Noda Development Ltd v H & H Funding Pty Ltd

These proceedings concern a General Security Agreement (“the Agreement”) dated 13 January 2016, entered into between the plaintiff (as the Secured Party), the first defendant (as the Grantor), and the second defendant (as the Guarantor). The second defendant (“Mr Hu”) was at that time the sole shareholder in, and the sole director of, the first defendant.

Pursuant to the Agreement, the plaintiff lent amounts in excess of $20 million to the first defendant in three tranches in January and February 2016 and a further tranche in March 2018. The term of the loan for each tranche was three years from the date of the Agreement (i.e., for a term ending on 13 January 2019). In respect of each tranche, interest was payable at the rate of 15% per annum, calculated annually. The loan was primarily secured by a charge over the personal property of the first defendant. By clause 16 of the Agreement, the second defendant agreed that the “guarantee and indemnity” extended to the “ultimate balance owing under this agreement”.

The loan was evidently intended to assist the first defendant in its development of a property in Epping. The development project was known as “Emerald Epping”.

The first defendant was not in a position to repay the loan when it became due for repayment in January 2019. The situation was the subject of discussions that took place in December 2018 between Mr Huo, a director of the plaintiff, and Mr Hu. There is a difference between the two about what was said in the course of those discussions.

By their Amended Commercial List Response, the defendants contend, based on Mr Hu’s version of events, that an oral agreement was reached to the effect that the plaintiff would not take action against the defendants who would instead be allowed to repay the loan out of agreed portions of net proceeds of sale as and when sales of units in the Epping development were settled. The defendants further contend that the oral agreement gave rise to an expectation that the loan would be allowed to be repaid in that fashion and that, in reliance upon that expectation, certain proceeds of sales (totalling $1,163,815.93) were paid to the plaintiff in February 2021 but the defendants otherwise did not take steps to repay the amounts claimed by the plaintiffs. The defendants allege that the plaintiff knew or intended the defendants to rely upon such an expectation, and that were the plaintiff allowed to resile from the oral agreement the defendants would suffer loss or damage. It is alleged that the plaintiff is thus estopped from requiring repayment of the loan otherwise than in accordance with the oral agreement.

The plaintiff denies the existence of any estoppel that would prevent it from exercising its rights in accordance with the terms of the Agreement. By its Summons filed on 30 October 2020, the plaintiff sought monetary judgments against both the first and second defendants for the amount outstanding under the Agreement.

The first defendant went into liquidation (creditor’s voluntary winding up) on 11 September 2022, and the proceedings against it were thereby stayed. However, on 13 March 2023, its newly appointed solicitors filed a submitting appearance, save as to costs. In those circumstances, the Court granted leave to the plaintiff pursuant to s 500(2) of the Corporations Act 2001 (Cth) to proceed against the first defendant.

Leave was also granted to file a Further Amended Commercial List Statement which made minor amendments to correct some errors and refer to certain events that occurred after the commencement of the proceedings.

The second defendant, Mr Hu, appeared for himself at the hearing. He had previously been represented by various firms of solicitors, most recently until about two weeks before the hearing. An application made by Mr Hu for an adjournment, so as to obtain further legal advice, was rejected.

The plaintiff claims a total amount of $27,667,026.53 (including interest) against each defendant.

The plaintiff was incorporated in the Marshall Islands on 31 August 2015. The first defendant was incorporated on 24 December 2015.

There is no dispute that the parties entered into the Agreement dated 13 January 2016. Counterparts of the Agreement were executed by Mr Huo on behalf of the plaintiff, and by Mr Hu on behalf of the first defendant and himself personally.

As noted earlier, the Agreement was entered into by the plaintiff as the Secured Party, the first defendant as the Grantor, and Mr Hu as the Guarantor. The recitals to the Agreement included the following:

Clause 3 relevantly provided:

By cl 5 of the Agreement, the first defendant granted a charge over all of its personal property in favour of the plaintiff. Clause 6 provided for certain additional security to be provided, including through the execution of a Shareholding Agreement between the first defendant and Mr Hu.

Clause 16 of the Agreement relevantly provides:

Clause 17 of the Agreement relevantly provides:

Mr Huo gave evidence, that was not challenged, that the plaintiff advanced funds pursuant to the Agreement into the trust account of its solicitors, Lin Tang & Co. Lawyers, in four tranches as follows:

The abovementioned evidence is to some extent corroborated by the solicitor’s trust account ledger. The ledger records amounts received on account of “Loan Sum” totalling $20,665,917.03, with the various amounts received on about the dates nominated by Mr Huo, save that the fourth tranche was not received until 22 March 2018, not 2016 as suggested by Mr Huo. Further, the defendants admit that between 18 January 2016 and 22 March 2018, various amounts totalling $20,617,896.63 were transferred by the solicitors to Bridgeland Second Pty Ltd, a company Mr Hu accepted was the first defendant’s nominee for the purposes of the Agreement. In these circumstances, I accept Mr Huo’s evidence that a total of $20,617,896.63 was advanced by the plaintiff pursuant to the Agreement by the four payments he identified, such payments being made on about 13 January 2016, 19 January 2016, 5 February 2016 and 22 March 2018.

Mr Huo also gave evidence to the effect that:

The term of the loan ended on 13 January 2019. At that time, the first defendant became liable to repay the principal of $20,617,896.63 and interest on the four tranches up to that date. It is clear that the first defendant was not in a position to meet those obligations.

Mr Huo and Mr Hu met in Sydney on 13 December 2018 to discuss repayment of the amounts owed. In paragraphs 30 and 31 of his affidavit of 5 May 2022, Mr Huo deposed that a conversation to the following effect occurred at the meeting:

Mr Hu signed documents on that day concerning his resignation as a director of the first defendant and the appointment of Mr Huo as a director in his place. One of the documents signed by Mr Hu refers to him resigning as a company secretary and Mr Huo being appointed to that position.

Mr Huo further deposed that, immediately following the meeting, he and Mr Hu went to a Westpac branch in the City and arranged for Mr Huo to become a signatory on the first defendant’s bank account.

Mr Hu deposed that he generally agreed with the words attributed to himself and Mr Huo in paragraph 30 of the latter’s affidavit. However, he deposed that the conversation also included discussion to the following effect:

In response to paragraph 31 of Mr Huo’s affidavit, Mr Hu deposed that Mr Huo also said words to the following effect:

There is no dispute that the loan and the accrued interest was not paid to the plaintiff on 13 January 2019. Nor is it disputed that, on 16 January 2019, solicitors acting for the first defendant handed the certificates of title in respect of the land at Epping to solicitors acting for the plaintiff. I note, however, that Mr Hu deposed that in giving instructions for that to occur, he was acting in accordance with what he describes as the Forbearance Arrangement, and on the assumption that Mr Huo “would permit the reasonable sale of the properties in order to permit [the first defendant] to be able to continue to make repayments to him”.

On 19 February 2019, solicitors acting on the instructions of Mr Huo sent an email to Mr Hu which included the following:

On 26 April 2019, Mr Hu sent an email to Jie Sheng (an assistant to Mr Huo) in the following terms:

Mr Huo deposed that he, Mr Hu and a director of Bridgeland Second Pty Ltd (Mr Chiao) met in Beijing on 16 May 2019 to discuss repayment of the amounts owing under the Agreement, but no agreement was reached.

Mr Hu deposed that at that meeting he asked Mr Huo to consider suspending interest and accepting some of the properties as payment under the loan, and asked him to agree to “maintaining our current situation in order for us to discuss how the proceeds from the future sale lots should be split between Mr Chiao and yourself”. Mr Hu deposed that Mr Huo responded with words to the following effect:

Mr Huo, in his affidavit in reply, denied that any agreement was reached or that he agreed to maintaining the “current arrangement”.

On 17 May 2019, Mr Sheng sent a WeChat message to Mr Hu that included the following:

Mr Hu responded later on 17 May 2019 in the following terms:

The Epping development was completed in about October 2019. Shortly thereafter, sales were completed in respect of 11 apartments in the development. Presumably as a result of such sales, the first defendant made payments to the plaintiff of the following amounts:

Mr Hu deposed that after the sale of the initial 11 apartments, he, Mr Huo and Mr Chiao “entered into a protracted period of negotiations”. He deposed that the negotiations extended into mid-2020. Mr Hu deposed that he continued to make sales “in line with the Forbearance Arrangement”. He further deposed that some sales were unable to be completed because Mr Huo would not give his consent, being dissatisfied with the amount of proceeds proposed to be paid to him [i.e., the plaintiff].

It appears from correspondence between the solicitors for the respective parties in April 2020 that the plaintiff was insisting that it be paid all of the net proceeds of sales, whereas the defendants wanted some of the proceeds to be paid to a builder. The defendants’ solicitors seem to have accepted that the plaintiff’s position accorded with its “entitlements”.

On 8 October 2020, the plaintiff’s solicitors sent a letter of demand to the defendants’ solicitors, claiming an amount of $20,715,533.41.

The proceedings were commenced by the filing of a Summons in the Commercial List on 30 October 2020.

Since the commencement of the proceedings, three further payments have been made to the plaintiff. These were:

In November 2021, the first defendant, as mortgagee, entered into possession of the remaining Epping properties. By that time, Mr Hu had been re-appointed as a director of the company, and Mr Huo had been removed as a director. Mr Huo says that this occurred without his knowledge, but nothing turns on this. It seems that some further sales of properties have since occurred, but no further payments have been made to the plaintiff.

As noted earlier, the first defendant went into liquidation on 11 September 2022, and its solicitors have filed a submitting appearance, save as to costs.

The only substantial defence to the plaintiff’s claims that is raised in the Amended Commercial List Response is the alleged estoppel described above at [5].

The estoppel contended for rests upon the oral agreement (or Forbearance Arrangement, as referred to in Mr Hu’s affidavit) said to have been made in December 2018 in the discussions between Mr Huo and Mr Hu. It is said that the estoppel operates to preclude the plaintiff from requiring repayment of amounts owed under the Agreement otherwise than in accordance with the oral agreement. The alleged oral agreement is to the effect that the plaintiff would not take action to enforce its rights whilst the defendants took steps to repay the loan out of the net proceeds of sales of units in the Epping development. It is alleged that by reason of the oral agreement the defendants had an expectation (described as the Deferred Payment Expectation) that the plaintiff would not enforce its rights under the Agreement and would allow the defendants to repay the loan out of agreed portions of net proceeds of sale as and when sales of units were settled.

For the following reasons, I am not satisfied that any oral agreement (or Forbearance Arrangement) was made as alleged. No estoppel has been established.

First, I accept Mr Huo’s account of the discussion, as contained in paragraphs 30 and 31 of his 5 May 2022 affidavit, as a broadly accurate recollection of the substance of what was said. Mr Huo’s account, which was not touched upon in cross-examination, is largely accepted by Mr Hu, albeit that Mr Hu claims that certain additional words of significance were said. I note that Mr Huo’s account is consistent with the subsequent conduct of the parties in changing the directors of the first defendant, in adding Mr Huo as a signatory on its bank account, and in the handing over of certificates of title to the plaintiff’s solicitors. More significantly, Mr Huo’s account seems to me to be consistent with the subsequent communications between the parties, including the email sent by his solicitors on 19 February 2019. During the 13 December 2018 discussion, Mr Huo, in responding to Mr Hu’s request that he not sue immediately after repayment of the loan fell due, agreed to not do so, but spoke of further discussions to be held and a new loan agreement to be entered into. The email of 19 February 2019, which called upon Mr Hu to provide an “update”, expressly contemplated a new loan agreement. Mr Huo’s account also seems to me to accord with the discussions that took place in May 2019, the tenor of which (as reflected in the WeChat messages) plainly suggests that no concluded agreement, whether written or oral, had been reached. Certainly, there is no statement in any of the written communications between the parties that a concluded agreement or arrangement had been reached to the effect of the oral agreement alleged.

Secondly, I am not satisfied that Mr Huo said words to the effect of the additional words attributed to him by Mr Hu, and which are set out above at [26]. I accept Mr Huo’s denial that he said the words attributed to him. Whilst Mr Huo may have said that he would not for the time being take legal action, I do not accept that he gave any firm assurance to the effect that no legal action would be taken “whilst you are selling apartments and making repayments”. It is clear that repayment via the sale of apartments was only one of the options under discussion in December 2018, and it was not expected that any sales would be completed until about May 2019. Again, the content of the subsequent communications does not suggest that any firm assurance was given as deposed to by Mr Hu, and the giving of such a firm assurance would be inconsistent with the tenor of the discussions which even Mr Hu accepts occurred. Further, when asked about his December 2018 meeting with Mr Huo, Mr Hu suggested that he may have signed a document that recorded the conditions of an agreement by Mr Huo not to take legal action. This evidence was somewhat confusing, and the existence of such a document is neither referred to in any of the written communications that are in evidence, nor otherwise advanced in the proceedings. Whilst I think that Mr Hu was trying to give his evidence honestly and to the best of his ability, I do not have confidence that his evidence about this matter is reliable or accurate. In the absence of corroboration by other testimony, or support from the documentary evidence, I am unable to accept that Mr Huo said the additional words attributed to him by Mr Hu.

Thirdly, based on Mr Huo’s account of the discussion on 13 December 2018, it cannot be concluded that the plaintiff agreed to anything more than a temporary forbearance to take action to enforce its rights. That is to say, Mr Huo did no more than indicate that, for the time being, whilst various possible means of repayment were considered, no such action would be taken. At the same time, Mr Huo was making it clear that the terms and conditions of the Agreement would continue to apply, including as to interest, until the plaintiff was paid in full. In these circumstances, and having regard to cll 17(b) and 17(c) of the Agreement, it would not have been reasonable for the defendants to assume or expect that the plaintiff would not take any action for so long as they were proceeding towards the repayment of the loan out of the net proceeds of sales of units. That is, it would not have been reasonable to hold the alleged Deferred Payment Expectation. For similar reasons, neither can the conduct of the plaintiff, in commencing proceedings in October 2020 and prosecuting the proceedings thereafter, be regarded as an unconscientious exercise of its legal rights. By that time, no new agreement had been entered into, and although some payments had been made to the plaintiff out of sales of units, more than $20 million apparently remained outstanding.

Fourthly, it has not been shown that the defendants (or either of them) have acted to their detriment in reliance upon what was said by Mr Huo in December 2018. The making of payments to the plaintiff of amounts that are owing under the Agreement cannot itself amount to relevant detriment. Further, it is difficult to see how any failure to make such payments could amount to relevant detriment when it was made clear by Mr Huo in December 2018 that interest would continue to run. In any event, it has not been shown that there were any payments that could have been made to the plaintiff but were not so paid.

As the alleged estoppel has not been made out, the plaintiff is not precluded from enforcing its rights under the Agreement against the defendants.

I should record that in the witness box, and in submissions, Mr Hu sought to raise another issue. As I understood it, Mr Hu complained that some sales of units did not go ahead, and thus payments in reduction of the amount owing were not made, due to failures on the part of the plaintiff or Bridgeland Second Pty Ltd to reach an agreement of some kind. It seemed to be suggested that the plaintiff thereby declined the opportunity to receive additional payments. However, the issue is not referred to, even obliquely, in the Amended Commercial List Response. It cannot be regarded as an issue properly or fairly raised, and I therefore do not propose to deal further with it.

The plaintiff provided the Court with a calculation, in spreadsheet form, of the amount outstanding under the Agreement. Counsel for the plaintiff explained the entries in the spreadsheet by reference to the evidence of payments made and received, and the relevant terms of the Agreement. I am satisfied that the spreadsheet is accurate, so that the amount owing to the plaintiff under the Agreement as at the date of hearing (27 March 2023) is $27,667,026.53. I note that Mr Hu said in the witness box that he had no issue with the calculation contained in the spreadsheet.

The amount outstanding under the Agreement is a debt owed by the first defendant to the plaintiff. Further, pursuant to cl 16(a) of the Agreement, Mr Hu agreed that his guarantee extended “to the ultimate balance owing under this agreement”. That expression encompasses the amount presently outstanding under the Agreement in circumstances where the loan was due to be repaid on 13 January 2019 and the amount outstanding has been established in recovery proceedings. Accordingly, Mr Hu as a guarantor is also liable to the plaintiff in the sum of $27,667,026.53.

Judgments will be entered in favour of the plaintiff against both defendants in that amount. The judgments will be ordered to take effect from 27 March 2023.

As for costs, I think it would be appropriate to order that the first defendant pay the plaintiff’s costs up to the date of liquidation (11 September 2022), but not thereafter. From that date, the proceedings against the first defendant were stayed (and thus effectively proceeded only against Mr Hu) until the date of the hearing, when leave to proceed against the first defendant was granted. By that time, the first defendant had filed a submitting appearance, save as to costs, and it was on the basis of that submitting appearance that leave to proceed was granted. There seems to be no reason why an order should not be made that the second defendant pay the plaintiff’s costs of the proceedings.

The Court will make costs orders in accordance with the above unless any party notifies my Associate by 6 April 2023 that different orders ought be made. In that event, I will make directions for brief written submissions to be made on costs, with a view to that issue being determined on the papers.