Luo v Windy Hills Australian Game Meats Pty Ltd (No 2)

1. [1]

   Mr Aimin Luo is ordinarily resident in the People’s Republic of China.

2. [2]

   Mr Luo claims that between September 2016 and February 2017 he entered into a series of contracts with the first defendant, Windy Hills Australian Game Meats Pty Ltd, to supply nine containers of frozen beef omasum (a kind of tripe) to be shipped from Pakistan to Mr Luo’s agent in Vietnam.

3. [3]

   Mr Luo paid Windy Hills a total of US$1,455,581 for the supply of the omasum and contends that no stock has been delivered.

4. [4]

   Mr Luo contends that Windy Hills failed to provide him with documents necessary for him to take delivery of the three containers that comprised two of the three consignments and that the six containers comprising the third consignment contained packing salt and only trace amounts of omasum.

5. [5]

   Windy Hills agrees that Mr Luo paid it US$1,455,581 and contends that all the omasum was delivered. In any event, it contends that its obligations were only to “facilitate” the supply of the omasum.

6. [6]

   Mr Luo contends that his entry into the sale contract with Windy Hills was procured by representations made by the second defendant, Mr Yingcai Zhang, that led Mr Luo to believe that Windy Hills was able to supply a large amount of omasum to him in Vietnam from particular suppliers in Pakistan with whom Mr Zhang said he had a good working relationship.

7. [7]

   Mr Luo seeks damages from Windy Hills in contract. Mr Luo also contends that the majority of funds he paid Windy Hills is the subject of a Quistclose type trust.

8. [8]

   Mr Luo contends that, by making the alleged representations, Mr Zhang engaged in misleading or deceptive conduct. Mr Luo also alleges that if Mr Zhang, or the third defendant Mr Ivan Coulter (the sole director and shareholder of Windy Hills), received any of the funds that those funds were held on trust for Mr Luo and a constructive trust should be imposed for the amount received.

9. [9]

   The second plaintiff, AusChina Procurement Centre Pty Ltd, is a company controlled by Mr Luo. It had no dealings with any of the defendants. It claims damages, said to arise from the defendants’ misleading or deceptive conduct, in relation to its intention to on sell the omasum.

10. [10]

    Windy Hills, Mr Zhang and Mr Coulter seek security for their costs of the proceedings.

11. [11]

    It is common ground that Mr Luo ordinarily resides outside Australia, and that there is reason to believe that AusChina will be unable to pay costs if ordered to do so.

12. [12]

    Accordingly, there is no dispute that the Court’s jurisdiction to make an order for security for costs is enlivened.

13. [13]

    The plaintiffs (and for simplicity I will refer simply to Mr Luo) contend that, nonetheless, security should be declined for seven reasons:

    1. (1)

       Mr Luo has very significant prospects of success in the proceedings;

    2. (2)

       that the defendants are “prima facie in contempt” by reason of their breach of an undertaking given to the Court on 21 March 2018;

    3. (3)

       an order for security will stultify the proceedings;

    4. (4)

       any inability of Mr Luo to pay costs is caused by the conduct of which he complains in the proceedings;

    5. (5)

       the proceedings are defensive in nature;

    6. (6)

       the defendants entered their commercial relationship with Mr Luo knowing he was a Chinese citizen and knowing that in the event that a dispute would arise, Mr Luo would have to commence proceedings here; and

    7. (7)

       it is not in the public interest to “shut the plaintiffs out of running these proceedings” where the facts involve international trade between persons and entities in Australia, China, Vietnam and Pakistan.

14. [14]

    I have found this matter to be finely balanced.

15. [15]

    I am not able to conclude that Mr Luo’s inability to provide security is caused by the conduct impugned in the proceedings. I do not see these proceedings as being defensive in any way that is relevant. Nor do I consider that the fact the defendants knew they were dealing with a Chinese resident and that the proceedings arise out of international trade to be relevant to the question of whether security should be provided.

16. [16]

    However, my conclusion is that I should decline to order security. That is because of:

    1. (1)

       the apparent strength of Mr Luo’s case;

    2. (2)

       the inconsistency between Mr Coulter’s current assertion that the omasum was delivered and his strident assertions to the contrary in communications in the past with Windy Hills’ purported Pakistani supplier;

    3. (3)

       the defendants’ failure to comply adequately with the undertaking given to the Court of 21 March 2018; and

    4. (4)

       my conclusion that in all probability, to order security will bring these seemingly meritorious proceedings to an end.

The merits of the case

1. [17]

   Mr Luo contends that he has very significant prospects of success, and that the defences raised are “weak and at times vexatious”. Mr Luo contends that there is a substantial amount of evidence to show that Windy Hills did not supply the stock ordered and did not have a bona fide supplier of the stock. Mr Luo also contends there is a strong prima facie case that “the defendants paid Mr Luo’s funds out in breach of trust”.

2. [18]

   Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1A)(a) provides that a matter to which the Court may have regard in considering a security for costs application is “the prospects of success or merits of the proceedings”.

3. [19]

   The Court of Appeal has recently emphasised that when looking at the merits of the proceedings it may be necessary to go further than concluding that the proceedings are not frivolous and that there are real issues to be tried.

4. [20]

   Thus, in Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 Bathurst CJ, Leeming JA, Barrett AJA said, at [98]:

5. [21]

   For that reason I will now turn to consider the prima facie strength of Mr Luo’s claims with respect to the failure to supply, misleading or deceptive conduct, and breach of trust.

6. [22]

   Mr Luo claims that he paid for nine containers of stock and received nothing. His case is that:

7. [23]

   In their Commercial List Response, Windy Hills and Mr Coulter assert that “all stock ordered by Mr Luo was supplied by the suppliers and delivered to [Mr Luo’s] nominated consignee in Vietnam in accordance with the agreements”.

8. [24]

   However, between February and August 2017, Mr Coulter sent email correspondence to the putative Pakistani supplier of the goods, and also to such entities as the Australian High Commission in Pakistan and the Australian Trade and Investment Commission alleging that the goods had not been supplied and that he had been defrauded by his Pakistani suppliers.

9. [25]

   For example, on 15 March 2017 Mr Coulter wrote to the High Commission of Pakistan in Australia stating:

10. [26]

    Thus Mr Coulter was asserting that some of the containers contained only sea salt and that the purported Pakistani suppliers of the omasum were “a large organised fraud group” and were “organised scammers/fraudsters”.

11. [27]

    Mr Coulter wrote in similar terms to the Australian Trade and Investment Commission on 16 March 2017.

12. [28]

    On 8 August 2017 Mr Coulter wrote directly to one of the Pakistani suppliers as follows:

13. [29]

    On 16 March 2017 Mr Zhang sent an email to the Pakistani Ambassador in China headed “Fraud report”. The email is written in Chinese characters. Mr Rayment, who appears for Mr Luo, said in his written submissions that the email alleges fraud (as its English language heading suggests).

14. [30]

    There is also documentary evidence suggestive of fraud.

15. [31]

    For example, on this application, Mr Luo adduced evidence from Mr Kashif Sultan, a solicitor in Pakistan, who deposes that his enquiries at the Overseas Investors Chamber of Commerce and Industry in Karachi indicated that two certificates of origin provided by Windy Hills’ Pakistani supplier were falsified. Mr Sultan’s evidence of enquiries made at the Ministry of National Food Security and Research, Animal Quarantine Department in Karachi suggests that two certificates of health provided by Windy Hills’ supplier were also falsified.

16. [32]

    I do not receive this evidence as evidence of the truth of what Mr Sultan was told. However, Mr Sultan’s evidence suggests that Mr Luo has good prospects of proving the falsity of these documents at a final hearing.

17. [33]

    I have referred to the fact that six containers were found to be full of salt. There is not yet direct evidence from the individuals who inspected those containers. However, Mr Coulter has made that allegation himself in correspondence. Photographs said to have been taken by inspectors are in evidence and appear to show that the containers were full of salt.

18. [34]

    Mr Luo alleges that each of Windy Hills, Mr Zhang and Mr Coulter made representations concerning Windy Hills’ ability to supply stock from Pakistan to Vietnam.

19. [35]

    The representations on which Mr Luo relies were made by Mr Zhang using a mobile phone application known as “WeChat”. Mr Luo’s evidence is that he had no direct dealings with Mr Coulter and that all his dealings with Mr Coulter and Windy Hills were conducted through Mr Zhang. All the representations relied upon are preserved either in recorded voice messages or text messages on the WeChat application. It thus appears there will be little dispute about what was represented. Indeed Mr Zhang has admitted in his Commercial List Response making many of the representations.

20. [36]

    Many of the representations are to the effect that Windy Hills was able to and would supply the nine containers of omasum to Mr Luo.

21. [37]

    This suggests that Mr Luo has good prospects of establishing the representations for which he contends.

22. [38]

    There is a further matter.

23. [39]

    On 23 January 2017 Mr Zhang sent Mr Luo a document called “International Money Transfer Issuance Advice” which purported to show a transfer of US$95,000 from Windy Hills’ bank account to the purported supplier of the eight containers of omasum, Neamah Enterprises. BankWest has produced on subpoena a copy of the original of this document which shows that the US$95,000 was not sent to Neamah Enterprises but to “TexMart” in the United Arab Emirates. Mr Luo’s evidence is that, at the time Mr Zhang sent him this document, Mr Zhang represented to Mr Luo that he and Mr Coulter had paid personal funds to their supplier in order to help Mr Luo. The documents produced by BankWest contradict this.

24. [40]

    Mr Luo contends for two Quistclose trusts. The first relates to a payment of US$100,000 Mr Luo paid into Windy Hills’ bank account on 18 November 2016. The second, which is said to supersede the first, relates to payments of US$706,331 and AU$600,000 that Mr Luo paid into Windy Hills’ bank account between 6 and 24 January 2017.

25. [41]

    Those payments were made following WeChat messages from Mr Zhang saying “we keep the money for you”, “all the risk is with us” and “we will not touch your money”.

26. [42]

    Mr Luo’s case is that despite those assurances Windy Hills’ bank account shows that it paid out the funds shortly after receiving them. Windy Hills’ bank records appear to show this is true.

27. [43]

    The time has not yet come for Windy Hills, Mr Zhang and Mr Coulter to adduce evidence.

28. [44]

    I am considering the merits of Mr Luo’s claim without knowing what evidence may be available to Windy Hills, Mr Zhang and Mr Coulter in response.

29. [45]

    However, as things stand, my conclusion is that Mr Luo has prima facie a very strong case against each of the defendants and that this is a factor that militates against providing security.

The 21 March 2018 undertakings - prima facie contempt

1. [46]

   Mr Rayment submits that “the defendants are prima facie in contempt” and that the application for security “should not be entertained unless and until that contempt is purged” and, alternatively, that “the contempt should be a factor that informs the exercise of discretion on security”.

2. [47]

   Mr Rayment drew my attention to the observations of the Court of Appeal in Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd [2015] NSWCA 241 (Emmett and Leeming JJA and Sackville AJA) at [17]:

3. [48]

   These principles may apply in a case of prima facie contempt. Thus in Young v Jackman, Young J (as his Honour then was) said at 101:

4. [49]

   At the outset of these proceedings, Mr Luo sought a freezing order against the defendants.

5. [50]

   That application was settled. As part of the settlement, the defendants undertook to the Court to swear or affirm an affidavit setting out details of their assets and “the present whereabouts of and what happened to the funds transferred to [Windy Hills] referred to in prayer 7 of the Amended Summons”.

6. [51]

   Prayer 7 of the Amended Summons lists 14 payments, approximating $1.4 million, made by Mr Luo into Windy Hills’ bank account maintained by Windy Hills with BankWest, between 21 November 2016 and 24 January 2017.

7. [52]

   Mr Zhang affirmed an affidavit about his assets. He said nothing in that affidavit about the whereabouts of the funds and gave no explanation for that omission.

8. [53]

   Mr Coulter made an affidavit on 29 March 2018 in which he gave what he described as a “detailed recount [sic], to the best of [my] recollection, of where the funds were transferred to from Windy Hills’ bank accounts and what the funds were used on behalf of Windy Hills by me”. In his affidavit Mr Coulter described some 21 transfers of funds from Windy Hills’ account with BankWest.

9. [54]

   In relation to two of those transfers he said:

10. [55]

    However, contrary to the first of those paragraphs, there is no debit from the Windy Hills’ bank account of US$90,000 on 15 October 2016.

11. [56]

    After Mr Luo’s solicitors pointed this out, Mr Coulter swore a further affidavit in which he said:

12. [57]

    As to the 24 October 2016 transfer of US$20,000, those funds were not transferred to the account of Mega Gold Foods (one of the purported Pakistani suppliers of the omasum) but to another account of Windy Hills maintained with Westpac Banking Corporation.

13. [58]

    In his second affidavit, Mr Coulter gave this explanation:

14. [59]

    Thus Mr Coulter’s explanation concerning the US$20,000 withdrawal on 24 October 2016 was that it had, in substance, been used to fund a payment of $23,311.23 made from Windy Hills’ Westpac account to Neamah Enterprises (another of the purported Pakistani suppliers) on 27 January 2017.

15. [60]

    In fact Windy Hills’ operations on its Westpac account had exhausted the US$20,000 transfer (which appears in the account as the Australian dollar equivalent $26,226.07) long before 27 January 2018.

16. [61]

    More importantly, the 27 January 2017 debit from Windy Hills’ Westpac account (which was for $22,311.23 rather than $23,311.23) is not described as a payment to Neamah Enterprises but as “Withdrawal Cash”.

17. [62]

    Mr Coulter’s revised “explanation” is thus not complete and, on the face of it, not correct.

18. [63]

    Further, although Mr Coulter’s first affidavit referred to some 21 withdrawals from Windy Hills’ BankWest account, it made no reference to a withdrawal of US$50,000 on 11 January 2017. That debit had a transaction description “Withdrawal IMT WINDY HILLS AUSTRLIAN GAME MEATS P/L WBC TANUNDS SA5352”. There was a corresponding credit entry in Windy Hills’ Westpac account of $67,796.61.

19. [64]

    In relation to that matter Mr Coulter gave this explanation in his second affidavit:

20. [65]

    But that explanation cannot be right. An examination of Windy Hills’ BankWest bank statements show that all deposits (bar one) into that bank account were from Mr Luo and the US$50,000 transferred from Windy Hills’ BankWest account to its Westpac account on 11 January 2017 was, on any reading of the bank statement, from funds deposited by Mr Luo.

21. [66]

    The central issue in this case, as Mr Coulter must know, is whether the funds advanced by Mr Luo to Windy Hills were used by Windy Hills to purchase omasum from its Pakistani suppliers. Mr Coulter must know that it is critical that he give an accurate account of “the present whereabouts of and what happened to the funds” that Mr Luo transferred to Windy Hills. He undertook to do so. And yet he has given an explanation which, to put the matter neutrally, cannot be correct.

22. [67]

    It is not appropriate for me to express any view as to whether Mr Coulter is thereby “prima facie in contempt”, as no application is on foot to have Mr Coulter dealt with for contempt.

23. [68]

    But Mr Coulter’s apparent failure to give precise and accurate evidence about this aspect of the matter is a factor I consider militates strongly against exercising my discretion in his favour concerning his application for security for costs.

24. [69]

    As Mr Zhang has made no attempt at all to comply with his undertaking to explain where the money has gone (for example, and at least, by stating that he does not know) I do not see him being in any stronger position.

Mr Luo’s financial position

1. [70]

   The only evidence Mr Luo has given as to his financial position before he contracted to purchase the omasum from Windy Hills, is that he owned an apartment in Guandong (which is the family home of Mr Luo, his wife and their three children) and a car. Mr Luo estimates the apartment is worth the equivalent of approximately AU$700,000 and that the car, which is now surrendered to a creditor, was then worth something in the order of the equivalent of AU$200,000.

2. [71]

   Mr Luo has not given evidence of what, if any, employment he was engaged in prior to the events with which these proceedings are concerned. In his affidavit of 6 June 2018 he stated “I have not earned any income since November 2016” suggesting that he was earning income from a source before that time.

3. [72]

   Mr Luo’s evidence is that he borrowed the majority, if not all of the funds he paid Windy Hills for the omasum. Mr Luo borrowed the equivalent of AU$400,000 from China Merchants Bank. That sum is secured over the Guandong apartment. Mr Luo also borrowed the balance from a number of business contacts and a friend. Mr Luo is paying interest to those individuals at a rate equivalent to approximately 36 per cent per annum.

4. [73]

   Mr Luo said that since January 2017 he has “been receiving financial support for the purposes of day to day living from my immediate and extended family members, including my wife, my younger brother, my cousins and nephew. They have all loaned me money to pay for my living expenses, mortgage repayments and for my air tickets to Australia, accommodation and food in Sydney”.

5. [74]

   In his affidavit of 6 June 2018 Mr Luo has given details of the money lent to him by his wife, his sister-in-law and his younger brother. Mr Luo states that all the loan proceeds were used to pay interest on the loans incurred for the purpose of purchasing the omasum, and for living expenses.

6. [75]

   In those circumstances Mr Luo has given evidence, which has not been challenged in cross-examination on this application (although, I am told, at one point Mr Luo was required by the legal representatives of Windy Hills and Mr Coulter to be present for cross-examination) that:

7. [76]

   Mr Luo’s evidence is that AusChina is dependent upon him for financial support. In his affidavit he stated:

8. [77]

   The financial position of the plaintiffs, and Mr Luo in particular, is relevant to two related questions.

9. [78]

   The first is whether an order that the plaintiffs provide security would stifle or stultify these proceedings: see UCPR r 42.21(1A)(f). The second is whether the inability of the plaintiffs to provide security is a consequence of the conduct of which they complained in the proceedings: see UCPR r 42.21(1A)(d).

10. [79]

    It is hard to come to any conclusion as to the second of these factors. That is because there is no evidence before me as to Mr Luo’s financial position before he entered into the arrangements of which he complains in these proceedings.

11. [80]

    However, it does appear that Mr Luo is now in a parlous financial position and will not be able to provide security unless his family and friends provide further financial assistance. In that regard Mr Luo’s evidence is that his wife has told him she is not able to borrow any further funds.

12. [81]

    I do not see Mr Luo’s relatives as “standing behind” or “standing to gain” from the litigation as might be said of a litigation funder. No doubt Mr Luo’s family members will benefit from a successful outcome of these proceedings, in the sense that Mr Luo will have the means to repay the monies they have lent him.

13. [82]

    However, I do not see those individuals as having a vested commercial interest in the proceedings of the same kind as a professional litigation funder might have.

14. [83]

    The defendants have drawn attention to three deposits, totalling $145,000, paid into AusChina’s bank account. Each deposit is described in AusChina’s bank statement as “Transfer from WEN CHEN NetBank alex chen”. The deposits are dated 10 January, 6 February and 16 March 2018. Two of the deposits (totalling $45,000) were used immediately to make a payment to the plaintiffs’ solicitor.

15. [84]

    At the outset of the hearing before me (which took the best part of a day) Mr Cleary, who appeared with Ms Laing for Mr Zhang, made clear that his submission would be that Mr Chen appeared to be an undisclosed funder of this litigation.

16. [85]

    Mr Brigden, who appears for Windy Hills and Mr Coulter, made the same point in her submissions. It was only then, late in the afternoon of the hearing, that Mr Rayment sought leave to “put on a short affidavit regarding this Alex Chen matter”. I refused to grant that leave upon the basis that the security for costs application had by then been on foot for some two months, and its hearing was almost concluded.

17. [86]

    Shortly before the conclusion of the hearing (at around 4.15 pm) Mr Rayment made what I regard as being an inappropriate attempt to tell me what evidence Mr Luo could have adduced concerning Mr Chen’s involvement. I do not propose to take into account what Mr Rayment said about that matter.

18. [87]

    Mr Rayment did point to the fact that the amount of Mr Chen’s deposits ($145,000) is approximately equal to RMB700,000 which is the total of two amounts that Mr Luo said his wife lent him in January 2018. But in his affidavit Mr Luo said that those funds had been used by him “to pay the loan interest to my lenders”. Mr Luo did not suggest that the Australian dollar equivalent of those amounts was used to fund payments to AusChina (by Mr Chen or anyone else).

19. [88]

    The result is that, on the evidence, the deposits from Mr Chen are unexplained.

20. [89]

    However, on reflection, I do not think I can conclude that Mr Chen is a undisclosed funder of this litigation. Although Mr Luo did not mention Mr Chen in his account of his financial position, he disclosed the bank statements that reveal the deposits from Mr Chen. He also instructed his solicitor to draw the Court’s attention to a number of corrections he wished to make to his initial statement of his financial position which suggests he was endeavouring to disclosure the truth about that question. And he was not cross-examined about the matter, although initially required to be available for cross-examination (see [75] above).

21. [90]

    Overall, I do not see the deposits from Mr Chen as a reason to doubt Mr Luo’s evidence that, in effect, an order for provision of security will bring these proceedings to an end.

22. [91]

    I find that a strong factor militating against ordering security.

Conclusion

1. [92]

   For these reasons, my conclusion is that the applications for security should be dismissed with costs.

2. [93]

   In deference to the careful arguments advanced by counsel in relation to remaining discretionary matters raised by Mr Rayment, I will deal with them, albeit briefly.

Are the proceedings defensive in nature?

1. [94]

   UCPR r 42.21(1A)(e) provides that a matter relevant to whether security should be ordered is whether the plaintiff is effectively in the position of a defendant.

2. [95]

   Mr Rayment submitted that Mr Luo is, in effect, in that position because Mr Luo paid funds to Windy Hills upon the basis that I have described, that Windy Hills paid away Mr Luo’s funds very shortly after they were received and despite the fact that Mr Luo had not received the stock in question that Mr Luo has been forced to commence these proceedings to compel the defendants to account for their conduct.

3. [96]

   The proceedings can perhaps be described as “defensive” in the sense that they are Mr Luo’s response to the conduct of which he complains.

4. [97]

   But almost all legal proceedings can be so characterised.

5. [98]

   In my opinion, this rule contemplates a situation where a party commences proceedings to ward off proceedings that that party reasonably anticipates will be brought against him, her or it by the parties named as defendant. I do not see these proceedings having those characteristics. Mr Luo cannot have thought that any of the defendants would commence proceedings against him.

6. [99]

   I do not see this as a factor relevant to the exercise of my discretion.

The defendants’ knowledge of Mr Luo’s residence outside Australia

1. [100]

   Mr Rayment pointed out that it has been held that it may be unfair to order security for costs where the defendants have voluntarily assumed the risk of the corporate plaintiff’s financial position: Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103 at [68].

2. [101]

   Mr Rayment submitted there is no reason why a voluntary assumption of risk associated with dealing with a person ordinarily resident outside Australia should not have the same consequences.

3. [102]

   But UCPR r 42.21(1)(a) specifies a plaintiff’s ordinary residence out of Australia as being one of the matters that, in terms, enlivens the Court’s discretion to order security.

4. [103]

   In those circumstances, I do not see how the fact that a defendant voluntarily enters into commercial and business relationships with such a person is a matter that could weigh against ordering security.

The public interest

1. [104]

   Mr Rayment pointed to the fact that this case involves international trade between persons and entities in Australia, China, Vietnam and Pakistan and submitted that, accordingly, it is in the public interest that these proceedings be permitted to continue.

2. [105]

   I do not see the public interest being affected by resolution of these proceedings. This is a dispute between people of commerce who happen to live in different countries and entered a business relationship involving delivery of goods internationally.

3. [106]

   I do not see this factor as having any relevance to the question of security for costs.