Federal Court of Australia

DC Rd DC Pty Ltd v Zhang (No 2) [2024] FCA 157

ORDERS

THE COURT ORDERS THAT:

1.    The fifth respondent (Link) make such requests and do such things as may be reasonably necessary to obtain the bank statements for any bank account in the name of, or held by, Link with Bank of China (Hong Kong) Ltd (BOC) for the period 1 January 2019 to 31 March 2023 (Link Account Statements), and produce them to the applicants, by 4 pm on 26 April 2024, including but not limited to:

(a)    arranging for the first respondent (Mr Zhang) or another director of Link to attend a BOC branch in Hong Kong in person;

(b)    completing any application form required by BOC;

(c)    providing such identity verification documents as may be required by BOC; and

(d)    paying any fees charged by BOC.

2.    For the purposes of Order 1 above:

(a)    Link is to provide the applicants with three business days’ notice of the branch location, date and time at which its director will attend a BOC branch in Hong Kong;

(b)    upon receipt of such notice, the applicants will inform Link of the identity of the solicitor from Withers Worldwide (the Applicants’ Representative) who will attend the BOC branch at the date and time specified by Link;

(c)    immediately upon receipt of the Link Account Statements from BOC, Link is to provide the hard copy Link Account Statements to the Applicants’ Representative;

(d)    within 14 days of receiving the Link Account Statements, the applicants are to provide complete electronic copies of the Link Account Statements to Link and Mr Zhang; and

(e)    the applicants are to reimburse Link for its reasonable expenses incurred in complying with Order 1, provided that the total amount of those expenses does not exceed AUD 10,000.

3.    Link is to pay the applicants’ costs of the Interlocutory Application dated 7 December 2023.

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

REASONS FOR JUDGMENT

JACKMAN J

Introduction

1    This is an application by the applicants in the nature of discovery, seeking orders that:

(a)    the fifth respondent (Link) produce the bank statements for any bank account in the name of, or held by, Link with Bank of China (Hong Kong) Limited (BOC) for the period 1 January 2019 to 31 March 2023 (Link Account Statements) (Order 1); or

(b)    alternatively, an order that Link make such requests and do such things as may be reasonably necessary to obtain the Link Account Statements from BOC, including but not limited to: (i) arranging for the first respondent (Mr Zhang) or another director of Link to attend a BOC branch in Hong Kong in person; (ii) completing any application form required by BOC; (iii) providing such identity verification documents as may be required by BOC; and (iv) paying any fees charged by BOC (Order 2).

2    In relation to the alternative order, the applicants seek further orders to the following effect:

(a)    Link is to provide the applicants with three business days’ notice of the branch location, date and time at which its director will attend a BOC branch in Hong Kong;

(b)    upon receipt of such notice, the applicants will inform Link of the identity of the solicitor from Withers Worldwide (the Applicants’ Representative) who will attend the BOC branch at the date and time specified by Link;

(c)    immediately upon receipt of the Link Account Statements from BOC, Link is to provide the hard copy Link Account Statements to the Applicants’ Representative;

(d)    within 14 days of receiving the Link Account Statements, the applicants are to provide complete electronic copies of the Link Account Statements to Link and Mr Zhang; and

(e)    the applicants are to reimburse Link for its reasonable expenses incurred in complying with the order provided that the total amount of those expenses does not exceed AUD10,000.

Salient Facts

3    In DC Rd DC Pty Ltd v Zhang [2023] FCA 342 at [6]–[23], I set out the salient aspects of the facts as they were then known to the applicants. The relevant aspects of that narrative, together with additional facts which have become apparent to the applicants (principally through the production of documents on subpoena) since that judgment on 11 April 2023, are as follows.

4    The proceedings arise out of a transaction by which the first applicant (DC) purchased the property located at 30 Denham Court Road, NSW, 2565 (Denham Court Property). DC purchased the Denham Court Property from 30 Denham Pty Ltd (in liq) (30 Denham) for $45 million under a contract for sale dated 25 July 2019. Unknown to the applicants, the actual vendor was Khengs Pty Ltd, which entered into a contract on the same day to sell the Denham Court Property to 30 Denham for $14 million plus GST.

5    A deposit of $4.5 million was paid on behalf of DC to 30 Denham. On 31 July 2019, $1.5 million was paid from these funds to InvestX Investments Pty Ltd (InvestX), a company controlled by Mr Zhang, and $1.5 million was paid to Charm Team Development Limited (CTD), a company controlled by the second respondent (Mr Cai).

6    The sale of the Denham Court Property settled on 5 September 2019. The lawyers for 30 Denham received $30,162,735.03 into their trust account, from which $25 million was paid to InvestX on 9 September 2019 and $5,232,961.63 was paid to CTD on 14 November 2019. Accordingly, InvestX received $26.5 million, and CTD received $6,732,961.63, from the proceeds of the sale of the Denham Court Property.

7    A complex series of fund transfers then ensued. Relevantly for the purposes of the present application, between February and May 2020, InvestX transferred funds totalling $19,739,471.93 to Link. Link was incorporated in Hong Kong on 10 September 2019, with Mr Zhang as its director. The sole shareholder of Link is Langkawi Investments Limited, a company incorporated in the British Virgin Islands, of which Mr Zhang is the sole director. At the time of the incorporation of Link, the seventh respondent (CAGA) was its company secretary. Mr Cai was the sole director of CAGA at the time.

8    These funds were transferred by InvestX into an account held by Link with BOC with account number 012 699 200 859 15 (BOC Account). The transfers were made as follows:

(a)    on 21 February 2020, InvestX transferred $500,000 to Link;

(b)    on 6 April 2020, InvestX transferred $5,000,000 to Link;

(c)    on 27 April 2020, InvestX transferred $8,000,000 to Link; and

(d)    on 29 May 2020, InvestX transferred $6,239,471.93 to Link.

9    Shortly after those transfers commenced, in late March and April 2020, Link appears to have transferred funds totalling $5,499,940 to Pleasant Land Pty Ltd (Pleasant Land). Pleasant Land is controlled by Fan He, Mr Zhang’s business partner. These transfers appear to have been made as follows:

(a)    on 30 March 2020, Link transferred $499,980 to Pleasant Land;

(b)    on 14 April 2020, Link transferred $999,980 to Pleasant Land; and

(c)    on 15 April 2020, Link transferred $3,999,980 to Pleasant Land.

10    The timing and amount (of approximately $5.5 million) of the transfers from Link to Pleasant Land almost exactly match the earlier transfers from InvestX to Link on 21 February 2020 and 6 April 2020 (which total $5.5 million).

11    Shortly after these transfers, on 16 April 2020, Pleasant Land appears to have paid $2.6 million to an ANZ trust account held by CBRE, which at that time was acting as co-agent for the vendor of a commercial property at 3 Minna Close, Belrose, NSW (Belrose Property). The payment of $2.6 million appears to have been made on account of the deposit for the purchase of the Belrose Property. The applicants submit that the payment may have been made by Pleasant Land because the ultimate purchaser of the Belrose Property, Belrose COB Pty Ltd (Belrose COB), was not incorporated until 16 April 2020. From the time of its incorporation until 27 January 2023, Mr Zhang was the sole director and shareholder of Belrose COB.

12    Shortly after the payment of the deposit for the Belrose Property, in June 2020, Link appears to have transferred a total of $13,799,960 to Belrose COB. Those transfers were made as follows:

(a)    on 22 June 2020, Link transferred $6,999,980 to Belrose COB;

(b)    on 24 June 2020, Link transferred $4,199,980 to Miriam Park West Ryde Pty Ltd (Miriam Park). Mr Zhang is and was at all material times a director and secretary of Miriam Park and at the time of the transfer was a 50% shareholder. Shortly afterwards on 30 June 2020, Miriam Park transferred $4,000,000 to Belrose COB; and

(c)    on 25 June 2020, Link transferred $2,799,980 to Belrose COB.

13    In addition to these transfers, on 25 June 2020, Pleasant Land appears to have transferred $1,900,000 to Belrose COB. Accordingly, it appears that Belrose COB received $15,699,960 in June 2020 which originated from the BOC Account held by Link.

14    On 10 August 2020, shortly after these payments, Belrose COB exchanged contracts to purchase the Belrose Property for $26,000,000. The settlement of the sale occurred on 16 September 2020. It appears that the funds transferred to Belrose COB from the BOC Account were used by Belrose COB for the purpose of acquiring the Belrose Property. On 16 September 2020, Belrose COB transferred the amount of $10,567,690.84 to its solicitors, Sui & Co Legal, which was used to fund the purchase of the Belrose Property. Separately, Belrose COB appears to have received the benefit of the payment of the $2.6 million deposit for the Belrose Property by Pleasant Land on 16 April 2020, which also appears to have originated from the BOC Account. In total, therefore, it appears that $13,167,690.84 of the monies from the BOC Account was used to purchase the Belrose Property.

15    The purchase of the Belrose Property was also funded in the amount of $14,288,500 from a loan by ING. Following settlement, on 14 October 2020, a mortgage in favour of ING was registered on the title of the Belrose Property.

16    It also appears that Link transferred $3,838,252.26 from the BOC Account to Link Investments (Australia) Pty Ltd (Link Investments Australia) on 12 August 2021. Mr Zhang is the sole director and secretary of Link Investments Australia, and at the time of the transfer was its sole shareholder. It appears that $3 million of the funds received by Link Australia may have been transferred to Harvest Land Group Pty Ltd (Harvest Land) between September and December 2021. Mr Zhang has been a director of Harvest Land since it was registered on 27 April 2021, and TECP Family Pty Ltd (a company associated with Mr Zhang) is a 50% shareholder.

17    The transfers were made as follows:

(a)    on 14 September 2021, Link Australia transferred $2 million to CAGA;

(b)    on 24 September 2021, Link Australia transferred $500,000 to Harvest Land;

(c)    on 15 December 2021, Link Australia transferred $1 million to Harvest Land;

(d)    on 17 December 2021, CAGA transferred $1 million to Harvest Land; and

(e)    on 18 December 2021, CAGA transferred $500,000 to Harvest Land.

18    It appears that these funds may have been used towards the purchase of the property at 40 Pavesi Street, Smithfield, NSW, 2161 (Smithfield Property). Smithfield 40 Pty Ltd (Smithfield) is the registered proprietor of the Smithfield Property. Mr Zhang has been a director of Smithfield since it was registered on 20 November 2021. Harvest Smithfield 40 Pty Ltd (Harvest Smithfield) is the sole shareholder of Smithfield. Mr Zhang has been a director of Harvest Smithfield since it was registered on 20 November 2021 and TECP Family Pty Ltd is a 50% shareholder. Smithfield purchased the Smithfield Property for $14.8 million pursuant to a contract of sale dated 3 November 2021. The deposit was $1,480,000 with a balance payable being $13,320,000. Sui & Co Legal acted for Smithfield on the purchase of the Smithfield Property. Settlement of the Smithfield Property took place on 27 January 2022. It appears that Harvest Land transferred $1,480,000, being the same amount as the deposit payable for the Smithfield Property, on 3 November 2021.

19    The following further transfers also appear to have taken place in the week before the settlement of the Smithfield Property:

(a)    on 21 January 2022, $3,880,000 and $150,000 was transferred from Harvest Land into a CBA account in the name of Smithfield;

(b)    on 24 January 2022, $4,144,166.50 was transferred from Smithfield into another CBA account in the name of Smithfield; and

(c)    on 24 January 2022, $4,050,000 was transferred from Smithfield into Sui & Co Legal’s trust account.

20    The amount of $4,050,000 was then paid on settlement of the Smithfield Property on 27 January 2022.

Previous Orders of the Court

21    On 26 July 2023, orders were made in relation to a notice to produce requiring production of the Link Account Statements, or affidavits explaining why those documents could not be produced. Affidavits were filed explaining why the documents could not be produced. The affidavit of Mr Paske of 8 August 2023, a solicitor for the applicants, is to the effect that in order for BOC to provide Link with access to the Link Account Statements now that the BOC Account is closed and Link does not have access to internet banking for the BOC Account, the following steps must be undertaken:

(a)    there must be personal attendance on behalf of Link at BOC’s branch in Hong Kong;

(b)    an application form is to be completed at the BOC branch in Hong Kong; and

(c)    following those steps, the statements can be collected in person from the branch approximately one week after the application is made.

22    On 14 September 2023, the Court made discovery orders that included as a specific category the Link Account Statements. Those orders required the discovery of documents within Link’s control, meaning within its “possession, custody or power”. The Link Account Statements were included in Part 3 of the verified list of documents, setting out documents that have been but are no longer in the control of Link.

The Application for Order 1

23    The basis on which the applicants seek Order 1 in their Interlocutory Application is r 20.32 of the Federal Court Rules 2011 (Cth), which provides that a party may apply to the Court for an order that another party produce for inspection any document that is included in the latter’s list of documents and that is in that party’s control. The applicants submit that the Link Account Statements are within Link’s “control” (defined when referring to a document as meaning “possession, custody or power”) because they are within Link’s “power”, in that Link has a presently enforceable right to inspect the Link Account Statements or to obtain possession or control of them from BOC. The applicants submit that the evidence establishes that if Link completes the application form in person in Hong Kong then it will be provided with the Link Account Statements as of right, there being no evidence that BOC has the power to withhold production of the Link Account Statements.

24    Link submits that the application for Order 1 is in substance an application for the same relief that has already been applied for, in circumstances where there has been no material change in circumstances since the previous orders of the court were made and no suggestion that those orders have not been complied with. Further, Link submits that r 20.32 cannot have been intended to allow a party to whom a list of documents has been provided to go behind the verifying affidavit and assert that a document in Part 3 of a list of documents is, contrary to the affidavit, nevertheless within the “control” of the party giving discovery for the purposes of r 20.32. Finally, Link submits that the applicants have not established that the Link Account Statements are in fact within Link’s “control” given that the banker-customer relationship between BOC and Link is now at an end.

25    In my view, it is not necessary to decide whether the Link Account Statements do in fact fall within the scope of r 20.32 and the associated definition of “control”. Link has adopted a firm position that the Link Account Statements are not within its control, and it appears to me almost inevitable that Link will maintain that position. If I were to order Link to produce those documents, the result will be further disputation as to whether Link has the capacity to comply with the order. That strikes me as anathema to the overarching purpose of the civil practice and procedure provisions, being to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible: s 37M of the Federal Court of Australia Act 1976 (Cth). Moreover, the application for Order 2 does appear (in light of the evidence available to me) to provide a solution to the problem which is quick, relatively inexpensive and efficient. Accordingly, I decline to make Order 1.

The Application for Order 2

26    The applicants describe Order 2 as being in the nature of a Sabre order, referring to the much-cited decision of Lockhart J in Sabre Corporation Pty Ltd v Russ Kalvin’s Hair Care Company (1993) 46 FCR 428 at 431–2. In that case, Lockhart J held that the Court has power to direct a party to take steps to obtain access to and discover documents which are in the possession, power or control of a third party where there is a real likelihood that the party to the proceeding would be given access to the documents upon request. The decision has been followed many times. Typically the form of order is for the party to the proceedings to “take all reasonable steps” to obtain or request the relevant documents. Examples of a Sabre order being expressed in those general terms may be found in Vringo Infrastructure, Inc v ZTE (Australia) Pty Ltd (No 2) [2014] FCA 525 at [44] (Yates J); Kraft Foods Group Brands LLC v Bega Cheese Ltd (No 4) [2018] FCA 1055 (O’Callaghan J); Mylan Australia Holding Pty Ltd v Commissioner of Taxation [2023] FCA 672 at [80] (Button J); and Impiombato v BHP Group Ltd (No 3) [2023] FCA 1104 at [31] (Moshinsky J). The order sought in the present application may be regarded as somewhat unusual in setting out (in a non-exhaustive way) the steps which are to be undertaken. However, I do not see any reason why a detailed order of the kind proposed in the present case should not be made in circumstances where each of those steps is itself reasonable. I note that in SPI Spirits (Cyprus) Ltd v Diageo Australia Ltd (No 2) [2006] FCA 931; (2006) 155 FCR 150 at [33], Edmonds J said that it would be preferable for any such order to set out explicitly the steps which, if taken, would satisfy the order. It appears to me likely to reduce the prospect of further disputation as to what is required by the order if the order does set out such detailed steps.

27    The applicants submit that Order 2 is appropriate for the following reasons. First, the production of the Link Account Statements will allow the applicants to confirm what they have pieced together to date through their analysis of documents produced on subpoena. Second, although Link is an overseas company, it has submitted to the jurisdiction of this Court and is actively defending the claims made against it and its director, Mr Zhang. Third, even if it were regarded as unreasonable to require Mr Zhang to travel to Hong Kong, there is no evidence that Mr Zhang could not appoint an additional director of Link solely for that purpose. Fourth, it would not be unreasonable to require Mr Zhang to travel to Hong Kong, which he did for the purpose of opening and later closing the BOC Account. Fifth, the Court should proceed on the basis that Link was the primary vehicle through which the proceeds of the disputed transactions were transferred, pointing to the seriousness of the allegations and the scale of the alleged misappropriation of funds. Sixth, at the final hearing it is likely that the Court will need to apply tracing principles to the flow of funds through the BOC Account, in particular the tracing of funds through a mixed account comprising trust funds and a trustee’s own funds. Any application of the lowest intermediate balance rule, namely that a beneficiary’s claim is limited to the lowest account balance in the period starting from the date of co-mingling to the date of the claim involving the account, will require the production of the Link Account Statements. Seventh, there is a question as to the source and co-mingling of funds in the BOC Account: the information obtained to date suggests that outflows from the BOC Account to Pleasant Land, Belrose COB, Miriam Park and Link Investments Australia total $23,338,132.26, but the inflows from InvestX into the BOC Account total $19,739,471.93. Eighth, the applicants intend to advance a proprietary claim in respect of the Belrose Property, and the Link Account Statements will assist the applicants in seeking that relief, noting that the applicants have now identified that at least $13,167,690.84 of the monies obtained by Mr Zhang or entities controlled by him from the back-to-back sale of the Denham Court Property appears to have been used to purchase the Belrose Property, and the Link Account Statements will be critical in establishing that proprietary claim.

28    I accept that the applicants have shown a sufficient basis for making a Sabre order. In my view, there is a real likelihood that Link will be given access to the documents by BOC upon request, provided that the process for making that request in person in Hong Kong is carried out.

29    The respondents (here Link and Mr Zhang) submit that it is an extraordinary interference with Mr Zhang’s liberty to compel him to travel to Hong Kong for a period of one to two weeks, noting that Mr Zhang will be required to apply for and obtain a visa and be supervised in Hong Kong by the applicants’ legal representatives. The respondents submit that the proposed travel and accommodation arrangements, limited to an amount of AUD10,000, are “Spartan”.

30    While I accept that Order 2 does interfere with Mr Zhang’s liberty, I do not regard that interference as being unreasonably onerous in the circumstances. The evidence indicates that the visa requirements can be met in two alternative ways. The first is to utilise the seven-day transit stay, possibly on two occasions given that there is expected to be a delay of a week or so between Link applying in person for access to the Link Account Statements and the provision of those documents by BOC. The second is to apply for an Entry-Exit Permit, which requires that there be a “local sponsor” who can be either a company or an individual (any such individual having to be of the age of 18 or above, a bona fide Hong Kong resident, and acquainted with the applicant). The evidence does not indicate that it would be difficult for Mr Zhang to comply with those visa requirements. The limit of AUD10,000 for reimbursement of travel and accommodation expenses does not strike me as unduly restrictive or frugal, but if Mr Zhang regards that limit as being overly austere and lacking in comfort then he is at liberty to spend some of his own money in satisfying his particular tastes. I regard the proposed regime whereby a legal representative for the applicants from the Hong Kong law firm, Withers Worldwide, will supervise the attendance of Mr Zhang (or another director of Link if one is appointed) at the BOC branch in Hong Kong as desirable in reducing the prospect of future disputation as to the sufficiency of what occurred during that personal attendance. In terms of timing, Link sought at the hearing before me to be given until 26 April 2024 to comply with the order, and I regard that timeframe as reasonable.

31    I note that the submission made in writing by Link to the effect that the case foreshadowed against Belrose COB has not been pleaded has now been overtaken by events in light of the applicants having been granted leave to file the Further Amended Originating Application and the Further Amended Statement of Claim. Although it is conceivable that one or more of the respondents will make admissions in their defences to those amended pleadings, which would render the proposed Sabre order unnecessary and wasteful, I do not regard it as desirable to await those defences before making the order. If the respondents intend to make such admissions they can do so at any time and, in that event, I will hear any application to vary or discharge the orders at short notice.

32    As the applicants have achieved substantial success on the interlocutory application, and had to approach the Court in order to obtain Order 2, Link should be ordered to pay the applicants’ costs of the interlocutory application.

Associate:

Dated:    29 February 2024

SCHEDULE OF PARTIES