Sunnya Pty Ltd v He

1. [1]

   BELL CJ: I agree with Basten AJA.

2. [2]

   LEEMING JA: I agree with Basten AJA.

3. [3]

   BASTEN AJA: This judgment is to be read in conjunction with the companion judgment arising out of the same proceedings and delivered at the same time: Supermega Market Ltd v Sunnya Pty Ltd [2025] NSWCA 78 (“Supermega judgment”). Both appeals concern a judgment of Williams J in the Equity Division delivered on 19 April 2024. [1] Much of the background of the dispute between the parties involved in preparing and exporting milk powder from New Zealand to the People’s Republic of China are set out by the Chief Justice in the Supermega judgment. The factual background will only be repeated to the extent necessary to explain the issues raised by this appeal. The abbreviations for the names of the parties used in that matter are adopted here.

1 Background

1. [4]

   Although Sunnya was largely successful in the proceedings in the Equity Division, the trial judge, Williams J, rejected claims by Sunnya Pty Ltd and its related company, Jatcorp Ltd, in respect of four matters. By a further amended notice of appeal, Sunnya and Jatcorp (hereafter “Sunnya”) appealed from those aspects of that judgment, being claims described as:

2. [5]

   It is convenient to refer to the respondents by their names (or abbreviated names). No orders were sought by Sunnya against the fifth respondent (HLW Investments Pty Ltd) or the eighth respondent (NZFDA Ltd). Further, GNT did not appear on the appeal, but the evidence demonstrated that it had been served with the relevant documents and the appeal proceeded against it in its absence.

3. [6]

   Both (a), the under-value sales claim (grounds 1 and 2) and (b), the commercial invoices claim (grounds 2A and 2B), concerned the conduct of the respondents Mr He, Ms Lu and one of two Sunnya agents in China, GNT. That conduct occurred prior to the resignations of Mr He and Ms Lu as directors of Sunnya on 25 November 2022. As to (c), the improper involvement in Neurio products sales (grounds 3 and 4), the affected respondents were again Mr He, Ms Lu and GNT, together with GABT (another Sunnya agent in China), Megadairy and Supermega, the last two being the producers of milk powder in New Zealand. Finally, as to (d), the improper use of Neurio/NRIO trademarks (ground 5), the only affected respondent was GNT. Both (c) and (d) related to conduct which occurred at about the time of the resignations on 25 November 2022.

4. [7]

   There is no doubt that the claim based on undervalue sales is significant to Sunnya in financial terms, if it succeeds. However, the commercial invoices claim chronologically precedes, and is relevant to, the undervalue sales claim. Although the commercial invoices claim was pursued at trial as an alternative if the undervalue sales claim failed, it is convenient to treat them together. Both involved conduct by Mr He and Ms Lu when they were in control of Sunnya.

5. [8]

   At the material time in 2021/2022, Jatcorp held a majority shareholding in Sunnya. Following a general meeting of Sunnya on 31 October 2022, newly appointed directors became aware that Mr He and Ms Lu had taken steps to cause the registered ownership of the Neurio trademarks in Australia and New Zealand to be transferred to GABT. At a board meeting held on 2 November 2022 it was resolved to remove them from their positions with Sunnya. They resigned as directors of Sunnya on 25 November 2022 and from their employment with Sunnya on 7 December 2022. The third issue raised by the Sunnya appeal concerned steps taken by Ms Lu and Mr He at the time of and following their resignation as directors to divert business involving the Neurio trademark to other entities associated with them and their families. The fourth matter concerns GNT’s knowing involvement in those activities. Accordingly, matters (c) and (d) may be dealt with together.

2 Under-value sales and Commercial invoices: grounds 1, 2A

1. [9]

   Sunnya adopted a number of mechanisms for selling milk products in China. Relevantly for present purposes, there were two channels, known as “the general trade channel” and “the cross-border channel”. In relation to the latter, the trial judge explained:

2. [10]

   Apart from providing a baseline for Sunnya’s prices, this mechanism was not relevant to the current issue. The alternative mechanism was described by the trial judge as follows:

3. [11]

   Prior to April 2019, Sunnya’s import agent had been GABT; thereafter that role was played by GNT. Products were delivered to GNT which was responsible for paying customs fees, collecting goods which had been cleared by customs, placing a Chinese language label on the tins and delivering them to the distributor. GNT collected a price from the distributor and remitted moneys to Sunnya. GNT was entitled to a 2% service fee calculated on the “import contract value”, which it deducted from the price paid by the distributor before remitting the balance to Sunnya. [2]

4. [12]

   That practice operated until April 2021. There were two elements of that arrangement which were presently significant. The trial judge stated the issue succinctly in the following terms:

5. [13]

   The trial judge adopted a collective term “the He parties” to refer to a group having common representation, which, for present purposes, included Mr He and Ms Lu. That group used the anodyne term “commercial invoices” to refer to the practice described above of understating the export prices for customs purposes in China. It is convenient to continue use of that term.

6. [14]

   In April 2021 the arrangement changed so that, instead of selling to the distributors, Sunnya sold products to GNT which on-sold to the distributor. Thereafter, the export price which had been shown on commercial invoices when processed by GNT through the agency arrangement was recorded in the commercial invoices as a sale to GNT at the export price. [3]

7. [15]

   There was expert evidence before the trial judge as to the price differential resulting from the change which was effected in April 2021. The difference between the experts for Sunnya, on the one hand, and the respondents on the other, was not resolved by the trial judge because she dismissed the claim for compensation on the basis that liability was not established. That finding was the subject of the present appeal: it is common ground that if the appeal succeeds, the matter will need to return to the Equity Division for the calculation of compensation. The general finding, however, was expressed in the following terms:

8. [16]

   Before turning to the reasoning of the trial judge with respect to liability, it is necessary to identify the relationship between GNT and the respondents, Mr He and Ms Lu. For that purpose, it is necessary first to have regard to the structure of GABT, which performed the functions of import agent for Sunnya products until April 2019.

9. [17]

   GABT had been registered in August 2007 in China, with Ms Lu as its major shareholder and her brother, Yancheng Lu, as the company’s chief executive. In March 2012 Ms Lu ceased to hold shares in GABT and thereafter the sole shareholders in the company were her brother and her sister, Yanping Lu. The trial judge recorded the changes in ownership, [4] namely that, “[o]n or about 5 March 2021, Mr Yancheng Lu and Ms Yanping Lu transferred 95% of the shares in GABT to Mr He. Mr Yancheng Lu held the remaining 5% of the shares”.

10. [18]

    GABT was and remains the registered owner of Neurio trademarks in China. Since October 2015 it was also the registered owner of the domain name neurio.com.cn. [5]

11. [19]

    GNT was registered in China in November 2010 and, until August 2019, Ms Lu was a shareholder. The trial judge did not record further details as at April 2019 and April 2021, but did record that, at the time of the trial, the principal shareholder was Ms Aiping Zhang who is married to Yancheng Lu and is therefore Ms Lu’s sister in law. Ms Yanping Lu (Ms Lu’s sister) is also a shareholder. Ms Aiping Zhang was identified as the “ultimate beneficiary” and “actual controlling person” in the company records.

12. [20]

    In essence, Sunnya’s claim involved two steps. First, the arrangement with respect to the commercial invoices adopted in April 2019 involved a deception of Chinese Customs and placed Sunnya at risk of, at least, investigation and action detrimental to its business in China. Secondly, when the deception was discovered, or at risk of discovery, the under-value price was adopted as the sale price to GNT, resulting in a reduction in the value of Sunnya’s revenue. Thus, Sunnya then invoiced GNT for a price significantly below the distribution price which GNT obtained in China, and which Sunnya had previously obtained, subject to payment for the costs of services provided by GNT as import agent. The new arrangement was detrimental to the financial interests of Sunnya and advantageous to GNT, a company controlled and ultimately owned by relatives of Ms Lu.

13. [21]

    In its statement of claim, Sunnya alleged that the arrangement, organised by Mr He and Ms Lu, involved breaches by them of their obligations under ss 181(1) and 182 of the Corporations Act 2001 (Cth). Further, it pleaded that, to the extent that the under-value invoices issued by Sunnya to GNT reduced the customs duty payable on Sunnya’s products, the conduct risked Sunnya suffering penalties in China and possible exclusion from Chinese markets. [6] On both bases, the conduct was not in Sunnya’s best interests.

14. [22]

    A declaration that Mr He and Ms Lu had contravened s 181 or s 182 of the Corporations Act would amount to a finding of breach of a civil penalty provision, entitling Sunnya to compensation for loss suffered, pursuant to s 1317H of the Corporations Act. It is necessary to identify the relevant principles derived from these provisions. However, as the Full Court of the Federal Court observed in BCI Finances Pty Ltd (in liq) v Binetter, [7] referring to the 2nd (1957) edition of Gower, [8] the statutory provisions reflect well-established principles governing the fiduciary duties of company directors, and are not a code as to the operation of those principles.

15. [23]

    Section 181 of the Corporations Act provides:

16. [24]

    This provision imposes an affirmative obligation on company directors and other officers. [9] To act in good faith must be understood as to act in honest pursuit of those best interests. Usually, the “proper purpose” will also involve pursuit of the best interests of the company, but will be subject to constraints imposed on fiduciaries, such as avoidance of conflicts of interest. Both par (a) and par (b) have a subjective element, namely either acting honestly, or the existence of a purpose being pursued by the director. Often that element will be derived from surrounding circumstances. Those circumstances may contradict a director’s statement as to his or her subjective intentions.

17. [25]

    Relevantly in this case, the section is directed to the exercise of powers or discharge of a duty as a director of the company. Acting, whilst a director of one company, as agent for another company, albeit not in the best interests of the first company, may not contravene s 181(1). As will be seen, Ms Lu negotiated contracts with Supermega for the supply of milk products to GABT, as agent for GABT, which were inimical to the interests of Sunnya, but did not breach s 181(1) because she was not acting as a director of Sunnya.

18. [26]

    Two further observations should be made in relation to the construction of s 181. First, it should be read coherently with surrounding provisions. Each provision in Part 2D.1 of the Corporations Act has its own function and the structure owes much to history. [10] Nevertheless, coherence is important. In that context, reference may first be made to s 180, which relevantly provides:

19. [27]

    Because s 180(2) only applies to business judgments, it will not encompass all powers and duties of a director. Nevertheless, conduct in the best interests of the company will often involve a business judgment. Secondly, the distinction in s 180(2)(a) and (d) between making a judgment in good faith for a proper purpose and rationally believing that the judgment is in the best interests of the corporation supports the view that an honest belief as to purpose under s 181 will only be satisfied where that belief is rational.

20. [28]

    By way of contrast, s 184(1), creating criminal offences (as opposed to civil penalties), places a different emphasis on the mental element involved:

21. [29]

    To constitute a criminal offence one of the mental elements in pars (a) and (b) must be added to a failure to act in accordance with (c) or (d). The section adds to the language of s 181(1) an element of recklessness or dishonesty. When s 181(1) is read with s 184 it is clear that dishonesty is distinct from an absence of good faith; and an additional element is required for an affirmative finding of dishonesty. Understood in this context, the use of the labels “subjective” and “objective” in relation to s 181 is unhelpful and distracting. The repeated references in judgments to an unresolved issue suggests that the labels suppose a false dichotomy. [11] The statutory language does not use them.

22. [30]

    The term “subjective” may refer to a state of mind, but the statute identifies several states of mind. Further, proof of a state of mind (or its absence) often depends on inferences drawn from “objective” facts and circumstances. The term “objective”, however, is not used here to refer to facts, external to the individual, but to a standard imposed by law, primarily elements of the duty owed by a fiduciary. These were identified by Malcolm CJ in Chew v The Queen [12] in the following terms:

23. [31]

    On appeal, the High Court [13] observed that a contravention might occur if the director had acted for an improper purpose, regardless of whether that purpose was achieved. The requirement for a purpose was described as “the equivalent of a specific intention”. [14] The point was reiterated in The Queen v Byrnes, [15] where the Court repeated and adopted an observation of Dawson J in Chew: [16]

24. [32]

    The joint reasons in Byrnes continued: [17]

25. [33]

    The distinction between acting in good faith in the best interests of the corporation and acting for a proper purpose may be illustrated by the following statement by Myers J in Ansett v Butler Air Transport (No 1): [18]

26. [34]

    That good faith imports a subjective element of honesty, but its absence does not demonstrate a contravention of s 184, which will only arise where conscious dishonesty has been established, was noted in Duncan v Independent Commission Against Corruption. [19] Further, a director may act in the firm belief that particular conduct is in the best interests of the company, but be pursuing a purpose for which the power was not intended. In In the matter of IW4U Pty Ltd (in liq) [20] Gleeson J (sitting in the Equity Division) stated:

27. [35]

    To these considerations should be added that there is a prior requirement that a corporation act lawfully – a consideration which limits the proper conduct of its directors and officers, and an assessment of what can be in the best interests of the corporation. Edelman J observed in Australian Securities and Investments Commission v Cassimatis (No 8): [21]

28. [36]

    The references to a corporation having “a real and substantial interest in the lawful or legitimate conduct of its activity independently of whether the illegitimacy of that conduct will be detected or would cause loss” and existing “as a vehicle for lawful activity” were quoted with apparent approval by Greenwood J on appeal. [23]

29. [37]

    As has been noted, the first two matters involved conduct by Mr He and Ms Lu as directors of Sunnya. The under-value invoices commenced in April 2019, at which time the import agent, GNT, continued to remit to Sunnya receipts from its distributors for the full amount of Sunnya’s price, less the agreed commission of 2%. It may be inferred that the arrangement was financially beneficial to Sunnya to the extent that customs duty was charged by the Chinese Customs Service on a reduced value and not the true value at which the produce was sold by Sunnya within China. At that point, there was no immediate financial detriment to Sunnya, although the conduct was unlawful and, Sunnya submitted, therefore improper, and placed Sunnya at risk of action being taken by the Chinese Customs Service. Further, the steps were taken in the knowledge that, in December 2018, the Chinese Customs Service had commenced an investigation into the importation of Sunnya’s milk products, by notice to GNT.

30. [38]

    What happened in April 2021 was immediately financially disadvantageous to Sunnya. At that point, GNT ceased to be an import agent for Sunnya and became the purchaser of the Sunnya products, which it then distributed within China. It purchased the products at the prices established by the under-value invoices. The money remitted to Sunnya was thereafter a significantly lower amount per item than the amount which had been paid by the Chinese distributors to Sunnya and was now to be paid by the Chinese distributors to GNT. The reduction, the quantum of which was not agreed and remains unresolved, was said to be “significant” after taking into account the higher import duty which would have been paid had the true cost of the product to the Chinese distributors been the price declared by GNT on its import of the products.

31. [39]

    The first and second respondents justified the change in arrangements in April 2021 as necessary to resolve the disclosure of the unlawful existing arrangement resulting in the customs investigation. The only available alternative was to concede the falsity of the invoicing practice from April 2019.

32. [40]

    The trial judge opened her analysis of the issue in the following terms:

33. [41]

    Why the outcome in fact adopted would have been foreseen as likely to involve, but “overcome”, such a revelation was not explained: nor did the evidence support an inference that it in fact did. Although the judge commenced by “assuming” that only two courses of action were available, that was the way the case was run and no basis was identified for inferring that some other course of action might have been available. But on the assumption that the allegation would have been “overcome”, the lack of evidence as to “potential consequences” seems immaterial. In the absence of evidence of possible adverse consequences to Sunnya, either from GNT (which did not defend the proceedings) or from Mr He and Ms Lu (who did not give evidence), the counterfactual should not have resulted in an assumption that there would have been potential adverse consequences, beyond, perhaps, payment of unpaid duty and a possible penalty. More importantly, what was absent was any evidence of a belief on the part of the respondents that such adverse consequences would be severe and warranted the course taken on Sunnya’s behalf. If the difference between the price paid to Sunnya was $10 less per tin and the duty was 10%, then the duty saved was $1 and Sunnya’s loss was $9 (or 90%) under the new arrangement for the indefinite future, subject to an allowance for the $1 undercharging for the past two years.

34. [42]

    The challenge raised by Sunnya to the reasoning of the trial judge was that it failed to take into account that the cause of the situation was the attempt to defraud the Chinese government of customs duty. If that conduct lacked a proper purpose within the terms of s 181(1)(b), it was unlawful and created a financial risk to the company, including that which eventuated; it could not be relied upon to justify an arrangement which entailed continuing losses for the foreseeable future. Further, being unlawful, the course of issuing under-value invoices was not in the best interests of the company, applying the reasoning in Vrisakis and Cassimatis. Being deliberately undertaken over a two year period by Mr He and Ms Lu, they cannot have been acting in good faith. Accordingly, contraventions of par (a) and par (b) of s 181(1) were established.

35. [43]

    As to the financial effects of the April 2021 changes, the judge appeared ambivalent. The judgment at [611] commenced:

36. [44]

    The question was not whether the inference was inevitable, but whether it should have been drawn on the balance of probabilities. On the assumption made, it was the undeniable and undenied effect of the change. Funds were diverted from Sunnya to a company controlled by relatives of Ms Lu.

37. [45]

    The trial judge then found that the evidence did not establish that Mr He or Ms Lu “stood to benefit personally from any increase in GNT’s profitability”: at [612]. An actual financial benefit, however, is not necessary in order to identify a conflict of interest or an improper purpose. Conduct which had the effect of diverting financial benefits from the corporation of which the first and second respondents were directors and controllers, to a family company owned by family members of one of them, was sufficient to demonstrate an improper purpose, unless otherwise explained.

38. [46]

    The contravention of s 181(1) was established with respect to the under-value invoice claim.

39. [47]

    Sunnya separately contended that the conduct constituted a contravention of s 182 of the Corporations Act, which provides:

40. [48]

    With respect to Sunnya’s reliance on s 182, the trial judge stated:

41. [49]

    When Chew was decided in the High Court, the equivalent provision, s 229(4) of the Companies (Western Australia) Code did not divide the provision up in the way that s 182(1) now does. Rather, it read:

42. [50]

    In Chew, the comma after “employee” (considered in the light of the legislative history) was construed as a prohibition on an improper use of position “in order to” cause a particular outcome or result. The joint reasons concluded: [24]

43. [51]

    The joint reasons in Chew continued: [25]

44. [52]

    The last statement concerned a criminal prosecution, which is not the subject of s 182. It is, nevertheless, clear that impropriety is to be determined objectively. Bearing those considerations in mind, the purpose (benefiting an unrelated entity at the expense of the corporation) was improper. Further, it is difficult to understand how, the outcome being an inevitable consequence of the conduct, and the conduct being voluntarily undertaken, the directors who undertook the conduct did not intend that outcome. The conclusion that that was their purpose is strengthened by the fact that the entity benefited was controlled by Ms Lu’s family.

45. [53]

    The absence of any evidence from Mr He and Ms Lu on this issue was significant. The judge drew the inference that nothing they could have said would have assisted them. But the judge continued, as she had in relation to the under-value invoice claim, that the absence of evidence “does not fill this evidentiary gap in the Plaintiffs’ case”. [26] However, with respect, the question was whether appropriate inferences were available from the objective circumstances. In criminal proceedings, there is rarely direct evidence of the intention of the accused, nor can any inference be drawn from the failure of an accused to give evidence. Nevertheless, criminal convictions commonly rely on an intention inferred from the voluntary conduct having a particular result. The willingness to reach such a conclusion should be heightened in a case where the relevant burden of proof is the balance of probabilities and the absence of evidence from defendants can give rise to an inference that what evidence they could have given would not have assisted them.

46. [54]

    The appellants took issue with the suggestion that the course taken in April 2021 could be in the best interests of Sunnya in circumstances where it deprived Sunnya of a significant part of its revenue and diverted it to another entity. The justification, namely that it was a necessary result to avoid sanctions from the Chinese Customs Service, merely took the analysis back one step to the introduction of the under-value invoices, in April 2019, creating a real risk which materialised in 2021. That in itself was said to involve a breach of duty to act in the company’s best interest.

47. [55]

    The issues were succinctly identified by the trial judge in the following terms:

48. [56]

    The judge was not satisfied as to consequence (b), namely the risk of being banned from importing goods into China. She was, however, satisfied as to consequence (a), namely the investigation, and as to the matters raised in (2) and (3). Thus, putting to one side the question of loss raised by (4), the critical issue became (1)(c), namely the risk of Sunnya being restricted to charge the export price recorded in the invoices. In rejecting that contention, the judge reasoned as follows:

49. [57]

    In order to understand this reasoning, it is necessary to refer back to earlier passages relied upon by the trial judge by way of cross-references. Thus, a footnote to the first sentence (as to the He parties’ admissions) referred back to the following passage:

50. [58]

    For the purposes of this part of the argument, the appellants accepted and relied upon those admissions: [628]. What is less clear is why the judge did not accept that the provision of under-value invoices was itself “a dishonest and fraudulent scheme because the commercial invoices were used to commence false sales information to a government authority”: [629]. That inference, which was certainly open, would have led to the further inference that there was a risk of being required to pay unpaid duty and to ensure that the information provided in the future did not involve under-value invoicing. In other words, item 1(c) should have been accepted, with the result that (4) should also have been accepted, namely that the April 2021 changes were both unjustifiable and caused financial loss to Sunnya.

51. [59]

    The reasoning for rejecting those inferences, set out in the second part of [636], was, purportedly, an absence of evidence from which to draw the inferences. A footnoted reference to the second sentence drew attention to the reasoning at [596]-[602]. At [596], the judge accepted a submission by the He parties that “the broad scope of the investigation extended to all of GNT’s importing activities during the whole of the time since April 2019 that GNT had been acting as Sunnya’s import agent” and that “the Customs Service had been asking questions about the dealings between Sunnya and GNT even before issuing the Notice of Inspection on 12 March 2021”.

52. [60]

    The matters which were not in dispute were as follows:

53. [61]

    The judge then dealt in some detail with an email by Mr He on 11 June 2021 indicating that the Customs Service had raised the possibility that “the practice of GNT collecting and remitting the sale price to Sunnya constituted Sunnya collecting and ‘smuggling’ profits that belonged to GNT, and that Sunnya could only charge GNT ‘the purchase price’”. However, that material tended to support the characterisation of Sunnya’s conduct as a fraudulent attempt to reduce Chinese import duties, which self-evidently carried the risks identified by the appellants. On a number of occasions, the judge referred to the lack of evidence as to “relevant Chinese customs, laws, regulations and practices”, but nevertheless “inferred that the commercial invoices practice, which involved the presentation of false information to the Customs Service in China, involved some departure from those laws, regulations and/or practices”. What the judge was not inclined to address were the consequences and potential gravity of that conduct. [28]

54. [62]

    With respect, the judge should have accepted on the balance of probabilities that one foreseeable consequence of indulging in a fraudulent scheme of rendering under-value invoices was that Sunnya would be required to make good any loss to the Chinese Customs Service and give some form of undertaking not to engage in similar conduct in the future. That risk should have been apparent to reasonable business people in the position of Mr He and Ms Lu at the time they initiated the practice in April 2019. This was not a case of directors monitoring compliance by a corporation of its legal obligations; it was a case of directors creating and implementing a fraudulent scheme. Nor was it a question of characterising the gravity or seriousness of the misconduct: it was merely a question of being satisfied that the misrepresentations might be discovered and that the company might suffer adverse financial consequences as a result. Inferences as to those risks should be drawn.

55. [63]

    The consequence of drawing those inferences is that the contention that Mr He and Ms Lu were acting in the best interests of the company in April 2021 fails because the financial impact on Sunnya was a direct consequence of their improper conduct in April 2019. The improper conduct in April 2019 led directly to the loss of part of the revenue flow to Sunnya which materialised in April 2021. That reasoning, in turn, suggests that condition (4) identified at [55] above (namely that the April 2021 changes caused financial loss to Sunnya) should have been satisfied. However, it is appropriate to refer to the judge’s reasoning for not making that finding.

56. [64]

    After addressing (1)(c), and noting that the second and third contentions were not in dispute, the trial judge continued:

57. [65]

    Why it was necessary to establish a loss, at least for the purposes of finding a breach of s 182, was not explained. If the reasoning of the High Court in Chew v The Queen set out at [50] above is applied, neither the accrual of an advantage, nor the suffering of a detriment is an element of the civil penalty provision. While the structure of s 182 is not identical to that of the provision considered in Chew, no different result should obtain. Thus, in Chew, there was a comma after the reference to the employee, and before the first of the objects, namely “to gain”. That structure led the High Court to conclude that “to” identified the purpose, and was equivalent to “in order to”. The punctuation now comes after the word “to” (in the form of a colon) but, if anything, the construction preferred by the High Court is strengthened rather than undermined. That is, it is the purpose, not the outcome, which constitutes the element of the prohibition. For that reason, Sunnya was required neither to plead nor to demonstrate a loss.

58. [66]

    On the other hand, for reasons explained above, the diversion of part of Sunnya’s revenue to GNT demonstrated both the impropriety of the purpose and, almost inevitably, the loss.

59. [67]

    A consequence of the reasoning with respect to breaches by Mr He and Ms Lu is that the judge was not required to (and did not) address the question as to whether GNT was knowingly involved in those breaches.

60. [68]

    One other aspect of the reasoning should be noted. In identifying the “counterfactual” against which the actual financial position of Sunnya was to be compared, the judge noted that it depended upon “relevant customs, laws and regulations in China” as to which Sunnya did not adduce any evidence. Whether or not that was a proper statement of the counterfactual, the need for evidence of Chinese law and practice for this purpose suggests that evidence of Chinese law with respect to trademarks was required to maintain the primary aspects of the He and Lu appeal. It was by no means obvious why, in principle, the usual assumption that foreign law reflected local law should apply with respect to trademarks, but not with respect to customs. Of course, it goes without saying that if Sunnya is to obtain a compensation order under s 131ZH, it will be necessary for it to demonstrate “damage suffered” resulting from the contravention.

61. [69]

    Accordingly, the appellants’ claim that the under-value sales invoicing constituted a breach of s 181(1) and s 182 of the Corporations Act should be accepted. As has been noted, the consequential need to address the claim for compensation pursuant to s 1317H of the Corporations Act must be determined by remittal to the Equity Division.

3 Involvement of GNT: grounds 2, 2B

1. [70]

   Having dismissed Sunnya’s claims against Mr He and Ms Lu with respect to the undervalue sales, the trial judge did not need to address any involvement that GNT might have had in the contraventions by Sunnya’s directors, and did not in fact do so. [29] Ground 2 in Sunnya’s appeal challenged that failure to make a finding with respect to GNT.

2. [71]

   In support of a finding against GNT, Sunnya relied upon the factual matters summarised by the judge and set out at [60] above. The legal, basis of the claim rested upon the application of s 79 of the Corporations Act, and the second limb of Barnes v Addy. [30] Sunnya submitted that GNT’s involvement in the new arrangements, by which it became a major beneficiary through the undervalue sales, involved it having been, in the language of s 79, “in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention” by Mr He and Ms Lu. From April 2019, GNT was the recipient of the “commercial invoices” and was aware that they were false. GNT was the recipient of the Chinese Customs’ notice of inspection and was assisted by Mr He and Ms Lu in responding to the investigation. There was evidence of Ms Lu’s direct involvement in the investigation including, it was inferred, meeting with Customs officials in China. [31]

3. [72]

   Absent some persuasive evidence to the contrary, the proper inference is that GNT was not merely the beneficiary of the changed arrangements from April 2021, but had a detailed knowledge of the circumstances in which the arrangements were made, including the involvement of Mr He and Ms Lu as directors of Sunnya, so as to be fully aware that benefits which previously flowed to Sunnya were now to be obtained by GNT. GNT had entered into contracts directly with the Chinese distributors, at the same prices as those formerly paid by the distributors to Sunnya, so as to obtain the financial benefits. There was no contrary evidence, GNT not having appeared in the proceedings, nor proffered a defence. In those circumstances, Sunnya’s submissions should be accepted and a finding made that GNT knowingly assisted in the breaches of fiduciary duty by Mr He and Ms Lu, and was involved in those breaches, within s 79 of the Corporations Act.

4 Neurio product claims: grounds 3 and 4

1. [73]

   Ground 3 alleged error on the part of the trial judge in failing to find that Mr He and Ms Lu breached fiduciary duties which they continued to owe to Sunnya following their resignation as directors on 25 November 2022. Their conduct involved negotiating contracts between GABT and Supermega on 25 November 2022, and between GNT and Supermega during the period from 7 December 2022 to 12 January 2023.

2. [74]

   Ground 4 alleged error in failing to find that GABT, GNT, Supermega and its related company, Megadairy, knowingly assisted in Mr He and Ms Lu in breach of their ongoing fiduciary duty. Both grounds cover the same evidence and findings and will be addressed together.

3. [75]

   From May 2020, Supermega had been the sole supplier to Sunnya of its Neurio- branded products for export to China. The products themselves were manufactured by Megadairy, on behalf of Supermega, a related company. [32] The “improper Neurio products claim” related to 17 contracts entered into between 2 March 2022 and 8 November 2022 by Supermega and one or both of two Chinese companies, GABT and Shanghai Gainful Industrial Co Ltd. [33] Throughout that period, both Mr He and Ms Lu were directors of Sunnya. Sunnya held the registered Neurio trademark in New Zealand. The effect of the contracts was to deprive Sunnya of a major part of its supply of Neurio-branded products, which were then exported to China and sold by GABT.

4. [76]

   As has been noted above, GABT was a Chinese registered company established in August 2007. From March 2021, Mr He held 95% of the shares in GABT. Ms Lu’s brother, Mr Yancheng Lu, held the remaining 5%. [34] In a company extract dated 1 November 2022, Mr He was identified as “the actual controlling person” of the company. On 10 March 2023, his shareholding was transferred to Ms Lu’s brother.

5. [77]

   There was no evidence referred to by the trial judge, nor on appeal, of the corporate details of Shanghai Gainful. However, in circumstances identified below, the trial judge accepted that it was an import agent used by Ms Lu to avoid revealing the identity of the purchaser, namely GABT. [35]

6. [78]

   Before explaining in further detail the nature of the claims with respect to the contracts entered into in the period from March to early November 2022, it is necessary, by way of context, to refer to the subsequent contractual arrangements entered into after Ms Lu and Mr He resigned as directors of Sunnya. These are directly relevant to ground 5, dealing with the accessorial liability of GNT, but are also relevant, indirectly, in understanding the arrangements with respect to the earlier set of 17 contracts.

7. [79]

   The overall scheme relied on by Sunnya as the dishonest diversion of its business of exporting milk products to China was identified in the following terms by the trial judge:

8. [80]

   The trial judge upheld the Plaintiff’s claims with respect to Mr He and Ms Lu in relation to their conduct at the time of and following their resignations on 25 November 2022, identified as “Plan B”. The judge also upheld the claim of knowing assistance with respect to, relevantly, GABT. She rejected the claim of knowing assistance in respect of GNT, which is the subject of ground 5, dealt with below. The question for present purposes concerns the rejection of Sunnya’s claims in respect of the earlier conduct in March – November 2022. This, on Sunnya’s case, involved a “transition period” following the failure of Plan A and before the NRIO-branded products the subject of Plan B could be available from Supermega. During the interim, Sunnya contended that Mr He and Ms Lu implemented a scheme by which Supermega would sell Neurio products directly to GABT (pursuant to contracts entered into on 25 November 2022), and thereafter, to GNT (pursuant to contracts entered into from 7 December 2022 until 12 January 2023). Throughout that period, Sunnya would be divested of its business with respect to Neurio-branded products sold pursuant to those contracts. The judge rejected that claim, largely on the basis that GABT and GNT operated as independent, self-motivated agents.

9. [81]

   The judge’s reasoning in this respect was as follows:

10. [82]

    This reasoning appears to be inconsistent with the proposition which the judge had earlier accepted, namely that the conduct of Ms Lu and Mr He throughout the period the subject of Plan A and Plan B, was to transfer Sunnya’s Neurio business to companies from which Ms Lu and Mr He could benefit, having lost, or being about to lose, control of Sunnya. In dealing with the Neurio/NRIO claims at [759], in the passage set out above, the judge referred back to earlier passages, including [708], which it is convenient to set out here:

11. [83]

    Significantly, the judge found that Mr He and Ms Lu encouraged GABT to terminate the cooperation relationship with Sunnya, purported to terminate Sunnya’s entitlement to use the Neurio trade mark and then found that Ms Lu negotiated on behalf of GABT the 11 contracts with Supermega. Those findings were inconsistent with the findings that (i) Mr He and Ms Lu were not involved in implementing a “scheme” with respect to the contracts entered into on 25 November 2022 and the related contracts; (ii) Plan B “was really a continuation of Plan A” as found at [795], [36] and (iii) Mr He would benefit directly and Ms Lu would benefit indirectly from profits earned by GABT “to a greater extent than they would have benefited if such profits had been earned by Sunnya”. [37]

12. [84]

    Further, with respect to the later period, the judge concluded:

13. [85]

    Like the findings with respect to the earlier period, these findings in relation to the later period were inconsistent with the conclusion that, during the transition, GABT and GNT operated independently of influence by Mr He and Ms Lu. Finally, in dealing with Neurio/NRIO claims, after rejecting the proposition that GABT acted as the “alter ego” of Mr He and Ms Lu, the judge stated:

14. [86]

    The challenges to these findings, in the He parties’ appeal and the appeal by Supermega, have been rejected. The findings were carefully reasoned and supported by the evidence. However, those findings and that reasoning should have led to the same conclusion with respect to the Neurio products claim. Accordingly, ground 4 should be upheld with respect to GABT.

15. [87]

    With respect to GNT, the same result should obtain as that upheld below under ground 5, and a finding made that GNT was also involved in knowingly assisting the breaches of the ongoing fiduciary duties owed by Ms Lu and Mr He.

16. [88]

    There remains the claim with respect to Supermega and Megadairy. The trial judge dealt with the claims against them purely on a consequential basis, namely that the claims against the other parties having failed, the claims against Supermega and Megadairy must necessarily fail. [38]

17. [89]

    With respect to the Neurio/NRIO claims, the judge found that “each of Supermega and Megadairy knowingly assisted Mr He and Ms Lu’s dishonest and fraudulent breaches of fiduciary duty from December 2022 by contracting to supply (in the case of Supermega) and by manufacturing (in the case of Megadairy) the NRIO-branded sachets of formulated milk powder products with knowledge that those products would be marketed and sold in Neurio/NRIO tins in China, as subsequently occurred”. [39] That finding turned upon two other findings:

18. [90]

    These findings are sufficient to support the further finding that Mr Wu, and therefore the NZ Parties, had the relevant knowledge with respect to the Neurio-branded products the subject of the transition claim. In their submissions in this Court, the NZ Parties did no more than assert, contrary to the judge’s findings set out above, that there was no evidence that Mr Wu had any knowledge of the essential matters relied upon by the Sunnya parties.

19. [91]

    Accordingly, grounds 3 and 4 should be upheld and orders made in favour of Sunnya with respect to the Neurio product claims.

5 Neurio/NRIO trademarks – role of GNT: ground 5

1. [92]

   As described above, the use of the Neurio and NRIO trade marks was the course of conduct described by Sunnya as “Plan B”. It resulted from court orders having been made in interlocutory proceedings in the first 10 days of November 2022 reversing the attempt by Mr He and Ms Lu to transfer the Australian and New Zealand Neurio trade marks to GABT. One element of the conduct was Sunlife seeking, on 25 November 2022, to register the NRIO trade mark in Australia and New Zealand, followed, on 6 December 2022, by GABT registering that trade mark in China. In the following passages, the trial judge accepted that Sunnya’s claims against Mr He, Ms Lu and GABT in respect of that conduct were made good:

2. [93]

   In terms of the causes of action, the trial judge was satisfied that both Mr He and Ms Lu breached their fiduciary duties to Sunnya, both during their service, and after their resignation, as directors. She also found that “the conduct of Mr He and Ms Lu transgressed ordinary standards of honest behaviour, and that those breaches of duty were therefore a dishonest and fraudulent scheme for the purpose of the second limb of Barnes v Addy”. [40]

3. [94]

   As to the involvement of GABT, having rejected a suggestion that GABT was merely the alter ego of Mr He, or Mr He and Ms Lu, the trial judge continued:

4. [95]

   The judge did not, however, accept that similar findings could be made with respect to GNT. The judge made some findings in favour of Sunnya’s claim:

5. [96]

   Then, having rejected the contention that GNT was the alter ego of Mr He and Ms Lu, the judge continued:

6. [97]

   On appeal, Sunnya did not so much challenge the judge’s reasoning, but rather sought to rely on a more complete statement of the circumstances with respect to the involvement of GNT. Before turning to that evidence, two points should be made in relation to the concept of “knowing assistance”. First, the principle relates to giving assistance in respect of a dishonest or fraudulent design on the part of a fiduciary. The trial judge found that Mr He and Ms Lu were engaged in such a dishonest and fraudulent scheme in seeking to divest Sunnya of the benefits of the business of importing Neurio-branded New Zealand milk products into China. Their conduct was dishonest according to an objective standard. Whether they believed it to be so was not determinative of their liability. Secondly, the knowledge of the assisting party must be assessed by the refence to the conduct of the fiduciaries. Again, knowledge that the fiduciaries were acting in a dishonest and fraudulent design does not require a belief on the part of the party assisting that their conduct should be so described. It is sufficient to have “knowledge of circumstances which would indicate the facts to an honest and reasonable [person]”, being category (iv) approved in Farah Constructions Pty Ltd v Say-Dee Pty Ltd. [41]

7. [98]

   What then did GNT know about the conduct of Mr He and Ms Lu by early December 2022?

8. [99]

   First, GNT knew about the false commercial invoice scheme introduced in April 2019, to which it had been a party when importing milk products into China as agent of Sunnya. Secondly, it was fully aware of the circumstances in which the arrangement changed so as to benefit GNT at the expense of Sunnya, in April 2021. Thirdly, when Mr Yancheng Lu, Ms Lu’s brother, wrote on behalf of GABT to give notice to Sunnya that the “Trade Mark Authorisation Agreement” was terminated, he identified himself in an accompanying letter of 21 October 2022 as “Manager” of GABT and GNT. That step was taken on the day following a notice of an extraordinary general meeting given by Sunnya, which included a proposal to appoint directors who, working together, would have taken control of Sunnya from Mr He and Ms Lu.

9. [100]

   Fourthly, the extraordinary general meeting was duly held and, on 22 November 2022, Sunnya’s lawyers wrote to GNT noting that an investigation had revealed that (i) Sunnya had been supplying GNT with “its products at significant underprice”, (ii) GNT appeared to be a “related party” to Mr He and Ms Lu, and (iii) “on 21 October 2022 [GNT] demanded Sunnya to transfer an amount of AUD $950,000 to [GNT] as a refund of certain deposits, but yet [GNT] directed Sunnya to transfer those funds to a company wholly controlled by Ms Lu”. [42] The letter continued, asserting that Sunnya believed that “its interest might have been harmed by the conduct of its directors who have acted in a breach of legal duties arising under Australian law, and that [GNT] has been involved in that breach”. GNT did not respond to the letter. [43]

10. [101]

    Fifthly, Sunnya filed a statement of claim on 5 December 2022 naming GNT as the fourth defendant. [44]

11. [102]

    Two days later, on 7 December 2022, GNT entered into five contracts with Supermega for the supply of Neurio-branded products. On the same day, Supermega entered into two further contracts with Shanghai Gainful, on behalf of GABT, for the manufacture and supply of NRIO-branded products. The trial judge found that Ms Lu was the agent for GABT in arranging those latter contracts.

12. [103]

    The fact that the nominal controller of GNT was Ms Lu’s sister-in-law may well not have been sufficient to draw the relevant inferences. However, the knowledge and conduct of her brother, as manager of both GABT and GNT, provides a somewhat different picture. Further, the attempt to terminate Sunnya’s right to use the Neurio trade mark relied upon two documents purportedly executed on 16 December 2014, which the trial judge found to be false:

13. [104]

    The judge’s reasoning to the contrary appeared to be based upon a failure of Sunnya to explain adequately the basis upon which it now relies to assert knowing assistance on the part of GNT. That issue was not explored, in the absence of GNT. However, the relevant material relied upon above was all available by reference to findings of fact made by the trial judge. In the absence of any claim of procedural unfairness (and it is clear that the material facts were pleaded and referred to in submissions), it is neither necessary nor appropriate for this Court to explore the extent to which the matter was not addressed in oral or written submissions before the trial judge in a manner in which it has been presented (albeit briefly) on appeal. The appeal being by way of rehearing, and there being no new material relied upon, it is open to Sunnya to present the matter in the way that it has.

14. [105]

    It follows that ground 5 should be upheld and there should be a finding that GNT was liable by way of knowing assistance in relation to the conduct of Mr He and Ms Lu from no later than 30 October 2022.

6 Conclusions

1. [106]

   Each of the seven grounds raised by Sunnya on its appeal having been upheld, it will be necessary for those findings of liability to be considered in the second part of the hearing, dealing with compensation. The first stage of the proceedings involved determining liability and making declarations. Where Sunnya was successful, the trial judge made orders by way of declaration of entitlement, orders for compensation and injunctive relief. Orders made by the trial judge on 19 April 2024 were entered on 20 September 2024. The cause of the delay in entering the orders is not known; although the orders envisaged further proceedings and submissions on costs, the time for those steps had expired long before the orders were entered.

2. [107]

   Consistently with the approach adopted above and dealing with certain grounds together, Sunnya sought orders on the appeal first, with respect to grounds 1 and 2, and secondly, with respect to grounds 3 and 4. With respect to ground 5, a variation was sought of orders (22) and (26). Order (70) provided that Sunnya’s claim for final relief was otherwise dismissed. As some claims remain unsuccessful, that order should stand.

3. [108]

   None of the respondents to Sunnya’s appeal took issue with the formulation of the orders proposed by Sunnya in its amended notice of appeal. However, the proposed orders contained internal references to Sunnya’s “prayers for relief”. Further, Sunnya sought orders for payment of compensation to be assessed at the subsequent hearing, or payments by way of an account for profits, at Sunnya’s election. While orders in that form may be made, the content of the relief was not debated during the appeal and will be determined by the judge dealing with the second stage of the proceedings.

4. [109]

   Further, it is desirable that, so far as reasonably possible, the orders should be self-explanatory without reference to the reasons for judgment: the form of the orders sought has required redrafting. To that end, defined terms should be used to identify the conduct in question.

5. [110]

   As to costs, Sunnya sought an order that “the respondents” pay its costs of its appeal. That may not be an appropriate order in the circumstances where two respondents against whom orders are to be made did not appear on the appeal and others, such as the NZ parties, played a relatively minor role. The costs order should be proportionate to the success or otherwise of the parties and their degree of involvement in the appeals. There was also a significant degree of overlap between the appeals brought by the He parties and the NZ parties and what was, in effect, a form of cross-appeal brought by Sunnya. Subject to the right of the parties to seek a variation of the orders, it is proposed that costs be dealt with globally with respect to the two days of hearing of the three appeals.

6. [111]

   Further, Sunnya sought an order that the respondents pay its costs of the trial. Although the orders entered in September envisaged a further stage for dealing with costs, that had in fact already happened. In a judgment handed down on 5 June 2024 [45] (to which no reference was made in submissions) the judge made the following orders in relation to the Sunnya proceedings: [46]

   1. (1)

      Order that the plaintiffs are to pay the costs of the first and second defendants (Mr He and Ms Lu) in respect of the undervalue sales claims and the commercial invoices claims referred to in the principal judgment at [459] and [586]-[648] on the ordinary basis, as agreed or assessed.

   2. (2)

      Order that there be no order as to the costs of the fourth defendant (GNT), which did not enter an appearance in the proceedings.

   3. (3)

      Order that the plaintiffs are to pay the costs of the sixth defendant (Ms He) in respect of the plaintiffs’ claims against her.

   4. (4)

      Order that the plaintiffs’ costs of their claims that are not the subject of orders (1) to (3) above be paid by the following defendants jointly and severally and on the following bases:

   5. (5)

      Order in relation to the first cross-claim that the cross-claimant (GABT) is to pay the costs of the cross-defendant (Sunnya) on an indemnity basis, as agreed or assessed.

   6. (6)

      Order in relation to the second cross-claim that the cross claimants (Mr He and Ms Lu) are to pay the costs of the cross-defendant (Sunnya) on the ordinary basis, as agreed or assessed.

   7. (7)

      Order that the plaintiffs are not to recover any component of their costs of these proceedings twice under orders (4) to (6) above.

   8. (8)

      Order that the net costs payable by each party to each other party under orders (1) to (6) above, after offsetting any costs payable by the second party to the first party under those orders, are payable forthwith.

7. [112]

   Order (1) should be set aside. It is appropriate to vary order (4): while order (2) should stand, there is no reason why, GNT having been found to have knowingly assisted Mr He and Ms Lu, Sunnya’s costs of pursuing GNT should be severed and excluded from the liabilities under order (4). The offsetting provided in order (8) is now unnecessary, but the order should stand. The other orders should not be varied.

8. [113]

   These observations require that the parties have liberty to apply with respect to the orders set out below, a liberty which should be exercised within 28 days of the delivery of judgment.

Orders

1. [114]

   The Court makes the following orders:

   1. (1)

      As to the commercial invoices and under-value sales:

   2. (2)

      As to the Neurio product sales:

   3. (3)

      As to the Neurio/NRIO trade mark sales:

   4. (4)

      As to costs, order that:

   5. (5)

      Liberty to all parties to apply by notice of motion for variation of these orders within 28 days of this judgment.

   6. (6)

      Direct that these orders not be entered for 28 days.

ADDENDUM OF 30 MAY 2025

1. [115]

   THE COURT: Pursuant to the leave granted by order 5, the appellants applied by motion filed on 22 May 2025 to vary the orders, so as to add:

2. [116]

   The proposed further orders reflect, as the appellants submit, what was stated in the first and second sentences of [112]. The proposed orders were unopposed, and appropriate, and will be made. The orders made on 24 April 2025, as supplemented by orders 4(c) and 4(d), will also now be entered.