Nature’s Care Holdings Pty Ltd v Chen (No 2)

1. [1]

   The plaintiffs are five companies which form part of the Nature’s Care Group. The first plaintiff, Nature’s Care Holdings Pty Ltd is, as its name suggests, the holding company for the group. The second plaintiff, Nature’s Care Group Pty Ltd, and the sixth plaintiff, Australia Nature’s Care Biotech Co. Ltd, are the trading companies.

2. [2]

   The Nature’s Care Group is an Australian vitamins and dietary supplements business. It has a manufacturing facility at Belrose in Sydney and distributes its products in Australia, North America and Asia. The group’s business is substantial. It employs some 240 people and in August 2023 was forecast to have an EBITDA for the calendar years 2023 and 2024 of $23.7 million and $32.8 million respectively.

3. [3]

   The current shareholding in Nature’s Care Holdings is:

4. [4]

   These proceedings were commenced on 19 January 2024 before the vacation duty judge arising from the acquisition on 17 January 2024 by the third defendant, AS Investment Vehicle Pty Ltd (“ASIV”), a company evidently associated with the Wu Parties, of the rights of 93% of Nature’s Care Holdings’ “Senior Lenders” under a Syndicated Facility Agreement dated 6 August 2018. That facility has been in default since 8 August 2023; some $138 million is due. ASIV purchased those Senior Lenders’ rights at par, using funds made available to it by Ms Chen.

5. [5]

   The plaintiffs contend, in circumstances that I will discuss in more detail below, that Ms Chen and Mr Wu procured that ASIV acquire these rights in circumstances where they were acting in breach of their fiduciary duties to the plaintiffs.

6. [6]

   On 23 January 2024, Rees J restrained the defendants from enforcing any rights under the Syndicated Facility Agreement that ASIV has purchased. [1]

7. [7]

   On 5, 6 and 7 February 2024, I heard argument as to whether those orders should be continued until the final hearing of these proceedings.

Decision

1. [8]

   I do not propose to continue the orders.

The Nature’s Care Group

1. [9]

   Ms Chen founded the Nature’s Care business in 1990.

2. [10]

   Until 2018, Ms Chen ran the business with her husband, Mr Alex Wu, and with Mr Wu, (together the “Wu Family”) and another son, Mr Jack Wu.

3. [11]

   In 2018, the Majority Shareholders, JIC and Tamar, acquired a 75% interest in the Nature’s Care Group for a price of approximately $585 million, being 75% of what was then said to be the “enterprise value” of the group of $780 million. $280 million of the purchase price was funded by debt.

4. [12]

   To give effect to the acquisition, the first plaintiff, Nature’s Care Holdings, became the holding company in the group, the shareholding of which then became as I have set out at [3] above.

5. [13]

   The debt component of the purchase price for the Majority Shareholders’ 75% in the Nature’s Care Group was funded by a syndicate of banks, the Senior Lenders, under the Syndicated Facility Agreement to which I have referred at [4].

6. [14]

   Various entities within the Nature’s Care Group provided security in favour of the Senior Lenders to secure the performance of Nature’s Care Group’s obligations under the Syndicated Facility Agreement.

7. [15]

   On completion of the Majority Shareholders’ purchase of their 75% interest on 10 August 2018, Nature’s Care Holdings, JIC, Tamar and the Wu Family entered into a Subscription and Shareholders Agreement (the “Shareholders Agreement”). I return to that document below.

8. [16]

   On 6 July 2020, JIC, Tamar and an entity representing the Wu Family entered into an agreement with Nature’s Care Holdings (the “Shareholder Loan Agreement”). Pursuant to that agreement, amongst other things, JIC, Tamar and the Wu Family, as “Junior Lenders”, agreed to advance $120 million to Nature’s Care Holdings in proportion to their shareholdings. A further $12 million was, in 2022, advanced in the same proportions.

9. [17]

   The debt of the Junior Lenders is subordinated to the debt of the Senior Lenders according to the terms of a Priority and Subordination Deed also made on 6 July 2020, to which I will return below.

10. [18]

    In around June 2022, Ms Chen and Mr Wu departed the business and handed management of it over to the Majority Shareholders. However, after their departure, it appears that the financial position of the plaintiffs deteriorated.

11. [19]

    It is the position of the Wu Parties that the plaintiffs’ position deteriorated so much so that in or around August 2022, the Majority Shareholders invited Ms Chen and Mr Wu to return to manage the business. Ms Chen was then appointed Chief Executive Officer. Ms Chen and Mr Wu re-joined the board.

12. [20]

    These matters were recorded in an amendment to the Shareholders Agreement dated 15 September 2022.

13. [21]

    By that document:

14. [22]

    The current directors of the Nature’s Care Group are nominees of the Majority Shareholders, including Mr Huayi (also known as “Bob”) Niu. Mr Ryan Rabbitt was appointed as an independent director by the directors representing the Majority Shareholders (the “Majority Directors”) on 27 December 2023, in the circumstances I describe below.

15. [23]

    Ms Chen and Mr Wu were directors until 13 October 2023. They resigned as directors that day. It is accepted for present purposes that Ms Chen resumed her role as a director on 28 December 2023 and again resigned on 11 January 2024. The parties allege that Ms Chen was at all other times either a shadow or de facto director of the plaintiffs. I return to these matters below.

16. [24]

    After resigning as directors on 13 October 2023, Ms Chen retained her position as Chief Executive Officer and Mr Wu remained as General Manager pursuant to a consultancy agreement. They were removed from these positions on 27 December 2023 in circumstances to which I will return.

The “pleaded case”

1. [25]

   It is important to examine carefully the manner in which the plaintiffs articulated their case in their Amended Commercial List Statement.

2. [26]

   Under the heading “Duties of First and Second Defendants” the plaintiffs alleged:

3. [27]

   There is no dispute that directors and company employees owe the proscriptive duties referred to in subpars (b) and (c) of that paragraph. [2]

4. [28]

   There is a controversy in Australia as to whether parties in the position of Ms Chen and Mr Wu owed the prescriptive duty to make material disclosure referred to in subpar (d).

5. [29]

   The current position in this Court is that they do not. Thus, in Diakovasili v Order of AHEPA NSW Incorporated, [3] Black J, after reviewing the authorities including that of the Western Australia Court of Appeal in Westpac Banking Corporation v Bell Group Limited (in liq) (No 3), [4] said that “Australian courts only recognise fiduciary duties of proscriptive or prohibitive character … and the existence of a fiduciary relationship does not impose a positive legal duty on the fiduciary to act in the beneficiary’s interest”.

6. [30]

   The plaintiffs then allege that Ms Chen and Mr Wu owed the plaintiffs the statutory duties set out in ss 181, 182, 183 and 191 of the Corporations Act 2001 (Cth).

7. [31]

   Having alleged the duties owed to the plaintiffs by Ms Chen and Mr Wu, the Amended Commercial List Statement then makes the following allegations under the heading “Breach of Duty by the First and Second Defendants”.

8. [32]

   The plaintiffs allege that Ms Chen and Mr Wu knew of “Confidential Finance Information”, defined as being the information referred to in the Syndicated Facility Agreement (not the Shareholders Agreement, see below), together with knowledge that:

   1. (1)

      the first plaintiff was in default of its obligations under the Syndicated Facility Agreement; and

   2. (2)

      the Senior Lenders could exercise the “Enforcement Rights” under the Syndicated Facility Agreement to take control and ownership of the business of the plaintiffs and to appoint a receiver and thereby potentially damage the business of the plaintiffs (referred to as the “Confidential Default Information”).

9. [33]

   Then, under the heading “Non disclosure by the Defendants”, the plaintiffs allege:

10. [34]

    The plaintiffs do not allege that Ms Chen and Mr Wu had breached their fiduciary obligations by causing ASIV to acquire the rights of the Senior Lenders under the Syndicated Facility Agreement. The allegation is of dishonest non-disclosure, following a request for full disclosure, of that acquisition.

11. [35]

    Next, under the heading “Interference in operation of Plaintiffs’ business by First and Second Defendants”, the plaintiffs allege that Ms Chen and Mr Wu interfered in the operation of the plaintiffs’ business after they were dismissed as Chief Executive Officer and General Manager on 27 December 2023. Ms Chen and Mr Wu gave undertakings to Rees J not to engage in such conduct until the final hearing of these proceedings. Those undertakings were continued before me.

12. [36]

    Accordingly, it is not necessary to consider them further, save in the context of consideration of the plaintiffs’ allegation that Ms Chen and Mr Wu were shadow or de facto directors during the periods that they were not actually directors.

13. [37]

    Next, under the heading “The operation of competing businesses by the First and Second Defendants”, the plaintiffs allege that Ms Chen and Mr Wu operated competing businesses contrary to terms of the Shareholders Agreement. These matters are not directly related to the plaintiffs’ contentions concerning ASIV’s position as assignee of the Senior Debt.

14. [38]

    This aspect of the Amended Commercial List Statement concluded with:

15. [39]

    The plaintiffs’ allegations of conflict between interest and duty are thus confined to the matters I have set out at [31] to [36] above.

16. [40]

    Under the subheading “Breaches of Duty”, being a subheading to the heading “Breach of Duty by the First and Second Defendants” referred to at [31] above, the Amended Commercial List Statement alleges:

17. [41]

    The Amended Commercial List Statement then made the following allegations concerning ASIV:

18. [42]

    Finally, the Amended Commercial List Statement alleges:

19. [43]

    All of these allegations are premised on the earlier alleged breaches of fiduciary duty and statutory duty, particularised as I have set out.

20. [44]

    Finally, the Amended Commercial List Statement alleges that the “Consequences” of these matters is that:

The Shareholders Agreement

1. [45]

   The Shareholders Agreement was entered into on 10 August 2018 and amended on 24 January 2020 and again, as I have set out, on 15 September 2022 when Ms Chen and Mr Wu returned to the business after a short absence.

2. [46]

   I have mentioned the provisions in the Shareholders Agreement concerning the obligations of JIC, Tamar and the Wu Family to advance funds to members of the Nature’s Care Group; as I have said, the amount of such Junior Debt was originally $120 million. The Junior Debt is now $132 million and has been advanced by JIC, Tamar and the Wu Family in proportion to their shareholding. The Shareholders Agreement describes these amounts as the “Second Funding Amount”. The Shareholders Agreement makes provision for a “Third Funding Event”, but this obliges only JIC and Tamar, and not the Wu Family, to make further advances to the Group.

3. [47]

   The Shareholders Agreement also makes provision for “Drag Along” rights to which I have referred at [21] above, pursuant to which if JIC and Tamar receive a bona fide offer from a third party for the purchase of the entire issued share capital of Nature’s Care Holdings, provided the cash price per share is no less than the “Price Floor”, JIC and Tamar have the right to require the Wu Family to transfer their shares to the third party purchaser. By the 15 September 2022 amendment to the Shareholders Agreement, JIC and Tamar agreed not to exercise the Drag Along rights if, relevantly, the “enterprise valuation” of the Nature’s Care business was less than $600 million. The 15 September 2022 amendment also gave all shareholders a right of first refusal if any shareholder wished to sell to a third party.

4. [48]

   As I set out below, much of the activity of the Majority Shareholders leading to the commencement of these proceedings was directed to means by which the sale of the plaintiffs’ business could be effected in a way that avoided these provisions being enlivened.

5. [49]

   I shall refer to other provisions in the Shareholders Agreement below.

The Syndicated Facility Agreement

1. [50]

   As I have mentioned, the Syndicated Facility Agreement provided for Senior Debt of $280 million which was used by the Majority Shareholders to purchase their interest in Nature’s Care Holdings.

2. [51]

   The loan, now some $138 million, was due for repayment on 8 August 2023. ASIV has now acquired, at par, the rights of 93% of the Senior Lenders under the Syndicated Facility Agreement.

3. [52]

   As the loan is in default, it is now open to ASIV to exercise any or all of the rights, remedies, powers and discretions referred to in the “Finance Documents”.

4. [53]

   Those powers are extensive and include an entitlement to:

5. [54]

   Although these powers are very broad, they would, at the very least, be subject to an obligation to exercise the powers in good faith so as to not wilfully or recklessly sacrifice the interests of the plaintiffs, [7] and, were ASIV to appoint a receiver, the constraints of s 420A of the Corporations Act.

The incorporation of ASIV and its acquisition of rights under the Syndicated Facility Agreement

1. [55]

   ASIV was incorporated on 27 December 2023.

2. [56]

   Its original shareholder was an entity associated with Mr Wu. Mr Wu was then the sole director and secretary. On around 10 January 2024, Mr Chan, a person evidently associated with the Wu Family, became sole shareholder and director. Mr Chan is mentioned in the allegation in the Amended Commercial List Statement I have set out at [41] above.

3. [57]

   ASIV acquired the rights of 93% of the Senior Lenders under the Syndicated Facility Agreement on 17 January 2024.

The course of events

1. [58]

   The events relevant to the question before me occurred between August 2023 and January 2024.

2. [59]

   As I have mentioned, the Syndicated Facility Agreement was due for payment on 8 August 2023. An amount of some $138 million was then payable. It was known to the directors of the plaintiffs at the beginning of August that the plaintiffs could not repay the loan.

3. [60]

   In those circumstances, on 2 August 2023, Mr Wu made an offer on behalf of the Wu Parties to acquire the shares of JIC and Tamar. The offer price was $50 million and was conditional on the Senior Lenders either waiving all breaches of the Syndicated Facility Agreement or agreeing to a three month standstill in relation to enforcement; and on JIC and Tamar forgiving their Junior Debt. The offer was made on the assumption that the plaintiffs would continue to be liable for the Senior Debt.

4. [61]

   On 8 August 2023, the Senior Lenders by their Security Agent, Standard Chartered Bank (Hong Kong) Ltd, served a Notice of Default under the Syndicated Facility Agreement.

5. [62]

   On the same day, the solicitors for the Security Agent, Allen & Overy, wrote on behalf of the “Supportive Lenders” (said to be some 48.04% of the Senior Lenders) to the plaintiffs’ solicitors, Clifford Chance, offering an interim “Standstill Period” until 29 August 2023, subject to various conditions concerning provision of financial information and details of any exit strategy that the plaintiffs proposed.

6. [63]

   On 29 August 2023, that standstill agreement was extended to 11 September 2023.

7. [64]

   At some time during August 2023, the Wu Parties proposed a “Trade Sale Process” whereby JIC and/or Tamar sought a purchaser of 100% of the shares in the plaintiffs on the basis that:

8. [65]

   On 5 September 2023, the directors of the plaintiffs, including Mr Niu, Ms Chen and Mr Wu, attended what was described as a “Board Meeting” but which was, in effect, also a shareholders meeting. The “Meeting Minute” runs for some 21 pages and appears to be, in effect, a transcript of what was said at the meeting.

9. [66]

   There was an extensive discussion of “Refinancing of Senior Debt”.

10. [67]

    The JIC appointed directors expressed their “trust in Jina Chen”.

11. [68]

    The minute noted:

12. [69]

    There was discussion about the need to preserve the plaintiffs’ reputation with the Senior Lenders and other prospective lenders.

13. [70]

    Mr Niu is recorded as having “firmly stated that shareholder rights are paramount and [the Majority Shareholders] would never encroach on the Wu Family’s equity stake” and that the main focus for the Majority Shareholders was “to cooperatively manage the company to improve its performance” and to find a “potential solution where both parties could provide a guarantee to settle the bank debt”.

14. [71]

    The minutes also record:

15. [72]

    Mr Wu’s reference to the need for a sale price to exceed $600 million was a reference to Drag Along rights in the Shareholders Agreement. [8]

16. [73]

    On 11 September 2023, the plaintiffs wrote to Allen & Overy, the solicitors for the Security Agent. The letter was expressed to be “signed by the representatives of the Board of NC Holdings and for and on behalf of” each of the shareholders of NC Holdings.

17. [74]

    The letter recorded:

18. [75]

    The letter annexed copies the Majority Shareholders’ proposed sale process and the Wu Parties’ proposed sale process.

19. [76]

    I have set out at [64] above the sale process that the Wu Parties proposed.

20. [77]

    The sale process proposed by the Majority Shareholders was a “fair trade sale” to achieve a “fair valuation” but on condition that “the Wu’s shall not have a right of first or last refusal” [9] on the basis that “this would discourage any third parties from participating in the sale process”.

21. [78]

    The letter to Allen & Overy continued:

22. [79]

    There was thus open discussion between the Majority Shareholders and the Wu Parties on the one hand, and the Senior Lenders, through Allen & Overy, on the other, of the competing positions of the Majority Shareholders and the Wu Parties concerning a sale process the object of which was to procure repayment of the Syndicated Facility Agreement. The discussion in the letter took place on the basis of the mutually known fact that the facility was in default. Dividing the parties was whether the Wu Parties should forgo their entitlement under the Shareholders Agreement not to sell at a price less than $600 million and thus to, in effect, exercise a right of last refusal.

23. [80]

    This is significant because, as I describe below, Mr Niu later developed what he described as a “strategy” to cause the plaintiffs’ business to be sold without regard to the rights of the Wu Parties under the Shareholders Agreement (“the Strategy”).

24. [81]

    On the same day, Allen & Overy wrote to the plaintiffs’ solicitors Clifford Chance. It is not clear whether this letter was written in reply to the plaintiffs’ letter to which I have referred.

25. [82]

    Allen & Overy stated:

26. [83]

    Later in the letter, Allen & Overy said:

27. [84]

    On 28 September 2023, Allen & Overy wrote to Clifford Chance and to Norton Rose Fulbright, who were by then acting for the Wu Parties, stating that the “Supportive Lenders” [10] agreed to extend a standstill on enforcement action until 6 October 2023 “so that the Obligors can organise the commencement of a sale process” but on condition that, amongst other things, “shareholders [would] waive any pre-emptive … rights” as this “would interfere with the sale process”.

28. [85]

    Allen & Overy were referring to the Wu Parties’ rights under the Shareholders Agreement.

29. [86]

    On 6 October 2023, Norton Rose Fulbright, for the Wu Parties, wrote to Clifford Chance, who were by then acting both for the plaintiffs but also for the Majority Shareholders:

30. [87]

    Clifford Chance replied:

31. [88]

    There is controversy between the parties as to whether Clifford Chance were themselves in a position of conflict by reason of acting both for the plaintiffs and for the Majority Shareholders, and for directors appointed to the Board of the plaintiffs on behalf of the Majority Shareholders. That complaint was ventilated in correspondence during the later months of 2023 and in the hearing before me. As no application has been made to restrain Clifford Chance from being involved in these proceedings, I do not consider it appropriate for me to make any observations or findings about that controversy.

32. [89]

    On 9 October 2023, Allen & Overy wrote to Clifford Chance enquiring as to the “appetite for [the Majority Shareholders] to embrace a bilateral deal with the Wu family” and stating that “I appreciate that [the Majority Shareholders] don’t like this outcome – but the counterfactual to this outcome is looking less and less rosy for the company”.

33. [90]

    Allen & Overy continued:

34. [91]

    Clifford Chance replied the same day:

35. [92]

    Thus, Clifford Chance stated that the “marching orders” from the Majority Shareholders’ “superiors in China” were to look for a sale on the open market to achieve the “price discovery that comes from running a sales process”, and without regard to the Wu Parties’ rights under the Shareholders Agreement.

36. [93]

    The passages I have emphasised in Allen & Overy’s letter at [90] (enquiring whether the Majority Shareholders “want to own the business”) and Clifford Chance’s letter at [91] (stating that the “only path forward” was a sales process run by the Majority Shareholders with the support of the Senior Lenders or by the Senior Lenders themselves) appear be the genesis of what Mr Niu described as “the Strategy”.

37. [94]

    In his affidavit, Mr Niu described the Strategy as follows:

38. [95]

    As I have said, on 13 October 2023, Ms Chen and Mr Wu resigned as directors of the plaintiffs, with Ms Chen retaining her position as Chief Executive Officer and Mr Wu remaining General Manager.

39. [96]

    Three days after Ms Chen and Mr Wu resigned as directors of the plaintiff, Mr Wu wrote to the Majority Directors attaching “on behalf of the Wu Parties” a “term sheet detailing our proposal to acquire the operating subsidiaries” of one of the holding companies in the plaintiffs’ group for an amount equal to 70% of the Senior Debt.

40. [97]

    On 26 October 2023, Allen & Overy wrote to Clifford Chance suggesting a discussion between members of the consulting firm FTI Consulting “regarding what a receivership will look like”. This appears to be a response to Clifford Chance’s 9 October 2023 suggestion that there be a sale process run by the Senior Lenders “through the enforcement of their security”.

41. [98]

    There is in evidence an email that Ms Chen had received a month earlier, on 19 September 2023, from a representative of one of the Senior Lenders, Taishin Bank, stating that “the banking group has reached a majority decision and instructed the lawyers to prepare legal documentation for a receiver”.

42. [99]

    There is no context in the evidence for this email. It predates and appears to be unrelated to Allen & Overy’s 9 October 2023 enquiry as to whether the Majority Shareholders wished to “own the business”, Clifford Chance’s 9 October 2023 suggestion to Allen & Overy that the process be run by the Senior Lenders “through enforcement of their security”, or Allen & Overy’s 26 October 2023 suggestion of a discussion as to “what a receivership will look like”.

43. [100]

    By 10 November 2023, Mr Henry Lister from FTI Consulting had been identified, I infer by Allen & Overy, as being a potential receiver of the plaintiffs.

44. [101]

    On 10 November 2023, Mr Lister wrote to Clifford Chance and Allen & Overy (but not to Norton Rose Fulbright for the Wu Parties) stating that a “funding facility” of approximately $20 million is “likely to be required by the Receivers and Managers”.

45. [102]

    Mr Lister said he had adopted a “conservative approach to estimating the likely funding requirement for the appointment of Receivers and Managers” to the plaintiffs because of, amongst other things, “[the] significant reduction in recent trading performance” of the plaintiffs in August and September 2023 and also “[the] likely disruption to the customer relationship arising from the Management takeover”.

46. [103]

    It thus appears that, by this time, an element of the Strategy was not only the appointment of the receiver to the plaintiffs but, as Mr Niu described, also a change in the management structure.

47. [104]

    Mr Niu, with the assistance of Clifford Chance, set about developing the Strategy.

48. [105]

    Thus, he deposed:

49. [106]

    Mr Niu’s reference to his “fellow directors” was a reference to the Majority Directors: as Mr Niu pointed out, by this time Ms Chen and Mr Wu had resigned as directors and the Wu Parties had no representation on the board of the plaintiffs. Mr Niu’s references to the “restrictions” in the Shareholders Agreement and to the “approach being taken by the Wu Parties” was a reference to the reservation by the Wu Parties of their entitlement to rely upon their rights under the Shareholders Agreement to, in effect, have a right of last refusal if the sale price of the business was to be less than $600 million.

50. [107]

    In his affidavit, Mr Niu described the development of the Strategy as follows:

51. [108]

    Thus, the Strategy was that the Senior Lenders appoint receivers and managers to the plaintiffs, to enable a sale to take place without regard to the Wu Parties’ rights under the Shareholders Agreement; and to dismiss Mr Wu as General Manager and Ms Chen as Chief Executive Officer, notwithstanding that Ms Chen had been appointed Chief Executive Officer by reason of the 15 September 2022 amendment to the Shareholders Agreement.

52. [109]

    As Mr Niu was to later observe, this would enable the Majority Shareholders “to take over the company”. [11]

53. [110]

    On the face of it, that appears to have been the precise object of the Strategy.

54. [111]

    It is clear from the evidence before me that an essential part of the Strategy was that it be kept secret from the Wu Parties.

55. [112]

    In cross-examination, Mr Niu agreed that he could not recall whether he told Ms Chen or Mr Wu about the Strategy. It is clear that he did not.

56. [113]

    Thus, on 13 November 2023, a representative from FTI Consulting wrote to Clifford Chance:

57. [114]

    Part of the Strategy was that Mr Wu and Ms Chen be dismissed as General Manager and Chief Executive Officer simultaneously with the appointment of the receiver.

58. [115]

    Thus, on 29 November 2023, Clifford Chance wrote to Allen & Overy:

59. [116]

    The requirement that the Strategy be kept secret from the Wu Parties was emphasised in further emails sent by Clifford Chance to Allen & Overy on 5 December 2023:

60. [117]

    Allen & Overy replied on 6 December 2023:

61. [118]

    Clifford Chance wrote to Allen & Overy later on 6 December 2023:

62. [119]

    And again, on 7 December 2023:

63. [120]

    The “pre-enforcement letter” to which Clifford Chance referred was in fact not sent.

64. [121]

    Matters continued to proceed apace.

65. [122]

    Thus, on 12 December 2023, Clifford Chance wrote to Allen & Overy:

66. [123]

    The following day, 13 December 2023, Allen & Overy wrote to Clifford Chance:

67. [124]

    Over the next few days, Clifford Chance pressed Allen & Overy for information as to the agreement of the Senior Lenders to proceed with the Strategy.

68. [125]

    Ultimately, on 20 December 2023, Mr Niu wrote to Clifford Chance:

69. [126]

    This email appears to reveal the object to which the Majority Shareholders saw the Strategy as being directed: “to take over the company”.

70. [127]

    On 22 December 2023, Allen & Overy wrote to Clifford Chance saying that “[r]eceiver appointment documents are ready to go” and that “[we] expect to have signed documents ready for 27 December” and asking for a “short update for sharing with lenders on readiness to make the senior management changes …”.

71. [128]

    Later on 22 December 2023, Clifford Chance wrote to Allen & Overy:

72. [129]

    On 24 December 2023, one working day before the Majority Shareholders proposed to give effect to the Strategy, the Wu Parties wrote to the Senior Lenders offering to purchase the Senior Debt at par. On the evidence before me, they took this step ignorant of the fact that the Strategy was in place and was to be implemented the next working day.

73. [130]

    The offer stated that the buyer “will be an Australian incorporated investment company established for the purpose of investing in financial assets”. This was a requirement in the Syndicated Facility Agreement for any assignment by the Senior Lenders of the Senior Debt.

74. [131]

    There is no direct evidence of the Senior Lenders’ immediate response to this offer. However, it must have appeared to them to be commercially irresistible, assuming it to be capable of implementation. Rather than participate in implementation of the Strategy by appointing a receiver, dismissing Ms Chen and Mr Wu and other senior management personnel and facing the uncertainties of a sale by the receiver of the business, the Senior Lenders were offered a safe exit: payment out at par.

75. [132]

    On 27 December 2023, the Majority Directors passed a Directors’ Circulating Resolution to:

76. [133]

    On the same day the directors resolved to suspend the employment of the plaintiffs’ Human Resources Management, its Finance Director and its Export Sale Manager.

77. [134]

    Also on 27 December 2023, ASIV was incorporated.

78. [135]

    Ms Chen and Mr Wu were notified of the decisions made in the Circulating Resolution the following day, 28 December 2024.

79. [136]

    Mr Wu immediately wrote to the directors:

    1. (1)

       asserting that the 27 December 2023 Circulating Resolution was invalid;

    2. (2)

       purporting to appoint Ms Chen and Mr Jack Wu as directors of the plaintiffs; and

    3. (3)

       demanding that Ms Chen be reinstated as Chief Executive Officer of the plaintiffs “to oversee the entire Nature’s Care Group”.

80. [137]

    Dr Ward SC, who appeared with Ms King for the plaintiffs, accepted, for the purposes of the present application, that Ms Chen was thereby effectively reappointed to be a director of the plaintiffs.

81. [138]

    Critically, Mr Wu continued:

82. [139]

    Mr Wu did not say in his email that the “offer covering 100 cents in the dollar for 100% of the Senior Lenders Debt” was made by the Wu Parties.

83. [140]

    But Mr Niu assumed this to be the case.

84. [141]

    In his affidavit, he said:

85. [142]

    Mr Williams SC, who appeared with Mr Riordan for ASIV, took the matter up in cross-examination:

86. [143]

    Accepting that English is not Mr Niu’s first language, I think Mr Niu understated matters somewhat. It must have been, and I find it was, obvious to him when he received Mr Wu’s 28 December 2023 email that the offer to the Senior Lenders had been made by the Wu Parties. As he said, a party offering to purchase the Senior Debt at par “must know the business very well”. That could only be the Majority Shareholders or the Wu Parties; and Mr Niu knew the offer had not been made by the Majority Shareholders.

87. [144]

    Thus he, and the Majority Directors, knew from the outset that the Wu Parties had offered to purchase the Senior Debt at par. It must also have been obvious to Mr Niu and to the Majority Directors that the Senior Lenders could not resist accepting that offer, provided the Wu Parties could show that they were good for the money; a matter about which there seems no reason to doubt.

88. [145]

    This is confirmed by the unchallenged evidence of Ms Rachel Mu, a Human Resources Director employed by the plaintiffs, who deposed that, on 29 December 2023, Mr Niu said to Ms Chen:

89. [146]

    On 1 January 2024, Mr Wu wrote to the directors of the plaintiffs stating, amongst other things:

90. [147]

    Again, it must have been obvious to the Majority Directors that the offer to which Mr Wu referred had been made by the Wu Parties.

91. [148]

    That is confirmed from the terms of the letter Clifford Chance sent, on behalf of the Majority Directors, to Allen & Overy on 5 January 2024:

92. [149]

    That letter makes clear that the Majority Directors understood that the offer to the Senior Lenders had been made by the Wu Parties.

93. [150]

    Throughout January 2024, Clifford Chance and Norton Rose Fulbright exchanged letters accusing the other’s clients of acting in positions of conflict. I do not find it necessary to set out the detail of that correspondence.

94. [151]

    On 11 January 2024, Ms Chen and Mr Jack Wu resigned as directors of the plaintiffs and purported to appoint Mr Louis Chen in their place.

95. [152]

    The companies continue to trade, albeit now with new management that the Wu Parties contend to be inexperienced and unsuitable.

96. [153]

    Between 10 and 15 January 2024, Mr Chan became the sole director and shareholder of ASIV.

97. [154]

    On 17 January 2024, 93% of the Senior Lenders assigned to ASIV their entitlements under the Syndicated Facility Agreement. Ms Chen funded the acquisition by making a payment of some $138 million that ASIV used to fund the acquisition.

98. [155]

    It was only on that day that Clifford Chance requested Norton Rose Fulbright to provide full details of the Wu Parties’ proposed “Debt Acquisition”; by which time the assignment had already taken place or was imminent.

99. [156]

    These proceedings were commenced two days later, on 19 January 2023.

The test on an application for an interlocutory injunction

1. [157]

   The purpose of an interim injunction is to preserve the status quo until the rights of the parties can be determined at a final hearing. [13] In deciding whether to grant an interlocutory injunction, the Court must consider whether there is a serious question to be tried and then whether the balance of convenience and questions of hardship and related factors warrant the grant of an interlocutory injunction. [14]

2. [158]

   First, the plaintiff must prove a serious, not a speculative, case which has a real possibility of ultimate success and that property or other interests might be jeopardised if no interlocutory relief is granted. [15] The plaintiff must show that if the evidence were to remain as it is, there would be a probability that at the trial of the action the plaintiff would be held entitled to relief. [16] How strong that probability needs to be depends upon the nature of the rights asserted by the plaintiff and the practical consequences likely to flow from the orders sought. [17] Put another way, the plaintiff must show a sufficient likelihood of success to justify the preservation of the status quo pending the trial. [18]

3. [159]

   At the time of seeking injunctive relief, the plaintiff must articulate, with some specificity, the final relief it seeks, together with the cause of action on which it relies. [19] In other words, the plaintiff must articulate a sufficient colour of right of the kind sought to be vindicated by final relief. If the plaintiff cannot demonstrate that colourable right, the foundation for the claim for interlocutory relief disappears. [20]

4. [160]

   Then, it becomes a matter of analysing if in all the circumstances of the case, considering the balance of convenience, issues of hardship and related factors, the Court should nonetheless exercise its discretion by declining to issue an interlocutory injunction. [21] It is whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted. [22]

5. [161]

   The related factors to which the Court will have regard include the adequacy of damages, the possibilities of alternative remedies, whether there has been any laches or delay, the strength of the grounds of defence suggested by the defendant, and what, if any, undertakings the defendant is prepared to give, but hardship and the balance of convenience are important. [23] If any infringement of a plaintiff’s right between writ and hearing would be properly compensated in damages, that fact alone can, but not must, be a ground for declining an injunction. [24] That is, an applicant for an interlocutory injunction must demonstrate that damages are an inadequate remedy.

The adequacy of the undertaking as to damages

1. [162]

   The usual undertaking as to damages is required in every case where an interlocutory injunction is sought, unless exceptional circumstances apply. [25]

2. [163]

   If a plaintiff’s undertaking as to damages is probably of little or no value this is “a powerful discretionary factor against the grant of an interlocutory injunction”. [26]

3. [164]

   The plaintiffs have given the Court the usual undertaking as to damages in relation to the interim order made by Rees J and offer that undertaking in relation to the proposed continuation of those orders.

4. [165]

   The Syndicated Facility Agreement matured on 8 August 2023 and, in default of their obligations under that facility, the plaintiffs have failed to repay their debts. The facility remains in default, with the plaintiffs owing some $138 million; now to ASIV. Default interest is continuing to accrue.

5. [166]

   The most recent consolidated group of accounts show that the group had a net current asset deficiency of approximately $123 million as at 31 December 2022. The financial accounts for the year ended 31 December 2023 are not available, but there is no evidence to suggest that the position has improved. The presentation given by FTI Consulting, the proposed receivers, to JIC and Tamar on 10 November 2023 predicted that $20 million in additional funding would be required upon their appointment. This was due in part to the perceived adverse impact that the termination of the employment of the Wu Parties’ representatives would have on the business and this time was due to volatile trading additions. The presentation also spoke of the need for $3.9 million in borrowings “to maintain the solvency” of the operating companies and “to bring all overdue creditors within the payment terms”.

6. [167]

   In those circumstances, the solicitors for both the Wu Parties and for ASIV have written to the solicitors for the plaintiffs pointing these matters out and demanding that JIC and Tamar, who in substance stand to benefit from a successful outcome of this application, themselves provide security. JIC and Tamar have refused to provide such an undertaking.

7. [168]

   The plaintiffs have pointed out that none of the defendants has adduced evidence that they will be prejudiced were the interim orders extended. However, ASIV has purchased, at par, the entitlement of 93% of the Senior Lenders under a facility that is in default and due and payable and is prejudiced to that, considerable, extent.

8. [169]

   The plaintiffs also suggest that I could consider, and if appropriate, order security for the undertaking as to damages. But that is not the point. The question is the adequacy of the undertaking as to damages currently offered. The undertaking appears to be of doubtful value.

9. [170]

   I find this to be a significant factor weighing against the continuation of the interim orders.

No payment into Court

1. [171]

   A further factor relied upon by ASIV is that the plaintiffs do not offer, as the price for a continuation of the interim orders, to pay into Court the amount owing under the Syndicated Facility Agreement, or any part of it.

2. [172]

   The general rule, in relation to applications to restrain the exercise by a mortgagee of a power of sale, is that the undisputed amount of the debt be paid into Court. [27]

3. [173]

   Dr Ward submitted that this principle does not apply unless a mortgagee in possession unsuccessfully seeks payment of the full amount of the debt and in any event, has no application “where the allegation involved is one of breach of duty or conflict”.

4. [174]

   It is true that many of the reported cases dealing with this issue involve circumstances where the mortgagee has demanded, but has not been paid, the amount of the debt. However, I do not understand that such demand is a condition precedent to a requirement that a party in the position of the plaintiffs pay into Court the amount owed. Further, there is authority supporting the proposition that a claim for damages against a defendant mortgagee for breach of duty as a director would not itself obviate the requirement for payment into Court. [28]

5. [175]

   I find this to be a further factor weighing against the continuation of the interim orders.

Serious question to be tried

1. [176]

   Although Mr Chan is now the sole director and shareholder of ASIV, it was established at the instigation of Mr Wu and for the purpose of acquiring the rights of the relevant Senior Lenders under the Syndicated Facility Agreement.

2. [177]

   I am satisfied that there is a serious question to be tried that ASIV is the nominee of the Wu Parties.

3. [178]

   As I have said, Ms Chen and Mr Wu resigned as directors on 13 October 2023. Ms Chen purported to reappoint herself as a director on 28 December 2023 and then resigned as director on 11 January 2024.

4. [179]

   On 2 January 2024, Ms Chen sent an email to “Members of the Nature’s Care Team”, describing herself as “CEO & Managing Director” and stating that “we have resolved to engage our legal representatives to thoroughly review and evaluate the restructuring process” and that “during this review period, I will continue to serve as the Chief Executive Officer of Nature’s Care”.

5. [180]

   There is also evidence that, during January 2024, both Ms Chen and Mr Wu purported to make decisions on behalf of the plaintiffs.

6. [181]

   It was not until 23 January 2024, during the hearing before Rees J, that Ms Chen and Mr Wu accepted that their roles as Chief Executive Officer and General Manager had effectively been terminated by the Circulating Resolution of 27 December 2023. As her Honour observed, “that concession may be tinged with self-interest, installing distance between Ms Chen, Mr Wu, and the Nature’s Care Group companies at the time of contentious events”. [29]

7. [182]

   In those circumstances, there is a serious question to be tried as to whether Ms Chen was either a director or a de factor or shadow director at all relevant times, and as to whether Mr Wu was acting as a senior executive at all relevant times. Accordingly, there is in my opinion a serious question as to whether Ms Chen and Mr Wu, at all relevant times, owed a fiduciary duty to the plaintiffs.

8. [183]

   As I set out above, their duty included the proscriptive requirements to not act in conflict and to declare any secret profit.

9. [184]

   Whether they also owed the prescriptive duty of material disclosure is more problematic.

10. [185]

    The plaintiffs allege that, prior to the incorporation of ASIV, Ms Chen and Mr Wu knew the confidential information as defined in the Syndicated Facility Agreement.

11. [186]

    Neither Ms Chen or Mr Wu were a party to the Syndicated Facility Agreement. In those circumstances, it is hard to see how they could have come into possession of any “Confidential Finance Information” as is specified in the Amended Commercial List Statement.

12. [187]

    The further confidential information that Ms Chen and Mr Wu are said to have been aware of is what is described as the “Confidential Default Information”, namely that:

13. [188]

    The allegation is that Ms Chen and Mr Wu knew of these matters by reason of being directors, shadow or de facto directors or senior executives of the plaintiffs.

14. [189]

    However, there is a considerable body of evidence suggesting that Ms Chen and Mr Wu came to know of this information by reason of being shareholders of the plaintiffs, rather than, or at least in addition to, by reason of their position as directors or senior executives.

15. [190]

    For example, the Priority and Subordination Deed of 6 July 2020: [30]

16. [191]

    There is no suggestion that this clause has been enlivened, but it shows that the Junior Lenders, including the relevant Wu Parties’ company, in their capacity as shareholders or representatives of shareholders of the plaintiffs, had a vital and legitimate interest in knowing that plaintiffs had caused a “Senior Event of Default” under the Syndicated Facility Agreement.

17. [192]

    Further, in the letter sent by the plaintiffs to Allen & Overy of 11 September 2023, [31] there was an open discussion about the “way forward in relation to the refinancing” of the Syndicated Facility Agreement, of which discussion was premised on the mutually known fact that the plaintiffs were in default and which was sent by the three named directors, including Mr Wu, for and on behalf of the shareholders they represented: in Mr Wu’s case “for and on behalf of the Wu Family Shareholders”. This was a letter sent to Allen & Overy on behalf of the shareholders of the plaintiffs and contained an open discussion about what was to be done in light of the plaintiffs’ default under the facility.

18. [193]

    There thus appears to be a strong case for the proposition, advanced by the defendants, that to the extent that the fact that the plaintiffs were in default under the Syndicated Facility Agreement was confidential, this was information known to Ms Chen and Mr Wu by virtue of being shareholders, rather than directors of the plaintiffs.

19. [194]

    In any event, there is a serious question as to whether the information is confidential at all, bearing in mind the plaintiffs’ likely obligations of disclosure under the applicable accounting standards and under the Corporations Act.

20. [195]

    To the extent that there is a serious question to be tried that the Confidential Default Information was confidential information that Ms Chen and Mr Wu had in their capacity as directors, it is a weak one.

21. [196]

    As I set out above, the key allegation that the plaintiffs make concerning the alleged breach of fiduciary duty by Ms Chen and Mr Wu is that they did not disclose that they were planning to use ASIV to acquire the rights of the Senior Lenders under the Syndicated Facility Agreement.

22. [197]

    The particular allegation in the Amended Commercial List Statement is that “the plaintiffs sought full disclosures from [Ms] Chen and [Mr] Wu of their material personal interests in ASIV, ASIV’s interests as an offeror and ASIV’s rights as Lender under the” Syndicated Facility Agreement, but that Ms Chen and Mr Wu:

    1. (1)

       failed to provide such disclosures; and

    2. (2)

       dishonestly sought to conceal ASIV’s acquisition of the Senior Lenders’ rights.

23. [198]

    But it was not until 17 January 2024, two days before these proceedings were commenced, that Clifford Chance on behalf of the plaintiffs sought detail of what was proposed, despite having referred to it in a number of communications with Norton Rose Fulbright during January 2024.

24. [199]

    Further, on 28 December 2023, and again on 1 January 2024, Mr Wu did disclose the offer. Although Mr Wu did not, in terms, state that the offer was made by or on behalf of the Wu Parties, it was, I have found, obvious to Mr Niu that this was the case.

25. [200]

    There appears to be no substance at all in the allegation that Ms Chen and Mr Wu “dishonestly sought to conceal from the Plaintiffs the acquisition by ASIV of rights as Lender”. During argument, I asked Dr Ward whether that allegation was pressed. He said that it was. I see no basis for the plaintiffs to have made, and maintained, such a grave allegation.

26. [201]

    If there is a serious question to be tried concerning this aspect of the matter, it can only be that Ms Chen and Mr Wu did not make a more detailed disclosure of their plans in relation to ASIV’s acquisition. I see their case as being, on the evidence so far adduced, very weak.

27. [202]

    There is some evidence of Ms Chen and Mr Wu purporting to play a role in the plaintiffs’ business between 27 December 2023 and the commencement of these proceedings, particularly Ms Chen’s letter of 2 January 2024 to which I have referred.

28. [203]

    As I have said, the defendants have provided undertakings not to engage in such conduct pending the hearing and those undertakings continue.

29. [204]

    One of the plaintiffs’ customers is an entity known as Provita Health Pty Ltd, the sole director and shareholder of which is apparently a nephew of Ms Chen.

30. [205]

    There is evidence that Provita is receiving market subsidies greater than those being offered by the plaintiffs to other customers. However, the evidence does not enable me to conclude from this that Ms Chen and Mr Wu are engaging in conduct in breach of their duty to the company. There may be good commercial reasons for Provita to be placed in such preferred position as it finds itself.

31. [206]

    There was also a suggestion that the Wu Family was operating a competing business though an entity known as Belrose. The plaintiffs’ submissions in relation to that aspect were not developed.

32. [207]

    I am satisfied that there is a serious question to be tried that ASIV acquired the rights of the Senior Lenders under the Syndicated Facility Agreement as nominee of the Wu Parties and that Ms Chen and Mr Wu owed the prescriptive, although not the proscriptive, fiduciary duties contended for by the plaintiffs.

33. [208]

    It may be that the plaintiffs have established a serious question to be tried that Ms Chen and Mr Wu acquired the Confidential Default Information in their capacity as directors, although I see this as being weak.

34. [209]

    I am not satisfied that the plaintiffs have established the particular breach of the fiduciary duties for which they contend, namely dishonestly failing to respond to the disclosure sought by the plaintiffs of their plan to cause ASIV to acquire those rights.

Balance of convenience

1. [210]

   I have set out above how Mr Niu and the other Majority Directors of the plaintiffs developed the Strategy from October 2023.

2. [211]

   That Strategy represented the implementation of the “marching orders from China” to the Majority Shareholders to “get the business sold for the best price possible” so that “the superiors in China” can enjoy the “price discovery that comes from running a sales process”. [32]

3. [212]

   Those “marching orders” led to the Majority Shareholders, whose nominee directors comprised the entire board of the plaintiffs from 13 October 2023, to seek to procure that the Senior Lenders appoint a receiver who would be empowered to sell the business free from what I would infer to be the carefully negotiated entitlements of the Wu Parties under the Shareholders Agreement.

4. [213]

   The object of the Strategy was, as Mr Niu said on 20 December 2023, “to take over the company”. [33]

5. [214]

   The correspondence that I have set out above shows that it was an essential element of the Strategy that it be kept secret from the Wu Parties.

6. [215]

   It appears that the Christmas Eve offer by the Wu Parties to acquire the rights of the Senior Lenders under the Syndicated Facility Agreement had the effect of thwarting the Strategy with the result that only one of its three elements was put into effect. That element was the removal of senior management of the plaintiffs; Ms Chen, Mr Wu as well as three senior managers. The second and third elements of the Strategy, the appointment of a receiver and the entry into a standstill agreement between the plaintiffs and the Senior Lenders could not be implemented, no doubt because the Senior Lenders were giving close attention to the obviously attractive offer from the Wu Parties to purchase their interest in the Senior Debt at par.

7. [216]

   There is a serious question as to whether that conduct was itself conduct oppressive of the interests of the Wu Parties as minority shareholders.

8. [217]

   It is neither necessary nor appropriate that I express any final views about this, but I see it as a factor, on the balance of convenience, weighing against granting the plaintiff the interlocutory relief.

9. [218]

   Dr Ward submitted that the parties had a “real concern about what ASIV might do” and that, absent restraint, it was likely that ASIV would sell to a “nominee for the lowest price they think achievable”, or “sell tomorrow to an associated company created for the purpose in the same interests for the price of the debt thereby retiring the debt and obtaining total control and management and ownership of the company … leaving everybody else hanging out to dry”.

10. [219]

    I see no basis upon which I could come to those conclusions.

11. [220]

    First, as the Wu Parties must know, ASIV’s powers are not unconstrained and are subject, at least, to the obligation of good faith to which I have referred above.

12. [221]

    Further, the Wu Parties, through a related company, is one of the Junior Lenders to the plaintiffs and has invested $33 million in the enterprise.

13. [222]

    No doubt the Wu Parties thought it to be to their commercial advantage to, through Ms Chen, invest some $138 million to enable ASIV to acquire rights under the Syndicated Facility Agreement.

14. [223]

    It is also true, as Dr Ward emphasised, that there is no evidence before me, directly or indirectly, from Ms Chen or Mr Wu as to their intentions.

15. [224]

    But it remains to be seen what steps the Wu Parties take.

16. [225]

    If and when they take steps that might be seen to be contrary to the interests of the plaintiffs and beyond the steps that an arm’s length secured lender (such as the syndicate banks) might take, then the plaintiffs, or the Majority Shareholders, directly or derivatively, may approach the Court.

17. [226]

    I see this as a further reason, on the balance of convenience, to decline to grant the plaintiffs the relief they seek.

18. [227]

    The plaintiffs referred to a freezing order made in the Federal Court of Australia on 22 December 2023 against Ms Chen and Mr Wu, at the instigation of the Federal Commissioner of Taxation, and evidently arising from the circumstances of the sale of their shares to the Majority Shareholders in 2018.

19. [228]

    I do not see this order as having any bearing on the question before me. It contains exceptions that make clear that the plaintiffs’ businesses will not be affected.

20. [229]

    As the plaintiffs have pointed out, the Syndicated Facility Agreement confers very wide powers on, now, ASIV, including a power to restore management control of the plaintiffs to the Wu Parties.

21. [230]

    But this was the position before, in implementation of the Strategy, the Majority Directors caused the Circulating Resolution to be passed on 27 December 2023 removing Ms Chen and Mr Wu, as well as senior employees evidently thought to be aligned with them, from management of the company.

22. [231]

    The company is currently managed by new employees who have no previous experience in the plaintiffs’ business and who, their own evidence suggests, are having difficulties effectively managing the plaintiffs’ business.

23. [232]

    I do not see this factor as weighing as heavily in the balance as those I have considered earlier but nonetheless, it is a factor weighing against continuation of the order.

24. [233]

    Dr Ward also submitted that Ms Chen and Mr Wu have not adduced any evidence that ASIV would be prejudiced were it to be restrained from exercising any rights pending the final hearing.

25. [234]

    It is true that no evidence has been adduced that, in terms, addresses this issue. However, as I have said, the fact is that ASIV is now the owner of the Senior Debt, has purchased it at par and is in the position of a secured lender of a facility in default and under which interest continues to accrue at default rates. It is obviously prejudiced to that, considerable, extent.

Conclusion

1. [235]

   The freezing orders made by Rees J will expire at 5pm today. I do not propose to extend them. The plaintiffs’ application is dismissed with costs. I stand the proceedings over to the Commercial List for directions on 16 February 2024.