Federal Court of Australia

Smart Education Program Pty Ltd (in liq) v CLGC Australia Pty Ltd [2023] FCA 826

ORDERS

THE COURT ORDERS THAT:

1.    The amended originating process be dismissed.

2.    The statement of cross-claim be dismissed

3.    There be no order as to costs.

4.    The orders made on 27 September 2017 and varied on 4, 9 and 27 October 2017, 2 November 2018 and 4 March 2019 (freezing the assets of the first and second defendants) be discharged.

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

REASONS FOR JUDGMENT

JACKMAN J

The Re-allocation of the Matter from Justice Farrell

1    These proceedings were heard by Farrell J on 12, 13, 14, 15, 16 and 19 October 2020, 20 November 2020, and 9 and 23 December 2020, a period of nine days. The references in that sentence to “2020” are not a misprint. Farrell J began the trial by complaining about the timeliness with which the evidence had come to her: T4.5-6. During the trial, Farrell J was understandably keen to keep the hearing on schedule: T193.43-194.12. Her Honour was particularly censorious of the plaintiffs’ key witness, the third plaintiff, for making the Court wait, and reminded him of his duties to the Court, and that “punctuality is expected. It costs a lot for all of these people to sit around waiting for you” (for which the third plaintiff apologised): T199.32-46. That was all relatively unexceptional, and, for the most part, appropriate. Regrettably, Farrell J has not delivered judgment. The delay in giving judgment is all the more glaring in light of the fact that Farrell J made freezing orders against the first and second defendants on 27 September 2017, which were subsequently varied but remain in place.

2    Despite the period of two and a half years without giving judgment, Farrell J has indicated that in view of her impending resignation from the Court, which the Governor-General has accepted and which is to be effective on 1 August 2023, she will not be giving reasons for judgment or making any orders in the proceedings. The Chief Justice has re-allocated the proceedings to me for that purpose. The evidence comprises about twenty affidavits, about ten volumes of documents and almost six hundred pages of transcript. I have read and analysed that material, and have done so bearing in mind that, unlike Farrell J, I have not had the advantage of having seen and heard the witnesses in person.

3    On 30 June 2023, the Chief Justice wrote to the parties advising them of the re-allocation, and suggested that they may wish to raise with me the making of orders and the granting of a certificate under s 10 of the Federal Proceedings (Costs) Act 1981 (Cth). That section provides relevantly in subs 10(2):

Subject to this Act, where any proceedings in a court to which this section applies are rendered abortive by reason that the person, or a person, before whom the proceedings are being conducted dies, resigns, or is removed or dismissed from, his or her office, suffers a protracted illness or otherwise becomes unable to continue with, or to give judgment in, the proceedings, the court may, on the application of a party to the proceedings, grant to that party a costs certificate in respect of the proceedings.

Subsection 10(4) provides that such a certificate states that in the opinion of the court, it would be appropriate for the Attorney-General to authorise a payment under that Act to that party in respect of such part as the Attorney-General considers appropriate of any costs incurred by that party in relation to those proceedings.

4    I have communicated to the parties my view that any application for the grant of such a certificate would be problematic in the present case. I now give my reasons for that conclusion. Her Honour has resigned her office, but the resignation will not be effective until 1 August 2023. As far as the evidence indicates, Farrell J has not suffered a protracted illness or otherwise become unable to continue with, or to give judgment in, the proceedings. I am not aware of any medical evidence to that effect. There was a reference by Farrell J during the hearing on 16 October 2020 to a doctor’s appointment at 8.30am on 19 October 2020, but the transcript indicates that no impediment arose for the continuation of the trial that day (T372.9-373.11), or on subsequent days. The problem does not appear from the evidence to be one of inability, to which subs 10(2) is directed, except perhaps in a euphemistic sense of “inability”. Rather, the problem seems to be one of unwillingness to discharge the judicial function of giving judgment in the proceedings. If it is not possible to make findings upon which the grant of a certificate under s 10 depends, no party can receive costs under the section: Foody v Horewood [2000] FCA 37; (2000) 96 FCR 386 at [4] (Finkelstein J).

5    The reallocation of the matter to me was made on 30 June 2023, the day after I was asked whether I would accept the reallocation. I have sought to prepare this judgment as expeditiously as possible, given the delays which the parties have patiently borne to date. It is a task which I have undertaken in the time available to me after dealing with what was already a full load of matters for hearing and judgment. While Farrell J is not one to rush to judgment, the evidence does not indicate any acceptable reason why her Honour could not have given judgment by 1 August 2023, even if her Honour did not begin the task until 30 June 2023.

6    There is a further reason why s 10(2) is not applicable, in that the proceedings have not been rendered “abortive”. I am able to give judgment disposing of the claims made in the proceedings, being the only remaining step to be taken in the proceedings. I have noted in these reasons the issues which I have not been able to resolve satisfactorily in the absence of having seen and heard the evidence being given. However, as my reasons demonstrate, the resolution of those issues was not necessary in order to resolve the claims which have been made.

7    Even if I had been of the view that s 10(2) was applicable, I would not have exercised the discretion in favour of granting a costs certificate. The parties have fought a lengthy forensic battle, and deserve to have judgment delivered. No further financial demands will be placed on the Commonwealth if the Court exercises its functions in that way.

8    The Chief Justice has apologised in correspondence to the parties and their legal representatives on behalf of the Court for this situation. I wish to add my own apology for what has transpired.

The Parties

9    The first plaintiff, Smart Education Program Pty Ltd (SEP) is a company registered under the Corporations Act 2001 (Cth) (the Act). It was wound up by order of the Supreme Court of New South Wales on 6 December 2021, about a year after the hearing of these proceedings was completed.

10    The second plaintiff, SEP Asset Management Pty Ltd (SEPAM) is also a company registered under the Act, and was also wound up by order of the Supreme Court of New South Wales on 6 December 2021.

11    The third plaintiff, who is also the first cross-respondent, Ronglai Zhang (Martin), was at all material times a director of SEP; from 10 February 2016, a member owning 50% of the issued capital in SEP; a director and the sole member of SEPAM; the sole director and secretary of the second cross-respondent, W&H Lawyers Australia Pty Ltd (in liq) (W&H Lawyers); the sole member and the principal of W&H Lawyers; and a legal practitioner who held a NSW Practising Certificate. W&H Lawyers was wound up on 6 December 2021 by order of the Supreme Court of New South Wales. Martin became a bankrupt on 10 March 2022 by order of the Federal Circuit Court of Australia. I granted leave yesterday to the cross-claimants to proceed with the cross-claim against Martin pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) and against W&H Lawyers pursuant to s 471B of the Act, particularly given the stage which the proceedings had reached by the time that those insolvent administrations began, and given that the grant of that leave was not opposed.

12    The first defendant, CLGC Australia Pty Ltd (Conglin Australia) was registered on or about 15 August 2013 under the Act, and at all material times was a wholly owned subsidiary of the fourth defendant, Conglin Group Co. Ltd (Conglin China).

13    The second defendant, and first cross-claimant, Peiliang Zhang (Peiliang) was at all material times a director of SEPAM, the Chairman of the Board of Directors of Conglin China, and a member of SEP.

14    The fourth defendant and second cross-claimaint, Conglin China, was at all material times a body corporate incorporated in the People’s Republic of China (PRC), and the sole member of Conglin Australia.

15    At all material times, Weiping Lu (Weiping) was the wife of Peiliang, and was the sole director and secretary of Conglin Australia. At one stage in the proceedings, Weiping was the third defendant, but she is no longer a party to the proceedings.

Salient Facts

16    In 2011, Martin met Peiliang and his wife, Weiping. Peiliang and Weiping engaged Martin to perform migration work for them. Between about July 2014 and the beginning of 2016, Martin introduced Peiliang to a number of investments. Peiliang provided the investment capital, Martin managed the investments and they shared the profits. Peiliang accepted in cross-examination that as at January and February 2016, no investment that Martin had proposed had made a loss, and some had been quite profitable: T358.16, 343.44, 344.1, 345.18.

17    In 2016, Peiliang was the Chairman of Conglin China, the holding company of a large corporate group operating in PRC. Peiliang was an 80% shareholder in Conglin China, with effective control of Conglin China and its related entities, and oversaw the group’s investments. Conglin Australia was one of the companies through which Peiliang conducted some of his business: T342.5-6 (Peiliang XX).

18    In January or February 2016, Martin and Peiliang met at Conglin China’s offices in PRC, and discussed a proposal made by Martin for an education business in Australia. At that time, Martin understood that Conglin China had approval for a foreign exchange quota: T100.5-9; 102.14-15; 104.35. At the time, it was Martin’s understanding that it was very difficult to get Chinese RMB out of PRC: T100.6-7; 104.13-15. Martin’s proposal was that parents in PRC would pay money to Conglin China for their child to study and Conglin China would use its foreign exchange quota to transfer money to its Australian subsidiary, Conglin Australia, which would pass it on to the Australian business. The money would be put in a fund and used for investments. There would be a gap between when the money entered the fund and when it was invested, and during that period Conglin China could borrow money from the fund at a cheaper rate than market rates: T100.5-25; 103.42-46; 104.37-41; 105.9-16 (Martin X). Conglin China would guarantee repayment of the funds to parents: T101.40-45; 102.7-10 (Martin X).

19    The imprecision and vagueness with which the proposal was discussed are reflected in the following passages of transcript. At T104.37, Martin was asked in chief what he recalled Peiliang saying, if anything, about the use of the foreign exchange quota, as Martin had proposed. Martin answered:

I mentioned this opportunity we only refund going to a parent company. This opportunity for – before we allocate a fund to realise some projects, and Conglin can access the fund, can borrow from the fund at a relatively cheaper rate.

At T105.8, Martin was asked in chief what was said at the meeting on the topic of Conglin China accessing cheaper finance through the fund. Martin replied:

I just explained the investment structure. The money moved from parents go into the parent company. The parent company inject into Australian wholly owned subsidiary, and a wholly owned subsidiary then inject into the investment project. There is a – a gap of time before we transfer funds over to allocate into the project. The fund now sitting in – the money now sitting in the fund. And because we give a guarantee and Conglin can borrow from the fund as well at a cheaper rate is compared to – because at the time it was difficult to get the finance, and that’s much easier for them to – to utilise the benefit of the fund.

20    Martin explained at the meeting that the SEP proposal was a new idea and it was a start-up: T381.1-5 (Peiliang XX). Peiliang conceded that it was obvious to him that its success depended on recruiting students from wealthy families, and there was no reliable way of predicting how many students would sign up: T381.15-20. However, he trusted Martin’s business judgment, and because of that he decided to invest: T381.25-37. Peiliang agreed to proceed with the business proposal at the end of the meeting in January or February 2016, including Conglin China’s provision of guarantees and Conglin China and Conglin Australia using the foreign exchange quota to transfer funds between China and Australia: T381.42-382.5 (Peiliang XX); T100.1-34 (Martin X).

21    Further, Peiliang gave unchallenged evidence that Martin said to him:

Besides, I was your lawyer. So I will do anything in your benefit.

This evidence was given through a translator. The defendants submit, and I accept, that Peiliang did not intend in that evidence, as translated, to say “was”, but “am”, given that the Chinese language does not have past, present or future tenses. I will return to the topic of the solicitor-client relationship later in the judgment.

22    Peiliang and Martin subsequently had a number of telephone discussions, in which they discussed Martin investing money in the business and Martin sourcing an office and personnel: T107.34-41; T108.9-31 (Martin X).

23    The parties have agreed upon a statement of agreed facts (SAF), which records that the following matters were discussed between Martin and Peiliang in early 2016, that is between around January and May 2016:

(a)    SEP would conduct the education business and be owned by Martin and Peiliang or their nominees: SAF 12.1, 12.2;

(b)    SEP would provide education and training in Australia to the children of Chinese nationals and their parents would pay in RMB the equivalent of A$500,000 (Investment) to either:

(i)    SEP; or

(ii)    Conglin China, which would then pay the Investment to SEP via Conglin Australia (using, if necessary, its rights under the law of PRC to convert RMB into AUD and transfer AUD out of China): SAF 12.3, 12.5.

(c)    SEP would have the use of the Investment, which it would invest in a fund together with payments received in respect of other students. At the conclusion of the education or training, the parent would be able to elect between having the balance of the Investment repaid to him or her, or converting it into equity in SEP: SAF 12.4, 12.6.

(d)    If the parent elected to have the balance of the Investment repaid to him or her, then SEP would pay that amount in AUD to Conglin Australia and Conglin Australia would transfer that money to Conglin China, so that Conglin China could pay in RMB the equivalent of that amount to the parent (using, if necessary, its rights under the law of PRC to convert AUD into RMB): SAF 12.7.

(e)    Conglin China would have the right to borrow from the fund at a discount to market rates: SAF 12.8.

(f)    Conglin China would provide guarantees to the parents in respect of the repayment of the investment: SAF 12.9.

(g)    Peiliang agreed to the use of Conglin China’s foreign exchange quota for the purpose of exchanging currencies and transferring funds between the PRC and Australia for the purpose of the business: SAF 13.

24    In February 2016, SEP was incorporated. Martin was its sole director and beneficially held 50% of the issued shares: CB7/2332-2340. Peiliang beneficially held 40% of its issued shares, contributing capital between March and June 2016: CB3/841. The other 10% was held by someone called Xue Qin: CB7/2334.

25    SEPAM was also incorporated. Both Martin and Peiliang were directors, and Martin beneficially owned all of its issued shares: CB7/2338-2340.

26    On about 29 March 2016, Conglin China obtained a foreign exchange authority that permitted it to transfer US$80 million to Conglin Australia as its “final destination” for the purposes of investing in Conglin Australia: CB3/955-956 (the Quota). The Quota is entitled “Enterprise Certificate of Overseas Investment” and was issued by the Department of Commerce of Shangdong Provence and dated 29 March 2016. It refers to the “Overseas enterprise (final destination)” as Conglin Australia. It contains repeated references to “investment”, including a description of Conglin China as the “Investment body”. The notes at the end of the Quota record that Conglin China was applying to increase its investment capital in Conglin Australia in the following terms:

Changes of circumstances: Conglin Group Co., Ltd applies to increase invest in CLGC Australia Co., Ltd. Changes are: The total investment amount is increased from $1,740 to $8,000, $6,260 is added. The total investment amount from the China side is increased from $1,740 to $8,000, 6,260 is added (unit: USD10,000).

The plaintiffs submit, and I accept, that the Quota unambiguously recorded that it could only be used to increase investment capital in Conglin Australia. Peiliang accepted in cross-examination that that stated purpose was not a true reflection of Conglin China’s actual purpose: T383.34-36.

27    Between March and September 2016, Martin took steps to establish the education business he had discussed with Peiliang, including by investing approximately A$1 million in SEP and SEPAM, and causing those entities to enter into various agreements, such as a lease and a bank guarantee: affidavit of Martin dated 27 September 2017 at [19]. On 16 March 2016, Peiliang invested A$23,000 of capital in SEP, and between 15 and 27 June 2016, Peiliang invested about A$777,000 of further capital in SEP: CB3/841. Martin and Peiliang continued to discuss the education business, guarantees and foreign exchange transfers: affidavit of Martin dated 27 February 2018 at [22]-[29]. Those discussions took place over the telephone, with Martin being in Australia and Peiliang being in PRC.

28    In April 2016, Peiliang accompanied Martin to a final inspection in Sydney for offices Martin was considering leasing for the business. Peiliang was supportive of Martin leasing the premises: T112.45-113.2; 113.5-6 (Martin X).

29    The business reached the stage of enrolling three students in SEP’s education courses, as follows:

(a)    In April 2016, Yaojia Zhang: CB8/2570-2572. The contract in relation to Yaojia Zhang differed from the others, in that W&H Lawyers was a party and guaranteed the return of the investment (cl 3). That feature was attributed by Martin to the personal relationship which the student’s family had with Martin: Martin’s affidavit of 27 February 2018 at [36]. The contract permitted payment in AUD to W&H Lawyers or in RMB to Conglin China (cl 2.3). Return of the investment was also guaranteed by Conglin China (cl 3).

(b)    In September 2016, Dehang Kong: CB6/1778-1787. SEP, Conglin China and Dehang Kong were parties and signed the agreement: CB6/1787. The agreement included terms that payment could be made in RMB to Conglin China, and a company referred to as Shandong Conglin Group Co. Ltd guaranteed repayment of the investment (cll 2.2(c), 3). I assume that that company is the same company as Conglin China, consistently with the plaintiffs’ submission, which does not appear to have been controverted by the defendants. The contract annexed a certificate of guarantee from Conglin China: CB6/1797.

(c)    In January 2017, Qingyun Dai: CB6/1764-1777. The letter of offer to Qingyun Dai incorporated standard terms (which included the term that payment could be made in RMB to Conglin China (cl 2.2(c)): CB6/1773. The contract included a guarantee from Conglin China (cl 6 at CB6/1766 and cl 3 at CB6/1774). The contract was signed by Conglin China: CB6/1769.

30    On about 14 September 2016, Conglin China executed a certificate confirming that it fully guaranteed student funds for the purposes of the SEP project: CB6/1652BJ.

31    Between May 2016 and January 2017, Conglin China:

(a)    received payments in RMB with respect to the enrolment of two of those students: affidavit of Peiliang dated 11 May 2018 at [65]; SAF 26.2; and

(b)    converted those amounts to Australian dollars and transferred them to Conglin Australia, using the Quota: Peiliang’s affidavit dated 11 May 2018 at [65]; Conglin Australia bank statements at CB4/1159A-1159F; Conglin China applications for foreign transfers at CB4/1163A, 5/1551A, 6/1682C, SAF 26.2.

32    Conglin Australia, in turn, transferred those funds to SEP: CB4/1159A-1159F; Peiliang affidavit dated 11 May 2018 at [65], SAF 26.2.

33    In 2017, Conglin China was in financial difficulty. On 10 March 2017, a judgment was entered against it for the equivalent of about A$3 million: CB6/1965. In mid-2017, PRC changed its lending policies, such that its banks called on existing loans and refused to refinance them through new loans. Conglin China had guaranteed the borrowing of a number of its subsidiaries and associated companies: Peiliang’s affidavit dated 12 September 2018 at [42]-[43]; affidavit of Xuewei Liu dated 12 December 2018 at [14]-[15]; T356.15-23 (Peiliang XX). In the first half of 2017, Conglin China was forced to seek millions of RMB of short-term borrowing, some of that borrowing at “extortionate” interest rates: T354.12-16 (Peiliang XX). Sometimes, it could not raise funds without Peiliang giving a personal guarantee: T354.21-26 (Peiliang XX). It still failed to pay those loans on time. Creditors took legal action and froze assets in the group: CB9/2882AQ-2882AU.

34    Within a few months of May 2017, Conglin China had debts well in excess of 1 billion RMB that needed to be repaid or refinanced, causing a sudden and unexpected shortfall in cash: T355.12-20 (Peiliang XX). In that passage, I read Peiliang’s response “I think so” at T355.15 as accepting that proposition. Conglin China did not have enough money to repay what the banks were demanding. It had to resort to strategies such as selling assets at a discount, offering discounts in return for early payment of debts and on-selling unpaid debts at a discount: T355.27-42 (Peiliang XX).

35    In June 2017, Conglin China provided financial statements to Bohai International Trust Co Ltd (Bohai Trust). The case was opened by the plaintiffs on the basis that Bohai Trust was contemplated as operating the proposed fund for SEP: T6.25-28. I return to that topic in further detail below.

36    In July 2017, Martin flew to China to discuss Conglin China’s financial position with Peiliang: T114.6-20 (Martin X). On the way to PRC, Martin was told that significant amounts in Conglin China’s bank accounts were frozen and that Conglin China was 7 billion RMB in debt: T114.35-115.16 (Martin X). The defendants criticised that evidence in their submissions as being hearsay and as not having been included in Martin’s affidavit evidence, but despite objection having been taken, the trial judge posed the question herself and objection was not taken to the answer. The plaintiffs also referred, by way of background to Martin’s trip to PRC, to the fact that Peiliang had not attended his only son’s wedding in Sydney. However, that non-attendance needs to be placed in context. Peiliang had already attended the traditional wedding ceremony for his son in PRC which all elderly relatives had attended, but did not attend the Australian wedding for his son’s young English-speaking friends: Peiliang’s affidavit dated 12 September 2018 at [50].

37    On 16 July 2017, Peiliang and Martin met at Conglin China’s offices in PRC. Martin asked Peiliang about Conglin China’s frozen bank account. Peiliang told him that Conglin China was “collapsing” because the Chinese banking system was not supporting manufacturers: T117.1-6 (Martin X). Peiliang told Martin that the position was “hopeless”, the company was “finished” and “going under”, and he could not hold it for longer than three months: T114.26-31, 115.37-46, 116.2-11, 120.21 (Martin X). The defendants dispute Martin’s version of the conversation, but in my view that evidence should be accepted as being consistent with the objective facts at the time. The fact that Conglin China did not enter reorganisation until almost a year later, and continued to trade under administration, does not undermine the dire predictions which Peiliang made at the time. The following day, Conglin China was required to repay a short term loan of RMB30 million, personally guaranteed by Peiliang, but did not make that repayment: CB9/2882AQ, T352.3-12 (Peiliang XX).

38    As the education business relied upon the ability to receive payments from PRC and give guarantees to parents in the PRC, following his conversation with Peiliang, Martin decided to close the SEP business down, and began taking steps to do so (including by sending termination letters to students): Martin’s affidavit of 27 February 2018 at [47], CB7/2189-2197.

39    The plaintiffs sought to prove through Martin’s oral evidence in chief that on 28 July 2017, Conglin China published a notice to its creditors on its website and advised that it was suffering from a financial deficit, which had resulted in overdue payments to them, and proposed a payment plan that involved deferring payment for six months and said that it would “try its best” to make that happen: T117.8-118.2 and CB7/2199. Peiliang denied that such a letter was published or issued at all: Peiliang’s affidavit of 11 May 2018 at [93] (responding to [54] of Martin’s affidavit of 27 February 2018, which was not read). It is not possible for me to resolve satisfactorily that issue of contested credibility without having seen and heard the evidence being given. Accordingly, I do not place any reliance upon that document, in light of the abundance of other evidence as to Conglin China’s financial position in mid-2017.

40    Between January and July 2017, Conglin China made losses equivalent to about A$19 million: CB3/844BD.

41    On 16 August 2017, Peiliang offered to pay Martin for the business’s losses. Although there is a dispute about why the offer was made, there is no dispute that the offer was made, as it was recorded in writing on WeChat: CB6/1707; SAF 29; T123.31-32 (Martin X). I do not regard that offer as constituting any form of admission of legal liability or moral responsibility.

42    Conglin China’s financial position continued to deteriorate. It lost the equivalent of about A$40 million that calendar year: CB3/844BI. In October 2017, judgment was entered against it and Peiliang in PRC for the equivalent of about A$9 million: CB8/2503.

43    In March 2018, Conglin China’s shareholders, including Peiliang, resolved to apply to a court in the PRC for bankruptcy reorganisation, on the basis that it was unable to pay its debts due: CB9/2882B, 2805B.

44    In April 2018, Conglin China produced a feasibility analysis report, recording that the company “has been trapped in a financial crisis since 2017. … Up to now, Conglin Group has found it hard to pay the loan principal and interest. Many creditors have filed law suits against Conglin Group …”. The report stated that Conglin Group had a net asset deficiency of 7 billion yuan: CB9/2805C.

45    In May 2018, a court in PRC made an order approving an application made by Conglin China and 23 related companies to enter into bankruptcy reorganisation. The order recorded that the Conglin Group was “seriously insolvent”: CB9/2828.

46    Conglin China prepared a draft proposal dated 21 April 2020 for its reorganisation, proposing that ordinary creditors should receive the equivalent of 12.64% of their debts: CB10/3205, 3211, 3212.

47    I indicated above that I would return to the topic of the financial statements sent to Bohai Trust. In about September 2016, Martin approached Bohai Trust to see if it might operate a trust fund licensed in PRC to raise capital for SEP’s education business. Martin gave evidence that he considered that such a fund was needed to comply with the law of PRC: affidavit of Martin dated 27 February 2018 at [43]; affidavit of Martin dated 27 September 2017 at [24]. That proposition was disputed as a proposition of the law of PRC, but whether Martin thought that that was the legal position is not a matter of any real significance.

48    On about 16 June 2017, an employee of Conglin China, Mr Li Wei, emailed Conglin China’s financial statements for calendar years 2015 and 2016 to an employee or representative of Bohai Trust, Mr Ai Pingping: SAF 27. The attachments to that email, being the financial statements, were not discovered. However, it is an admitted fact (SAF 28) that the financial statements provided to Bohai Trust purported to record Conglin China’s financial position as follows:

(a)    in calendar year 2015, the net assets were RMB9,783,421,061.69 and the net profit was RMB1,319,155,406.25; and

(b)    in calendar year 2016, the net assets were RMB10,806,155,208.23 and the net profit was RMB1,391,704,830.80.

The defendants sought to withdraw the admission in SAF 28 in the course of their final address on the very last day of the hearing (T566.18-20), on the basis that they wished to submit that the financial statements referred to in SAF 28 were those pertaining to the Conglin Group as a whole rather than to Conglin China. Unsurprisingly, after hearing argument from both sides, the trial judge refused leave to withdraw the admission (T573.32-38).

49    Three days later, on Monday, 19 June 2017, Mr Ai Pingping provided Conglin China’s 2015 and 2016 financial statements to a lawyer at W&H Lawyers, referring to them as the “Audit reports”: CB7/2098. Those financial statements are expressed to be for Conglin China. In the calendar year to 31 December 2015, they show total assets in the amount of RMB18,202,036,041.93 and total liabilities of 8,418,615,340.24 (CB7/2111 and 2110 respectively). The difference between those figures (namely RMB9,783,420,701.69) is very close to the amount of RMB9,783,421,061.69, given for the net assets for the 2015 year referred to in SAF 28 as having been provided to Bohai Trust. In relation to the calendar year ended 31 December 2016, those financial statements show total assets of RMB18,904,083,072.38 and total liabilities of 8,097,927,864.15 (CB7/2116 and 2115 respectively). The difference is the figure of 10,806,155,208.23 shown in SAF 28 as having been the net assets in the financial statements provided to Bohai Trust. Accordingly, it is an obvious inference that the audited financial statements sent on 19 June 2017 for calendar year 2016 at CB7/2113 are the same as the financial statements which were sent to Bohai Trust on 16 June 2017. The audited financial statements sent on 19 June 2017 for calendar year 2015 at CB7/2018 are very close to, but not exactly the same as, the financial statements sent to Bohai Trust on 16 June 2017.

50    The plaintiffs contrast what was provided to Bohai Trust by Conglin China in June 2017 with a different set of financial statements provided by Conglin China in discovery in these proceedings. The discovered financial statements show the following (CB3/844BZ):

(a)    in the calendar year ended 31 December 2015, the total assets of Conglin China were RMB3,875,598,408.41 and the total liabilities were RMB3,709,581,238.18, a surplus of less than RMB 200 million (or approximately A$35m); and

(b)    in the calendar year ended 31 December 2016, the total assets of Conglin China were shown as RMB3,777,137,653.60 and the total liabilities were RMB3,608,461,576.30, again a difference of less than RMB 200 million (or approximately A$35m).

The plaintiffs submit that the financial statements produced on discovery are a more reliable indication of Conglin China’s financial position than those provided to Bohai Trust.

51    The defendants submit that the documents produced to Bohai Trust related to the Conglin Group as a whole, rather than Conglin China in particular, thus accounting for the very large disparity in the net asset positions. However, that submission depended upon the defendants being granted leave to withdraw their admission in SAF 28 (corresponding to an admission in [43] of the defence by Peiliang and Conglin China), and as I have indicated that application was rightly refused. The defendants also draw attention to various media articles in PRC and drafts of the reorganisation proposal for Conglin China, but I do not place any weight on those documents, being either hearsay or drafts, and which (as the defendants acknowledge) related to Conglin China plus 23 related entities. The defendants also drew attention to statements in Conglin China’s application for bankruptcy reorganisation as to the asset and liability position as at February and March of 2018, but that does not appear to me to have any relevance to the financial position in 2015 and 2016.

52    Accordingly, in my view the plaintiffs are correct to say that there is a very large and unexplained disparity between the two sets of financial statements. I will return to that topic when I consider the question of reasonable grounds for making certain representations when I deal with the case concerning statutory misleading conduct.

53    Before dealing with the particular causes of action alleged by the plaintiffs, I should also deal with the evidence concerning the role of Peiliang with respect to Conglin Australia.

54    The sole appointed director of Conglin Australia was Weiping, Peiliang’s wife. As I have indicated above, the sole shareholder of Conglin Australia was Conglin China. Peiliang was the 80% shareholder in Conglin China, thereby giving Peiliang effective control of the group, and Conglin Australia was one of the companies through which Peiliang conducted business: T340.47-341.23; 342.5-6 (Peiliang XX). Peiliang described himself as overseeing the Conglin Group and its subsidiaries: Peiliang’s affidavit of 11 May 2018 at [29]. However, Peiliang said in that paragraph that he did not generally get involved in the management of the investments and projects undertaken in Australia with Martin. At [6] of that affidavit, Peiliang acknowledged that he was the Chairman and a major shareholder of Conglin China, which was the sole shareholder of Conglin Australia, but said that he did not have control of the operations of Conglin Australia, as Weiping was the director of that company. That evidence does not appear to have been the subject of any direct challenge. Although Peiliang acknowledged that he was involved in discussions about decisions to sell properties owned by Conglin Australia (T393.39-394.6; 399.16-400.36; 403.3-23 (Peiliang XX)), that evidence falls short of establishing any actual decision-making by Peiliang. In my view, the plaintiffs have failed to establish that Weiping was accustomed to act in accordance with Peiliang’s instructions or wishes, or that Peiliang effectively made decisions for Conglin Australia himself: see Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 82 ACSR 703 at [196]-[197] and [205]-[232] (Young JA, with whom Hodgson and Whealy JJA agreed). Accordingly, I reject the submission that Peiliang was a shadow director of Conglin Australia.

The Plaintiffs’ Case in Contract

55    The plaintiffs submit that a contract was formed between SEP, SEPAM, Conglin China and Conglin Australia by reason of the discussions between Martin and Peiliang in February 2016, or by reason of those discussions together with the conduct of the parties in the period to September 2016.

56    The plaintiffs submit that the terms of such a contract included that:

(a)    Conglin China would accept investments from parents in China on behalf of SEP;

(b)    Conglin China would provide a guarantee of commercial value with respect to those investments;

(c)    Conglin Australia would remit investments to SEP in Australian dollars for use in SEP’s education business; and

(d)    Conglin China would be able to borrow from the investment fund at discounted rates.

57    In relation to the discussions in February 2016, the evidence falls far short of establishing an intention to enter binding legal relations. Those discussions reflect a degree of consensus in pursuing the business proposal which Martin raised with Peiliang, but neither Martin nor Peiliang evinced any intention to be legally bound to perform the various elements of that proposal in the future. Even taking Martin’s evidence at its highest, the language used by Martin and Peiliang did not manifest any intention to be legally bound. Peiliang accepted the proposition that at the end of the February meeting he “agreed to the proposal” (T381.39-42), but the subject matter of the consensus was no more than that, a proposal.

58    Further, it strikes me as most improbable that experienced businessmen would have regarded their discussions as legally binding in the absence of agreement on many matters of important detail in relation to the business proposal. There was no specification of the proposed investment fund, or even the nature of the investments in that fund. Although it was contemplated that there would be a period of time between receipt of money by SEP and the investment of that money, there appears to have been no discussion as to how long that period would be. That was an important matter because an integral aspect of the proposal was that Conglin China would have the ability to borrow cheaply from the fund during that period, which would require some specification not only of the period but also of the rates at which Conglin China would be borrowing. Another important aspect of the proposal was that the parents of children being educated through the proposal would have a choice of a cash refund or a subscription for equity in SEP at the end of the process, however there was no discussion at all as to the price at which shares in SEP would be issued (or any formula for calculating such a price) if the parents chose the latter option. Accordingly, I reject the submission that a contract had been formed by February 2016.

59    As to the submission that a contract was formed by subsequent conduct in the period to September 2016, the plaintiffs rely upon the principle that the existence and terms of a contract can be inferred from the parties’ conduct, even if no conventional offer and acceptance can be identified: Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 at [71]-[81] (Heydon JA); Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 at [369] (Allsop J). As the reasoning in those cases indicates, the essential question is whether, in all the circumstances, the parties have manifested mutual assent to an intention to be legally bound to the essential elements of a contract. However, it is necessary to avoid the fallacy of inferring, from conduct which is not inconsistent with a contract, the conclusion that the conduct actually took place because of the contract: J.D. Heydon, Heydon on Contract (2019), [2.110]. That statement was approved in GC NSW Pty Ltd v Galati [2020] NSWCA 326 at [90] (Gleeson JA, with whom White JA and Emmett AJA agreed).

60    The conduct of the parties in the present case does contain elements which are consistent with the discussions which had taken place in February 2016. SEP enrolled three students in the education business (although only two students by September 2016). Pursuant to the relevant agreements, the students were able to pay Conglin China in RMB and Conglin China guaranteed repayment to them. Conglin China itself was a party to the student agreements, and appears to have signed two of them. Conglin China received payments in RMB with respect to the enrolment of two students in SEP’s education program. It converted those amounts to Australian dollars and transferred them to Conglin Australia, using the Quota: affidavit of Peiliang of 11 May 2018 at [65(a)-(b)]; Conglin Australia bank statements at CB4/1159A-1159F; Conglin Australia applications for foreign transfers at CB4/1163A; CB5/1551A; CB6/1682C; SAF 26. Conglin Australia transferred the amounts received from Conglin China to SEP: Peiliang affidavit of 11 May 2018 at [65(a)-(b)]; Conglin Australia bank statements at CB4/1159A-1159F; SAF 26. Conglin Australia guaranteed the repayments of three students enrolled in the program at A$500,000 per student: Peiliang affidavit of 11 May 2018 at [68]; guarantee certificate at CB6/1652BJ; student agreements at CB6/1766 (cl 6); CB6/1782 (cl 3); CB6/1797; SAF 19.

61    However, that evidence is also consistent with the business proposal proceeding on the basis that Conglin China and Conglin Australia would consider their position in relation to each application in respect of students at the time it was received, reserving a discretion as to whether to adopt the business proposal in relation to each such application, and leaving for future negotiation matters such as the terms on which Conglin China would borrow money from SEP and the terms on which parents could subscribe for equity in SEP. There is nothing to suggest that Conglin China and Conglin Australia intended to bind themselves on an indefinite basis without further negotiation to accept each and every application which was made in respect of students. Accordingly, I reject the submission that the conduct of the parties manifested a mutual intention to be legally bound by the terms that had been discussed in February.

62    It is therefore not necessary for me to deal with further reasons for rejecting the case in contract, including whether any such contract was void for uncertainty or whether there was an absence of consideration flowing to the defendants. I note, however, in relation to the latter argument that consideration must move from the promisee but it need not move to the promisor: Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13; (2005) 79 ALJR 825 at [66] (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ). It is also unnecessary to deal with the submissions as to whether there was a repudiation of any such contract and as to the measure of damages for breach of any such contract.

The Plaintiffs’ Claim for Statutory Misleading Conduct

63    The plaintiffs claim that each of Conglin China, Conglin Australia and Peiliang contravened s 18 of the Australian Consumer Law, being Sch 2 to the Competition and Consumer Act 2010 (Cth), which provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. As expressed in the final written submissions for the plaintiffs at [86], this aspect of the case is based on the allegation that in January or February 2016, Conglin China, Conglin Australia and Peiliang each represented to the plaintiffs that Conglin China and Conglin Australia would be able to:

(a)    exchange currencies and transfer funds between PRC and Australia, including in sufficient amounts to allow the education business to operate as planned; and

(b)    provide guarantees for the purpose of the education business that would provide reasonable assurance to the parents that they would receive the repayments or would otherwise have real value

(each and together, the Representations).

64    It is also alleged that each of the Representations related to future matters, being the ability of Conglin China and Conglin Australia to take certain steps in the future. The plaintiffs rely on s 4(2) of the Australian Consumer Law which casts an evidential burden on the defendant to adduce some evidence of reasonable grounds for making a representation with respect to any future matter, failing which that party is taken not to have had reasonable grounds for making the representation. However, that evidential burden does not displace the onus which rests on the plaintiff to demonstrate that the defendant did not have reasonable grounds for making the representation: s 4(3). If the person is found not to have had reasonable grounds for making a representation with respect to any future matter, the representation is taken for the purposes of Sch 2 to be misleading: s 4(1).

65    In their final written and oral submissions, the plaintiffs made clear that there were two aspects to their allegations concerning the notion of “ability” which was a fundamental feature of the Representations, namely factual ability and legal ability. In broad outline, the plaintiffs submitted that there were no reasonable grounds for making the Representations in relation to both those senses of “ability”, due to the financial position of Conglin China as a matter of fact, and due to the restrictions inherent in the Quota as a matter of law.

66    The first issue which arises concerns the extraterritorial application of the Australian Consumer Law. The plaintiffs rely on two provisions in submitting that s 18 of the Australian Consumer Law applies to what took place at the meeting between Martin and Peiliang in PRC.

67    First, the plaintiffs rely on s 5(1)(c) and (g) of the Competition and Consumer Act 2010 (Cth), which have the effect of extending the operation of the Australian Consumer Law to “bodies corporate incorporated or carrying on business within Australia”. Conglin Australia is an entity incorporated under the Act and is plainly a body corporate incorporated in Australia. Conglin China, however, is not such a body.

68    As to Conglin China, the plaintiffs submit that at the relevant time it was carrying on business in Australia. The plaintiffs rely upon the facts that:

(a)    on three occasions Conglin China received a payment for an education business and investment to be performed in Australia, and paid monies for that purpose to Conglin Australia;

(b)    Conglin China offered three guarantees with respect to payments to be made to and from an education business in Australia;

(c)    Conglin China held the Quota permitting the transfer of monies from Conglin China to Conglin Australia;

(d)    Conglin China gave money to Conglin Australia to purchase a factory in Lidcombe: T341.40-44; 401.3 (Peiliang XX); and

(e)    Conglin China engaged in activities with respect to the education business in Australia through Peiliang meeting with Martin in Australia.

69    It is well established that the notion of carrying on a business typically involves a series or repetition of acts on a continuous basis and having a permanent character: Valve Corporation v Australian Competition and Consumer Commission [2017] FCAFC 224; (2017) 258 FCR 190 at [144]-[145] (Dowsett, McKerracher and Moshinsky JJ). I do not regard the two or three occasions in which Conglin Australia performed a role in the education business of SEP as the carrying on of a business by Conglin China. The business was one carried on, if at all, by SEP and perhaps also by SEPAM. The involvement of Conglin China was too sporadic, intermittent and transitory to constitute the carrying on of a business by it. In any event, the transactions with the three students all occurred after the Representations were allegedly made, and therefore cannot establish the carrying on of a business at the relevant time. The investment in the factory in Lidcombe was by Conglin Australia (T341.37-38 (Peiliang XX)), in relation to which Conglin China was merely a shareholder and funder, and was in any event a single and isolated transaction. Accordingly, s 5(1)(c) and (g) do not apply to Conglin China.

70    The plaintiffs also rely on s 32(1)(d) of the Fair Trading Act 1987 (NSW). That section provides as follows:

(1)    The Australian Consumer Law (NSW) applies to and in relation to:

(a)    persons carrying on business within this jurisdiction, or

(b)    bodies corporate incorporated or registered under the law of this jurisdiction, or

(c)    persons ordinarily resident in this jurisdiction, or

(d)    persons otherwise connected with this jurisdiction.

(2)    Subject to subsection (1), the Australian Consumer Law (NSW) extends to conduct, and other acts, matters and things, occurring or existing outside or partly outside this jurisdiction (whether within or outside Australia).

Section 28(1) provides that the text of the Australian Consumer Law applies as a law of New South Wales, and as so applying may be referred to as the Australian Consumer Law (NSW).

71    In the context of equivalent language in various state legislation, it has been observed that the “test of ‘otherwise connected’ in paragraph (d) should be applied liberally and a remote or general connection between the conduct complained of and the relevant state or territory should be sufficient”, and means something other than the other concepts referred to in provisions corresponding to s 32(1): Australian Competition and Consumer Commission v Prysmian Cavi E Sistemi Energia SRL (No 4) [2012] FCA 1323; (2012) 298 ALR 251 at [264]-[265] (Lander J), noting that leave to appeal was refused in Nexans SA RCS Paris v Australian Competition and Consumer Commission [2013] FCA 192 (Besanko J).

72    The plaintiffs submit, and I accept, that Conglin China and Peiliang were persons “otherwise connected” with New South Wales. Conglin China was the sole shareholder of Conglin Australia, a company residing and conducting business in New South Wales, and Peiliang was the chairman and 80% shareholder of Conglin China.

73    As to whether the Representations (if made) were made “in trade or commerce”, s 2 of the Australian Consumer Law defines “trade or commerce” in a way which confines it to trade or commerce within Australia or between Australia and places outside Australia. In my view, the alleged Representations satisfy the latter of those concepts, as they concerned trading and commercial activities by Peiliang and Conglin China in PRC in collaboration with the plaintiffs in Australia.

74    I turn then to the question whether the Representations were made, and if so by whom. The agreed fact that the discussions in early 2016 included the proposition that Conglin China would provide guarantees to the parents in respect of the repayment of the investment conveyed implicitly that Conglin China would be able to provide such guarantees, and that those guarantees would provide reasonable assurance to the parents that they would receive the repayments and would otherwise have real value. That was a Representation which was made by Peiliang and by Conglin China. While Martin’s evidence proves that that Representation was made in the discussions in January or February 2016 in PRC, the extraterritorial effect of the Australian Consumer Law (NSW) under s 32(1)(d) of the Fair Trading Act applies to that Representation. Similarly, the agreed fact that in the discussions in early 2016, Peiliang agreed to the use of Conglin China’s Quota for the purpose of exchanging currencies and transferring funds between PRC and Australia for the purpose of the business conveyed implicitly that Conglin China would legally be able to exchange currencies and transfer funds in that way, including in sufficient amounts to allow the proposed education business to operate as planned. That was also a Representation which was made in PRC, but was captured by the extraterritorial effect of the Australian Consumer Law (NSW). That representation was made by both Peiliang and Conglin China.

75    In my view neither Representation was made by Conglin Australia. Peiliang was not a director (whether appointed or acting as such) of Conglin Australia, and there is insufficient evidence that he was an agent or other person within the meaning of s 84(2) of the Competition and Consumer Act 2010 (Cth) whose conduct was attributable to Conglin Australia. Moreover, the Representations pertain to matters to be performed by Conglin China, rather than Conglin Australia, and accordingly would not have been treated by the ordinary recipient of the Representations as having been made by Conglin Australia.

76    The next issue is whether the Representations were misleading. Dealing first with the Representation concerning the ability to exchange currencies and transfer funds between PRC and Australia, the terms of the Quota indicate clearly that it was available lawfully only for increases in Conglin Australia’s investment capital, and could not be used for the purposes of SEP’s education business. Accordingly, it was objectively misleading for Peiliang and Conglin Australia to represent that Conglin China would be able to exchange currencies and transfer funds between PRC and Australia for the purpose of the education business. Peiliang accepted that the stated purpose for the Quota was not a true reflection of Conglin China’s actual purpose: T383.34-36.

77    As to the Representation that Conglin China would be able to provide guarantees for the purposes of the education business, which would provide reasonable or valuable assurance to the parents that they would receive the repayments, the question whether Conglin China and Peiliang had reasonable grounds to make that Representation, which was with respect to a future matter, depends upon the material available to them in early 2016 pertaining to the financial position of Conglin China. Evidence has been adduced as to such reasonable grounds, so as to discharge the evidential burden imposed by s 4(2) of the Australian Consumer Law, in that the financial statements provided to Bohai Trust in June 2017 showed that as at 31 December 2015, Conglin China had a very healthy net asset position of almost 10 billion RMB. The evidence indicates that those financial statements had been audited. The very large disparity between those financial statements and the ones discovered in these proceedings, which show a net asset position at 31 December 2015 of less than 200 million RMB, has not been explained. However, the fact that the financial statements provided to Bohai Trust were audited, in my view, gave Conglin China and Peiliang reasonable grounds for representing that Conglin China would be able to provide guarantees of sufficient commercial substance to fulfil the purpose for which they were intended in the business model. I reject the plaintiffs’ contention that Peiliang knew in June 2017 when financial statements were provided to Bohai Trust that those financial statements materially overstated Conglin China’s financial position. In any event, the submission is directed to the wrong timeframe. The difficulties which confronted Conglin China in 2017 appear to have been unexpected, and the evidence does not disclose any basis on which those difficulties were, or should have been, anticipated in early 2016. Accordingly, in my opinion, Conglin China and Peiliang did have reasonable grounds for making that Representation at the time it was made.

78    The next issue is whether the plaintiffs relied on the Representation which I have found to be misleading, namely the Representation that Conglin China would have the legal ability to exchange currencies and transfer funds between PRC and Australia to allow the education business to operate as planned. Martin gave evidence in his affidavit of 27 February 2018 at [29] that as a result of the conversations which he had with Peiliang in early 2016, he formed the belief that the SEP business would be able to operate successfully because Conglin China would be able to provide a valuable guarantee to the students’ parents and provide foreign exchange for the business, and he says he would not have proceeded with the SEP business if he had not formed that belief. In my view, there are insuperable obstacles confronting the plaintiffs in establishing such reliance.

79    The defendants submit that Martin was fully aware of the terms of the Quota. The defendants submit that he was a solicitor, and it was the terms of the Quota which indicated the misleading nature of this Representation. In support of that submission, the defendants refer to evidence that Martin was involved in the establishment of the Quota prior to the inception of the business: affidavit of Martin dated 27 February 2018 at [18]. The problem with that submission is that [18] concerns events which occurred in “2015 (or possibly earlier)”. The relevant document was one created on 29 March 2016, well after the establishment of the foreign exchange quota to which Martin was referring at [18]. A firmer evidentiary basis for the submission, however, is provided at [24] of the same affidavit (referred to at footnote 36 of the defendants’ opening written submissions), in which Martin says that in about February and March 2016, he frequently communicated with Qinggang Wang, a representative of Conglin China, to obtain the foreign exchange certificate which would permit the transfer of funds between PRC and Australia. Martin then refers by way of annexure to a copy of the Quota dated 29 March 2016, and a translation of that document. The paragraph concludes with the statement that the Quota permits the transfer of monies from Conglin China, as holding company, to its wholly owned subsidiary, Conglin Australia. Although Martin does not explicitly state in that paragraph that he received a copy of the Quota in about March 2016 pursuant to his requests, that appears to me to be the ordinary and natural meaning of the paragraph, particularly in circumstances where Martin annexed the document and gave no evidence to the effect that he did not receive it at the time. Indeed, senior counsel for the plaintiffs said in his opening oral address, after referring to a document dated 16 March 2016 that that was “shortly before the evidence will show that Mr Wang provided the foreign exchange certificate to Martin”: T8.25-27. Further, Martin appears to have made a concession to that effect in his cross-examination at T134.26-32. Accordingly, I find that Martin did have a copy of the Quota on or about the date that it bears, namely 29 March 2016. He was therefore fully aware of the terms of the Quota, and as a solicitor, he would have read it and would have drawn the obvious conclusion that it did not permit the exchange and transfer of funds for the education business. Martin therefore cannot have relied on the Representation, as he was actually aware of its misleading nature.

80    Why then did Martin proceed with the business, despite knowing that an important element of the business could not lawfully be performed? In my view, the answer is that Martin was not concerned about the legalities of the exchange of currencies and transfer of funds, provided that as a matter of fact that exchange and transfer could be effected. If the exchange and transfer of funds could be disguised in such a way as to appear to be lawful to any relevant law enforcement agency, then Martin was untroubled.

81    I draw that inference from the insight into Martin’s character provided by the evidence concerning Martin’s role, as principal solicitor of W&H Lawyers, in giving legal advice to Peiliang and numerous related entities between 2011 and August 2017. Martin denied that he and W&H Lawyers were legal advisers to Peiliang and various of his entities (except for very limited instances): affidavit of Martin of 27 February 2018 at [7]-[12], [16]; affidavit of Martin of 16 July 2018 at [7], [15], [24]-[26]. That was a remarkable line for Martin to take, given that there is an abundance of documentary evidence indicating the contrary, namely:

(a)    numerous letters of engagement: CB2/580, 583A, 584, 594, 604, 614, 745, 749, 763, 780 and 3/803;

(b)    invoices rendered: CB2/793, 3/802A, 820A, 820C, 5/1574A, 6/1677A, 6/1759A, 7/2365A, 8/2366, 2432, 2433, 2509; and

(c)    trust statements and ledger entries: CB6/1722A, 1895, 1983, 8/2369, 2421, 2514, 2520, 2549A, 2555, 2561, 2562, 9/2890, 2920A.

82    When asked in cross-examination about the costs agreements Martin caused to be issued to Peiliang and his entities, he simply said that he used the “wrong template” in the early years of the operation of the firm: T177.8, 177.11, 178.6. I reject that explanation as wholly implausible. When asked about costs agreements that were issued at later periods of time, Martin said that he only issued those agreements for “compliance purpose”: T188.40, 188.43. That answer in itself demonstrates a propensity to create an appearance of lawfulness and legitimacy by documentation, irrespective of the underlying reality. Martin then gave evidence of having been previously warned by the Law Society, apparently with respect to a failure to enter into necessary costs agreements: T189.33. It is difficult to reconcile his initial evidence that in the “early days” costs agreements were issued when they should not have been (meaning that he had issued too many costs agreements), and his later evidence that he had been in trouble for failing to issue costs agreements, so had decided to issue costs agreements. I accept that the costs agreements, on their face, reflect the fact that Martin and W&H Lawyers were acting as the lawyers for Peiliang and various related entities. That is consistent with the notification of an insurance claim which Martin made to LawCover in relation to these proceedings: T190.28-191.32 (Martin XX). Martin’s evidence showed him to be a witness who would give whatever answer was necessary to suit his forensic and commercial purpose at any given time, irrespective of its consistency with other evidence, including his own. To my mind, that revealed a witness who would not have been in the least bit troubled by a flaw in the legalities of using the Quota for the purpose of the proposed SEP business, provided that the unlawfulness was not detected. As events transpired, the Quota was used successfully, albeit unlawfully, in transferring funds to SEP in relation to two students: affidavit of Martin of 27 February 2018 at [40]; affidavit of Qinggang Wang of 30 April 2018 at [36].

83    To the extent that Martin’s evidence of reliance at [29] of his affidavit of 27 February 2018 applies to the Representation concerning the ability of Conglin China to provide foreign exchange to the business, I reject that evidence. Accordingly, the plaintiffs have failed to establish any entitlement to damages in relation to any misleading conduct. Taken together with my findings concerning the contractual cause of action, the claims made by the plaintiffs fail.

84    A consequence of the failure by the plaintiffs to establish their claims is that the freezing orders made by Farrell J on 27 September 2017 and varied on 4, 9 and 27 October 2017, 2 November 2018 and 4 March 2019 must be discharged. It is not necessary to consider whether those orders should be discharged in any event on the ground that the undertaking as to damages given by the plaintiffs on 27 September 2017 may now be worthless.

The Cross-Claim

85    The cross-claim seeks relief under three heads:

(a)    damages for negligent misrepresentations made to the cross-claimants, being Peiliang and Conglin China;

(b)    damages for misleading or deceptive conduct comprising representations made to the cross-claimants; and

(c)    to the extent that Conglin China is obliged to pay any money under the plaintiffs’ claim relating to the guarantees it issued to parents under the SEP business program, under the Counter Guarantee given by W&H Lawyers, W&H Lawyers is obliged to pay Conglin China an equivalent amount.

That third aspect has fallen away, not only because I have found that the plaintiffs’ claims fail, but also because the parties themselves in their closing submissions treated it as academic: see the defendants’ outline of submissions on the cross-claim at [58], and the plaintiffs’ oral submissions at T588.29.

86    The damages sought are in the amount of A$1,040,000, comprising A$800,000 contributed by way of capital to SEP, and a further amount of A$240,000 which the cross-claimants allege was a capital contribution to SEP, and the cross-respondents allege was a loan.

87    The representations which form the basis of the allegations of negligent misrepresentation and misleading conduct were representations allegedly made by Martin to Peiliang with respect to the nature and profitability of the business, the prospects of the business succeeding and the number of students Martin anticipated in the first and subsequent years. It was an admitted fact that Martin represented to Peiliang and Conglin Australia in the discussions in early 2016 that the business would accept around 100 students in its first year of full operations and higher numbers in subsequent years: SAF 14.1. Peiliang’s evidence as to the predictions of large profits made by Martin in those discussions was disputed. It is very difficult, in the absence of having seen and heard the witnesses, to decide which of Martin and Peiliang is to be preferred on those disputed conversations.

88    In those circumstances, I propose to take the cross-claimants’ evidence and submissions as to the representations which were made at their highest, and then to analyse whether the cross-claim has merit on that basis. I have referred above to the agreed fact that Martin told Peiliang that the business would accept around 100 students in its first year of full operations: SAF 14.1. The cross-claimants submit that that was a representation that the business would have 100 students in the first year, and I will proceed on that basis. In circumstances where each student was to provide at least A$500,000 (as to which the cross-claimants’ written submissions on the cross-claim wrongly refer to $3,500,000 at [37]), which SEP could invest and otherwise utilise, the cross-claimants submit that Martin effectively represented to Peiliang that they would have at least $50 million available to invest in the first year alone. The cross-claimants submit that even a moderate return on an investment of $50 million would be substantial. The cross-claimants then point to unchallenged evidence that Martin suggested to a representative of Conglin China that the funds would be used on investments returning 50-100% per annum: affidavit of Qinggang Wang dated 30 April 2018 at [21]. The cross-claimants refer also to the agreed fact that Martin represented that the business would accept higher numbers of students in years thereafter: SAF 14.1. The cross-claimants submit that a Business Plan provided to Peiliang in June 2016 (Peiliang’s affidavit of 11 May 2018 at [63]) provided for 50 students to be enrolled by August 2016, then a further 50 students in a Melbourne office by February 2017, and in Sydney alone it was expected that by June 2018 there would be 100 students, bringing in funds of $50 million: CB5/1318 at 1320, 1324. Although that document was not pleaded as containing representations on which the cross-claimants sue and is not relied on for that purpose (cross-claimants’ closing written submissions at [38]), the cross-claimants submit that it is useful in confirming the nature of the oral representations that Martin had already made. The cross-claimants then refer to the dispute as to further representations which were allegedly made, specifically that Peiliang says that Martin told him that:

(a)    Peiliang did not need to worry about finding students: T305.37-42;

(b)    Martin had done in-depth research, and could get as many as 6,000 students in Sydney: T305.46;

(c)    Martin knew student recruitment officers in key universities in both Melbourne and Sydney who would contribute to recruitment of students: T306.1-4;

(d)    Peiliang did not need to worry about the money he invested, his investment was safe, and would bring him “loads of profit”: affidavit of Peiliang of 11 May 2018 at [45];

(e)    Martin himself was putting money into the business because it was not going to fail (a submission made without any reference to evidence); and

(f)    to the extent Conglin China was required to give a guarantee, it was purely for promoting the SEP project (T308.44; 309.12-24), and Martin ultimately agreed to offer a counter guarantee from W&H Lawyers (although this last aspect is now academic).

89    I will assume (without deciding) for the purpose of analysis that all of those representations were made, other than the representations concerning the guarantee and counter-guarantee in sub-paragraph (f) in the preceding paragraph, which I understand are now academic. If (contrary to that understanding) there remains a practical point to the cross-claimants’ allegation that Martin represented to Peiliang that the Conglin China guarantee was purely for promoting the SEP project, then I reject the allegation (and Peiliang’s evidence to that effect at T308.38-45, 309.12-24) as inconsistent with the very nature of the guarantee as a legally binding obligation. The guarantees by Conglin China could not serve a marketing purpose unless they were enforceable in accordance with their terms. Further, I will assume (without deciding) that Martin did not have reasonable grounds for making the representations set out in the preceding paragraph (other than those pertaining to the guarantees and counter-guarantees) with respect to future matters.

90    However, I reject the allegation that Martin and the other cross-respondents owed a duty of care to Peiliang and Conglin China in making those representations. An essential element in establishing a duty to exercise reasonable care in making a statement or giving advice is that it must be reasonable in all the circumstances for the recipient to rely upon the utterance of the speaker: Tepko Pty Ltd v Water Board [2001] HCA 19; (2001) 206 CLR 1 at [47] (Gleeson CJ, Gummow and Hayne JJ). As I conclude below, the cross-claimants did not rely on the alleged representations, and therefore cannot have relied reasonably on them. It is difficult to understand why the cross-claimants put the negligent misrepresentation case as their primary cause of action, in circumstances where establishing a case of strict liability for statutory misleading conduct is almost invariably less onerous for a claimant than proof of negligence on the same facts: Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357 at [99] (Heydon, Crennan and Bell JJ).

91    Even making the assumptions in favour of the cross-claimants to which I have referred above, as to the representations being made and being misleading, the cross-claim fails at the point of having to establish actual reliance on the alleged misrepresentations. In a skilful piece of cross-examination, Mr Lawrance SC extracted clear and unequivocal admissions from Peiliang that:

(a)    at the meeting in February 2016, Martin explained that the SEP proposal was a new idea and a start-up: T380.45-381.3;

(b)    Martin said he was planning to recruit 100 students in the first year and high numbers in the later years: T381.7-10;

(c)    it was obvious to Peiliang that the success of the project depended on recruiting students from wealthy families: T381.12-15; and

(d)    Peiliang understood that there was no reliable way of predicting how many students would sign up: T381.17-20.

92    Accordingly, Peiliang knew that he could not rely on Martin’s predictions as to student numbers in the absence of any reliable way of predicting those numbers. Further, those student numbers were the basis of any success which the project might enjoy, and thus any predictions as to the profitability of the project were similarly unreliable. While Peiliang trusted Martin’s business judgment and that was the basis of his decision to invest (T381.31-35), Peiliang could not have relied on the predictions of student numbers or profitability which were the subject matter of the alleged representations.

93    In those circumstances, even taking the cross-claimants’ case as to misleading conduct relating to student numbers and profitability at its highest and assuming the corresponding questions of contested credibility in their favour, the essential ingredient of reliance has not been established on the basis of Peiliang’s express admissions as to his state of mind. It is not necessary to deal with the cross-claimants’ elaborate submissions as to why the business ultimately failed. Accordingly, the cross-claim should be dismissed.

94    Counsel for the defendants indicated at a case management hearing yesterday that, if both the plaintiffs’ claim and the cross-claim were successful, then the defendants would wish to have the opportunity of contending for a set-off, with apparent reference to s 553C of the Act. That was not an issue addressed at the hearing before Farrell J, given that the hearing took place long before any of the companies involved were wound up. In light of my conclusion that both sets of claims should be dismissed, this issue is academic.

Costs

95    Each of the rival sets of parties has failed in the claims that they have made, and has achieved corresponding success in resisting the claims made against them. I cannot see any way of conveniently separating out the evidence, or steps in the preparation of the case, relating to each of those rival claims, and the overlap between them is so substantial that any exercise of separation or apportionment would ultimately be futile. In those circumstances, the appropriate order is that there be no order as to costs.

Associate:

Dated:    21 July 2023