Federal Court of Australia

Zhang v Zhang [2023] FCA 1660

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application brought by the first applicant dated 24 November 2023 be dismissed.

2.    The third and fourth respondents be discharged from the undertaking as to damages given to Beach J on 6 October 2023.

3.    The first applicant pay the first and second respondents’ costs of the application.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J

Introduction

1    By interlocutory application dated 24 November 2023, the first applicant seeks to discharge a freezing order made by Beach J on 6 October 2023. The freezing order was made on the application of the respondents in an inter partes hearing, in anticipation of them bringing a cross-claim, which has since been brought, although only by the first and second respondents.

2    I heard the application on 13 December 2023. It is desirable that I rule on it before the end of term.

3    The first applicant (James Zhang) and the first respondent (Eric Zhang) are not related. At the hearing before me, counsel used their first names, for the sake of convenience and to avoid confusion. I will do likewise, intending no disrespect.

4    At the hearing before Beach J, James chose not to call evidence and eschewed the opportunity for an adjournment. The freezing order has not been appealed, nor has any application been made to vary it.

Background

5    James runs “the APH Group”, which invests and develops in the commercial, health care, hospitality, retail and residential property sectors.

6    In about August 2016, Eric, who runs “the Tasman Group”, first met James in China. They discussed investing in a development of residential apartments in Darlinghurst, NSW.

7    Shortly afterwards, Eric told James that he would be conducting his due diligence on him and his companies, and he instructed his employees to do so.

8    At about the same time, they also discussed participation in a development of land in Campsie, NSW.

9    As a result of these discussions, in February 2017 Eric caused Tasman Development Holdings Pty Ltd (TDH, the second respondent) and another company controlled by him, Tasman Capital Management Pty Ltd, to pay certain deposits on the “Campsie Land” of $2.4 million.

10    On 20 April 2017, Eric caused TDH to transfer $5.5 million to 10 London Street Pty Ltd (10LS).

11    James, however, did not disclose to Eric that he had been charged, and on 20 December 2016 convicted, by the Futian District People’s Court in China of “the illegal transfer of a land use right by means of fraudulent lawsuits”, and that he received a suspended term of imprisonment of three years and four years’ probation, and financial penalties.

12    10LS became the registered proprietor of the Campsie Land on 4 October 2017.

13    TDH and 10LS formalised their agreement relating to the $5.5 million transfer on about 9 November 2017 by a document called the “Tasman Loan Agreement”.

14    On 20 July 2017, TDH and another company controlled by Eric, TFM Chatswood Land Pty Ltd (TFM Chatswood), and a company controlled by James, Ausea Capital Investments Pty Ltd (Ausea), entered into a cooperation deed relating to a development of property in Wolli Creek, NSW (Wolli Creek Development Cooperation Deed). Ausea is the third applicant in this proceeding, which I will now briefly summarise.

The proceeding

15    On 7 August 2023, James, Yong Heng Australia Pty Ltd, Ausea, and Australia Bai Fu Xin (International) Investment Pty Ltd (collectively, the applicants) commenced this proceeding against Eric, TDH, Xinran (Yvonne) Liu (Ms Liu, the third respondent), and Northwalker Realty Pty Ltd (Northwalker, the fourth respondent) (collectively, the respondents).

16    The relief sought includes orders permanently preventing, extinguishing, and/or transferring the obligation of payment by 10LS to TDH under the Tasman Loan Agreement; declarations that the respondents engaged in misleading or deceptive conduct and/or unconscionable conduct; and orders for the payment of damages, compensation, and indemnity pursuant to statute and contract including damages for alleged breaches of the Wolli Creek Development Cooperation Deed.

17    Mr CM Archibald KC, who appeared with Mr P Annabell for the applicants, summarised the pleaded issues in his oral submissions with admirable brevity, in these terms:

Broadly speaking, the – at the heart of the dispute for the Campsie project is that the respondents did not disclose to APH Group a valuation for the Campsie property which was much less than the price at which we bought in, a non-disclosure of value – valuation. And for the Wolli Creek project, the allegations centre upon a misrepresentation as to the level of presales for the apartments or premises that were to be constructed as part of Wolli Creek. Where the cross claim brought by Eric Zhang, the first respondent, arises is that he pursues repayment of the Tasman loan, the loan I referred to as pleaded on the statement of claim as having been swept within the buyout of the Campsie project. The cross claim contends that the Tasman loan was left out of the buyout and is pursued for repayment.

18    In late November 2023 (that is, almost two months after the freezing order was made) Eric and the second respondent filed their defence and cross-claim.

19    Ms Liu is the Head of Finance of the Tasman Group, Eric’s personal assistant, and the sole director of Northwalker, which carries on a real estate business. Mr D Merriman of counsel appeared for both Ms Liu and Northwalker on this application.

20    The cross-claim includes an allegation by Eric and TDH that, had Eric known of James’s conviction, and the circumstances surrounding it, he would not have caused TDH to lend the $5.5 million to 10LS. Eric alleges that he would also not have entered into the Wolli Creek Development Cooperation Deed or the “Buy-Out Agreement” alleged by the applicants in their statement of claim.

21    Mr D Pritchard SC appeared with Mr N Kabilafkas for Eric and TDH. They summarised the purport of the cross-claim in their written submissions as follows:

The first and second respondents, as cross-applicants, plead at SOCC [44] that they had a reasonable expectation that James would have disclosed his other names and his arrest, conviction, sentence, and fine by reason of the parties’ discussions; James’ representations about himself as a businessman; their joint participation in property developments; and James’ knowledge that Eric was conducting due diligence (these matters being pleaded at SOCC [32]-[39] and [42]). Failure to disclose those matters would consequently constitute misleading [or] deceptive conduct contrary to section 18 of the Australian Consumer Law, section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth), and section 1041H of the Corporations Act 2001 (Cth): SOCC [47] and [50].

If the obligation of 10LS to repay the Tasman Loan Agreement is extinguished or permanently stayed, as the applicants seek in their SOC, then Eric and TDH have suffered the loss of their money, which they can claim in damages: SOCC [51].

The prima facie value of the loss of the first and second applicants is $5.5 million plus statutory interest (SOCC [51]), which was the sum claimed in the Freezing Order Application and contained in the Freezing Orders, as made.

22    I will now return to the matter of the freezing order, and the judge’s reasons for making it.

Judge’s reasons for making freezing order

23    Having heard from counsel for both James and Eric, the learned judge granted a freezing order in substantially the terms sought by the respondents, reasoning as follows:

Generally speaking, I am satisfied on the affidavit material that has been put before me, and solely by the respondents, that there is a good prima facie case made out for the potential claim concerning the loan of $5.5 million. I only have evidence from the respondents. There has been no affidavit material filed in opposition to this application by the applicants, which makes me more comfortable to reach the view that there is a good prima facie case that has been shown. In terms of the disposition of assets, it seems beyond doubt that the first applicant disposed of a half interest in some real property in Victoria for no consideration and has done so at a point in time that suggests that it may have been done to put his assets beyond reach of potential claims.

It seems on one view of the matter arguably to have involved a transfer to his wife, but in my view, that does not really change the – the potential sting in relation to the question raised concerning that transaction. This morning I gave Ms Zambelli, counsel for the first applicant, an opportunity to explain the timing of the transaction, another – seeking to defeat the hypothesis of the respondents. There has been nothing properly put before me to explain the timing of that transaction, which obviously heightens the potential difficulty with it. In terms of the principles that apply to applications of this type, they have been neatly set out in the helpful written submissions filed by the respondents, and I am satisfied in all the circumstances that a freezing order should be made in the circumstances based on the evidence, the written submissions filed and the oral submissions of counsel this morning.

There have been some modifications to the freezing order. Obviously, an undertaking as to damages is essential, and that will be, together with the other undertakings given by the respondents, the price of my making this order. In terms of any further variation or discharge to this order, this matter is coming before O’Callaghan J on 30 November, and, of course, it is open to the first applicant if he wishes to do so to apply for a discharge or a variation of that order based upon any new material, but that will be a matter for him and his legal advisors to consider, not me. I think that is all I need to say for present purposes. Mr Pritchard, you will submit the amended order later this morning and I will try and get that done and out to the parties by lunchtime.

Application to discharge freezing order

24    Mr Archibald read the following affidavits:

(a)    the affidavit of James affirmed 22 October 2023, which provided disclosure of his assets pursuant to the orders of Beach J, and another affidavit of James affirmed 12 December 2023 concerning the purchase of a Rolls Royce and the Baulkham development;

(b)    the affidavit of Joshua Aaron Pederick, solicitor at Norris Coates Lawyers, affirmed 17 November 2023, which exhibited documents relating to the transfer of James’s half interest in the matrimonial home to his wife;

(c)    the affidavit of Ruiyu (Yoyo) Zhang, Chief Financial Officer of the APH Group, affirmed 24 November 2023, which referred to the Group’s dealings with lenders;

(d)    the affidavit of Janet Mary Vivienne Whiting AM, solicitor for the applicants, affirmed 29 November 2023, about which little was said; and

(e)    the affidavit of Henry Lun, Capital and Investment Director of the APH Group, affirmed 2 December 2023, which also dealt with the topic of the Group’s dealings with lenders.

25    Mr Pritchard read the following affidavits (although it was not necessary for him to take me to much of the material contained in them):

(a)    affidavits of Eric affirmed 29 September and 6 December 2023;

(b)    the affidavit of Siyu Zhang, solicitor for the first and second respondents, affirmed 29 September 2023;

(c)    the affidavit of solicitor Minghan (Stephen) Zheng, an expert Chinese solicitor, affirmed 29 September 2023, which detailed the nature of the crime committed by James in China;

(d)    the confidential affidavit of Yu Chen, solicitor for the first and second respondents, affirmed 29 November 2023;

(e)    the affidavit of Yu Chen affirmed 6 December 2023;

(f)    the affidavit of Guoqiang Zhang, sole director of TDH, affirmed 6 December 2023; and

(h)    affidavits of Siyu Zhang affirmed 11 and 12 December 2023.

26    The third and fourth respondents relied on the affidavit of Ms Liu affirmed 6 December 2023.

The applicable principles

27    The applicable principles were not ultimately in dispute. The power to discharge an interlocutory order is ordinarily only exercised in exceptional circumstances, bearing in mind the overarching principle of the finality of litigation. A mere change of heart, for example, will not do. Nor will the discretion to vary orders be invoked for the purpose of allowing a party to present its arguments a second time to its better advantage.

28    The relevant principles are helpfully explained further in the reasons of Young J in Paras v Public Service Body Head of the Department of Infrastructure (No 2) [2006] FCA 652; (2006) 152 IR 352 at 354 [4] and [5]:

The first issue which arises concerns the application to discharge the injunctive order made on 19 May 2006. There is a preliminary question as to the circumstances that must be demonstrated before a court would consider varying or discharging an interlocutory injunction. Under O 35, r 7 of the Federal Court Rules (Cth), the Court has power to vary or set aside an order. Under subr (1), the power extends to any judgment or order before it has been entered. After entry, the power is limited to stipulated cases which include the case where the order is interlocutory: see subr (2)(c). In each case, the power is discretionary, and the authorities in this Court indicate that it is ordinarily only exercised in exceptional circumstances … Where the order has not been entered, an order varying or setting aside the terms of a judgment can also be made to correct error or oversight or to give effect to a review of the contemplated order so that the orders made more adequately deal with the matter as litigated before the Court …

The authorities indicate that the kind of exceptional circumstances that might attract the power of discharge or variation include where an interlocutory order was obtained by fraud or non-disclosure of material facts, or through an accident or mistake that occurred without the fault of the parties seeking the relief under O 35, r 7 … The court’s discretion to vary or set aside an order is to be exercised with great caution having regard to the importance of the public interest in the finality of litigation … Similar principles apply to the variation or discharge of final orders. Further … the rule is not an alternative to the appellate procedure in respect of interlocutory judgments, nor is it to be invoked for the purpose of allowing a party to present a case a second time to its better advantage. In my opinion, these principles apply, a fortiori, where the party applying for discharge of an interlocutory order seeks to reargue the issues that have already been determined by reference to additional evidence that was available to it on the earlier occasion but which it chose not to advance …

(All citations to cases omitted).

29    Further, as Buckley LJ (with whom each of Shaw LJ and Oliver LJ agreed) said in Chanel Ltd v FW Woolworth & Co Ltd [1981] 1 WLR 485 at 492-93:

The defendants are seeking a rehearing on evidence which, or much of which, so far as one can tell, they could have adduced on the earlier occasion if they had sought an adequate adjournment, which they would probably have obtained. Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter. The fact that he capitulated at the first encounter cannot improve a party’s position.

James’s submissions

30    James submitted that the freezing order should now be discharged for these reasons.

31    First, he submitted that a cross-claim has now been filed, on which the current operation of the freezing order now rests. At the time the freezing order was made, no cross-claim had been filed by any party against James. Rather, Eric asserted that he had a good arguable case against James based on an asserted claim for misleading or deceptive conduct for damages of $5.5 million plus statutory interest. That cross-claim, so James contends, does not disclose a good arguable case.

32    Secondly, he submitted that further information has been disclosed by the respondents, following the making of the freezing order, about their assets and liabilities, which casts significant doubt on their ability to make good their undertakings as to damages.

33    Thirdly, he submitted that as a result of the freezing order, James’s business activities have been materially affected. The evidence relied on in that regard was that one lender has withdrawn from negotiations with the APH Group for a facility worth $4.2 million; and a second has renegotiated the terms of its facility to require additional security, because of the existence of the freezing order.

34    Fourthly, he submitted that there is no genuine risk that he will dissipate his assets.

Eric’s submissions

35    Eric submitted that I should not exercise the discretion to discharge the freezing order for these reasons.

36    First, he submitted that the applicants are in continuing breach of the freezing order, because the disclosure of assets required by those orders has been inadequate – and being in breach, so he said, the applicant should be disentitled from seeking the relief he now seeks.

37    Secondly, he submitted that there has been no material change since the hearing before Beach J. He said that the applicants had made a deliberate forensic decision not to go into evidence before Beach J, “and they are not entitled to seek to have the freezing order revoked because they regret their choice”. The only evidence not actually available to the applicants at the time of the application for a freezing order (the evidence concerning the conduct of lenders referred to above) was foreseeable and could have been raised by the applicants on 6 October 2023 and, in any event, is largely inadmissible hearsay and opinion.

38    Thirdly, he submitted that the case for the respondents on the merits of the freezing order application is stronger now than it was before Beach J because the first and second respondents have now filed their cross-claim, consistently with the case adumbrated in submissions before Beach J, which his Honour found established a good arguable case.

39    Fourthly, he submitted that James has made the issue of risk of dissipation of his assets worse for himself, because not only did he alienate, without notice and for no consideration, the sole real property registered in his name in Australia (his half share of the matrimonial home he owned with his wife), but he also, again without notice, is attempting to sell for $518,000 a motor vehicle registered in his own name (a 2016 Rolls Royce Ghost), which was listed in his disclosure affidavit. James has also recently bought a new Rolls Royce Phantom, for the sum of $1.63 million, which has been registered in the name of a corporate trustee.

40    Fifthly, he also emphasised that James still has offered no explanation for the transfer of his share in the matrimonial home to his wife.

Consideration

41    I will take each point in turn.

The pleading

42    Mr Archibald submitted that the cross-claim did not disclose a good arguable claim, and that now that the case that Beach J had found was a good arguable case has been pleaded, I should form a different view. He submitted that is a relevant material change of circumstance within the meaning of the principles referred to above.

43    I do not agree with that submission.

44    It seems to me that the pleaded case is no more and no less than the case that Eric’s counsel told Beach J would be pleaded, both orally and in writing. (As to the latter, see Eric’s submissions on the freezing order application dated 6 October 2023 at [26]-[29]). Indeed, Mr Archibald volunteered that the difference between the case put to Beach J and the pleaded one “is different … [as] a matter of detail”.

45    I do not, in those circumstances, propose to traverse the detail of the cross-claim, or Mr Archibald’s criticisms of it.

46    He can pursue whatever complaints remain (if any) after he has conferred with Mr Pritchard about them, in the usual manner.

The impact of the freezing order on James

47    The next thing said to constitute a material change of circumstance is the evidence given by Ms Yoyo Zhang to the effect that one lender has withdrawn from negotiations with the APH Group for a facility worth $4.2 million and a second lender has renegotiated the terms of its facility to require additional security.

48    The evidence did not disclose the identity of the lenders. That information was redacted.

49    Mr Pritchard said in those circumstances, the evidence was inadmissible hearsay under s 75 of the Evidence Act 1995 (Cth) because no evidence was adduced of its source.

50    That may well be right, but it seems to me that Mr Pritchard’s better point is that the time to make submissions about such obviously foreseeable consequences was before Beach J. Further, in the circumstances of this case, even accepting that two lenders to the APH Group have acted in the way alleged, in my view that does not weigh with any particular significance in assessing the balance of convenience.

James’s wealth

51    It was also submitted on behalf of James that the evidence contained in his disclosure affidavit shows that his wealth is so significant that the Court should not require him to put up security. Whether the evidence shows that is debatable. But, more relevantly for present purposes, the time to make that submission was before Beach J.

Risk of dissipation

52    Eric submitted that there are four circumstances which provide a basis for inferring a threat of dissipation: (i) the transfer of his share in the matrimonial home; (ii) the serious nature of James’s conviction for an offence of dishonesty in China; (iii) noncompliance with the disclosure order; and (iv) the offering for sale of the Rolls Royce, one of the assets disclosed in James’s disclosure affidavit.

53    The only evidence James sought to adduce on this application about the transfer of his half share of the matrimonial home to his wife concerned how it was effected. In that regard, Mr Pederick exhibited to his 17 November 2023 affidavit a title search, a deed of transfer, correspondence and a registration confirming that James’s wife has been the sole proprietor since 15 September 2023. But no evidence was adduced as to why he did it. And no explanation was given about what on the face of it is the all too convenient timing of the transfer. So the position is no further advanced than it was before Beach J.

54    As to the offence with which James was charged, tried and convicted, it was obviously a serious offence. He was sentenced to three years in prison with a probation period of four years; fined RMB ¥20.9 million; proceeds valued at RMB ¥311 million were confiscated; and eight properties were seized.

55    And the fact that James offered for sale a valuable motor car and bought a new one in the name of a corporate trust surely makes the position worse than it was as at 6 October 2023.

56    In my view, as Beach J must be taken to have found, there is thus a danger or real risk that James’s assets will be dealt with in a way which would prevent Eric from recovering any future judgment debt.

57    In those circumstances, it is not necessary to decide whether James failed to comply with his obligation to disclose his assets in his disclosure affidavit.

58    It follows that I am not persuaded that the risk of dissipation that concerned Beach J has been alleviated. It is, if anything, worse.

The undertaking as to damages

59    As Beach J said, “[o]bviously, an undertaking as to damages is essential, and that will be, together with the other undertakings given by the respondents, the price of my making this order”.

60    Mr Archibald made this submission about the fact that the undertakings as to damages were given by all four respondents as the condition for the freezing orders and the value of the undertaking given by Eric and TDH:

The last matter to address, and I should be able to do it relatively briefly, if it’s convenient to the court, is the inadequacy now revealed of the backing for the undertakings as to damages. We should say here that the undertakings as to damages was given by all four respondents as the condition for the freezing orders applied for by the first respondent. There is no evidence of the sufficiency of the assets of the third and fourth respondents and, indeed, we see from their submissions that they want to extricate themselves from those undertakings. But that, of course, would only further erode the balance of convenience for any continuing freezing orders.

The written submissions were filed – identified at paragraphs 43 to 44 the heart or the upshot of the evidence which has now been put on by our learned friends. For Mr Eric Zhang, the only asset of substance appears to be his share of equity in his matrimonial home, which is heavily encumbered. And our learned friends have put on evidence of a recent valuation which increases the starting point before one takes account of the encumbrances and allocates a share between him and his wife and so on and so forth. But on any view, it remains very modest and so it is substantially viewed against the potential impact of a freezing order operating on Mr Zhang.

And the second aspect which is relied upon by Mr Eric Zhang as being in his interest is a shareholding in a company which owns another project called Baulkham Hills. It’s a project which, as I understand our instructions, Mr Zhang and the APH Group used to be part of, but are no longer. And the evidence of our learned friends of the value of that project is put on the basis – on two bases. One as is, being for that $11 million. And secondly, if the whole project were carried out and funded and completed and so forth, it’s projected to be a higher figure, but the full completion of the project is irrelevant. That’s prospective and not the state of play at the moment.

The state of play, the as is valuation, is only around $11 million but after dealing with the encumbrances and loans and so forth, it really comes back to nil.

61    He also relied on the terms of a cooperation deed exhibited to James’s 12 December 2023 affidavit, which suggests that Eric’s interest in a Baulkham Hills project may be 55%, not 100%.

62    Eric deposed that he has equity in his family home of about $1.4 million; cash in bank in the vicinity of $350,000; shares valued at $132,000; plus the value of his 100% share in TDH, which Mr Guoqiang Zhang deposed by reference to the company’s balance sheet is worth about $5.2 million.

63    On the evidence before me, I am not able with any confidence to say whether the points that Mr Archibald makes have merit. But Eric was not cross-examined and, as things stand, I have no compelling reason to conclude that the undertakings as to damages do not have the backing that he swears they do.

64    In any event, an applicant’s inability to provide an undertaking of any value should be regarded as but one factor to be weighed into the balance of convenience.

65    In my view, there has not been shown any material change of circumstance in that regard.

The position of the third and fourth respondents

66    Counsel for the third and fourth respondents made this submission:

At present the third and fourth respondents do not intend to file any cross-claim against the first applicant (Mr James Zhang).

For those reasons, the third and fourth respondents do not consent [to] nor oppose the relief sought in the first applicant’s interlocutory application dated 24 November 2023 (application).

Likewise, in the event the application is dismissed, and the freezing order made on 6 October 2023 is maintained, the third and fourth respondents will seek orders that they be discharged from their undertaking made to the Court on 6 October 2023.

67    As will be apparent from my reasons, I do not propose to discharge the freezing order. And the available evidence is insufficient to conclude that the undertaking given by the Eric and the second respondent is not of sufficient value. In those circumstances, I propose to discharge the third and fourth respondents from their undertaking.

Other matters

68    Counsel for Eric made a host of objections to parts of the evidence adduced by James. He also relied on a Notice to Produce, which, he complained, was ignored, and which counsel for James submitted was invalid.

69    In the view I take of the application, it is not necessary to deal with those matters, and I decline to do so.

Disposition

70    The application will be dismissed.

71    James should pay Eric’s and TDH’s costs of the application.

Associate:    

Dated:    22 December 2023

SCHEDULE OF PARTIES