Hu v Blue Whale Entertainment Pty Ltd

The question before the Court is whether it should take the unusual step of ordering specific performance of a settlement agreement by which the defendants agreed to pay a sum of money in settlement of the plaintiffs’ claim in these proceedings.

The proceedings were commenced by summons filed on 10 March 2020. At that time, the plaintiffs sought payment by the defendants of the sum of $5,750,000 in respect of convertible debentures issued to the plaintiffs by the first defendant. The plaintiffs did not exercise their rights of conversion and, in accordance with the terms of the debentures, sought the return of their original investment of $5,000,000 together with interest of $750,000 (calculated at 15 per cent per annum). The first defendant’s obligations under the debentures were guaranteed by the second defendant.

At the time of commencing proceedings, the plaintiffs also sought and were granted an ex parte freezing order in respect of the $5,750,000, principally because, despite a number of requests, the defendants had not offered any explanation for their refusal to pay the amount claimed.

The defendants filed an appearance and List Response. According to the List Response the issues in the case included:

It is apparent from affidavit evidence filed by the parties that it was the defendants’ contention that the convertible debentures were never issued. Instead, according to the defendants, the amount paid by the plaintiffs was invested in the Cornerstone New SIV Bond Fund (the Fund), pending the acquisition of the debentures, which ultimately never proceeded. The Fund is an investment scheme managed by Cornerstone Capital Investment Group Pty Ltd (Cornerstone). The trustee of the scheme is One Funds Management Pty Ltd (the Trustee). Mr Menghong (Michael) Gu is a director of Cornerstone. He is also a director of each of the first and second defendants. The plaintiffs accept that they understood that the $5,000,000 was to be held in the Fund pending the issue of the debentures. However, it was their case that the debentures were issued.

In connection with the investment in the Fund, Mr Gu provided to the plaintiffs a “side letter” dated 3 December 2018 which relevantly stated:

Other interlocutory steps have occurred in the proceedings. Relevantly, in accordance with the original freezing order, Mr Gu (albeit late) swore an affidavit on 3 April 2020 deposing to the assets of the first and second defendants. That affidavit supplemented an earlier affidavit he had sworn on 30 March 2020. Mr Gu’s evidence was that the first defendant was a special purpose vehicle that was set up to invest in the Canberra Casino. The investment did not proceed, which he says explains why the debentures were never issued. The first defendant has no current assets to speak of. According to a balance sheet as at 29 February 2020, which is annexed to Mr Gu’s 3 April affidavit, the first defendant has an unidentified non-current asset of $1,000,000 and total liabilities of $1,160,740, leaving a total net equity of negative $160,505. Consistently with the defendants’ case, there is no reference to the $5,000,000 in the balance sheet.

Mr Gu said that the second defendant had the following assets:

Mr Gu says that the cash and cash equivalents are held in a bank account of iProsperity Capital Management Pty Ltd, a related party of the second defendant, with the Commonwealth Bank. The balance sheet for the second defendant as at 29 February 2020 which is annexed to Mr Gu’s 3 April affidavit showed the following liabilities:

On 8 April 2020, after receiving the defendants’ evidence, the plaintiffs’ solicitors wrote to the Trustee seeking to exercise the plaintiffs’ rights of redemption in respect of the bonds held on their behalf. The solicitors for the Trustee responded to the redemption request on 17 April 2020. In that response, they said that the Trustee was unaware of the side letter until 8 April 2020. They went on to say:

On 14 April 2020, prior to receipt of the Trustee’s response, the solicitors for the defendants made an offer to settle the proceedings, which was expressed to be made in accordance with the principles stated in Calderbank v Calderbank [1975] 3 All ER 333. The offer was in the following terms:

The plaintiffs accepted that offer on 15 April 2020.

The defendants have not made any payment under the settlement agreement.

Relying on s 73 of the Civil Procedure Act 2005 (NSW), which gives the Court power to determine any dispute in relation to a settlement of proceedings and make orders to give effect to its determination, the plaintiffs, by an amended notice of motion filed in Court on 8 May 2020, relevantly seek the following orders:

In the alternative, the plaintiffs seek judgment in the amount of $5,750,000 plus interest. They sought other orders relevant to the freezing order. Those orders are no longer in issue.

Although the Court has power to order specific performance of an obligation to make a monetary payment, orders of that type are rare: see Dixon v Barton [2011] NSWSC 1525 at [183]ff. There are a number of reasons for that. First, a judgment for a monetary amount will normally provide a sufficient remedy. If it does, that provides a strong discretionary ground for refusing equitable relief. Second, the failure to comply with an order for specific performance may amount to a (civil) contempt. It is generally not appropriate to expose a judgment debtor to punishment for contempt. Third, the law provides various procedures for the recovery of judgment debts. The Court should not seek to circumvent those procedures by an order for specific performance. Lastly, and connected to some of the other factors, it is not appropriate to make an order for specific performance where the judgment debtor is insolvent. Such an order may require something to be done that cannot be done. At the very least, it may have the effect of giving one unsecured creditor priority over others, when insolvency law is specifically designed to ensure an equitable distribution of the assets of an insolvent judgment debtor.

In the present case, the plaintiffs submitted that there were a number of reasons why the Court should make an order for specific performance in this case.

First, it was the defendants who offered to settle the case; and their offer was to settle the case by the payment of money in a particular way and by a particular time – that is, within 14 days after the offer was accepted. They should be held to the terms of that offer.

Second, there is no reason in this case to think that the defendants will be unable to comply with the order. The evidence is that the second defendant holds ample cash to make the required payment. Although it appears from the second defendant’s balance sheet that it has a deficiency of net assets, that deficiency arises from large non-current liabilities consisting of loans. Without knowing more about those loans, it is not possible to say that the second defendant is insolvent. It was open to the defendants to lead evidence concerning their solvency. They chose not to. It should be inferred from their failure to do so that they are not insolvent.

Third, Mr Gu has engaged in improper conduct. At the very least, the side letter he signed was misleading. An order for specific performance is appropriate in those circumstances.

Fourth, and connected to the third point, the defendants’ conduct has been dishonest and evasive. There is a risk in those circumstances that they will engage in transactions to defeat the plaintiffs’ rights under the settlement agreement. Those risks are best ameliorated by an order for specific performance.

I do not accept the plaintiffs’ submissions. Prior to the offer being made and accepted, it is difficult to see how the plaintiffs could have obtained an order for specific performance for the payment of the money they claim. Their original claim was a claim for a debt. The appropriate remedy for a claim in debt is a judgment for the amount claimed. If there was a danger that either of the proposed judgment debtors would dispose of their assets with the result that they would not be in a position to satisfy the judgment, it was open to the plaintiffs to seek a freezing order, which is what they did.

The plaintiffs do not explain why they should be in a better position having accepted an offer to compromise their claim. The terms of compromise provide for the payment of the sum of money they claimed. This is not a case where the plaintiffs agreed to accept a lesser amount in return for the certainty of payment. The terms of the offer they accepted contemplated the possibility that the money they claimed would not be paid and made provision for it. In particular, the terms of settlement did not provide for the immediate dismissal of the proceedings. Rather, the proceedings were to be stood over until a date after payment was due. It may be inferred that it was contemplated that if payment was not made in accordance with the terms of the settlement agreement, the plaintiffs were given a choice. They could affirm the agreement and exercise any rights they had in respect of its breach. Alternatively, they could terminate it and continue with the proceedings. The fact that the plaintiffs chose the former course is not itself a reason for ordering specific performance.

It might be said that the plaintiffs are entitled to an order for specific performance because the settlement agreement provided for more than the mere payment of money. In particular, under its terms, the first plaintiff unconditionally agreed to withdraw his redemption request dated 7 April 2020 in respect of the Fund. However, two points may be made about that. First, that obligation is conditional on payment. Consequently, it is not at present binding on the first plaintiff. Second, the obligation is consistent with the plaintiffs’ case. Faced with the defendants’ evidence, the plaintiffs had a choice. They could have maintained their case that the debentures were issued and sought to recover the sum payable to them in accordance with the debentures’ terms from the first and second defendants. Alternatively, they could have accepted that, contrary to what they had been told and the documents they had been given, they had not invested in the debentures but that the money they invested was paid into the Fund on terms which were inconsistent with the terms they were led to believe applied. However, they could not pursue both courses of action, which is what they sought to do when their solicitors sent a redemption notice to the Trustee. Ultimately, it is apparent that the plaintiffs have chosen the former course. But having chosen that course, it is difficult to see how they can maintain that the first plaintiff has an interest in the Fund and therefore is entitled to give a redemption notice.

The plaintiffs submit that an order for specific performance will expose Mr Gu to a charge of contempt because it may be a contempt on his part as a director of the defendants if the defendants do not comply with the order. They say that that is appropriate given Mr Gu’s conduct. But put like that, the plaintiffs seek to obtain the benefits of a case that Mr Gu is personally responsible for their failure to be repaid without having to prove the facts necessary to make out that case. In my opinion, an order for specific performance should not be used as a means of placing a personal obligation on Mr Gu when the plaintiffs have not sought to make out a case against him personally. That is not to say that the evidence does not raise serious questions concerning Mr Gu’s conduct. And that conduct and his apparent control over the defendants are very relevant to the question whether freezing orders should be continued and in what form. But that is not the current issue before the Court.

It follows that there should be judgment for the plaintiffs in the sum of $5,750,000 together with interest from 29 April 2020 (the date payment was due) to the date of this judgment at Court rates. That amount is $5,761,972.60.

I will hear the parties in relation to the costs of the amended motion if costs cannot be agreed.

It follows that the orders of the Court are: