital gain on the sale and the rental income in respect of the West Wyalong project. Having made a forensic choice not to contest BCEG’s case by service of evidence, the appellants cannot complain that they were denied procedural fairness because her Honour dealt with the claim for an amount of profits at trial. That BCEG limited its claim to the profits in respect of the capital gain and rental income occasioned no prejudice to the appellants.

13. [104]

    In the circumstances, no occasion arises to consider whether if there was a denial of procedural fairness, the appellants were denied the possibility of a different outcome: Stead v State Government Insurance Commission (1986) 161 CLR 141.

14. [105]

    Ground 3 should be rejected.

15. [106]

    There are admissions by Mr Xiao on the pleadings that he owed duties to BCEG as a director not to promote his personal interests by making or pursuing a gain when in a position of conflict or a real or substantial possibility of conflict between those personal interests and the interests of BCEG (the conflict duty), not to obtain any unauthorised benefits from his as against BCEG (the profit duty), and to exercise his powers and discharge his duties in good faith in the best interests of BCEG (the good faith duty). No similar admissions were made by Ms Chen, who denied that she was a director of BCEG.

16. [107]

    The pleading alleged that if BCEG had known of the conduct constituting breaches of duty by each of Mr Xiao and Ms Chen of their duties at the time in which it was engaged, BCEG would not have entered into the contract in relation to the Wagga project with IWC or the construction contract with Trojjan because it would not have been willing to commit itself to an ongoing commercial relationship with entities associated with Mr Xiao and Ms Chen.

17. [108]

    No dispute arises as to her Honour’s statement of the legal principles in respect of causation, including at PJ [390]-[392], which it is convenient to reproduce:

18. [109]

    Addressing BCEG’s claim for equitable compensation from Mr Xiao and Ms Chen, the primary judge accepted BCEG’s causation argument in relation to losses suffered on the Wagga project for the reasons given at PJ [413]-[414], which have been set out at [30] above.

19. [110]

    Her Honour assessed the equitable compensation in the amount of $8,249,974, together with compound interest. The quantum of this award against Mr Xiao and Ms Chen is the subject of challenge in ground 6.

20. [111]

    An understanding of the causation argument on appeal is assisted by noting one matter which is not in issue. The High Court has stated that fiduciary obligations are proscriptive rather than prescriptive in nature: Breen v Williams (1996) 186 CLR 71 at 93-94 (Dawson and Toohey JJ), 113 (Gaudron and McHugh JJ); [1996] HCA 57; Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [74] (McHugh, Gummow, Hayne and Callinan JJ); Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [84] (French CJ, Gummow, Hayne and Bell JJ); Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [31]-[32] (French CJ and Keane J); at [56] (Hayne and Crennan JJ).

21. [112]

    No occasion arises to consider the implications of these High Court cases for earlier authorities which accepted that fiduciaries have some positive obligations in particular contexts. Two types of cases, among others, should be mentioned.

22. [113]

    First, it has long been accepted that those who issue a prospectus or information proposal to potential investors have an obligation of “utmost candour and honesty”: Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99 at 113 (Lord Chelmsford LC). The High Court applied Kisch in United Dominions Corporation v Brian Pty Ltd (1985) 157 CLR 1 at 12 (Mason, Brennan and Deane JJ), 5-6 (Gibbs CJ) in the context of the fiduciary duties owed by a person who was negotiating a joint venture.

23. [114]

    Second, earlier authorities of the High Court stated that company directors owe a fiduciary duty to exercise their powers bona fide in the interests of the company as a whole: see, for example, Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL) (1968) 121 CLR 483 at 490, 492-494; [1986] HCA 37 (Barwick CJ, McTiernan and Kitto JJ). In BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597 at [598], the Full Court of the Federal Court (Allsop CJ, Moshinsky and Colvin JJ), expressed the view that the more recent High Court cases referred to at [111] above did not suggest that the earlier authorities of the High Court, such as Harlowe’s Nominees, were incorrect.

24. [115]

    The parties diverged as to whether it was implicit in her Honour’s reasons on causation that Mr Xiao and Ms Chen were each required to disclose to the China based directors of BCEG the existence of their breaches of fiduciary duties, and it was their failure to do so that caused the claimed loss in relation to the Wagga project.

25. [116]

    The appellants submitted that her Honour erred in imposing an additional duty, of a positive nature, upon Mr Xiao and Ms Chen to disclose the existence of their breaches of fiduciary duty because: (a) such a duty was not pleaded, (b) the authorities do not support this additional positive duty, and (c) the primary judge’s reasoning erroneously focused either on a different duty in relation to a different transaction, or a positive equitable duty that does not exist and not the duty that was breached. The appellants further submitted that there is no duty imposed on a fiduciary to disclose a prior wrong: Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALRJ 312 at [37] (Gleeson CJ, Gaurdron and Gummow JJ).

26. [117]

    In its written submissions, BCEG did not seek to uphold her Honour’s causation finding on the basis that Mr Xiao and Ms Chen had a positive duty to disclose their wrongdoing. BCEG submitted that it was the continuing deception by Mr Xiao and Ms Chen of BCEG which supplies an adequate or sufficient connection between the breaches of duty in relation to the dissipation of monies from the Varsity Lakes facility to the West Wyalong project and the loss that was suffered upon BCEG committing itself to the Wagga project. Reference was made to statements by Spigelman CJ in O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 279.

27. [118]

    In oral argument, however, BCEG submitted that Mr Xiao and Ms Chen had a duty to obtain the informed consent of the other directors of BCEG to the dissipation of monies from the Varsity Lakes facility to the West Wyalong project. Reference was made to Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23. The submission continued that but for the failure of Mr Xiao and Ms Chen to disclose their conflict of interest in relation to the West Wyalong project, BCEG would not have entered into the later transactions in relation to the Wagga project with IWC in July 2012 and Trojjan in February 2013: see [5] above. Senior counsel for BCEG put this argument as follows:

28. [119]

    The appellants’ response was that O’Halloran is distinguishable on the facts and there was no duty to obtain the informed consent of the other directors of BCEG to the conduct which involved a breach of fiduciary duty by Mr Xiao and Ms Chen. Rather, the existence of informed consent, had it been obtained, would have negated what would otherwise have been a breach by Mr Xiao and Ms Chen.

Causation and breach of fiduciary duty by a director

1. [120]

   The causation enquiry in relation to breaches of fiduciary duty directs attention to the relevant equitable duty: Youyang Pty Limited v Minter Elllison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [44]. In Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43, Gageler J said at [88] of the liability to account for a dishonest and fraudulent breach of fiduciary duty:

2. [121]

   The joint judgment of Kiefel CJ, Keane and Edelman JJ at [9], said of the test of causation for disgorgement of a benefit obtained as a result of knowing participation in a breach of fiduciary duty:

3. [122]

   Applying these principles to the present case, neither the “continuing deception” argument, nor the “duty of disclosure” argument should be accepted as a basis for finding causation between the breaches of duty in relation to the dissipation of monies from the Varsity Lakes facility and the loss in relation to the subsequent Wagga project.

4. [123]

   In O’Halloran, a director breached his fiduciary duty to the company by transferring shares without payment being made and without disclosing that no payment had been received. The question was whether registration of the transfer of the shares caused the loss or whether there were other causes. Spigelman CJ (at 279) rejected a submission advanced for Mr O’Halloran that his subsequent conduct was not relevant to a case based on breach by improper registration, referring to the reasoning of McLachlin J in Canson Enterprises v Boughton Ltd (1991) 85 DLR 4th 129 at 163G:

5. [124]

   The subsequent acts by O’Halloran were his systematic obstruction of all attempts to prevent any dealing with the shares or rectification of the register “which constitutes a continuation by him of the original wrongful act” (at 279). Spigelman CJ held that the reasoning in Canson Enterprises was directly applicable save that the wrongful acts permitted by O’Halloran’s original wrongful act, included further acts by himself, as well by another. It was this subsequent conduct of O’Halloran that “also constitutes a direct link between the original conduct and the loss” (at 279).

6. [125]

   As the appellants correctly submit, there is no analogy between O’Halloran and the present case. In O’Halloran there was a breach of fiduciary duty and a continuation by O’Halloran of the original wrongful act, and loss arising therefrom in relation to one transaction, not like the present case of breach of fiduciary duty in relation to one transaction (the dissipation of monies from the Varsity Lakes facility) which was said to cause loss in relation to separate subsequent and otherwise unimpeached transactions between BCEG and each of IWC and Trojjan in relation to the Wagga project.

7. [126]

   The premise of BCEG’s alternative causation argument is that Mr Xiao and Ms Chen had a duty to obtain the informed consent of the other directors of BCEG to the dissipation of monies from the Varsity Lakes facility for the benefit of the West Wyalong project in which Mr Xiao and Ms Chen had a personal interest through WWM.

8. [127]

   In Breen v Williams, when rejecting the extension of the doctrine of “informed consent” as it had developed in negligence claims by a patient against a medical practitioner to a claim by a patient against a medical practitioner of breach of fiduciary duty, Gummow J said at 125:

9. [128]

   The same approach was taken in Maguire v Makaronis which involved a claim by clients of solicitors who had given a mortgage in favour of the solicitors to secure bridging finance in circumstances where the solicitors did not draw to the clients’ attention the fact the solicitors were to be the mortgagees or tell them they should obtain independent legal advice. The clients succeeded in setting aside the mortgage for breach by the solicitors of their fiduciary duty in entering the mortgage in the absence of informed consent of the clients to the solicitors’ interest in the transaction.

10. [129]

    The joint judgment of Brennan CJ, Gaudron, McHugh and Gummow JJ observed (at 466) that if the solicitors were to escape an adverse finding of breach of fiduciary duty, with consequent remedies, it was for them to show, by way of defence, informed consent by the clients to the solicitors acting, in relation to the mortgage, with a divided loyalty. The joint judgment continued (at 467):

11. [130]

    That disclosure is a defence, rather than a positive duty has been endorsed in later cases, including decisions of intermediate appellate courts. It is sufficient to refer to the following decisions.

12. [131]

    In Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 276 ALR 646, Besanko J (Finkelstein and Jacobson JJ agreeing) observed that descriptions of a “duty” of disclosure are best explained as no more than a shorthand way of referring to the defence of fully informed consent by the principal: at [105]. Addressing the interplay between causation and disclosure, Besanko J noted that there were two views on this topic, one which accepts that fiduciary duties are proscriptive and not prescriptive; the breach of fiduciary duty is the conduct of the fiduciary in placing him or herself in a position of conflict, and disclosure is simply a means of avoiding a breach, not a duty. On this view, his Honour said at [105]:

13. [132]

    The other view is that the duty is not to act in a position of conflict without informed consent of the principal: at [107]. Reference was made to Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 at 240 (Dixon CJ, Williams and Taylor JJ); [1953] HCA 9; BLB Corporation of Australia Establishment v Jacobsen (1974) 48 ALJR 372 at 378; Walden Properties Ltd v Beaver Properties Ltd (1973) 2 NSWLR 815 at 835 (Hope JA).

14. [133]

    In support of the view that disclosure was a defence, rather than a positive duty, Besanko J referred at [106] to the decision of Lindgren J in National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd [1998] FCA 564, where having surveyed the authorities that were relied upon to support a positive duty of disclosure, Lindgren J concluded that these cases, on their proper reading, were “consistent with the view that disclosure assumes significance as a potential defence”: at page 26.

15. [134]

    Besanko J accepted the orthodox approach that disclosure is part of a defence: at [108]. Importantly for the issue of causation, his Honour concluded at [109]:

16. [135]

    The approach in Blackmagic has been followed in Yarrawonga Earthmoving & Garden Supplies Pty Ltd v Clem Court Pty Ltd [2014] VSC 439 at [41] (Warren CJ); Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2012] WASC 425 at [69] (Le Miere J); Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154 at [92] (Tracey J); Wright v Lemon (as executor of estate of Wright) [2021] WASC 159 at [314]-[316] (Le Miere J).

17. [136]

    Blackmagic has also been followed in decisions of this Court: Gunasegaram v Blue Visions Management Pty Ltd; Blue Visions Management Pty Ltd v Chidiac [2018] NSWCA 179; [2018] 129 ACSR 265 at [153]; Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 at [122].

18. [137]

    For completeness, I will briefly address the three cases referred to by Besanko J at [107]: see [132] above. Tracy v Mandalay was a promotors case. The joint judgment of Dixon CJ, Williams and Taylor JJ stated at 240:

19. [138]

    This statement is consistent with the well-established principle in Kisch which was accepted in United Dominions Corporation v Brian Pty Ltd, referred to at [113] above. It has no application to the present case.

20. [139]

    BLB Corporation takes the matter no further. As Lindgren J noted in Citibank, the reasoning in BLB Corporation demonstrates the way in which disclosure, if made, operates as a defence to a claim of breach of fiduciary duty.

21. [140]

    The facts in Walden Properties are conveniently summarised by Lindgren J in Citibank at page 28 as follows:

22. [141]

    Hope JA considered that B owed W “a fiduciary obligation, albeit of a limited character” arising from a relationship of agency: Walden Properties at 833C, 834E. The duties on B were described by Hope JA as being limited to (at 833D):

23. [142]

    Later, Hope JA characterised B’s fiduciary obligation (at 835G) in the following terms:

24. [143]

    In support of this proposition, Hope JA cited Jacobus Marler Estates Ltd v Marler (1913) 114 LT 640 to the effect that fiduciary law dictates that, without the fully informed consent of the principal, an agent must not assume a position where his or her own interests conflict with the duty to the principal, or retain a profit acquired in transactions within the scope of the agency arrangement. This formulation of the relevance of disclosure, and Hope JA’s treatment of the issue, ultimately go no further than the orthodox position that disclosure is only a means of avoiding a breach.

25. [144]

    There is no reason to doubt Maguire v Makaronis or the subsequent intermediate appellate decisions, including of this Court, that disclosure by a fiduciary of a conflict of interest (or duty) is not a positive obligation, but rather a defence to what would otherwise be a breach of duty. Her Honour’s causation finding cannot be sustained in the manner contended for by BCEG.

26. [145]

    The finding which should be made is that if the breach of duty by Mr Xiao and Ms Chen in relation to the dissipation of monies from the Varsity Lakes facility had not occurred, BCEG would still have entered into the Wagga project which was ultimately loss making. Accordingly, ground 4 should be upheld.

27. [146]

    The findings of the primary judge in relation to quantum at PJ [414]-[415] are set out at [30] above.

28. [147]

    The appellants submit that BCEG failed to prove the quantum of its loss in relation to equitable compensation awarded against Mr Xiao and Ms Chen in respect of the Wagga project. The appellants say that her Honour erred in relying upon the figure of $8,249,974 as constituting sufficient evidence of the quantum of the loss, or alternatively, by not reducing that amount by $3,241,526. The appellants point to the observation by the primary judge at PJ [407], which is set out at [23] above, that the position in relation to BCEG’s China loans to BCEG as recorded in BCEG’s 2014 financial statements “was now clear as mud”.

29. [148]

    In their reply submissions, the appellants raised a new argument by reference to the 31 December 2016 financial report of BCEG, that the correct figure is $6,954,780.

30. [149]

    Given the conclusion in relation to ground 4, the quantum issue does not arise. Nevertheless, I will briefly indicate my views.

31. [150]

    The appellants’ submission that BCEG led no evidence of the quantum of its loss for the equitable compensation claim should be rejected. At trial, BCEG relied upon the 2014 financial statements of BCEG signed by its directors, including Mr Xiao, which recorded the apportionment of the previous BCEG China loans across five projects, including the Varsity Lakes, Wagga and West Wyalong projects. The non-current liability shown as “working capital The Mill resid” of $8,249,974 as at June 2014 represented the amount of BCEG’s borrowings from BCEG China which had been advanced to the builders in connection with the Wagga project.

32. [151]

    The 2014 financial statements of BCEG were business records of the company within s 69 of the Evidence Act 2005 (NSW). Moreover, by s 1305(1) of the Corporations Act, the financial statements of BCEG were prima facie evidence of any matter stated or recorded in the accounts which was a book kept by BCEG under the requirements of the Corporations Act.

33. [152]

    Next, the appellants complain that her Honour’s language in PJ [414] referring to the “best evidence” of the sums advanced in connection with the Wagga project is that contained in the 2014 financial statements of BCEG which record the value of the “working capital of The Mill” as $8,249,974, was not a finding on the balance of probabilities of what BCEG had proved, but involved a search to aid BCEG appropriate to “a case where a plaintiff cannot adduce precise evidence of what has been lost”. That submission should be rejected.

34. [153]

    On a fair reading of her Honour’s reasons, the reference to “best evidence” means what it says. BCEG had drawn down money from BCEG China which it had paid to Trojjan as the builder of the Wagga project. In BCEG’s 2014 financial report, this amount was recorded as $8,249,974.

35. [154]

    The appellants further submit that insofar as the profit and loss statement in BCEG’s 2014 financial report recorded income received from the Wagga project of $3,241,526, this casts doubt over the figure in the balance sheet of $8,249,947. That is because, the submission continued, the liability of some $8 million should be set off against income of some $3 million. There are several difficulties with this submission.

36. [155]

    First, it conflates an item recorded on the revenue account being an amount of income received over a financial period with an item recorded in the balance sheet which records the amount of the liability of BCEG to BCEG China as at the end of the financial period.

37. [156]

    Second, her Honour’s rejection of the appellants’ setoff argument was consistent with the principles of double-entry accounting. Applying those principles, the proper inference is that the corresponding debit entry to the credit entry in respect of income received of $3.241 million was either an increase in assets or a decrease in liabilities which would already have been reflected in the balance sheet position at the end of the 2014 financial period.

38. [157]

    Third, there was no error by her Honour in not reducing the figure of $8,249,974 by $3,241,526 since the appellants did not lead any evidence that the figure of some $8.25 million in the 2014 balance sheet was inaccurate, let alone by reason of the amount of income received from the Wagga project during the financial year, as recorded in the 2014 profit and loss statement.

39. [158]

    Turning to the appellants’ new argument raised in their reply submissions relying on BCEG’s December 2016 financial report, the appellants say that there is no consistent accounting treatment over five financial reports, and it was not open to her Honour to select the figure in the June 2014 financial report instead of the December 2016 financial report, which records an amount of $6,954,780 as the non-current liability in respect of the Wagga project loan. Again, this submission should be rejected for several reasons.

40. [159]

    First, the figure of $8,249,974 appears consistently as a non-current liability in the 30 June 2014, 31 December 2014, 30 June 2015, and 31 December 2015 financial reports of BCEG. Second, the December 2016 financial report which contains the lesser figure of $6,954,780 was not signed by Mr Xiao. Third, Mr Xiao gave no evidence explaining the reduction in figures between the December 2015 financial report and the unsigned December 2016 financial report, or why the latter figure should be taken to be correct.

41. [160]

    If it were unnecessary to determine the quantum issue, in my view, ground 6 should be rejected.

Conclusion and Orders

1. [161]

   The appeal has succeeded in part on the causation issue (ground 4). In my view, ground 6 does not arise and the other grounds have not been made out. Given the mixed outcome on appeal, the parties should be afforded an opportunity to make submissions as to the appropriate costs orders in this Court and below. The issue of costs should be decided on the papers.

2. [162]

   I propose the following orders:

   1. (1)

      Appeal allowed on ground 4 and is otherwise dismissed.

   2. (2)

      Set aside orders 2, 7, 8, 9 and 15 made by the primary judge on 22 July 2022 and orders 1, 2 and 4 made by the primary judge on 17 August 2022.

   3. (3)

      Direct the parties to bring in short minutes of order in respect of the amount of monetary judgment in order 1 made on 22 July 2022, together with compound interest (such judgment to take effect on 17 August 2022).

   4. (4)

      In the absence of agreement as to costs in this Court and below, direct the appellants to file and serve short written submissions on the question of costs in this Court and below within 14 days, the respondent to file and serve its response within a further 14 days and the appellants to file and serve any reply within a further 7 days. Any such submissions are not to exceed 3 pages.

   5. (5)

      Note that the question of costs will be determined on the papers.

3. [163]

   MITCHELMORE JA: I agree with Gleeson JA.

4. [164]

   GRIFFITHS AJA: I agree with Gleeson JA.