FEDERAL COURT OF AUSTRALIA

Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiffs serve (but not file) draft orders to give effect to the Court’s reasons, together with sufficiently detailed workings of their calculations of interest to enable the defendants to check and respond to those calculations by 26 July 2024.

2.    The plaintiffs file and serve written submissions and any affidavits on costs by 26 July 2024.

3.    The defendants serve (but not file) their response to the plaintiffs’ draft orders and calculations of interest with sufficiently detailed explanations for their positions to enable the plaintiffs to check and respond to those positions by 9 August 2024.

4.    The defendants file and serve their written submissions and any affidavits on costs by 9 August 2024.

5.    The parties confer with a view to reaching agreement on the draft orders and calculations of interest by 16 August 2024, and in the event that agreement is not reached each party is to file and serve written submissions as to orders and calculations of interest by 16 August 2024.

6.    The plaintiffs file and serve any written submissions and affidavits in reply on costs by 16 August 2024.

7.    Any oral hearing on the form of orders and on the question of costs be fixed at 9am on 23 August 2024, noting that the parties will be informed by 4pm on 21 August 2024 if such a hearing is not required.

8.    The parties have liberty to apply on two days’ notice.

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

REASONS FOR JUDGMENT

JACKMAN J:

Glossary

1    In these reasons, I have used the following defined terms:

Introduction

2    These proceedings concern investments by each of the plaintiffs, Ms Hong (Chloe) Chu and Mr Xueping Xu, of $3.5 million in the Fund in 2014. The Fund was an unregistered managed investment scheme of which the seventh defendant, Gold Stone was the trustee.

3    In 2014, each of the plaintiffs was a citizen of the People’s Republic of China who wished to obtain a SIV from the Australian Government. The SIV program commenced on 24 November 2012 as a new stream within the Business Innovation and Investment (Provisional) (Subclass 188) visa and the Business Innovation and Investment (Permanent) (Subclass 888) visa. Among the requirements for SIV applicants was the making of investments of at least $5 million in complying investments, which included ASIC regulated managed funds with a mandate for investing in Australia. Regulation 1.03 of the Migration Regulations 1994 (Cth) defined “managed fund” as follows:

managed fund means an investment to which all of the following apply:

(a)     the investment is a managed investment scheme (within the meaning of the Corporations Act 2001) in which members acquire interests in the scheme;

(b)     the interests are not able to be traded on a financial market (within the meaning of section 767A of the Corporations Act 2001);

(c)     no representation has been made to any member of the managed investment scheme that the interests will be able to be traded on a financial market;

(d)     the issue of the interest is covered by an Australian financial services licence issued under section 913B of the Corporations Act 2001.

4    For an ASIC regulated managed fund to qualify as a complying investment, it had to be limited to categories of investments specified by the relevant Minister in a legislative instrument in writing. From 23 November 2013, the relevant legislative instrument, known as IMMI 13/092, specified the following investments in managed fund investments for the purpose of the specification by the Minister of complying investments:

(a)    infrastructure projects in Australia;

(b)    cash held by Australian deposit taking institutions (including negotiable certificates of deposit, bank bills and other cash-like instruments);

(c)    bonds issued by the Commonwealth Government or a State or Territory government;

(d)    bonds, equity, hybrids or other corporate debt in companies and trusts listed or expected to be listed within 12 months on an Australian Stock Exchange;

(e)    bonds or term deposits issued by Australian financial institutions;

(f)    real property in Australia;

(g)    Australian Agribusiness;

(h)    annuities issued by an Australian registered life company in accordance with section 9 or 12A of the Life Insurance Act 1995;

(i)    derivatives used for portfolio management and non-speculative purposes which constitute no more than 20 per cent of the total value of the managed fund;

(j)    loans secured by mortgages over the investments listed in subparagraphs 2(a) to 2(h) of this instrument; and

(k)    other managed funds that invest in the investments listed in subparagraphs 2(a) to 2(j) of this instrument.

5    Each of the defendants was involved in the management or administration of the Fund, although there is a substantial dispute as to the nature and extent of that involvement. The first defendant, Ms Louise Lin, was not appointed a director of Gold Stone. Ms Lin was a licensed conveyancer and from 2007 to 2016 was a registered migration agent. The second defendant, Mr Hai Zhong (John) Cai, was Ms Lin’s husband and was registered as a director of Gold Stone. Together, Ms Lin and Mr Cai were directors and shareholders of DCK Asset Holding Pty Ltd, which held 50% of the shares in GDI, which itself held a 95% shareholding in Gold Stone.

6    The third defendant, Mr David Darmali, was not an appointed director of Gold Stone. He was a director of Fiducia Singapore, which owned 5% of the shares in Gold Stone. Fiducia Singapore was also the ultimate owner of all the shares in the fourth defendant, Fiducia Asset, of which Mr Darmali was the sole director. Fiducia Asset held an AFSL and an ACL, and it appointed Gold Stone as its AR for both licences. Fiducia Asset’s AFSL relevantly authorised it from 11 February 2011 to carry on a financial services business to provide financial product advice and to deal in a financial product (including by issuing the product, or applying for a financial product on behalf of another person) in respect of various classes of financial products including “interests in managed investment schemes limited to [its] own managed investment scheme only”: cll 1(a)(vi),1(i)(B) and 1(b)(ii)(F) (CB15/6695.1–2 and 15/6706–7). Fiducia Asset’s AFSL identified Mr Darmali as its key person (CB15/6695.3). Before Gold Stone was an AR of Fiducia Asset in respect of its AFSL, it was an AR of Ergo, which had appointed Mr Darmali as its key person in respect of its AFSL (CB15/6674.2). Ergo’s AFSL authorised it to deal in a financial product by (relevantly) issuing or applying for interests in managed investment schemes “limited to [its] own managed investment scheme only”: cl 1(b)(i)(C) (CB15/6674.1).

7    The fifth defendant, Mr Xiao Wu, was a registered director of Gold Stone and was the secretary of Wei Feng (Australia) Pty Ltd, the other 50% shareholder in GDI. Wei Feng (Australia) Pty Ltd was entirely owned by Mr Xiao Wu’s father, Mr Xufeng Wu (a non-party to the litigation). An important issue in the proceedings is the extent to which Mr Wu’s signature was forged on a number of documents, including loan documents pursuant to which monies held by the Fund were disbursed.

8    The sixth defendant, Ms Josephine Darmali (Mr Darmali’s daughter), was appointed a director of Gold Stone on 14 February 2014 according to an ASIC search of Gold Stone (CB15/6763). Gold Stone’s initial directors on its formation a week earlier were Mr Cai and Mr Wu. There is no contemporaneous evidence to suggest that Ms Darmali had any other involvement in Gold Stone. Ms Darmali has not appeared in the proceeding.

9    The seventh defendant is Gold Stone, which was incorporated on 7 February 2014. Gold Stone was deregistered on 13 May 2020, but was restored to the register by Court order on 10 August 2022.

Credibility of witnesses

Ms Chu

10    Ms Chu’s first affidavit purported to give evidence in direct speech of conversations which occurred about a decade ago. That conveyed the impression that she had a verbatim memory of what was said on those occasions, and that impression was not dispelled by the fact that the direct speech was prefaced by the obfuscatory expression “in words to the following effect”. The falsity of that impression was laid bare in her cross-examination, in which she conceded that she could not really remember what had happened at the meetings, except that she said that she recalled saying at the first meeting in January 2014 that her principal must be safe (T179.33–41). I accept that Ms Chu had a recollection of the gist of what she said to that effect, as I indicate below. Apart from that matter, I regard Ms Chu’s recollection as too unreliable for me to accept her affidavit evidence, except in circumstances where it is corroborated by a reliable witness or by contemporaneous documents, or where it is consistent with the objective probabilities.

11    In Kane’s Hire Pty Ltd v Anderson Aviation Pty Ltd [2023] FCA 381 at [127]–[129], I deprecated the longstanding practice adopted in New South Wales of drafting affidavits of conversations in direct speech in circumstances where the witness could only recall the gist of what was said, and I also deprecated the longstanding practice of prefacing the direct speech with the formula “in words to the following effect”. I regarded the practice as logically, ethically and grammatically wrong. My reasons were approved by the New South Wales Court of Appeal on 17 July 2023 in Gan v Xie [2023] NSWCA 163 at [119] (White JA, with whom Simpson and Basten AJJA agreed). In Kane’s Hire, I did not take into account the form in which evidence of conversations had been given in affidavits when assessing the credibility of witnesses, as I took the view that adequate notice had to be given to the profession of the unacceptability of the then practice before taking it into account on the question of credibility. Now that about a year has gone by since those reasons were published and approved by the New South Wales Court of Appeal (and more than three months had gone by since the Court of Appeal’s decision by the time the plaintiffs’ affidavits were filed and served), I regard it as adverse to a witness’s credibility for the witness to convey the false impression in an affidavit of a verbatim recollection of a conversation by using direct speech, when all the witness remembers is the gist of something which was said. Accordingly, I regard the form in which Ms Chu’s affidavit was drafted and approved by her as a matter which is adverse to her credibility.

12    Ms King, who appeared for Mr Darmali and Fiducia Asset, put a baseless submission that Ms Chu made a knowingly false and misleading statement to the Australian Government in her application for a permanent residency visa by including in her application a letter by Mr Cai dated 30 April 2018 (CB11/5369) stating that she still held $3.5 million investments in the Fund at a time when she knew that the funds had been lost: T1128.25–1135.15, 1217.38– 1219.18. The letter by Mr Cai stated relevantly:

This is to confirm that Ms … Hong Chu … had made $3.5M investment to Gold Stone Secured Income Mortgage Fund on 30th April 2014. Ms Hong Chu still holds $3.5M investment in the Fund.

The Fund is invested into Australia Real Estate Project and meets the requirement as compliance investment for SIV visa.

Ms Chu was cross-examined on whether the letter was submitted to the Australian Government, and she agreed that it had been: T190.44–47. She was also cross-examined on the declaration which she made in her SIV application that she had continuously held the complying investment for the specified holding period (CB11/5375.13 and T193.1–45). However, it was not put to Ms Chu that her declaration was false or that she knew or understood that Mr Cai’s letter was false or misleading. In my view, that is itself fatal to the submission. In any event, the argument proceeds on a misreading of the letter. Mr Cai was saying no more than that Ms Chu still held the units in the Fund which she had acquired for $3.5 million; that is, Ms Chu had neither transferred the units, nor had they been redeemed. Mr Cai’s letter cannot sensibly be read as providing an opinion as to the then current value of the units. In my view, the submission by Ms King as to Ms Chu making a knowingly false statement (a matter which would have constituted an offence) was completely without foundation, and should never have been put. The defensive tactic, whereby if one feels one is under attack then one should fight back even harder against one’s opponents in an attempt to frighten them, is probably better suited to avoiding snakes on a bush walk than it is to litigation.

Mr Xu

13    Mr Xu’s evidence calls for the same criticism as to the form of evidence of conversations. His first affidavit purports to give evidence in direct speech of conversations a decade ago, again prefaced by the formula “in words to the following effect”. In cross-examination, however, he readily conceded that his memory of what happened in 2014 was not very good (T213.17–20). He claimed to remember what had happened in the last two years, but did not have a good memory of matters which occurred longer than two years ago (T214.36–44). I accept that he recalled the gist of saying that he would invest in the Fund if the principal was safe, but otherwise I do not think that Mr Xu had any genuine recollection of what had been said in the meetings. Apart from that matter, I do not regard Mr Xu’s evidence as reliable, except where it is corroborated by reliable witnesses or contemporaneous documents, or where it is consistent with the objective probabilities.

14    Ms King also put a submission that Mr Xu was guilty of making a false and misleading statement to the Australian Government by including in his application for a permanent residency visa a letter by Mr Cai dated 27 September 2018 (CB12/5404) to the same effect as the letter submitted by Ms Chu dated 30 April 2018. Mr Xu gave evidence, which I accept, that he did not recall having seen the letter before (T249.33–250.11). He was cross-examined on his SIV application, and the declaration (at CB12/5425) that he had continuously held the complying investment for the specified holding period (T250.13–251.44), but it was not put to him that he knew that Mr Cai’s letter or anything in his application was false or misleading. For the reasons given in relation to Ms Chu, I regard the submission by Ms King as so baseless that it should never have been put.

Mr Wang

15    I regard Mr Wang as an impressive and credible witness, although his credibility would have been enhanced if he had avoided the use of direct speech in his first affidavit.

Mr Chen

16    I also regard Mr Chen as an impressive and credible witness, although he too regrettably engaged in the pretence (or self-delusion) of being able to recall conversations a decade ago in direct speech. He sensibly made concessions in cross-examination as to his difficulties in precisely remembering conversations in 2014 and 2016 (T296, 304.5–16).

17    Counsel for the third and fourth defendants, Ms King, sought to attack Mr Chen’s credibility on several grounds. One of the contentions advanced by Ms King was that Mr Chen was a participant in making a false and misleading statement to the Australian Government by reason of deploying Mr Cai’s letters dated 30 April 2014 and 27 September 2018 (CB11/5369 and 12/5404). I have rejected that contention as baseless on a proper reading of the letters. In addition, I accept Mr Chen’s evidence that he did not read the letters because he did not deal with the paperwork (T315.45–47). His junior colleague, Mr Wang, received Mr Cai’s letters (affidavit of 3.11.23 at paras 76–77) but was not cross-examined about them.

18    The other criticism by Ms King which is worthy of additional comment was Mr Chen’s reluctance to answer questions concerning his substantial economic interest in Huaxia, and his admission as to the payment of $178,000 to a wholly owned subsidiary of Huaxia as an introduction fee which had been agreed between him and Ms Lin (T308–9). Mr Chen accepted that he did not tell the plaintiffs about that commission (T290.15–25). Ms King submitted that Mr Chen acted as a migration agent for the plaintiffs, and thus owed them fiduciary obligations which required him to disclose the amount of that commission, given that he had an indirect economic interest amounting to 40% of Huaxia. However, the evidence falls well short of what that submission would require. In the first place, it is not at all clear that Mr Chen acted as an agent in the legal sense of a relationship involving authority or capacity in one person (the agent) to create or affect legal relations between another person (the principal) and third parties: International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 at 652–3. Second, even if Mr Chen was an agent in the strict legal sense, the evidence does not extend to the terms of his engagement. Those terms may or may not contain a provision which expressly excludes a fiduciary relationship between Mr Chen and the plaintiffs, as exemplified by Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; (2007) 62 ACSR 427 (Jacobson J). I am not in any position to say whether Mr Chen breached his duties to the plaintiffs by not disclosing the commission, and I am certainly not in a position to say that the moral calibre of any such breach should be regarded as adverse to Mr Chen’s credibility.

Mr Wong

19    Mr Wong was an impressive and credible witness. He made sensible concessions, including as to his inability to remember exactly what was said at meetings in 2013 (T334.45–46), although the concession was at odds with the direct speech deployed in his affidavit.

Ms Lily Xu

20    Ms Xu was a credible witness, whose evidence I accept.

Ms Meng Xu

21    I do not think that Ms Meng Xu had a genuine recollection of what had been said a decade ago. Her affidavit evidence claimed a recollection that Mr Xu (her uncle) said at the dinner in Shanghai in early 2014 that his investment must be safe, but in cross-examination, her evidence was that her uncle had always said that the interest must be safe and indicated a wish to obtain higher returns (T353.24–27). The latter evidence was at odds with the evidence given by all other witnesses, and I do not accept it.

Mr Fong

22    Mr Fong gave oral evidence on subpoena and gave clear and direct answers to questions. He was careful to distinguish between his actual recollection and non-recollection of events which had occurred about a decade ago, as illustrated by his contrasting evidence concerning the negotiations for the loan agreement made on 26 May 2014 (T370.39–372.13) and the negotiations for the loan agreement entered into on 8 August 2014 (T367.38–45). Mr Fong does not appear to have any commercial or personal interest in the litigation. Although Ms King submitted that Mr Fong showed a hostility towards Mr Darmali arising out of the circumstances which had led to Mr Fong’s bankruptcy in 2015, I accept Mr Fong’s denial of that proposition. I accept Mr Fong’s evidence that he was disappointed in Mr Darmali because of what had happened with a project in Pyrmont, which affected other projects, arising from what was said to be Mr Darmali’s failure to contribute $3 million to that project (T405.33–406.5). Mr Fong gave evidence, which I accept, that he did not blame Mr Darmali for his bankruptcy, even though he thought that Mr Darmali had contributed to it (T407.34–47). I regard Mr Fong’s position in that regard as one of magnanimity, not of personal hostility to Mr Darmali, and that conclusion is reinforced by the tone of Mr Fong’s oral evidence.

23    Mr Fong’s conduct, however, is not unblemished. On one occasion Mr Fong provided a cheque to Gold Stone for $500,000 which was subsequently dishonoured (a matter which is acknowledged by the plaintiffs in the Third Further Amended Statement of Claim at paras 110B–110C). Further, it appears that Mr Fong entered into inconsistent contracts relating to a unit in the development at Lane Cove, which he acknowledged to have been “an error on my part” (T394.77–395.9). However, it was not put to Mr Fong that the error was deliberate, and I do not therefore regard it as a matter of any real significance in terms of Mr Fong’s credibility as a witness. Ms King also relies upon the proposition that one of the parties to the rival contracts concerning that unit provided consideration by way of gambling chips (T394.12–16), but I do not regard that as a matter adverse to Mr Fong’s credibility without admissible evidence of all the circumstances surrounding the transaction. Nor was it put to Mr Fong that the casino chips were used by him personally rather than for the benefit of the company, and in the absence of cross-examination it is not open to Mr Darmali to put a submission to that effect (cf at T1116.8–9 and T1116.36–38). In addition, on one occasion during his cross-examination, Mr Fong responded adamantly that the proposition being put to him was a lie (T400.25), but after the relevant document was put to him he accepted the proposition (T403.44). That was an exception to the generally measured way in which Mr Fong gave his evidence. I deal in detail below with the particular controversy surrounding the plaintiffs’ allegation that Mr Fong’s company paid secret commissions to Mr Darmali.

24    On the whole, while I approach Mr Fong’s evidence with considerable caution, I regard his evidence as reliable and credible. In particular, I regard Mr Fong as a great deal more reliable and credible than either Mr Cai or Mr Darmali.

Mr Cai

25    I regard Mr Cai as an unsatisfactory and unreliable witness who was determined to say whatever he perceived to be in his forensic interests. I do not accept his testimony except where it consists of admissions against interest, or where it is corroborated by the contemporaneous documents, or where it is consistent with the objective probabilities. I discuss Mr Cai’s evidence in detail below, but for present purposes I refer to three telling instances in his evidence.

26    First, Mr Cai adamantly denied with great confidence in his cross-examination that he was the person who had the dealings with MVLC and MVDA in relation to the three loan agreements to which I refer below: T435.21–29. However, he was then confronted with an affidavit which he made to support Gold Stone’s statutory demand for unpaid amounts pursuant to those loan agreements on 23 June 2015 (CB9/3900) in which he said expressly that he was the person who, on behalf of Gold Stone, had the dealings with MVLC and MVDA that gave rise to the debt which was claimed. Mr Cai continued to deny the truth of that proposition, claiming that he made the affidavit because Ms Lin asked him to do so (T436.28–33). Ultimately, Mr Cai accepted that the affidavit was a true statement (T436.43–45).

27    Second, as I explain in detail below, after Gold Stone received the proceeds of the settlement with the liquidators of MVLC and MVDA in November 2017, Mr Cai paid a large amount of those funds to himself (T493.35–510.16). He did so having signed the settlement agreement, and being aware that the funds received were trust monies and were the only monies that were recovered from the three loans (T490.40–491.7). Mr Cai was aware that he should not have dealt with the funds without the consent of the plaintiffs (T493.16–33). Mr Cai conceded on a number of occasions that he knew that there was no proper basis for the withdrawal of those funds. He then brazenly told the plaintiffs’ representative that it was Ms Lin who had taken all the money (T510.18–511.2). Mr Cai’s conduct was dishonest.

28    Third, Mr Cai denied having read the Fund Constitution, but then found himself in the awkward position of being forced to accept as a result that he was wilfully blind to his obligations as trustee (T456.34–40). However, after a break in his cross-examination over the King’s Birthday long weekend, Mr Cai admitted that he had had a copy of the Fund Constitution which Ms Lin gave him after he signed it, that he read it and that Ms Lin had explained some of it to him (T469.39–471.15). He also accepted, after having thought about his evidence over the long weekend, that he read cl 20.4 dealing with the trustee’s powers of investment, and that he understood that the trustee could only invest in loans secured by mortgages (T472.12–20).

Mr Darmali

29    Mr Darmali was also an unsatisfactory and unreliable witness who, in my view, gave whatever evidence he thought would advance his forensic interests. I do not regard his evidence as reliable or credible, and I do not accept it except in circumstances where it contained admissions against interest, or where it is consistent with the contemporaneous documents, or with the objective probabilities. Without being exhaustive, the matters which lead me to those conclusions include the following.

30    Most importantly, Mr Darmali denied in his affidavit of 8 February 2024 (paras 54–5 and 79) that he was the Fund Manager of the Fund and that he was in fact managing the fund, and claimed that references in the documents to his role being “Fund Manager” were because Ms Lin said that it would be something that Chinese clients understand, as opposed to “financial planner” which they would not understand. The plaintiffs submit, and I accept, that that evidence was false and contrived. Mr Darmali referred to himself as the Fund Manager for Gold Stone and the Fund in a great many instances when communicating with people who knew precisely what that meant (T559.1–567.40), including: Macquarie Bank (CB5/2327); Mr Fong, Mr Cai, Ms Lin, and Ms Kwok (CB6/2547); the Australian Government (CB6/2647); Ms Gai and Mr Geering (CB6/2659); and Mr Fong’s solicitor, Mr Adam Huxley (CB6/2692–3). In relation to the email of 2 May 2014 (CB6/2650), he said that referring to himself as “the fund manager” was a lie which he made because he was trying to impress the recipients. However, the recipients were Mr Geering, Ms Gai and Ms Lin who knew exactly what his role was as one of their business colleagues.

31    Mr Darmali was in fact an experienced fund manager. The AFSL for each of Ergo and Fiducia Asset (which I discuss below), in respect of which Mr Darmali was the key person and responsible manager, authorised those companies to deal in financial products by, among other things, issuing interests in managed investment schemes limited to “own managed investment scheme only” (CB15/6674.1, 6695.1). Mr Darmali’s understanding was that this meant that those entities had to be the responsible entities for all schemes in which they issued interests (T636.1–639.35). Although Mr Darmali said that he did not understand that the description of “own managed investment scheme only” would be satisfied where he was merely the “Fund Manager” of the scheme, he said that makes sense to him now (T638.39–47). In my view, that was likely to have been his understanding in 2014. I regard Mr Darmali’s description of himself in the contemporaneous documents as Fund Manager as reflecting a consciousness on his part that he needed to occupy and perform a key role in terms of making investment decisions for the Fund in order to satisfy the AFSL conditions. I note in this regard that Mr Darmali claimed to have relied on legal advice by Mr Geering to the effect that the Fund could fall within the concept of Fiducia Asset’s “own managed investment scheme” even if Mr Darmali was not involved in managing the Fund, but accepted that the advice does not make sense to him now (T638.18–37). I do not accept that Mr Geering gave that advice, and I find that Mr Darmali did hold the belief in 2014 that the Fund could only be Ergo’s or Fiducia Asset’s “own managed investment scheme” if Mr Darmali was actively managing the Fund, in the sense of guiding and participating in its investment decisions and overall operations.

32    Mr Darmali held himself and Fiducia Asset out as having more than $500 million in funds under management (affidavit of 11.6.24, ExDD–3, p 123), although he gave implausible evidence that he was there referring to business associates in Indonesia and Singapore (T598.7–599.37). Further, the agreement between Mr Darmali’s companies and Gold Stone provided for a scale of remuneration to his entities based on Gold Stone’s funds under management (CB5/2098–9, 6/2796). Mr Darmali denied that he paid attention to what funds Gold Stone had under management (T553.29–554.10), but I do not regard that evidence as being at all credible. As I will explain below, Mr Darmali took a keen interest in the fees and other remuneration earned by him and his entities.

33    It is clear that in 2014 Mr Darmali was familiar with ASIC Regulatory Guide 105 (CB7/2898), although he denied that in cross-examination (T601.27–35, 604.1–10). That regulatory guide provided that key person licence conditions were imposed where the licensee was heavily dependant on the competence of one or two responsible managers, and responsible managers were required to have direct responsibility for significant day-to-day decisions about the licensee’s financial services (T602.22–605.39). As the responsible manager and key person under the AFSLs of both Ergo and Fiducia Asset, as well as Fiducia Asset’s ACL (CB5/2104), I find that Mr Darmali regarded that as an appropriate description of the role which he played in relation to the Fund.

34    In addition to his work as Fund Manager, Mr Darmali gave evidence that he also worked as a financial planner and a mortgage broker, and that his mortgage broking business included “financing for small developments” (affidavit of 8.2.24 at para 11). He resiled from that evidence in cross-examination and said that he referred clients who sought finance for developments to another person (T542.18–543.14). The contemporaneous documents show that Mr Darmali held himself out as someone with the ability to arrange development finance, including for large developments (CB5/1965.1; affidavit of 11.6.24, Ex DD–3, p 123). Further, Mr Darmali’s own evidence was that Mr Fong had been introduced to Mr Darmali “as a potential client for Fiducia’s mortgage broking business as Victor [Fong] needed to borrow money for his property developments” (affidavit of 8.2.24 at para 62). That was consistent with Mr Fong’s evidence on the subject (T363.18–32). I note at this point that, as a mortgage broker, Mr Darmali must have had a sophisticated understanding of such matters as loan security (as he acknowledged at T543.16–24), and as is reflected in his email of 10 April 2014, in which he referred to the Fund as being “second in line as creditor after the senior debt” (CB6/2547).

35    Mr Darmali agreed that he was aware that the intention of Ms Lin in acquiring Ergo was to use it to take advantage of the SIV policy (T606.11–25). He agreed that he was aware from at least about December 2013 that Ms Lin was proposing to establish a mortgage fund for that purpose (T606.27–40). I accept that evidence.

36    The plaintiffs submit, and I accept, that Mr Darmali was well aware of the restrictions on investments in cl 20.4 of the Fund Constitution. Mr Darmali accepted that he was given a copy of the Fund Constitution and IM for the Fund (T555.1–6). He said that he could not recall reading them, but accepted that it would have been his ordinary practice to do so (T555.16–42). He later denied having read cl 20.4 of the Fund Constitution (T609.40–610.43). That evidence was implausible. In any event, Mr Darmali knew by 30 April 2014 that the Fund was restricted to specific investment types, given the terms of the Form 1413 declaration that he signed for Ms Chu (CB6/2647), which he eventually accepted he probably read (T610.45–612.41). Moreover, Mr Darmali was clearly aware of the importance of documents such as the Fund Constitution and IM, and I find that he would have read them carefully. That is supported by the evidence as to his approach in relation to the Gold Stone Future Investments Property Fund (of which NGI was the trustee), in relation to which Mr Darmali retained and reviewed the Fund Constitution and IM and checked whether that fund had been managed consistently with those documents (CB6/2702–4). He denied that in cross-examination, but that denial was obviously false given the contents of the document on which he was being questioned (T545.20–547.16). In a transcribed meeting on 21 May 2014 (CB6/2713–2729), Mr Darmali spoke knowledgeably about the trust deed constituting the Gold Stone Future Investments Property Fund, cl 20.4 of which is exactly the same as cl 20.4 the Fund Constitution (CB5/2057–8). Accordingly, I find that Mr Darmali read and understood the terms of the Fund Constitution and IM and was familiar with cl 20.4. In addition, I note that on 22 May 2014, Mr Darmali wrote that “the main role of the trustee is being the steward of client’s fund and need to consider risk that it might take by placing fund without proper security or risk management” (CB6/2730). Mr Darmali was thus well aware of Gold Stone’s obligations with respect to security and risk management.

37    Ms King placed great reliance on Mr Darmali’s resignation in June 2014 as the key person for Ergo’s AFSL, on the basis that it demonstrated strict adherence to proper compliance with the reporting of breaches to ASIC (CB7/2847). However, the first (and I find the principal) reason given by Mr Darmali in that document for his resignation was that “I was keep in the dark with significant decision in providing the financial service and products”, being a matter which he re-iterated in an email of 11 July 2014, saying “To date, I was keeping in the dark and all the major decisions that were made, were done behind my back” (CB7/2898). No such problem arose in relation to the Fund, in relation to which he occupied centre stage in the Fund’s decision-making along with Ms Lin and Mr Cai.

38    A curious feature of Mr Darmali’s evidence concerned the appointment of Ms Josephine Darmali as a director of Gold Stone. Josephine Darmali is his daughter, and he gave evidence that he had had a strained relationship with her since she was a teenager (affidavit of 8.2.24 at para 14). He said that in early 2014, Josephine had dropped out of her university course and was looking for a job and wanted to learn about business, so Ms Lin offered to make her a director of Gold Stone, and Mr Darmali thought that would be a good idea (affidavit of 8.2.24 at paras 53, 59–60). He then said that Josephine resigned in March 2015 because she had not been doing much and had not been paid (affidavit of 8.2.24 at para 134). Mr Darmali also said that he had been appointed a director of many companies and he had a business understanding of directors’ duties, and said that he had never been a director of an insolvent company (affidavit of 8.2.24 at para 43). In cross-examination, he accepted that he knew Gold Stone was incorporated to manage funds for Chinese investors seeking SIVs, and he expected it would be managing significant amounts of money, potentially in excess of $20 million (T613.27–35).

39    In those circumstances, it strikes me as extremely unlikely that Mr Darmali thought it would be a good idea for a 21-year old university drop-out to “gain experience and learn about business” by becoming a director of a funds management company in charge of millions of dollars of other people’s money. Further, Mr Darmali’s evidence on the point is not corroborated anywhere, and there is not otherwise any evidence that Josephine was ever involved in Gold Stone, save for her name appearing on the ASIC records. The plaintiffs submit, and I accept, that the most plausible explanation is that Mr Darmali caused his daughter (rather than himself) to be appointed as a director on the ASIC records in an attempt to avoid personal liability in the event that anything went wrong, and to preserve his record of never having been a director of an insolvent company.

40    As to the three loan agreements at the heart of this case, which I discuss below, Mr Darmali’s affidavit evidence was that he was not involved in the drafting or negotiation of those loan agreements (affidavit of 8.2.24 at para 94; affidavit of 3.5.24 at para 32). In cross-examination, Mr Darmali continued to deny having had anything to do with the negotiation of the three loan agreements (T590.40–45, 593.27–30, 594.32–595.1, 619.15–18, 623.22–27, 627.27–35, and 629.1–15). That evidence was demonstrably false.

41    At the outset, it is worth noting that on 10 April 2014, Mr Darmali sent an email to Mr Fong, Mr Cai, Ms Lin and Ms Kwok attaching a draft joint venture agreement (CB6/2547). His affidavit evidence was that he could not recall who drafted it (affidavit of 8.2.24 at para 74), although he accepted that he had been involved in discussions regarding it (T615.45–616.42). It was obvious on the face of the email that Mr Darmali drafted the agreement, because he wrote “Please review the draft agreement between the Fund and Victor [Fong] and get back to me with any queries, I am not a lawyer and this might need to be tidy up by the legal”. That draft joint venture agreement was clearly based on the same precedent as the earlier joint venture agreement which Mr Darmali (on behalf of Fiducia Singapore) had entered into with Mr Fong on behalf of MVLC (CB5/1965.1–6). Mr Fong said that Mr Darmali had drafted both documents and I accept that evidence (T364.12–15, 381.30–39). Both joint venture agreements included a set of boilerplate clauses which were almost identical to the ones included in the AR Agreement which Fiducia Asset entered into with Gold Stone (CB6/2799–800, T551.6–552.14). The only common participant in relation to those documents was Mr Darmali.

42    Similarly, the loan agreements which Gold Stone executed (CB6/2665–80, 6/2746–61, 7/3090–106) were in identical form to the ones signed by Mr Darmali’s mother, Mrs Darmawati (CB6/2402–16). Mr Fong’s evidence, which I accept, was that Mr Darmali prepared the loan agreement for Mrs Darmawati (T379.20–23).

43    Turning to the loan agreements themselves, it was Mr Darmali who introduced Mr Fong to Ms Lin (T614.36–39). Mr Darmali had a relationship with Mr Fong from at least about December 2013 or January 2014, pursuant to which Mr Darmali was to assist Mr Fong in obtaining funding for Mr Fong’s projects (CB5/1965.1). As I discuss below, Mr Fong’s evidence, which I accept, is that Mr Darmali was paid a commission of about 10% of the amounts of loans which he sourced.

44    Mr Darmali’s mother’s loan (CB6/2402–16) was entered into on the same day as Gold Stone’s first loan to MVLC, namely 18 March 2014. Mr Darmali appeared to have been concerned to ensure that Gold Stone advanced the funds on that day (CB6/2423–5). The coincidence in timing and Mr Darmali’s concern in that respect suggests that the funds were required for some urgent purpose, of which Mr Darmali was well aware, and that Mr Darmali had been responsible for negotiating both loans.

45    Mr Darmali was clearly aware that Ms Lin’s motive for engaging Mr Fong in the Turramurra project was to protect the funds which GDI had invested. He was aware from at least about 17 March 2014 that Ms Lin was seeking to extricate herself from the Turramurra project (CB6/2401). On 2 May 2014, he received an email from Ms Lin in which she said that he had put her personal money into GDI and she was concerned about the safety of her capital, which was why she wanted Mr Fong’s involvement in Turramurra (CB6/2658). On 15 May 2014, he received an email from Ms Lin in which she made it clear that a condition of Mr Fong’s involvement in the Turramurra project had to be that GDI’s $2 million would be refunded (CB6/2692–3). It was obvious that Ms Lin wanted Mr Fong to be involved in order to protect the funds which she (through GDI) had invested in the project.

46    Mr Darmali was also aware that the loans to MVLC and MVDA were made in exchange for Mr Fong’s involvement in the Turramurra project. Mr Fong expressly told Mr Darmali that he was concerned about the feasibility of the project by email dated 29 April 2014 (CB6/2645). Further, Mr Darmali said in his affidavit evidence that “Victor [Fong] wanted investment in his Lane Cove project in exchange for his investment in the Turramurra project” (affidavit of 8.2.24 at para 66), which was consistent with Mr Darmali’s 17 April 2014 email, in which he said “To help improve the return of the project, the fund will invest $1m into Lane Cove Aurora development with security as previous placement” (CB6/2586). In cross-examination, Mr Darmali denied any recollection of those matters (T616.44–618.30), but that evidence is simply implausible and I reject it.

47    Mr Darmali accepted that by the middle of 2014 he had visited the Lane Cove project and received some information about it (T558.26–32). He said that he had given some information to his mother before she entered into her loan with MVLC on 18 March 2014 (T575.18–24). Mr Darmali said that he was satisfied that the “security” for his mother’s loan was satisfactory, and demonstrated a sophisticated (but not necessarily correct) understanding of that matter (T577.6–578.10, 591.35–47, and 592.38–48).

48    Mr Darmali accepted that he knew that the payment from Gold Stone in respect of the MVLC Loan Agreement was for a loan, because he wrote that on the withdrawal form, but he said he had no idea what the security was (CB6/2684; T619.40–620.19). That evidence is highly implausible and I reject it. Mr Darmali otherwise disclaimed responsibility for the Macquarie Bank withdrawal forms that he signed as authorised signatory of the 645 Account, and those he completed but which were signed by Ms Lin and Mr Cai (T593.26–594.17, 595.8–32, 620.28–622.36). However, Mr Darmali did accept that he knew he was causing trust money to be disbursed to MVLC and MVDA (T620.1–9, 623.29–38, 624.36–625.1, and 628.10–36).

49    Mr Darmali also accepted that his signature appeared on the two MVDA Loan Agreements as the witness to Mr Fong’s signature, but he denied any knowledge of what the loan agreements said (T623.9–23, 624.19–31). That evidence was also implausible. I do not regard it as coincidental that Mr Darmali was in the room when those documents were signed by Mr Fong. In my view, the fact that Mr Darmali witnessed Mr Fong’s signature is further evidence that he had been actively involved in negotiating the loan agreements.

50    Mr Darmali was also directly involved in negotiating with Mr Fong for amendments to be made to the Second MVDA Loan Agreement after it had been signed on 8 August 2014. As I discuss below, on 11 and 12 August 2014 it was Mr Darmali who altered the Schedule to the Second MVDA Loan Agreement after it had been signed in order to change the description of the Mortgaged Property referred to in Item 6 and the unit which was the subject of the so-called Collateral Document. Mr Darmali’s patently false denials of involvement in the substitution of the Schedule reinforce his absence of credibility.

51    As I discuss below, I find that Mr Darmali was heavily involved both in the operation of the Fund and in the negotiation of each of the three loan agreements. He was aware of the terms of the Fund Constitution, IM, and the three loan agreements. He was financially sophisticated and knew that the “security” offered by MVLC and MVDA for the loans was non-existent and inadequate, but nevertheless procured Gold Stone to enter into the loan agreements because he wanted to earn the commissions from Mr Fong, the fees charged by Fiducia Asset as the holder of the AFSL and ACL used by Gold Stone as AR, and the profits that Fiducia Asset stood to receive as a shareholder of Gold Stone in the event that the loans were repaid with interest. He had appointed his estranged daughter as a director of Gold Stone in order to avoid having personal exposure in the event that Gold Stone were wound up. He was a signatory on the Macquarie Bank trust account and had general authority to operate that account for any purpose.

52    Further inconsistencies and oddities arise in relation to Mr Darmali’s evidence as to his knowledge of the Fund’s financial difficulties in relation to the three loans. From February 2015, Gold Stone ceased paying Fiducia Asset’s invoices, and Fiducia Asset then terminated the AR agreements in August 2015 (affidavit of 8.2.24 at paras 133 and 140). Mr Darmali said that at the time that that occurred, he was not aware of any issues with the Fund (affidavit of 8.2.24 at paras 140 and 163). In that regard, Ms King, counsel for Mr Darmali, referred to Mr Darmali’s knowledge of a payment direction by Mr Fong on behalf of MV Fiducia Pty Ltd to Gold Stone as trustee for the Fund of $678,493 on 29 December 2014 (CB8/3519), but that was well before the non-payment by Gold Stone of Fiducia Asset’s invoices and the ultimate termination of the AR agreements in August 2015.

53    In fact, Mr Darmali was copied into the emails from Ms Kwok in February 2015, in which Ms Kwok was chasing Mr Fong for repayment of the MVLC Loan and the Second MVDA Loan (CB8/3558 and 3566–7). Mr Darmali was in a personal relationship with Ms Kwok at the time (T556.31, 629.29–30). He denied reading the emails (T629.27–630.30), but that is implausible given that he was clearly concerned that his invoices had not been paid and thus had a substantial commercial interest in the recoverability of Gold Stone’s loans. Mr Darmali was also copied into Ms Lin’s email of 18 March 2015, in which she called an urgent meeting to discuss protecting fund assets and cash flow difficulties (CB8/3754). Mr Darmali accepted that when he received the email he understood that Mr Fong was in default on the loans, and this concerned him, but he took no steps to inform the Fund’s investors about those problems (T631.16–27). Mr Darmali was also copied into Ms Lin’s email of 12 August 2015, which gave as the subject line “MV Developments (Lane Cove) Pty Limited (Administrators Appointed) and MV Developments (Aust) Pty Ltd (Administrators Appointed) (the Companies)”, in which Ms Lin submitted a proof of debt on behalf of Gold Stone in the administrations of MVLC and MVDA in the amount of about $8.1 million (CB9/4011–2). He denied reading that email, because he said that his relationship with Ms Lin had “gone pretty bad” at the time (T631.37–47). That denial is implausible given that the email was sent at around the time that Mr Darmali says he terminated the AR agreements with Gold Stone for non-payment. It is fanciful to think that Mr Darmali would have ignored emails from Ms Lin that were clearly related to Gold Stone’s loans, and clearly identified that the borrowers were in administration. Accordingly, I find that Mr Darmali’s evidence that he understood the Fund to be in good financial order when he terminated the AR agreements with Gold Stone in August 2015 was false.

54    Mr Darmali submits that his purported signature on three documents is not his genuine signature. The three documents in question are the Fund’s letter to Mr Xu on 24 July 2014 (CB7/3047–8), the Form 1413 dated 11 August 2014 on behalf of Mr Xu (CB7/3136), and an application form dated 14 August 2014 on behalf of Mr Xu for an investment of $1.5 million in government bonds (CB7/3144). There is no expert handwriting evidence adduced in support of the submission, and the signatures on those documents purporting to be that of Mr Darmali do not seem to me to be sufficiently different from signatures which Mr Darmali accepts were genuine for me to conclude that the signatures were forgeries. As counsel for Mr Darmali points out, Mr Darmali’s name is misspelt on the 24 July 2014 letter as “Darmili”, and Mr Darmali’s date of birth on the document of 14 August 2014 had the year crossed out and was replaced by someone who put a horizontal line through the figure “7” (and the evidence demonstrates that Mr Darmali did not cross his “7”). Those matters, however, merely demonstrate that the letter and the form were drafted and filled out respectively by someone other than Mr Darmali, and they were then presented to Mr Darmali for his signature, which I regard as a relatively common practice. I do not regard those matters as establishing that the signature of Mr Darmali was not genuine. In light of the fact that I do not regard Mr Darmali as a credible witness, I do not accept his evidence that the signatures on those documents were not genuine.

Mr Wu

55    I regard Mr Wu as a reliable and credible witness, who gave clear and direct answers to the best of his ability to the questions put to him in cross-examination.

56    The principal question concerning Mr Wu’s credibility relates to the genuineness or otherwise of his signatures purportedly appearing on a number of the contemporaneous documents. In relation to the two loan agreements with MVDA which purportedly bear Mr Wu’s signature, Mr Wu’s denials of the genuineness of that signature are supported by the expert handwriting analysis of Ms Holt in her report of 23 August 2023, which I accept. In relation to the MVLC Loan Agreement, there are two versions of the agreement in evidence. One version bears the signature of Mr Cai on behalf of Gold Stone, and no second signature (CB6/2680). The other version bears the signature of Mr Cai and what purports to be Mr Wu’s signature (CB9/4065), but the relevant page is an exact duplicate of the signature page taken from the Second MVDA Loan Agreement of 8 August 2014 (CB7/3106), which Ms Holt’s evidence establishes was not genuine. Accordingly, I conclude that none of the three loan agreements bears Mr Wu’s genuine signature.

57    As to the other documents which purport to bear Mr Wu’s signature, Mr Wu accepts that two of them were signed by him, namely the Commonwealth Bank authority document of 10 February 2014 (CB5/2010–11), and the Authorised Corporate Representative agreement dated 11 February 2014 (CB5/2095–2106). Both were signed by Mr Wu using Chinese characters. I accept Mr Wu’s evidence in relation to all the documents which he says were not signed by him, namely the Fund Constitution dated 10 February 2014 (CB5/2067–93), the Commonwealth Bank authority document dated 11 and 19 February 2014 (CB5/2133–4), the Short Form Deed for the Turramurra development dated 24 February 2014 (CB5/2138–45 and 2297–2304), the Macquarie Cash Management Account Application document for the 645 Account dated 5 March 2014 (CB5/2306–13 and 2318–25), the Macquarie Bank Cash Solutions Third Party Authority document dated 5 March 2014 (CB5/2326–30 and 2314–7), the Macquarie Bank withdrawal form for $500,000 dated 18 March 2014 (CB6/2417–8), the Commonwealth Bank authority document dated 27 March (or 27 May) 2014 (CB5/2444–5), the Authorised Corporate Representative Agreement dated 29 May 2014 (CB6/2791–2801), and the Commonwealth Bank authority document dated 21 August 2015 (CB9/4116–7).

Expert witnesses

58    Mr Wengel was a reliable and credible accounting expert who gave balanced and careful evidence. I accept the expert evidence given by Ms Holt as a handwriting expert without qualification.

Salient facts

59    On 2 October 2012, GSVC was registered, with Ms Katherine Gai and Ms Zhu as its directors (CB15/6770). Ms Zhu was Ms Lin’s mother and nominee, and at all times acted at Ms Lin’s direction (affidavit of Ms Lin of 17.10.14 in the Supreme Court of NSW, paras 22–24: CB8/3333–4). In early 2013, GSVC purchased the shares in Ergo (3/1150–73) for the purpose of attracting investors who were looking to acquire a SIV (CB5/1905 and 3/1134–9). In mid-2013, the Gold Stone Future Investments Property Fund was established and issued an IM (CB4/1408–27), although its constitution is oddly dated 10 February 2014 (CB5/2038–66). The trustee of that fund was NGI, which had been appointed as AR of Ergo’s AFSL, and was wholly owned by GSVC (CB15/6893, 6895). The directors of both Ergo and NGI were Ms Gai and Ms Zhu (CB15/6679). Ms Gai was married to Mr Kristjan Geering. Mr Geering and Ms Lin were the two directors of Austleg Lawyers Pty Ltd (CB15/6770). There was also a fund called the Gold Stone Income Fund (CB4/1435–6, 6/2702–4, 14/6438–53).

60    On 15 August 2013, a letter was sent by NGI as trustee for the Gold Stone Income Fund to Ms Chu, setting out an investment proposal for an investment of $3.5 million in the Gold Stone Income Fund for a period of 12 months (CB4/1435–6). A document was attached entitled “Significant Investor Visa Investment Plan” which referred to Ms Chu proposing to invest $1.5 million in Waratah Bonds and $3.5 million in the Gold Stone Managed Investment Scheme in conjunction with her SIV application (CB4/1437-8).

61    On 14 November 2013, Ms Chu submitted an application for a visa under the SIV application stream. The application form called for Ms Chu to give details of the complying investments which she planned to make in Australia, to which she responded: “invest 3.5 million AUD through Gold Stone’s MIS, invest 1.5 million AUD in NSW Waratah Bonds” (CB4/1538 at 1548).

62    On 5 December 2013, Mr Xu made a SIV application, in which he stated in relation to the complying investments which he planned to make in Australia: “I want to invest AUD 5 million into a private company, Paragon Business Group” (CB4/1807 at 1815).

63    On 12 December 2013, Mr Darmali wrote an email to Ms Lin, Ms Gai and Mr Geering (a solicitor at Austleg Lawyers Pty Ltd) (CB5/1905) thanking them for their time the previous day and stating:

It has been almost a year now since we started Ergo Capital and it has been a challenging year for all of us to make the business successful. As they said, Rome was not built in a day. Well, I feel confident that we have the right people as well as resources to make Goldstone [sic] successful.

…

Next year is coming soon and I assumed that you have a big plan for Goldstone.

Ms Lin replied on 14 December 2013 (CB5/1905), thanking Mr Darmali for the email and for “your faith on us” and stated:

Truly appreciate your supports and professional inputs in the past 10 months. And personally I enjoyed the time spent with all of you.

Ergo Capital was acquired for the purpose of taking advantage of the SIV visa policy released by the Department of Immigration in Nov 2012. So far there are about 20 of SIV has been granted, despite the budget for business migration for year 2013/2014 is 7000. The good news is 700 SIV sponsorships have been approved by the States, and the Minister last week has clearly state that the Department shall speed up the process of SIV applications. So as we are expecting more business migrant invest to Australia, we are in a better position to take Gold Stone up.

We have been experienced the challenge to tailor our products to suite the clients appetite. Especially our target audience is to the high net worth individual and every one of them have their own unique needs, purpose and concern. To complicate further their investment decision is largely affected by their migration application outcome and family residence arrangement. At the moment we are trying to package a product provide the flexibility in terms of size and length of the investment can be made to attract wider range of audiences. The Gold Stone Mortgage Fund under the discussion is one of them.

The commercial application to the Mortgage Fund in my view will only be certain after we tested it and obviously the market will tell. There are risks involving large sum of money for conducting such trial. Maybe it is only sensible and logical to have something similar in nature for us to try before we commit largely to it. I think we should always to have alternative and contingency plan there to insure the execution of our big plan.

64    On 17 December 2013, GDI entered into a contract with C21, which referred by way of “Background” to C21 having arranged for the sale to GDI of six properties at 1444B–1452 Pacific Highway, Turramurra, and GDI having signed contracts for the purchase of those properties for $13,558,389 with a deposit of $1,510,000 (CB5/1956). The contract referred also to the total costs and expenses incurred by or on behalf of C21 in respect of the development application and ancillary matters being an amount of $1,541,611, which GDI had agreed to pay to C21 on completion of the contracts to purchase the Turramurra properties. GDI’s obligations under the contract were guaranteed by Mr Cai and Mr Xufeng Wu (the latter being the father of the fifth defendant).

65    On either 19 December 2013 or 28 January 2914 (the document bears both dates), Fiducia Singapore and MVLC entered into a Joint Venture Agreement in relation to future property development projects: CB5/1965.1–6. The agreement was executed by Mr Darmali and Mr Fong respectively.

66    In January 2014 Mr Xu met with Ms Lin and others over dinner in Shanghai. Mr Xu affirmed an affidavit in which he gave evidence in direct speech (prefaced by the obfuscatory language “words to the following effect”) as to what he and Ms Lin said at the dinner, but in his cross-examination all he could actually remember saying to Ms Lin was that if Ms Lin could guarantee the principal invested then he would invest in the fund which was under discussion: T232.40–234.42. Mr Chen recalled Mr Xu saying that his main goal was to guarantee that the principal was safe and that he did not really care about the return: T304.44–305.2. Mr Wang’s evidence was to the same effect: affidavit of 3.11.23 at para 53. Ms Meng Xu (Mr Xu’s niece) claimed to recall Mr Xu saying the opposite, namely “I put the investment with Louise and the interest is very safety and we can get higher returns. It is enough for you guys to live in Australia”: T353.24–27. I do not accept Ms Meng Xu’s evidence. I accept Mr Chen’s and Mr Wang’s evidence, and I accept Mr Xu’s evidence to the extent that it is corroborated by Mr Chen and Mr Wang.

67    In January 2014, Ms Chu and Mr Chen met with Ms Lin in Sydney. Ms Chu gave evidence in direct speech in her affidavit as to what she and Ms Lin said, but in cross-examination Ms Chu accepted that she could not recall precisely what she said or what happened at the meeting: T179.18–26. However, Ms Chu did claim to recall saying that she needed to get her principal back: T179.33–41. Ms Chu claimed to have asked questions at the meeting about how the money was going to be invested, but then accepted (after being taken to her affidavit) that she did not ask such questions: T179.43–180.47. Mr Chen gave evidence (commendably in indirect speech) that Ms Chu said that she was not too concerned about interest or dividends, but she was concerned about the safety of her funds (affidavit of 26.4.24 at para 10). I accept Mr Chen’s evidence, and I accept Ms Chu’s evidence to the extent that it was corroborated by Mr Chen.

68    The notes of a meeting held on 27 January 2014 between Ms Lin, Ms Gai and Mr Geering refer to the funding and progress of the purchase of the Turramurra properties and the proposed development and on-sale of those properties as completed apartments (CB4/2002). The notes of the meeting then refer to the ultimate goal being for “the property fund to be registered proprietor” and refer to a mortgage fund offering a fixed return to the investor of 8% with a new trust company, namely Gold Stone with “Mr. Wu jnr. as director”. Under the heading “David’s [ie Mr Darmali’s] Deal – credit lic./AFSL” the following appears (CB4/2003):

$50k or 100K plus share of the net profit – 5% < $20m, 10% + $20m, exclusive, actively manage the fund, report to the Investors, excluded from the AFSL deal, he is going to pick it anyway AFSL fee because of “funds under management”, set up a board to make the investment decisions.

Role – manager excluding the investment decisions he make recommendations,

First three months $50kpa rate then $100kpa rate.

69    By early 2014, Ms Lin had lost confidence that GDI could undertake the development project at Turramurra on its own, and that for GDI to continue with the Turramurra development on its own would lead to a financial disaster and could adversely impact on GDI’s important financial relationship with Mr Xufeng Wu, being a shareholder in GDI: affidavit of Ms Lin of 31.12.14 at [100] (tendered by the plaintiffs and admitted against Ms Lin only). Ms Lin gave evidence to the same effect in her affidavit of 17 October 2014 (paras 61–2) in the NSW Supreme Court case of Thomson v Golden Destiny Investments Pty Ltd (CB8/3346), and that evidence was admitted against all defendants (T700.20–25).

70    On 4 February 2014, Ms Lin sought vendor finance for the purchase of the Turramurra properties: CB5/2009. However, that proposal did not succeed.

71    On 7 February 2014, Gold Stone was incorporated, with Mr Cai and Mr Wu as its directors. A week later, on 14 February 2014, Ms Darmali also became a director (CB15/6762–3). The registered office and the address of the principal place of business of Gold Stone was given as level 6, Suite 606, 451 Pitt Street, Sydney which was also the office of Austleg Lawyers Pty Ltd where Ms Lin practised as a licensed conveyancer and was a director and shareholder. It was also the address of Mr Cai’s real estate agency, Australian Sydney Realty Pty Ltd.

72    On 10 February 2014, Mr Cai and Mr Wu filled out and signed a Commonwealth Bank form nominating themselves as the authorised signatories for the 889 Account in the name of Gold Stone: CB4/2010. Mr Wu accepts that his signature on the form is genuine.

73    Also on 10 February 2014, the Fund Constitution was formed by way of a deed poll which was executed by Gold Stone (CB4/2067–93) setting out the terms of the unit trust known as the Gold Stone Secured Income Mortgage Fund, being the Fund at the heart of these proceedings. The deed was signed by Mr Cai and also purports to bear the signature of Mr Wu, who disputes that it is his signature and I accept that Mr Wu’s signature is a forgery. Mr Cai gave evidence that Ms Lin gave him the trust deed and asked him to sign it (T452.15), and that he observed in 2014 that Ms Lin had a copy of the trust deed in her possession (T457.32–35). I accept that evidence despite my adverse view of Mr Cai’s credibility. The evidence is consistent with the objective probabilities, as well as with the references by Ms Lin to Gold Stone as “my company” and to the Fund as “my mortgage fund” in her affidavit of 17 October 2014 in the NSW Supreme Court proceedings Thomson v Golden Destiny Investments Pty Ltd (CB8/3327): see paras 74, 119, 124 and 223 of that affidavit. Ms Lin accepted in her cross-examination in that case that Gold Stone as trustee of the Fund was controlled by her (CB8/3600 lines 40–45).

74    Gold Stone is referred to in the Fund Constitution as “RE” and the following appears as a “Notation” after the definitions:

Responsible Entity (RE) under the Act means the entity responsible for a registered managed investment scheme, (please refer to section 9 of the Act). Notwithstanding the use of Responsible Entity in this Deed it is the intention at the time of settling the Fund that it will not be required to be registered.

Clause 3 states that: “The RE has agreed to act as responsible entity and trustee of the Trust.”

75    Clause 16 provides for reimbursement of expenses. Clause 16.1 provides relevantly:

Subject to clause 16.3, all the costs and expenses relating to the Trust are payable out of the Assets [being the Property, Investments, rights and income of the Trust].

Clause 16.3 provides as follows:

So long as and to the extent that it is required by the Act [ie Corporations Act 2001 (Cth)], the rights of reimbursement and indemnity granted under this clause 16 are only available to the extent the RE has properly performed its duties. However, to the extent permitted by the Act, nothing in this clause 16.3 limits any rights of reimbursement or indemnity conferred on a trustee or the RE by law or statute.

76    Clause 17 of the Fund Constitution deals with the RE’s remuneration, and provides for an initial service fee of up to 1% of application money, a management fee equal to 1% per annum of the gross asset value and a performance fee calculated by reference to the extent to which the Fund outperforms a benchmark of an internal rate of return of 8% per annum. Clause 18.1 entitles the RE (together with its related bodies corporate and associates or officers and employees) to be interested in any contract or transaction with the RE as trustee of the Trust or in another capacity or with an associate of the RE or any unitholder. Clause 19 contains limitations on the RE’s right of indemnity and clause 19.7 limits its indemnity to the extent that the RE “has properly performed its duties having regard to the powers and discretion conferred on the RE”. In that regard, I note that the plaintiffs do not make any claim pursuant to s 197 of the Act.

77    Clause 20.4 of the Fund Constitution sets out the authorised investments of the Fund in the following terms, which are directly modelled on the legislative instrument referred to above, known as IMMI 13/092 which commenced on 23 November 2013:

On behalf of the Trust the RE is permitted only to invest in the following:

(a)    infrastructure projects in Australia;

(b)    cash held by Australian deposit taking institutions (including negotiable certificates of deposit, bank bills and other cash-like instruments);

(c)    bonds issued by the Commonwealth Government or a State or Territory Government;

(d)    bonds, equity, hybrids or other corporate debt in companies and trusts listed or expected to be listed 12 months on an Australian Stock Exchange;

(e)    bonds or term deposits issued by Australian financial institutions;

(f)    real property in Australia;

(g)    Australian Agribusiness;

(h)    annuities issued by an Australian registered life company in accordance with section 9 or 12A of the Life Insurance Act 1995;

(i)    derivatives used for portfolio management and non-speculative purposes which constitute no more than 20 percent of the total value of the Net Asset Value;

(j)    loans secured by mortgages over the investments listed in paragraphs (a) to (h) above;

(k)    other managed funds that invest in the investments listed in (a) to (j) above;

(h)    [bis] and other investment categories contained in the list of “Eligible Investments” as gazetted by the Minister from time to time for the purposes of Regulatiion 5.19B of the Migration Regulations 1994 (Cth) or the said regulation’s successor.

Paragraph (j) is of central importance in relation to the issue as to whether the Fund’s investments were authorised or not.

78    On 10 February 2014, Gold Stone issued the IM as the Trustee and Manager of the Fund. The first page of the IM expressly stated that it was provided only to Eligible Investors (CB5/2016), defined as wholesale clients as defined by the Act (CB5/2028). That page also stated that an investment in the Fund is “subject to risk” and that “The value of your investment can fluctuate up or down with the value of the assets of the Fund.” The IM stated that Gold Stone is a corporate AR of Ergo in relation to the latter’s AFSL, and is a credit representative of Fiducia Asset in relation to its ACL (CB5/2018). The “Key Features of the Fund” (CB5/2019) included a statement of the investment strategy of the fund being “To invest directly or indirectly in Australian real estate mortgages, property mezzanine finance, term deposits and interest deposits (within Australian financial institution)”. The investment objective of the Fund was stated to be 8% p.a. return on its invested capital net of all fees and charges. The minimum initial subscription was stated as AUD500,000 with a minimum holding of AUD250,000. The return to investors was stated to be 8% per annum fixed simple interest paid quarterly. However, the IM also stated that: “Where possible and in the absolute discretion of the Trustee and Manager, the Fund will make distributions to the unit holder quarterly, in the months of July, October, January and April”: CB5/2021.The IM set out further details concerning the investment strategy and investment objective of the Fund (CB5/2020). The IM stated that “The fund manager will manage the investment in the most professional and competent way to achieve the target return”: CB5/2020. I find that that was a reference to Mr Darmali who was the Fund Manager. It also referred to the entitlement of Gold Stone to use related bodies corporate and associates to provide services relating to the activities of the Fund, including providing mortgages and other loans to related entities and through joint venture agreements, but stated that “All related parties dealing will be at arms length and will not be breaching the conflict of interest as well as duty of care to our investors” (CB5/2022).

79    Under the heading “Factors Influencing Potential Success of the Trust”, the IM identified the material risks associated with an investment in the Fund, stating that all investments carry risk, primarily relating to the risk of losing money (CB5/2026). The IM encouraged potential investors to read the entire document to fully appreciate the specific and general risks and if appropriate to seek professional advice before deciding whether to invest. Under the heading “Specific Risks”, the IM said that when the industry-specific risks are aggregated, there is a possibility, however remote, that all application monies could be lost, and stated “Any investment in the Trust should be considered high risk” (CB5/2026). After providing a list of the “General Risks”, the IM stated: “The Trustee and Manager manage these risks through a conservative lending policy and by diligent management of the Fund” (CB5/2027). The IM included an application form for units in the Fund, which included a declaration as follows (CB5/2031):

The applicant agrees to be bound by the provisions of the Constitution of the Gold Stone Secured Income Mortgage Fund (as amended and as it may be amended from time to time in the future) and acknowledges the Gold Stone Secured Income Mortgage Fund does not guarantee the performance of the Fund or the repayment of capital.

80    On 11 February 2014, an Authorised Corporate Representative Agreement was entered into between Fiducia Asset and Gold Stone, authorising Gold Stone to act as an AR in relation to Fiducia Asset’s ACL (number 405904) (CB5/2096). The agreement was signed by Mr Darmali on behalf of Fiducia Asset, and by Mr Cai and Mr Wu on behalf of Gold Stone (CB5/2102). Mr Wu accepts that he did in fact sign that agreement. It is not entirely clear why Gold Stone regarded an ACL as necessary, but it would appear to relate potentially to two aspects of the authority granted to Fiducia Asset under its ACL in the event that Gold Stone were to engage in consumer lending, namely:

(iii)    performing the obligations or exercising the rights of a mortgagee in relation to a mortgage or proposed mortgage that secures or will secure obligations under a credit contract under which the licensee is not the credit provider; and/or

(iv)    performing the obligations or exercising the rights of a beneficiary under a guarantee or proposed guarantee that guarantees obligations under a credit contract under which the licensee is not the credit provider …

81    From 7 March 2014 to 17 January 2015, Gold Stone made 11 payments pursuant to the Authorised Corporate Representation Agreement relating to the ACL, totalling $108,261.20. The plaintiffs claim equitable compensation for that amount on the basis that the payments were made in breach of trust.

82    On 19 February 2014, Ms Lin was added as an authorised signatory for the 889 Account of Gold Stone (CB5/2133). Mr Wu correctly disputes that what purports to be his signature on that form is genuine, pointing out that it appears to have been copied from the initial Commonwealth Bank form of 10 February 2014 (CB5/2011).

83    On 24 February 2014, a deed was entered into between GDI, NGI, Gold Stone in its capacity as trustee for the Fund, and Ergo Investment Management Pty Ltd relating to the development project at Turramurra (CB5/2138–45). The recitals indicate that GDI did not wish to develop the project, that NGI as trustee of the Gold Stone Future Investments Property Fund did wish to develop the project provided certain terms and conditions were met, and that Gold Stone as trustee of the Fund or GDI wished to provide to NGI debt funding to pay the purchase price of $15.1 million for the Turramurra properties (CB5/2139). Clause 2.7 provides that in the event that the purchase contracts for those properties were novated to NGI, Gold Stone as trustee of the Fund or GDI will lend to NGI up to $5.5 million with the salient terms being an interest rate of 20% per annum for a loan by the Fund and 15% per annum for a loan by GDI (but without any reference to any security for such loans). The deed purports to be signed by Mr Wu on behalf of both GDI and Gold Stone, but he correctly disputes that the signature is genuine.

84    On 24 February 2014, GDI, NGI (as trustee for the Gold Stone Future Investments Property Fund), Gold Stone (as trustee for the Fund) and Ergo entered into a Short Form Deed whereby GDI agreed to novate the Turramurra contracts to NGI, and Gold Stone and GDI agreed to advance $5.5 million to fund the development: CB5/2138–45. Recital E stated that GDI did not wish to develop the Turramurra project: CB5/2139. Ms Lin continued her efforts to extricate GDI from the Turramurra development: CB5/2249.

85    On 25 February 2014, Ms Lin emailed Mr Wu, attaching a copy of the IM in Chinese, asking Mr Wu to make a copy and pass it on to anyone who was interested: CB5/2171.1, being the English translation of CB5/2146.

86    On 28 February 2014, Gold Stone as trustee of the Fund issued a term sheet for the purchase of units in the Fund for the “Aurora” project in Lane Cove, New South Wales, with a total proposed placement of $1 million (CB5/2255 at 2259). The project was identified as “Aurora” at 3–9 Finlayson Street, Lane Cove, NSW and specified the target investment return as 10% per annum which was said to be guaranteed by the developer, MVLC. The security for the Fund is described as follows (CB5/2259):

GSC [ie Gold Stone] will secure its capital and interest with the following securities:

(i)    Formal exchange contract of sale with deposit value of $1.3 millions on apartments number 1.06 and G.12, 3–9 Finlayson Street, Lane Cove, NSW, with a deed option for full cash refund.

(ii)    Guarantee by [MVLC] which owns Aurora Site.

At that time, the apartments referred to as security for the Fund did not exist as a matter of the law of real property, given that the draft strata plan was not yet registered. The borrower was identified as MVLC, and Mr Victor Fong was referred to as its director and shareholder (CB5/2263).

87    On 5 March 2014, Gold Stone applied to open the 645 Account, being a cash management account with Macquarie Bank (CB5/2318–25). The account signatories were identified as Mr Cai, Mr Darmali and Ms Lin, any two of whom were required to sign (CB5/2324). Mr Wu was not nominated as an authorised signatory. The application form was signed by Mr Cai, and purports to have been signed by Mr Wu, but Mr Wu correctly disputes the genuineness of that signature (CB5/2325). A separate form dated 5 March 2014 conferred authority on Fiducia Asset to operate the 645 Account (CB5/2326–30). The document was signed by Mr Cai, and purports to have been signed by Mr Wu who correctly disputes the genuineness of that signature (CB5/2330).

88    On 12 March 2014, the Joint Unitholders filled out and signed an application form for 500,000 units in the Fund, enclosing the initial subscription amount of $500,000 (CB5/2267–75, and see CB5/2265–6). Apart from the plaintiffs, they were the only other unitholders of the Fund. It appears that they invested jointly in those units. Mr Wengel, an expert accounting witness engaged by the plaintiffs, has identified that Gold Stone received into the 645 Account $100,000 on 12 March 2014 and $400,000 on 13 March 2014, being the subscription monies in relation to the investment by the Joint Unitholders in the Fund (report of 19.4.24 at para 19.2). The amount of $100,000 was sourced from a joint account held by the Joint Unitholders (CB6/2373), but the evidence concerning the $400,000 payment (CB6/2375) does not reveal its source. Mr Wengel identifies a payment of $500,000 on 18 March 2014 from the 645 Account to MVLC, corresponding to the $500,000 investment in units (report of 19.4.24 at para 19.6). I note at this point that on 31 December 2014, repayment was made to the Joint Unitholders in the amount of $552,446.30, being the return of their funds invested plus interest of $52,446.30 (Mr Wengel’s report of 19.4.24 at para 19.11.1). That amount was paid into a joint account held by the Joint Unitholders (CB8/3525). Accordingly, two of the three entries for payments involving the Joint Unitholders expressly identify that the payment was made from or to a joint account. I infer that the Joint Unitholders paid for their units entirely from jointly held funds. Importantly, it appears that their units were redeemed, such that the only unitholders in the Fund after 31 December 2014 were the plaintiffs.

89    On 12 March 2014, Ms Lin sent an email to Mr Geering and Ms Gai stating (CB6/2374):

Gold Destiny [ie GDI] is not in a position to complete the Contract. NGI will complete the contract and Gold Destiny will provide fund up to 5.5M as per Agreement signed on 24th February 2014.

Gold Destiny has formally assigned its right to NGI under the Agreement.

90    On 17 March 2014, GDI failed to attend the scheduled settlement of the contracts to purchase the Turramurra properties: CB6/2398. At that time, Ms Lin was seeking funding, and discussed with Mr Darmali the possibility of finding a new investor to take over the Turramurra development: CB6/2401.

91    On 18 March 2014, a loan agreement was entered into between Ms Darmawati Darmawati (Mr Darmali’s mother) as the lender and MVLC as the borrower for a loan of $1 million for six months at an annualised interest rate of 30% (and a default rate of 35%) (CB6/2402–16). The mortgaged property was said to be a particular lot in “an unregistered plan” being part of the “Aurora” development in Lane Cove (CB6/2415). I accept Mr Fong’s evidence that Mr Darmali prepared the loan agreement and provided it to Mr Fong (T379.20–23), to which I have already referred at [42] in discussing Mr Darmali’s lack of credibility as a witness. The format of the loan agreement is substantially identical to the three loan agreements discussed below under which Gold Stone lent money to two companies associated with Mr Fong.

92    On the same day, 18 March 2014, Gold Stone withdrew $500,000 from the Fund’s 645 Account with Macquarie Bank, payable to MVLC. The withdrawal form was signed by Mr Darmali and Mr Cai, and also purports to have been signed by Mr Wu (although that signature is correctly disputed). The reference to appear on the destination’s bank statement (ie MVLC’s) was “Loan Gold Stone Capital” and the description to appear on Gold Stone’s statement was “MV Developments (Lane Cove) P/L Draw Down” (6/2418). There is no evidence of a documented loan agreement. The loan thus appears to be an informal, unsecured loan repayable on demand. The withdrawal of $500,000 corresponds to the amount invested six days earlier by the Joint Unitholders (CB6/2417). Earlier that day, Mr Darmali had attempted to withdraw the $500,000 himself, but was asked by the bank to arrange for the withdrawal form to be signed by Gold Stone’s two directors (Mr Cai and Mr Wu) (CB6/2421–31), which he did.

93    On 19 March 2014, Mr Geering of Austleg Lawyers Pty Ltd wrote to the solicitors for the vendors of the Turramurra properties, noting that one of the parties to the contracts of sale had passed away, thereby deferring the completion date pursuant to a special condition until 14 days after the legal personal representative of the deceased party had become the registered proprietor of the relevant property (CB6/2434). The contracts for the Turramurra properties were otherwise due for completion on 17 March 2014.

94    A Commonwealth Bank form for the nomination of authorised signatories for the 889 Account appears to have been signed on either 27 March 2014 or 27 May 2014. The date is not clear but 27 May 2014 appears to me to be what was written on the form. The form nominates any one of Mr Cai or Ms Lin as the authorised signatories for the 889 Account, and was signed by Mr Cai and purportedly by Mr Wu (although Mr Wu’s signature is correctly disputed) (CB6/2444–5).

95    At some time in April 2014, Ms Chu signed an application for units in the Fund, although the form is otherwise blank: CB6/2455–66. The form contains a declaration whereby the applicant acknowledges that the Fund “does not guarantee the performance of the Fund or the repayment of capital”, although that declaration is no more prominent than any other aspect of the application form (CB6/2458). On 3 April 2014, the Department of Immigration and Border Protection of the Australian Government wrote to Ms Chu advising her that her application for a visa in the SIV stream had reached the stage where she was invited to select and make a complying investment of at least $5 million in Australia (CB6/2481–4). On 17 April 2014, Ms Chu received and signed a letter from Fiducia Fund Management Pty Ltd providing a mandate to Fiducia Fund (of which Mr Darmali was the sole director) to obtain $1.5 million in NSW Waratah bonds (CB6/2566–7). Fiducia Fund was an AR of Fiducia Asset’s AFSL (CB15/6709–10)

96    On 3 April 2014, Mr Xu signed a Form 1412 Deed of Acknowledgment, Undertaking and Release with the Department of Immigration and Citizenship acknowledging, among other things, that he was responsible for any financial or legal risk that exists in relation to the complying investment, including any risk in relation to a loss of value of the complying investment (CB6/2480).

97    On 4 April 2014, the solicitors for the vendors of the Turramurra properties served notices to complete on the purchasers (CB6/2509).

98    On 10 April 2014, Mr Darmali sent an email to Mr Fong, Mr Cai and Ms Lin referring to their discussions to date in which they had all agreed that Mr Fong would take over the Turramurra project from GDI, and attached a draft agreement between the Fund and Mr Fong which would also be extended to an SPV when the SPV was set up (CB6/2547). Mr Darmali’s email then sets out a summary of the steps needed and the agreement in principle, which included:

•    Upon the signing of signing of the JV agreement, Victor [Fong] will take over the liaising between the vendor and [GDI].

•    A new SPV will be set up which comprise of Vic and the fund interest.

•    Mortgagee document will be sign by the SPV and the fund.

•    The fund will place the $6.5M investment into the SPV.

•    Victor will provide the blance of the fund needed from the start of the take over to the final completion of the project.

•    Victor will organise the settlement and has the financial capability to settle as well as complete the project profitably.

•    The fund will be second in line as creditor after the senior debt.

•    Victor will pay GDI the sum of $1.5m on the novating of the contract to the SPV.

•    The balance of the payment of $230,000 which cover the cost of the work to date will be reimburse to GDI at the final settlement date.

•    Victor will run and managed the project to ensure its profitability.

•    John will be allocated a number of apartments (to $ value) to market and paid commission as per commercial arrangement.

•    David Darmali will be the fund manager and point of contact for all parties.

99    On 17 April 2014, Mr Darmali sent a further email to Ms Lin and Mr Fong on the subject of “Turramurra”, relevantly as follows (CB6/2545):

From discussion with both of you, these are my understanding on the propose change:

Louise need assurance that Victor [Fong] is committed and has financial capability to settle and complete the project.

Victor need assurance that fund will invest $6.5M.

To help Improve the return of the project, the fund will invest $1m into Lane Cove Aurora development with security as previous placement.

The new SPV will be set up and the fund will contribute $5.5m and within 7 days Victor will place $1M minimum.

Louise [Lin] will receive $1.5M at the novation of the contract to the SPV and a further $231,000 at the final settlement.

Victor will provide guarantee return of 17% net p.a from the date of settlement to maturity at the end of 2 years.

Victor will provide return of 10% p.a for the fund placement in the SPV up to the final settlement date.

Considering the time pressure, we need to make a decision one way or another. So could you please come back to me by email today if the above is OK or any adjustment need to be made.

100    On 17 April 2014, Ms Lin sent an email to Mr Darmali and Mr Fong, copied to Austleg Lawyers, as follows (CB6/2545):

Thank you for the email. We are negotiating a replacement contract with the vendor with 3 months addition settlement period. That gives everyone time for the proposed SPV.

Either NGI or Gold Stone Capital can be the funding partner for the SPV subject to Victor provide assurance to settle and complete the project, plus deliver point 4 to 7.

The new settlement arrangement with the vendor will take the heat off this deal and we can meet and discuss detail with you next week.

101    In an affidavit made on 27 November 2015 in the Supreme Court of New South Wales in Lum v MV Developments (Lane Cove) Pty Ltd, Ms Lin said that she was the person on behalf of Gold Stone who carried out the discussions with Mr Fong as deposed to in that affidavit: CB10/4485 at para 2. Those matters included the loans to Mr Fong’s companies under agreements dated 5 May 2014, 26 May 2014 and 8 August 2014, and the Turramurra development project. Importantly, Ms Lin said that the three loans were advanced “In the interests of furthering the proposed relationship between GDI and Fong”: para 6. The three loans are referred to below as the MVLC Loan Agreement, the First MVLC Loan Agreement and the Second MVLC Loan Agreement.

102    On 17 April 2014, an unsigned letter was sent by Fiducia Fund to Ms Chu headed “Investment mandate”, and referring to Ms Chu’s proposed investment of $1.5m into NSW Waratah Bonds for a period of 4 years (CB6/2566). The letter made a recommendation for that investment. The letter stated that if Ms Chu required clarification of any issues raised in the letter, then she should contact Mr Darmali and provided his mobile telephone number. The document was signed by Ms Chu as confirmation of acceptance of its terms. Although the typed letter referred to an engagement and establishment fee of 1% of the investment amount, the word “waived” was handwritten beside that matter. Mr Darmali gave unchallenged evidence, which I accept, that he agreed to waive the 1% engagement and establishment fee at Ms Lin’s request because Ms Lin told Mr Darmali that Ms Chu was very wealthy and might become a financial planning client of Fiducia: affidavit of 8.2.24 at [76]–[77]; T571.12–41. I infer that the mandate letter was sent by Mr Darmali.

103    On 17 April 2014, the solicitors for the vendors of the Turramurra properties wrote to the solicitors for the purchaser, stating that the purchaser had had ample time to settle the purchase and the vendors were not prepared to wait any longer for completion beyond three months from the expected date of exchange of the new contracts for sale, that is, 22 July 2014 (CB6/2570–1). On 23 April 2014, GDI entered into six new contracts for the purchase of the Turramurra properties, and before the exchange of those contracts Ms Lin “expressed that she no longer wanted to take the risks associated with the project and wanted to get out of the project”: CB6/2628.

104    Between 24 and 28 April 2014, Ms Chu deposited a total of $5 million into the Fund’s 645 Account (CB14/6478 and 6/2623–5).

105    On 29 April 2014, Mr Fong sent an email to Mr Darmali on the subject of “Turramurra” attaching a revised feasibility study based on their discussion the day before (CB6/2645). Mr Fong stated that the project was showing a 62% return on equity for a 30 month period and added “I have serious concern regarding the project.” Mr Fong gave evidence, which I accept, that the property developments that he had invested in had typically provided a return on equity of 100% over the period of about three years of the project: T382.22–28.

106    On 30 April 2014, Mr Darmali as the “Fund Manager” of the Fund signed a Form 1413 Declaration in relation to managed funds to the Department of Immigration and Border Protection of the Australian Government (CB6/2647). The declaration is to the effect that the Fund meets the definition set out in reg 1.03 of the Migration Regulations 1994, and sets out that definition in the body of the declaration. The declaration also includes the proposition that “I understand that giving false or misleading information is a serious offence.” On the same day, Mr Darmali as “Fund Manager” signed a letter to Ms Chu on the letterhead of Gold Stone confirming receipt from her of $5 million and referred to Ms Chu’s intention to invest $1.5 million in NSW State Government Waratah Bonds and $3.5 million in the Fund (CB/2648).

107    On 2 May 2014, Mr Darmali sent an email to Mr Geering, copied to Ms Gai and Ms Lin, referring to a meeting the day before between Mr Fong, Mr Darmali, Ms Lin and Mr Cai in relation to GDI’s interest in the Turramurra project (CB6/2659). Mr Darmali stated that: “It is at the end of the day, up to the director of Golden Destiny (GD) to make a decision what to do with their existing commitment with vendor of Turramurra.” The email ends with the following paragraph:

Could you please make yourself clear, who are you acting in your dealing? Are you acting on behalf of Gold Stone Capital Pty Ltd (because I am the fund manager) as lawyer or are you acting in your capacity as shareholder (Ergo) or trustee of New Galaxy?

108    On 5 May 2014, the MVLC Loan Agreement was entered into between Gold Stone as trustee for the Fund as the Lender and MVLC as the Borrower for an amount of $500,000 for a term of 9 months (CB6/2665–80). Mr Fong gave evidence, which I accept, that the loan was the result of a request made by Mr Fong to Mr Darmali for a loan of $500,000 for the Manly project: T366.17–35. The document was executed by Mr Fong on behalf of MVLC (and on his own behalf as guarantor) and by Mr Cai as director of Gold Stone. The interest rate was expressed as “Fixed at 30% for 9 months”, and in relation to unpaid amounts the interest was stated to be “40% per annum” (CB6/2678). Accordingly, the interest rate was effectively 40% per annum, irrespective of whether the Borrower was in default.

109    Clause 12 of the MVLC Loan Agreement dealt with “Security” and provided as follows (CB6/2672):

12.1     The Borrower hereby charges with payment of monies hereby secured all the right, title and interest of the Borrower in the Land Mortgaged.

12.2    The Borrower hereby covenants with the Lender to sign, seal and deliver to the Lender the Collateral Documents on the execution hereof.

12.3     The Borrower hereby covenants with the Lender to do all such things and pay all such monies and carry out all such acts as are necessary to effect registration of the Collateral Documents and ensure that all requirements and requisitions of the Land Titles Office and the Registrar General are met for the purpose of effecting such registration.

110    The term “Land Mortgaged” is defined in cl 1.1(g) as the land described as such in Item 6 of the Schedule, which specifies the “Mortgaged Property” as (CB6/2678):

Unit 1.06/3–9 Finlayson Street, Lane Cove, NSW unregistered plan which is part of Lot 71–74 Plan 10155 (Part Folio 71–74/10155) which also named at “Aurora” Lane Cove – Unit 1. 06/3–9 Finlayson Street, Lane Cove, NSW.

As is clear from the express language used in Item 6 of the Schedule, the proposed strata plan for the relevant property was then “unregistered”. That is, the strata plan had not been registered under s 7(2) of the Strata Schemes (Freehold Development) Act 1973 (NSW), which was then in force. Mr Fong gave evidence, which I accept, that he told Mr Darmali at the time that the development and the units were not registered: T366.39–367.21. Mr Fong also told Mr Darmali that MVLC was unable to grant any security over the Lane Cove property in light of the two mortgages already granted to Westpac and Wingate: T368.1–18. Those mortgages were stamped at a total secured figure of $26.94 million (CB4/1466) and $6.1 million respectively (CB4/1444): T362.12–363.10. I accept that Mr Fong was surprised that Gold Stone was prepared to lend money without security: T368.28–35.

111    The term “Collateral Documents” is defined in cl 1.1(c) as the documents described as such in Item 8 of the Schedule, which refers to (CB6/2678):

Deed of call option to purchase Unit 1.06/3–9 Finlayson Street, Lane Cove NSW with the contract deposit value of $1,100,000.00.

There is no evidence of any such deed of call option ever being drafted or executed. There is no other identification of the terms of any such call option. Clause 12.3 of the MVLC Loan Agreement is oddly drafted, in that it obliges MVLC as the Borrower to effect registration of the Collateral Documents, and makes no reference to any obligation to effect registration of a mortgage. It is not clear how it was proposed to register a deed of call option with the Land Titles Office. Nor is it clear what the notion of a “contract deposit value of $1,100,000.00” was intended to mean.

112    The following day, on 6 May 2014, the amount of $500,000 was withdrawn from the Fund’s 645 Account in favour of MVLC (CB6/2684). Mr Darmali wrote as the reference to appear on the destination statement “Gold Stone Capital (Loan)”, and as the narrative to appear on Gold Stone’s statement “MV Development (Loan Draw Down)”: cross-examination of Mr Darmali, T533.1–6. The payment was clearly the advance of the principal amount under the MVLC Loan Agreement entered into the previous day. The withdrawal form for the 645 Account with Macquarie Bank was signed by Mr Darmali and by Mr Cai (CB6/2684).

113    On 13 May 2014, Ms Lin sent an email to Ms Gai and Mr Cai, copied to Mr Darmali and Mr Geering (CB6/2688), stating that after discussion with all parties with an interest in the Turramurra site, “we decide for the best interest of the investors and Golden Destiny Investment Pty Ltd, we will not assign the Contracts to New Galaxy Investment Pty Ltd ATF Gold Stone Future Investment [Property] Fund. We will assign the Contracts to a company which is more suitable to develop the site.”

114    On 15 May 2014, Mr Darmali sent an email to Mr Huxley (a lawyer engaged by Mr Fong), Ms Lin, Mr Fong and Ms Kwok (CB6/2692) beginning as follows:

As per our telephone conversation, Louise [Lin] (the MIS) and Victor [Fong] will be JV partner in Turramurra development project. The Fund will provide $6.5M Injection, Golden Destiny will be reimburse for the deposit of $1.5M as well as other out of pocket expenses at the novation of the contract to the new SPV (Sarah [Kwok] will set this up today).

Later in the email the MIS is referred to as “Gold Stone Security Income Mortgage Fund” (that is, the Fund) and the SPV is identified as an entity associated with Mr Fong. Mr Darmali identified himself at the end of the email as “Fund Manager Gold Stone Capital Pty Ltd” (CB6/2693).

115    On 19 May 2014, the Fund sent to Ms Chu a “Confirmation Statement”, referring to Ms Chu as the holder of 3.5 million units in the Fund at a unit price of $1.00 (CB6/2708).

116    On 26 May 2014, the First MVDA Loan Agreement was entered into between Gold Stone as trustee for the Fund as the Lender and MVDA as the Borrower (CB6/2746–61). The document was executed by Mr Fong on behalf of MVDA and on his own behalf as guarantor (his signature being witnessed by Mr Darmali) (CB6/2760). The document was also executed by Mr Cai as director of Gold Stone, and purports to have been executed by Mr Wu, although Mr Wu’s signature is disputed (CB6/2761). The First MVDA Loan Agreement is in the same form as the MVLC Loan Agreement, including the oddity in the drafting of cl 12.3 to which I have referred at [111] above. The Schedule identifies the principal amount as $2,700,000, and the term is stated to be 12 months (CB6/2759). The interest rate is stated to be 18% for 12 months, although the higher interest rate applying to outstanding amounts is stated as 25% per annum (CB6/2759).

117    Item 6 identifies the “Mortgaged Property” as follows:

•    12–13 Marine Parade, Manly and being the whole of the land in Certificate of Title Folio Identifier 2/575535 and being Lot 2 in Deposited Plan 5755535.

•    102 Bower Street, Manly and being the whole of the land in Certificate of Title Folio Identifier C/345580A and C/345580B and being Lot C in Deposited Plan 345580A and Lot C in Deposited Plan 345580B.

At that time, the registered proprietors of those two properties in Manly were Mr Fitzgerald and Ms Rees, who were not associated with MVDA or any of Mr Fong’s entities. The two properties were adjacent to each other and effectively one property on separate titles (Fong, T372.26–27). There is no evidence that Mr Fitzgerald and Ms Rees had consented to their properties being mortgaged in favour of Gold Stone, and there is no evidence of any rational basis on which they would ever have given such consent. Mr Fong gave evidence, which I accept, that he told Mr Darmali, Ms Lin and Mr Cai at the time that he did not own either of the two Manly properties and was trying to borrow funds to buy those properties: Fong, T372.7–20, and see T370.39–46. Mr Fong gave evidence, which I accept, that he was “pleasantly surprised” that Gold Stone was willing to advance a loan “secured” by property that he did not own: T373.20–23.

118    I note at this point that the evidence includes a single front page of two contracts for the sale of the Manly properties to MVDA signed by Mr Fitzgerald and Ms Rees as vendors, each dated 28 February 2014: CB5/2290.1–2. One provides for a purchase price of $5,518,948 (and a 10% deposit), and the other provides for a purchase price of $8,278,422 (and a 10% deposit). They both provide for a completion date of 26 May 2014. The rest of the contracts was not tendered, and apparently could not be found. The report of the liquidators of MVDA to creditors dated 18 March 2020 refers to a deposit having been paid for the purchase of those properties on an unspecified date in May 2014 (CB13/5903), and the signed transfers of the properties by Mr Fitzgerald and Ms Rees were made on 18 August 2014 (CB7/3147.1–2). The liquidators’ report does not identify the amount of the deposit. Given that the deposit was not paid until May 2014, it is most unlikely that contracts were exchanged on 28 February 2014, or at any time before May. It is possible that the two single front pages (CB5/2290.1–2) were intended to be included in an option agreement in late February 2014, but the evidence is not sufficient to support a finding that any such option agreement was entered into at that time.

119    Further, I am unable to conclude that the deposit for the Manly properties was paid by MVDA on or before 26 May 2014 (being the date of the First MVDA Loan Agreement), or that contracts had been exchanged at that time, given that the liquidators’ reference to the payment of the deposit in May 2014 does not specify a date. In one sense, there is a mathematical probability of 26:31 that the deposit paid in May 2014 was paid on a day from 1 to 26 May, rather than on a day from 27 to 31 May, given the length of those respective periods. However, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found, and it cannot be found as a result of a mere mechanical comparison of probabilities independent of any belief in its reality: Briginshaw v Briginshaw (1938) 60 CLR 336 at 361 (Dixon J). The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied, not merely a choice between guesses on the ground that one guess seems more likely than another or others: West v Government Insurance Office of New South Wales (1981) 148 CLR 62 at 66 (Stephen, Mason, Aickin and Wilson JJ). The point is illustrated by the hypothetical example given by Jonathan Cohen in The Probable and the Provable (OUP, 1977) of 499 people paying for admission to a rodeo, but 1,000 are counted on the seats, including the defendant. As Cohen contends, a court would not find in favour of the promoter of the rodeo in an action against the defendant, on the basis of a bare 0.501 probability that the defendant did not pay. As Justice DH Hodgson said extra-judicially, the bare 0.501 probability would not be based on adequate material concerning the circumstances: “The Scales of Justice: Probability and Proof in Legal Fact Finding” (1995) 69 ALJ 731 at 735–6. In the present case, I have found that Mr Fong told Mr Darmali, Ms Lin and Mr Cai at the time that the First MVDA Loan Agreement was entered into that he did not own the two Manly properties which were referred to as the Mortgaged Property, and was trying to borrow funds to buy them, from which I infer that there was then no contract by which MVDA was entitled and obliged to purchase the properties.

120    Item 8 of the Schedule identifies the “Collateral Documents” as follows:

Deed of call option to purchase Unit 3/12–13 Marine Parade, Manly, New South Wales 2095 and 102 Bower Street, Manly, New South Wales 2095, Being Lot 3 in an unregistered Strata Plan – To be advised.

There is no evidence that any such deed of call option was ever drafted or executed. It is clear that what is described as “Lot 3” in Item 8 did not then exist as real property recognised by the law, but was a lot which was proposed to be created in a strata plan which was at that time “unregistered”. Although Item 8 ends with the words “To be advised”, there is no evidence that any such advice was ever given.

121    On 27 May 2014, the day after the First MVDA Loan Agreement was entered into, Gold Stone withdrew $2,700,000 from the Fund’s 645 Account in favour of MVDA (CB6/2781). The withdrawal form for Macquarie Bank was executed by Mr Cai and Mr Darmali. The amount was clearly the advance of principal under the First MVDA Loan Agreement.

122    On 28 May 2014, Ms Chu signed a Form 1412 Deed of Acknowledgement, Undertaking and Release with the Department of Immigration and Citizenship of the Australian Government, acknowledging among other things that she was responsible for any financial or legal risk that exists in relation to the complying investment, including any risk in relation to a loss of value of the complying investment (CB6/2785).

123    On 28 May 2014, a payment was made by MVDA to Ms Darmawati Darmawati (the mother of Mr Darmali) in the amount of $220,000 (CB6/2790). A handwritten notation by Mr Fong at the foot of the relevant RTGS Application states that the payment was “for loan on 26/5/14”. Mr Fong gave evidence, which I accept, that the payment was for commission earned by Mr Darmali in relation to the First MVDA Loan Agreement: T374.18–21. I accept Mr Fong’s evidence that he had an oral arrangement with Mr Darmali to pay him commission of about 10% for every loan that Mr Fong received through Mr Darmali (with the exception of the MVLC Loan Agreement): T374.25–44; 380.1–11. The source of funds for Mr Fong to pay that commission was the funds advanced by Gold Stone the day before: T375.1–5.

124    On 29 May 2014, an Authorised Corporate Representative Agreement was entered into between Fiducia Fund (as the AR of Fiducia Asset) and Gold Stone, whereby Gold Stone was appointed as the AR of Fiducia Fund in relation to the AFSL No 387963 issued to Fiducia Asset (CB6/2791–2801). The agreement was executed by Mr Darmali on behalf of Fiducia Fund and by Mr Cai and Ms Lin on behalf of Gold Stone (CB6/2801). The agreement also purports to bear the signature of Mr Wu, but that signature is correctly disputed. The agreement authorises Gold Stone to do a number of things listed in the AFSL, relevantly (CB6/2794):

(a)    to provide financial product advice for interests in managed investment schemes limited to “Own managed investment scheme only”;

(b)    to deal in a financial product by issuing, applying for, acquiring, varying or disposing of a financial product in respect of interests in managed investment schemes limited to “Own managed investment scheme only”; and

(c)    to deal in a financial product by applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of interests in managed investment schemes limited to “own managed investment scheme only”.

That authorisation and its limitation correspond to the terms of AFSL No 387963 effective from 11 February 2011 (CB15/6706–7). The agreement set out fees payable by Gold Stone by reference to, among other things, the amount of funds under management (CB6/2796). The agreement also obliged Gold Stone to provide Fiducia Fund with complete access to records relevant to the activities under the AFSL, including the information memorandum and clients’ files including all correspondence (CB6/2798). Gold Stone ceased to be the AR of Ergo in relation to the latter’s AFSL No 420978 on 28 May 2014 (CB15/6766).

125    On 6 June 2014, Mr Fong’s lawyer, Mr Huxley, sent an email to Mr Fong, Ms Lin, Mr Darmali and Mr Cai, referring to the intention of the parties to novate the current contracts to purchase the Turramurra properties from GDI to MV Golden Destiny Development (Turramurra) Pty Ltd, of which Mr Fong was the sole director and company shareholder, with the shares in that company being held equally by Mr Fong and GDI (CB6/2818). Mr Huxley refers to the funds advanced to date being about $8 million and queries the nature of the “funding agreement with the MIS”, but this does not appear to be a reference to the Fund as no money from the Fund was ever advanced directly for the Turramurra project. Accordingly, the reference to “the MIS” appears to be a reference to a separate managed investment scheme. A deed of novation was executed to effect the intended novation in July 2014 (CB7/2848–2862). The recitals to that deed refer to the completion date of the contracts to purchase the Turramurra properties as 22 July 2014 (CB7/2848).

126    On 4 July 2014, Mr Darmali as “Fund Manager” of the Fund sent a letter to Mr Xu, confirming that the Fund is a complying fund for the purpose of the SIV requirements (CB7/2871). In relation to the Fund, Mr Darmali stated, among other things:

The [Fund] fund the Projects as debt holders secured over the real assets of the Project. Subject to the management fee, the Fund allows the investor to receive a quarterly return on capital and be secured and preferred over the development projects and properties.

The plaintiffs submit (T48.31–34), and I accept, that the meaning of that awkward language is that Mr Darmali and Gold Stone were assuring Mr Xu as a potential investor that Gold Stone’s loans were secured over the real property assets of the relevant projects.

127    On 5 July 2014, Mr Darmali as “Fund Manager” wrote to Ms Chu on the letterhead of Gold Stone, making a recommendation that Ms Chu open a line of credit against the $1.5 million NSW Waratah Bond with Deutsche Bank Australia for $1.2 million, and invest in a “Wholesale” Gold Stone Secured Income Mortgage Fund. The letter states that the investment in the Fund is not guaranteed by Gold Stone nor its directors or associates, and is subject to risks of loss because of market, currency, economic, political, human error, business and other events (CB7/2874). The letter appears to be signed by Ms Chu (CB7/2878), but she disputes the authenticity of the signature (affidavit of 30.5.24 at para 5), and I accept Ms Chu’s evidence in that regard. (I also accept her denial as to the genuineness of her signature on the Deutsche Bank Private Wealth Management document at CB14/6425–6.)

128    On 9 July 2014, Ms Chu received a letter from the Australian Government Department of Immigration and Border Protection advising her that she had been granted a visa the previous day pursuant to the SIV stream (CB7/2879–86).

129    On 24 July 2014, a letter was sent to Mr Xu on the Fund’s letterhead, purporting to be from Mr Darmali (whose name is misspelt “Darmili”) as “Fund Manager”, confirming that the Fund is a complying fund for the purpose of meeting the requirements of the SIV stream (CB7/3047). The letter contains the same statement extracted above from the letter of 4 July 2014 to Mr Xu as to the Fund funding projects as debt holders secured over the real assets of the project, with investors receiving a quarterly return on capital (CB7/3048). I find that the letter was sent by Mr Darmali. A sentence had been added to the earlier letter’s description of the Fund’s investments to state that, in general, 50% of the property mezzanine finance will be allocated to Victorian-based development projects. This appears to have been prompted by a discussion with the office of the Victorian government’s business migration sponsorship sector as to how the Fund invests to benefit the economy of the State of Victoria (CB7/3047). There is no evidence that the Fund ever advanced finance to Victorian-based development projects, or had any such intention, although Mr Xu did invest $1.5 million in Victorian Government bonds.

130    On 24 July 2014, Mr Darmali as “Fund Manager” wrote a letter “To Whom it May Concern” on the letterhead of the Fund, warranting that it is a complying fund for the purposes of qualifying for the SIV stream and stating as follows (CB7/3059):

[The Fund] invests in a diversified portfolio Australian real estate mortgages, property mezzanine finance, term deposits and interest deposits (within Australian financial institution) and government bond. [The Fund] in general puts 40% of its fund to Victoria based real [property] development projects and 40% to NSW based projects. [The Fund] retain 20% in term deposits and government bond maintain it cash liquidity.

The [Fund] fund the Projects as debt holders secured over the real assets of the Project of Victoria. Subject to the management fee, the Fund allows the investor to receive a quarterly return on capital and be secured and preferred over the development project and properties.

The letter goes on to refer to the Fund’s claimed economic benefit to Victoria’s economy including funding Melbourne-based property development, working closely with Melbourne based professional service providers such as lawyers and accountants, and allocating funds to Victorian State government bonds. There does not appear to be any basis in fact for any of those claimed benefits said to be provided by the Fund to the Victorian economy.

131    On 28 July 2014, the Department of Immigration and Border Protection of the Australian Government advised Mr Xu that his application for a visa had reached the stage where he was invited to select and make a complying investment of at least $5 million in Australia (CB7/3061). On about 30 July 2014, a meeting was conducted over Skype involving Mr Xu, Mr Chen, Mr Wang, Ms Lin and Mr Darmali. Mr Xu gave evidence in his affidavit in direct speech of that meeting, but all he could recall in his cross-examination was that he said to Ms Lin that the principal would be safe and that was why he would make the investment: T234.21–42. Mr Chen also gave evidence that Mr Xu said that as long as Ms Lin could guarantee that his principal was safe, there was no problem, to which Ms Lin replied that it was guaranteed: T306.7–27. Mr Wang’s evidence was to the same effect: affidavit of 3.11.23 at para 57. I accept that evidence.

132    On 1 August 2014, Mr Darmali sent an email to Ms Lin copied to Ms Kwok as follows (CB7/3065.1):

Thank you for great work in rising the capital. Please find attached the mandate letter fro Mr Xu. Could you kindly check make sure I didn’t miss anything before send it to him? He need to initial all pages and signed on the acceptance section.

On 1 August 2014, Mr Darmali as the “Fund Manager” wrote to Mr Xu under the heading “Investment mandate” referring to his application for a SIV. The letter recommended an investment in a bond issued by the Victorian State government, and an investment in “ASIC regulated managed investment scheme (MIS), which provide investment into Australian property with a fixed return (eg 8% p.a)”. The letter also stated “investment into property MIS is subject to risks of loss because of market, currency, economic, political, human error, business and other events” (CB7/3065.13). The letter invited Mr Xu to contact Mr Darmali on his mobile telephone number if he required clarification of any issues raised in the letter. Mr Xu signed the letter as confirmation of acceptance of its terms (CB7/3071).

133    Mr Xu paid $3,069,229.12 into the Fund’s 645 Account between 5 and 7 August 2014, and paid further amounts of $892,540.10 on 11 August 2014 and $1,746.06 on 14 August 2014, being a total of $3,963,515.28 (CB14/6481).

134    On 8 August 2014, the Second MVDA Loan Agreement was entered into between Gold Stone as trustee for the Fund as the Lender and MVDA as the Borrower (CB7/3090). The agreement is in the same form as the MVLC Loan Agreement and the First MVDA Loan Agreement. The Schedule identifies the principal amount as $3,200,000 and the term of the loan is expressed as “6 months (option for 3 months)”. The interest rate is expressed as “Fixed at 10% for 6 months”, with a higher interest rate on amounts in arrears of “25% per annum”.

135    Item 6 of the Schedule identifies the Mortgaged Property as follows:

Unit 4, 12–13 Marine Parade, Manly, NSW 2095 and 102 Bower Street, Manly, NSW 2095. Unregister Plan: Lot in an unregistered Strata Plan which is part of 2/575535, C/345580A and C/345580B, Part Folio: 2/575535, C/345580A and C/345580B.

Unit 2. 07/3–9 Finlayson Street, Lane Cove. Unregistered Plan: Lot 35 in an unregistered plan which is part of Lot 71–74 Plan 10155, Part Folio 71–74 /10155.

Unit 2. 06/3–9 Finlayson Street, Lane Cove. Unregistered Plan: Lot 34 in an unregistered plan which is part of Lot 71–74 Plan 10155, Part Folio 71–74 /10155.

As I have indicated above, a proposed lot in an unregistered strata plan is not a form of real property known to the law. Mr Fong could not recall discussing with Mr Darmali, Ms Lin or Mr Cai on this occasion the identification of the Mortgaged Property or the legal consequence of the strata plans being unregistered: T376.39–377.7. I accept that Mr Fong was again surprised that Gold Stone agreed to lend money on an unsecured basis: T377.8–12.

136    Item 8 of the Schedule identifies the “Collateral Documents” as follows:

Deed of call option to purchase Unit 4, 12–13 Marine Parade, Manly, NSW 2095 and 102 Bower Street, Manly, NSW 2095, with the contract deposit value of $3,520,000.00,

There is no evidence that any such deed of call option was ever drafted or executed.

137    The agreement was executed by Mr Fong on behalf of MVDA and on his own behalf as guarantor, his signature being witnessed by Mr Darmali (CB7/3105). Mr Cai executed the agreement on behalf of Gold Stone, and the document also bears what purports to be the signature of Mr Wu (although that signature is correctly disputed) (CB7/3106). Mr Darmali earned and received a commission of $300,000 in relation to the Second MVDA Loan Agreement, consistently with Mr Fong’s handwritten note on the bank transfer record of 2 October 2014 (CB7/3326) and with Mr Fong’s testimony (T378.7–18 and 402.14–17). The source of funds for the payment of that commission was the loan by Gold Stone of $3.2 million (Fong, T378.27–30).

138    On 8 August 2014, Mr Darmali and Ms Lin signed a withdrawal form for Macquarie Bank to withdraw $3 million from the Fund’s 645 Account to be paid to MVDA. Also on that day, Mr Darmali and Ms Lin signed a separate withdrawal form with Macquarie Bank for a withdrawal of $200,000 from the Fund’s 645 Account to be paid to MVDA (CB7/3135).

139    8 August 2014 was a Friday. On the following Monday, 11 August 2014 at 8.20 am, Ms Kwok sent an email to Ms Lin and Mr Darmali as follows (CB7/3135.3):

Further to our meeting last Friday, could you please confirm which unit number of the Manly site for GSSIMF [i.e. the Fund] to invest AUD$3.2 million to MV Development?

I believe that there is an mistake for the “call option for unit 3” and the loan agreement in last Friday as well as the sale contract. Could you please checking with MV Development which unit number of that call option for GSSIM invested that AUD$3.2 million. If something you’re unclear or unsure as a fund manager, I would recommend that to hold on the investment fund until clear. Also, how do you do the due diligence checked on this Manly project? We need to ensure the investors money not investing to risk position and/or mistake. Please note, GSSIM has invested $2.7 million in Manly Project (sale contract named at unit 3) for Ms Chu Hong’s fund in May 2014.

140    Mr Darmali replied on 11 August 2014 at 9.26 am to Ms Kwok, copied to Ms Lin (CB7/3135.2) as follows:

Spoken to Victor [Fong] and he will give us 2 of the Lane Cove apartments and the unit number for Manly for this one is number 4 (number 3 is for previous one). In all for this $3.2M we will be holding close to $9 millions of security plus a reduced price of $1m on the apartments which will be valued in completion for $7m (this is based on bank senior debt assessment).

As per the due diligent, we have the full visibility study, his sales contract, building cost, funding arrangements but most important is sufficient security in the case of worst scenario.

Ms Kwok replied at 9.56 am saying (CB7/3135.1):

I will wait for all revised signed contract for unit 4 and loan agreement as well as call option.

141    On 12 August 2014 at 2.47 pm, Ms Kwok sent an email to Ms Lin, Mr Cai and Mr Darmali (CB7/3137.1–2), asking specifically of Mr Darmali:

Could you please update me the information about the investors fund for Mr Xu and copy signed contract and loan agreement for my compliance records.

Mr Darmali responded at 4.21 pm that day, copying Ms Lin and Mr Cai (CB7/3137.1), saying:

I will include the other 2 properties in Lane Cove in the loan documents.

142    I draw the inference from the emails of 11 and 12 August 2014 that what now appears as the Schedule to the Second MVDA Loan Agreement (CB7/3104) was not part of the document executed by the parties and provided to Ms Kwok on Friday 8 August 2014. Mr Darmali agreed that that was fairly obvious: T627.3–8. The Schedule which now appears refers to a call option over Unit 4, rather than Unit 3 as referred to by Ms Kwok. Further, the Schedule which now appears refers to two proposed lots in the unregistered strata plan at Lane Cove, which is what Mr Darmali said at 9.26 am on 11 August 2014 Mr Fong had now offered to provide, and what Mr Darmali said at 4.21 pm on 12 August 2014 he would include in the loan documents. Mr Darmali denied being involved in replacing the original schedule in the 8 August 2014 loan agreement with the Schedule that now appears (T625.37–627.47), but I reject Mr Darmali’s evidence and find that he personally replaced the original schedule with the new one on about 12 August 2014. The original Schedule in the document executed on 8 August 2014 is not in evidence. It appears to me from the emails of 11 and 12 August 2014 that the Schedule in the document signed on 8 August 2014 referred in Item 6 to Unit 4 of the Manly unregistered strata plan (and not the two units in the Lane Cove unregistered strata plan) and referred in Item 8 to Unit 3 (not Unit 4) in the Lane Cove unregistered strata plan.

143    On 11 August 2014, a Form 1413 Declaration in relation to managed funds was sent to the Australian Government in relation to Mr Xu’s investment in the Fund. The document purports to have been signed by Mr Darmali as the “Fund Manager”, and declares that the Fund meets the definition set out in reg 1.03 of the Migration Regulations 1994 (CB7/3136). Mr Darmali disputes that the signature on the document is his, but I do not accept that evidence. As discussed at [54] above in relation to Mr Darmali’s credibility, the signature is not so markedly different from versions of Mr Darmali’s signature which he accepts to be genuine for me to draw that conclusion in the absence of expert handwriting evidence, and as I have indicated above, I do not regard Mr Darmali’s uncorroborated evidence as being credible. Also on 11 August 2014, the Fund sent to Mr Xu a Confirmation Statement recording his holding of 3.5 million units in the Fund at a unit price of $1.

144    On 13 August 2014, Ms Lin sent an email to Ms Kwok copied to Mr Darmali referring, among other transactions, to the two transfers of funds by Gold Stone to MVDA amounting to $3.2 million (CB7/3140.2). The email pointed out that a certificate had to be issued for the issue of 3.5 million units in the Fund on 11 August 2014, and also a letter to confirm the receipt of Mr Xu’s funds in the Fund’s trust account. On 13 August 2014, Ms Lin sent an email to Ms Kwok saying that she needed the two documents that day “or the client will miss his deadline for SIV” (CB7/3140.1). On 14 August 2014, Mr Darmali as “Fund Manager” of the Fund wrote to Mr Xu confirming that the Fund had received his transfer of $3,963,515.28 into the Fund’s trust account, and that there was a settlement delay for the balance of the fund totalling $5 million for reasons relating to the banking system (and apparently relating to the exchange of currency). The letter confirmed the investment of $3.5 million in the Fund “as per mandate” (CB7/3142).

145    On 18 August 2014, Mr Fitzgerald and Ms Rees executed two transfers of the properties in Manly in favour of MVDA, being Folios 2/575535, C/345580A and C/345580B (CB7/3147.1–3). At about that time, MVDA executed two mortgages in favour of Win Senior No 123 Pty Ltd, the first in respect of Folios C/345580A and C/345580B (CB7/3148) and the second in respect of Folios 71/10155, 72/10155, 73/10155, and 74/10155 (CB7/3190). The second of those mortgages was cross-collateralised with the existing second mortgage given by MVLC to Win Mezz No 75 Pty Ltd (CB4/1444). Another mortgage, to XPC and others, was later registered on the Manly site in about late October 2014 (CB8/3438). MVDA did not at that time execute a mortgage in favour of Gold Stone, nor did cl 12.3 of the First MVDA Loan Agreement require it to do so.

146    On 26 August 2014, Ms Chu received a distribution statement from the Fund, referring to a payment of $70,000 (less withholding tax) being 2% of the $3.5 million which she had invested in the Fund (CB7/3262).

147    On 9 September 2014, Mr Darmali as “Fund Manager” of the Fund wrote to Mr Xu confirming the receipt of a total of $5,000,025.18 into the Fund’s trust account (CB7/3281). The letter stated that, in accordance with Mr Xu’s instructions, $3.5 million had been invested in the Fund, and $1.5 million had been transferred to the Treasury Corporation of Victoria.

148    On 17 September 2014, Mrs Darmawati Darmawati sent a letter to Mr Fong on behalf of MVLC directing that the final repayment of the loan of 18 March 2014 be made to Mr Darmali’s personal bank account (CB7/3296). On 2 October 2014, an amount of $800,000 was received by Mr Darmali in that bank account (CB7/3326). The bank transfer document of 2 October 2014 (CB7/3326) has a handwritten note by Mr Fong referring to a payment of $300,000 for the loan dated 8 August 2014, being the Second MVDA Loan Agreement. I infer that the balance of $500,000 paid on 2 October 2014 was the final payment for Mrs Darmawati’s loan, although Mr Fong could not recall that (T378.20–21; 404.19–20).

149    Mr Darmali gave evidence (in his affidavit of 3 May 2024, paras 51–53) that the payment of $800,000 on 2 October 2014 was for the balance of his mother’s $1 million loan (after the 28 May 2014 payment of $220,000 which included interest), and it was paid to Mr Darmali under her payment direction of 17 September 2014. I do not accept the evidence that the full amount of $800,000 was a loan repayment. Although the evidence does not show any other repayments by MVDA of Mrs Darmawati’s loan, it may well be that the documentary evidence is incomplete. Even if there were no other repayments to Mrs Darmawati, I find that Mrs Darmawati accepted the $800,000 payment (which she directed to be paid to her son) in full and final settlement of her loan, despite the fact that the two amounts of $220,000 and $300,000 were commissions payable to Mr Darmali. Mrs Darmawati may not have known of the commission arrangement between her son and Mr Fong, and Mr Darmali may not have told her (if it was the case) that she was entitled to a further repayment of $500,000. These possibilities were not explored in the cross-examination of Mr Darmali, but that would have been a pointless exercise in circumstances where Mr Darmali refused to accept that there was any commission arrangement between him and Mr Fong.

150    Ms King submitted that if the commission arrangement had existed as recounted by Mr Fong, then it would have been reflected in the banking records referred to in Mr Fong’s affidavit of 11 June 2024, and would have been noticed and reported on by the liquidators of MVLC and MVDA. The effect of Mr Fong’s evidence was that the 10% commission would generally be paid by the lender directly to Mr Darmali, and the commission paid for the two MVDA loans was exceptional, in that the full amount of principal was advanced by Gold Stone as lender and the commission was then paid by MVDA: T380.1–11. Mr Fong gave evidence, which I accept, that the liquidators of MVLC and MVDA did not ask him any questions about the commission arrangements: T397.45–398.2. Mr Darmali’s affidavit of 11 June 2024 contained banking records for his personal account with ANZ from 23 January 2014 to 22 May 2015, and for Fiducia Asset’s ANZ account from 3 February 2014 to 1 April 2015, in an attempt to establish that Mr Darmali did not receive the alleged commissions. However, Mr Darmali did not say in the affidavit or elsewhere that they were the only bank accounts which Mr Darmali or his companies held or controlled, and the evidence refers to an account in his name with NAB (CB9/4259). The records pertaining to that NAB account were not produced, despite the fact that they fell within the terms of a notice to produce served by the plaintiffs on Mr Darmali on 4 June 2024 (CB14/6475.1–.2). As to the liquidators’ investigations and reports, in my view a diligent liquidator may well have missed the commission arrangement and payments, given the very brief and opaque handwritten reference made on the two bank withdrawal documents. I find that the commission arrangement was based on an oral agreement made between Mr Darmali and Mr Fong, such that there was no written agreement which would have been available to the liquidators. Further, it is not clear to me that the liquidators of MVLC and MVDA would have taken any particular interest in the matter. While a 10% commission appears to me to be unusually high, the financial constraints facing MVLC and MVDA at the time may have made the task of finding a willing lender unusually challenging and thus deserving of a relatively high reward. The evidence is insufficient for me to form a view as to whether the amount of the commission was unreasonably high in the circumstances, or would have struck the liquidators as unreasonably high if they had become aware of it. Further, I do not regard it as implausible that, in the case of the loans by Gold Stone, the commissions were (contrary to Mr Fong’s evidence of the usual practice) paid by MVDA rather than by Gold Stone directly out of the loan amount, in that Mr Darmali would have had to disclose the commissions to Gold Stone if the usual procedure had been followed, and he may well have been reluctant to do so.

151    On 18 October 2014, Mr Xu was advised by the Department of Immigration and Border Protection of the Australian Government that he had been granted a visa in the SIV stream (CB8/3427).

152    On 26 November 2014, Ms Chu received her second distribution statement from the Fund, again in the amount of $70,000 (less withholding tax) at a rate of 2% of her investment of $3.5 million (CB8/3505).

153    On 19 January 2015, Ms Kwok sent an email to Mr Fong, copied to Ms Lin, Mr Cai and Mr Darmali, reminding him that there were two loan agreements due for repayment shortly, being $650,000 on 6 February 2015 (an apparent reference to the MVLC Loan Agreement including interest) and $3,520,000 due on 8 February 2015 (an apparent reference to the Second MVDA Loan Agreement including interest) (CB8/3558). Ms Kwok sent a further email to that effect on 2 February 2015 (CB8/3566). On 9 February 2015, Ms Kwok sent a further email to Mr Fong (copied to Mr Cai, Ms Lin and Mr Darmali) asking him to advise when he could make the repayment, and stating that “The director of trustee will take an action and lodge a caveat on the properties if we haven’t heard from you by today at 5:00 pm” (CB8/3567). Gold Stone did in fact lodge caveats in March 2015, one in relation to Folio 1/1202366 of which the registered proprietor was MVLC (CB8/3582) and the second in relation to Folios 2/575535, C/345580A and C/345580B in respect of which MVDA was the registered proprietor (CB8/3584). In both caveats, the particulars of the estate or interest claimed were stated to be the Loan Agreements of 5 May 2014 and 8 August 2014 which were said to be “secured over the property”, but in the section of the caveats calling for further information under the subheading “By virtue of the facts stated below” reference is made only to the personal guarantee provided by Mr Fong (CB8/3583 and 3585). In each case the statutory declaration required by the caveats was made by Mr Cai on 3 March 2015 (CB8/3583 and 3585). Ms Lin witnessed Mr Cai’s making of those statutory declarations in her capacity as a Justice of the Peace.

154    On 9 March 2015, Ms Meng Xu (Mr Xu’s niece) made an inquiry of Mr Xu’s migration agent, Mr Leon Wang, as to why Mr Xu had not received a quarterly distribution from the Fund (CB8/3750). Mr Wang responded that he would check with the Fund. On 13 March 2015, Mr Xu received his first distribution statement from the Fund in the amount of $70,000 (less withholding tax) at a rate of 2% of his investment of $3.5 million (CB8/3751). On 16 March 2015, three days later, Mr Xu received his second distribution statement, again in the amount of $70,000 (CB8/3752). On 16 March 2015, Ms Chu received her third distribution statement in the amount of $70,000 (CB8/3753).

155    On 18 March 2015, Ms Lin sent an email to Ms Kwok, Mr Darmali, Mr Wu and Mr Cai stating that a letter of demand had been sent to Mr Fong and MVLC on 16 March 2015 (CB8/3754). The email referred to a meeting between Ms Lin and Mr Fong on Monday afternoon (i.e. 16 March 2015) in which Mr Fong had advised that St George Bank had told him by email that he had been served with “Default Advice” and that an administrator may be appointed to MVLC. Ms Lin stated:

We need meet urgently to discuss what we shall do to protect Fund Assets and resolve the current cash flow problems.

Mr Darmali and Mr Wu denied attending any such meeting, and I am not satisfied that the foreshadowed meeting actually took place.

156    On 27 March 2015, a Priority Agreement was entered into between Gold Stone as trustee of the Fund, MVLC, MVDA and Mr Fong (CB8/3774). The recitals to that agreement refer to caveats having been lodged on 10 and 16 March 2015 on the titles to the Lane Cove property and the Manly property, and refer to the Lane Cove property being encumbered by mortgages to St George Bank, and to Win Mezz No 75 Pty Ltd and Win Senior No 123 Pty Ltd (the latter two referred to as the Wingate Mortgages). The recitals also refer to Gold Stone having agreed at the request of Mr Fong to withdraw the caveats on the terms of the agreement. MVLC and MVDA agreed to repay the monies borrowed under the Loan Agreements of 5 May 2014 and 8 August 2014 as and from the date on which all of the monies owing by MVLC were repaid to St George Bank and Wingate (cl 1.1). Gold Stone agreed that on signing the Priority Agreement it would deliver signed withdrawals of the caveats (cl 2.1). MVLC and MVDA agreed to deliver to Gold Stone upon exchange of the Priority Agreement the mortgages over certain units (cl 3.1) in registrable form and duly executed, being:

The units in the Lane Cove Project being the lots numbered 5, 14, 23, 25, 34, 43, 49, 50 and 56 in the strata plan 85782 to be registered in respect of that project.

Annexure A to the Priority Agreement set out the terms of those mortgages. Plainly, the strata plan had not yet been registered and the so-called lots referred to as the subject-matter of the mortgages did not yet exist.

157    On 16 April 2015, Strata Plan 85782 was registered, being in respect of the property at 3–9 Finlayson Street, Lane Cove, NSW (CB9/3830.12). A mortgage was granted by MVLC to Gold Stone in respect of Lots 5, 14, 23, 25, 34, 43, 49, 50 and 56 of Strata Plan 85782 but the mortgage is undated (CB8/3761). On 22 June 2015, Gold Stone lodged a further caveat over Lots 5, 14, 23, 25, 43, 49, 50 and 56 (but not Lot 34) of Strata Plan 85782, claiming an interest as mortgagee under a mortgage granted by MVLC (CB9/3882–4).

158    On 23 June 2015, Gold Stone as trustee of the Fund sent a creditor’s statutory demand for payment of a debt to MVLC in the amount of $7,853,367.40, signed by Mr Cai as director (CB9/3898–9). The affidavit accompanying the statutory demand was made by Mr Cai and stated in para 2 (CB9/3900):

I am the person who, on behalf of the Gold Stone Capital, had the dealings with the debtor company that gave rise to the debt and I have inspected the business records of Gold Stone Capital Pty Ltd in relation to the debtor company’s account with Gold Stone Capital Pty Ltd.

Mr Cai ultimately accepted in his cross-examination that that statement was true (T436.43–45), in contradiction of his earlier denials (which were expressed with great confidence and absolute certainty) that he had not had any dealings with MVLC or MVDA in relation to these loans (T435.12–29, 436.28–32). There is an element of exaggeration in the statement quoted above from Mr Cai’s affidavit accompanying the statutory demand, in that Mr Darmali also had extensive dealings with MVLC on behalf of Gold Stone, and Ms Lin was also centrally and directly involved in these dealings. I have referred above to the evidence given by Ms Lin in NSW Supreme Court proceedings in her affidavit dated 27 November 2015 that she was the person who discussed and negotiated the three loans with Mr Fong. However, Mr Cai was also directly involved as a central participant in Gold Stone entering into and performing the three loan agreements.

159    On 26 June 2015, administrators were appointed to MVLC (CB9/3908 and 13/5897). On 1 July 2015, administrators were appointed to MVDA (CB9/3925 and 13/5897).

160    In early July 2015, Ms Lin and Mr Cai sought advice from Mr Paul Reese of Summer Lawyers in relation to recovery of Gold Stone’s loans to MVLC and MVDA (CB9/3958). On 20 July 2015, Mr Reese sent an email to Ms Lin on the subject of Lin v MV Golden Destiny Developments (Turramurra) Pty Ltd and Dahua Group Turramurra Project Pty Ltd, setting out a schedule of properties at Lane Cove and Manly and the security held by Gold Stone in relation to them (CB9/4000). In relation to the Lane Cove properties, the schedule refers to Gold Stone as holding a fourth and fifth charge in relation to Lots 5, 14, 20, 23, 34, 43, 49 and 56 of Strata Plan 85782. In relation to the Manly properties, Gold Stone is stated as having a fourth charge in relation to Folios C/345580B and 2/575535. Mr Reese says in the email that he finds the loan agreements and security completely unacceptable for an outlay of $7 million and adds: “Frankly speaking you might as well have had no security whatsoever for your money.” In an email of 12 August 2015, sent by Ms Lin to Mr Darmali, Mr Cai and others, Ms Lin refers to the amounts owed by MVLC and MVDA to Gold Stone as being $8,109,948.56 (CB9/4011–12).

161    On 12 August 2015, Ms Lin on behalf of Gold Stone submitted a proof of debt in the administrations of MVLC and MVDA (copied to Mr Cai and Mr Darmali) claiming a secured debt of $8,109,948.56 (CB9/4011–6).

162    On 18 August 2015, $1 million was credited to the Fund’s 065 Account and the balance of the 065 Account at the end of that day was $1 million (CB13/5978). The accounting expert engaged by the plaintiffs, Mr Wengel, was unable to identify the source of that amount, describing it as "Unknown": report of 19.4.24, para 15.8, Table 11. Mr Cai gave evidence that the source of the $1 million deposit was GDI, which had obtained the money from the settlement of the Turramurra project: T418.6–15. That evidence was accepted by the plaintiffs in final address: T890.7, 1179.21–29. I accept that evidence as being consistent with the objective probabilities, and in the absence of any other plausible explanation. As no units in the Fund were ever issued to GDI, I regard the payment by GDI to the Fund as a loan, noting that Gold Stone was entitled to borrow money pursuant to cl 20.2(g) of the Fund Constitution (CB5/2086).

163    Jumping ahead in the chronology but staying with the subject of GDI’s loan to Gold Stone, on 21 July 2016, Gold Stone withdrew $300,000 from the Fund’s 065 Account, and deposited that amount in the 022 Account (CB13/5980). On the same day, Gold Stone transferred $300,000 from the 022 account in favour of G3, a company controlled by Ms Lin as sole director and shareholder. Mr Wengel noted the transactions with G3 (report of 19.4.24 at para 14.8.6), but did not include them in his calculation of the GDI loan balances. The bank trace documents show that Ms Lin authorised the payment of $300,000 by Gold Stone to G3: CB12/5887–8. I accept the plaintiffs’ submission that the payment to G3 should be treated as having been at the request or direction of GDI, and thus a partial repayment by Gold Stone of its loan account with GDI (T1190.25–47). None of the defendants opposed that characterisation.

164    Mr Wengel analysed the transactions between GDI and Gold Stone in the Fund’s bank accounts (excluding the $1 million deposit on 18 August 2015 and the $300,000 paid to G3 on 21 July 2016), treating the deposits from GDI as loan advances, and withdrawals in favour of GDI as loan repayments, and also calculated a running balance of GDI’s loans to the Fund: report of 19.4.24, para 19.29.2, Table 27. If the $1 million deposit on 18 August 2015 and the payment to G3 of $300,000 on 21 July 2016 are included, the relevant amounts are as follows:

165    GDI is now de-registered and is therefore unable to make any claim to the balance of $99,613.21.

166    On 20 August 2015, Gold Stone ceased to be an AR of Fiducia Asset (CB15/6766). I accept Mr Darmali’s evidence that Fiducia Asset terminated its AR agreement with Gold Stone due to unpaid invoices: affidavit of Mr Darmali of 8.2.24 at paras 140–3. However, I reject Mr Darmali’s evidence (at para 140) that at the time, so far as he was aware, the Fund was in good financial order and there were no issues with the Fund. That evidence is contrary to the emails from Ms Lin of 18 March 2015 (CB8/3754) and 12 August 2015 (CB9/4011), and inconsistent with Gold Stone’s non-payment of Fiducia Asset’s monthly invoices from February to July 2015 amounting to $74,797.80 (Mr Darmali’s affidavit of 8.2.24, para 133; CB10/4700), as I have discussed at [52]–[53] above in relation to Mr Darmali’s credibility.

167    On 21 August 2015, Mr Cai and Mr Wu signed a Commonwealth Bank form for the 889 Account, changing the signatories to the account to Mr Cai and Ms Lin (CB9/4116–7).

168    On 31 August 2015, MVDA and MVLC were wound up by order of the Supreme Court of New South Wales (CB9/4286 and 13/5897). The administrators were appointed as liquidators of both companies.

169    On 14 September 2015, Ms Lin was told that the property at 102 Bower Street and 10–12 Marine Parade, Manly was the subject of a contract for sale for the amount of $16.35 million (CB9/4247).

170    On 1 October 2015, the Fund sent a letter to Ms Chu under the heading “Investment Summary Report for 2014/2015 Financial Year” (CB9/4278). The letter records Ms Chu’s return on investment as $210,000, and contains a highly misleading description of the Fund’s investments, including relevantly (CB9/4280–81):

•    The Fund Manager has made direct investment to the development project located at 102 Bower Street & 13 Marine Parade Manly. The investment is charge over the real estate of the Project. The Project is a DA approved development for luxury oceanfront prestigious apartments. As at the date of this report the development has been disposed for a gain and the Trustee is expecting part of the investment to be liquidated on November 2015.

•    The Fund Manager has made direct investment to the development project located at 3 Finlayson Street, Lane Cove NSW. The Lane Cove Development contains 55 residential apartments in Sydney North Shore area and it is complete the building construction on May 2015 ready for occupation. The Fund investment is secured over the unsold apartments with a Priority Agreement after the mortgagee. The Lane Cove Development is under process of liquidation with prospect to distribute all the sales proceed to creditors as soon as possible.

171    On 1 October 2015, the Fund sent a letter to Mr Xu containing the same information as to the Fund’s investments, and referring to Mr Xu’s return on investment as $210,000 (CB10/4471). On 10 October 2015, Gold Stone paid further distributions to Ms Chu (CB14/6553).

172    On 30 October 2015, the liquidators of MVLC and MVDA issued a report to creditors (CB9/4283). In relation to MVLC, the liquidators estimated its assets to be between $18,603,523 and $26,782,123 (CB9/4296). MVLC’s secured creditors, namely Westpac Banking Corporation and the two Wingate lenders, were owed a total of $22,917,500, or $12,517,500 if the $10.4 million owing to Win Senior Pty Ltd was totally repaid out of the assts of MVDA (CB9/4348). Gold Stone and Ta Lee Investments Pty Ltd are described as “Caveator Creditors”, being owed $8,109,948.56 and $3,420,242.64 respectively (CB9/4348). Unsecured creditors were estimated to be in the range of $33,669,807 to $34,729,809 (CB9/4348). In relation to MVDA, the liquidators estimated its assets to be $18,750,000 (CB9/4302). MVDA’s secured creditors were owed $15,983,487 (CB9/4350), leaving a potential surplus of $2,766,513. Gold Stone was said to be one of four “Caveator Creditors”, being owed $8,109,948.56 out of a total amount owed to Caveator Creditors of $11,078,703.07. Unsecured creditors were estimated to be in the range of $16,939,229 to $17,239,229. The claims by creditors estimated by the liquidators of MVLC and MVDA were stated as subject to change as a result of interest and costs accruing, together with the results of the liquidators’ security review. Ultimately, as I explain at [179] below, Gold Stone’s claims were settled on arm’s length terms with the liquidators of MVLC and MVDA on 14 November 2017 for a payment to Gold Stone of $445,000.

173    On 20 November 2015, Mr Xu received a third distribution statement from the Fund in the amount of $70,000 (less withholding tax), calculated at the rate of 2% of $3.5 million (CB10/4483). On 14 December 2015, Mr Xu was paid a further distribution in the amount of $56,636.36 (CB14/6555). On 12 January 2016, Ms Meng Xu noticed that the distribution at the end of 2015 was less than the previous quarterly distributions, and asked Mr Wang to investigate (CB10/4531). Mr Wang then said that Gold Stone had replied that there had been changes in the tax rate (CB10/4531), which was plainly a false explanation provided by Gold Stone.

174    It appears that the initial sale of the Manly property at $16.35 million fell through, and the property was again listed for sale. At an auction held on 1 March 2016, the property achieved a final sale price of $13.1 million (CB10/4621). The liquidators’ report to creditors of 18 March 2020 (CB13/5894) provides evidence of the following matters. From the sale proceeds, the debt owing to the first-ranking mortgagee (Win Senior No 123 Pty Ltd) was discharged in full and $1.641 million was paid to the second-ranking mortgagee, XPC, in partial satisfaction of its debt (which totalled about $3 million: CB9/4302). There was also an amount of $1.267 million retained as the subject of a marshalling claim by Gold Stone and another secured creditor (CB13/5915). At that time, the liquidators still had a damages claim against the original purchaser and its guarantor, and they still held the $1.635 million deposit that the purchaser had paid, which was the subject of a claim by the purchaser. That deposit was later paid to XPC after the claim against the purchaser was settled in 2017 (CB13/5913–4).

175    On 28 February 2016, a meeting took place in Sydney between Mr Xu, Mr Jin (a relative of Mr Xu), Mr Chen and Ms Lin. I accept the evidence of Mr Jin (affidavit of 27.10.23 at paras 9–21) to the following effect. Mr Xu asked what had happened to his capital and asked for it to be returned, to which Ms Lin responded by seeking to interest Mr Xu in a property development at Gosford. Mr Xu expressed a lack of interest in the Gosford project and reminded Ms Lin of her statement that his $3.5 million was capital guaranteed. Ms Lin responded that she was unable to repay Mr Xu’s $3.5 million and again sought to interest him in the Gosford project.

176    On 27 June 2016, Mr Fong was made bankrupt (CB13/5898).

177    On 22 August 2016, Ms Meng Xu sent a WeChat message to Mr Leo Wong, saying that the Fund had not paid the interest for two instalments and she had contacted Ms Lin (CB10/4757). On 26 August 2016, Ms Lin sent an email to Ms Meng Xu, referring to Gold Stone having been the AR of Ergo and later of Fiducia Asset (CB10/4818), and then stating as follows:

The AFSL license holder is responsible to design the product and ensure the Fund compliance with ASIC. The Licensee and Director of Fidusa Asset Management is David Darmali who is also the fund manager of Gold Stone Secured Income Fund to make the investment decision.

Ms Meng Xu responded that day (CB10/4817), including the following:

You have informed that the Trustee has engaged a new responsible manager. Is that indicating David Darmili is no longer the fund manager of the Gold Stone Fund? Should information of new fund manager be given to the investors? Since David Darmali is the Licensee and Director of Fidusa Asset Management, how can we ensure the Fund still compliance with ASIC if he is not fund manager?

Ms Lin’s email stated that Gold Stone had engaged a new responsible manager and was in the process of applying for an AFSL through an associated entity in order to take full control of the Fund’s operation.

178    In September 2016, Ms Chu and Mr Lincoln Wong met with Mr Chen, who said that Ms Lin had told him that there was a problem with the investment, and there was then a meeting in Ms Lin’s office in Sydney. Ms Lin said that the investment had failed, whereupon Ms Chu said to Ms Lin that before investing, Ms Lin had promised her that the principal was guaranteed, to which Ms Lin replied that every investment carries risks, and that she was not in charge of the fund, and referred Ms Chu to Ms Lin’s lawyer (Chu affidavit of 3.11.23, paras 80–84).

179    On 14 November 2017, Gold Stone entered into a Deed of Settlement and Release with the liquidators of MVLC and MVDA and others under which Gold Stone was paid $445,000, and in return released the liquidators of MVLC and MVDA from all claims relating to the matters identified as being in dispute (cl 2.2(a)(i) and (b)(i)) (CB11/5090). The deed records the agreement of the parties that Gold Stone has an equitable interest in (a) the proceeds of sale of Lots 5, 10, 13, 18, 38, 43, 46, 49 and 50 of the Strata Plan at Lane Cove; (b) the proceeds of sale of Folios C/3455880A, C/3455880B and 2/575535 in Manly; and (c) Lot 34 in the Strata Plan at Lane Cove (cl 2.1(a)(i)). On 20 November 2017, an amount of $395,504.40 was deposited into Gold Stone’s 022 Account with the Commonwealth Bank (CB11/5153 and CB14/6555), being the settlement payment of $445,000 less legal expenses.

180    On 23 April 2018, an amount of $3,000 was withdrawn from the 889 Account by way of bank transfer, and was described as “service fee”. Mr Cai was not cross-examined on that withdrawal, but no issue of procedural fairness arises as the transaction was clearly pleaded (para 132H Item 1 in the Third Further Amended Statement of Claim). The description is substantially similar to the withdrawal of $5,500 on 8 October 2018, described as “Trustee service fee”, and in light of Mr Cai’s admission that there was no proper basis for such a charge I similarly regard it as a transaction known by Mr Cai to have been improper at the time: see [182] below.

181    On 24 July 2018, an amount of $205,000 was withdrawn from the 022 Account with the description “deposit for hotel” (CB14/6555). Mr Cai made that payment to G3 in accordance with a direction from Ms Lin (affidavit of Mr Cai of 2.12.23 at para 66). The amount was a 0.5% deposit for a development project in Gosford for which Ms Lin had sought unsuccessfully to obtain funding from Ms Chu and Mr Xu at the meeting in September 2017 to which I have referred above. Mr Cai gave unchallenged evidence that he understood at the time that Ms Chu and Mr Xu consented to that payment being made (T493.24–33). I accept that evidence. Clearly, however, Ms Lin knew that the plaintiffs had not consented to the payment and that it was a misappropriation of cash held by Gold Stone as trustee of the Fund. Ultimately, the amount of $205,000 was repaid to the Fund’s 022 Account on 17 January 2020, although no interest on that amount was paid. The plaintiffs do not make a claim for that interest.

182    On 8 October 2018, an amount of $10,000 was withdrawn from the 022 Account and credited to the 889 Account (CB14/6554–5). On the same day, an amount of $5,500 described as “Trustee service fee” was withdrawn from the 889 Account by Mr Cai, who agreed in cross-examination that there was no proper basis for him to charge a service fee to the Fund in October 2018 (T495.20–23).

183    Also on 8 October 2018, Mr Cai made a cash withdrawal from the Commonwealth Bank in Victoria Avenue in Chatswood of $6,600 (CB7/2963 and 14/6554). Mr Cai accepted that it was inappropriate for him as the director of the trustee of the Fund to withdraw that money from the Fund’s 889 Account in October 2018 (T496.18–22). Although it is pleaded in the Third Further Amended Statement of Claim (para 132, Item 4) that the payment was authorised by Mr Cai and/or Ms Lin, Mr Cai said that he could not recall whether it was him or Ms Lin who made the withdrawal (T495.35–39). After being taken to the withdrawal voucher (CB7/2963), Mr Cai conceded that he had made the withdrawal (T495.41–496.22). I am not satisfied on the balance of probabilities that Ms Lin also authorised the withdrawal.

184    On 17 October 2018, Mr Cai transferred $15,000 from the 022 Account to the 889 Account (CB14/6554–5). On the same day, Mr Cai withdrew $15,000 from the 889 Account and described the withdrawal as “Director Fee” (CB14/6554). Mr Cai accepted that there was no appropriate basis on which he could charge the Fund a fee for his work as a director (T497.23–27). Mr Cai gave evidence that Ms Lin had told him that he could charge a director fee and he decided that $15,000 was an appropriate amount (T497.27–39). I accept that evidence.

185    On 18 December 2018, Mr Cai sent a message to a WeChat chat group called the Goldstone Fund Group (CB11/5272), saying:

Hi everyone, as the director of Goldstone Capital, I would like to take the deposit back (it was agreed as fully refundable deposit), which has transferred to Louise’s company G3 Assets in formal legal procedures. I have almost arranged a lawyer. Do you still want to pay $41 million for 100 hotel rooms, which have not built yet and it is difficult to build property.

On 30 December 2018, Mr Cai sent a further message to the Gold Stone Fund Group asking for written confirmation as to whether the investors in Gold Stone still wanted to leave the deposit with G3 Assets Holding (CB11/5284).

186    On 9 January 2019, Mr Cai withdrew an amount of $100,000 from the 022 Account described as “back to GDI” (CB14/6556). Mr Cai said in cross-examination that he knew at the time that the investors in the Fund had not authorised that payment and that there was no lawful basis to his knowledge for that money to be paid out of the trust account to GDI in January 2019 (T500.25–34). However, that is one of the payments which Mr Wengel treated as a repayment of GDI’s loan to the Fund, and I accept Mr Wengel’s characterisation of the payment. Accordingly, I do not accept Mr Cai’s concession that he knew there was no lawful basis for the payment.

187    Also on 9 January 2019, Mr Cai withdrew an amount of $40,000 from the 022 Account which was transferred into the 889 Account (CB14/6554, 6556). On the same day, Mr Cai withdrew $10,000 by cashing a cheque on the 889 Account at a branch in Chatswood (CB7/2967 and T500.42–501.19). Mr Cai accepted that there was no appropriate basis for that withdrawal of $10,000 on 9 January 2019 (T501.21–29).

188    On 10 January 2019, $20,000 was paid from the 889 Account with a reference “Back to GDI” (CB14/6554). Mr Cai accepted that he knew at the time that the investors in the Fund had not authorised that payment (T501.46–502.1). However, Mr Wengel identified that transaction as a repayment of GDI’s loan, and I accept that evidence.

189    On 15 February 2019, a further payment of $10,000 was paid from the 889 Account with the description “Back to GDI” (CB14/6554). Mr Cai said that he understood that GDI had invested $1 million in the Fund which GDI should get back (T502.25–29). I accept that evidence. Although GDI was never a unitholder in the Fund, it had advanced loan monies to the Fund, and the running balance of the loan account at the time was a credit of $320,000 in GDI’s favour. Mr Cai did accept that he was conflicted in making a decision as to GDI getting its money back (T502.31–42).

190    On 11 April 2019, Mr Cai made a cash withdrawal of $4,000 from a bank branch at Chatswood Chase (T503.38–504.28). Mr Cai accepted that to his knowledge there was no basis upon which he could properly withdraw that money from the account (T504.30–37).

191    On 4 June 2019, Mr Cai withdrew $10,000 from the 889 Account (CB14/6554). Mr Cai sought to say that there was a proper basis upon which he was entitled to withdraw that money, namely that it was a repayment to GDI (T506.20–38). The withdrawal was made by Mr Cai in cash at the counter of the Commonwealth Bank at its Chatswood branch (CB7/2971 and T506.40–47). I reject Mr Cai’s evidence that it was a repayment to GDI. The money was withdrawn in cash rather than by way of bank transfer, and I do not accept that a repayment to GDI would have been made in that matter and without documentary evidence that GDI received the benefit of it. Mr Cai could not recall making the withdrawal when he made his affidavit of 28 May 2024 (para 11), but accepted that the withdrawal was made in cash (para 5, item 10).

192    As I have indicated above, the amount of $205,000 was repaid to the Fund’s 002 Account on 17 January 2020 (CB14/6556). On 9 March 2020, Mr Cai withdrew the entire amount of the credit balance of the 022 Account, which amounted to $210,169.40 (CB14/6556). Mr Cai paid that amount to GDI (T507.46–508.7). Mr Cai accepted that there was no legitimate reason for him to pay that amount to GDI rather than to the investors in the Fund (T508.9–13). Mr Cai agreed that the money should have been paid to the investors in the Fund (T508.22–25). Mr Cai said that, despite knowing that it was trust money, he deliberately paid the money to GDI “because GDI is part of the trust” (T508.34–37). However, Mr Wengel treated the $210,000 as a repayment of GDI’s loan, which I regard as the correct characterisation. In that sense (ie as a lender to the Fund), GDI was “part of the trust”. Mr Wengel did not deal with the additional withdrawal that day of $169.40, but I infer that it was also a repayment to GDI in reduction of the running loan account. I deal below with the question whether the plaintiffs were entitled to the amount of $210,169.40, rather than GDI.

193    On 30 July 2020, Mr Cai sent a message to the Goldstone Fund Group (CB11/5318), saying:

Hello, everyone. Don’t you want to get your investments money back? I feel sorry for you guys.

At the time that Mr Cai sent that message, he knew that he had paid away all of the amount in the trust fund to GDI (T510.13–16). After Mr Chen responded that “of course we want to get them back”, Mr Cai sent a further message (CB11/5318), saying:

You should ask Louise [Lin]. She has all the money. I am also the victim.

Did Gold Stone commit breaches of trust?

194    This question is an essential component of two causes of action against Ms Lin, Mr Cai and Mr Darmali. The first is the allegation that each of them knowingly procured or induced breaches of trust by Gold Stone, and the second is that they knowingly assisted in a dishonest and fraudulent design by Gold Stone. These are separate causes of action: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [161] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ). The plaintiffs contend that there were four ways in which Gold Stone committed breaches of trust in relation to the making of the loans to MVLC and MVDA.

195    The first is the contention that each of the three loans was an unauthorised investment, in that they fell outside the powers of investment in cl 20.4 of the Fund Constitution, and specifically cl 20.4(j) (when read with cl 20.4(f)) concerning loans secured by mortgages over real property in Australia). Section 14 of the Trustee Act 1925 (NSW) enables a trustee to make any form of investment unless expressly forbidden by the instrument creating the trust, and cl 20.4 is such an express prohibition. The word “mortgages” in cl 20.4(j) must be given a wide meaning, consistently with the ordinary and natural meaning of the term in Australia. In its strict legal sense, a mortgage involves a conveyance of land or an assignment of chattels as security for the payment of a debt or the discharge of some other obligation for which it is given: Santley v Wilde [1899] 2 Ch 474 at 474 (Lindley MR). However, a central case (if not the central case) of a mortgage in Australia is a registered mortgage over Torrens title land, which has effect as a security but does not involve a transfer of land: see s 57(1) of the Real Property Act 1900 (NSW) and cognate legislation in other States and Territories. Accordingly, the term “mortgages” in cl 20.4(j) should be construed as meaning mortgages or charges.

196    A further question of construction concerns the value of the security in order for a loan to be characterised as a loan “secured by” mortgage. If, for example, the mortgage or charge were over an asset worth $1,000, but the principal amount advanced by way of loan was $1 million, it could not properly be described as a loan secured by mortgage because the loan would be only partially (and to a minimal extent) secured by the mortgage. In my view, cl 20.4(j) requires that the security be at least as valuable at the time the loan is made as the principal amount of the loan in question in order to satisfy the ordinary and natural meaning of a loan secured by mortgage. In any event, that issue is academic in the present case, given the conclusions which I express below as to the complete absence of any security in relation to the three loan agreements.

197    Dealing first with the MVLC Loan Agreement, as I have indicated at [110] above, the Mortgaged Property in Item 6 of the Schedule was a unit in an unregistered strata plan. However, a lot in an unregistered strata plan is not “real property”. It has been held that a purchaser’s interest under a contract of sale for a lot in a proposed but unregistered strata plan, in appropriate circumstances, would be protected by a court by granting specific performance to require the vendor to do all things necessary to be done to procure registration of the strata plan, as well restraining the vendor by injunction from dealing with the land inconsistently with the purchaser’s right to specific performance of the contract, and accordingly the estate or interest claimed by a purchaser under a contract for such a lot may be sufficient to ground a caveatable equitable interest in the relevant land: Kuper v Keywest Constructions Pty Ltd [1990] 3 WAR 419 at 432 (Malcolm CJ, with whom Pidgeon and Seaman JJ agreed). That decision was followed by Barrett J in Forder v Cemcorp Pty Ltd [2001] NSWSC 281; (2001) 51 NSWLR 486 at [27]–[29], expressly on the basis that the caveat system is designed to preserve the status quo pending resolution of the claim underlying the caveat, and accordingly a narrow interpretation should not be given to the word “interest” in the relevant provision dealing with the lodgement of caveats. The reasoning in those cases says nothing about the ability to grant a mortgage or charge over a lot in an unregistered strata plan, which I do not regard as “real property”. In my view, the so-called Mortgaged Property in the MVLC Loan Agreement did not create any mortgage or charge over any real property, or any of the other kinds of assets as set out in cl 20.4.

198    The Schedule to the MVLC Loan Agreement also refers in Item 8 to a Collateral Document, being a deed of call option to purchase the lot in the unregistered strata plan referred to as the Mortgaged Property (see [111] above). No such deed of call option exists, and I cannot discern from the brief description in Item 8 what the terms of it were intended to comprise, including the exercise price and option period. The expression “contract deposit value” does not have any established or clear meaning. In any event, I do not see how a deed of call option can constitute or confer an interest in real property, at least in advance of the option being exercised. It has been said that the “interest” of a purchaser under an uncompleted contract for the sale of land is commensurate with the availability of specific performance: see Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 at [53] (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ); Chan v Cresdon (1989) 168 CLR 242 at 252–3 (Mason CJ, Brennan, Deane and McHugh JJ). However, that proposition says nothing about the position of a party with the benefit of a call option which it has not yet exercised in relation to a proposed lot in an unregistered strata plan. Accordingly, the MVLC Loan Agreement was not a loan secured by mortgage.

199    As to the First MVDA Loan Agreement, the Mortgaged Property in Item 6 is said to be two pieces of real property in Manly. As I have indicated at [117] above, those two pieces of real property were then owned by Mr Fitzgerald and Ms Rees. Although Mr Fong on behalf of MVDA was seeking to obtain funds in order to purchase those properties, I have found at [119] above that there was no contract of sale as at 26 May 2014 when the First MVDA Loan Agreement was entered into. Even if contracts for sale for the two items of real property in Manly had been exchanged by 26 May 2014, the interest of MVDA in those items of real property could not have been any greater than the amount of the deposit paid, and there is no evidence as to the amount of the deposit which the liquidators reported as having been paid at some unspecified date in May 2014. Further, I do not think that the equitable interest of a purchaser in an uncompleted contract can properly be characterised as “real property in Australia” within the meaning cl 20.4(j). The purchaser of land under an uncompleted contract who has paid a deposit ordinarily has the benefit of an equitable lien over the land for the amount paid and is therefore treated as a secured creditor for the repayment of that money: Hewett v Court [1983] HCA 7; (1983) 149 CLR 639 at 645 (Gibbs CJ); 650 (Murphy J); 653–4 (Wilson and Dawson JJ); 663–4 (Deane J). As Deane J explained at (664):

The word “lien” is used somewhat imprecisely in the phrase “equitable lien” to describe not a negative right of some legal or equitable interest but what is essentially a positive right to obtain, in certain circumstances, an order for the sale of the subject property or for actual payment from the subject fund.

Accordingly, any right or interest which MVDA may have had in relation to the Manly properties as at 26 May 2014 (contrary to my finding that contracts had not been exchanged and the deposit had not been paid by then) was in the nature of a chose in action (not real property) as a secured creditor of the vendors, and any right or interest which Gold Stone may have had by reason of the so-called security purportedly granted under the First MVDA Loan Agreement was not a mortgage or charge over real property.

200    Item 8 of the Schedule for the First MVDA Loan Agreement refers to the Collateral Document, being a deed of call option to purchase a lot in an unregistered strata plan in Manly. As discussed at [120] above, no such deed of call option was ever created, and the description of it in Item 8 says nothing about its terms, including the exercise price or the option period. That proposed transaction was incapable of constituting a mortgage or charge over real property. Accordingly, the First MVDA Loan Agreement was not a loan secured by mortgage over real property as required by cl 20.4(j).

201    As to the Second MVDA Loan Agreement, the Mortgaged Property in Item 6 refers to three lots in unregistered strata plans in Manly and Lane Cove (see [135] above). As discussed already, they were incapable of constituting mortgages over real property as at 8 August 2014 when the loan agreement was entered into.

202    Item 8 of the Schedule to the Second MVDA Loan Agreement refers to the Collateral Document, being a deed of call option to purchase a lot in an unregistered strata plan in Manly (see [136] above). No such deed of call option was ever created, and the description in Item 8 does not specify the option period or the exercise price. That description does refer to a “contract deposit value” of a particular amount, but as with the MVLC Loan Agreement, I am unable to discern the intended effect of that element of the description. Accordingly, the Second MVDA Loan Agreement was not a loan secured by a mortgage over real property within the meaning of cl 20.4(j).

203    The plaintiffs have therefore established breaches of trust by Gold Stone on the basis that each of the three loans in question fell outside the powers of investment conferred by cl 20.4 of the Fund Constitution.

204    The second way in which the plaintiffs allege breaches of trust is to contend that each of the three loan agreements was an imprudent investment in a hazardous security in the sense referred to by the High Court in Fouche v The Superannuation Fund Board (1952) 88 CLR 609 at 637 (Dixon, McTiernan and Fullagar JJ). As the High Court stated in that case (at 641), it will be a breach of duty by a trustee if the trustee invests funds in a way which does not satisfy the standard of the reasonably prudent man of business. Further, Gold Stone held itself out as a professional corporate trustee and should accordingly be held to a higher standard: Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 517–8 (Finn J); Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 at [272]–[273] and [276] (Edelman J). Further, given that the trustee’s business included acting as a trustee or investing money on behalf of other persons, the trustee must, in exercising a power of investment, exercise the care, diligence and skill that a prudent person engaged in that business would exercise in managing the affairs of other persons: s 14A(2) of the Trustee Act 1925 (NSW). That provision is amplified by the list of matters which the trustee must take into account when exercising a power of investment, as set out in s 14C(1) of that Act.

205    The plaintiffs rely upon the unchallenged and uncontested evidence from an expert mortgage fund manager, Mr Hakim, in relation to the types of systems that a prudent fund management company would have had in place (report of 15.4.24). Mr Hakim identifies that the fundamental responsibility of a reasonably competent and prudent lender is to identify and seek to mitigate risks through conducting an assessment of the loan and the borrower, having regard to matters such as security, serviceability and interest rates (see paras 9.1–9.6 of his report). Mr Hakim expressed the opinion that each of the three loans was a high risk unsecured loan (see paras 10.2–10.12 of his report), and that no competent fund manager would have made any of the loans (see paras 10.13–10.24). Further, there is no evidence that anything resembling a due diligence process was undertaken in relation to any of the loans. The closest the evidence comes to that is an email by Mr Darmali dated 11 August 2014 in which Mr Darmali acknowledged that he had access to a substantial array of documents pertaining to the borrower and the relevant development projects (but stops short of saying that he actually read and analysed them), and concluded that Gold Stone had the benefit of “close to $9 millions of security” for its $7 million loans: CB7/3135.2. I cannot see any rational basis on which Mr Darmali could have come to that conclusion as to the value of the so-called security, and there is no evidence of any analysis which could conceivably have supported the opinion. Accordingly, the plaintiffs have successfully established breaches of trust of this kind.

206    The third way in which the plaintiffs put their case of breach of trust is to contend that the three loan agreements earned, or had the potential to earn, a return exceeding 8% per annum, and thereby Gold Stone stood to gain substantially by way of its Performance Fee pursuant to cl 17.1(c) of the Fund Constitution, and had an improper purpose in doing so. This appears to be an allegation of improper purpose (T1155.1–3), in that by seeking to further the self-interest of Gold Stone, Ms Lin, Mr Cai and Mr Darmali made investments for the Fund which would earn a return exceeding 8% per annum. There is a number of insuperable problems with this allegation. First, the Performance Fee was a term of the Fund Constitution, and was disclosed in the IM. Second, cl 18.1(b) of the Fund Constitution permitted Gold Stone (and its related body corporates and associates or officers and employees of any of them) to be interested in any contract or transaction with Gold Stone or another related body corporate, and retain profits or benefits derived from such contracts or transactions. Third, if the fund were to be viable, then Gold Stone would need to earn more than 8% per annum from its investments because that was the distribution that was promised to unitholders in the IM. Gold Stone would have to meet the overheads and other costs of doing business (including the fees other than the Performance Fee) out of its income before making an 8% per annum distribution to its unitholders. The interest rate of 40% per annum specified in the MVLC Loan Agreement, and the interest rate of 25% per annum (being the higher default rate in the two MVDA Loan Agreements) may be taken to be indicative of the high-risk unsecured nature of the Loans, which I regard as establishing breaches of trust as contended for by the plaintiffs in their second argument referred to above, but I do not regard the fact that the interest rates were above 8% per annum as constituting breaches of trust in themselves or as reflecting an improper purpose. Accordingly, I reject this third aspect of the plaintiffs’ breach of trust case.

207    The fourth way in which the plaintiffs put the breach of trust case is that the three loans were made for an improper purpose, principally the purpose of procuring Mr Fong’s assistance for the Turramurra project. The evidence to which I have referred in setting out the chronological narrative of salient facts amply establishes that improper purpose. Ms Lin was determined to extricate herself from the Turramurra project by enticing Mr Fong to assume the burdens of developing that project, and expressly recognised the need to provide financial incentives to Mr Fong in doing so. Mr Darmali’s and Ms Lin’s emails of 17 April 2014 (copied to Mr Fong), are explicit as to that purpose (CB6/2545), as too was Ms Lin’s affidavit in the NSW Supreme Court of 27 November 2015 which stated that all three loans were “In the interests of furthering the proposed relationships between GDI and Fong” (CB10/4485 at para 6). Although the Deed of Novation was entered into in July 2014 (CB7/2848), and therefore before the Second MVDA Loan Agreement of 8 August 2014, there was a commercial imperative to keep Mr Fong and his entities in funds in order to meet the payment obligations under that deed, and in any event the company receiving the novation, namely MV Golden Destiny Development (Turramurra) Pty Ltd, was half-owned by each of GDI and Mr Fong (CB10/4487 at para 16). Ms Lin thus retained a substantial commercial interest in the Turramurra project. The purpose of enticing Mr Fong to assume a substantial part of the burden of the Turramurra project was of no benefit to the unitholders in the Fund because the Fund had no interest in the Turramurra project. Rather, Ms Lin was exposed to the failure of that project by reason of GDI’s investment in it, and Mr Cai was exposed by reason of the guarantee which he had given. It was also in Mr Darmali’s interest to put Mr Fong’s entities in funds in order to repay the loan advanced by his mother, Mrs Darmawati. In addition, Mr Darmali had a direct financial interest in procuring loans to Mr Fong’s entities by reason of the arrangement which I have found to exist whereby Mr Darmali earned secret commissions for procuring those loans. Accordingly, I find that the three loans were procured for an improper purpose in breach of Gold Stone’s duty as trustee of the Fund.

Did Ms Lin, Mr Cai and Mr Darmali knowingly induce or procure Gold Stone’s breaches of trust?

Legal Principles

208    The principles pertaining to this cause of action have been analysed in Pittmore Pty Ltd v Chan [2020] NSWCA 344; (2020) 104 NSWLR 62 by Leeming JA (with whom Bell P and Brereton JA agreed). I gratefully adopt the analysis of Leeming JA, which may relevantly be summarised as follows (omitting references):

(a)    “inducing” and “procuring” a breach of trust are synonyms or substantial equivalents: [161];

(b)    a third party’s liability for inducing or procuring a breach of trust has two elements, the first of which is the intentional conduct which causes, and is intended to cause, the breach of trust, which requires more than merely assisting a breach of trust: [186] and [192]–[194];

(c)    the second element is that the third party knew that he or she was bringing about a breach of trust, with any of the following four categories of knowledge being sufficient: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable person: [186] and [191]–[192]; and

(d)    what is required is knowledge of the essential matters which go to make up the breach of trust, even if the procurer or inducer did not know that those matters amounted to a breach of trust: [195].

209    Leeming JA also dealt with the question whether a director “acting as such” is capable of procuring or inducing a breach of trust by the director’s company: [162]–[170]. It was not necessary for Leeming JA to decide the point, although his Honour said that he was far from convinced about the correctness of the proposition that a director acting as such could be so liable for his or her company’s breach of trust: [162]. (I note that Leeming JA’s hesitation appears to have been shared by Ward P, Brereton JA and Griffiths AJA in Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88; (2023) 111 NSWLR 304 at [293].) Leeming JA regarded the proposition as sitting awkwardly with the position concerning the tort of inducing a breach of contract, as expressed in O’Brien v Dawson [1942] HCA 8; (1944) 66 CLR 18, in which Starke J (at 32–33) and McTiernan J (at 34) said that a director could not be liable for inducing a breach of contract by the company where he was acting in pursuance of his authority as a director: [163]–[164]. However, Leeming JA said that none of that reasoning is to deny that directors who act other than in their capacity as one of the organs of a company may be found to have procured or induced a breach of trust of fiduciary duty: [166]. Even so, Leeming JA observed that the reasoning of Finn J in Australian Securities Commission v AS Nominees Ltd [1995] FCA 915; (1995) 62 FCR 504 at 523 proceeds on the basis that directors exercising the powers of the board who thereby cause their company to commit a breach of trust are “peculiarly vulnerable” to liability for knowing assistance: [168]. I can see no reason why the reasoning of Finn J would not also extend to the cause of action of knowingly procuring or inducing a breach of trust.

210    In the present case, except in relation to Mr Cai, the question whether a director acting purely in his or her capacity as director as one of the organs of a company is capable of procuring or inducing a breach of trust is academic, in that the plaintiffs’ allegations for this cause of action against Ms Lin and Mr Darmali in the Third Further Amended Statement of Claim are not confined to conduct by them merely in their alleged capacity as directors (see paras 16(e) and 19(d)). For completeness, I note that Ms Lin by her counsel conceded that she was a director within the extended meaning of para (b) of the definition of “director” in s 9 of the Act. That definition covers a person who is not validly appointed as a director if (i) they act in the position of a director (commonly referred to as a de facto director), or (ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes (commonly referred to as a shadow director). Mr Darmali makes no such concession. I do not regard Mr Darmali as having acted in the position of a director. Rather, I regard him as having acted in the position of “Fund Manager”, and in that capacity was a direct participant in decision-making by Gold Stone in relation to the entry into the three loan agreements in question. Further, I do not regard the other directors of Gold Stone as having been accustomed to act in accordance with Mr Darmali’s instructions or wishes, in the sense referred to in Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 82 ACSR 703 at [181]–[232] (Young JA, with whom Hodgson JA and Whealy JA agreed), which was approved by the Full Federal Court in Federal Commissioner of Taxation v BHP Billiton Ltd [2019] FCAFC 4; (2019) 263 FCR 334 at [91] (Thawley J, with whom Allsop CJ agreed) and [29] (Davies J). What appears to have happened in relation to Gold Stone’s decision to enter into the three loans is that there was a convergence of views among Ms Lin, Mr Cai and Mr Darmali, but I am unable to say that that consensus arose because Ms Lin and Mr Cai were accustomed to act in accordance with Mr Darmali’s instructions or wishes.

211    As to Mr Cai, the plaintiffs do not allege that he acted in any capacity other than as a director (Plaintiffs’ Closing Submissions, para 229). However, I do not share Leeming JA’s hesitation as to whether a director of a trustee company acting as such can be liable for knowingly procuring or inducing the company’s breach of trust. The question is now the subject of an illuminating article by Ms Max McHugh, “Directors’ Liability for Inducing a Breach of Trust or Fiduciary Obligation” (2024) 140 LQR 223, which advances a compelling argument as to why there should be no objection in principle to a director acting as such being found liable for knowingly inducing or procuring a breach of trust. I respectfully and gratefully adopt Ms McHugh’s analysis of the relevant principles, and her conclusion, which may be summarised for present purposes as follows:

(a)    A company is a separate legal person liable for its own wrongs, with the corollary that directors are not liable as accessories for corporate wrongs merely because they are directors;

(b)    A company’s liability as primary wrongdoer does not prevent a director from being liable as an accessory: see Hamilton v Whitehead (1988) 166 CLR 121 at 128; Andar Transport Pty Ltd v Brambles [2004] HCA 28; (2004) 217 CLR 424 at [46];

(c)    A director acting as such is personally liable as an accessory to a corporate wrong (whether a common law or statutory wrong) not merely because the director authorises, directs or procures the wrong, but because an element of knowledge can be established: see Hashtag Burgers Pty Ltd v In-N-Out Burgers, Inc [2020] FCAFC 235; (2020) 385 ALR 514 at [136] and [138] (Nicholas, Yates and Burley JJ), citing JR Consulting & Drafting Pty Ltd v Cummings [2016] FCAFC 20; (2016) 329 ALR 625 at [345] and [350]–[ 351] (Bennett, Greenwood and Besanko JJ), both decisions approving Keller v LED Technologies Pty Ltd [2010] FCAFC 55; (2010) 185 FCR 449 at [291] (Besanko J);

(d)    However, there is a body of authority holding that a director who knowingly causes a company to breach its contract is not personally liable for the tort of inducing breach of contract: Said v Butt [1920] 3 KB 497 at 505–6 (McCardie J); O’Brien v Dawson [1942] HCA 8; (1942) 66 CLR 18 at 32–3 (Starke J) and 34 (McTiernan J); this line of authority should be regarded as weak and anomalous, but in any event any analogy between inducing breach of trust and inducing breach of contract is imperfect and should not be pressed too far. (I note that about a month after Ms McHugh’s article was published, the Supreme Court of the United Kingdom held in Lifestyle Equities CV v Ahmed [2024] UKSC 17; [2024] 2 WLR 1297 at [54]–[63] that the rule stated in Said v Butt as a principle of the law of tort is sound but does not apply to civil wrongs which do not depend on any contract or voluntary arrangement between the parties. That may require some qualification to Ms McHugh’s argument but does not strike me as adversely affecting the central thrust of the argument. In particular, while a unit trust as in the present case may be regarded as a kind of voluntary arrangement, the Supreme Court did not consider whether the rule in Said v Butt has any analogical application to directors inducing a breach of trust by their company. I doubt whether (to adopt the language of Lord Leggatt at [54]) there is any “general norm or social understanding” that if a director knowingly induces a trustee company to commit a breach of trust then only the trustee company (which often has very minimal paid up capital, and no assets of its own other than its right of indemnity over trust assets for liabilities which are properly incurred) and not its directors will incur liability to the beneficiaries. Further, the Supreme Court at [63] acknowledged that the law in this area is not completely coherent.)

(e)    A considerable number of cases have recognised the existence of liability on the part of directors (acting as directors) for knowing assistance in their company’s breach of trust or fiduciary duty (including ASC v AS Nominees Ltd to which I have referred at [209] above), and there is no sufficient justification for taking a different approach to directors’ liability for inducing a breach of trust;

(f)    A director causing a company to commit a breach of trust or fiduciary duty is best seen as inducement rather than assistance, and a director who induces such a breach with (at least) knowledge of facts which would indicate a breach to a reasonable person should be in no better position than a stranger; in both cases, their conscience is sufficiently affected to attract the intervention of equity.

(g)    Just as a director should not be liable merely by virtue of their position as a director, so too should they not escape liability due to their position.

Ms Lin

212    There is no doubt that Ms Lin induced or procured the breaches of trust which I have found Gold Stone committed. As I have indicated at [73] above, in her affidavit in the Supreme Court of New South Wales made on 17 October 2014, Ms Lin referred to Gold Stone as “my company” and to the Fund as “my mortgage fund” (at paras 74, 119, 124 and 224), and she accepted in her cross examination in that case that she controlled Gold Stone as the trustee of the Fund (CB8/3600 lines 40–45). It is clear from that evidence, together with the contemporaneous documents tendered in the present case, that Ms Lin played a very substantial role in directing the affairs of Gold Stone and the Fund. Against that background of admissions by Ms Lin and of the objective facts, I accept the evidence of Mr Cai and Mr Darmali to the effect that Ms Lin was a driving force in the establishment and operation of the Fund, despite the reservations I have as to their credibility: affidavit of Mr Cai of 2.12.23 at paras 17, 24 and 31; affidavit of Mr Darmali of 8.2.24 at para 41.

213    As to Ms Lin’s knowledge of the breaches of trust, dealing first with the breaches by way of unauthorised investments, I accept Mr Cai’s evidence that Ms Lin gave him the Fund Constitution and asked him to sign it (T452.15) and that he observed in 2014 that Ms Lin had a copy of the Fund Constitution in her possession (T457.32–5): see [73] above. That evidence is inherently plausible. Ms Lin clearly knew the terms of the three loan agreements, as she acknowledged in her affidavit in the Supreme Court of New South Wales of 20 November 2015 that she was the person on behalf of Gold Stone who carried out the discussions and negotiations with Mr Fong, including in relation to the three loan agreements (CB10/4485–6). She therefore knew the nature of the so-called security referred to in the Schedules. As a licensed conveyancer, she must have been aware that a mortgage could not validly be granted over a proposed lot in an unregistered strata plan. In relation to the MVLC Loan Agreement, Ms Lin was aware that Gold Stone had purported to take security over lots in an unregistered strata plan in Lane Cove (CB8/3690 line 40 to 3691 line 12; CB10/4486 at para 14). In relation to the First MVDA Loan Agreement, I have accepted at [117] above the evidence of Mr Fong that he told Ms Lin (as well as Mr Darmali and Mr Cai) at the time that he did not own either of the two Manly properties which were referred to as the Mortgaged Property in the Schedule. In addition, in relation to the Second MVDA Loan Agreement, Ms Lin was a signatory to the withdrawal forms (along with Mr Darmali) which withdrew the total of $3.2 million and advanced that money to MVDA. She was also copied in on the emails of 11 and 12 August 2014 concerning the substitution of the Schedule to that loan agreement. Accordingly, there is no doubt that Ms Lin had actual knowledge of the facts constituting the breaches of trust by way of unauthorised investments.

214    It follows from Ms Lin’s knowledge of the terms of the three loan agreements that she knew that the loans were high-risk unsecured loans at high interest rates. Ms Lin’s affidavit in the Supreme Court dated 17 October 2014 shows that she understood the importance of security and serviceability for loans (CB8/3399 at para 198). The cross-examination in that case reveals that she understood that high interest rates were associated with high risk (CB8/3644 line 27 to 3645 line 7). Ms Lin understood that it was wrong to speculate with investors’ funds and was critical of Ms Gai and Mr Geering for doing so in relation to the Gold Stone Future Investments Property Fund (affidavit of 17.10.14 at paras 156 and 162–3, CB8/3382–6). Where her own money was concerned, Ms Lin’s approach was “just like any investor the number one thing we concern is the capital safety. Return on the investment comes second” (CB6/2658).

215    As to the breach of trust by way of improper purpose, the contemporaneous documents demonstrate that Ms Lin was very concerned to extricate GDI from the Turramurra project because she had invested her own funds and perceived that her investment, and the assets of Mr Cai (her then husband) as guarantor, were at significant risk. Her concern was sufficiently great that she considered GDI to risk “financial disaster” if it was unable to extricate itself from the project (affidavit of 17.10.14 in the Supreme Court at paras 61–2, CB8/3346, which was repeated in her affidavit in these proceedings of 31.12.24 at para 100 although the latter was tendered only against her). The avoidance of that disaster was the primary reason for the engagement with Mr Fong (as revealed by the documents at CB6/2658, 2687 and 2692 among others). That rationale is a principal theme of her affidavit in the Supreme Court proceedings dated 17 October 2014 at paras 37, 47–8, 57–66, 81–2, 96, 113–15, 122, 141, 151 and 156 (CB8/3338–84). It is also apparent from her cross-examination in that case (8/3627 line 8 to 3628 line 3). As Ms Lin expressed the matter succinctly in her affidavit of 27 November 2015, Gold Stone agreed to lend money to MVLC and MVDA pursuant to the three loan agreements “In the interests of furthering the proposed relationship between GDI and Fong” (CB10/4485 at para 6). Accordingly, Ms Lin knowingly used the trust money in the Fund for the purpose of advancing her own commercial interests in circumstances which were detrimental to the interests of the plaintiffs as unitholders in the Fund.

216    Accordingly, I find that Ms Lin procured or induced the breaches of trust by Gold Stone in making the three loans in question with actual knowledge of the circumstances constituting those breaches of trust. That conclusion is based on direct evidence. To the extent that I have drawn inferences against Ms Lin, I draw them with greater confidence because Ms Lin did not give evidence in circumstances where she was in a position to cast light on whether such inferences should be drawn: Jones v Dunkel (1959) 101 CLR 298 at 308 (Kitto J), 312 (Menzies J) and 320–21 (Windeyer J); Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 at [63] (Heydon, Crennan and Bell JJ).

Mr Cai

217    Mr Cai also induced or procured the breaches of trust by way of the three loan agreements. As I have found at [26] and [158] above, he played a central role in negotiating the loan agreements with Mr Fong (along with Ms Lin and Mr Darmali), as his affidavit in support of the statutory demand on 23 June 2015 expressly acknowledged (CB9/3900). He signed each of the three loan agreements and signed the bank withdrawal forms in order to make the advance of $500,000 to MVLC and the advance of $2.7 million under the First MVDA Loan Agreement.

218    As to Mr Cai’s knowledge, I have found at [28] above in relation to Mr Cai’s credibility that he had a copy of the Fund Constitution which Ms Lin gave to him after he signed it, that he read it and that Ms Lin explained some of it to him (T469.39–471.15). In addition, Mr Cai read cl 20.4 and he understood that Gold Stone as trustee could only invest in loans secured by mortgages (T472.12–20). He plainly knew the terms of the three loan agreements, including the purported security referred to in the Schedule to each of them. As a licensed real estate agent, he knew what a mortgage was (T439.33–45). He understood that strata plans had to be registered, and indeed had been involved in a lot of off-the-plan sales (T440.1–13). I have found at [117] above that Mr Cai was a participant in the conversation with Mr Fong in which Mr Fong said that he did not own either of the two Manly properties referred to as the Mortgaged Property in the First MVDA Loan Agreement, and was trying to borrow funds to buy those properties.

219    As to the First MVDA Loan Agreement, Mr Cai understood at the time that the proposed lot referred to in the Collateral Documents was in a strata plan which was not registered at the time of the loan (T487.6–9). In relation to the Second MVDA Loan Agreement, Mr Cai said that he was told by Ms Lin that Mr Fong planned to build on a block of land and “afterwards, when the construction is complete, all these properties would be used to – as security” (T487.11–14). It follows that he was aware that the purported security comprised non-existent properties, Mr Cai accepted that he knew at the time that the strata plans referenced in Item 6 of the Second MVDA Loan Agreement had not been registered (T487.6–9).

220    Mr Cai denied that he knew that the MVLC Loan Agreement was not secured by mortgage over real property in Australia (T472.33–40). He accepted that he took no steps to check that the payments to MVLC and MVDA were authorised by the Fund Constitution, and in relation to the MVLC Loan he accepted that he made a deliberate decision not to take such steps (T460.15–29, 484.37–40, 487.32–488.15). Mr Cai said that he did not look at the loan agreements properly and did not see that the proposed security property was unregistered (T474.20–25), but he was aware that the Lane Cove development had not been completed (T474.27–30). I do not accept that evidence except for the last proposition. I find that Mr Cai had actual knowledge that the three loan agreements were not secured by mortgages over real property, and that they were not authorised by the Fund Constitution. However, even if I were to accept Mr Cai’s evidence, I would have found that his knowledge fell within one or more of the other categories sufficient to render him liable, namely wilfully shutting one’s eyes to the obvious, wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make, and knowledge of circumstances which would indicate the facts to an honest and reasonable man.

221    Mr Cai also knew of the facts which rendered the three loans recklessly imprudent investments. As I have said, he knew that the security for the loans was non-existent, and must have observed that the interest rates referred to in the three loan agreements were extraordinarily high, reflecting the very high risk involved in making the loans. He did not undertake any due diligence, and did not believe that anyone else on behalf of Gold Stone had done so.

222    As to Mr Cai’s knowledge of the improper purpose of the loans, Mr Cai knew that he was a guarantor under the contracts to purchase the Turramurra properties and that GDI did not have sufficient funds itself to complete those contracts (T445.12–446.29). Mr Cai denied that Ms Lin conveyed to him that GDI would not be able to develop the Turramurra properties without assistance (T449.1–6), that it was in his financial interest for Mr Fong to take over the project (T462.1–25), and that the loans had anything to do with the Turramurra project (T481.1–5, 485.19–22). I reject those denials, which are not at all credible in the face of the contemporaneous documents. It is obvious from the contemporaneous documents that Ms Lin was highly concerned about those matters and Mr Cai was involved in the discussions concerning Ms Lin’s purpose of seeking to extricate GDI (and therefore herself and Mr Cai) from the Turramurra project. He must have been well aware of the financial risks which he was facing personally as guarantor, and the fact that Mr Fong’s involvement was intended to extricate him (as well as Ms Lin and GDI) from those risks. He was obviously paying attention to what was happening with the Turramurra project, because he was heavily involved in selling units off-the-plan (CB6/2816–7).

223    Accordingly, I find that Mr Cai knowingly induced or procured the breaches of trust by Gold Stone in relation to the three loan agreements.

Mr Darmali

224    I have dealt with Mr Darmali’s evidence in considerable detail in relation to his credibility as a witness. As I have said in that passage of the judgment, as well as the detailed findings which I have made in relation to the chronological narrative of salient facts, Mr Darmali played a central role in negotiating the three loan agreements with Mr Fong and in preparing those loan agreements. He witnessed Mr Fong’s signature on the First and Second MVDA Loan Agreements. Mr Darmali prepared and signed the Macquarie Bank withdrawal forms for the advances to MVLC and MVDA under each of the three loan agreements. Accordingly, Mr Darmali procured or induced the relevant breaches of trust.

225    As to Mr Darmali’s knowledge of the breaches of trust, I find that he had actual knowledge of the facts giving rise to the three ways in which the plaintiffs have succeeded in establishing breaches of trust. He knew the terms of the Fund Constitution, the IM, and the loan agreements. He knew that the loans were made using the Fund’s money. He knew that the security for the loans was non-existent, and, given his background as a mortgage broker and financial planner, he was well aware that the very high interest rates under the loan agreements reflected the very high level of risk being undertaken. He knew that Gold Stone had not undertaken any real investigations or due diligence as to the financial prospects and position of the borrowers. He also knew that Ms Lin’s primary motivation in procuring Mr Fong’s assistance was to protect the money that she had invested in the Turramurra project, and that one of the purposes of the loans was to encourage Mr Fong to extricate Ms Lin (along with GDI and Mr Cai) from that project. Mr Darmali was also aware of the improper purpose of earning commissions for himself by procuring Gold Stone to make the loans to MVDA.

226    Accordingly, I find that Mr Darmali is liable for knowingly inducing or procuring the breaches of trust by Gold Stone.

Pleading point

227    The defendants submit that the plaintiffs had not adequately pleaded the allegation that each of Ms Lin, Mr Cai and Mr Darmali knowingly procured the breaches of trust. There is no merit in that submission. The matter is expressly pleaded in those terms in para 160 of the Third Further Amended Statement of Claim, with ample cross-references to the earlier allegations on which that ultimate allegation is based.

Did Ms Lin, Mr Cai and Mr Darmali knowingly assist in a dishonest and fraudulent design?

228    The plaintiffs also allege that Ms Lin, Mr Cai and Mr Darmali knowingly assisted in a dishonest and fraudulent design by Gold Stone as trustee in committing the breaches of trust. For the purpose of this allegation, the plaintiffs rely on the unauthorised nature of the investments, the improper purpose of seeking to earn Performance Fees in excess of the 8% per annum payable to investors and with the knowledge that the loans were high risk, and the improper purpose of procuring Mr Fong’s assistance for the Turramurra project (Plaintiffs’ Closing Written Submissions, para 227). As Leeming JA observed in Pittmore Pty Ltd v Chan at [194], merely assisting in a breach of trust is a lower level of conduct by way of involvement than inducing or procuring a breach of trust. While the conduct of the third party is thus less onerous to establish under the second limb in Barnes v Addy, a very high degree of moral wrongdoing on the part of the trustee must be established. I am comfortably satisfied that the breaches of trust by Gold Stone in knowingly making unauthorised investments and in having the improper purpose of procuring Mr Fong’s assistance with the Turramurra project were dishonest and fraudulent within the ordinary and natural meaning of those words, as discussed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd at [159]–[186]. As “assisting” is a lower level of involvement than “inducing” or “procuring”, that element is also satisfied for the reasons already given. As Leeming JA said in Pittmore Pty Ltd v Chan at [192] and [194], there is no difference in the requirement of knowledge between the two principles concerning third party liability for breaches of trust. Accordingly, I find that Ms Lin, Mr Cai and Mr Darmali are liable under the second limb in Barnes v Addy.

229    A pleading point is also taken concerning this allegation. Again, it is without merit. The pleading of liability pursuant to the second limb in Barnes v Addy is made in para 162 of the Third Further Amended Statement of Claim, which is supported by ample cross-references to the earlier paragraphs which are relied upon. The sub-heading immediately before para 162 is “Dishonest and Fraudulent Design”. The Full Federal Court has held that there is no express requirement that the pleading use the words “Dishonest and Fraudulent Design”: Zibara v Ultra Management (Sports) Pty Ltd [2021] FCAFC 4 at [116] (McKerracher and Anderson JJ). However, as I have said, the pleading in the present case expressly uses that expression.

Limitation Period

230    Section 47(1)(a) and (e) of the Limitation Act provides relevantly that an action on a cause of action in respect of fraud or a fraudulent breach of trust against a person who is, while a trustee, a party or privy to the fraud or the breach of trust is not maintainable by a beneficiary under the trust if brought after the expiration of a limitation period of 12 years running from the date on which the plaintiff first discovers, or may with reasonable diligence discover, the facts giving rise to the cause of action and that the cause of action has accrued. In the present case, I have found that the breaches of trust by Gold Stone were fraudulent, and that the conduct of Ms Lin, Mr Cai and Mr Darmali was engaged in with actual knowledge of the fraudulent breaches of trust. In those circumstances, the relevant limitation period is 12 years from the date when the plaintiffs first discovered, or could with reasonable diligence have discovered, the facts giving rise to the cause of action. As the relevant events occurred in 2014, the present proceedings which were commenced on 18 January 2022, were brought well within the 12-year period which has still not expired. There is no need for me to deal with the question of whether the fraud to which s 47(1)(a) refers must involve actual dishonesty, rather than merely a consciousness of wrongdoing (as the NSW Court of Appeal held in relation to s 55 of the Limitation Act in Seymour v Seymour (1996) 40 NSWLR 358 at 372 (Mahoney A-CJ, with whom Meagher JA and Abadee A-JA agreed), given that the conduct in the present case did amount to actual dishonesty. Further, there is no need to decide whether the limitation period of 12 years applies to Ms Lin, Mr Cai and Mr Darmali by way of analogy, rather than by way of the direct application of s 47. As Leeming JA explained in Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118; (2018) 355 ALR 703 at [61]–[65], s 47 provides the appropriate analogy for a claim under the second limb of Barnes v Addy, and s 47 may also be regarded as applying in terms to such a claim, irrespective of whether the defendant received any trust property, as such a defendant will be required to account to the plaintiff as a constructive trustee (noting that the term “trust” is defined in s 11(1) to include constructive trusts which arise only by reason of a transaction impeached). In my view, the same reasoning applies to the claim in the present case for knowingly procuring or inducing breaches of trust.

Remedy

231    In Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [36], the High Court cautioned against generalisations concerning the appropriate remedy for breaches of trust, given that equity provides a range of remedies and the nature of the remedy may vary to reflect the terms of the trust and the breach of which complaint is made. In that case, the High Court decided against providing a remedy by way of restoring or replenishing funds thereafter to be held on trusts yet to be fully performed: [37]. The High Court noted the availability of equitable compensation where the appropriate remedy was simply one of compensating the beneficiary for a loss: [38]. Similarly, in Target Holdings Ltd v Redferns [1996] AC 421 at 434–5, Lord Browne-Wilkinson said that equitable compensation for the beneficiary, rather than restitution of the trust fund, may be the appropriate remedy where the trust has come to an end and the beneficiary is the sole owner of the trust estate. In the present case, the Fund no longer exists. If it did exist, the plaintiffs would be the only unitholders in the Fund, given that the Joint Unitholders had their units redeemed in December 2014. It would be a pointless and unnecessarily expensive exercise for the Court to appoint a receiver to undertake the restoration of the Fund, and then to distribute the net proceeds to the plaintiffs after meeting the costs of the receivership. In my view, the clearly appropriate remedy is simply to award equitable compensation in favour of the plaintiffs against Ms Lin, Mr Cai and Mr Darmali.

232    The appropriate calculation is as follows. The starting-point is that the plaintiffs are entitled to a total of $6.4 million, calculated as follows:

(a)    $500,000 plus interest in relation to the MVLC Loan Agreement;

(b)    $2.7 million plus interest pursuant to the First MVDA Loan Agreement; and

(c)    $3.2 million plus interest pursuant to the Second MVDA Loan Agreement.

I deal below with the question of the appropriate award of interest, and the date from which it should be paid.

233    Second, the plaintiffs concede that it is necessary to credit the defendants with the net settlement proceeds of $395,504.40 received on 23 November 2017, being the return which the Fund obtained from the three loans, against the amount otherwise owing pursuant to these claims. I accept that concession. I deal below with the question of misappropriations from the settlement proceeds of $395,504.40, which involve separate causes of action from the ones with which I am presently concerned.

234    Each of the plaintiffs is entitled to 50% of the amount thus calculated, together with 50% of the interest on that amount, because each of the plaintiffs held 50% of the units in the Fund.

Misappropriation Claims

Mr Darmali’s secret commissions

235    I have accepted the plaintiffs’ contention that Mr Darmali was paid a total of $520,000 in commissions by MVDA for procuring the loans made by Gold Stone: see [123] and [148]–[150] above. Ms King accepted that if I were to find that Mr Darmali was the Fund Manager of the Fund and if I found also that he actually performed the functions of that office, then Mr Darmali owed fiduciary duties to Gold Stone, including the duty not to receive a benefit within the scope of his obligations as fiduciary without the fully informed consent of Gold Stone (T1101.27–43). Ms King also accepted that Gold Stone did not give its fully informed consent to the payment of those commissions, and that (on the hypothesis that Mr Darmali did act as Fund Manager) Mr Darmali would be duty-bound to repay the commissions, subject to any applicable limitation period (T1102.14–26).

236    Those concessions by Mr Darmali’s counsel were well made. Although the role of “Fund Manager” is not one of the traditional categories of fiduciary duty, it cannot be doubted in the present case that Mr Darmali as Fund Manager was under an obligation, consistently with the reasonable expectations of the parties, to exercise his functions in that role in the interests of Gold Stone as trustee of the Fund, rather than in his own self-interest. Further, the right of the principal to the disgorgement of a benefit obtained by a fiduciary in breach of duty does not require proof that the principal has been made worse off by the fiduciary’s profit-taking. There are thus cases where the principal has been held to be entitled to disgorge the fiduciary’s profit obtained within the scope of the fiduciary obligation even though the principal was either legally or factually unable to take that benefit itself: Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; Keech v Sandford (1726) 25 ER 223; and see Warman International Ltd v Dwyer (1995) 182 CLR 544. The applicable limitation period is 12 years pursuant to s 47(1)(a) of the Limitation Act as a fraudulent breach of trust (whether by analogy to breach of fiduciary duty or by direct application to Mr Darmali as a constructive trustee), and thus the proceedings were brought within time. Now that the Fund has come to an end in circumstances where the only unitholders are the plaintiffs, Mr Darmali should account to each of the plaintiffs in the amount of 50% of $520,000, namely $260,000 to each, plus interest. However, consistently with my findings as to these commissions, they arose only because of Gold Stone entering into the First and Second MVDA Loan Agreements, and were paid by MVDA out of those loan advances. I have found that Mr Darmali is liable to compensate the plaintiffs in relation to the amounts advanced in those two loan agreements, less the net recovery under the settlement deed of 14 November 2017. Accordingly, the plaintiffs must elect between an account of profits against Mr Darmali for $520,000 or having that amount treated as part of their claim for equitable compensation. It does not appear that there is any monetary difference between the two alternatives, but the plaintiffs accept that they cannot have both equitable compensation in the full amount of the two MVDA loans (less the settlement deed net recovery) and an account of profits for the amount of $520,000 (Plaintiffs’ Note on Relef Sought dated 20.6.24 at para 14; T1197.4–10).

Credit Licence Payments

237    As I have said at [81] above, Gold Stone paid $108,261.20 from the Fund to Fiducia Asset pursuant to the agreement whereby Gold Stone was appointed AR for the purpose of Fiducia Asset’s ACL. An ACL was necessary only to the extent that the Fund engaged in consumer lending: National Consumer Credit Protection Act 2009 (Cth), s 29; Australian Securities and Investments Commission v BSF Solutions Pty Ltd (Liability) [2024] FCA 553 at [7]–[13]. The plaintiffs submit that Gold Stone only lent money to MVLC and MVDA, and there was thus no legitimate reason why Gold Stone required an ACL. In my view, however, the plaintiffs have not discharged their burden of proof in establishing that the payment of that money for use of the ACL constituted a breach of trust. It may well have been reasonably contemplated at the time that the relevant AR agreement was entered into that the Fund would engage in lending to consumers so as to require that Gold Stone held an ACL, or that it became an AR in respect of an ACL. Indeed, the plaintiffs appeared to open the case on the basis that that was a realistic possibility (T28.19–22). Accordingly, I reject the plaintiffs’ claim in relation to these payments.

Payments to Ms Helen Cheng

238    In 2014 and 2015, Ms Lin’s firm known as Austleg & Co had an employee named Ms Helen Cheng, who was described as a conveyancing consultant (CB10/4624–5 and 4632). Between 30 August 2014 and 9 January 2015, Gold Stone paid $14,118.94 to Ms Cheng in wages from the 889 Account (Mr Wengel’s report of 19.4.24, Table 5 and para 14.8.23). There was no legitimate purpose for those payments, and they were made for Ms Lin’s benefit. Accordingly, Ms Lin should account for them. Counsel for Ms Lin did not put any submission in opposition to such an order (T945.7–31). There is no issue concerning the limitation period, as the payments concern a fraudulent breach of trust within the meaning of s 47(1)(a) of the Limitation Act.

Payments to Austleg Pty Ltd and Austleg & Co

239    Between 2014 and 2018, Gold Stone paid amounts totalling $70,473.22 (comprising $60,000 on 28 November 2014, $2,173.22 on 14 November 2016, $5,000 on 17 February 2017 and $3,300 on 16 October 2017: CB12/5877 and 13/5964) to Austleg Pty Ltd and Austleg & Co, the former being a company of which Ms Lin was the sole director and shareholder and the latter being her firm. The report of Mr Wengel of 19.4.24 (at Table 5 and paras 14.8.16 and 14.8.27) gave different figures of $73,290.81 and $5,000, but the plaintiffs have limited their claim to $70,473.22 in their final submissions on relief dated 20 June 2024 (paras 17 and 20). There was no legitimate purpose for those payments, totalling $70,473.22, and they were made for the benefit of Ms Lin, who should account for them. Of those amounts the $3,300 paid on 16 October 2017 is also claimed against Mr Cai, who is shown on the bank trace to have authorised the payment (CB12/5877). Accordingly, Mr Cai is liable for that amount. The payments involved fraudulent breaches of trust within the meaning of s 47(1)(a) of the Limitation Act, and thus the claim was made within time.

240    Ms Lin submits that three of the payments to Austleg Pty Ltd should be treated as repayments of GDI’s loan to Gold Stone, in that the source of those payments must have been the $1 million advanced by GDI on 18 August 2015 (CB13/5978). The amounts in question are a payment on 14 November 2016 of $2,173.22, a payment on 17 February 2017 of $5,000 and a payment on 16 October 2017 of $3,300. I reject that submission for the reasons which I give below concerning the inability of Gold Stone to repay GDI’s loan from monies standing to the credit of the trust account held by Gold Stone in circumstances where Gold Stone had not remedied the breaches of trust by restoring the Fund in relation to the losses arising from those breaches of trust.

Settlement Proceeds

241    As I have indicated at [179] above, on 14 November 2017, Gold Stone entered into a Deed of Settlement and Release with the liquidators of MVLC and MVDA, under which Gold Stone was paid $445,000 (CB11/5090). On 20 November 2017, an amount of $395,504.40 was deposited into Gold Stone’s 022 Account with the Commonwealth Bank (CB11/5153 and CB14/6555), being the settlement payment of $445,000 less legal expenses. I have set out in the chronological narrative of salient facts the various withdrawals which Mr Cai made from those settlement proceeds. I have also included in this section of the judgment the payment on 21 July 2016 of $300,000 to G3, even though it was paid well before the settlement deed of 14 November 2017. As I have said at [163] above, this amount should be treated as having been paid at the request or direction of GDI, and thus was a partial repayment by Gold Stone of its loan account with GDI. I have included it here along with the post-14 November 2017 repayments to GDI because it raises the same issue of legal principle concerning the clear accounts rule. The payments in question here can be divided into two categories.

242    The first category concerns withdrawals which cannot be regarded as having been intended as repayments to GDI of the loan made by GDI to Gold Stone. Only one of those payments is alleged to have been authorised by Ms Lin, namely the amount of $6,600 withdrawn on 8 October 2018 (para 132H Item 4 of the Third Further Amended Statement of Claim), but as I have indicated at [183] above, I am not satisfied on the balance of probabilities that Ms Lin also authorised the withdrawal, and the claim against her for that payment does not seem to be pressed (Plaintiffs’ Note on Relief Sought dated 20.6.24, para 22). The amounts of $3,000 paid on 23 April 2018 and $5,500 paid on 8 October 2018 (being the two payments described as “Trustee service fee”) are claimed against both Ms Lin and Mr Cai. In light of Ms Lin’s references to Gold Stone as “my company” and to the Fund as “my mortgage fund” (see [73] and [212] above), I infer that Ms Lin received the benefit of those two payments purporting to be a “Trustee service fee”, and accordingly is liable under the first limb of Barnes v Addy as the knowing recipient of money paid in breach of trust. As Mr Cai authorised the two payments, he is liable for knowingly inducing or procuring the breach of trust, and for knowingly assisting in the trustee’s dishonest and fraudulent design within the second limb of Barnes v Addy. The payments which fall into this first category are as follows:

243    Each of those payments was a fraudulent misappropriation by Mr Cai of trust monies belonging to the Fund. He is liable to pay 50% of the total amount plus interest to each of the plaintiffs. Ms Lin is liable for the first two payments totalling $8,500, plus interest, and that is payable as to 50% to each of the plaintiffs.

244    As to the second category, being the withdrawals which I have treated as repayments to GDI, the amounts which are claimed by the plaintiffs are as follows, noting that the amount of $300,000 paid on 21 July 2016 is claimed only against Ms Lin (T1193.22–1194.28), and the other amounts are claimed only against Mr Cai:

245    As I have indicated above, I regard GDI as having been a genuine creditor of the Fund. That raises a legal question as to whether Gold Stone as trustee was entitled to exercise its right of indemnity against the trust assets before such time as it had restored to the trust estate the amount of the loss incurred by reason of its breaches of trust in having made the three loans in question.

246    The principle on which the plaintiffs rely is that a trustee’s right of indemnification is subject to a condition precedent, namely that the trustee make good any loss it caused to the estate. The principle is often referred to as the clear accounts rule, and was analysed by Brooking J in RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 and by Gordon J in Australian Securities and Investments Commission v Letten (No 17) [2011] FCA 1420; (2011) 286 ALR 346. As Brooking J said in RWG at 397–8, a balance is to be struck between what is due by way of compensation and what is due by way of indemnity, and if the balance is in favour of the trustee then the trustee may recover from the estate to that extent. That reasoning was approved by the Full Federal Court in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 at [138] (Lee, Hill and Drummond JJ) and in Queensland Nickel Sales Pty Ltd v Park [2023] FCAFC 150; (2023) 299 FCR 169 at [185]–[186] (Markovic, Banks-Smith and Halley JJ). Accordingly, the clear accounts rule involves an arithmetic exercise setting off the trustee’s right to indemnity against its liability with respect to previous breaches of trust. As Gordon J expressed the point in Letten at [20], the quantum of the trustee’s right to indemnity may be diminished by breaches unrelated to the liabilities for which the right of indemnity is claimed. Accordingly, the clear accounts rule applies if it can be established that the trustee acted in breach of trust or breach of duty such as to give rise to a liability to pay compensation to the relevant trust fund in an amount equal to or in excess of the trustee’s claim for indemnity. As Gordon J said at [72]:

It is immaterial whether the trustee’s claim on the fund arises from a liability that it has incurred, or from a management or other fee to which it is entitled, or even from the fact of also being a beneficiary of the trust. In every case, equity requires that the trustee be regarded as applying its share of the fund to the payment of its debt to the fund. The debts in this case exceed by a considerable margin the total of the possible claims by the trustee companies upon the respective funds.

247    In the present case, at the time that the repayments of GDI’s loan were made by Gold Stone (including the payment to G3 on 21 July 2016) totalling $622,169.40, Gold Stone had an obligation to restore the Fund for the losses incurred by reason of its breaches of trust in making the three loans in question. The amount of that compensation was initially $6.4 million plus interest, although that amount was reduced by $395,504.40 by reason of the settlement deed of 14 November 2017. At all material times, the amount owed by Gold Stone in order to restore the Fund for the losses caused by its breaches of trust exceeded $6 million. That amount far exceeded the total of the claims made by Gold Stone to be indemnified by the Fund. Accordingly, the pre-condition for the ability of Gold Stone to claim indemnity from the Fund was not satisfied. Mr Chan, counsel for Mr Cai, relies on the principle that the trustee’s right of indemnity is entitled to priority in the administration of the trust, and that the entitlement of the beneficiaries is confined to so much of the trust assets as is available after the liabilities properly incurred by the trustee have been discharged: Chief Commissioner of Stamp Duties for New South Wales v Buckle [1998] HCA 4; (1998) 192 CLR 226 at [47]–[48] (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ). However, that question of priority does not arise unless the trustee has a valid and operative claim for indemnity. The effect of the clear accounts rule is that the pre-condition to the existence and operation of the trustee’s indemnity is not met unless (and to the extent) that the trustee has restored to the trust fund the amount of losses incurred by reason of breaches of trust. Accordingly, in the present case, Gold Stone’s right of indemnity for repayments of the legitimate loan advanced by GDI simply did not arise. Accordingly, those repayments by Gold Stone to GDI were made in breach of trust.

248    The amount of $300,000 paid on 21 July 2016 is claimed against Ms Lin, whereas the other repayments of GDI’s loan are claimed only against Mr Cai. Both Ms Lin and Mr Cai had actual knowledge of the essential matters which went to make up the breaches of trust, and of the matters which obliged Gold Stone to pay more than $6 million in restoration of, and compensation to, the Fund. They obviously knew that Gold Stone had not made such restoration or compensation to the Fund. As Leeming JA said in Pittmore Pty Ltd v Chan at [195], it is not necessary for third parties involved in the breach of trust to know that the matters amounted to a breach of trust, and I do not find that Ms Lin or Mr Cai was aware of the clear accounts rule or of its effect in the present case. However, that is irrelevant to their liability, which is founded on their actual knowledge of the relevant facts, not their knowledge of the law pertaining to a trustee’s right of indemnity. Accordingly, both Ms Lin and Mr Cai are liable for the amounts claimed against them by the plaintiffs on the ground that they knowingly induced or procured the breaches of trust in making those repayments to GDI in circumstances where the Fund had not been restored or compensated for the losses caused to it by Gold Stone. They are liable to pay the respective amounts plus interest as to 50% to each of the plaintiffs.

249    As I have noted at [164] above, the running balance of Gold Stone’s loan from GDI yields a balance in GDI’s favour of $99,613.21. If Ms Lin, Mr Cai and Mr Darmali between them satisfy the judgment for equitable compensation in relation to the three loan agreements, they will have satisfied the clear accounts rule on behalf of Gold Stone, and Gold Stone would then be entitled to be indemnified for the (notional) payment to GDI of $99,613.21 to pay out GDI’s loan. GDI has been de-registered and thus cannot claim that amount. However, the plaintiffs concede that upon restoring the trust fund by paying the judgment for equitable compensation, Ms Lin, Mr Cai and Mr Darmali are entitled to the credit of $99,613.21 (Plaintiffs’ Note on Relief Sought dated 20.6.24 at para 25; T1199.1–8). In my view, that concession is well made. The appropriate course is simply to deduct $99,613.21 from the principal amount awarded as equitable compensation (with no adjustment for interest as the defendants’ entitlement to that credit does not strictly arise until the trust fund is restored).

Interest

250    The plaintiffs make a claim for pre-judgment interest to be calculated by way of compound interest at yearly rests at the rates set out in para 2.2 of the Interest on Judgments Practice Note issued on 18 September 2017, namely:

(a)    in respect to the period from 1 January to 30 June in any year – the rate that is 4% above the cash rate last published by the Reserve Bank of Australia before that period commenced; and

(b)    in respect of the period from 1 July to 31 December in any year – the rate that is 4% above the cash rate last published by the Reserve Bank of Australia before that period commenced.

The plaintiffs acknowledge that s 51A(2)(a) of the FCA Act provides that s 51A(1) does not authorise the giving of interest upon interest, but they make their claim for compound interest pursuant to the general power under by s 23 of the FCA Act, conferring on the Court the power to make orders of such kinds as the Court thinks appropriate. The Court clearly has power to award compound interest: Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 at [547]–[552] (Finn, Stone and Perram JJ).

251    The question of the availability of compound interest in relation to breaches of trust or fiduciary duty was the subject of extensive analysis by the Queensland Court of Appeal in Herrod v Johnston [2012] QCA 360; [2012] 2 Qd R 102. The reasons of Muir JA (with whom Gotterson JA and Applegarth J agreed) identified two main circumstances relevant to the present case in which compound interest may be awarded: at [25]–[50]. Those circumstances are (a) where the trustee is guilty of fraud, serious misconduct or contumelious disregard of the interests of beneficiaries, and (b) where the trustee or fiduciary has wrongfully made a profit out of the breach. In my view, that reasoning applies equally to third parties who have either knowingly procured or induced the breach of trust or fiduciary duty, or who have knowingly assisted in a dishonest and fraudulent design by the trustee or fiduciary.

252    In the present case, I have found that Ms Lin, Mr Cai and Mr Darmali knowingly and dishonestly procured or induced Gold Stone’s breaches of trust, and knowingly assisted in the dishonest and fraudulent design of Gold Stone in committing those breaches of trust. In my view, that conduct renders it appropriate for compound interest to be paid at yearly rests. In addition, I have made findings as to misappropriations of the Fund’s money by Ms Lin, Mr Cai and Mr Darmali, who have thereby profited from the breaches of trust involved in the misapplication of those monies, and compound interest at yearly rests should be paid on the amount of those misappropriations. Although the interest rates set out in the Court’s Interests on Judgments Practice Note are intended to apply to pre-judgment interest under s 51A(1)(a) of the Federal Court Act, and that provision does not allow the award of compound interest, I regard those rates as appropriate for the calculation of the compound interest at yearly rests which I have decided should be awarded in order to properly compensate the plaintiffs for the time-value of the principal amounts claimed, and to ensure that the defendants do not profit from the misappropriated amounts. I note that in the Supreme Court of New South Wales, orders for compound interest are typically made at the rates set out in the Court’s Practice Note applicable at the time, and such interest is compounded on yearly rests: Hagan v Waterhouse (1991) 34 NSWLR 308 at 393 (Kearney J); Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480 at [13] (Hamilton J); BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972 at [394] and Order 11 (Rees J).

253    As to the time from which such interest should run, in relation to the payment of equitable compensation in relation to the breaches of trust in making the three loans, interest should run from the date when the last distributions were paid to the plaintiffs, namely 10 October 2015 in the case of Ms Chu, and 14 December 2015 in the case of Mr Xu. That is because the plaintiffs received distributions from the Fund (mostly at the promised rate of 8% per annum to be paid on a quarterly basis) until those dates, but not thereafter. Accordingly, the plaintiffs have already received appropriate payments reflecting the time-value of the money which they invested in units in the Fund up until those dates. As to the interest payable on the misappropriated amounts, interest should run from the time when each of the payments was made. Mr Bagley submitted that the period over which interest should be awarded should be reduced by reason of the plaintiffs’ delay in commencing proceedings, referring to Spotlight Pty Ltd v Fatseas Investments Pty Ltd [2020] NSWCA 132 at [104] (Gleeson JA, with whom White JA and Emmett AJA agreed). Mr Bagley submitted that it was unreasonable for the plaintiffs to wait until they had received their permanent residency visas to commence the proceedings (T1215.1–42). I reject that submission. The fundamental point of the plaintiffs’ investments in the Fund was to qualify for permanent residency pursuant to the SIV program. The plaintiffs were apprehensive about their SIV applications in circumstances where their investments had failed. In my view, that was a reasonable concern for the plaintiffs to hold, as foreign citizens who were unfamiliar with the potential attitude of the Australian Government, and the plaintiffs faced a real difficulty in anticipating how the Australian Government might react if the defendants’ misconduct in relation to the Fund was exposed in litigation.

The Plaintiffs Claim that the Fund was an Unregistered Managed Investment Scheme

254    In short, the plaintiffs contend that the Fund was required to be registered as a managed investment scheme under s 601ED of the Act, but was not registered. The plaintiffs claim that by operating the Fund, the defendants breached s 601ED(5), and thereby caused loss which may be recovered by the plaintiffs pursuant to s 1325(2) of the Act.

Salient Legislative Provisions

255    Section 601ED of the Act provides relevantly as follows:

(1)    Subject to subsection (2), a managed investment scheme must be registered under section 601EB if:

…

(b)    it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes;

…

(2)    A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.

…

(5)    A person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered.

Another ground of requiring registration under subs 601ED(1) is if the scheme has more than 20 members, and for that purpose, subs (4) provides that in working out how many members a scheme has, “joint holders of an interest in the scheme count as a single member”. However, subs (4) does not have any wider application, including in terms of the Regulations to which I refer below.

256    A Product Disclosure Statement was not relevantly required unless an interest in the scheme was issued to a retail client: s 1012B(3)(b). In relation to the exception conferred by subs 601ED(2), the aspect concerning the requirements for a Product Disclosure Statement under Division 2 of Part 7.9 which is of relevance to the present case is whether the financial product or financial service satisfied the elements of s 761G(7)(a) of the Act, namely:

the price for the provision of the financial product, or the value of the financial product to which the financial service relates, equals or exceeds the amount specified in regulations made for the purposes of this paragraph as being applicable in the circumstances (but see also subsection (10))

Subsection 761G(9) provides for a presumption that the product or service was provided to the person as a retail client (and thus required the giving of a Product Disclosure Statement) unless the contrary is established.

257    Subsection 761G(10) provides as follows:

In addition to specifying an amount or amounts for the purposes of paragraph (7)(a), the regulations may do either or both of the following:

(a)    deal with how a price or value referred to in that paragraph is to be calculated, either generally or in relation to a specified class of financial products;

(b)    modify the way in which that paragraph applies in particular circumstances.

258    The Regulations as they stood at 7 August 2013, provided relevantly as follows:

7.1.18 Retail clients and wholesale clients: price of investment-based financial products

…

Price

(2)    For paragraph 761G(7)(a) of the Act, the amount applicable in relation to an investment-based financial product is $500 000.

Working out price: general rule

(3)    For paragraph 761G(10)(a) of the Act, the price of an investment-based financial product:

(a)    is the amount that is paid or is payable to acquire or purchase the investment-based financial product; and

(b)    does not include any amount paid for or in respect of the investment-based financial product following its issue or acquisition unless the issue or acquisition would not have taken place without an arrangement to pay the amount.

…

7.1.19 Retail clients and wholesale clients: value of investment-based financial products

…

Value

(2)    For paragraph 761G(7)(a) of the Act, the amount applicable in relation to an investment-based financial product is $500 000.

Working out value: general rule

(3)    For paragraph 761G(10)(a) of the Act, the value of an investment-based financial product on a day is:

(a)    if the financial product is a security, or a financial product under paragraph 764A(1)(j) of the Act – the market value of the investment-based financial product; or

(b)    if paragraph (a) does not apply – the amount of money that stands to the client’s credit in relation to that investment-based financial product.

259    The Regulations were amended with effect from 15 March 2014, but the provisions to which I have referred were not affected.

Did s 601ED(1)(b) apply to the Fund?

260    The plaintiffs submit that the Fund was required to be registered because it was promoted by people (particularly Ms Lin and Mr Darmali) who were in the business of operating managed investment schemes. The plaintiffs rely on the proposition that “promoting” a scheme extends to formulating it, advertising it, soliciting others to participate in it, and embarking on and implementing it: Australian Securities and Investments Commission v PE Capital Funds Management Ltd [2022] FCA 76; (2022) 159 ACSR 1 at [56] (Cheeseman J). The plaintiffs submit that Ms Lin and Mr Darmali were in the “business” of promoting such schemes because they had also promoted the Gold Stone Income Fund (CB4/1435–6; CB6/2702–4), the Gold Stone Future Investments Property Fund (CB4/1408–27; CB6/2702–4) and, in the case of Ms Lin, the Gold Stone Cash Management Fund (affidavit of Ms Lin dated 31 January 2024 at paras 48 and 58, this affidavit being admitted only against Ms Lin). I accept those submissions.

Did s 601ED(2) apply?

261    The answer to this question turns on whether the Joint Unitholders were retail clients, which depends on whether the price for the provision of, or the value of, the financial product supplied to them equalled or exceeded the amount of $500,000 specified in regs 7.1.18(2) and 7.1.19(2) of the Regulations. The plaintiffs submit that the exception in s 601ED(2) is not applicable because the Joint Unitholders invested in the scheme, and those persons are presumed to have been retail clients unless the contrary is established by reason of s 761G(9). As I have indicated above, the Joint Unitholders jointly invested a total of $500,000. The question thus arises whether the Act and Regulations permit the aggregation of those monies when determining the status of the Joint Unitholders, or whether their investment operated as an investment of $250,000 each. The fact that the Fund was marketed as a wholesale client fund does not affect the answer to that question. For the reason given below, I accept the plaintiffs’ submissions.

262    A similar issue arose in Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209 at [568]–[598]. Edelman J was faced with a submission in that case that investors who were couples were given a single statement of advice, or were advised to invest jointly, and were described as joint investors, and accordingly it was submitted that the investors who were a couple should be aggregated: [587]. At [588], Edelman J referred to the statement in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2; (2015) 254 CLR 425 at [48] by French CJ, Hayne, Bell and Gageler JJ that the maxims concerning the nature of a joint tenancy, and statements that joint tenants are considered by the law as one person for most purposes, cannot be taken as the premise for deductive reasoning about the effect of a joint tenancy. That statement in turn drew upon Dixon J’s reasoning in Wright v Gibbons (1949) 78 CLR 313 at 330. As Edelman J said, the focus must be on the text, context and purpose of the statutory provision. Edelman J said that the words of s 761G militate against the submission which had been made, referring to the numerous occasions when the section refers to “the person”, “a person”, “a retail client”, or a “professional investor”, saying that on each occasion the reference to a person is in the singular: [589]. Edelman J said that the context of s 761G also militates against the submission that the investors can be aggregated, referring to circumstances in the legislation where a financial product is provided to a group of people but there remained a concern about each individual person: [590]. Further, Edelman J said that the statutory purpose of s 761G also militates against the aggregation of two investors who will both suffer the consequences of a breach of the provisions which are concerned with protecting retail clients, the statutory purpose being concerned with the protection of vulnerable investors: [591]. His Honour added that if a couple, each of whom would be a retail investor, invested jointly then there is twice the vulnerability or exposure to the lack of the protections provided by the Act: [593]. Accordingly, the submission that the two investors should be aggregated runs contrary to both the words and the protective purpose of the provision: [593]. Edelman J added that if that submission were correct, there is no reason why it should not apply to any joint investment by retail investors, not merely for married investors, and not merely investments by only two persons, and thus the protective purpose of the provision would be easily circumvented by encouraging aggregation of two or more single investors to be joint investors: [593].

263    At [596], Edelman J referred to the opposing submission made by ASIC in that case, that where a couple has invested jointly (such that, according to the submission, each individual owns a 50% share of the investment) then the price or value of the financial products acquired is the price or value of each individual’s 50% share in the relevant financial product. Edelman J said that the premise of ASIC’s submission was incorrect, because when a couple invests jointly, each person owns, and is entitled to, 100% of the investment unless the joint ownership is severed, and joint ownership is ownership of the entirety of the investment for each joint owner: [596]. Despite that criticism of the premise of ASIC’s submission, Edelman J rejected the submission that the amount of a joint investment should be aggregated: [597]. Edelman J said that the “working out rule” in reg 7.1.18(3)(a) is concerned with the amount “that is paid or payable to acquire or purchase the investment-based financial product”, not the value to which each person might become (jointly) entitled. Edelman J added that the statements of advice did not contemplate any particular manner by which couples would pay for the financial products, and in the absence of any evidence of alternative arrangements, the assumption must be an equal contribution from each: [597].

264    Mr Bagley, counsel for Ms Lin, submitted that Edelman J should be understood as having held that for the purpose of working out the “price” under reg 7.1.18, the amount of $500,000 could not be attributed to each of the joint investors unless there was evidence of alternative arrangements other than an equal contribution from each. In the present case, Mr Bagley submits that the evidence shows (either directly or by inference) that the Joint Unitholders paid for their units out of a joint bank account, the funds in which belonged equally to each of them, referring to Russell v Scott (1936) 55 CLR 440. In relation to working out the “value” under reg 7.1.19, Mr Bagley submits that Edelman J’s reasoning is to the effect that each of the joint investors has a full entitlement to the $500,000. That submission is said to be based on Edelman J’s rejection of the premise of ASIC’s submission, that where a couple invests jointly, each individual owns a 50% share of the investment. As Edelman J explained at [596], when a couple invests jointly, each person owns and is entitled to 100% of the investment unless the joint ownership is severed. Mr Bagley submits (in this respect correctly) that the defendants do not need to succeed on both “price” and “value” (as they are alternatives) in order to establish that the Joint Unitholders were not retail clients.

265    In my view, Mr Bagley’s submissions turn on a misreading of Edelman J’s reasoning. The central thrust of Edelman J’s reasoning is that the text, context and purpose of the relevant provisions are contrary to the notion that an investment made by joint investors of $500,000 can be treated as an investment of $500,000 by each and every one of them for the purpose of the calculation of either “price” or “value”. In rejecting the premise of ASIC’s submission, Edelman J was merely restating the general principle of law that each of the joint owners is entitled to 100% of the investment unless the joint ownership is severed. That cannot be read as supporting a conclusion that the value of an investment for the purposes of reg 7.1.19 is to be deduced by reference to that legal principle, and such a reading of Edelman J’s reasons would be inconsistent with the caution that his Honour emphasised earlier in the judgment to the effect that the legal principle cannot be taken as the premise for deductive reasoning about the effect of a joint tenancy. Nor was Edelman J saying that if the purchase money for the joint investment is sourced from a joint bank account, then in the calculation of “price” in reg 7.1.18, each of the joint owners is to be treated as having provided the entirety of the purchase price. Again, that would be contrary to the central thrust of his Honour’s reasoning concerning the text, context and purpose of the provisions. Mr Thomas SC submits, and I accept, that Edelman J’s reference at [597] to an assumption of equal contribution from each of the joint owners in the absence of any evidence of alternative arrangements, contemplated that there could be an agreement between the joint owners that they would hold the investment in proportions other than 50% each (for example 60:40). I do not read Edelman J as saying that if the purchase money is sourced from a joint bank account, then that is sufficient to constitute such alternative arrangements, that being the very kind of deductive reasoning which Edelman J had cautioned against.

Did Ms Lin, Mr Cai, Mr Darmali and Fiducia Asset operate the Fund in contravention of s 601ED(5)?

266    The term “operate” in this context refers to the management of, or the carrying out of, the activities which constitute the scheme: Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; (2002) 41 ACSR 561 at [55] (Davies AJ). That includes formulating and directing the scheme (Pegasus at [56]), actively promoting and implementing the scheme (Australian Securities and Investments Commission v IP Product Management Group Pty Ltd [2002] VSC 255; (2002) 42 ACSR 343 at [18] and [29] (Byrne J)) and otherwise taking steps to effectuate it (Australian Securities and Investments Commission v Takaran Pty Ltd [2002] NSWSC 834; (2002) 43 ACSR 46 at [47] (Barrett J)).

267    Each of Ms Lin, Mr Cai and Mr Darmali operated the scheme within the meaning considered in those authorities. I note that Ms Lin and Mr Cai did not contest that proposition. They were responsible for formulating and promoting the scheme, and for the implementation of the scheme by way of negotiating and agreeing to the three loan agreements, and causing the loan monies to be advanced. In addition, Fiducia Asset operated the scheme as the issue of units in the Fund was conducted by Gold Stone as AR of Fiducia Asset under the latter’s AFSL. Accordingly, each of them is liable for having operated the Fund in contravention of s 601ED(5).

268    The plaintiffs accept that if I conclude that Mr Wu did not sign the Fund Constitution, then I would not find that Mr Wu operated the scheme so as to fall within s 601ED(5). As I have found that Mr Wu’s signature on the Fund Constitution is a forgery, it follows that Mr Wu is not liable for any contravention of s 601ED(5).

Are Ms Lin, Mr Cai, Mr Darmali and Fiducia Asset liable to compensate the plaintiffs under s 1325(2) of the Act?

269    The plaintiffs submit that s 601ED(5) prohibits the operation of an unregistered managed investment scheme in circumstances where it is required to be registered, and s 1325(2) empowers the Court to award compensation for loss suffered “because of” the contravening conduct. The plaintiffs submit that if Ms Lin, Mr Cai, Mr Darmali and Fiducia Asset had not contravened s 601ED(5), the Fund would not have been operated at all, and therefore the plaintiffs would not have lost their investments. The plaintiffs therefore seek the total amount invested by them in the Fund by way of compensation pursuant to s 1325(2). Ms Lin, Mr Cai, Mr Darmali and Fiducia Asset contend that the relevant causal connection is not satisfied merely by the Fund having been operated, and submit that it must be shown that the relevant loss arose because of the Fund not having been registered. It is not necessary for me to express a view about those rival submissions, given the conclusion which I have reached in relation to the claim being statute-barred.

270    Section 1325(4) provides that an application under subs (2) may be made within 6 years after the day on which the cause of action arose. These proceedings were commenced on 18 January 2022, and accordingly the defendants must show that the plaintiffs’ causes of action arose before 18 January 2016. The plaintiffs submit that their causes of action arose on the date that loss was first suffered, whereas Mr Bagley (for Ms Lin) submitted that the cause of action arose when the plaintiffs were “likely to suffer” loss or damage, that being a sufficient ground for the application of s 1325(2). That particular controversy is resolved in favour of the plaintiffs by reference to the Full Federal Court’s decision in Magman International Pty Ltd v Westpac Banking Corporation (1991) 32 FCR 1, which dealt relevantly with a claim under s 87(1A) of the Trade Practices Act 1974 (Cth), which similarly applied to a claim by a person who has suffered or is likely to suffer loss or damage. In the reasons of Beaumont J (at 18, with whom Black CJ, Gummow, von Doussa and Hill JJ agreed), in circumstances where actual damage is alleged and relief is sought under s 87(1A), the cause of action accrues for limitation purposes when loss or damage was suffered, and not merely when loss or damage was likely to be suffered. That reasoning applies equally to a claim under s 1325(2). Mr Wu submitted that the cause of action arose when s 601ED(5) was contravened, being the date when the Joint Unitholders invested in the Fund in March 2014. However, the plaintiffs’ cause of action is for compensation for loss or damage under s 1325(2), and that cause of action did not arise until the relevant loss or damage was suffered.

271    The plaintiffs rely on a number of authorities in support of the proposition that their loss did not crystallise until 14 November 2017, when Gold Stone entered into the settlement deed by which it released its right to seek repayment of the loans such that repayment of the loans at that time was impossible. The plaintiffs submit that in a case involving a loan, loss occurs only when recovery can be said with some certainty to be impossible, because up to that point the loan may be repaid, albeit late: Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; (2013) 247 CLR 613 at [31]–[33] (French CJ, Hayne and Kiefel JJ); Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413 at [16] (Gaudron J). However, in the present case the plaintiffs did not make a loan. They purchased units in a managed investment scheme, and it was the trustee of that scheme which made the loans. Accordingly, I do not regard the cases concerning claims by lenders to be apposite. Rather, for the purpose of a claim by an investor in an investment scheme, damage is suffered when it becomes ascertainable that the investor has suffered an overall loss on the investment: Tomasetti v Brailey [2012] NSWCA 399; (2012) 274 FLR 248 at [115] (Macfarlan JA, with whom McColl and Campbell JJA agreed).

272    In the present case, in my view, it was at least ascertainable, if not practically certain, that the plaintiffs had suffered an overall loss on their investment in the Fund well before 18 January 2016.

273    Each of the plaintiffs invested $3.5 million in the Fund on the basis that the amount of capital which they invested would be safe, as they conveyed to Gold Stone before making their investments. The IM itself said that Gold Stone would manage the risks of the investments through “a conservative lending policy and by diligent management of the Fund” (CB5/2027). That mutual understanding was fundamental to the arm’s-length price paid for units in the Fund. By 8 August 2014, Gold Stone had invested $6.4 million of that $7 million in three loans which were unsecured, high risk and unreasonably imprudent. In my view, that in itself was enough to constitute an overall loss to the plaintiffs, even though there remained a prospect that their capital would be preserved and that they would also earn the promised 8% per annum from their investment. An arm’s-length investment of $3.5 million in a secure and conservatively managed fund cannot be equated to a $3.5 million investment in an unsecure, high risk and imprudently managed fund. The market value of units in the latter must be less than the former because the high risk which the investor is undertaking should be matched by a high reward, which would be achieved only by a willing but not anxious investor paying a relatively low price for the units in question. Accordingly, in my view, the plaintiffs had suffered an overall loss so as to give rise to a claim for compensation pursuant to s 1325(2) by 8 August 2014.

274    Further, the MVLC Loan was repayable on 6 February 2015 and was not repaid, the First MVDA Loan was repayable on 27 May 2015 and had not been repaid, and the Second MVDA Loan had been repayable on 11 February 2015 and had not been repaid. In addition, the cheque for $500,000 which Mr Fong provided to Gold Stone on 27 February 2015 was dishonoured three days later (as the plaintiffs acknowledge in the Third Further Amended Statement of Claim at paras 110B–110C). On 26 June 2015, administrators had been appointed to MVLC, and on 1 July 2015 administrators were appointed to MVDA. Those appointments were made pursuant to s 436A of the Act, which requires a resolution of the board of the company to the effect that in the opinion of the directors, the company is insolvent or is likely to become insolvent at some future time. Those matters demonstrated that the principal amount of the loans which had been advanced to MVLC and MVDA was at very substantial risk, with the result that the value of the units which the plaintiffs had purchased in the Fund must have been diminished by reason of the instantiation of that risk.

275    On 27 March 2015, Gold Stone entered into the Priority Agreement with MVLC and MVDA, pursuant to which Gold Stone was promised mortgages over certain units in the unregistered strata plan at Lane Cove. On 16 April 2015, the strata plan was registered, and it appears that at about that time a mortgage was granted by MVLC to Gold Stone in respect of nine lots in Strata Plan 85782 in Lane Cove. On 20 July 2015, Mr Reese gave his advice on the security held by Gold Stone over the Lane Cove properties by way of fourth and fifth charge and the Manly properties by way of fourth charge, and said that Gold Stone “might as well have had no security whatsoever for [its] money”, referring also to the outlay of $7 million (CB9/4000). That was perhaps a little pessimistic because ultimately, on 14 November 2017, Gold Stone entered into the Deed of Settlement and Release with the liquidators of MVLC and MVDA under which Gold Stone was paid $445,0000 in respect of its claim to hold security over the proceeds of sale over the lots in Strata Plan 85782 at Lane Cove, and the proceeds of sale of the Manly properties. While there may have been changes in the value of that security between 2015 and 2017, in my view, the amount of $445,000 represents the approximate arm’s-length value of the security which Gold Stone held by late 2015 in relation to the money which it had advanced to MVLC and MVDA in 2014. The report of the liquidators of MVLC and MVDA dated 30 October 2015 did suggest that, on the most optimistic of the liquidators’ estimates of assets and liabilities, and on the most favourable view of the effect of Gold Stone’s claimed security, there was a theoretical possibility of Gold Stone recovering its debt of $8.1 million. However, as P.G. Wodehouse’s Jeeves would have said, the possibility was a remote one. It is unthinkable that an investor would have purchased 50% of the units in the Fund for $3.5 million on the expectation of any such recovery. The value of the units held by the plaintiffs as at 30 October 2015 must have been a small fraction of the amount they had actually paid in 2014. Accordingly, by 30 October 2015, the plaintiffs must have suffered an overall loss on their investment.

276    The plaintiffs submit that they are entitled to seek an extension of the limitation period applicable to a claim made under s 1325(2). That limitation period is imposed by s 1325(4) which provides:

An application under subsection (2) may be made within 6 years after the day on which the cause of action arose.

The plaintiffs contend that such an extension is available pursuant to s 1322(4)(d) of the Act, which provides that the Court may, on application by any interested person, make any of the stated range of orders, including:

an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding

Subsection 1322(6)(c) provides that the Court cannot make such an order unless it is satisfied that “no substantial injustice has been or is likely to be caused to any person”.

277    In my view, s 1322(4)(d) is not available as a matter of statutory construction to extend the limitation period under s 1325(4). In Binqld Finances Pty Ltd (in liq) v Binetter [2024] FCA 361, Kennett J conducted an extensive review of the authorities in this area, and concluded that s 1322(4)(d) could not be used to extend the limitation period imposed by s 1317K. The cases analysed by Kennett J included Newtronics Pty Ltd v Gjergja [2008] VSCA 117, in which it was held that s 1322(4)(d) was not available for an extension of the limitation period in s 1317HD, which provided that proceedings under that section “may only be begun within 6 years after the contravention”. Similarly, Kennett J referred to Austructures Pty Ltd v Makin [2014] VSC 544, in which Almond J held that the power in s 1322(4)(d) was not available to extend the limitation period in s 1317K, which provided that certain proceedings “may be started no later than 6 years after the contravention”. Kennett J held that there was not any real difference in meaning between “may only be made” (being the language considered in Newtronics) and “may be made not later than” (in s 1317K): [52]. Further, Kennett J held that s 1317H created a right of action, and the express time limit within which an application must be made which was imposed by s 1317K was prima facie inherent in that right of action: [51].

278    In relation to s 1325(4), I do not think that there is any real difference in substance between the expression “may be made not later than” (in s 1317K, which was considered in Austructures and in Binqld) and the expression “may be made within 6 years” (as used in s 1325(4)). The former is merely a way of stating in the negative the proposition which the latter expresses in a positive form. Further, s 1325(2) creates a right of action, and the express time limit which appears in the same section in subsection (4) appears to be intended as a matter which is inherent in that right of action. Accordingly, by making express provision for an application to be made within a specific timeframe under s 1325(4), on the proper construction of the Act, it was not intended that the discretionary power of the Court under s 1322(4)(d) would be available to extend that period. I note that in Karl Suleman Enterprizes Pty Ltd (in liq) v Pham (No 2) [2013] NSWSC 110; (2013) 92 ACSR 691, Beech-Jones J said at [112]–[114] that an amendment application which raised the issue whether the limitation period in s 1325(4) could be extended under s 1322(4)(d) was not futile, but that was an interlocutory application which turned on a very low threshold. The statement was by way of obiter dicta and the reasoning was effectively superseded by Binqld Finances Pty Ltd (in liq) v Binetter.

279    In any event, an order pursuant to s 1322(4)(d) is available only if the Court is satisfied that no substantial injustice has been or is likely to be caused to any person: s 1322(6)(c). I am not satisfied of that matter. As McHugh J said in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 553:

A limitation period should not be seen therefore as an arbitrary cut off point unrelated to the demands of justice or the general welfare of society. It represents the legislature’s judgment that the welfare of society is best preserved by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated.

280    There is a presumptive injustice of a substantial kind in granting any extension of time for a stale claim. That has a particular resonance in the present case, where the memories of witnesses have clearly eroded over the decade since 2014, and some of the documents which may have been relevant to the proceedings have been lost at unknown times during that period. While the plaintiffs point to the fraudulent nature of the wrongdoing, and also contend that Ms Lin, Mr Cai and Mr Darmali have been guilty of fraudulent concealment of their wrongs, I do not regard those matters as being of particular significance in terms of s 1322(6)(c). That provision does not call for a balancing exercise between substantial injustice to the defendants, on the one hand, and substantial injustice to the plaintiffs, on the other hand. It merely asks relevantly whether no substantial injustice has been or is likely to be caused to Ms Lin, Mr Cai, Mr Darmali and Fiducia Asset if I were to extend the 6 year limitation period. Even if, contrary to my reasoning above, I had regarded such a discretionary power as being otherwise available, I would not have been satisfied of that matter.

The Plaintiffs’ Misleading and Deceptive Conduct Case

281    The plaintiffs make allegations against Ms Lin, Mr Darmali and Fiducia Asset that they contravened the prohibitions on misleading and deceptive conduct contained in s 12DA(1) of the ASIC Act (or alternatively s 1041H(1) of the Act) by way of non-disclosure of certain matters to the plaintiffs. The claim in this case concerns a financial service and financial product and thus falls under the former provision, but there is no material difference between the two provisions, and thus I will refer to both in this analysis. A case of positive misrepresentation by Ms Lin and Mr Darmali in contravention of those provisions was abandoned by the plaintiffs at the outset of the trial.

282    The relevant principles concerning misleading or deceptive conduct by non-disclosure were set out by the Full Federal Court in Addenbrooke Pty Ltd v Duncan (No 2) [2017] FCAFC 76; (2017) 348 ALR 1 at [480]–[483] (Gilmour and White JJ), the most salient of which are as follows:

(a)    conduct is misleading or deceptive or likely to mislead or deceive if it has a tendency to lead into error: Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; (2013) 250 CLR 640 at [39];