CLGC Pty Limited v Zhang

1. [1]

   The first defendant in these proceedings, Zhang Ronglai, is also known as Martin Zhang. Originally from China, he graduated with an Australian law degree in 2007. Initially he worked in China for a Chinese law firm called Beijing W&H Law Firm (“WH Beijing”). In 2011 he returned to Australia to practise here. I will refer to him in this judgment as “Mr Zhang”.

2. [2]

   The proceedings arise out of the business and professional dealings between Mr Zhang and Zhang Peiliang (no relation). Zhang Peiliang is a Chinese businessman. He is the chairman of a substantial Chinese company called Conglin (pronounced “Chong Lin”) Group Co Limited (“Conglin Group”). I will refer to him in this judgment (as he was referred to during the proceedings) as “Chairman Zhang” to distinguish him from Mr Zhang.

3. [3]

   The claims in the proceedings concern investments and loans by Chairman Zhang in Australia, through Australian companies. There are four plaintiffs. Each of them is, or at least was at the relevant time, a company controlled by Chairman Zhang or persons who reported to him. The four companies are:

   1. (1)

      CLGC Pty Limited (referred to in the course of the hearing as “CLGC 191”);

   2. (2)

      CLGC Australia Pty Limited (“CLGC Australia”);

   3. (3)

      CLGC Investment Pty Limited (“CLGC Investment”); and

   4. (4)

      CLGC Investment Holdings Pty Limited (“CLGC Holdings”).

4. [4]

   The second defendant, W&H Lawyers Australia Pty Limited (“WHL”), is a company which at all relevant times operated as an incorporated legal practice. It was incorporated in 2011. Initially Mr Zhang held a 25% share and WH Beijing held 50%. The company is now wholly owned by Mr Zhang and he is the sole director.

5. [5]

   The third defendant, RZ Consulting Pty Limited (“RZC”), is a company which is wholly owned by Mr Zhang. It appears to have been used by him as a vehicle for his own commercial dealings. Mr Zhang is the sole director.

6. [6]

   WH Investment Holdings Pty Limited (“WHI”), the fourth defendant, is a company which was originally established by Mr Zhang and other lawyers from WH Beijing for the purposes of an Australian property investment. Mr Zhang is now the sole director of the company.

7. [7]

   SEP Asset Management Pty Limited (“SEPAM”), the fifth defendant, and Smart Education Program Pty Limited (“SEP”), the seventh defendant, are both companies which were set up for the purpose of a venture between Chairman Zhang and Mr Zhang which I describe in more detail below. Mr Zhang is the sole director of each company.

8. [8]

   The plaintiffs’ claims against the defendants includes claims for breach of solicitor’s duties. Mr Zhang and WHL have cross-claimed against their professional indemnity underwriter, Lawcover Insurance Pty Limited (“Lawcover”).

Claims and defences for determination

1. [9]

   Initially the defendants in the proceedings were Mr Zhang, WHL, RZC and WHI. Later the plaintiffs joined SEPAM, SEP and Guo Jun. Mr Guo (who was the sixth defendant) is a Chinese lawyer who at all relevant times was a principal of WH Beijing. He was a shareholder in, and for a time a director of, WHI.

2. [10]

   The proceedings were originally fixed for hearing before me in February last year. Following an application to vacate the hearing because of the COVID-19 emergency, I ordered that the claim against Mr Guo (which was in a position to proceed) be determined at a separate and preliminary hearing. The claim was then settled and Mr Guo dropped out of the proceedings.

3. [11]

   The claims against the remaining defendants came on for hearing before me on 31 March this year. There were six pleaded claims. I will now summarise those claims. Some of the transfers of money which I will describe involved more than one individual payment, but I will for simplicity ignore that and refer to each transfer, or group of transfers, as a single payment.

4. [12]

   The first claim arose out of a $200,000 payment made by CLGC Australia to Mr Zhang. This transaction was straightforward. It was, and was documented as, a loan from CLGC Australia to Mr Zhang personally.

5. [13]

   CLGC Australia sought judgment against Mr Zhang in debt under the terms of the loan agreement. CLGC Australia also alleged that entry into the agreement was the product of breaches by WHL and Mr Zhang of their duties as solicitors. Damages or equitable compensation were claimed for any losses suffered by CLGC Australia as a result of entering into the loan (given the possibility, which now appears to be a virtual certainty, that Mr Zhang will prove unable to repay it).

6. [14]

   The second claim arose out of a payment by CLGC Investment of $3 million to WHI. The purpose of the payment was to acquire the economic benefit of units held by WHI in a property investment trust known as the Coronation Parramatta Unit Trust. The transaction between CLGC Investment and WHI was documented by means of a deed of assignment pursuant to which WHI agreed to assign the units (thus creating an equitable interest in them) and account to CLGC Investment for income received from them.

7. [15]

   Under the deed of assignment, WHI remained registered as the holder of the units. Later, without the knowledge or approval of CLGC Investment, Mr Zhang (who was still in control of WHI) caused it to sell the units to a third party. WHI received a total of $3.4 million. Most of that money was disbursed through other companies then controlled by Mr Zhang. Directly or indirectly, monies were received by SEPAM, SEP, RZC, WHL and Mr Zhang personally.

8. [16]

   CLGC Investment claimed from WHI an account of the monies received by it. Accounts were also sought from each of the downstream recipients for the amounts received by them. CLGC Investment also claimed damages from WHI and Mr Zhang for misrepresentation. Finally, CLGC Investment claimed damages or equitable compensation from WHL and Mr Zhang for breach of solicitor’s duties.

9. [17]

   The third claim arose out of a payment of $110,000 made by WHL to a third party out of trust monies held by it for CLGC Holdings. CLGC Holdings alleged that the payment was made without instructions (as well as having been of no benefit to CLGC Holdings) and making it had been a breach of fiduciary duty on the part of WHL and Mr Zhang. CLGC Holdings claimed equitable compensation for breach of duty, and also damages for negligent misrepresentation.

10. [18]

    The fourth claim similarly involved a payment by WHL out of monies held on trust for CLGC Holdings. Again CLGC alleged that the payment ($70,000) had been made without instructions (and not for the benefit of CLGC Holdings). It was repaid before the proceedings began, but CLGC Holdings sought an account from Mr Zhang in order to recover any profit which he derived from holding the money.

11. [19]

    The fifth claim arose out of a payment of $1.5 million which was made by CLGC Holdings to a third party at the direction of RZC. This payment was not documented, but CLGC Holdings contended that it was properly characterised as a loan to RZC (paid by direction to the third party). CLGC Holdings sought judgment in debt against RZC for repayment of that loan. CLGC Holdings also claimed damages (from Mr Zhang) or equitable compensation (from both Mr Zhang and WHL) for breach of solicitor’s duties.

12. [20]

    Sixthly, there was a claim arising out of a further payment of $1.5 million from CLGC 191 to RZC. This payment was documented as a loan from CLGC 191 to RZC, guaranteed by Mr Zhang. CLGC 191 sought judgment in debt against RZC and Mr Zhang under the loan agreement. CLGC 191 also claimed damages or equitable compensation from Mr Zhang for breach of solicitor’s duties.

13. [21]

    The six claims had some common features. Each arose out of a payment by (or, in the cases of the third and fourth payments, which were made out of WHL’s trust account, on behalf of) one or other of the Australian companies. Apart from the third payment (the $110,000 paid out of WHL’s trust account), the recipient of the payment was one of the defendants and receipt-based liability (debt or account) was the cause of action, or one of the causes of action, relied upon against that defendant. In each case causes of action were also pleaded against WHL or Mr Zhang or both for breach of solicitor’s duties.

14. [22]

    WHL and Mr Zhang sought indemnity from Lawcover against any liability they might have on the claims against them for breach of solicitor’s duties. Lawcover denied indemnity. Its first defence was that any liabilities of WHL and Mr Zhang did not arise in the ordinary course of legal practice, and therefore did not fall within the terms of the insuring clause under the policy. Lawcover also relied, in the alternative, on various policy exclusions which I discuss in more detail below.

15. [23]

    As will appear below, in the end there was little dispute about the recipient liability claims. At various points in the hearing and afterwards I entered judgment against the recipients in debt or account for all of the payments apart from the third (the recipient of which, as I have said, was not a party). Most of the debate ultimately centred on the personal claims against WHL and Mr Zhang for breach of solicitor’s duties, and the cross-claim for indemnity from Lawcover against any resulting liability.

Chronology of events

1. [24]

   Mr Zhang obtained his law degree (together with a commerce degree) from the University of Melbourne. He worked for WH Beijing in China, based in Beijing, for about three years. His return to Australia appears to have coincided with the establishment of an Australian branch of the WH Beijing firm which I now describe.

2. [25]

   WHL was incorporated in April 2011. There were three initial directors: Gary Donovan, Yu Jiayi and Mr Zhang. The initial shareholders were WH Beijing (50%); Mr Yu (25%) and Mr Zhang (25%). Mr Donovan appears to have been the senior lawyer in the WH Australia firm. According to Mr Zhang, at that time his own practising certificate was restricted. The evidence says nothing about Mr Yu’s role.

3. [26]

   An ASIC search of WHL shows that Mr Yu was replaced as a director of WHL by Sun Gang in October 2011. Again there was no evidence about Mr Sun’s role.

4. [27]

   According to the ASIC search of WHL, Mr Donovan and Mr Sun both ceased to be directors of the company in June 2013. Presumably from that point forward the WHL practice was under the sole direction of Mr Zhang.

5. [28]

   Mr Zhang’s first contact with Chairman Zhang occurred soon after the establishment of WHL in 2011. Chairman Zhang wanted to obtain visas for himself and his wife, Lu Weiping, to allow them to live in Australia for a few months of the year. It seems that the work on trying to obtain visas went on for some years, but in the end Chairman Zhang and Ms Lu never lived here.

6. [29]

   By 2011, before his first contact with Mr Zhang, Chairman Zhang had apparently developed some interest in Australia, although the evidence does not identify what that interest was. He had an Australian assistant, Yu Hao, and it was she who identified Mr Zhang as a suitable lawyer in Australia and introduced him to Chairman Zhang.

7. [30]

   At that time none of the plaintiff companies had been incorporated except CLGC 191. That company was incorporated in November 2009. The evidence does not explain why it was incorporated. Its initial directors were Ms Yu and Zhang Jiajiang. I was informed that he is Chairman Zhang’s son.

8. [31]

   Ms Lu owns 60% of the shares of CLGC 191, and apparently has done so since it was incorporated. She was however only appointed as a director in May 2011. The other 40% of the shares are held by Chairman Zhang, and apparently have been since June 2011 when he was appointed as a director. Before that the 40% parcel appears to have been held for a period of time by Zhang Jiajiang. He ceased to be a director in December 2011. Both Ms Yu (May 2014) and Chairman Zhang (August 2015) also later ceased to be directors, leaving Ms Lu as sole director.

9. [32]

   Initially it seems the relationship between Chairman Zhang and Mr Zhang was solely a solicitor-client one centred on the visa work. But from 2012 onwards, their dealings widened to include substantial investments and loans, especially in connection with property ventures. As part of these dealings, Mr Zhang arranged for the incorporation of several companies (including the other Australian companies apart from CLGC 191) and the establishment of at least two trusts.

10. [33]

    The first investment was a property venture described in the evidence as the Doncaster Prime Unit Trust. This took place in October 2012.

11. [34]

    In April 2013, Mr Zhang identified another potential investment for Chairman Zhang. This was a company called Brooker Marine Pty Limited (“Brooker Marine”) which conducted some sort of manufacturing operation. WHL was retained by CLGC 191 to undertake a due diligence investigation, which resulted in a report. Eventually the decision was made to invest $1.3 million by acquiring 63% of the shares in Brooker Marine.

12. [35]

    The investment was effected through a new company called Brooker Marine Holdings Pty Limited (“BM Holdings”) which was incorporated in late July 2013. Chairman Zhang is recorded on the company search as the sole director and shareholder, although in his evidence he described the company as being a wholly owned subsidiary of CLGC 191.

13. [36]

    CLGC Australia was incorporated in August 2013. It is a 100% subsidiary of Conglin Group. Initially its director was Chairman Zhang’s assistant Ms Yu. Ms Lu became the sole director in August 2014, at the same time as the incorporation of CLGC Holdings, referred to below.

14. [37]

    In July 2014 Mr Zhang emailed to Chairman Zhang a memorandum in which he proposed the establishment of a fund for investing in Australian real estate. The money to establish the fund ($10 million was proposed) would come from Chairman Zhang. The fund would be managed and administered by Mr Zhang and a Mr Simon Elcham. Mr Elcham was a real estate operative who was known to Mr Zhang.

15. [38]

    The proposal involved a profit share arrangement. Up to a level (20% return) all profits would go back to Chairman Zhang. Above that level Mr Elcham and Mr Zhang would between them get a 30% share of the return, increasing to a shared 50% if the return exceeded 100%.

16. [39]

    This proposal was accepted by Chairman Zhang. The fund was established as a unit trust known as the CLGC Investment Trust. CLGC Investment was incorporated to act as the trustee, with Chairman Zhang the sole shareholder and the sole director. The unit holders were Chairman Zhang; Mr Zhang’s company RZC; and TYGA Pty Limited (“TYGA”), a company associated with Mr Elcham.

17. [40]

    CLGC Holdings was incorporated in August 2014, a month after the CLGC Investment Trust was established. Again Chairman Zhang was the sole shareholder and the sole director.

18. [41]

    The purpose of incorporating CLGC Holdings as a separate vehicle was not revealed by the evidence. But it too became involved in property investment. In particular, a holding in a trust which owned property in Sussex Street, Sydney, was acquired in its name.

19. [42]

    Towards the end of 2014, Qinggang Wang came to Australia to look after Chairman Zhang’s Australian interests. Mr Wang is also known as Gary Wang. Before coming to Australia, he had worked for Conglin Group in China for about sixteen years. After his relocation he was involved in some of the dealings with Mr Zhang alongside Chairman Zhang. He also dealt himself with Mr Zhang on occasions, on Chairman Zhang’s instructions.

20. [43]

    The first transaction which is the subject of a claim in these proceedings took place in December 2014, shortly after Mr Wang arrived in Australia. This was the $200,000 loan from CLGC Australia to Mr Zhang (see [12]-[13] above). The loan was supposed to be for one year. Its purpose was to fund a personal investment by Mr Zhang in Brooker Marine.

21. [44]

    One of the investments made by the CLGC Unit Trust was a short-term loan of $2.3 million to a company called AXF Group Pty Limited (“AXF”). AXF was apparently a property development company. The loan agreement is dated 1 May 2015. It provided for a loan term of 31 days and interest of $191,700 (equating to slightly more than 100% per annum) with a default interest rate of 100% if the loan was not repaid on time. The loan was eventually repaid in September of that year, netting $450,000 in interest, half of which was divided between RZC and TYGA in accordance with the profit-sharing arrangement applicable to investments which generated a 100% per annum return.

22. [45]

    The second transaction which is the subject of these proceedings took place in September 2015, at around the same time as the repayment of the loan by AXF. This was the $3 million payment from CLGC Investment to WHI pursuant to the deed of assignment under which CLGC Investment was to acquire the economic benefit of WHI’s unit-holding in the Coronation Parramatta Unit Trust (see [14] above).

23. [46]

    WHI’s investment in the Unit Trust had been made the year before. WHI had been incorporated at that time. The shareholders in WHI appear to have been principals or other associates of WH Beijing. They were Zhang Xiaowei, a Chinese lawyer, who is not related either to Mr Zhang or Chairman Zhang (40%); Mr Guo (30%); and Meng Lifeng, another Chinese lawyer (30%). The directors were Mr Guo, Mr Meng and Mr Zhang.

24. [47]

    According to what Mr Zhang told Chairman Zhang, the combined investment in the Unit Trust had been $2 million. The three Chinese shareholders of WHI had contributed $1.8 million between them and Mr Zhang had contributed $200,000. On these figures, the Chinese shareholders made a combined profit of $900,000 out of the “sale” to CLGC Investment, and Mr Zhang made a profit of $100,000.

25. [48]

    Following the $3 million payment WHI remained the registered owner of the units. The three Chinese shareholders were paid out and appear to have taken no further interest in WHI. Mr Guo and Mr Meng remained as directors, but control of the company for practical purposes was left with Mr Zhang.

26. [49]

    In February 2016, SEP and SEPAM were incorporated. This was for the purpose of a new venture between Mr Zhang and Chairman Zhang, which had been devised by Mr Zhang. The idea was to provide an alternative way for Chinese parents to fund the education of their children in Australia by means of something like an education bond. The parents would deposit with SEP capital sums (say, $500,000 each) from which their children’s education would be funded. SEP would accept liability to repay this amount (to the extent not expended) and in the meantime would have use of the money for investment purposes, from which it would generate its return.

27. [50]

    SEP had a complicated share structure involving different classes of shares. The A Class shares were held by Mr Zhang (50%); Chairman Zhang (40%); and Qin Xue (10%). Mr Zhang was from the outset the sole director. Qin Xue’s role is not revealed by the evidence.

28. [51]

    SEPAM was wholly owned by Mr Zhang. He was also appointed the sole director from incorporation. Chairman Zhang held office as a director between 31 March and 4 May 2016, and again from 5 May 2016 onwards.

29. [52]

    Meanwhile, in December 2015 the loan from CLGC Australia to Mr Zhang had fallen due for repayment. Mr Zhang did not repay the loan, but he continued to pay interest.

30. [53]

    Earlier in 2015 a dispute had arisen about the realisation of the Sussex Street property in which CLGC Holdings had an interest (see [41] above). The dispute resulted in litigation in this Court, the nature of which is not revealed by the evidence. Eventually the sale of the property was completed in October 2016. As a result some of the proceeds were paid into WHL’s trust account, to the credit of CLGC Holdings.

31. [54]

    This was the background to the third and fourth transactions, which involved payments of money out of the funds in WHL’s trust account (see [17] and [18] above). The third transaction involved a payment of $110,000 in October 2016. The fourth transaction involved a payment of $70,000 in November, two weeks later.

32. [55]

    The fifth transaction (see [19] above) also involved the payment of money by CLGC Holdings, apparently also representing proceeds of the Sussex Street property. In this case the payment was $1.5 million which was paid to AXF at the direction of RZC. The payment was made in December 2016.

33. [56]

    The sixth transaction (see [20] above) involved a payment of $1.5 million by CLGC 191 in June 2017. Again this payment was straightforward. It represented the drawdown of a loan to RZC pursuant to a written loan agreement between CLGC 191 and RZC (with Mr Zhang as guarantor) which had been executed in late May.

34. [57]

    At some point over the following couple of months, Chairman Zhang appears to have lost confidence in Mr Zhang. The last interest payment on the various loans from Mr Zhang and RZC had been made in mid-May. In August 2017 or thereabouts Chairman Zhang terminated Mr Zhang’s retainer.

35. [58]

    Chairman Zhang appointed a new solicitor, Mr Hudson Lu, to act for him in Australia. On 12 September, Mr Lu wrote to Mr Zhang requesting the transfer of all files in which he had acted for Chairman Zhang or any of the Australian companies.

36. [59]

    Mr Zhang transferred the files in answer to this request. But he remained the sole director of WHI and thus retained control of the units in the Coronation Parramatta Unit Trust which had been the subject of the deed of assignment in favour of CLGC Investment two years before.

37. [60]

    Two days after Mr Lu’s letter, Mr Zhang caused WHI to enter into an agreement to sell its units in the Coronation Parramatta Unit Trust. The agreed price was $3.6 million. Within a few days, the purchasers made a part-payment of $200,000 in accordance with the agreement.

38. [61]

    In November 2017 the $1.5 million loan from CLGC 191 to RZC which was the subject of the May 2017 loan agreement fell due for repayment. No repayment was made. Mr Lu wrote to Mr Zhang formally demanding repayment of the loan, and of the $200,000 loan made in December 2014. Mr Lu made other demands, including for repayment of the $3 million paid under the deed of assignment and the $1.5 million paid to AXF in December 2016.

39. [62]

    None of Mr Lu’s demands was complied with. Brooker Marine had gone into administration in August 2017. It is now in liquidation, and the liquidator has confirmed that there will be no return for shareholders.

40. [63]

    During the first half of 2016 preliminary steps had been taken to establish the SEP business. It is not clear from the evidence how far the project got. Chairman Zhang ceased to be a director of SEPAM on 27 September 2017, after he fell out with Mr Zhang. This left Mr Zhang as the sole director of both SEP and SEPAM. The SEP venture eventually failed and became the subject of separate litigation in the Federal Court.

41. [64]

    The agreement for the sale of the units in the Coronation Parramatta Unit Trust had been due to complete at the end of February 2018. The purchasers paid $200,000 in consideration of extending the settlement date for purchase until 18 May.

42. [65]

    The present proceedings were commenced by the filing of a statement of claim on 9 April 2018. At that stage the defendants named in the proceedings were Mr Zhang, WHL, RZC and WHI.

43. [66]

    On 22 April Mr Zhang notified the claim to Lawcover. On 3 May Lawcover wrote to him denying the claim.

44. [67]

    On 16 May, the time for completion of the sale of the units in the Coronation Parramatta Unit Trust by WHI had arrived and it was necessary to execute the transfers of the unit holdings. The transfer forms were prepared for signature by Mr Guo and Mr Zhang as directors of WHI. But Mr Guo did not sign them. Instead Mr Zhang himself wrote Mr Guo’s name (in Chinese characters) above his signature. The transfers were accepted and the transaction was completed. The purchaser paid the sum of $3 million to complete. This brought the total paid to $3.4 million; the discrepancy with the original sale price of $3.6 million was not explained in the evidence.

45. [68]

    Most of the money received from the sale of the units was quickly on-lent to SEPAM. Some of the proceeds were further distributed to SEP, RZC, Mr Zhang and WHL. Once the sale came to the notice of the plaintiffs, a successful application was made for freezing orders to prevent further dissipation of the monies still in the defendants’ hands.

46. [69]

    In October, further defendants were joined to the proceedings, including Mr Guo. This provoked correspondence between Mr Zhang and Mr Guo in which Mr Zhang tried to prevent Mr Guo from exposing the fact that he had not signed the transfers of the units back in May. As I have already described, the claim against Mr Guo was later dismissed and he dropped out of the proceedings.

Summary and analysis of evidence

1. [70]

   The plaintiffs’ witness evidence came from Chairman Zhang and Mr Wang. Both of them were cross-examined. There had been some disagreement (but not much) between some details in their affidavits and those of Mr Zhang, but as will be seen the differences were not ultimately pursued. There was no challenge to their credit and I see no reason not to accept their evidence so far as it goes. I say “so far as it goes” because each of them was being asked to recall oral conversations years after the event and the difficulties of giving reliable evidence in such circumstances are well known.

2. [71]

   Mr Zhang was the sole witness for the defendants. He was extensively cross-examined, with substantial challenges being made to his credit.

3. [72]

   The proceedings revealed a litany of discreditable behaviour, and attempts at obfuscation, by Mr Zhang. He had not admitted liability even for the amounts due under the written loan agreements, but one by one his defences were dropped. It also emerged clearly that, after having procured the effective sale of WHI’s units in the Coronation Parramatta Unit Trust to CLGC Investment, he then sold the units a second time to the third party purchaser and retained the benefit of the proceeds in companies which he controlled.

4. [73]

   Most troubling of all was Mr Zhang’s refusal in cross-examination to acknowledge that by writing Mr Guo’s name on the transfer form he had effectively forged Mr Guo’s signature. I was concerned that a solicitor holding a current practising certificate could profess such an attitude and raised my concern with counsel for the defendants, who obtained an undertaking from Mr Zhang not to practise until the issue had been satisfactorily resolved. That undertaking was continued and eventually Mr Zhang surrendered his practising certificate.

5. [74]

   There were other challenges to Mr Zhang’s credit, but it is not necessary to detail them. Counsel for the defendants did not suggest that I should prefer Mr Zhang’s evidence to the evidence of Chairman Zhang or Mr Wang on any point and it is unnecessary to make any further general comments about his evidence.

6. [75]

   None of the six payments in these proceedings formed part of a transaction which was the subject of a specific retainer agreement. As will be seen, counsel for the plaintiffs contended that some of the payments fell within the terms of written letters of engagement, but counsel also argued that there was a general relationship of solicitor and client between WHL on the one hand and each of the Australian companies on the other which derived from Mr Zhang’s relationship with Chairman Zhang.

7. [76]

   In evidence are three letters of engagement dated from 2011-2012 which covered WHL’s work on obtaining visas for Chairman Zhang and his wife Ms Lu (see [28] above). In the first, dated June 2011, Ms Lu was identified as the client. In the second, issued in October 2011, it was CLGC 191 (as proposed employer sponsor). In the third, dated March 2012, it was Chairman Zhang himself. But in each case, the work identified in the letter of engagement was confined to tasks directly associated with applying for visas. There was no reference to any other transactions or investments.

8. [77]

   The proposed investment in Brooker Marine in 2013 (see [34] above) was the subject of a further letter of engagement between WHL and CLGC 191 which was signed in April 2013. The letter was signed on behalf of WHL by Mr Donovan who at the time appears still to have been the senior lawyer at WHL. The letter of engagement covered due diligence investigations and any resulting acquisition, including the preparation and completion of the acquisition agreement and any necessary transfers of property.

9. [78]

   WHL entered into a similar letter of engagement with Conglin Group in September 2013. This engagement covered the possible purchase of, or entry into a joint venture with, an Australian architecture/interior design firm. There was no further evidence about this proposed transaction, and it appears not to have eventuated.

10. [79]

    After the acquisition of Brooker Marine was completed, there was a period of about two years during which WHL made monthly charges of $5,500 (plus disbursements) representing some sort of ongoing management or service charge. But it seems that no new letter of engagement was entered into.

11. [80]

    Meanwhile, as I have already described, Mr Zhang continued to be involved in the making of new investments. The July 2014 memorandum from Mr Zhang to Chairman Zhang which proposed the establishment of the CLGC Investment Trust (see [39] above) identified Mr Zhang’s status as a solicitor as part of the rationale for his involvement in the venture. After referring under the heading “background” to Mr Elcham’s experience in identifying real estate investment opportunities, the memorandum continued:

12. [81]

    The memorandum went on to indicate how this would operate in the case of the CLGC Investment Trust:

13. [82]

    In September 2014, once the Trust had been established, WHL issued a formal letter of engagement with CLGC Investment, the trustee. The letter described the scope of the services to be provided as:

14. [83]

    On the same date in September 2014, WHL issued a letter of engagement with CLGC Holdings to cover the sale of the Sussex Street property (see [53] above). The work also included the collection of rent and the payment of expenses (including loan interest) out of the monies collected. When the dispute about the sale led to litigation in this Court further formal letters of engagement were issued in May and July 2015 for acting in the proceedings.

15. [84]

    These are the last formal engagement letters in evidence. But there is one further piece of formal evidence which is relevant.

16. [85]

    In September 2015, Mr Zhang borrowed the sum of $600,000 for a short period of time. According to Chairman Zhang, the loan was not approved, but the money was quickly replaced. For reasons which are not explained in the evidence, but may be guessed at, Mr Zhang later had Chairman Zhang sign an authority. The authority stated:

17. [86]

    In his affidavit Chairman Zhang stated:

18. [87]

    After referring to some of the specific letters of engagement which were signed at various stages, Chairman Zhang continued:

19. [88]

    Mr Zhang in his affidavit did not dispute this evidence. He said however that early in 2014 he had the following conversation with Chairman Zhang:

20. [89]

    In cross-examination by counsel for Lawcover Chairman Zhang was pressed about how he understood the nature of his relationship with Mr Zhang. He gave the following evidence:

21. [90]

    Counsel for the plaintiffs emphasised in final submissions the evidence of Chairman Zhang which I have quoted above in which Chairman Zhang described an agreement with Mr Zhang that Mr Zhang would undertake, as required, legal work on investments undertaken by Chairman Zhang in Australia. Counsel pointed out, correctly, that it had not been suggested to Chairman Zhang that the conversation had not taken place. Counsel invited me to find that the conversation had set the ground rules for all subsequent investments after 2012, whichever company those investments were carried out through.

22. [91]

    But although this evidence from Chairman Zhang was effectively unchallenged, I have some doubts about whether a conversation in the precise terms recorded in the affidavit took place as early as 2012. Chairman Zhang’s version of events is noticeably similar to the proposal put forward in Mr Zhang’s memorandum of July 2014 (see [80] above). In particular, that proposal refers to the role to be played by Mr Elcham and reads as if Mr Zhang were introducing Mr Elcham to Chairman Zhang for the first time. It is difficult to resist the conclusion that Chairman Zhang may have telescoped the July 2014 proposal together with earlier events.

23. [92]

    The point of this is that it is clear from the terms of Mr Zhang’s July 2014 memorandum that the proposal under which he was to provide administrative and legal services was one which was specific to CLGC Investment as trustee of the CLGC Investment Trust. There is no reference in the memorandum to the undertaking of investments through, and provision of services to, other CLGC companies.

24. [93]

    There is also the fact that there were numerous specific letters of engagement entered into with the different companies for different purposes. These included one with CLGC Investment which generally covered its investment activities. Chairman Zhang’s explanation that the engagement letters were only for authority purposes (see [87] above) does not seem to be a complete one. As Chairman Zhang himself noted, Mr Zhang did charge fees for some matters. He also opened a number of different files in the names of different companies. It seems that, at least in Mr Zhang’s mind, there were at least some aspects of the work he did for Chairman Zhang which represented discrete legal matters.

25. [94]

    The ultimate significance of all this, however, is limited. The July 2014 memorandum shows that the proposal was consistent with a more general business model being offered by Mr Zhang of a “one stop shop”, and all of the transactions with which these proceedings are concerned took place after July 2014. In this period Mr Zhang was describing himself as Chairman Zhang’s solicitor (see [86] above). Admittedly this was in the context of a “loan” from CLGC Investment, not one of the other companies. But even putting that to one side, the evidence shows that throughout the relevant period Mr Zhang in fact provided a “one stop shop” for all of Chairman Zhang’s companies, not merely CLGC Investment.

26. [95]

    Some weight must also be given to the fact that Chairman Zhang’s account was not challenged. Indeed it goes further than that. Mr Zhang’s response to what Chairman Zhang said was not to deny it outright but to suggest that there was later an agreement between them that Mr Zhang would relinquish any legal role in his work with Chairman Zhang. It is significant that Mr Zhang placed this alleged conversation in early 2014, which was well before the July 2014 memorandum.

27. [96]

    I do not accept Mr Zhang’s evidence on this point. But the fact that Mr Zhang felt obliged to put it forward is significant. It bespeaks a consciousness on Mr Zhang’s part that he was providing legal as well as commercial advice to Chairman Zhang, and that this was not tenable.

28. [97]

    Accordingly, even if Chairman Zhang’s account of the 2012 conversation has had details of later events introduced into it, there is every reason to think that it reflected a wider but informal understanding reached at an earlier time.

29. [98]

    The earliest documentary evidence of the loan arrangement is an email dated 2 December 2014 from Mr Zhang to Mr Wang. The email was sent from Mr Zhang’s WHL email address using what I infer was the template used by Mr Zhang on professional business for WHL. Mr Zhang signed as “Legal Practitioner/Director” for “WH Lawyers Australia”; the logo and a list of branch offices of the Chinese firm, WH Lawyers, also appeared.

30. [99]

    The email stated:

31. [100]

    The $200,000 was paid in three tranches on 2, 3 and 4 December. The transaction was documented as a loan agreement dated 12 December. The agreement was executed on behalf of CLGC Australia by Ms Lu.

32. [101]

    The loan agreement was in conventional form. It had a cover page bearing the name “W&H Lawyers”. The term of the loan was one year from the date of the loan agreement. The interest rate was nil for the first six months of the loan and then 5% thereafter. Clause 7 provided that the parties agreed that the security specified in the agreement “is security to the intent that the monies owing are secured thereby”. The security was specified as being shares in Brooker Marine issued to Mr Zhang in November 2014.

33. [102]

    The loan came about as a result of a request from Mr Zhang to Chairman Zhang. Chairman Zhang’s account of the conversation was:

34. [103]

    Mr Zhang challenged Chairman Zhang’s version of events in his second affidavit, but the affidavit was ultimately not read. Chairman Zhang was however cross-examined about the security provided for in the agreement. He said:

35. [104]

    There is written evidence of the proposal which led to the deed of assignment between CLGC Investment and WHI over WHI’s units in the Coronation Parramatta Unit Trust. It is found in an email dated 16 September from Mr Zhang to Chairman Zhang. The email relevantly stated:

36. [105]

    The Deed of Assignment itself was dated 18 September 2015, two days later. It provided (clause 2) that in consideration of the payment of $3 million, WHI agreed to assign its units in the Coronation Parramatta Unit Trust to CLGC Investment. But it contained no provisions for a formal assignment to follow, and it is common ground that the parties did not consider that to be possible. Clause 5 provided that WHI would hold “any payments it entitles to [sic] under the” Trust on trust for CLGC Investment and distribute such payments at CLGC Investments’ request.

37. [106]

    Chairman Zhang recalled the background to the investment in his affidavit evidence. He said that in around August 2015, Mr Zhang called him to describe an investment opportunity in Parramatta. The following conversation took place:

38. [107]

    Both in his affidavit and in cross-examination, Mr Zhang agreed with Chairman Zhang’s version of events. Chairman Zhang was cross-examined on the investment as follows:

39. [108]

    Mr Wang was also cross-examined about the investment:

40. [109]

    The payment in question was made by WHL out of trust on 24 October 2016. The narrative recorded referred to an invoice issued by TYGA, the company associated with Mr Elcham [see [39] above]. There was a supporting invoice from TYGA which was addressed to CLGC. It described the $110,000 as a “Co-ordination Fee” for the sale of the Sussex Street property.

41. [110]

    According to Mr Wang, he first noticed the payment in February 2017. In his affidavit evidence he deposed that after this discovery, he had the following conversation with Mr Zhang:

42. [111]

    Mr Wang said that the payment had never been authorised by him. Chairman Zhang gave evidence to similar effect, that he was unaware of the payment when it was made and never authorised it. Mr Zhang revealed at the hearing that following the transfer of the $110,000 to TYGA, a sum of $56,000 was transferred by TYGA to RZC.

43. [112]

    Mr Zhang provided a rival version of events in his affidavit, but the relevant paragraphs were ultimately not read. Neither Mr Wang nor Chairman Zhang was challenged about what they said in their affidavits.

44. [113]

    This payment was made out of WHL’s trust account on 4 November 2016. It was made in favour of Mr Zhang personally. Mr Zhang repaid it the following February.

45. [114]

    The evidence does not reveal what the payment was for, although Mr Zhang suggested it was to do with a property venture which did not proceed. Until Mr Wang brought it to Chairman Zhang’s attention in February 2017, he had been unaware of the payment (and repayment).

46. [115]

    Mr Zhang provided a rival version of events in his affidavit, but the relevant paragraphs were ultimately not read. Both Mr Wang and Chairman Zhang gave evidence that they had not authorised the payment and this evidence was not contested.

47. [116]

    Although this payment to AXF (see [55] above) was not legally documented from CLGC Holdings’ point of view, a contemporaneous loan agreement was drawn up for a loan from RZC to AXF. The agreement was in substantially the same form as the loan agreement between CLGC Australia and Mr Zhang. It was dated 16 December 2016. The principal sum was specified as $3.5 million but it is clear from other terms of the agreement that what was contemplated was an immediate loan of $1.5 million followed by a further loan of $2 million to be drawn later. Interest on the $1.5 million was to be paid at a rate of 100% per annum from the date of the loan agreement.

48. [117]

    Payment was made by CLGC Holdings direct to AXF in two tranches totalling $1.5 million on 16 December. CLGC Holdings’ bank statements identify the recipient as “RZ” not AXF.

49. [118]

    Chairman Zhang’s version of the conversation which preceded this payment was:

50. [119]

    Mr Zhang provided a rival version of events in his affidavit, but the relevant paragraphs were ultimately not read. Chairman Zhang was not challenged about what he said in his affidavit.

51. [120]

    The loan agreement pursuant to which this payment was made (see [20] and [56] above) was dated 26 May 2017. It was another agreement in substantially the same form as those I have described. Once again it bore the name “W&H Lawyers” on the front page. The due date for repayment was 180 days and the interest rate was 35% per annum. RZC was the borrower and Mr Zhang was the guarantor. The payment was made by bank cheques which were deposited into the account of RZC on 13 June 2017.

52. [121]

    On Chairman Zhang’s account, this loan originated in a discussion with Mr Zhang in May 2017:

53. [122]

    Mr Zhang provided a rival version of events in his affidavit, but the relevant paragraphs were ultimately not read. Chairman Zhang was not challenged about what he said in his affidavit.

Payment 1: December 2014 loan to Mr Zhang

1. [123]

   The payment was formally documented as a loan from CLGC Australia to Mr Zhang. On the first day of the hearing, counsel for Mr Zhang acknowledged that his pleaded defences could not succeed. Accordingly, later that day I entered judgment in debt against Mr Zhang in the sum of $258,054, representing the unpaid principal and outstanding interest.

2. [124]

   The statement of claim alleged that both WHL and Mr Zhang personally acted as legal representatives for Chairman Zhang and each of the plaintiff companies for the whole period from 2011 (or, in the case of companies incorporated after that date, from the date of incorporation) down to when instructions were withdrawn from Mr Zhang in August 2017. The particulars in support of this allegation set out each of the letters of engagement to which I have referred. The statement of claim went on to allege that as legal representatives, each of WHL and Mr Zhang owed their clients duties of care in tort and fiduciary duties.

3. [125]

   The plaintiffs’ case would have supported claims against WHL based on obligations to act with proper skill and diligence implied in the contract of retainer, as well as a duty of care in tort. But this was not expressly pleaded and would probably have made no practical difference in the circumstances of this case. It does not need to be considered further.

4. [126]

   Having alleged the existence of a tortious duty of care and a fiduciary duty, the statement of claim pleaded each of the relevant transactions and made specific allegations of breach of duty concerning that transaction. The defendants denied the existence of any relevant duty, as well as denying breach if a duty existed.

5. [127]

   It emerged in the opening by counsel for the plaintiffs that the plaintiffs’ case on the existence of solicitor’s duties was not limited to the formal letters of engagement. As I have already noted, counsel for the plaintiffs accepted that not all of the transactions were the subject of a formal retainer, but relied on the existence of an overarching relationship of solicitor and client derived, so it was contended, from the relationship between Mr Zhang and Chairman Zhang. Each of the transactions in question was said, implicitly if not expressly, to have been the subject of a retainer to WHL.

6. [128]

   Counsel for the defendants complained that this was not properly open on the pleadings. Counsel’s first point was that, to the extent that the plaintiffs relied upon a retainer implied from the overarching relationship between Mr Zhang and Chairman Zhang (as they did in the case of the December 2014 loan, there being no written letter of engagement concerning the loan, and indeed no written engagement letter with CLGC Australia at all), that implied retainer had not been pleaded.

7. [129]

   In the context of the December 2014 loan, the critical fact concerning retainer is the oral agreement between Mr Zhang and Chairman Zhang, established by the evidence (see [102] above), that Mr Zhang (meaning WHL) would draw up a loan agreement. That is reflected in the fact that the loan agreement bore WHL’s name. This in fact would support an express oral specific retainer, rather than one which was implied from the general relationship between Mr Zhang and Chairman Zhang.

8. [130]

   The statement of claim pleaded that WHL and Mr Zhang prepared the agreement and acted for CLGC Australia in doing so. It did not however plead an oral retainer based on the conversation between Chairman Zhang and Mr Zhang. It would have been better if it had done so. But the evidence in question was given without objection. No complaint was raised prior to the hearing or in the opening by counsel for the defendants. I can see no reason why, had the point been taken at that stage, an amendment would not have been permitted to supply the deficiency. Certainly it was not suggested that there was any specific prejudice to the defendants. I reject this pleading point.

9. [131]

   On the evidence, I think it is clear that WHL was indeed retained by CLGC Australia to act on the loan transaction. I say “act on the transaction”, rather than merely draft the loan agreement, because, although all that was mentioned orally was drawing up the agreement, the conversation took place before the money was paid over and the retainer had been established by that point. Any obligation to disclose, if disclosure was called for, thus arose before the money was paid over.

10. [132]

    The next pleading complaint by counsel for the defendants was that the statement of claim failed to plead the content of WHL’s and Mr Zhang’s duties as solicitor. I understood this complaint applied both to the duty of care alleged at common law and the fiduciary duty alleged in equity. Counsel submitted that rather than baldly alleging, for instance, that WHL and Mr Zhang owed a “fiduciary duty” to CLGC Australia, the statement of claim needed to go on and specify that WHL and Mr Zhang were thereby obliged not to prefer their own interests to those of CLGC Australia, not to act in circumstances of conflict, etc.

11. [133]

    I do not accept this submission. The existence and scope of a duty of care is a legal conclusion based on the facts which have been established. In the present case the relevant facts determining the duty’s existence and scope were the terms of the retainer and the actions taken pursuant to it. If the relevant facts are pleaded (as they were in this case) the legal consequences of those facts do not have to be.

12. [134]

    A plaintiff may, of course, be required to plead a point of law if failure to do so could cause unfair surprise to the defendant. It is conceivable that in the case of a novel duty of care it would be necessary for the plaintiff, in order to avoid surprise, to plead not only the facts of which the claim is based, but also the existence and scope of the duty. But that is not applicable here. The solicitor’s duty of care to the client is a well-established duty. There was no need to spell it out in the present case. Similar considerations apply to the allegation of breach of fiduciary duty. I reject the second pleading point.

13. [135]

    In support of the allegation of breach of the tortious duty of care, the statement of claim alleged that at the time of the loan to Mr Zhang, Brooker Marine was in precarious financial circumstances and the security, in the form of Brooker Marine shares, was insufficient to cover the amount which had been lent. There was no evidence to support this allegation and it gave rise to obvious causation problems given Chairman Zhang’s evidence which I have set out above. In final submissions it was not pressed.

14. [136]

    The allegation of breach of fiduciary duty was pleaded as follows:

15. [137]

    The personal benefit to Mr Zhang constituted by receipt of the loan monies would have been obvious to Chairman Zhang. As the loan was, for part of the loan period, at no interest, it would also have been obvious to Chairman Zhang that, at least for that period, it was at a lower interest rate than was available on the market. There was no evidence that thereafter the interest rate was below market rates, but if it was it is hardly likely that Chairman Zhang would have been unaware of that.

16. [138]

    These allegations of breach were not developed by counsel. Instead counsel emphasised Mr Zhang’s failure to advise Chairman Zhang to obtain independent legal advice. But while that is relevant to the breach alleged, it is not the critical matter.

17. [139]

    A solicitor’s duty in the case of a conflict is not a duty to refer the client to an independent solicitor as such. The duty is not to act without fully informed consent. Suggesting that the client take independent advice may be relevant to whether fully informed consent has been obtained, but it is not the same thing. If all the solicitor does is tell the client that independent advice can be obtained, without explaining the reasons why the solicitor’s conflict may prejudice the client, the client’s consent is unlikely to be fully informed: see Malouf v Constantinou [2017] NSWSC 923 at [103]-[104]. By the same token, it is possible in theory to give a sufficient explanation of the conflict and obtain appropriate consent without expressly recommending that the client obtain independent advice.

18. [140]

    In my view the real complaint in this case is (or needed to be) about disclosure. Once WHL undertook responsibility to act on the loan as solicitor, it was obliged to make disclosure to its client of any information, whether derived from performing the work under the retainer, or otherwise, relevant to the decision about proceeding with the loan.

19. [141]

    In the present case, because WHL was acting through Mr Zhang, this would include all information Mr Zhang had, not only about Brooker Marine, but about his own financial circumstances, if such information bore on whether he was a good credit risk. Furthermore, if Mr Zhang would in fact have been prepared to pay a higher interest rate, or otherwise enter into the loan on terms which were more favourable than those which he was asking for, that fact would have been relevant and should have been disclosed. (Incidentally, this underlines why reference to an independent solicitor is not the question in this case: had an independent solicitor been retained, that solicitor would not have had the information in question.)

20. [142]

    Breach of an obligation to disclose relevant information might properly be classified as a breach of the solicitor’s obligations at law, rather than breach of exclusively equitable obligations. But leaving that to one side, the case was not presented on such a basis. There was no evidence of what Mr Zhang’s financial position was, or the terms on which he would have been prepared to borrow.

21. [143]

    Furthermore, there is the question of causation where compensation is sought for breach of an equitable duty. That question was recently considered by the Court of Appeal in a breach of trust case, Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5 at [94]-[104]. The Court made it clear (at [96]-[97]) that in order to recover equitable compensation for a loss following a breach of trust, it is necessary to prove on the balance of probabilities, and on a “but for” basis, that the loss resulted from the trustee’s breach. Counsel did not suggest that the principle is any different where equitable compensation is claimed from a solicitor.

22. [144]

    In the present case, there was no evidence that, had an independent solicitor been retained, this would have made any difference to the loan. There is no reason to think that it would have, given Chairman Zhang’s evidence. The claim against WHL fails.

23. [145]

    As I have mentioned, the plaintiffs made claims not only against WHL but also against Mr Zhang personally. A consequence of the statutory provisions which now permit incorporated legal practices is that it was WHL which was the solicitor, not Mr Zhang personally. Mr Zhang was only the individual through whom WHL undertook the work.

24. [146]

    So far as the tortious claim at common law is concerned, this does not create a problem. There is no reason to doubt that Mr Zhang was under a personal duty of care to the client in carrying out the work under the retainer, just as a solicitor employed by a partnership would be.

25. [147]

    The position in equity is more complicated. A solicitor’s fiduciary obligations to the solicitor’s client have traditionally been seen as incidents of the retainer between solicitor and client. The solicitor will be liable for conduct of an employee or agent who actually undertakes the work under the retainer on the solicitor’s behalf. If there is a breach by the solicitor, the employee or agent may be liable for participation in the breach on the principles in Barnes v Addy (1874) LR 9 Ch App 244. But it is far from clear that the employee or agent owes to the client direct fiduciary duties equivalent to those owed by the actual solicitor. For one thing, it is hard to see how the remedy of account, which is the paradigm equitable remedy in this field, could operate against the employee or agent personally when property received or dealt with under the retainer is, in law, received or dealt with by the solicitor.

26. [148]

    Counsel for the plaintiffs submitted that the effect of s 33 of the Legal Profession Uniform Law 2014 (NSW) (read together with the definition of “professional obligations” in s 6(1)) was to make Mr Zhang, as the solicitor-director responsible for the discharge of WHL’s obligations under the retainer, personally liable in equity for breaches by WHL of its equitable obligations. The point was not, however, the subject of detailed argument. In view of the conclusions that I have reached I do not need to consider it any further.

27. [149]

    Counsel for Lawcover emphasised the distinction drawn in the authorities between financial or commercial advice on the one hand or legal advice on the other. Counsel pointed out that no complaint had been made about the terms of the loan agreement itself. Counsel submitted that the real reasons for the loss was that Mr Zhang had proved to be a bad credit risk.

28. [150]

    The insuring clause covers liabilities as solicitor for claims that arise “from the provision of legal services”. The term “legal services” is defined as meaning:

29. [151]

    I do not completely accept the premise of counsel’s submission. It is true that Mr Zhang was providing advice of a commercial nature. Chairman Zhang himself saw his relationship with Mr Zhang as having a commercial dimension as well as a legal one. I accept that to the extent that Mr Zhang was performing work for Chairman Zhang, or advising him, on a commercial issue, that was not something in the ordinary course of his business as a solicitor.

30. [152]

    But it is perfectly possible for the two relationships to co-exist. In particular, complaint about breach of a solicitor’s duty in failing to make adequate disclosure seems to me to be a liability which would usually fall within the ordinary course of business, even if the subject matter of the transaction is a commercial loan to the solicitor himself.

31. [153]

    In the end, it is not necessary to resolve this question for the purpose of dealing with this part of the case. I have found that neither WHL nor Mr Zhang is liable for breach of fiduciary duty, and accordingly, the question of indemnity against such liability does not arise.

Payment 2: consideration for assignment of WHI interest in Coronation Parramatta

1. [154]

   An assignment which is ineffective, or not completed, at law, is still effective in equity if given for consideration: see J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths) at 237 [6-050]. That was the position in the present case. WHI was unable to transfer the units in the Coronation Parramatta Unit Trust to CLGC Investment as purchaser (or at least the parties seem to have assumed that that was so). But CLGC Investment had paid $3 million and the effect was to give it an equitable interest in the units.

2. [155]

   It may be that the provision in the deed of assignment about WHI holding “payments” received “under” the Coronation Parramatta Unit Trust was wide enough to apply directly to the proceeds of the sale of those units in 2018. But even if the express terms of the deed did not go so far, that was not necessary. The effect of the assignment itself was in effect to constitute WHI as trustee of the units for CLGC Investment. Whether WHI was a trustee in the strict sense, or only subject to equitable obligations analogous to those of a trustee (Meagher, Gummow and Lehane at 238-239 [6-050]) does not matter. Upon sale of the units WHI held the $3.4 million in proceeds on trust for CLGC Investment.

3. [156]

   In these circumstances I suggested to counsel for the defendants that WHI would be liable to account to CLGC Investment for those proceeds. Counsel did not demur. Nor was it suggested that there were any deductions available to WHI (for instance, expenses of sale or just allowances). Accordingly, counsel accepted there should be judgment in favour of CLGC Investment against WHI for $3.4 million plus interest from the date of receipt of that amount.

4. [157]

   To the extent that the proceeds flowed on to other defendant companies, there was no dispute that the defendants were liable to account to CLGC Investment for the amounts received by them together with interest from the date of receipt, and there should be judgment accordingly. It was agreed on the last day of submissions that the parties would submit a minute of order, and on 4 May I entered judgment as follows (together with interest):

5. [158]

   The plaintiffs pleaded a case of misleading and deceptive conduct against WHI (acting through Mr Zhang). There was also a pleaded case of misleading and deceptive conduct against Mr Zhang personally. It was alleged that Mr Zhang made representations to Chairman Zhang about the profitability of the venture and also about the effectiveness of the structure which he had devised whereby WHI was to remain the owner of the units. Those representations were alleged to have been misleading or deceptive, including because they were representations as to future matters which were taken to have been misleading or deceptive unless evidence was presented to the contrary: Competition and Consumer Act 2010 (Cth) Sch 2 – Australian Consumer Law, s 4(1).

6. [159]

   Little attention was paid to these claims in the course of the evidence or in final submissions. In the end, the favourable predictions attributed to Mr Zhang were not disputed; nor did counsel for the defendants suggest that there was any evidence that Mr Zhang had acted reasonably in making those predictions. Nor was any point taken by counsel for the defendants about whether Mr Zhang, as an individual, was subject to the relevant provisions of the Competition and Consumer Act. On the face of it, therefore, the claims succeed.

7. [160]

   However, it would only be to the extent that CLGC Investment fails to recover under its judgments against the recipients that any question of loss will arise (note that CLGC’s judgment against WHI is for $3.4 million plus interest from the date of receipt, whereas any judgment for damages would be calculated by reference to the $3 million originally invested, although interest would run from the date of the investment). No doubt there will be a shortfall, but there is no evidence before me which would allow me to assess how much it is likely to be.

8. [161]

   It would be open to the Court to enter another overlapping judgment against WHI on the separate cause of action (as for example in Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540, where there had been separate judgments entered for the same damage under separate causes of action: see order 5(g) set out in [2003] HCATrans 648). But there may be no practical utility in doing so. I could also enter judgment against Mr Zhang but in view of the number of judgments against him already there may again be no point. Accordingly, I propose to defer the misrepresentation claims for further consideration following the delivery of my judgment.

9. [162]

   There was no dispute that acting on the transaction which resulted in the deed of assignment fell within the terms of the letter of engagement of 22 September 2014 (see [82] above). Both WHL and Mr Zhang therefore owed tortious duties of care to CLGC Investment as the client, and WHL (at least) owed fiduciary duties.

10. [163]

    The statement of claim pleaded a case of breach of duty of care, but this was not pursued in final submissions. What was pursued was a case of breach of fiduciary duty.

11. [164]

    The pleading of this claim was diffuse. It consisted of a recitation of alleged representations and other facts which went for 27 paragraphs, and dealt not only with entry into the transaction but also with the subsequent failure to account for the $3.4 million received. The statement of claim then pleaded that “for the reasons pleaded” in those paragraphs WHL and Mr Zhang had breached their fiduciary duty “in respect of the Parramatta project”.

12. [165]

    This form of pleading was unsatisfactory. There should have been a much more precise identification of the facts, or alleged facts, upon which breach of duty depended. But no point has been taken about this and all facts pleaded are therefore available, to the extent relevant, to support the equitable claim.

13. [166]

    In opening written submissions, counsel for the plaintiffs emphasised what were alleged to be personal benefits received by Mr Zhang as a result of the transaction. But again this was of little use in identifying the actual conduct of Mr Zhang as a solicitor which could have given rise to breach of fiduciary duty. In oral submissions counsel for the plaintiffs focused on two pleaded matters. First, Mr Zhang had failed to disclose that he remained a director of WHI. Second, there was the fact that he did not recommend that CLGC Investment obtain independent legal advice.

14. [167]

    Again, I think the reference to independent legal advice is something of a distraction. There is no doubt that Mr Zhang and his associates were on the opposite side of the transaction from CLGC Investment. In effect they were the vendors, and they were making a profit from the sale. But that was clear from the description which Mr Zhang gave to Chairman Zhang.

15. [168]

    There may not have been an express disclosure that Mr Zhang remained a director of WHI, but had Chairman Zhang or Mr Wang thought about the matter at all they would probably have assumed that he would continue. Certainly, it would have been clear to them that following the completion of the transaction CLGC Investment would not have control of WHI, for the simple reason that no provision was made in the deed of assignment for CLGC Investment to acquire the shares in WHI.

16. [169]

    With the benefit of hindsight, this was the fatal deficiency, so far as CLGC Investment was concerned, in Mr Zhang’s “sneaky” plan. Once the economic interest in the units had been disposed of, there was no reason for the investors in WHI, or Mr Zhang, to remain in control of its affairs. Had the deed of assignment stipulated for the transfer of ownership in WHI to CLGC Investment, that would not, so far as appears, have fallen foul of any restriction in the Coronation Parramatta trust deed. Such a transfer would have given CLGC Investment not just an equitable interest but also de facto control over the legal interest. It was the lack of control over the legal interest which enabled Mr Zhang, when the relationship with Chairman Zhang broke down, to effect the sale and appropriate the proceeds as he wished.

17. [170]

    A complaint along these lines would have had considerable force as a criticism of the legal work done by Mr Zhang in preparing the deed of assignment. Arguably the deed simply failed to protect CLGC Investment’s interests adequately. Probably this could have been formulated not as a purely equitable claim but as an ordinary breach of common law duty.

18. [171]

    At times during the oral argument, counsel for the plaintiffs flirted with such a complaint. But in the end I do not think it is available. Although it is supported by the evidence as it has come out, in my view the complaint does not fairly arise out of the pleaded case. Although at present I cannot see an answer to it, I think it would be unfair to the defendants to allow it to be raised and formulated in this way for the first time in final submissions, especially bearing in mind the diffuse and unsatisfactory way in which the breach of duty claims were formulated in the statement of claim.

19. [172]

    Returning to the claim as pleaded, I am not satisfied that the failure to disclose that Mr Zhang was a director of WHI is of sufficient significance, of itself, to amount to a breach of solicitor’s duty. Furthermore, there is no evidence from the plaintiffs that, had the disclosure been made, it would have made any difference to the decision to enter into the transaction. The claim for breach of solicitor’s duty against WHL therefore fails. There is no need to consider whether a personal claim would be available against Mr Zhang.

20. [173]

    Again, counsel for Lawcover referred to the distinction between commercial and legal advice, submitting that the advice in question was commercial in nature. Counsel also relied on the fraud exclusion in clause 11 of the policy which provides:

21. [174]

    Again, I am not sure that counsel is correct in characterising the issue as a failure of commercial advice. A complaint of the type I have outlined above would, it seems to me, fall squarely within the type of legal advice (as going to structuring) usually provided by a solicitor.

22. [175]

    But again, because the claim against WHL and Mr Zhang for breach of solicitor’s duty fails, there is no need to reach a final conclusion on this. Nor is there any need to consider whether the claim may be said to arise out of Mr Zhang’s actions (which were no doubt dishonest for the purposes of the clause: see McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579) or the failure to provide adequate protection against this dishonesty (which, counsel conceded, would not).

Payment 3: $110,000 payment out of trust October 2016

1. [176]

   As I have noted, TYGA was not a party to these proceedings and there is, strictly speaking, no recipient liability claim for this amount (although RZC indirectly received $56,000).

2. [177]

   The case against WHL is clear. It was the solicitor. The monies in question were held by it in its bank account on trust for CLGC Holdings as the client. It would have been open to CLGC Holdings to seek an account covering all of WHL’s dealings with that money. But it was not suggested that CLGC Holdings was limited to seeking a full account; it was open to CLGC Holdings to claim equitable compensation for loss flowing from a single unauthorised payment, which is what CLGC Holdings did: see Meagher, Gummow and Lehane at 803 [23-030].

3. [178]

   Counsel for the defendants conceded that in so far as $56,000 of the payment had ended up in RZC’s bank account, there had been a breach of trust. Counsel did not concede that there was a breach for the full $110,000, but did not develop any further argument about the balance other than to say that the evidence did not demonstrate that the payment had been unjustified.

4. [179]

   I do not accept this submission. Either the $110,000 withdrawal was wholly justified or it was not. The fact that $56,000 ended up in RZC’s bank account shows that it cannot have been wholly justified. But even without that fact, I think the evidence shows clearly enough that TYGA had no entitlement to any form of payment.

5. [180]

   Had a formal account been taken, WHL as the accounting party would have had the obligation to explain and justify the payment. WHL made no attempt at the hearing to do so. The evidence showed that another agent, Colliers, had been retained to effect the sale. I am satisfied that the invoice was created simply to give an apparent justification for a payment which was not in the client’s interest.

6. [181]

   It is therefore clear that WHL, as the trustee of the monies, must pay compensation for the full amount of the payment. The position with Mr Zhang is, however, more complicated. RZC could have been made liable on the basis of receipt of trust property to the extent of the $56,000 it received, but Mr Zhang’s only liability would have been on the basis of a claim under the second limb of Barnes v Addy, and no such claim was pleaded against him. In particular, while I have no doubt that Mr Zhang would have been responsible for the payment, there was no pleading against him of dishonest behaviour. The personal claim against Mr Zhang fails.

7. [182]

   As I understood counsel for Lawcover, he did not dispute that the policy responded to a claim of breach of trust by payment out of trust monies without the client’s instructions. But counsel relied upon the exclusion for fraud. I think he was justified in doing so. Although no claim was pleaded against Mr Zhang, I have no doubt that he was responsible for the payment and well aware of its unjustified nature. Accordingly, although the policy responds to WHL’s liability, the indemnity claim fails.

Payment 4: $70,000 payment out of trust November 2016

1. [183]

   Counsel for the defendants did not dispute that this payment, which was made to Mr Zhang personally, was a breach of trust on the part of WHL. Counsel merely noted that the amount had been repaid. But counsel for the plaintiffs pressed for an order that an account be taken of any profit Mr Zhang may have made from the transaction.

2. [184]

   It seems to me inherently very unlikely that any significant profit would have been made; and the utility of such an account, given that I have already given judgment against Mr Zhang for more than $6 million, seems very questionable. However, I think that CLGC Holdings is entitled to an account if it insists on one, although if the process proves to be pointless CLGC Investment might find itself liable for the costs.

3. [185]

   Ultimately the making of orders for an account was not resisted and those orders were among the orders I made on 4 May. Strictly speaking, it seems to me that the only party required to give an account of profits would have been Mr Zhang as the recipient. But the proposed order required an account on a wider basis, which included an account from WHL. Because there was no opposition to this, I made the order in that form.

4. [186]

   In theory, if an account results in the payment of further monies, there might be a question whether the additional liability is covered by the policy. However, the contingency seems to me to be so remote as not to require any further consideration for the purposes of this judgment. Should the parties wish to raise the matter for further consideration following delivery of this judgment then they may do so.

Payment 5: December 2016 payment of $1.5 million to AXF

1. [187]

   The evidence in my view clearly established the existence of an oral “back to back” loan arrangement whereby the $1.5 million paid by CLGC Holdings was to be treated as a loan to RZC, combined with a loan from RZC to AXF. Chairman Zhang’s evidence to that effect was not contested, and it is entirely consistent with, and probably implicit in, the RZC-AXF loan agreement which was drawn up and signed.

2. [188]

   In final submissions, counsel for the defendants did not dispute this analysis. Following the hearing, I entered judgment in favour of CLGC Holdings against RZC in the sum of $4,443,921, consisting of the principal sum together with interest (there was no suggestion that the very high interest rate represented a penalty).

3. [189]

   In final submissions, counsel for the plaintiffs first pressed the claim against Mr Zhang personally for breach of a common law duty of care. Counsel submitted that Mr Zhang advised CLGC to proceed with the loan without a written loan agreement, and in circumstances where he ought to have known that RZC would not or could not repay the loan.

4. [190]

   Counsel also pressed the claims both against WHL and against Mr Zhang personally for breach of fiduciary duty. As with the December 2014 loan to Mr Zhang himself, entry into the transaction was said to give rise to a personal benefit to Mr Zhang (through his interest in RZC) and thus a conflict of interest, which should have led Mr Zhang to advise CLGC Holdings to seek independent legal advice.

5. [191]

   Obviously Mr Zhang did not advise that the advance be documented as a loan by CLGC Holdings. But this allegation of breach of duty was not pleaded. In any event, it is hard to see how such advice would have made any causative difference to the outcome.

6. [192]

   The statement of claim did allege that Mr Zhang ought to have known that RZC would be unable to repay the loan, but no misrepresentation claim was pleaded. It was not, for instance, alleged that Mr Zhang’s advice was false, or that it involved a representation as to a future matter. There was no evidence about RZC’s financial position, or the perceived ability of AXF to repay, at the time of the loan. I therefore do not think that the pleaded breach of duty was established.

7. [193]

   There is a more fundamental difficulty still with this part of the plaintiffs’ claim. Because no stand-alone misrepresentation claim was pleaded, it was necessary to show that Mr Zhang owed a duty as solicitor to give the advice in question. That depended upon establishing that the transaction fell within his retainer as a solicitor, which was questionable.

8. [194]

   It was faintly argued by counsel for the plaintiffs that the making of the loan was covered by the letter of engagement with CLGC Holdings concerning the sale of the Sussex Street property (see [83] above). But as I read that letter of engagement, it is a conveyancing-style retainer which would not extend to the making of a fresh loan out of the proceeds of sale.

9. [195]

   The advice given by Mr Zhang about the transaction was commercial in nature, and fell under Mr Zhang’s role as investment advisor rather than his role as solicitor. No written loan agreement was prepared, and there was no identifiable legal work undertaken in connection with the payment by CLGC Holdings. In my view no question of solicitor’s duty arose.

10. [196]

    It follows that the claims of breach of fiduciary duty cannot succeed. In any event, the same comments apply to those claims as apply to the equitable claims concerning the December 2014 loan to Mr Zhang. The plaintiffs’ case failed to identify the information which was not disclosed and which allegedly should have been, and failed to prove that disclosure of such information would have made a difference to the decision to proceed with the loan.

11. [197]

    As no question of solicitor’s liability arises, it is not necessary to consider any issues arising on the claim for indemnity.

Payment 6: $1.5 million paid in June 2017

1. [198]

   The payment was formally documented as a loan from CLGC 191 to RZC, guaranteed by Mr Zhang personally. Although in the defendants’ pleadings neither RZC or Mr Zhang admitted any liability with respect to the loan, none of the pleaded defences were maintained at the hearing. On 8 April 2021 I entered judgment against RZC as debtor, and against Mr Zhang as guarantor, in the sum of $3,522,328. Again there was no point taken about the very high rate of interest.

2. [199]

   For some reason, breach of solicitor’s duty was pleaded against Mr Zhang only, and not WHL. And although a claim of breach of duty of care was pleaded against Mr Zhang, this was not pursued in final submissions. Instead counsel for the plaintiffs focused exclusively on breach of fiduciary duty.

3. [200]

   The only letters of engagement between WHL and CLGC 191 dated from 2011 and concerned work on obtaining visas for Chairman Zhang and Ms Lu (see [76] above). But that is of itself not an insuperable problem. As with the December 2014 loan to Mr Zhang, the evidence clearly establishes an informal retainer of WHL (through Mr Zhang) to document the transaction.

4. [201]

   As I have discussed at [146] above, the fact that the retainer was with WHL would not prevent CLGC 191 from pursuing a personal claim against Mr Zhang for breach of a tortious duty of care. Whether Mr Zhang owed a personal fiduciary duty which would give rise to a claim against him personally based on a conflict of interest in the retainer may be debateable. But, as with the claim with respect to the December 2014 loan, it is not necessary to consider that issue any further for the purposes of this judgment. Once again, the plaintiffs’ case failed to identify the information which was not disclosed and which allegedly should have been, and failed to prove that disclosure of such information would have made a difference to the decision to proceed with the loan.

5. [202]

   Once again, the result is the same as for the claim concerning the December 2014 loan. As I have rejected the claim of breach of solicitor’s duty, the indemnity questions do not arise.

Conclusions and orders

1. [203]

   I have described at [123], [157], [188] and [198] the orders I have already made against the various defendants based on claims which were not ultimately disputed. So far as the remaining claims are concerned, I have concluded that:

   1. (1)

      the misrepresentation claims against WHI and Mr Zhang with respect to payment 2 succeed;

   2. (2)

      the claims for breach of solicitor’s duty against WHL and Mr Zhang with respect to payments 1, 2, 5 and 6 fail;

   3. (3)

      the claim against WHL concerning payment 3 being wrongly paid out of trust succeeds, but the claim against Mr Zhang fails;

   4. (4)

      the indemnity claim by WHL with respect to payment 3 is defeated by the fraud exclusion;

   5. (5)

      the indemnity claims by WHL and Mr Zhang with respect to payments 1, 2, 5 and 6 do not arise for decision.

2. [204]

   As already noted, whether I should proceed to enter judgment on the misrepresentation claims (and if so, what the damages would be) is subject to further consideration. In these circumstances, conclusion (1) should be treated as provisional, even so far as the views I have expressed about contravention are concerned.

3. [205]

   It is not clear whether there will ultimately be any liability with respect to payment 4. I will likewise reserve this claim for further consideration.

4. [206]

   It will also be necessary to deal with costs. I will adjourn the proceedings for a short time to allow the parties to consider this judgment and, if possible, agree orders giving effect to it.

5. [207]

   The orders of the Court are:

   1. (1)

      Adjourn the proceedings to 9.15 am on 17 August 2021 or such other time as may be arranged with my Associate.

   2. (2)

      Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.