FEDERAL COURT OF AUSTRALIA

Beijing Hua Xin Liu He Investment (Australia) Pty Ltd v Lu (No 2) [2018] FCA 1583

ORDERS

THE COURT ORDERS THAT:

1.    The applicants have leave to amend the statement of claim in terms of the minute provided 28 September 2018.

2.    The applicants file and serve the amended statement of claim by 4.00 pm on 19 October 2018.

3.    The applicants provide to the respondents particulars of the amended statement of claim by 26 October 2018 as follows:

(a)    as to paragraphs 8, 10, 12, 14 and 17, particulars of the matters relied upon in support of the contention that payments made to Zeus Technology were for use by Mr Lu; and

(b)    as to paragraph 16, particulars of the matters relied upon in support of the contention that the pleaded invoice constituted a direction by Mr Lu for Beijing to pay the unpaid balance of the purchase price to Zeus Technology.

4.    The respondents file and serve an amended defence by 16 November 2018.

5.    The parties provide standard discovery in accordance with r 20.14 of the Federal Court Rules 2011 (Cth) by 7 December 2018.

6.    The costs of the case management hearing of 2 October 2018 are reserved.

7.    The applicants pay the respondents' costs thrown away resulting from the amendments to the statement of claim and pay the respondents' costs of the hearing of 20 September 2018.

8.    The costs of the case management hearings of 2 May 2018, 20 July 2018 and 19 October 2018 are in the cause.

9.    There be a further case management hearing in December 2018 on a date to be fixed.

10.    Liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BANKS-SMITH J:

1    The application before me today is for leave for the applicants to amend their statement of claim in terms of a minute.

2    The statement of claim was first filed on 2 December 2016. The respondents filed an application for summary judgment on 13 February 2017 and that application was granted on 29 March 2017.

3    The applicants appealed against the orders for summary judgment, and the appeal was allowed by the Full Court on 4 December 2017: Beijing Hua Xin Liu He Investment (Australia) Pty Ltd v Lu [2017] FCAFC 186 (Gilmour, Jagot & Moshinsky JJ).

4    That background explains to a large extent why the application to amend comes before me today, being a considerable period after proceedings were instituted. The other reason is that a heated contest about further and better particulars which commenced by communications in January 2018 was to my mind becoming so expensive and inefficient in terms of progressing the matter that I invited the applicants to first amend their statement of claim. I will return to that aspect later.

5    The principles that apply to an application for leave to amend a pleading are well known and recited elsewhere: see in particular Caason Investments Pty Ltd v Cao [2015] FCAFC 94; (2015) 236 FCR 322 at [19]-[21] (Gilmour, Foster & Edelman JJ). In summary, the power to refuse or grant leave must be exercised in the way that best promotes the Court's overarching purpose to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible. The Court's power is broad and has a remedial objective of ensuring the real questions in the proceedings are properly agitated (Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 at [14] (French CJ), [71] (Gummow, Hayne, Crennan, Kiefel & Bell JJ). Leave to amend should be granted unless the proposed amendment is futile, such that the issue is unlikely to succeed or the amendment is likely to be struck out.

6    As in any interlocutory application, the issue of case management and the principles discussed in Aon loom large. In considering this application, I take into account the delay in seeking the amendments, any prejudice to the respondents that follows and general case management principles.

7    The proposed amendments detail the manner of the payment of the purchase price for certain shares in the second respondent, Zeus Technology HQB Pty Ltd (Zeus), by the first applicant, Beijing Hua Xin Liu He Investment (Australia) Pty Ltd (Beijing) from the first respondent, Mr Lu.

8    The Full Court summarised the share acquisition the subject of the applicants' claim in its judgment as follows (at [3]):

The applicants claimed that in 2010 Beijing and Mr Lu agreed that Beijing would purchase Mr Lu's 75 shares in Zeus for $1.2 million, with Mr Lu holding the shares on trust for Beijing until Beijing requested a transfer of shares, with Mr Lu to provide an executed but undated transfer form to be held by Beijing. The applicants also claimed that under this agreement, by September 2011, Beijing paid Mr Lu directly or through Zeus the sum of $1.2 million and that Mr Lu delivered to Beijing an undated share transfer form signed by Mr Lu transferring Mr Lu's 75 shares in Zeus to Beijing and an undated memorandum of resolution of Zeus resolving to approve the share transfer also signed by Mr Lu. The particulars to the payment of $1.2 million referred to payments to Zeus "for use by Mr Lu" of $116,000 on 30 April 2011, $232,000 on 30 May 2011, $174,000 on 7 June 2011, $174,000 on 10 June 2011, $347,287 before 15 August 2011, and $156,713 on 12 September 2011.

9    In April 2018 the respondents filed an affidavit of Mr Lu in which they indicated they would apply for further and better particulars of the payment of the sum of $347,287 referred to in the statement of claim. It is apparent from the affidavit that since at least early 2018 the respondents have been seeking further and better particulars of the statement of claim, including further and better particulars of that particular payment. I note that such payment was always the subject of some particulars.

10    In April 2018 and following a number of communications about the prospective request for further and better particulars, the applicants' solicitors told the respondents' solicitors that they intended to amend their pleading after discovery, but informally provided further and better particulars as to the $347,287 payment. In short, the correspondence informed the respondents that the obligation to make such payment was met by both a number of cash payments made by third parties, Mr Tu and Mr Zheng, and a number of bank transfers to bank accounts nominated by Mr Lu. The applicants also proposed programming orders as to discovery and witness statements.

11    The respondents by an affidavit sworn by Mr Lu deny receipt of any cash payments from Mr Tu or Mr Zheng and deny receiving any bank transfers, although noting that they have been unable to date to obtain bank records to confirm that denial. Mr Lu also says that he made no representation to the effect that the sum of $347,287 was to be taken into account in relation to any purchase of the shares. That is, the respondents have been able to address the allegations about payment, at least by affidavit.

12    Other issues raised by the respondents in the correspondence between solicitors included the basis for the pleaded allegation that certain other funds said to be part payment of the purchase price were paid to Zeus for the 'use of Mr Lu'.

13    The respondents filed a formal application for further and better particulars on 11 May 2018. The applicants contend that they were of the view conferral was continuing at that time, but that is of little moment in the scheme of things. The parties through their solicitors had been conferring for quite some time without apparent progress.

14    The application was programmed by consent on 25 May 2018.

15    It then came before me for hearing on 20 July 2018. On that date, and having taken into account the lengthy affidavits and submissions filed on behalf of both parties, it seemed to me that the respondents had some legitimate concerns about a lack of detail as to the manner in which the obligation to pay $347,287 was met, but that taking into account the likely cost of ongoing dispute about the drafting of the particulars and the potentially onerous number of requests for particulars made by the respondents, the better course was for the applicants to amend their statement of claim in order to plead or particularise with more clarity the circumstances relating to the various payments.

16    The applicants through their counsel properly accepted that there was scope to clarify aspects of the statement of claim by amendment.

17    Accordingly, I ordered that the applicants serve a minute of proposed amended statement of claim. The applicants require leave because pleadings have closed (r 16.12 and r 16.51(1) of the Federal Court Rules 2011 (Cth)). The question of leave to file the amended minute in any particular form was adjourned pending consideration of any draft minute by the respondents.

18    After the hearing the parties exchanged further correspondence with respect to a draft proposed minute.

19    The final version of the proposed minute was then the subject of further submissions at a hearing of the application before me on 20 September 2018. Again, a number of affidavits and submissions were filed for the purpose of that hearing. The respondents did not consent to the proposed amendments. As explained below, that hearing was further adjourned to 2 October 2018 and then to today.

20    The minute sets out the dates on or about which it is said that payments were made by Beijing to Zeus. There are three components to the payment regime.

21    First, there are specified payments to Zeus pleaded that total $765,600 (including GST). In particular, paras 7 to 14 of the minute refer to four separate payments made by Beijing following receipt of invoices issued by Zeus. It is pleaded that payments were made in the invoiced amounts by Beijing to Zeus for use by Mr Lu.

22    It is then pleaded that by an email from Mr Lu to a director of Beijing dated 15 August 2011, Mr Lu directed and accepted that those payments to Zeus satisfied Beijing's obligation to pay $696,000 of the purchase price.

23    The reliance on the email of 15 August 2011 should not take the respondents by surprise. It was considered carefully during the summary judgment process. In particular, the terms of the email from Mr Lu are referred to in the Full Court's judgment at [8]:

Hello Chen Shan,

Following our conversation here is the summary of the account about Zeus acquisition:

•    Zeus invoices $696,000.00

•    Historic payment $347,287.00

•    Balance to be transferred $156,713.00

...

24    The applicants plead in the minute that by the same email, Mr Lu directed and accepted that an historic payment paid to him by persons other than Beijing satisfied Beijing's obligation to pay $347,287 of the purchase price. Particulars of the historic payments are then provided. Particulars are provided of a series of cash payments and a series of bank transfers. The cash payments were said to have been made in Australia (the Gold Coast, Melbourne and Perth) or in China. As to cash payments said to have been made in Australia, the time windows during which it is said payments were made is provided. The applicants are currently unable to particularise the specific amounts of such payments, but say that is not critical to their case: they say that what is important is that according to the email of 15 August 2011, the obligation to pay $347,287 was said to have been met by historic payments that had been made.

25    As to the bank transfers, the applicants have already indicated that they are seeking production of the relevant bank account statements from the nominated bank, but that at present the precise amounts cannot be stated.

26    Third, the minute pleads that a final payment in the sum of $172,384.30 was made in response to an invoice issued by Zeus to Beijing and that such invoice constituted a direction by Mr Lu for Beijing to pay the unpaid balance of the purchase price to Zeus.

27    The applicants then plead that by those three payment regimes, its obligation to pay the purchase price to Mr Lu under the sale agreement in accordance with Mr Lu's payment directions was satisfied.

28    During the first hearing, and in order to attempt to address some of the respondents' concerns that the nature of the case might continue to shift and take them by surprise, I paraphrased what I understood to be the applicants' amended pleaded and particularised case as to payments as follows:

(a)    Beijing was obliged to pay a purchase price of $1.2 million to Mr Lu for the shares;

(b)    Beijing made four payments to Zeus in response to invoices that total $765,600;

(c)    there was an agreement that the $765,600 satisfied $696,000 of the debt to Mr Lu such that the debt was then reduced by $696,000, leaving a balance due of $504,000;

(d)    there had been various other cash payments by a Mr Tu and Mr Zheng and various bank transfers to Mr Lu for sums unknown but which the applicants say were taken by Mr Lu to satisfy payment of $347,287 of the $504,000 then owing, leaving a balance due of $156,713; and

(e)    there was then a final payment made by Beijing of $172,384 ($156,713 + GST) in September 2011, bringing the balance due to zero.

29    The applicants' counsel confirmed that the summary accurately paraphrased the case as to payment of the purchase price.

30    It is clear from the minute that the applicants rely on the 15 August 2011 email in support of their claim that the payments made by Beijing to Zeus were accepted as payments to Mr Lu to the extent of $696,000, and that the historic payments (whatever might be their sum) satisfied the obligation to pay $347,287.

31    As to the final payment, the applicants rely on the invoice to Beijing of 12 September 2011. They do not expressly refer to the 15 August 2011 email. It would appear to be part of the evidentiary context of that payment (as recorded by the Full Court at [16(3)]).

32    The respondents objected to leave being granted for the applicants to rely on the proposed amended statement of claim contending that, in summary:

(a)    the delay in seeking to amend the statement of claim was not explained;

(b)    the minute does not properly disclose the basis upon which any direction was made by Mr Lu or the manner in which it was said that there was an agreement that payments by Beijing to Zeus somehow comprised payments in satisfaction of the purchase price obligations to Mr Lu;

(c)    the minute gives rise to a question as to whether the claims are restitutionary or might be based upon an alleged collateral or secret contract made between Beijing and Mr Lu that somehow relates to the earlier provision of services between Zeus and Beijing.

33    I have carefully considered the matters raised by the respondents.

34    As to delay, I take into account that there was a summary judgment application and an appeal, both steps that have consumed the time of the parties. I also take into account that the genesis of the amendment application was the Court's direction that a minute be prepared. I made that direction in order to attempt to cut through the ongoing debate about particulars (and a related dispute about discovery). These matters are common ground and no evidence is required. I also note that the need for and the nature of any further particulars was the subject of competing views for some time after the Full Court's decision. It is not that the applicants did not engage on the issue. The correspondence before the Court evidences the various communications. That process of dispute by correspondence took some months and it is not surprising that an application was eventually brought. It is appropriate to take into account that communications continued during quite a long period.

35    At a hearing before me on 2 October 2018, scheduled for a different reason as addressed below, the respondents agitated an issue of the delay in providing particulars of the historic payment. The respondents say the particulars indicate a change in the nature of the claim since the summary judgment application, in that it is now alleged the relevant payments were made by a series of payments by third parties, rather than by Beijing itself. They say no representative of the applicants with appropriate knowledge has provided an explanation as to the delay in providing those particulars, and that absence weighs against the leave application, referring to Tamaya Resources Limited (in liq) v Deloitte Touche Tohmatsu (a firm) [2016] FCAFC 2; (2016) 332 ALR 199 at [127] (Gilmour, Perram & Beach JJ). I directed an affidavit be filed addressing the question, and one was subsequently affirmed by the company secretary, Mr Zheng. Mr Zheng deposed to the following:

(a)    he is a native Mandarin speaker and uses Mandarin to communicate business dealings or uses an interpreter;

(b)    he instructed a lawyer in Perth to act for Beijing in 2016 and that lawyer had conversational Mandarin, but there were difficulties in conveying complex instructions;

(c)    he has seen a translated version of the statement of claim in its original format but does not recall seeing it at the time the proceedings were commenced;

(d)    he always understood from the email of 15 August 2011 (which he provided to the original lawyer in around December 2016) that Mr Lu had acknowledged receipt of the historic payment and because of that he did not check the detail of who made the payment;

(e)    the current solicitors (Squire Patton Boggs) were retained in January or February 2017 and the summary judgment application was then filed;

(f)    after the appeal was finalised Squire Patton Boggs started asking for details of the historic payment, and he provided the information now set out in the particulars to Squire Patton Boggs in March and April 2018, after his office reopened after the Chinese New Year; and

(g)    he is not familiar with Court proceedings in Australia and did not think to disclose the further information to the respondents or Squire Patton Boggs until after his lawyers started asking for further details in February 2018.

36    In all the circumstances, I accept Mr Zheng's explanation as credible, sufficient and adequate. There is no evidence from which I can infer a deliberate withholding of information or similar conduct. The email of 15 August 2011 will no doubt continue to be the topic of much debate and evidence during these proceedings, but Mr Zheng's understanding of its effect is not illogical or without some foundation (albeit that its construction is ultimately a matter for determination in the proceedings). It is also not surprising that the question of the historic payment was revisited by Squire Patton Boggs after the appeal decision and once the respondents requested further and better particulars.

37    This is not a case of inaction. Nor is it an example of an application to amend being brought close to trial. The respondents have ample time to address the matters raised. This matter is still some way off being listed for trial and I do not consider the respondents are prejudiced in their preparation for trial. They have been on notice for some months now of the manner in which the applicants claim that the consideration was paid, including the historic payment. The applicants by minutes of proposed orders have also been seeking to progress interlocutory steps such as discovery and the exchange of witness statements. There is no evidence that they are seeking to delay the proceedings.

38    Taking into account all of those circumstances and the evidence that has been provided, I do not consider this is a case where delay justifies a refusal of leave.

39    As to the alleged uncertainty as to whether some allegation of restitution or secret contract lies behind the pleadings, the applicants have said in writing that the plea reflects the recognised principle that an obligation to pay a creditor can be met by a debtor directing payment to the creditor by a third party: see, for example, Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13; (2005) 214 ALR 392 at [66] (Gleeson CJ, McHugh, Gummow, Hayne & Heydon JJ); Dunlop Pneumatic Tire Co Ltd v Selfridge & Co Ltd [1915] AC 847 at 853. Having made that statement, absent a good explanation any attempt by the applicants to run a case that differs from that approach will be carefully scrutinised at trial.

40    It may well be that the Court is ultimately not persuaded that the applicants have sufficient or persuasive evidence to satisfy the onus of establishing a direction as pleaded by the applicants. However, the issue at the moment is one of pleading rather than whether there is cogent evidence, and to my mind the case is sufficiently pleaded to enable the respondents to now file an amended defence.

41    It is clear from the submissions that have been made that there are issues as to whether any payments made by Beijing were made to Zeus for the benefit of Mr Lu, or for services provided by Zeus or for other purposes, and those are matters that can be raised by the respondents in their defence if they consider it appropriate. It is not as if the proposed amendments have given rise to such questions: they were raised before the Full Court (see in particular [17] and [20]). As the Full Court observed, there may be a number of reasons why consideration was paid to Zeus rather than Mr Lu and factual issues may well arise as to those matters. However, in my view it cannot be said that the claim as pleaded in the minute as to the payments to Zeus lead to a conclusion that the claim as amended by the minute is futile, unlikely to succeed or likely to be struck out.

42    To the extent that there are issues about the manner of or reason for payments being attributed to a reduction in consideration of $347,287, again factual issues may well arise. The applicants will still be obliged to prove the terms of the alleged agreement but again, in my view, the case propounded by the applicants is sufficiently clear. And again, as the Full Court noted, the email of 15 August 2011 written by Mr Lu refers to a historical payment reducing the debt and is consistent with the pleaded case.

43    I acknowledge that if and to the extent the applicants need to prove the cash payments in order to establish their case, they may well have evidentiary difficulties, taking into account the effluxion of time and the need to potentially rely upon oral evidence. However, such evidentiary and factual issues do not lead to a conclusion that the claim as amended by the minute is futile, unlikely to succeed or likely to be struck out.

44    As to the final payment to Zeus, the fact that the amount in the relevant invoice issued by Zeus coincides with the amount referred to in the 15 August 2011 email written by Mr Lu undermines the respondents' argument that the reference to a 'direction' is without foundation or so vague that it should not stand.

45    The facts of this case have been well aired in the initial stages by the summary judgment application and subsequent appeal. More particularly, they have been revisited and aired recently by way of the numerous affidavits and submissions filed in light of the respondents' application for further and better particulars. It is true that there has been some development of the nature of the applicants' claims in terms of the manner of payment. It is generally appropriate that a pleaded case be refined as preparation for trial proceeds and the power to grant leave to amend a pleading reflects that.

46    Having said that, it does seem to me that the respondents continue to regard with suspicion the pleas that payments were made 'to the use of' Mr Lu and that the final payment was made by Mr Lu's 'direction'. At present, the applicants refer to the email of 15 August 2011 and the invoice for the final payment. In effect, the respondents want the applicants to confirm whether they say that such arrangements or directions are to be inferred from only those matters or from those and other matters. The respondents' suspicions may be allayed if the applicants would confirm, to the extent they now can, the matters upon which they rely in support of the contention that the payments were made to Zeus 'to the use of' Mr Lu and that the final payment was made by Mr Lu's 'direction'. This can be done by way of particulars.

47    However, for the reasons I have given, I do not consider that at this point in the proceedings there is a valid reason to refuse a grant of leave to amend the statement of claim in terms of the minute (which I note was amended by further minor refinements in a version provided on 28 September 2018), and accordingly such leave is granted. I consider this outcome is consistent with the Court's overarching purpose to facilitate the just resolution of disputes.

48    I will also direct that the applicants provide particulars:

(a)    as to paras 8, 10, 12, 14 and 17, of the matters relied upon in support of the contention that payments made to Zeus were for use by Mr Lu; and

(b)    as to para 16, of the matters relied upon in support of the contention that the pleaded invoice constituted a direction by Mr Lu for Beijing to pay the unpaid balance of the purchase price to Zeus.

49    I note that when the matter came before me on 20 September 2018 and after written outlines had been provided, the respondents also sought to argue that leave should not be granted on the basis of 'new' documents they had uncovered which, it was submitted, indicated that the applicants in fact had no claim against the respondents. The respondents submitted that the existence of the documents undermined the ability of counsel for the applicants to in effect sign off on any pleading, because the pleading would be patently incorrect and untenable on the evidence.

50    Whilst I was concerned at the lateness of the submission, I granted a short adjournment until 2 October 2018 for the sole purpose of the respondents having an opportunity to provide a translation of the relevant documents (which were said to be in Mandarin) and to provide them to the applicants so that they could consider whether such documents caused them to have any ethical or other obligation to seek to amend the pleading further or discontinue the claim.

51    The relevant documents are an email from a director of Beijing, Ms Chen, to others within Beijing and Beijing Hua Xin Liu Investment Co Ltd of 24 August 2011 and a due diligence report prepared by Mallesons Stephen Jacques, apparently attached to the email.

52    The draft due diligence report is dated 9 August 2011. On its face, the draft report has been prepared for the benefit of Beijing or Beijing Hua Xin Liu Investment Co Ltd. In its introduction, it refers to a 'proposed transaction' that Beijing acquire 100% of the shares in Zeus. The respondents emphasise that the email and report post-date the date on which the pleading states the share sale agreement was reached (in early May 2011). They also post-date some of the payments.

53    By an affidavit of Beijing's solicitor affirmed 28 September 2018, the applicants say:

(a)    the report is a draft;

(b)    the applicants do not accept the summary as an accurate summary of the transaction;

(c)    Mallesons Stephen Jacques was instructed to prepare the report in May 2011;

(d)    the purpose of obtaining the report was to confirm there were no significant issues before completion; and

(e)    the report did not refer to any issues of significance and the final payment was made after its receipt.

54    It seems to me that there may well be reasons for the delay in Beijing receiving the report from Mallesons Stephen Jacques. There may well be arguments about waiver. It may be that Beijing decided to proceed with the transaction, albeit that the report was late. It may be that Mallesons Stephen Jacques ascribed the term 'proposed' to the description of the transaction when they received instructions and that the description was simply perpetuated. The description may be, as the applicants allege, incorrect as at August 2011. The email refers somewhat cryptically to the need to 'make a decision' and that too gives rise to questions, but I cannot properly assume what the author was referencing by that expression.

55    Again, these will be matters of evidence at trial relevant to the applicants' onus and standard of proof. Questions arise from the documents. However, I would not be prepared on the basis of those documents to deny leave to amend the statement of claim. Those documents and their purpose are by no means sufficiently clear so as to persuade me that the applicants' claim to have entered into an agreement as at May 2011 is untenable.

56    Finally, the parties have been at loggerheads with respect to discovery for some time. I do not say that by way of criticism, but simply to explain my decision that it is appropriate for the Court to now make a discovery order. There has been considerable conferral and much communication in order to attempt to agree categories of discovery or to agree that there be standard discovery. I have read the various correspondence closely. It seems to me that the most efficient manner by which discovery should be dealt with in this matter is by the making of a standard discovery order, as I indicated to the parties at the previous hearing. Accordingly, I will make such an order.

57    Separately, I have directed the parties to attend mediation.

Associate:

Dated:    19 October 2018