Federal Court of Australia

Credit Suisse AG v Gu (Strike Out and Amendment) [2023] FCA 407

ORDERS

THE COURT ORDERS THAT:

1.    The application by i-Prosperity Pty Ltd ACN 142 091 585 (in liquidation) (IPPL) for leave to amend its defence to the Second Further Amended Statement of Cross-Claim dated 13 May 2022 filed on behalf of the Hu Parties in the form attached to the Interlocutory Application dated 13 September 2022 be dismissed save only for those parts of the amendments which were not opposed by the cross-claimants (being the Hu Parties).

2.    By 4pm on 10 May 2023, IPPL is to file and serve an Amended Defence in a form consistent with order 1.

3.    Subject to order 4, IPPL pay the costs of the Hu Parties of the related interlocutory applications the subject of these reasons.

4.    By 4pm on 10 May 2023, any party wishing to be heard on an application for a costs order different to that in order 3 is to notify the Associate to Cheeseman J and any other relevant party.

5.    Any application notified under order 4 will be heard at the case management hearing on 12 May 2023.

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

REASONS FOR JUDGMENT

CHEESEMAN J:

INTRODUCTION

1    These are two related interlocutory applications before the Court which arise in the context of the second further amended statement of cross-claim. This cross-claim is one of a number filed in the proceedings. The cross-claimants are the third to sixth respondents in the substantive proceedings. They are Mr Zhi Huang, Mrs Ying Qin, Mr Zhenhua Zhang and Mr Po Hu (together, the Hu Parties). The cross-respondents to the cross-claim are parties to the main proceedings, and relevantly include i-Prosperity Pty Ltd ACN 142 091 585 (in liquidation) (IPPL). The Hu Parties’ cross-claim is the only cross-claim relevant for present purposes.

2    The first of the interlocutory applications is an application by the Hu Parties to strike out certain paragraphs of IPPL’s defence to the Hu Parties’ cross-claim.

3    The second interlocutory application is by IPPL seeking leave to file a proposed amended defence to the Hu Parties’ cross-claim. IPPL’s application was filed after the Hu Parties’ strike out application and responds to the strike out application. To the extent that various other amendments in the proposed amended defence are not opposed, I will grant leave in respect of those amendments.

4    The principal issue in dispute thus focusses on the illegality defence that the Hu Parties seek to raise in their proposed amended defence (the Illegality Amendment). As a practical matter, the strike out application has been largely overtaken by the amendment application because IPPL seeks to reframe [33(c)-(e)], in which the substantive illegality defence the Hu Parties sought to strike out was contained. Although [15(a)-(c)] of the proposed amended defence, formerly [16(a)-(c)] of the defence, remain, those paragraphs stand or fall with the Illegality Amendment. The second related issue concerns an amendment by which IPPL contends that IPPL has priority over the interests of the Hu Parties and the cross-respondents other than IPPL because the Hu Parties “acquired their interest in violation of the laws of a friendly country as pleaded above” (the Priority Amendment).

5    The interlocutory dispute between the parties extended to a dispute in relation to discovery. That aspect of the dispute has resolved.

APPLICABLE PRINCIPLES

Principles relating to strike out

6    The strike out application is made pursuant to r 16.21(1)(e) of the Federal Court Rules 2011 (Cth), which provides that:

(1)      A party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading:

…

(e)     fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading;

7    At the hearing, the Hu Parties did not press for the strike out application on the basis that the impugned paragraphs were an abuse of process and accordingly abandoned their reliance on r 6.21(1)(f).

8    The applicable principles are well established:

(1)    a “reasonable cause of action” (or defence) means one with some chance of success if regard be had only to the allegations in the pleadings relied upon by the claimant. In such a case, the claim cannot be struck out;

(2)    the mere fact that the case appears to be a weak one is not of itself sufficient to justify the striking out of the action;

(3)    normally, the power to strike out should be exercised with great caution and only in plain and obvious cases, where no reasonable amendment could cure the alleged defect; and

(4)    where a point of law can be decided appropriately, thereby avoiding the necessity of, and expense in, going to trial the Court is entitled to determine the point.

See: Dey v Victorian Railways Commissioners [1949] HCA 1; 78 CLR 62, Dixon J at 91; Favell v Queensland Newspapers Pty Ltd [2005] HCA 52; 221 ALR 186 at [6]; Trade Practices Commission v Pioneer Concrete (Qld) Pty Limited [1994] FCA 628; 52 FCR 164 at 175 (Sheppard J, with whom Jenkinson and Drummond JJ agreed); Allstate Life Insurance Co v Australia & NZ Banking Group Ltd [1994] FCA 636; 217 ALR 226; Polar Aviation Pty Ltd v Civil Aviation Safety Authority and Ors [2012] FCAFC 97; 203 FCR 325 at [40]-[43].

9    IPPL emphasise that whether a pleading should be struck out depends on whether it is fairly arguable and whether in the particular circumstances it is necessary to do so in the interests of justice: John Holland Pty Ltd v Maritime Union [2009] FCA 437 at [60].

10    Unless futile to do so, a court will ordinarily grant leave to a party to replead those parts of its pleading that have been struck out: Matheson Engineers Pty Ltd v El Raghy [1992] FCA 619; 37 FCR 6.

Principles relating to amendment

11    Leave to amend pleadings may be granted as a matter of discretion pursuant to r 16.53 of the Rules. The onus is on the party seeking leave to amend to persuade the court that such leave should be granted: Dye v Commonwealth Securities Limited (No 2) [2010] FCAFC 118 at [17]. The factors to be taken into account in considering an application to amend include the effect of the delay in raising the proposed amendments, wasted costs, and the efficient conduct of legal proceedings: see, for example, Caason Investments Pty Ltd v Cao [2015] FCAFC 94; 236 FCR 322 at [19]-[21]; Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; 239 CLR 175; Tamaya Resources Ltd (in liq) v Deloitte Touche Tohmatsu [2015] FCA 1098.

12    The Full Court of this Court has observed that “[t]he Court’s power to grant leave to amend is broad and has the remedial objective of ensuring that any defect in the pleadings is cured and that the real questions in the controversy are properly agitated and to avoid a multiplicity of proceedings”: Aon at [14]; Caason Investments Pty Ltd v Cao at [20].

13    Leave to amend will not be granted where the amendment would be futile: see Caason Investments Pty Ltd v Cao at [21]; Plaintiff P1/2003 v Ruddock [2007] FCA 65; 157 FCR 18 at [12]-[14]. Each case turns on its own facts.

BACKGROUND

Substantive proceedings

14    It is useful to briefly address the procedural context.

15    At the heart of the proceeding is a priority dispute in respect of competing asserted equitable interests in surplus funds of about $5.2 million remaining after the mortgagee sale of a property at 10 Superba Parade, Mosman, New South Wales. The property was previously owned by Mr Menghong (Michael) Gu. Mr Gu was declared bankrupt in August 2021. His trustee in bankruptcy assigned to the Hu Parties the whole of Mr Gu’s rights, title, and interest in the surplus funds and the various associated rights to sue which are relevant to the present proceedings, pursuant to a deed of assignment and sale dated 17 January 2022 (the Gu Assignment). Despite being the first respondent in the proceeding, neither Mr Gu or his trustee in bankruptcy, Mr David John Kerr, have appeared or filed a notice of address for service. The whereabouts of Mr Gu are not known, although, media reports suggest Mr Gu fled Australia in July 2020 and has not returned. Credit Suisse AG was the relevant mortgagee and original applicant in the proceeding. Credit Suisse is no longer an active party. The surplus funds are presently held in an interest bearing account opened by the solicitors for the Hu Parties and pursuant to order of the Court are to be so held pending the resolution of the proceedings.

16    These proceedings originally comprised two proceedings, one of which was transferred from the Supreme Court of New South Wales. The proceedings, being inter-related, were consolidated following the transfer being effected. The rationale for the transfer was to ensure that the two proceedings could be heard together free from doubt as to jurisdiction in respect of certain aspects of the claims under the Bankruptcy Act 1966 (Cth): Credit Suisse AG v Gu (No 2) [2022] NSWSC 198 at [32]. The pleadings in that proceeding, being NSD 211 of 2022, stand as the pleadings in the consolidated proceedings.

17    As assignees under the Gu Assignment, the Hu Parties seek to set aside certain transfers of property by Mr Gu to Great Lands Investment Pty Ltd and Mr Chunshan Jing, pursuant to ss 120 and/or 121 of the Bankruptcy Act and press a claim in respect of the surplus funds.

18    The Hu Parties’ cross-claim which is relevant to the present interlocutory applications is one of four cross-claims in the proceedings — the respective cross-claimants seeking payment of part or all of the surplus funds are:

(1)    the Hu Parties (the relevant cross-claim);

(2)    IPPL;

(3)    Great Lands; and

(4)    Jing Spring Hill Pty Ltd (JSH) as assignee from Mr Jing.

See: Credit Suisse AG v Gu (No 2) at [5].

19    Before the proceedings were transferred to this Court, the Supreme Court made orders for discovery and evidence, and the proceedings were fixed for hearing commencing on 4 April 2022 with an estimate of five days. Since the proceedings were transferred there have been a number of developments, including the provision of discovery, security for costs, and amendments to pleadings, which have increased the estimate of the likely hearing time.

THE RELEVANT PLEADINGS

The Hu Parties’ cross-claim

20    The Hu Parties allege that they hold an equitable charge over the surplus funds derived from the equitable charge granted to them over, amongst other things, the Mosman property pursuant to cl 7.2 of a deed of guarantee and indemnity entered into with IPPL, i-Prosperity Capital Management Pty Ltd (ICM), and Mr Gu on or about 2 June 2020 (the Hu Deed). The Hu Parties contend that the amount secured by the equitable charge exceeds the balance of the surplus funds.

21    To understand the context relevant to the Hu Deed it is necessary to briefly canvas various other proceedings in the Supreme Court.

22    On about 10 March 2020, the Hu Parties commenced proceedings in the Supreme Court against Blue Whale Entertainment Pty Ltd and IPPL (the First Proceeding). Also on about 10 March 2020, the Hu Parties obtained ex parte freezing orders in the First Proceeding against the assets of Blue Whale and IPPL. An offer to settle the proceedings, which was expressed to be made in accordance with the principles stated in Calderbank v Calderbank [1975] 3 All ER 333, was made and accepted. Upon the defendants’ failure to make any payment in accordance with the settlement agreement, the plaintiffs applied, amongst other things, for judgment against the defendants. On 14 May 2020 the Supreme Court gave judgment in the First Proceeding for the Hu Parties against Blue Whale and IPPL in the sum of $5,761,972.60 (First Judgment Debt): Hu v Blue Whale Entertainment Pty Ltd [2020] NSWSC 562. The Supreme Court then made orders on about 15 May 2020 in the First Proceeding that the freezing orders would continue to operate until the First Judgment Debt was paid in full.

23    On 2 June 2020, after IPPL and Blue Whale failed to pay the First Judgment Debt, the Hu Parties entered into the Hu Deed. Blue Whale is not a party to the Hu Deed. The Hu Deed provided, amongst other things, that Mr Gu and ICM guaranteed the payment of the First Judgment Debt on or prior to 30 June 2020, and that the Hu Parties were to forbear from enforcing the First Judgment Debt up to and including 30 June 2020. It was also a term of the Hu Deed that Mr Gu granted to the Hu Parties an equitable charge over the Mosman property, which secured Mr Gu’s payment obligations under the Hu Deed. The First Judgment Debt was not paid by 30 June 2020.

24    On about 8 July 2020 the Hu Parties commenced proceedings in the Supreme Court against Mr Gu and ICM, seeking to enforce the guarantees and indemnities given in the Hu Deed (Second Proceeding). On or about 21 August 2020 the Supreme Court gave judgment in the Second Proceeding for the Hu Parties against Mr Gu in the sum of $5,929,897.86 (Second Judgment Debt): Hu v Gu [2020] NSWSC 1193. The Second Judgment Debt was secured by the equitable charge over the Mosman property. On the completion of the sale of the Mosman property, the Hu Parties allege that the equitable charge over the property attached to the surplus funds.

IPPL’s defence

25    Given the application for leave to amend, the following summary of IPPL’s defence is principally based on the proposed amended defence which is the subject of IPPL’s amendment application. As mentioned above, in its proposed amended defence, IPPL seeks to reframe the defence based on illegality it first raised in its original defence and which was the target of the Hu Parties’ strike out application. The Priority Amendment is premised on the Illegality Amendment.

26    IPPL alleges that the Hu Parties, each of whom are Chinese nationals, acquired the interest they assert in the surplus funds in violation of the law of the Peoples’ Republic of China (PRC), a friendly country, and that as a matter of public policy the Court should not enforce the Hu Deed. The Illegality Amendment is expressly premised on the allegation that there is a singular or overarching “agreement documented in the subscription for the convertible debentures issued by Blue Whale (in respect of the China Subscription Amount) and the Hu Deed”: [30A(u)] of the proposed amended defence. Further, that the Court would not give effect to that agreement because:

(1)    the agreement was made for the purpose of violating the laws of a friendly country and is thus void against public policy; and, or alternatively

(2)    a court of equity would not assist in or give effect to a contravention by the Hu Parties of a violation of the laws of a friendly country; and, or alternatively

(3)    the Hu Parties do not come to court with clean hands.

: [30A(u)(i) to (iii)] of the proposed amended defence.

27    The material facts that IPPL relies upon are as follows.

28    IPPL points to the fact that in the First Proceeding, the Hu Parties, as plaintiffs, sought payment of $5,750,000, comprised of an original investment of $5 million and interest of $750,000, in respect of convertible debentures issued by Blue Whale which had fallen due and were unpaid.

29    IPPL next alleges that $1.6 million of the subscription fee paid in respect of the convertible debentures was sourced from “Mr Hu paying the equivalent of AUD$1,600,000 by way of the transfer of Chinese currency from a bank account held by Mr Hu in mainland China to a bank account held in the name of Qi Nan Zhai in mainland China”: [15(a)-(c)] of the proposed amended defence (China subscription amount).

30    IPPL contends the transaction involving the China subscription amount is part of a broader transaction provided for by the terms of the Hu Deed which provide for repayment of the debt owing to the Hu Parties in respect of the convertible debentures, including the China subscription amount, in Australian Dollars in Australia. IPPL contends that this broader transaction is illegal under Chinese law: [30A(s)(i)] of the proposed amended defence. Alternatively, IPPL contends that any payment to the Hu Parties of the surplus funds in repayment of the amount owing in respect of the debentures issued by Blue Whale (in respect of the China subscription amount) and the Hu Deed would be illegal under the law of the PRC: [30A(s)(ii)] of the proposed amended defence.

31    IPPL contends that pursuant to Article 12 of the Peoples Republic of China Civil Code, the law of the PRC applies to the payment of the China subscription amount. Further, that the Hu Deed relevantly secured the repayment by Mr Gu, IPPL and ICM of the debt that remained owing to the Hu Parties in respect of the convertible debentures, including the China subscription amount, and required the debt owing to be repaid in Australian Dollars in Australia. IPPL pleads that at all relevant times, Article 30 of the Measures for the Administration of Individual Foreign Exchange (PRC), People’s Bank of China, Order No 3, 1 February 2007 (Forex Measures) provided that where “a domestic individual conducts exchange trading or any other transaction involving foreign exchange, the transaction is required to be conducted through a domestic financial institution with the appropriate authorisation”. Further, that at all relevant times it has been a criminal offence under the Criminal Law of the PRC, Article 225, Items 3 and 4 for a person to conduct a transaction in breach of Article 30 of the Forex Measures, and for a person to be an accomplice to such a breach of Article 225, pursuant to Articles 25 to 27.

32    IPPL then allege that “[t]he transaction documented by the subscription and payment for the convertible debentures issued by Blue Whale (in respect of the China Subscription Amount) and the Hu Deed involved foreign exchange trading or another transaction involving foreign exchange, within the meaning of Article 30 of the Forex Measures”, by or with the assistance of the Hu Parties and/or alternatively Mr Gu: [30A(p)] of the proposed amended defence.

33    Further or in the alternative, the Hu Parties allege that the payment to the Hu Parties of the surplus funds in repayment of the debt owing in respect of the subscription for the convertible debentures issued by Blue Whale (in respect of the China subscription amount) pursuant to the Hu Deed, would involve foreign exchange trading or another transaction involving foreign exchange, by or with the assistance of the same parties, none of whom have at any time been authorised by the People’s Bank of China to conduct foreign exchange trading or another transaction involving foreign exchange: [30A(p)-(r)] of the proposed amended defence.

CONSIDERATION

34    The Hu Parties oppose the Illegality Amendment on the basis that it is both not arguable and futile. For the reasons which follow, I am satisfied that leave to amend to include the Illegality Amendment should be refused.

35    The illegality defence on which IPPL seeks to rely is informed by the public policy of international comity. Australian courts will not will not enforce a contract that provides for the commission of a criminal offence in a foreign country with which Australia is not at war, regardless of whether the contact is implemented and the criminal offence is committed. In order for IPPL to avail itself of a defence based on the principle it must first establish that there is an act, or a contemplated act, on Chinese soil which is necessary for the performance of the contract sued upon which is said to be illegal under Chinese law: Fullerton Nominees Pty Ltd v Darmago [2000] WASCA 4 at [28]-[32] per Ipp J (Kennedy and Wallwork JJ agreeing).

36    A useful illustration of the principle in the present context is provided by the facts in Xinfeng Australia Internal Investment Pty Ltd v GR Capital Group Pty Ltd [2021] NSWSC 614. That decision arose in circumstances where an application was made to set aside a judgment obtained pursuant to consent orders. The judgment had not been enforced. The defendants moved to set it aside on the ground of illegality. The illegality relied upon concerned an alleged contravention of Chinese exchange control laws arising from a facility agreement that was relied upon as the basis for a debt claim in the proceedings which had been settled by consent. In that context, having concluded that the primary contention of illegality under Chinese law was not established, Parker J observed, in obiter, that the “agreement to settle the proceedings was a separate and distinct contract which cannot be impeached even if the underlying claim by the plaintiffs was arguably invalid”: Xinfeng at [207].

37    IPPL in essence contend that the precise boundaries of the defence are not defined and submit that there is no judgment which says that the defence does not apply where there is no act on foreign soil. IPPL points to the observation made by Parker J in Xinfeng at [143], to the effect that there are a number of uncertainties about how far the illegality principle extends, one of which is the connection between the violation of foreign law and the obligation being enforced (at [152]ff). That may be so. However, the fact that the metes and bounds of the defence are not defined does not alter the fact that IPPL has not identified any case in which an illegality defence has been recognised in remotely similar circumstances nor advanced any sound basis rooted in comity to support the application of the principle to the facts as alleged by it. An analysis of the pleadings presently in issue demonstrates that IPPL’s Illegality Amendment is predicated on allegations which do not form part of the claim advanced by the Hu Parties. Even taking IPPL’s allegations at their highest, the facts alleged are divorced from the obligation which the Hu Parties seek to enforce and at their highest are incidental factual allegations about events adjacent to the anterior convertible debentures agreement. There is no allegation that the China subscription amount was made or required to be made under contract that is relevant to the Hu Parties’ claim such that it would attract the policy considerations that inform the illegality defence.

38    The Hu Parties sue on the Hu Deed. The Hu Deed secures obligations that arise from the First Judgment Debt and extends to the Second Judgment Debt. In the present proceedings, the Hu Parties do not claim under the convertible debentures agreement with Blue Whale. They do not sue in respect of or in reliance on the antecedent debt owed in respect of the convertible debentures. The Hu Parties’ cross-claim does not refer to the convertible debentures. No aspect of the performance of the Hu Deed requires or even involves an act on Chinese soil.

39    The Illegality Amendment is underpinned by an allegation that there is an overarching or composite contract which is illegal under Chinese law and/or that the payment to the Hu Parties from the surplus funds would be illegal under Chinese law. Although IPPL equivocated on this issue in its submissions on this application, the amendment proffered expressly contends that there is one agreement. Indeed, the overarching contract allegation appears to be directed to establishing the requisite connection with China in order to engage the public policy which informs the illegality defence. The allegation that there is an overarching or composite contract is not fairly arguable for the following reasons.

40    First, IPPL does not plead any facts to support its contention that there is one composite contract. The sequence of the individual agreements, which are implicitly relied on to form the component parts of the composite contract alleged, do not support the allegation of a composite contract and is not otherwise addressed in the pleading.

41    Secondly, an illegality defence based on the existence of a composite contract is further flawed in that there are different parties to the Hu Deed on the one hand and the composite contract which is alleged. The contract for convertible debentures, which forms part of the alleged composite contract, is between the Hu Parties, Blue Whale and IPPL, whereas the Hu Deed does not involve Blue Whale, but involves the Hu Parties, IPPL, Mr Gu and ICM.

42    The third impediment to the Illegality Amendment arises from the settlement agreement, formed when the Calderbank offer was accepted on about 15 April 2020. This is an intervening event between the agreement to invest in the convertible debentures in 2019 and the Hu Deed in 2020. The Hu Parties submit, and I accept, that the settlement agreement strengthens their contention that the Illegality Amendment is futile. Not only do the Hu Parties not sue on the convertible debentures, they could not sue on the convertible debentures following the settlement of the First Proceedings because they sued on the settlement agreement to obtain the First Judgment Debt. If the settlement agreement was an accord and satisfaction, then it had the effect of extinguishing the underlying cause of action on the convertible debentures. In that case, the Hu Parties’ only rights were to sue on the settlement agreement itself. If the settlement agreement was an accord and conditional satisfaction, then the Hu Parties were precluded from enforcing their rights under the contract for convertible debentures before performance under the settlement agreement was due: Osborn v McDermott [1998] 3 VR 1 at 10-11. Upon default in the performance of the settlement agreement, assuming the default was a repudiation or essential breach, the Hu Parties faced an election between terminating the settlement agreement and pursuing their cause of action on the convertible debentures or suing on the settlement agreement in place of the original cause of action: Deutsch v Deutsch [2012] VSC 227; 6 ASTLR 386 at [86]-[103]. In the Second Proceeding, the Hu Parties sued on the settlement agreement itself. They did not sue in reliance on the agreement pursuant to which the convertible debentures were issued. This constituted an election to affirm the settlement agreement. Thereafter, they were prevented from terminating unless there was a further breach entitling them to terminate, or a further or continuing repudiation: see Galafassi v Kelly [2014] NSWCA 190; 87 NSWLR 119 at [73]-[84] (Gleeson JA; Bathurst CJ and Ward JA agreeing).

43    Relatedly, IPPL’s reliance on Moffet v Dillon [1999] 2 VR 480 to support the submission that it is at least reasonably arguable that Chinese law may provide that a subsequent contract — in this case the Hu Deed — is unenforceable, is misplaced. The principle relied upon by IPPL is that one can sue on a negotiable instrument and it does not destroy the underlying cause of action until payment is received. Here, the Hu Parties do not sue on a negotiable instrument. They sue on the Hu Deed. Further, they have sued on the debt the subject of the Hu Deed to judgment.

44    Fifthly, insofar as IPPL contends that Chinese law may treat the convertible debentures and the Hu Deed as one composite contract, that does not remedy the inherent flaws in the Illegality Amendment because the illegality defence is a defence to the enforcement of an Australian contract in an Australian court. Through the lens of comity considerations, Chinese law is only relevant to whether performance of the Australian contract sued upon involves an illegal act on foreign soil. Here, the Australian contract is the Hu Deed and it does not involve an illegal act on Chinese soil.

45    Sixthly, IPPL’s submissions based on unclean hands depend on the Illegality Amendment being fairly arguable. It falls with the Illegality Amendment. In order to rely on the Hu Parties having unclean hands, IPPL must establish that the Hu Parties must rely on the alleged illegal act in order to establish their cause of action: Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060; 12 BPR 22421 at [179]-[181] and [185]. The Hu Parties do not rely on the alleged illegal act in the requisite way or at all. The Hu Parties do not need to establish any advance occurred pursuant to the convertible debentures in order to establish their claim.

46    Finally, in the context of the complicated procedural history, and having regard to the flaws I have identified, I am satisfied that case management considerations weigh against granting leave to amend. If the amendment is permitted at this stage of the hearing it will likely prolong the final hearing, noting that foreign law is a matter which is proved as a fact. That is so even though an illegality defence forms part of the Hu Parties’ defence to Great Lands’ cross-claim. I do not see force in what was essentially a goose and gander submission advanced by IPPL. An integral part of the Great Lands’ cross-claim is based on an advance which is alleged to have occurred in China. The Hu Parties rely on that act in China as the relevant illegal act for the purpose of the illegality defence that they raise to Great Lands’ claim. By way of contrast, the Hu Parties do not base their claim on any act which occurred in China. While there will be some overlap in the evidence as to the content of the relevant Chinese law if the amendment is allowed, the evidence in relation to the manner in which that law applies, if at all, to the different facts and circumstances alleged in the Illegality Amendment will necessarily travel beyond that relevant to Great Lands’ Cross-claim.

47    Conscious of the caution that is necessarily warranted in the context of an application for leave to amend in the face of a strike out application, for the reasons identified, I am satisfied that leave must be refused in respect of the Illegality Amendment.

48    I now turn to the Priority Amendment.

49    As mentioned above, the Priority Amendment is dependent on the Illegality Amendment. It is pithily expressed ([30A(aa) of the proposed amended defence):

30A     And in answer to all of paragraphs 15 – 30 of the SFASOCC, [IPPL] says:

…

(aa)     that [IPPL’s] interest in the Surplus Funds has priority over any interest of any of the [Hu Parties], including because the [Hu Parties] acquired their interest in violation of the laws of a friendly country as pleaded above.

50    The Priority Amendment relies on the alleged illegal conduct on the part of the Hu Parties to support IPPL’s contention that it has a better equitable interest.

51    The proposed amended defence does not allege any material facts which in any way connect the impugned alleged illegality on the part of the Hu Parties in a way that relevantly impacts the competing interest that IPPL asserts. Rather, IPPL relies on what Young J described in FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 at 554-555 as “general naughtiness”, and does not raise any issue which could, according to principle, have a bearing on the respective priorities of the parties’ asserted equitable interests.

52    Both parties relied on Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99; 18 BPR 36,683. In Linfield, Ward JA (as her Honour then was) (with whom McColl and Gleeson JJA agreed) considered the question as to whether disentitling conduct is confined to conduct that causes or contributes to the creation or acquisition of the later interest. After considering the historical development and context of the priority principles, her Honour concluded that such principles “do not rest upon any narrow concept of disentitling conduct”: at [232]. Her Honour held at [228] that “in an appropriate case…the concept of disentitling conduct can extend to conduct which contributes to a failure by the holder of a later interest to have taken steps at an earlier time to protect the rights that it had”. The identification of the better equity turns upon all the circumstances of the case: Linfield at [257]. That said, there must be some connection or impact on the other party’s equitable interest or the other party’s conduct in relation to its equitable interest. Indeed, Ward JA observed that the emphasis on a party’s alteration of position is “instructive”, by reference to the dissenting joint judgment of Duffy and Starke JJ in Lapin v Abigail [1930] HCA 6; 44 CLR 166, which may extend to a decision not to act: Linfield at [242]-[243].

53    IPPL does not allege any material facts in its proposed amended defence which allege the requisite connection between the conduct they seek to impugn as illegal under Chinese law and the interest they seek to assert or their conduct in respect of that interest. Taking the proposed amended defence at its highest, I am satisfied that the Priority Amendment is not fairly arguable — it does not rise above an allegation of general naughtiness on the part of the Hu Parties. Accordingly, leave to amend must be refused. Again, I have reached this conclusion conscious of the caution attendant on the exercise of discretion in the present circumstances.

CONCLUSION

54    For the reasons I have given I will make orders dismissing the amendment application, save to the extent that the proposed amendments were not opposed by the Hu Parties. In the result, I see no reason why costs should not follow the event. I will make an order accordingly, but will condition it on any party who wishes to be heard on an alternative costs order having an opportunity to be heard, provided notice is given within the period specified in the orders I will make.

Associate:

Dated:    5 May 2023

SCHEDULE OF PARTIES