BCEG International (Australia) Pty Ltd v Xiao

HIS HONOUR: Yesterday, I heard, on an urgent basis, an application by the first and second defendants (applicants) by notice of motion filed on 13 January 2023 to vary (the variation application) one of various orders made by Rees J on 21 September 2022 (stay orders).

Mr Le Plastrier of counsel appeared for the applicants. Mr D Williams SC and Mr Riordan appeared for the respondent to the application being the plaintiff in the proceedings.

The application was supported by affidavits from Fergus Robert Beams, affirmed on 13 January 2023 and 16 January 2023, and an exhibit to the 13 January 2023 affidavit.

The respondent relied upon an affidavit by Jodi Walkom sworn 16 January 2023 and an exhibit to that affidavit.

I determined to dismiss the variation application with costs.

Because of urgency to provide reasons described below, to enable the applicants to make what I describe as an extension application to the Federal Court prior to tomorrow, I indicated yesterday that I would list the matter today to provide reasons. What follows are my essential reasons for dismissing the application.

The reasons are provided in the context of urgency that I have described.

On 22 July 2022, Rees J delivered judgment in these proceedings (principal judgment): BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972 – in which the respondent brought claims against the applicants and other defendants.

Her Honour found that the applicants are liable for breaches of certain fiduciary duties, and that the fourth and fifth corporate defendants, being respectively Interlink Wagga Central Pty Ltd (IWC) and West Wyalong Marketplace Pty Ltd (WWMP) were liable as accessories.

Orders were made by Rees J at the end of those reasons for judgment: at [446].

Further orders were made on 17 August 2022, including a notation that the plaintiff elected for equitable compensation against the applicants in respect of what is described as the Wagga Project claim, and alteration of certain of the monetary judgment amounts.

The particular order which is sought to be varied is order 4 of the stay orders made by her Honour, to allow CX & DN Holdings Pty Ltd (Holdings) to draw down on a loan from OUF Commercial Pty Ltd (OUF) in the amount of $1,542,639.02 (the amount sought).

Holdings appears to be the trustee of the Xiao and Chen Family Trust.

On the hearing of the application, Mr Le Plastrier handed up a proposed set of short minutes of order refining with some precision the orders he sought.

Relevantly, the first and second of those orders sought in the proposed short minutes of order are as follows:

The stated purpose of the application was to allow the amount sought to be transferred by OUF to a trust account for the solicitors for the applicants, and for those solicitors in turn to transfer, as soon as practicable, the amount sought into an account to be nominated by the respondent, to pay an amount described in the applicants’ submissions as the “Beijing Dragon Award” (comprising certain payments referred to in the judgment as the Beijing Dragon Payments and interest amounts).

There has been a notice of appeal lodged from the decision of Rees J. However, following the filing of an amended notice of appeal, the amounts of the Beijing Dragon Award are not, as I understand it, disputed on appeal.

On 18 August 2022, the respondent issued a bankruptcy notice (bankruptcy notice) in respect of the applicants’ total indebtedness under the judgment, being a sum in excess of $17 million.

The urgency in the matter arises from the fact that the applicants wish to apply to the Federal Court on or before tomorrow, 19 January 2023, to extend the time for compliance with a bankruptcy notice (the extension application).

The applicants’ claim that the extension application is only arguable if the variation application is allowed.

Mr Le Plastrier submitted that there is power to vary the order, both under the general law, citing Douglas v John Fairfax & Sons Ltd [1983] 3 NSWLR 126 at 134 per Hunt J, and pursuant to r 36.16(3) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) .

He submits that the power is exercisable where it is just to do so.

On the hearing of the application, no particular submissions were made in respect of how that power is to be exercised.

The parties proceeded effectively on the basis that there is a power to vary such an order in the circumstances, if the Court considered it was appropriate and just to do so.

As a preliminary matter, Mr Le Plastrier frankly accepted that, on one view, the variation application could and should have been sought before Rees J, or, at any rate, before the term ended. The Court term formally ended last year, on 16 December 2022, and at least since that time or close to that time has been in vacation.

For example, it is clear that on 8 December 2022, Rees J made a variation of order 7 of the stay orders.

Mr Le Plastrier submitted that the applicants will suffer prejudice if the variation application is rejected in paragraphs 34-36 of his submissions:

Certainly, the applicants, unless they can come up with ready moneys, will or at least might suffer the consequences that Mr Le Plastrier has referred to.

However, on one view of the matter, in light of what is referred to below regarding asset preservation orders, the context of the stay application, and the terms of order 4, the applicants, or at least the first applicant, has – as I understood to be contended by the respondent – been the author of his or their own misfortune.

On 16 September 2022, Rees J heard a stay application by the applicants. On 21 September 2022, Rees J ordered a stay, and such stay was pending the outcome of the appeal from judgment which appeal is listed for 6 and 7 February 2023.

On 29 September 2022, the Federal Court granted an extension of time for compliance with the bankruptcy notice. The extension of time is said to expire on the earlier of the determination of the appeal or 14 days after expiry of the stay, according to the submissions of Mr Le Plastrier.

When those orders were made on 21 September 2022, the appeal in respect of the judgment was in respect of what is described by Mr Le Plastrier as the whole judgment or the whole judgment debt.

I have referred to the fact that an amended notice of appeal was filed.

That occurred on 7 December 2022. The amended notice of appeal withdrew, as I have noted, the appeal in relation to the Beijing Dragon Award.

On 8 December 2022, the day following filing of the amended notice of appeal, Rees J made the variation order that I have referred to.

On 5 January 2023, the defendants did not pay the sum ordered under the varied orders or any sum at all into Court and, accordingly, the stay was lifted on that day.

Tomorrow, on 19 January 2023, the time for the applicants to comply with the bankruptcy notice will expire.

It is appropriate to set out a little detail regarding the arrangements which impact upon order 4 of the orders that are the subject of the variation application.

ILC Commercial Pty Ltd (ILC) is an entity controlled by the first applicant and is the registered proprietor of commercial property in Wagga Wagga, including a property described as “the Edward Street property”.

ILC gave OUF a mortgage over the Edward Street property (the OUF mortgage) which secures a loan of $3 million from OUF to Holdings (the OUF facility).

Holdings, I am informed, is controlled by the first applicant.

It was noted as an agreed fact that the applicants are guarantors in respect of the OUF facility: T 4.

I was informed that:

The total amount of the facility is approximately $5.5 million and, accordingly, apart from $3 million which has already been drawn down, there is, subject to the variation application, apparently available an amount of $2.5 million of the facility which could, if permitted, be drawn down.

Mr Le Plastrier, at paragraph 30 of his written submissions, described the effect of the stay orders as reflecting observations made by Rees J at the hearing of the stay application insofar as they:

Mr Le Plastrier submitted that the only immediate way the applicants could pay the Beijing Dragon Award is to allow Holdings to drawdown the amounts sought on the OUF facility.

Mr Le Plastrier articulated it was appropriate to make the orders in paragraph 38 of his submissions:

Mr Williams SC submitted that at first blush the variation application seemed relatively straightforward.

However, the respondent opposed the variation application essentially because it submits that it perpetuates a contempt made by at least the first applicant and other defendants. Mr Williams SC submitted that the case was a ”fraud case“ in which sham transaction documents had been entered into and created by the defendants and that her Honour found that each of the defendants were guilty of serious fraud and that none of the fraud findings were challenged on appeal: T 9.

Rees J in the principal judgment referred to the fact that, in August 2021, Williams J had dealt with an asset preservation application: at [306] – see BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027.

In particular, Mr Williams SC referred to paragraph 308 of the principal judgment in which her Honour states as follows:

Some of the details regarding the contempt application which is made against the applicants and at least against IWC and WWMP is set out in the affidavit of Jodi Walkom.

Mr Williams SC further indicated that particular details of this are set out in the respondent’s submissions on the contempt application, which are in evidence before me; see in particular the submissions regarding the security swap transaction described below and the obtaining of the OUF facility at 112-117 of Exhibit JW-17.

Initial freezing orders were made.

The submissions outline events from 1 June 2022 leading to a second freezing order made on 8 June 2022 and the provision of an affidavit by the first applicant on 10 June 2022: see 122-124 of Exhibit JW-17.

Essentially, the respondent alleges that the applicants caused IWC and WWMP to be parties to a security swap transaction by which formerly unencumbered properties owned by WWMP came to be burdened by mortgages securing debts which exceeded the value of those properties.

The respondent further alleges that the security swap transaction was orchestrated by the applicants to enable Holdings to enter into the OUF facility.

The OUF facility, apart from being secured by a mortgage over the Edward Street property, is also secured over a property in The Rocks, Sydney.

On 10 June 2022, the first applicant set out in an affidavit sworn on that date an undertaking to the Court that by 30 September 2022 he would cause the release of lots 30 and 31, which are described as the Flinders Street properties, from the security of IWC’s Commonwealth Bank of Australia mortgage.

Ms Walkom’s evidence is that the first applicant did not cause those properties to be released from the mortgage by that date, that is, by 30 September 2022; nor has the first applicant offered any explanation for his failure to do so.

Ms Walkom indicates that the respondent contends that the impugned security swap transaction enabled entry into the OUF facility and that without that transaction no first ranking mortgage over the Edward Street property could have been offered to OUF.

The respondent seeks, by its contempt application, to hold the first applicant to his undertaking and to require the applicants to purge the contempt by reversing the security swap transaction, and for those transactions to be unwound.

Mr Williams SC, in response to questions from myself, indicated that an essential part of the contempt application is that the Edward Street property should not have been encumbered at all and that if the Court were to permit the variation application it would perpetuate the contempt: T 11.

Mr Le Plastrier submitted that the overarching intent of the stay orders was to have a secured fund of money from the sale of property that could be utilised to meet the judgment debt: T 9.

He did not accept that the sole justification for order 4 was that her Honour had a suspicion, a concern or had formed a view about the contempt: T 12.

As it appeared to me, a critical aspect of addressing the matter was to understand the basis on which Rees J had, under the stay order, not permitted any further drawdown. I asked the parties to draw my attention to any material which bore upon that.

As I understand it, her Honour did not provide any separate reasons for judgment for the provision of the stay orders.

Nonetheless, the orders were made in a context where there was a hearing of the stay application, and I was taken to a transcript of the hearing of the stay application (which occurred on 16 September 2022).

In particular, Mr Le Plastrier drew my attention to two passages being as follows (at 211-212 and 215-216 of Exhibit FRB-1 respectively):

Mr Williams SC submitted that if the application is acceded to, apart from perpetuating the contempt, it would make the transaction that is sought to be unwound even more difficult to undo because there would be an additional amount that is outstanding under the loan agreement and secured, and that the borrower under the loan agreement is not a party to these proceedings. He submitted that the applicants will have to borrow from Holdings and to drawdown under the security, and that there is no admissible evidence that they could pay a “$1.5 million judgment debt”: T 15.

There is evidence as to the financial circumstances of the applicants, but it is somewhat contested in the proceedings. In paragraph 50 of the affidavit of Ms Walkom, she sets out, at least from the respondent’s perspective, a response to the purported asset position of the applicants as set out in the exhibit to the affidavit of the first applicant dated 10 June 2022.

Mr Williams SC commented upon the applicants’ asset schedule and submitted that it was demonstrably incorrect as it did not even include the OUF loan asset: T 16.

Mr Le Plastrier, on the other hand, disputed that the transactions would be difficult to unwind. He submitted that what is proposed is simply a matter between OUF and Holdings and that it has no impact upon the respondent’s rights to retain the $1.5 million amount sought save that the amount would need to be “brought to book” (his words), when the balance of the judgment debt is discharged through the sale of unencumbered properties that the plaintiff wants to get access to: T 18.

Towards the end of the hearing. I expressed a provisional view that I was not minded to make the relief sought by the applicants.

In that context, Mr Le Plastrier sought the opportunity to explore whether he might obtain instructions to propose an undertaking which, in his words, might be able to walk a line between the parties’ respective interests. I gave him that opportunity: T 23.

Following a short adjournment, Mr Le Plastrier indicated to the Court that he was instructed to offer an undertaking that if the orders in the motion were made then the first applicant would undertake to repay the debt to OUF created by the drawdown through his own borrowings from non-bank lenders.

Following clarification, the reference to the debt was classified as being what I have described as the amount sought (approximately $1.542 million) and that that sum would be repaid within 45 days: T 24.

Mr Williams SC opposed the variation order being made on terms of the proffered undertaking for three reasons. He stated as follows:

Mr Williams SC further stated that it was an unsecured undertaking with no indication as to the source of funds in circumstances where it was claimed that there was no other source of funds available: T 25.

Mr Le Plastrier indicated that he could not proffer any further detail about the source of the funding.

Mr Williams SC, lastly, submitted that the judgment had been outstanding since 22 July 2022 and that the evidence revealed that the first applicant had been using his funds for his own purposes rather than paying the judgment debt.

Ultimately, I am not persuaded that Rees J was indifferent on the hearing of the stay application to whether the OUF facility could be used as a source by the applicants to fund payment of their obligations and, in particular, to pay the Beijing Dragon Award.

The impression that I have is that her Honour’s references in the transcript that I have referred to above (at 69), particularly the second passage, to the applicants obtaining funds was, properly construed, intended to be a reference to obtaining funds from resources other than from a further drawdown of the OUF facility.

However, it is not necessary for me to finally determine whether that is the proper construction or not. It appears at least right to say that it (funding other than further drawdown) was a significant consideration for her Honour.

Overall, in assessing whether a variation should be permitted, it seems to me that a material consideration in balancing the interests to be considered is the evidence of the circumstances in which the asset preservation orders were made initially and subsequently, and the fact that there is a serious issue regarding whether the first applicant has breached such orders, at least in part, by encumbering the Flinders Street property in order to obtain the facility.

It is not for me to determine whether such a contempt was committed or not.

However, whether the variation application should be permitted should be considered in the context in which there is a plausible or a serious issue to be determined regarding whether the freezing orders were breached in that way.

Further, I was and am satisfied that there is potential prejudice to the respondents in circumstances where the respondent seeks to have the applicants purge the contempt by unwinding the transactions referred to, and that if the variation application is acceded to the respondent asserts that will be made more difficult, and that appears to be a plausible contention.

Further, the fact there is a live issue in the proceedings regarding the applicants’ financial resources and ability to marshal assets fortifies me in coming to the view that on balance the variation application should not be permitted.

In those circumstances, I dismissed the variation application.