BCEG International (Australia) Pty Ltd v Xiao (No 2)

1. [1]

   HER HONOUR: In April 2022, I heard a three-week fraud trial brought by the plaintiff, BCEG International (Australia) Pty Ltd (BCEG) against its former director, Yu Xiao, wife Yanying Chen (who I found was a de facto director of BCEG) and the couple’s three companies, Interlink Laboratory Pty Ltd, Interlink Wagga Central Pty Ltd and West Wyalong Marketplace Pty Ltd.

2. [2]

   As detailed in my judgment given in July 2022, the fraudulent activity engaged in by Mr Xiao and Ms Chen was extensive, taking place over several years, several property developments, numerous transactions and involving considerable sums: BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972. (I have adopted defined terms from my primary judgment in what follows.) BCEG sought a variety of forms of relief against each of the defendants, some of which was sought in the alternative and some of which required BCEG to elect between equitable compensation and an account of profits. BCEG made an election in respect of some claims before or during the trial and, in respect of other claims, deferred making an election until after my judgment.

3. [3]

   On delivering judgment, I made orders, directions and notations requiring BCEG to attend to various matters, including calculating interest, ascertaining the Australian dollar equivalent of payments made in US dollars, providing a copy of my judgment to the liquidators of two non-party companies pending the proposed rescission of contracts between BCEG and those companies, and orders for the taking of accounts. In addition, I directed the parties to notify any errors or omissions within 14 days. Having published my reasons, I raised the following matter with counsel:

4. [4]

   Rather than exercise this liberty, BCEG has filed a motion under rule 36.16(3A) of the Uniform Civil Procedure Rules 2005 (NSW), seeking to vary an order. In doing so, BCEG apprehended that the scope of the ‘slip’ rule may not encompass the variation sought. I agree that the rule identified by BCEG is the correct head of power.

Rule 36.16

1. [5]

   Rule 36.16 provides:

2. [6]

   In Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300, Mason CJ explained that the jurisdiction to reopen a judgment is to be exercised with great caution, having regard to the importance of the public interest in the finality of litigation; generally speaking, it will not be exercised unless the applicant can show that by accident and without fault on their part, they have not been heard: at 301-302. Further, at 302-303:

Primary judgment

1. [7]

   I have had the benefit of written submissions from the parties’ counsel and oral submissions this morning in respect of the portion of my primary judgment where things may have gone awry (being [436]) and the resulting alteration sought to Order 11 to set matters to rights. It concerns BCEG’s claim against West Wyalong Marketplace for an account of profits in respect of the West Wyalong project.

2. [8]

   In short, BCEG China borrowed US$35 million to fund construction of a hospital on the Gold Coast (the Varsity Lakes project) but, from 2010 to 2012, Mr Xiao and Ms Chen used $3,423,739 of this loan facility to wholly pay for the construction of their personal project in West Wyalong, owned by West Wyalong Marketplace.

3. [9]

   BCEG sought equitable compensation against its director and de facto director in the sum of $3,423,739. As to quantification of equitable compensation, I concluded at [401]-[402]:

4. [10]

   Ultimately, I awarded equitable compensation against Mr Xiao and Ms Chen in the amount of $2,528,949.42. This amount covered not only BCEG’s claim in respect of the West Wyalong payments but overlapped with BCEG’s claim in respect of sham sub-contracts and partially overlapped with BCEG’s claim in respect of the Beijing Dragon payments.

5. [11]

   Separately, BCEG pursued a claim for accessorial liability against West Wyalong Marketplace and elected an account of profits, comprising rental income enjoyed on the property since its completion ($1,234,632.72) together with capital gain on the sale of the property in February 2019 ($1,710,000). I concluded that BCEG was entitled to this amount, together with interest: at [435]. At [436]: (emphasis added)

6. [12]

   It is the italicised portion which BCEG submits has proceeded on a misapprehension as to the facts or the law and which the defendants, for their part, embrace.

Consideration

1. [13]

   BCEG observed that, where I had earlier found that the West Wyalong payments should be regarded as having been repaid by “the defendants”, the evidence of the defendants’ accounting expert, Tony Samuel, was that Interlink Laboratory paid $37,114,387 to BCEG while West Wyalong Marketplace paid $267,436: at [312]. Any deduction of the profits to be disgorged by West Wyalong Marketplace should be limited to payments which it made, not payments made by “the defendants”. Further, given the details of the payments provided by Mr Samuel, no deduction should be made at all.

2. [14]

   The defendants submitted that there could be no question of any misapprehension of fact or law and the proper course was for BCEG to appeal. The defendants pointed to a portion of my judgment where I dealt with the defendants’ submission in respect of BCEG’s contractual claim against Interlink Laboratory, at [314]:

3. [15]

   The defendants submitted that this conclusion applied to the issues, claims and defences in the proceedings generally, including in respect of the conclusions reached at [436] and in Order 11. The defendants submitted that the Court there held that, as the repayments by the defendants in respect of the West Wyalong projects had consequences for equitable compensation, there were also consequences for the profit, for which an account must be given. The profit should be calculated on the basis that the construction costs were paid to BCEG by the defendants.

4. [16]

   The defendants’ submissions, with respect, rather highlight and repeat where I have gone wrong. One cannot take a finding in respect of a contractual claim, filter it through a comment made in respect of the assessment of equitable compensation, and then apply it to an account of profits claim against a separate corporate entity. Each cause of action against each party must be considered having regard to the principles and evidence relevant to that cause of action alone. Whilst it was certainly the defendants’ thesis at trial that BCEG rendered invoices to Interlink Laboratory for the Varsity Lakes project which included the West Wyalong payments and Interlink Laboratory, somehow, thereby repaid the construction costs of the West Wyalong project, I should not be taken to have accepted that submission: see [384]. It was certainly the case that BCEG’s accounting and banking records – maintained by Mr Xiao and Ms Chen – were “as clear as mud”: at [407]. But this should not result in muddied thinking on my part.

5. [17]

   BCEG is right to say that I have elided the separate corporate entities and individuals at [436] and, by proceeding on the basis that the payor of the West Wyalong payments were “the defendants” collectively, the Court has bestowed a set-off on West Wyalong Marketplace against profits it was otherwise obliged to disgorge. Where the principal payor of the repayments identified at [402] was Interlink Laboratory, no such setoff ought to have been allowed in favour of West Wyalong Marketplace at [436].

6. [18]

   There is no evidence that West Wyalong Marketplace paid for the construction of the project. The only payments made by West Wyalong Marketplace identified by Mr Samuel post-dated completion of construction by several years. So far as the supporting invoices – where available – suggest, those payments had nothing to do with the construction of the project. The misapprehension, probably both as to the facts and the law, was mine alone and cannot be attributed to the neglect or default of BCEG. Indeed, it was on this very subject that I sought the parties’ assistance, when handing down judgment, to notify the Court if “I have missed something”.

7. [19]

   For these reasons I make the following orders:

   1. (1)

      Pursuant to rule 36.16(3A) of the Uniform Civil Procedure Rules 2005 (NSW), vary Order 11 made on 22 July 2022 to delete the words “less the West Wyalong payments, as described in the judgment of Rees J”.

   2. (2)

      The monetary judgment in Order 11 made 22 July 2022 be varied to $3,731,547.75.