Supreme Court New South Wales Medium Neutral Citation: Zhong v Shield Resources Pty Ltd [2021] NSWSC 617 Hearing dates: 31 May 2021 Date of orders: 31 May 2021 Decision date: 31 May 2021 Jurisdiction: Common Law Before: N Adams J Decision: (1) Of the sum of $753,200.62 paid into court on 6 January 2021 $100,000 be released to the second defendant Ying (Emma) Guan. (2) That order is stayed until Thursday, 3 June 2021 at 5pm. (3) Costs of the motion to be the costs in the cause as between the plaintiff and the second defendant. (4) Parties have liberty to apply to re-list the outstanding argument concerning the notice to produce. Catchwords: CIVIL PROCEDURE — Interim preservation — Freezing orders – release of funds paid into court – whether necessary for second defendant's living expenses and funding of defence – where second defendant restrained from selling property – limited release of funds ordered Cases Cited: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170; [1981] HCA 39 Category: Procedural rulings Parties: Yuping Zhong (Plaintiff) Shield Resources Pty Ltd (First Defendant) Ying Guan (Second Defendant) Representation: Counsel: S Burchett (Plaintiff) A Kaufmann (Defendants) Solicitors: Juris Cor Legal (Plaintiff) Rostron Carlyle Rojas Lawyers (Defendants) File Number(s): 2020/95833 Publication restriction: Nil Decision under appeal File Number(s): 2020/95833 JUDGMENT (REVISED FROM EX TEMPORE) 1. By statement of claim filed on 27 March 2020, the plaintiff seeks an order that the defendants pay a debt of $2 million said to be owed to him pursuant to a loan agreement in which it was agreed that $2 million would be advanced in the future. In the alternative, an amount of approximately $1.15 million is sought. 2. The plaintiff is a businessman who resides in the People's Republic of China. The first defendant is a company dealing in the sale of timber. Feng Ye is a director of that company. The second defendant is Mr Ye's wife, Ms Ying (Emma) Guan, who on the plaintiff's case guaranteed the loan. 3. Since the commencement of these proceedings the Court has had to rule on a number of interlocutory questions. Significantly, Wright J made freezing orders on an urgent basis on 18 December 2020 which were extended by consent before Black J on 14 January 2021. Those orders required the second defendant to pay approximately $750,000 into court and restrained her from selling her property she owns in St Ives. 4. The parties dispute nearly every factual issue relevant to the finalisation of these proceedings. This is demonstrated by the fact that the plaintiff has filed a notice of motion for summary judgment whereas the second defendant has filed a motion for summary dismissal as against her. Both of those motions are listed for hearing on 1 July 2021. There is also a motion by the second defendant to have the freezing orders listed on that day. 5. By notice of motion filed on 20 May 2021, the second defendant now seeks orders that $550,000 of the money paid by her into court be released to her. That matter came before Beech Jones J on Friday 28 May 2021 in his capacity as duty judge. At that time, further arguments were raised challenging a notice to produce served upon the defendants by the plaintiff. The defendants contend that the notice to produce is oppressive and a fishing expedition. His Honour stood all matters over before me today. 6. When the matter came on for hearing today in my capacity as duty judge the parties indicated that they did not seek to have the dispute over the notice to produce determined by me today. The issue thus is a narrow one: should $550,000 of the monies paid into court be released to the second defendant prior to the final hearing of that motion in six weeks' time. 7. In support of the motion, the second defendant, the applicant on the motion, relies upon the following affidavits: 1. Affidavit of William Michael Elliot Finch, 17 May 2021. 2. Affidavit of Xiaosi (Robin) Chaney Quan, 17 May 2021. 3. Affidavit of Xuxu (Suzie) Li, 18 May 2021. 4. Affidavit of Ying (Emma) Guan, 18 May 2021. 5. Affidavit of Ying (Emma) Guan, 24 March 2021. 6. Affidavit of Ying (Emma) Guan, 28 May 2021. 1. In opposing the notice of motion the plaintiff relies upon the following: 1. Affidavit of Mingjing Ni, 26 May 2021 with the exhibit "MN"-3 (Exhibit A). 2. Affidavit of Yuping Zhong, 23 September 2020 with the exhibit "YZ-1" (Exhibit B). 3. Affidavit of Mingjing Ni, 10 December 2020 with the exhibit "MN-1" (Exhibit C). 4. Transcripts of three hearing days on 10 and 18 December 2020 and 14 January 2021. 5. Notice to Produce and letter, 27 May 2021. 1. In addition, the financial statements for the first defendant's business and the Ye Family Trust statements ordered by Beech Jones J to be provided to the plaintiff were tendered and relied upon by the plaintiff. 2. Both parties also provided outlines of written submissions. The issues 1. The plaintiff's case is that he entered into an agreement with the defendants to agree to loan $2 million charged over specified real property owned by the second defendant. The loan agreement was before the Court and it is signed by the plaintiff, Mr Ye, and his wife, the second defendant. No separate guarantee document exists. The terms of the loan warranted that the borrower will pay the amount loaned. 2. There is no dispute that all three parties signed that document. 3. It is common ground that approximately $1.15 million was transferred to the first defendant some time afterwards. There is paperwork to confirm that transfer was through a third party consistent with banking requirements in the People's Republic of China, where the plaintiff resides. The first defendant admits receipt of that money but denies that it came from the plaintiff. Rather, it asserts that it was a payment by a third party for the sale of timber. In response to a notice to produce, the first defendant concedes that there are no documents to support any such sale. 4. On the face of it there is certainly a triable issue that the first defendant owes the plaintiff $1.15 million. 5. Mr Burchett of counsel for the plaintiff submitted that there is also a triable case that $2 million is owed to the plaintiff under the contract, because that was what was agreed to be loaned, even if that amount was not actually loaned. 6. Both the first defendant and the second defendant deny that any amount is owed. Although the second defendant describes it as a "sham" loan agreement in her affidavit, that is not the pleaded defence. Undoubtedly, a number of legal issues will arise for determination in this matter. One of them concerns whether the second defendant is liable for the amount of the debt under the agreement at all, given its terms. It is not necessary for me to make any finding on that issue for the purposes of today's motion. The freezing orders 1. The loan agreement describes the loan to be secured over property at 49 Waterhouse Ave, St Ives. A caveat was initially placed on that property. 2. Prior to the commencement of these proceedings, on 20 January 2020 the solicitor for the plaintiff wrote to Ms Guan's solicitors noting that she applied for the lapsing of the caveat over the property. Advice was sought as to whether she intended to sell the property. 3. On 24 January 2020, Ms Guan's solicitor sent an email indicating that their client was not obliged to give any undertaking or response in relation to her intention, but that she nevertheless indicated that whilst it was not to be deemed a promise or undertaking, she did not currently have plans to sell the St Ives property. 4. It was apparently in reliance upon this correspondence that there came to be no caveat on the property. The plaintiff appears to have relied upon the solicitor's advice that there was no intention to sell at that stage. 5. The plaintiff's solicitor, Ms Ni, states in her affidavit of 10 December 2020 that on 3 December 2020 she noticed an advertisement on the website realestate.com.au of the sale by auction of the property. No notice had been provided of the sale of the property. It was on that basis that the matter was urgently listed before Wright J in December. By the time it came to this Court, contracts had already been exchanged. 6. In the proceedings before Wright J, counsel for the first defendant conceded that there was an equitable charge over the property the subject of the sale, given the terms of the loan agreement. 7. As a result of the second defendant's actions in selling the property, over which there was an equitable charge, Wright J was satisfied that the assets of the second defendant as guarantor might be dissipated and moved to freeze her assets. Those orders comprised the proceeds of the sale of the property, $750,000 being paid into court, and an order restraining the second defendant from selling her other property in St Ives, which is the one she apparently now lives in with her husband and school aged son. 8. Justice Wright noted at the time that although those orders may seem draconian the second defendant could always approach the Court for a carveout for her everyday expenses. 9. When the matter came back before Black J as duty judge on 14 January 2021 the temporary orders made by Wright J were consented to. The Court noted in relation to the order that the net proceeds of the sale of the land at 49 Waterhouse Ave, St Ives be paid into court, that the sum of $753,200.62 was paid into court on 6 January 2021 pursuant to that order "to abide the outcome of these proceedings", and that order included the following words in parentheses: "subject to any notice of motion for prior payment out". Evidence in support of the release of funds 1. The second defendant claims that she needs $550,000 of the money paid into court to be released so that she can pay back some of her bills. It is intended that she would keep $100,000 for her own personal expenses and that $450,000 would be paid into Shield Resources, the first defendant company. She is the beneficiary of the trust of that company. 2. Some limited information was put before the Court as to the second defendant's financial circumstances. She said she was not involved in preparing the loan agreement with the plaintiff. She stated that she first learned in late 2019 that there was a caveat on the property and she stated that she was not involved in the day to day operations of the first defendant at all. 3. In her affidavit of 24 March 2021, she described her occupation as "Director of the Brilliance Group Pty Ltd". No further information was provided as to what that group does, nor what income she receives from it. 4. Ms Guan stated that she had obtained a valuation report for 12 Gibran Place and its estimated market value was $3.6 million. Of this, there is an amount of $2.144 million owing to Westpac. She thus submits that her equity is $1.456 million. She also owes an amount on her car loan of $110,483.50. 5. In her affidavit of 18 May 2021, Ms Guan explained that she sold the Waterhouse Ave property with the intention of using the funds to assist the first defendant, because the company had suffered losses due to COVID-19 and Australia's trade tensions with China. She stated that because of the orders made on 18 December 2020 she instead had to pay those monies into court. 6. Ms Guan states that other than the 12 Gibran Place property and her car she does not hold any other assets of notable value in Australia. She described her expenses as: mortgage repayments of $5,717.72 per month on the Gibran Place home; car repayments of $1,842.21 a month; tuition fees of $9,560 for her son's school payable three times a year; monthly fees of $800 for after school activities; and an estimated $3,500 per month for shopping and groceries, utilities and general services. Ms Guan estimated her minimum monthly liabilities as $12,000 per month. 7. Ms Guan states that since paying the monies into court she has been relying upon her savings and the balance has decreased from $110,442.94 on 3 February 2021 to $64,315.68 on 18 May 2021. She states that she cannot borrow any more money from the bank because of the value of the mortgage. She is concerned that any delay in the release of the funds paid into court will detrimentally affect her ability to make repayments on her mortgage and car loan and meet other day to day expenses and monthly liabilities. She is also concerned that it will impact on the ability of Shield Resources to pay its employees and suppliers and her ability and the first defendant's ability to defend the proceedings. 8. There was evidence before the Court that Ms Guan has been paying for a loan on a Mercedes Benz for which she entered into a hire purchase agreement for $120,000 in August 2020. I pause to note that it was never explained why Ms Guan would do so at a time when on her evidence she and her husband were struggling financially due to the impact of COVID-19. 9. It is to be noted that Wright J ordered that the second defendant file an affidavit of her assets and liabilities last December. Ms Guan now concedes that there are a number of omissions from that affidavit. In her affidavit affirmed 28 May 2021, she explained that due to the short time frame in preparing the December affidavit she had limited time to discuss with her solicitors what should be included in her list of assets and liabilities. 10. She states that she forgot to include her St George Bank balance but notes that had she remembered she would have included it as evidence of her ability to pay the amounts said to be owing. That was said to be an inadvertent error. 11. She stated that her car had been included as a liability rather than an asset because it was under finance and she had only made repayments of $5,526.63 and she generally did not consider cars to be assets. 12. She further stated that at the time of making the December affidavit she did not recall having any outstanding personal liabilities such as school or recreational fees, because the school year had finished. She also stated that she did not include her utility bills because she was in the process of moving between properties, and she "did not think about the utilities at [her] new address". 13. Ms Guan relied upon an affidavit of Xiaosi (Robin) Chaney Quan, her accountant, affirmed 17 May 2021. His evidence is that as at 30 April 2021 Shield Resources had accounts payable of about $530,668.72. No other details were provided about this. Objection was made on behalf of the plaintiff to this part of the affidavit given that there was no identification of what those debts were, no supporting documentation nor any indication as to whether there was corresponding income in connection with those debts. I allowed the affidavit and considered it to be ultimately a question of weight. 14. Mr Quan also noted that the company holds assets primarily in machinery and equipment that are not liquid and that are unique to the industry and cannot be sold if the business is to continue to trade. It was also noted that the company is required to make payment of employee wages and entitlements totalling $61,443.50 by 30 May 2021. 15. Mr Quan also stated that the company is experiencing short term cash flow issues due to COVID-19 and political tensions with China. Although they have sought finance of $750,000 from the Commonwealth Bank, that was recently refused. Mr Quan noted that if the money was released it would assist with these immediate cash flow difficulties. 16. The second defendant also relied upon an affidavit of Suzie Li. She is the director and CEO of Shield Resources. She states that she and Ms Guan's husband have provided personal cash loans to the business on a needs basis when there are short term cash flow issues. Her evidence was that she had been informed by Mr Quan, the accountant, of the state of the accounts payable and noted that the intention is if the money is released it would pay off the company's debts. She states that any further delay would detrimentally affect the business and the payment of wages and entitlements, and also the first defendant's ability to conduct its defence. 1. Some of the financial statements of the company were before the Court, though somewhat out of date, but they show the asset company structure and significantly show the $1.15 million payment as a liability. The applicant's submissions 1. It was submitted on behalf of the second defendant that it was always intended that she would come to court to seek a carveout given that that was expressly allowed for in the orders of Black J on 14 January 2021. 2. It was submitted that the urgency arose from the fact that the accountant's evidence is that on 6 May 2021 the bank refused to provide a facility to it. It was also submitted that it is common for there to be a carveout provision when freezing orders are made, and no carveout for Ms Guan's personal expenses has been allowed thus far. 3. It was submitted that there was no case that she is liable for the amount, given the terms of the loan agreement; it was submitted that the debt is owed by the borrower, not the guarantor. It was also submitted that the amount currently frozen by the Court far exceeds the amount of $1.15 million to which the plaintiff would be entitled. It was submitted that it would be unjust enrichment for the plaintiff to receive $2 million under the contract and that given the second defendant is restrained from dealing with property worth $3.3 million there is no detriment to the plaintiff if the monies are to be released as requested. 4. It was further submitted that the second defendant's solicitor never made any undertaking not to sell the property and that the second defendant was perfectly entitled to do so. It was submitted that this is not a case where the second defendant has sought to dissipate assets overseas, rather she simply wishes to assist with the company's businesses as she holds an interest in it. 5. It was further noted that none of the money has been transferred offshore, that the money is to assist Ms Guan's husband to pay for legal expenses and that the applicant should not be in a better position than that which he would be entitled to. 6. During the submissions Mr Kaufmann of counsel received an email from his solicitor confirming who the shareholders of the second defendant are. They were noted to be Gemstone Pty Ltd with 186 shares, LLS Management with one share, Aware Pty Ltd with one share and the Phoenix group with 12 shares. It was noted that the Gemstone Group was the trust under which Ms Guan is the beneficiary. Reliance was placed on this to submit, contrary to the plaintiff's submissions, that there are not unlimited other shareholders who could loan money to the company to get them out of their current problem. The plaintiff's submissions 1. The plaintiff contends that none of this is new material, that the hearing is only six weeks away and that there has been no significant change in circumstances such as would warrant any variation to the orders made by Wright J. 2. It was noted that in the financial records of Shield Resources the amount advanced is accepted to be a liability. It was submitted that when regard is had to those documents it is apparent that Shield is insolvent and if any money is released it will all be dissipated in that company. It was noted that when the security for costs application was first made, the defendants initially sought $350,000 as being their reasonable expenses. The order made was in fact in the amount of $50,000. 1. It was submitted that if the second defendant is so confident of the valuation of the property being restrained, then it is unclear why she is not able to borrow against it. It was noted that the second defendant has provided no details as to which expenses are outstanding or overdue and that her evidence is completely devoid of the usual evidence as to assets and liabilities and the difficulty she is facing. 2. Mr Burchett submitted that the plaintiff is entitled to the $2 million and that there would be no unjust enrichment if that amount was to be paid to him. The alternative argument was that the interest rate of the 12 per cent per annum calculated daily provided for under the loan agreement when added to the amount outstanding would make it approximately $1.5 million in any event. 3. It was submitted that there was a paucity of evidence from the second defendant as to what her income is. It was also submitted that there was a paucity of information from the accountant as to what the debts were and whether there was correlating income in relation to the accounts payable. 4. It was accepted that there can be carveouts under freezing orders but that there was inadequate material before the Court to show that such money was needed in the present case; this was especially so given that there was no explanation as to how the second defendant has been able to pay her bills thus far. Determination 1. The plaintiff relied upon the decision in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170; [1981] HCA 39 as authority for the proposition that when an interim arrangement is made in court proceedings, a substantial exchange in circumstances is required before a variation such as that sought today would be granted. That somewhat overstates the ratio of that decision. The special leave point was whether a court has power to release a party from an undertaking, at least in the absence of consent of the other party. There are no undertakings in the present matter. Justice Wright made orders in December 2018 that were not challenged up until now, thus they were re- entered by consent on 14 January 2021 before Black J. 2. I propose to proceed on the basis that such arrangements can be varied if new facts come into existence which may "render enforcement unjust". Just as an interlocutory injunction continues "until further order" so must an interlocutory order based on either an undertaking or consent. The question is whether it would be unjust if the second defendant cannot have any access to her funds prior to 1 July 2021. 3. The second defendant brings this application. As the chronology I have recounted discloses, her approach to the proceedings thus far leaves much to be desired. First, there is the fact that she sold the secured property without notice while these proceedings were on foot. It is submitted that she was entitled to do so. Given the correspondence before the Court I am satisfied that her solicitor was obliged to warn of a pending sale given that there had previously been a caveat on the property. It seems to me that selling the property in the circumstances she did certainly justified the freezing order made by Wright J. 4. Secondly, the second defendant was far from forthright in her affidavit as to her assets and liabilities. That was a court ordered affidavit. I have had regard to her affidavit of 28 May 2021 in which she explains her omissions in that regard. Even accepting that there was no intention to mislead the Court, her omissions are certainly inconsistent with any awareness of the importance of full disclosure in legal proceedings such as these. 5. Thirdly, she now approaches the Court having sold the property without notice and having failed to disclose her assets in a court ordered affidavit, seeking that $550,000 of the $750,000 paid into court be returned to her without providing any detailed information as to why there is any urgency or requirement for her to do so. The high point of her evidence is that the first defendant's company needs money. The difficulty is that there is insufficient evidence before me beyond assertions by the co-director and the accountant to assess that. 6. It is to be accepted that her savings have been reduced. She claims to need to pay the mortgage and school fees, yet no evidence has been filed by her husband as to whether he takes any of the responsibility for any of those household shared expenses. Nor was there any explanation as to why, after these proceedings were commenced and in the middle of a COVID-19 slowdown in business, she approached a bank to get funding to obtain a very expensive motor vehicle. 7. It seems to me some form of carve out was always envisaged, firstly by Wright J and secondly by the terms of the first order by Black J. No such carve out was sought until now but what was no doubt envisaged was some minor adjustment for living expenses and legal fees, not that over two-thirds of the amount would be released. 8. I am satisfied that no unfairness could flow to the plaintiff should some of her funds be released. The Court has currently frozen the assets of Ms Guan in an amount above the $1.15 million transferred to the first defendant by the plaintiff. Ms Guan claims $1.456 million equity in her home plus the $750,000 deposited into court. 9. On the limited basis upon which it was argued I am unable to accept the plaintiff's submission that the Court would order the first and second defendants to pay back $2 million when it is common ground that only $1.15 million was actually loaned. I have also had regard to the terms of the loan and the question is whether Ms Guan did in fact agree to guarantee the amount owing. Although the case that the plaintiff paid the company $1.15 million appears strong, the liability of Ms Guan as guarantor is certainly arguable but not as straightforward. 10. I have also had regard to the evidence as to the financial position of Shield Resources. It does seem to me that there is some risk that if the monies are paid out on loan to the company they may not be able to be recovered. Despite this, that would only be a relevant consideration if the amount frozen could not satisfy the amount claimed. 11. I am not satisfied that enough material has been provided to the Court to establish the urgency of $550,000 being paid to Ms Guan but I am satisfied that this litigation is hard-fought and the legal costs are going to be significant in that so many issues are in dispute. 12. On that basis I am satisfied that it would be unfair to Ms Guan not to have some funds released to pay her personal expenses and legal fees. On that basis I would release the $100,000 she needs for her own expenses but not the $450,000 to inject into her husband's business. I have arrived at that conclusion having regard to all of the matters to which I have just referred. In particular, this course would still leave the plaintiff protected up to the amount it seems to me would be paid to him including default interest and also the fact that it was, clearly, always anticipated that some carveout would be made and that this is the first application to do so. 1. Accordingly, I make the order that of the sum of $753,200.62 paid into Court on 6 January 2021 $100,000 be released to the second defendant Ying (Emma) Guan. Stay of orders 1. I have just made an order that $100,000 of the amount deposited into court on 6 January 2021 be released to the second defendant for her to pay her legal fees and other expenses. Mr Burchett of counsel for the plaintiff sought a stay of that order for seven days in order to consider whether he wishes to appeal my decision. 2. By a combination of equity in real property and funds deposited into court, over $2 million is currently held by the Court as security. The submission of Mr Burchett is that the funds are in a different category to the property that has been restrained. The basis of that submission is that the property which was sold was specified in the loan agreement even though it was described as being owned by the company and not the second defendant. It was submitted that it is in a separate category to the St Ives property where the second defendant currently resides because there was never any suggestion that there was an equitable charge over the latter. 1. In response, Mr Kaufmann has submitted that the question of any equitable charge over the property has now lapsed because it has been sold. If one or both of the defendants is required to pay the amount sought under the loan then the Court could well make orders freezing certain property so it would not be dissipated in order to comply with that order. 2. It is to be accepted that there is a difference as between those two categories of funds. However, it seems to me that the funds in court do have a factual nexus with the property over which there was an equitable charge. It is not immediately apparent to me why the Court would treat the funds in court differently to the property which is currently restrained. Both the funds and the restrained property were solely in the name of the second defendant. There is no difference of ownership as between them that could be identified. 3. Despite this, given the fact that Mr Burchett is considering an urgent appeal of my decision I am prepared to stay my orders for three days until close of business on Thursday 3 June at 5pm. That order will lapse unless an approach is made to my chambers before that time for any extension. 4. I note that a copy of my revised reasons will be made available to the parties early tomorrow morning. Orders 1. Accordingly, the orders I make in full are as follows: 1. Of the sum of $753,200.62 paid into court on 6 January 2021 $100,000 be released to the second defendant Ying (Emma) Guan. 2. That order is stayed until Thursday, 3 June 2021 at 5pm. 3. Costs of the motion to be the costs in the cause as between the plaintiff and the second defendant. 4. Parties have liberty to apply to re-list the outstanding argument concerning the notice to produce. ********** Amendments 04 June 2021 - [46] - "sought" instead of "ought" Cover sheet, [67], [74] - "Guan" instead of "Guam" 07 June 2021 - Cover sheet correction DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 June 2021