FEDERAL COURT OF AUSTRALIA

Aucare Dairy (Aust) Pty Ltd v Huang [2017] FCA 746

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to rule 20.32 of the Federal Court Rules 2011 (Cth), the respondents produce electronically for inspection the documents over which a claim of privilege is made by the respondents, being:

(a)    documents 1 to 58 in a list of documents of the first respondent filed on 27 January 2017 at 4.19.09 pm;

(b)    documents 33 to 39 in a list of documents of the first respondent filed on 27 January 2017 at 4.19.10 pm; and

(c)    documents 186 to 188 in a list of documents of the third respondent filed on 27 January 2017 at 4.19.11 pm.

2.    The respondents pay the applicants’ costs of and incidental to the applicants’ interlocutory application dated 27 January 2017.

3.    Liberty to apply.

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

REASONS FOR JUDGMENT

(Revised from transcript)

O’CALLAGHAN J:

INTRODUCTION

1    By an interlocutory application dated 27 January 2017 the applicants seek an order pursuant to r 20.32(1) of the Federal Court Rules 2011 (Cth) that the respondents produce for inspection documents over which a claim for legal professional privilege has been made by the respondents. The documents in respect of which the claim for privilege has been made are principally communications between Ms Huang and Mr Guo, who are the first and second respondents respectively, and their solicitors, Macpherson + Kelley (M+K Lawyers or the solicitors).

2    The applicants submit that legal professional privilege does not attach to those communications because they were made as part of a fraudulent scheme, either at common law or in equity, in which the solicitors were involved. It is important at the outset to note that, for the purposes of this application, the applicants do not contend, nor do they need to contend, that the solicitors were knowingly involved, or participants, in the alleged fraud.

3    This proceeding arises out of a failed joint venture between Aucare Dairy (Aust) Pty Ltd (Aucare), the first applicant, and Noyier Dairy Pty Ltd (Noyier), the fourth respondent. Those two companies agreed to form a joint venture, and to that end incorporated Australia Pure Dairy Pty Ltd (APD). APD subsequently went into liquidation. Aucare has since taken an assignment of APD’s rights against the respondents.

4    The facts set out below are, in the main, derived from documents contained in two folders of materials which were in evidence before me. They include documents obtained by the applicants from the respondents, or some of them, by way of discovery, together with documents obtained on subpoena from third parties. Counsel who appeared for the respondents consented to the documents going into evidence and did not contest the proposition that they contain prima facie evidence relevant to the various claims made by the applicants against the respondents in this proceeding. Many of those documents, including some of the relevant agreements and SMS and email correspondence between the parties, have been translated from Chinese into English.

Background

5    By the terms of an Investment Cooperation Agreement dated 7 November 2013 (the joint venture agreement) Aucare and Noyier agreed to set up APD as a joint venture vehicle to establish a baby milk powder manufacturing plant at 16 Crompton Way, Dandenong South in Victoria. The parties agreed that each of them would pay $3 million to purchase their respective 50% portion of the shares in APD. The parties further agreed they were entitled to the profits of APD proportional to their respective shareholdings, and that they would also bear any liabilities for losses in the same proportion.

6    By the terms of an agreement entitled “Baby Milk Powder Filling Factory Construction Contract” also dated 7 November 2013 (the clean room construction contract) APD agreed to appoint Great Vision Australia Pty Ltd (Great Vision), the third respondent to this proceeding, “as the contractor for the overall construction of the baby milk filling factory project”. By the terms of that agreement, Great Vision agreed to plan, design and construct all the relevant parts of the baby milk powder filling factory, including the filling line, main and auxiliary equipment, a clean room, the automatic air filtration system, a disinfection room and wind shower room, a laboratory and a raw material and storage room, among other things. It was a term of that agreement that Great Vision would “submit claims to [APD] for the equipment and material procurement costs and construction costs of the various stages, and [APD] [would] pay the appropriate amounts in accordance with the following terms…”, which terms included that “[t]he total cost for the project is [$6m]”, less certain other costs involving such things as insurance, WorkCover costs, utilities and a contract deposit of $100,000.

7    Great Vision and APD also entered into a contract entitled “Baby Milk Powder Filling Line And Packaging Line Main Equipment Procurement Contract” dated 19 November 2013 (the main equipment contract). The main equipment contract contained terms and conditions concerning the purchase of the main equipment for the new baby milk powder filling line and the packaging line. That agreement contemplated that APD would pay Great Vision $3,305,280 for a large number of items of equipment, but did “not include installation, commissioning and related materials and labour costs of the equipment”. The contract also provided that the total contract price would be paid in three separate instalments of 30% with a fourth instalment of 10%. The full purchase price was to be payable 84 days after the signing of the agreement. The equipment was to be delivered and installed within 150 days.

8    APD and Great Vision also entered into a contract entitled “Baby Milk Powder Filling Line and Packaging Line Auxiliary Equipment Procurement Contract” (the auxiliary equipment contract), dated 20 December 2013. It was in similar terms to the contract dated 19 November 2013 and provided for the payment by APD to Great Vision for auxiliary equipment for the baby milk powder filling line and the package line, for the total cost of $582,200.

9    APD and Great Vision also entered into an agreement dated 5 January 2014 for the supply of a clean room and factory construction at a total cost to APD of $1,525,869. The agreement is entitled “Clean Room Quotation” (the clean room agreement). It is the only agreement that contains a retention of title clause: clean room agreement, cl 5 (“All Material and Equipment shall remain the property of [Great Vision] until such time that full payment is received”).

10    The first respondent, Ms Huang, was and is the sole shareholder and director of Great Vision.

11    On about 5 January 2014, Great Vision sent a purchase order to APD for the equipment for the clean room in the sum of $1,525,869, including GST.

12    That purchase order was largely a “cut and paste” of a purchase order that Ms Huang, in her capacity as a director of Great Vision, had earlier obtained from a third party supplier. That document, which the applicants obtained on subpoena from a third party, prima facie proves that the third party supplier agreed to sell the same clean room equipment to Great Vision for $908,882.70, netting Great Vision a profit of over $600,000 on the sale to APD. The document in evidence is dated 18 January 2014, but a copy of it must have been provided to Great Vision before 5 January 2014 because large parts of it, as I say, were cut and pasted into the quote provided to APD by Great Vision. In circumstances where Ms Huang was (and is) the sole director and shareholder of Great Vision, as well as the sole shareholder and director of the company which owned 50% of APD (that is, Noyier), she was in an obvious position of conflict of interest. These facts have given rise, among others to claims by the applicants against Ms Huang and Noyier for damages for breach of fiduciary duties that they owed to the applicants.

13    On 24 January 2014, Ms Huang wrote an email to Ms Haolin Bai, known as Stephanie Bai, who is a director of Aucare. In that email Ms Huang told Ms Bai that “we have already arranged all of the work in order to save time and part of the deposit has been advanced”. She also attached a list of “costs up until now” and asked Ms Bai to “look and record them to the account”. The email told Ms Bai that both parties would need to deposit $305,710 into APD’s general company account. The email attached a document entitled “Equipment and contraction [sic] expenses advanced by the Contractor”. That document listed 13 separate items of equipment or expense in relation to the construction of the factory which it was claimed had been paid, totalling $2,900,718.

14    On 27 March 2014, Mr Guo, who is Ms Huang’s de facto partner, on behalf of Great Vision, wrote to Ms Bai attaching another funds request and asking that Aucare “please quickly transfer the money”. The document attached was entitled “Factory Contracting Phase 3 Application for Payment”. The document contains 35 separate items and finished with an accounting note that said “[f]or the above expenses, each side shall pay: $3,229,473*50% equals $1,614,736 (including GST)”. It is clear from Ms Huang’s 24 January 2014 email and Mr Guo’s 27 March 2014 correspondence that the parties understood and were proceeding on the basis, consistently with the terms of the joint venture arrangements, that each of Aucare and Noyier was responsible for 50% of the expenses of the joint venture.

15    On 31 March 2014, Ms Bai wrote to Mr Guo saying that they “need to talk about a few things”. Among other things she said: “[t]he original budget was 6,000,000, maximum of 6,600,000 including tax. Now it has totalled to 7,200,000 (including tax), I still don’t understand why we need to pay the full amount at the current progress of the project!” She concluded: “I am just speaking my thoughts, I hope this will not affect our trust”.

16    Mr Guo replied on 26 April 2014. He said, among other things, that “[m]ost of the work cannot be accurately budgeted in advance even if it is the same type of factory due to different conditions, it can lead to different costs. The place we chose is the scenic belt in Dandenong, so the certification fees are higher than other places and the application requirements are stricter so we need more documentation. It even need approval just to plant a tree. It is more complicated than other factories and many situations are unpredictable, so it is hard to save money on this aspect”.

17    Sometime in early May 2014, Aucare discovered that it had contributed in the order of $2.4 million into the joint venture but Noyier had contributed less than $700,000.

18    On 19 May 2014, Ms Bai wrote to Ms Huang and Mr Guo attaching a reconciliation of APD’s bank account demonstrating that Aucare had contributed a total $2,423,613.90 in several tranches, and that Noyier had contributed $686,700. Ms Bai wrote that she believed that a refund of $2.6 million was appropriate and that Aucare had agreed to a proposal that had been put, apparently, by Noyier, that Aucare have returned to it its investment amount and compensation. Nothing further came of this.

19    On 23 May 2014, Ms Bai wrote to Ms Huang as follows:

Given that your side had previously asked for both parties to continue to deposit money into the general company’s account and authorise payments, we hope that your party can continue to fulfil your obligations in accordance with the agreement of investing 50% each. As your side knows, my side has already invested more than $2.42 million Australian dollars to APD bank account, this amount is far more than the $686,700 deposited into APD bank account by your party … So your side needs to deposit the difference of 1.7 million Australian dollars short of the $2.42 million … Recent expenditures include the cost of the company’s rent, telephone and Internet charges can be paid from the $1.7 million Australian dollars from your party.

20    On 30 May 2014, M+K Lawyers wrote to Ms Bai on behalf of Noyier, Ms Huang and Great Vision. It was a letter of demand.

21    Having set out what is described as “background”, and an alleged default for failure to advance monies to the joint venture and failure to pay Great Vision, the letter continued:

As a result of the transactions described above:

•    APD owes Noyier the sum of $2,314,439 + 78,654.67 (loan for expenses) for repayment of shareholder loans advanced to APD which are repayable on demand;

…

22    The letter further alleged that “APD owes Great Vision the sum of $2,521,022 for works performed by Great Vision but which remains unpaid by APD”. The letter further continued by asserting as follows: “APD does not have any funds to pay the amounts owing to Noyier or Great Vision. Unless you are willing to advance the sum of $4,914,115.67, it will not have sufficient funds to satisfy the demand amounts”. The letter further continued that “[o]ur client has prepared a rough outline of the assets and liabilities of APD in the event of liquidation for your consideration”.

23    The following table was then set out, under the heading “Liquidation – The Outcome”:

24    The letter further stated:

It is also worth noting that pursuant to the contract between APD and Great Vision in respect of the Clean Room, Great Vision retains title to that asset until it is paid for in full, and so that will also have an impact on the debt amount to Great Vision and the asset pool of APD for sale.

(Emphasis added.)

25    It is not clear, and it was not explained to me by the respondents on the hearing of this application, what the basis is, among other things, for the assertion in the letter that Aucare had been lent money “for expenses” and that “shareholder loans” had been advanced to APD, which were repayable on demand.

26    Senior counsel appearing for the applicants described the letter in his oral submissions as a form of extortion. In his reply, senior counsel elaborated as follows:

And what was being asked for in the M+K letter was over $4 million from our client. What was stated in that letter, outrageously, was that unless that money was paid the company would be insolvent. And so there was a clear communication that it wasn’t just our client paying its share. What M+K was saying was, we want you also to pay Noyier’s share as well. So you have to pay over $4 million if this company is to have any further life to it at all. Which was a clear indication that the intention was, that Noyier wasn’t going to pay any more money, and that if we wanted the company to continue to trade we would have to pay its amount as well.

He may well have a point.

27    There then ensued correspondence between M+K Lawyers and HWL Ebsworth, solicitors acting for APD and Ms Bai. In letters written by HWL Ebsworth between 2 June 2014 and 17 June 2014, it was pointed out to M+K Lawyers, among other things, that Ms Huang as a director of APD had a duty at all times to act in the best interests of APD. Presumably in response to the assertion in M+K Lawyers’ 30 May 2014 letter that Great Vision enjoyed the benefit of the retention of title clause in the clean room contract, HWL Ebsworth, in a letter dated 2 June 2014, warned M+K Lawyers that for Ms Huang or Great Vision to enter the premises where the clean room equipment was stored, and remove the equipment, would render them liable to APD for trespass and conversion and that Ms Huang would be acting in breach of her director’s duty to act in the best interests of APD if she did so. So much, one would have thought, would have been self-evident.

28    M+K Lawyers replied on 12 June 2014 asserting that APD was heavily indebted to Great Vision and that Great Vision had stopped all further work until it was paid in full. The letter also asserted that Great Vision “has retention of title rights over all plant and equipment and the ‘Clean Room’” (emphasis added). That assertion represented a more ambitious claim than the claim made in M+K Lawyers’ 30 May 2014 letter that there was a retention of title clause only in respect of the clean room contract. The 12 June 2014 letter also informed HWL Ebsworth that the purported rights had been registered on the Personal Property Securities Register. Registration numbers were provided. The registrations were effected on 2 June 2014 – three days after M+K Lawyers had implied that the only retention of title clause that existed was in respect of the clean room agreement.

29    The obvious difficulty with the notion that Great Vision enjoyed the benefit of retention of title clauses in respect of the main and auxiliary equipment contracts is that it is untrue. Despite attempts by HWL Ebsworth in letters dated 13 and 17 June 2014 to insist that M+K Lawyers produce evidence of any agreement between Great Vision and APD entitling it to the alleged retention of title rights over all of the equipment, no such evidence was provided, nor has it ever been provided. In any event, APD had possessory title to the equipment, which as senior counsel for the applicants put it, “gave it a distinct advantage, namely, that it could resist Great Vision’s … claims by simply refusing access to the premises”.

30    The only response that M+K Lawyers gave in respect of the retention of title point was in a letter dated 25 June 2014 to HWL Ebsworth which said, among other things: “[o]ur client asserts the enforceability of its retention of title rights and entitlements, as is outlined in our letter dated 12 June 2014 … Notwithstanding those rights and entitlements, we confirm our client agrees not to remove any equipment from the premises without providing your clients with prior notice”.

31    The undertaking not to remove the equipment did not last long. In a letter dated 4 July 2014 to HWL Ebsworth Lawyers, M+K Lawyers said that if resolution of the matter could not be reached within seven days, “our client puts yours on notice that it will immediately thereafter … exercise its retention of title rights over all equipment and the clean room and remove those goods” and “without any further notice take enforcement steps to recover the amounts owing by APD to both [Great Vision] and Noyier” (emphasis added). In none of the correspondence is it made clear how it was asserted that, despite having contributed no more than $700,000 into the joint venture, and in face of the fact that Aucare had contributed $2.4 million into it, that the joint venture owed Noyier anything. It was also never made clear in the correspondence, nor was it sought to be explained to me during the hearing of this application, how it was that APD remained indebted to Great Vision. In any event, neither Noyier nor Great Vision has ever “take[n] enforcement steps to recover the amounts owing by APD to both [Great Vision] and Noyier”, as the letter threatened to do.

32    Sometime between mid-July to early August 2014, it is not precisely clear when, the factory equipment was removed from APD’s Dandenong South factory premises by people acting on behalf of Ms Huang or Great Vision. The items of the equipment that were removed, or some of them, are described in affidavits of Ms Huang and Mr Guo filed on 12 July 2016 in response to a freezing order made by the Court on 22 June 2016.

33    On 1 August 2014, HWL Ebsworth Lawyers wrote to M+K Lawyers informing them that, because neither party to the joint venture was prepared further to invest in it, APD was likely to become insolvent if the dispute could not be resolved. That letter also sought an undertaking that Ms Huang would not remove, and would ensure that Great Vision or other persons associated with Ms Huang, would not remove, any equipment from the Dandenong South premises. Three days later, M+K Lawyers informed HWL Ebsworth Lawyers that its client would not be providing any such undertaking.

34    It is apparent from the documents in evidence before me, obtained by the applicants on subpoena from a corporate adviser, Mr Craig Seymour at BPS Advisory, and from other documents in evidence, that Ms Huang then determined, knowing that it was likely that a liquidator would be appointed to APD, to purport to procure Great Vision to sell all the equipment the subject of the main and auxiliary contracts and the clean room contract, by exercising what she claimed were rights under retention of title clauses.

35    To that end, and with the assistance of M+K Lawyers, two new companies were established in early August 2014, one CFM Associates Pty Ltd (CFM), the fifth respondent, the other Nutritional Choice Australia Pty Ltd (NCP), the seventh respondent. The shareholder and sole director of both companies was (and is) Ms Qiong (Annie) Huang, who is Ms Huang’s aunt. It is clear, and counsel for the respondents did not dispute, that Ms Qiong Huang knew nothing of this at the time. That much is apparent from the fact that no document has been discovered in this proceeding that indicates that M+K Lawyers acted for her. M+K Lawyers also secured two valuations of the equipment, one on an asset realisation value basis, the other on a going concern valuation basis. The former valuation of June 2014 (from Grays Asset Services (Grays)) was for $441,340. The latter, which was provided by a company called Cardinal Asset Services on 25 November 2014, was for $3,364,339.

36    M+K Lawyers were also involved in procuring the valuations. For example, on 24 August 2014, Mr Guenther wrote the following email to Ms Huang:

It is likely that the valuation will be challenged in court and so it needs to pass scrutiny. If the valuation is lacking important information, then it won’t hold up which could put the sale to CFM in jeopardy. Also, I expect a price comparison of Europe would inflate the value which is also less than ideal. As I mentioned in my text, I think we should give Keith [the valuer from Grays] what he asks for the purposes of the valuation.

It remains to be explained how “inflating the value” of the assets of the joint venture was thought to be “less than ideal”.

37    Ms Huang herself was involved in procuring the valuation from Grays and was dissatisfied with the valuer. In an email to Mr Guenther dated 24 August 2014, the response to which appears in the preceding paragraph, Ms Huang complained that “Keith makes things really difficult to me” and that he “seems understood about everything. Now I think not”. The email goes on to say “he too scare about our case will go to the court I never seen any valuer do valuation in this way. All the invoices gave to him but he seems does not believe me”.

38    Great Vision then purported to sell the equipment to CFM at a price equal, or nearly equal, to the asset realisation value. That sale was purported to be effected by an asset sale agreement dated 21 August 2014. Quite why Ms Huang caused that to occur when the intention of the joint venture was to use the equipment in a baby milk powder factory is one of the issues that will be dealt with at the trial of this proceeding.

39    CFM then purported to grant a licence to use the equipment to NCP. The copy of the licence agreement in evidence is unsigned. The applicants do not accept that it was ever signed, or even if it was, that it could ever have been effective. The respondents, on the other hand, continue to insist that the sale and licence arrangements I have described are valid and effective. For example, in an affidavit filed in this proceeding on behalf of the respondents by Ms Dalle Nogare, a solicitor at M+K Lawyers, she asserts that she was instructed that to the extent that the equipment had not been disposed of prior to 22 June 2016, the assets were controlled by NCA, who had possession of them under a license agreement from the third-party owner and that “NCA cannot sell the Assets because it does not own [them]”.

40    Ms Huang herself has also sought to rely on the validity of the sale and licence agreements. In an affidavit that she swore on 12 July 2016, she deposes: “this item of plant and equipment is currently owned by CFM. It is in the possession and control of NCA under licence from CFM and is located at the factory [in Carrum Downs]”.

41    These facts form the basis of the applicants’ claim against the respondents that such actions were intended fraudulently to thwart the liquidators of APD by putting the equipment beyond their reach and that the equipment was sold at a gross undervalue in breach of Ms Huang’s duties as a director of AFD, something that senior counsel for the applicants characterised, with some apparent force, as “a disingenuous and transparent plan”.

42    It is unclear what Ms Huang’s defence is to that part of the applicants’ case. In that regard, I note the following exchange between me and counsel who appeared for the respondents on this application:

HIS HONOUR: What was the rush? Why couldn’t the goods have been sold at a market price?

MR CLOUGH: I think if one takes a step back

HIS HONOUR: There was no need for a fire sale, so why have one?

MR CLOUGH: I submit that it was understandable for Ms Huang to prefer a rational transfer of the assets to a better use than would have been achieved if the assets had been liquidated. Hence she obtained a valuation of their fair value and added 10 per cent to it, to ensure that their – or to save against an argument that it was

HIS HONOUR: And this is after the liquidator has been appointed.

MR CLOUGH: It was well known by all of the parties that APD was insolvent and likely to be wound up.

HIS HONOUR: What did she think she was doing?

MR CLOUGH: I’m sorry, your Honour. I missed that.

HIS HONOUR: But what did she think she was doing? The liquidator had been appointed and she says, well, I don’t care about that. I’m just going to go and sell the goods anyway.

MR CLOUGH: I don’t think that there’s an allegation that she didn’t care what happened to them – quite to the contrary. In the context of those assets being owned by an insolvent company and her knowing or believing that she could put the assets to a better use, it was appropriate to have a transfer of those assets at their fair – at better than their fair value, that is.

HIS HONOUR: Is this the defence that she’s going to run at trial, is it?

MR CLOUGH: Your Honour, what I need to demonstrate today – or if I might say so, what I need to defend against is an allegation of fraud.

HIS HONOUR: No. I asked you is that the defence you’re going to run at trial.

MR CLOUGH: Your Honour, I haven’t drafted the pleadings. I’m recently in the case. I can’t comment on what the strategy is at trial.

HIS HONOUR: All right. I didn’t know that, Mr Clough. I won’t press you then.

MR CLOUGH: My focus has been on whether there is fraud in these circumstances.

HIS HONOUR: Maybe others might have a close look at whether that’s the defence that your client intends to run.

MR CLOUGH: And thank you for that indication, your Honour.

43    Nor is it clear what defence the respondents intend to make to the case that the main equipment contract and the auxiliary equipment contract did not contain retention of title clauses.

44    Among the documents in evidence before me is an email from Ms Huang to Mr Seymour, the corporate adviser, dated 25 August 2014. The applicants contend that this document reveals that Ms Huang was alive to the potential risks of purporting to sell the equipment and then licence it to companies owned by her aunt. The email reads as follows (including understandable grammatical errors):

Hi, Craig!

Thanks for coming today.

Attached are companies & shareholders information. please have a check.

Lease company: Green Dairy Australia pty ltd

Asset Company: CFM associates pty ltd.

Operating company: Nutritional Choice Australia pty ltd

there is one mistake for Nutritional Choice Australia is: one of the shareholding company is asset company. I gave wrong company’s information to Grant [Mr Grant Guenther, solicitor at M+K Lawyers] before. Actually I want to use CNCF COMPANY as asset company, and CFM company as share holding company. So there is record shows my auntie and me are related to each other.

So Grant suggests me to put CNCF as shareholding company in Nutritional Choice other than CFM company.

45    It seems that by this stage it was, in any event, too late to effect these instructions.

46    On 22 August 2014, on the application of Aucare, liquidators were appointed to APD.

47    The subpoenaed material also includes an email dated 15 September 2014 written by Mr Seymour to Ms Huang in which Mr Guenther has included his own responses to the matters raised by Mr Seymour with Ms Huang. That email provides, in part, as follows (the passages in regular font are the statements made by Mr Seymour, the statements in italics contain the responses from Mr Guenther):

Hi YoYo [Ms Huang’s English name]

Ok, I’ve completely reconciled all of the money in and out of 80 PD and in two GVA [Great Vision].

In a nutshell, this is what I think:

1.    Auscare (sic) put in $2,423,094 plus they probably paid $12,859.80 in June 2014, the same as you did for 50% of various bills for a total of $2,435,953.80.

...

2.    You contributed $711,700 to APD less $78,655 returned plus $12,859.80 for a total of $645,904.80. It is unclear whether this was a loan or equity – but we will have to treat both Auscare (sic) and Noyier equally in that regard.

I think that the contributions of both Noyier/GVA and of Aucare for that matter are debt, and should be treated as same. Shares were not issued and were never intended to be issued for these advances or further amounts. They are shareholder debt in every statement and we (and Aucare) have made to date. I think that is the better view.

When you say “you” do you mean Noyier or GVA or both?

3.    You contributed $870,000 to GVA plus $250,000 to GVA’s cash reserve account for a total of $1,120,000. All of this was by way of loans and is clearly documented as such.

In addition, through GVA, you (and [Mr Gou]) did all of the work and organising and GVA’s profit margin was effectively the price paid by Auscare (sic) for your effort – the thing that would have brought you up to 50% parity. (The difference was $670,000 between the two sides). Our argument should be that this was fully disclosed and that everyone understood that Auscare (sic) had money and you had money and skills to make up your respective contributions to the project.

The position we have stated in writing to date is that Noyier (via GVA or otherwise) made a matching contribution to APD. This has been done by GVA is issuing invoices (recorded as paid) up to the value of the $4.6 million (roughly $2.3 million each) as was set out in the spreadsheet YoYo prepared. The gap in actual cash amounts was a loan account between Noyia(sic) to GVA.

Noyier was contractually obliged to match with cash (not sweat equity) and there is merit in maintaining that position. That G VA didn’t collect that gap cash from APD or Noyier (as yet) means it had to fund that itself until Noyier repay the loan and expect it was doing that out of its profit margin as it was merely meeting actual costs in the interim. That all seems okay to me.

We might be able to run the argument regarding other forms of contributions (effort, time, skills, sources for machinery, etc) in the alternative if its (sic) needed – but don’t think we need to be too quick to abandon the above position as I think it is sustainable – and is the one on record at the moment.

…

I do not propose to enter into any discussion or argument with the liquidator on any point whatsoever, but will now complete the Report as to Affairs and Questionnaire along the lines of the above. I have again communicated with the liquidator today and advised them that they will have materials on Wednesday morning.

I think this is a good idea. Whilst the time may come that we need to sit down and consider doing a deal with Ferrier [the liquidators of APD] – we don’t need to rush into that. Even just the time to get the plant up and running will be very valuable. If we can slow all this down in the meantime until that occurs, that would be ideal.

48    Senior counsel for the applicants characterised these exchanges as an attempt by Mr Seymour and Mr Guenther to try to come up with an argument to explain Great Vision’s shortfall in contributions.

49    As I have already said, Ms Huang, or those acting on her behalf, moved the equipment from the Dandenong South factory to the premises at Carrum Downs. The applicants contend, and I accept, that they have prima facie established it to be so that neither Ms Huang, Noyier or Great Vision had any right “to take it anywhere”.

50    M+K Lawyers were involved since at least 10 July 2014 in the preparation of a written lease for the Carrum Down premises, between a company called Chas Jacobson Racing Pty Ltd as lessor and Australia Green Dairy Pty Ltd (AGD), the sixth respondent as lessee – another company, so it happens, the sole shareholder and director of which was and is Ms Qiong (Annie) Huang. Mr Guenther is noted in correspondence prepared by Colliers International, real estate agents, as the solicitor representing AGD.

51    On 15 October 2014, the seventh respondent, NCP, entered into a sublease of factory premises from AGD. M+K Lawyers drafted that sublease. As a result, the equipment was purportedly returned to Ms Huang’s control. The applicants submit that the only explanation for such a purported transaction was to defeat any interest in the equipment that AFD was going to assert.

52    The equipment remains at the premises at Carrum Downs and remains subject to the freezing order.

RELEVANT PRINCIPLES OF LAW

53    The relevant principles of law are not in dispute. They are conveniently summarised by Finkelstein J in Freeman v Health Insurance Commission (1997) 78 FCR 91. Although his Honour’s decision was reversed (see Health Insurance Commission v Freeman (1998) 88 FCR 544), the successful appellant conceded that his Honour made no error in this enunciation of legal principles ((1997) 78 FCR at 94):

Legal professional privilege is a principle of great importance. Its basis was explained by Lord Halsbury LC in Bullivant v Attorney-General for Victoria [1901] AC 196 at 200-201 as follows:

I think the broad proposition may be very simply stated: for the perfect administration of justice, and for the protection of the confidence which exists between the solicitor and his client, it has been established as a principle of public policy that those confidential communications shall not be subject to production.

To much the same effect is a passage in the joint judgment of Stephen, Mason and Murphy JJ in Grant v Downs [1976] HCA 63; (1976) 135 CLR 674 at 685:

The rationale of this head of privilege, according to traditional doctrine, is that it promotes the public interest because it assists and enhances the administration of justice by facilitating the representation of clients by legal advisers, the law being a complex and complicated discipline. This it does by keeping secret their communications, thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure of the relevant circumstances to the solicitor. The existence of the privilege reflects, to the extent to which it is accorded, the paramountcy of this public interest over a more general public interest, that which requires that in the interests of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available.

Nevertheless, the privilege does not apply to all communications between a legal practitioner and his or her client. One well known exception when the privilege will not apply is where the communication sought to be protected is part of a criminal proceeding or was made in furtherance of an illegal object: R v Bell; Ex parte Lees [1980] HCA 26; (1980) 146 CLR 141 at 145. It does not matter that the legal practitioner is innocent of knowledge of the criminal proceeding or illegal object. In R v Cox and Railton (1884) 14 QBD 153 at 168, Stephen J explained that for legal professional privilege to apply "there must be both professional confidence and professional employment", and if the illegal object is not disclosed the client "reposes no confidence, for the state of facts, which is the foundation of the supposed confidence, does not exist. The solicitor's advice is obtained by a fraud." The exception also includes a communication that is a step in or an aid to the commission of a "civil fraud": Varawa v Howard Smith & Co Ltd [1910] HCA 11; (1910) 10 CLR 382 at 386. In this context civil fraud is not limited to deceit "but includes all forms of fraud and dishonesty such as fraudulent breach of trust, fraudulent conspiracy, trickery and sham contrivances": Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] Ch 553 at 565.

54    See also In the Matter of ACN 005 408 462 Pty Ltd (formerly TEAC Australia Pty Ltd) [2008] FCA 964 at [16], where his Honour said:

For reasons of public policy there is no privilege in a communication which is a part of criminal or unlawful conduct: Bullivant v Attorney-General (Vic) [1901] AC 196, 201. The rule is not confined to a communication in pursuance of fraud or illegality. In Attorney-General (Northern Territory) v Kearney (1985) 158 CLR 500, it was applied to a public body that had exercised its powers in bad faith. It was not suggested that the authority had acted fraudulently or dishonestly. The allegation was that the authority had exercised its powers for an ulterior purpose. That was sufficient because the word “fraud” is wide enough to include “fraud on justice” (Kearney 158 CLR at 514) or conduct that would “frustrate the processes of law” (R v Bell; Ex parte Lees (1980) 146 CLR 141, 156). The exception includes a communication to further any abuse or misuse of power or deliberate breach of a legal duty: Southern Equities Corporation Ltd (in Liq) v Arthur Anderson & Co (1997) 70 SASR 166, 174.

55    The applicants also referred me to a useful (and again uncontroversial) summary of the relevant principles in cases concerning efforts to put assets beyond the reach of creditors in the decision of Lander J in Gartner v Carter; In the matter of Gartner Wines Pty Ltd [2004] FCA 258, and to the following passages in particular:

[129]     In Southern Equities Corporation Limited (in liq) v Arthur Anderson & Co [1997] SASC 6712; (1997) 70 SASR 166 at Doyle CJ said at 174:

... fraud in this context embraces a range of legal wrongs that have deception, deliberate abuse or misuse of legal powers, or deliberate breach of legal duty at their heart.

[130]     In my opinion a communication between a client and the client’s lawyer for the purpose of the client putting his assets beyond the reach of the legitimate claims of his secured creditors is a fraud on justice. Such a purpose is a fraud on the creditor and there is no public interest in protecting that communication.

[131]     That was also the decision of the Court of Appeal in England in Barclays Bank Plc and Others v Eustice and Others [1995] EWCA Civ 29; [1995] 4 All ER 511. Schiemann LJ, (with whom the other members of the Court agreed) identified the question before that Court at 520-521:

I turn therefore to the question of general interest in relation to the law governing discovery. We start for this purpose from the position that there is a strong prima facie case that Mr Eustice (the transferor) entered into transactions at an undervalue and that his purpose in so doing was to prejudice the interests of the bank (the claimant). It is also common ground that these documents are relevant to the issues between the parties and therefore disclosable. The question which falls to be resolved is whether legal professional privilege attaches to documents containing or evidencing communications between the transferor and his legal advisers relating to transactions entered into by the transferor at an undervalue for the purpose of prejudicing the interest of persons making a claim against him. If it does then the documents need not be produced for inspection.

[132]    In addressing that question he said at 522:

I regard the present case, however, as being essentially one about advice sought on how to structure a transaction. I accept that it must have been obvious to the defendants that the bank might, once it learnt of the challenged transactions, start proceedings. It was faintly submitted on behalf of the defendants that therefore advice as to structuring the transaction was to be regarded as advice coming into existence for the dominant purpose of being used in contemplated proceedings. That submission I reject. The dominant purpose was to stop the bank from interfering with the defendants’ use of what they regarded as family assets.

[133]     At 524 he said:

... For reasons given earlier in this judgment we start here from a position in which, on a prima facie view, the client was seeking to enter into transactions at an undervalue the purpose of which was to prejudice the bank. I regard this purpose as being sufficiently iniquitous for public policy to require that communications between him and his solicitor in relation to the setting up of these transactions be discoverable.

    If that view be correct, then it matters not whether either the client or the solicitor shared that view. They may well have thought that the transactions would not fall to be set aside under s 423 either because they thought that the transactions were not at an undervalue or because they thought that the court would not find that the purpose of the transactions was to prejudice the bank. But if this is what they thought then there is a strong prima facie case that they were wrong. Public policy does not require the communications of those who misapprehend the law to be privileged in circumstances where no privilege attaches to those who correctly understand the situation.

[134]         The respondents do not have to prove the fraud, but they do have the onus of showing reasonable grounds for believing that the document containing the communication for which legal professional privilege is claimed was created for some illegal or improper purpose. Such purposes would be contrary to the public interest. In Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 Brennan CJ said at 514:

I state the criterion as "reasonable grounds for believing" because (a) the test is objective and (b) it is not necessary to prove the ulterior purpose but there has to be something "to give colour to the charge", a "prima facie case" that the communication is made for an ulterior purpose. The purposes that deny the protection of privilege for a communication (whether documentary or oral) between a client and the client’s solicitor or counsel include the furthering of the commission of an offence.

(Footnotes omitted)

CONSIDERATION

56    Counsel for the respondents conceded that there are “several arguable causes of action in this matter: causes of action in breach of contract, essentially; potentially breaches of duty; potentially trespass; potentially conversion”. He submitted that “it should not be drawn from there being several causes of action over a course of conduct over a long period of time that there is an overarching fraudulent scheme, and that’s the essence of my argument”. He further submitted that:

[t]here is not an overarching scheme where it can be shown that Ms Huang or any of the respondents had a conscious intent or conscious improper purpose from the start to the end to achieve every one of the steps to which my learned friend has referred as part of some grand plan that was intended from the start. The disconnect is essential.

57    He also submitted that there was insufficient evidence that the joint venture was founded on the notion that each participant should contribute 50% in cash. He submitted that I should find that there is sufficient evidence to establish that Noyier’s contributions were:

…not in terms of cash payments to APD, but in essence, incurring liabilities to [Great Vision] in exchange for [Great Vision] assuming certain invoices to have been paid, invoices to APD, that is. So the essence of Noyier’s contribution at least at that early nascent stage of the construction of the factory was that Noyier would incur liability effectively on behalf of APD as its contribution to APD in exchange for which what APD owed to Great Vision was reduced.

58    He also submitted that “from the outset of the joint venture, APD owed [Great Vision] $6m” because the joint venture agreement contained a clause that “the total cost for the project is $6 million, less [certain] costs…”. He submitted accordingly that there was insufficient evidence of fraud.

59    I reject each of those submissions. First, it is not necessary for the applicants to establish in this application or at trial “an overarching fraudulent scheme” and I do not understand the applicants’ case to depend on any such thing. Secondly, in my view, the evidence that each participant was to contribute 50% cash into the joint venture is overwhelming. It is apparent from the express terms of the joint venture agreement, and from a number of exchanges between the parties, before Ms Bai discovered that Noyier had not contributed its equal share of funds to the joint venture, that the parties had agreed, and well understood, that the contemplated expenditures were to be shared 50-50. Counsel for the respondents was unable to point to any evidence whatsoever that Noyier’s contribution was to be other than in cash, other than the email exchange between Mr Seymour and Mr Guenther set out at [47] above. In my opinion, that email exchange is not evidence of what the parties intended. That email exchange suggests, on the contrary, that Mr Seymour and Mr Guenther were endeavouring to cobble together some explanation for not having complied with the unambiguous provision of the joint venture agreement that each of Great Vision and Noyier contribute $3 million. Further, counsel for the respondents was unable to provide any plausible defence to the proposition that if Noyier had paid the same amount that Aucare had paid into APD, then at least at the end of May 2014 no question of insolvency would have arisen. As to the proposition that “from the outset of the joint venture, APD owed [Great Vision] $6m” because the joint venture agreement contained a clause that the total cost for the project is $6 million, less certain costs, it need only be stated to be rejected.

60    Counsel for the respondents did not seriously contest that only the clean room contract contained a retention of title clause. He submitted that, on his instructions, Ms Huang nonetheless “believed” such clauses existed. He also submitted that:

…there is an arguable point that in a suite of contracts, where one of the contracts has a retention of title clause and the others are silent, when all the circumstances are considered it could be construed that equipment that hasn’t been paid for is subject to retention of title rights. It’s an arguable contractual point. But as I say, your Honour, I’ve been premising my submissions, putting aside the retention of title rights issue. I’m not saying it’s – the retention of title rights is a strong point.

61    With great respect to counsel, the submission that because a retention of title clause is contained in one contract, and not in two others, where the three contracts form a “suite”, one reads the clause to exist when it does not, is untenable.

conclusion

62    In my view, there is a strong prima facie case that Ms Huang and Mr Guo and the other respondents which or whom they control, have acted in a way to defeat the interests of the applicants in a number of respects that give rise to a number of causes of action which are founded on fraud, at the very least in the sense that they have committed fraud on justice or have engaged in conduct that would frustrate the processes of law.

63    There is a strong prima facie case that the respondents, or some of them, caused the plant and equipment to be removed from the Dandenong South premises, which were leased by APD, without any authority or right to do so, and took it to the premises at Carrum Downs. That gives rise, among other things, to a strong prima facie case that, in doing so, Ms Huang preferred her personal interest and her interest as a director and shareholder of Great Vision over her interest as a director of APD.

64    There is also a strong prima facie case that the respondents took steps to place the legal ownership and control of the equipment beyond APD by the purported transactions which I have described above. It is also readily apparent that all of this was done with the assistance of M+K Lawyers, and Mr Guenther in particular, a proposition with which counsel for the respondents did not cavil. It follows that there is a strong prima facie case that the wrongful and fraudulent conduct took place with the assistance of M+K Lawyers in furtherance of that improper purpose.

ORDERS

65    Accordingly, I propose to make an order in the form of the order sought by the applicants, namely, that:

1.     Pursuant to rule 20.32 of the Federal Court Rules 2011 (Cth), the respondents produce electronically for inspection the documents over which a claim of privilege is made by the respondents, being:

(a)     documents 1 to 58 in a list of documents of the first respondent filed on 27 January 2017 at 4.19.09 pm;

(b)     documents 33 to 39 in a list of documents of the first respondent filed on 27 January 2017 at 4.19.10 pm; and

(c)     documents 186 to 188 in a list of documents of the third respondent filed on 27 January 2017 at 4.19.11 pm.

66    The respondents must also pay the applicants’ costs of and incidental to the interlocutory application dated 27 January 2017. There will be liberty to apply.

Associate:

Dated:    3 July 2017

SCHEDULE OF PARTIES