FEDERAL COURT OF AUSTRALIA

Beijing Hua Xin Liu He Investment (Australia) Pty Ltd v Lu [2017] FCA 319

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) and r 26.01(a) of the Federal Court Rules 2011 (Cth), the claims by the applicants set out in paragraphs 1 to 6, 15(a) and 15(b) of the applicants’ statement of claim be dismissed.

2.    The applicants pay the respondents' costs of the application, to be assessed if not agreed.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

1    The respondents apply for summary judgment in relation to part of the applicants’ claim, namely, the contractual component of the applicants’ claim. That part seeks relief in respect of an alleged oral agreement to transfer shares for which it is said consideration was paid.

2    The respondents seek summary judgment on the basis that despite the respondents’ express denial, both as to the existence of an agreement and more importantly for present purposes, that any consideration thereunder was ever paid, the applicants have given no evidence of such payment. The respondents have put on specific evidence as to the actual reason for part payment. This has not been challenged. The respondents are Mr Xin Lu and Zeus Technology HQB Pty Ltd (ACN 054 558 851) and the applicants I will refer to collectively as Beijing. Beijing contends that there was an oral contract between Ms Shan Chen for Beijing Hua Xin Liu He Investment (Australia) Pty Ltd (ACN 141 548 521) (Beijing Australia) and Mr Lu to transfer Mr Lu’s 60% shareholding in Zeus to Beijing Australia in consideration for a payment of $1.2 million. The contract claim is independent from a claim for rectification of the share register arising from a share split and is capable of being dealt with discretely by this application, I gather by consent.

3    For the following reasons I consider the respondents are entitled to summary judgment.

THE ISSUES

4    Relevantly, to this application, the pleadings raise these issues in respect of the contractual claim:

(a)    whether an oral agreement in 2010 was in fact entered into between Beijing Australia and Mr Lu;

(b)    what the terms of any agreement were; and

(c)    whether Mr Lu has breached the alleged agreement.

5    The respondents accept that there was discussion about an agreement to sell the Zeus shares to Beijing Australia. However, the thrust of the respondents’ summary judgment application is that the only payment relied upon by Beijing as consideration for the purchase of the shares was plainly not for purchase of shares, but for the provision of professional services by Zeus.

6    Beijing plead (but have not gone on affidavit to assert) that payment for consideration of the shares constituted in six payments, five on specific dates, with each of the six payments being identified as being a specific sum.

SUMMARY JUDGMENT PRINCIPLES

7    The respondents rely upon the test set out by Kenny J in QS Holdings Sarl v Paul's Retail Pty Ltd [2011] FCA 853, referring to Spencer v Commonwealth (2010) 241 CLR 118 and referred to by Gordon J in Zippo Manufacturing Co v Jaxlawn Pty Ltd [2011] FCA 1125, wherein her Honour said (at [16]):

No hard and fast rule can be laid down as to when summary judgment is available. Much depends on the case at hand. Nonetheless, generally speaking, summary judgment would appear appropriate when well-established propositions of law deny the prospect of success. Summary judgment would appear inappropriate where there are “factual issues capable of being disputed and in dispute”. See generally Spencer 132 [25] per French CJ and Gummow J. Generally speaking, it also remains true to say, as Gordon J did in Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372 (“Jefferson Ford”) at 407 [127] that “it is inappropriate in defence of a claim for judgment made under s 31A of the Federal Court Act to seek to defend by merely putting a claimant to formal proof”. There are, of course, a variety of circumstances that may attract summary judgment under s 31A of the Federal Court Act and, on each occasion, the critical question is that set by the statute – has the moving party persuaded the Court that the opposing party has no reasonable prospect of success?

8    Beijing also relies upon Spencer (particularly at [51]-[60]), where the High Court (Hayne, Crennan, Kiefel and Bell JJ) said:

51    First, the central idea about which the provisions pivot is “no reasonable prospect” (emphasis added). The choice of the word “reasonable” is important. If s 31A is to be seen as deriving from r 24.2 of the Civil Procedure Rules 1998 of England and Wales, its provisions underwent an important change in the course of their translation from that jurisdiction to this. The English rule speaks of “no real prospect”; s 31A speaks of “no reasonable prospect”. The two phrases convey very different meanings.

52    Secondly, effect must be given to the negative admonition in sub-s (3) that a defence, a proceeding, or a part of a proceeding may be found to have no reasonable prospect of successful prosecution even if it cannot be said that it is “hopeless” or “bound to fail”. It will be necessary to examine further the notion of “no reasonable prospect”. But before undertaking that task, it is important to begin by recognising that the combined effect of sub-ss (2) and (3) is that the enquiry required in this case is whether there is a “reasonable” prospect of prosecuting the proceeding, not an enquiry directed to whether a certain and concluded determination could be made that the proceeding would necessarily fail.

53    In this respect, s 31A departs radically from the basis upon which earlier forms of provision permitting the entry of summary judgment have been understood and administered. Those earlier provisions were understood as requiring formation of a certain and concluded determination that a proceeding would necessarily fail. That this was the basis of earlier decisions may be illustrated by reference to two decisions of this Court often cited in connection with questions of summary judgment: Dey v Victorian Railways Commissioners and General Steel Industries Inc v Commissioner for Railways (NSW).

54    In Dey, the defendants moved for summary judgment on the grounds that the action was frivolous, vexatious and an abuse of process. In a passage often later cited, Dixon J said that “[a] case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury”. What Dixon J meant by “very clear” was identified by his observation that “once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process” (emphasis added). And there would be a “real question” unless the defendant could “show that it was so certain that [the question] must be answered in the [defendant's] favour that it would amount to an abuse of the process of the court to allow the action to go forward for determination according to the appointed modes of procedure” (emphasis added). The test identified by Dixon J in Dey can thus be seen to be a test requiring certain demonstration of the outcome of the litigation, not an assessment of the prospect of its success.

55    In General Steel Industries, Barwick CJ pointed out that previous decisions about summary termination of actions on the motion of a defendant had been given in cases in which the so-called “inherent” jurisdiction of a court to protect itself and its processes from abuse had been invoked, and in cases where the defendant had relied upon a particular rule of court permitting the court to strike out pleadings or dismiss an action on it being shown that a pleading “does not disclose a reasonable cause of action” or the action “being shown by the pleadings to be frivolous or vexatious”. The material available to the court might differ, depending upon which power was invoked, but all the cases emphasised the need for “exceptional caution” in exercising a power to dismiss an action summarily. As Barwick CJ also pointed out in General Steel Industries, the test to be applied was expressed in many different ways, but in the end amounted to different ways of saying “that the case of the plaintiff is so clearly untenable that it cannot possibly succeed” (emphasis added). As that formulation shows, the test to be applied was one of demonstrated certainty of outcome.

56    Because s 31A(3) provides that certainty of failure (“hopeless” or “bound to fail”) need not be demonstrated in order to show that a plaintiff has no reasonable prospect of prosecuting an action, it is evident that s 31A is to be understood as requiring a different enquiry from that which had to be made under earlier procedural regimes. It follows, of course, that it is dangerous to seek to elucidate the meaning of the statutory expression “no reasonable prospect of successfully prosecuting the proceeding” by reference to what is said in those earlier cases.

57    Likewise, it is dangerous to apply directly what has been said in the United Kingdom about the application of a test of “no real prospect” or what has been said in United States decisions about summary judgment. The United Kingdom cases are directed to a different test. The controversies in the United States about what is sufficient to resist a motion for summary judgment, reflected in the recent decisions of the Supreme Court of the United States in Ashcroft v Iqbal and Bell Atlantic Corp v Twombly and in that Court's earlier decision in Conley v Gibson, turn upon the requirements of the Federal Rules of Civil Procedure applied to a system of “notice” pleading. The notion of what is not a “plausible” claim, discussed in Iqbal and Twombly, may in some cases overlap, but does not coincide, with the notion of “no reasonable prospect”.

58    How then should the expression “no reasonable prospect” be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is “no reasonable prospect”. The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like “no reasonable prospect” is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes, as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.

59    In many cases where a plaintiff has no reasonable prospect of prosecuting a proceeding, the proceeding could be described (with or without the addition of intensifying epithets like “clearly”, “manifestly” or “obviously”) as “frivolous”, “untenable”, “groundless” or “faulty”. But none of those expressions (alone or in combination) should be understood as providing a sufficient chart of the metes and bounds of the power given by s 31A. Nor can the content of the word “reasonable”, in the phrase “no reasonable prospect”, be sufficiently, let alone completely, illuminated by drawing some contrast with what would be a “frivolous”, “untenable”, “groundless” or “faulty” claim.

60    Rather, full weight must be given to the expression as a whole. The Federal Court may exercise power under s 31A if, and only if, satisfied that there is “no reasonable prospect” of success. Of course, it may readily be accepted that the power to dismiss an action summarily is not to be exercised lightly. But the elucidation of what amounts to “no reasonable prospect” can best proceed in the same way as content has been given, through a succession of decided cases, to other generally expressed statutory phrases, such as the phrase “just and equitable” when it is used to identify a ground for winding up a company. At this point in the development of the understanding of the expression and its application, it is sufficient, but important, to emphasise that the evident legislative purpose revealed by the text of the provision will be defeated if its application is read as confined to cases of a kind which fell within earlier, different, procedural regimes.

EVIDENCE

9    By an affidavit in support of his application, Mr Lu addresses the history, the circumstances and content of the payments said by Beijing to comprise the consideration for the purchase of the shares. Mr Lu says in substance:

6.    … the Respondents deny that payment number 5 in the sum of $347,287 was paid by [Beijing Australia] …

8.    As to the payment number 1 dated 30 April 2011, [Zeus] sent a tax invoice to [Beijing Australia] dated 30 April 2011 number 106822 in the sum of $127,600 inclusive of GST (a copy of which is annexed to this affidavit and marked XL1); [Beijing Australia] sent to [Zeus] a purchase order dated 30 April 2011 number 232 in the sum of $127,600 inclusive of GST (a copy of which is annexed to this affidavit and marked XL2) which tax invoice was paid in the normal course of business.

9.    As to payment number 2 dated 30 May 2011, [Zeus] sent a tax invoice to [Beijing Australia] dated 30 May 2011 number 106916 in the sum of $255,200 inclusive of GST (a copy of which is annexed to this affidavit and marked XL3); [Beijing Australia] sent to [Zeus] a purchase order dated 30 May 2011 number 246 in the sum of $255,200 inclusive of GST (a copy of which is annexed to this affidavit and marked XL4) which tax invoice was paid in the normal course of business.

10.    As to payment number 3 dated 7 June 2011, [Zeus] sent a tax invoice to [Beijing Australia] dated 7 June 2011 number 106979 in the sum of $191,400 inclusive of GST (a copy of which is annexed to this affidavit and marked XL5); [Beijing Australia] sent to [Zeus] a purchase order dated 7 June 2011 number 265 in the sum of $191,400 inclusive of GST (a copy of which is annexed to this affidavit and marked XL6) which tax invoice was paid in the normal course of business.

11.    As to payment number 4 dated 10 June 2011, [Zeus] sent a tax invoice to [Beijing Australia] dated 10 June 2011 number 107030 in the sum of $191,400 inclusive of GST (a copy of which is annexed to this affidavit and marked XL7); [Beijing Australia] sent to [Zeus] a purchase order dated 10 June 2011 number 110617 in the sum of $191,400 inclusive of GST (a copy of which is annexed to this affidavit and marked XL8) which tax invoice was paid in the normal course of business.

12.    As to payment number 6 dated 12 September 2011, [Zeus] sent a tax invoice to [Beijing Australia] dated 12 September 2011 number 107858 in the sum of $172,384.30 inclusive of GST (a copy of which is annexed to this affidavit and marked XL9); [Beijing Australia] sent to [Zeus] a purchase order dated 12 September 2011 number 390 in the sum of $172,384.30 inclusive of GST (a copy of which is annexed to this affidavit and marked XL10) which tax invoice was paid in the normal course of business.

13.    Each of the payments numbers 1-4 and 6 described in paragraphs 8 to 12 above were for the use of [Zeus], in payment for tax invoices issued by [Zeus] for services rendered by [Zeus] to [Beijing Australia] including but not limited to human resources function, provision of infrastructure, maintaining debtor insurance arrangements, and operational support.

14.    The above payments 1-4 and 6 described in paragraphs 8 to 12 above are amounts invoiced in the same manner and with the same documentation as a long series of tax invoices and purchase orders and payments passing between [Beijing Australia] and [Zeus] between 2011 and 2013.

15.    [Zeus] has declared the income of $696,000 plus GST (payments 1-4 exclude GST) and $156,713 plus GST (payment 6 excludes GST) in its income tax returns, and has declared the GST component of each tax invoice on its business activity statements.

10    Also produced are the tax invoices and purchase orders relating to the alleged particularised payment.

11    Mr Lu’s case is simply that it is quite plain that the payments made by Beijing Australia were for the services provided to Beijing Australia by Zeus, not for the purchase of Mr Lu’s shares in Zeus.

12    In support of that contention, the respondents stress that the funds received pursuant to the invoices for professional services were both declared as income and treated in business activity statements as income. They have offered inspection of Zeus’ relevant tax documents to confirm that treatment.

13    There is no obvious reason why a capital receipt for a sale of shares would be treated as income for that purpose (albeit that there may be some capital gains component).

14    It is particularly notable that at no point has any person deposed on oath on behalf of Beijing to the effect that the payments made, notwithstanding the content of the produced invoices, were not payment in respect of professional services. On that very short point, the respondents argue that the Beijing’s case cannot possibly succeed, or at least the respondents have satisfied the now lower threshold for summary dismissal.

BEIJING’S RESPONSE

15    The approach taken to the summary judgment application by Beijing has been, relevantly, to produce a chain of email correspondence which it says contains material consistent with its case, such that summary judgment should not be granted.

16    The correspondence on which Beijing relies is produced by its solicitor in two affidavits on the basis of information and belief.

17    Also produced are various recent exchanges between the respective solicitors, including a notice to produce given by Beijing to the respondents in respect of ‘all financial records and bank statements for [Zeus] for the period April 2011 to 23 February 2017’. Counsel for Beijing called on this notice at the hearing of the summary judgment application. The documents were not produced. Four grounds were given in relation to the refusal: first, it was being used as an opportunity for discovery when discovery had not yet been ordered; second, it was oppressive; third, it was a fishing exercise; and finally, it was not relevant to the matters that are before the Court. Of these grounds, at this stage of the proceedings, I am of the view that the ground of oppression at the very least is made out. The documentary request is very broad over a number of years given the narrow compass of the issues. I draw no adverse inference from the failure to respond to the production of documents in the summary judgment application.

18    Beijing also points to the fact that Mr Lu admits that he prepared and signed a share transfer in respect of the transfer of the shares. Mr Lu in response says, through his solicitors by letter dated 20 October 2016, that as part of a proposed (but not completed) transaction whereby his shares were to be sold for $1.2 million to Beijing Australia, the transfer was sent to Ms Chen (who represented Beijing Australia) by Mr Lu for Ms Chen to hold in escrow. This may be a little unusual but the fact that the transfer was not executed by Beijing Australia for several years is consistent with the account. Mr Lu contended that the terms of the escrow had been breached by the execution by Beijing Australia of the transfer in the absence of a concluded agreement. This latter contention is unnecessary to consider.

ANALYSIS

19    It is interesting to note that the letter of demand sent to Mr Lu, dated 17 October 2016, also does not contend that consideration under the ‘agreement’ was paid. The demand says that in approximately 2011, Beijing purchased Mr Lu’s 60% shareholding in Zeus for $1.2 million, being 75 ordinary shares. It goes onto say that the purchase was recorded in the ‘Standard Transfer Form’, signed in, or about, August 2011. Apparently it was signed as recently as 2016 by Beijing Australia, when, through solicitors, it demanded the registration of the transaction be recorded by Zeus in its register.

20    There is an email dated 15 August 2011 from Mr Lu to Ms Chen, the subject of which is ‘Account Reconcile and Summary’. This email says:

...

Hello Chen San,

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

•    Zeus invoices $696,0000.00 [sic]

•    Historic payment $347,287.00

•    Balance to be transferred $156,713.00

As discussed, I’ll follow up these matters:

•    Transfer Zeus Appollo Pty Ltd to Zeus.

•    Register following business names:

•    Zeus Appollo Solar.

•    Zeus Appollo LED.

•    Contact NAB to apply to add Zeus bank accounts to your internet banking log in.

Please let me know if you think of anything else

……..

Kind regards,

Louis Lu

…

21    Counsel for Beijing, Mr Steven Wong, stresses that these amounts add up to exactly the amount to be paid for the share purchase and implicitly should be regarded as actually being payments made for the shares.

22    While this mathematical point may be correct, no one has expressly deposed to the fact that the shares were paid for despite the clear evidence that no funds were ever received for any proposed share transfer (no agreement being actually reached) and that the funds which were received were expressly paid in respect of invoices rendered for professional services provided in accordance with a regular history of performing such services.

23    There are other difficulties in relying on this communication. It does not say anything at all about a sale of Mr Lu’s shares in Zeus. There is nothing in any of this terminology which pertains to payment for the purchase of shares. Of course, if an officer of Beijing Australia had deposed on oath to the fact that these payments were in truth for the purchase of shares, then that would be a difficulty with which the respondents would have to grapple, but there is no such evidence.

24    To this communication, about an hour and a half later, Ms Chen simply responded saying ‘no more at this moment’, in response to the invitation to let Mr Lu know if she thinks of anything else. She continues:

One thing for next step is the report of current business (computer, MYOB) of Zeus, we can discuss it at the meeting and decide what business we can and will put into Zeus. I mentioned to Cunzhang we could not purchase Zeus and put it aside, by going through Zeus, a lot of things which benefit for LH and himself could be done.

25    Again, there is nothing in this communication which would suggest that any purchase of shares in Zeus had already taken place at that stage, even though it may well have been in contemplation.

26    This stands in contrast to [5] and [6] of the statement of claim which contends that the agreement was reached in 2010 and that, pursuant to the sale agreement, by September 2011 Beijing Australia paid Mr Lu (directly or through Zeus) a sum of $1.2 million. It goes on to plead that (by [6(b)]) in 2011, Mr Lu delivered to Beijing Australia an undated standard transfer form, transferring Mr Lu’s 75 ordinary shares in Zeus to Beijing Australia and an undated document entitled ‘Memorandum of Resolutions of the Director(s)’ of Zeus resolving to approve the transfer of the 75 ordinary shares.

27    The particulars of payment on which Beijing rely are the following:

    30 April 2011 $116,000 to Zeus ‘for use by Mr Lu’;

    30 May 2011 $232,000 to Zeus ‘for use by Mr Lu’;

    7 June 2011 $174,000 to Zeus ‘for use by Mr Lu’;

    10 June 2011 $174,000 to Zeus ‘for use by Mr Lu’;

    prior to 15 August 2011 $347,287 to Mr Lu; and

    12 September 2011 $156,713 to Zeus ‘for use by Mr Lu’.

28    In an email in response to Ms Chen’s point about not leaving Zeus ‘put aside’, on 17 August 2011, Mr Lu emailed Ms Chen outlining the manner in which Zeus could ‘add a lot of flexibility and stability to overall operation and accounting’. Nothing in this communication appears to confirm any already agreed share sale (an agreement that was allegedly reached in 2010), nor, more importantly to the consideration argument, is there any suggestion at all in this more lengthy email that payments received, which almost precisely correspond with the invoices for professional services, were in fact payments by instalments for the purchase of the shares.

29    Ms Chen’s response on the same day, (but the year after the alleged oral agreement) also appears to deal with a proposal which is in the future, not one which has already been agreed. Ms Chen said:

…

Another exciting field when organize Zeus well.

If we can start the iron ore and coal business, we can put Zeus in mining industry easily.

We’ll require half day to talk and discuss Zeus issue on the meeting. I mean the structure of ALH and the function of Zeus which is another margin growth and platform of LH and Cunzhang.

If the potential of the SA iron mine is good, we can report it to Cunzhang, convince him make the investment by the name of Zeus Appollo Resources. Zeus Appollo Resources can also be the shell company to invest different mining, resource projects, split the shares or sell some to Chinese companies or list on ASX in a few years.

It seems drunk already, dreams one by one.

…

30    There is then the slightly unusual matter of the Share Transfer Form, as to which Mr Lu swears as follows (at [18]-[23]):

18.    On 16 June 2016 there was a fallout between me and [Beijing Australia] when [Beijing Australia’s] Queensland solicitors and approximately 16 representatives of [Beijing Australia] arrived at the business premises of Zeus in Welshpool. At that time there was no assertion by any representatives of [Beijing Australia] that the Share Transfer Form was executed by [Beijing Australia] and would be relied upon by [Beijing Australia].

19.    The first time I became aware of the execution of the Share Transfer Form by [Beijing Australia] was on or about 17 October 2016 when I received a letter from [Beijing Australia’s] solicitor dated 17 October 2016. [The letter was produced]. As far as I am aware the Share Transfer Form remains undated.

20.    The letter demanded that the Share Transfer Form as executed by [Beijing Australia] be registered at ASIC. The Share Transfer Form is false in that it does not reflect the proper consideration, and is undated. Further, it is not registrable because no agreement had been reached as to the transfer of the Shares.

21.    Since there was never any concluded agreement for the proposed sale of the Shares I instructed my solicitors on or about 20 October 2016 to advise [Beijing Australia’s] solicitors that the Share Transfer Form would not be registered, for the reasons stated [in that letter].

22.    For the avoidance of doubt I also instructed my solicitors to inform [Beijing Australia’s] solicitors that [Beijing Australia’s] failure to pay the sum of $1.2 million within a reasonable time or at all was a repudiation of the agreement asserted by [Beijing Australia] to purchase the Shares, which repudiatory conduct was accepted by me as bringing any such asserted agreement to an end. [The correspondence was produced].

23.    I say that [Beijing Australia’s] claim for a declaration that [it] is entitled to 60% of [Zeus’] issued shares should be dismissed because there was no concluded agreement to sell the Shares. If there was a concluded agreement (which is denied) then I state that I did not receive the sum of $1.2 million or any sum for the sale of the Shares.

(emphasis added)

31    As noted above, there has never been any sworn denial of the respondents’ statement that no consideration was ever received for the transfer of the shares. Nor has there been any sworn denial that, consistently with the only evidence as to the tax treatment, the funds paid were in fact for professional services.

32    There is both an absence of critical evidence on the consideration point to countermand the clear and repeated assertion for the respondents that no consideration was ever paid for a share purchase (as no agreement was ever finalised despite discussions as to a possible agreement) and an absence of any documentation put forward to corroborate or confirm the transaction as pleaded in [5] and [6] of the statement of claim.

CONCLUSION

33    In these circumstances, in my view, Beijing has no reasonable prospects of success on this aspect of its claim and the respondents are entitled to summary judgment as claimed in respect of the matters pleaded in relation to the claims by Beijing set out in paras 1-6 of the statement of claim and the relief sought in para 15(a) and para 15(b) of the statement of claim, namely, declaratory relief and an order lodging an instrument of transfer for registration.

Associate:

Dated:    29 March 2017