Supreme Court New South Wales Medium Neutral Citation: BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972 Hearing dates: 4 – 22 April 2022 Date of orders: 22 July 2022 Decision date: 22 July 2022 Jurisdiction: Equity - Commercial List Before: Rees J Decision: Judgment for the plaintiff, see orders at [446]. Catchwords: CORPORATIONS – directors and officers – company sues director and de facto director for breach of duty – company borrows US$35m to fund Gold Coast development – development costs over-stated – directors raise false invoices to divert $3.4m to personal project in West Wyalong – sham sub-contracts created to substantiate $23m drawn down on Gold Coast facility – multiple payments to directors' company – unaware of fraud, company enters into contracts for further development in Wagga – $2.05m of Gold Coast facility used to buy Wagga land but by directors' company– negotiations – partial repayment. CIVIL PROCEDURE – pleadings in Commercial List – further questionable transactions emerge during trial – whether plaintiff entitled to additional relief – where evidence establishes matters beyond pleadings – principles at [368]-[376] – given serious nature of allegations, held to pleaded case. DIRECTORS – de facto director – principles at [329]-[333] – not necessary for de facto director to make decisions independently of other directors – directors' duties – whether fiduciary duties modified by inherent conflict of interest in corporate structure – not modified in absence of disclosure of wrongdoing. Legislation Cited: Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: A v New South Wales (2007) 230 CLR 500; [2007] HCA 10 Alati v Kruger (1955) 94 CLR 216 Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45 Armory v Delamirie (1722) 1 Stra 505; (1772) 93 ER 664 Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151 Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 Bamford v Bamford [1970] Ch 212; [1968] 2 All ER 655 Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 Barnes v Addy (1874) LR 9 Ch App 244 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors [2008] NSWCA 243 BCEG (Australia) v Xiao (No 2) [2020] NSWSC 1403 BCEG International (Australia) Pty Ltd v Xiao [2020] NSWSC 1234 BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027 BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102 BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227 BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597 Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969 Boardman v Phipps [1967] 2 AC 46 Breen v Williams (1996) 186 CLR 71 Briginshaw v Briginshaw (1938) 60 CLR 336 Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129; (2010) 28 ACLC 10-073 Chan v Zacharia (1984) 154 CLR 178 Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601 Clay v Clay (2001) 202 CLR 410; [2001] HCA 9 Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 Commonwealth Dairy Produce Equalisation Committee Ltd v McCabe (1938) 38 SR (NSW) 397 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226 Cubillo v Commonwealth of Australia (No 2) (2000) 103 FCR 1; [2000] FCA 1084 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 Dare v Pulham (1982) 148 CLR 658 Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572; (1816) 35 ER 781 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 Forkserve Pty Ltd v Jack [2000] NSWSC 1064; (2001) 19 ACLC 299 Furs Ltd v Tomkies (1936) 54 CLR 583 GC NSW Pty Ltd v Galati [2020] NSWCA 326 Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWSC 453 GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113 Gould & Birbeck & Bacon v Mount Oxide Mines (1916) 22 CLR 490 Gray v National Crime Authority [2003] NSWSC 111 Grimaldi v Chameleon Mining NL (No 2) (2012) [2012] FCAFC 6; (2012) 87 ACSR 260 Halford v Halford [2022] WASCA 1 Hagan v Waterhouse (1991) 34 NSWLR 308 Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; [2000] WASCA 29 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10 Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307; (2016) 339 ALR 659 Hogg v Cramphorn Ltd [1967] Ch 254 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 Hourigan v Trustees Executors & Agency Co Ltd (1934) 51 CLR 619 Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 In the matter of ACN 092 745 330 [2017] NSWSC 241 In the matter of Anna Bay Resort Pty Ltd [2022] NSWSC 331 In the matter of French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 In the matter of Swan Services Pty Ltd (in liq) [2016] NSWSC 1724 John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 Jones v Dunkel (1959) 101 CLR 298 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 Legione v Hateley (1983) 152 CLR 406 Leotta v Public Transport Commission of New South Wales (1976) 9 ALR 437 Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480 Lewis v Wilson (1997) 42 NSWLR 228 Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681; [2014] HKC 368 Lockyer v Macready (1965) 66 SR (NSW) 369 Magill v Magill (2006) 226 CLR 551; [2006] HCA 51 Maguire v Makaronis (1997) 188 CLR 449 Masters v Cameron (1954) 91 CLR 353 McKenzie v McDonald [1927] VLR 134 Mills v Mills (1938) 60 CLR 150 Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173 Moratic Pty Ltd v Gordon [2007] NSWSC 5 Mualim v Dzelme [2021] NSWCA 199; (2021) 157 ACSR 367 Mudgee v Mudgee Dolomite & Lime Pty Ltd (in liq) [2022] NSWCA 12; (2022) 398 ALR 658 Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 Nocton v Lord Ashburton [1914] AC 932 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 Nowlan v Marson Transport Pty Limited (2001) 53 NSWLR 116; [2001] NSWCA 346 O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166; (2011) 285 ALR 93 Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 Orr v Ford (1989) 167 CLR 316 Parker v McKenna (1874) LR 10 Ch App 96 Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) (2003) 214 CLR 514; [2003] HCA 25 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31 Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324; (2014) 101 ACSR 415 Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378 Ripani v Century Legend Pty Ltd [2022] FCA 242 Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [2003] NSWCA 71 Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405; (2014) 17 BPR 33,717 Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 Skilled Group Ltd v CSR Viridian Pty Ltd [2012] VSC 290 Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 WLR 189 Swiss Re International SE v Simpson [2018] NSWSC 233; (2018) 354 ALR 607 Taouk v Assure (NSW) Pty Ltd [2017] NSWSC 534 Target Holdings Ltd v Redferns [1996] 1 AC 421 Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027; (2015) 107 ACSR 445 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 Wallersteiner v Moir (No 2) [1975] QB 373 Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109 Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 Texts Cited: Wigmore, JH, Wigmore on Evidence (3rd ed., 1940, Little, Brown and Co.) Ritchie's Uniform Civil Procedure NSW (LexisNexis, looseleaf) Heydon, JD and Leeming, MJ, Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis) Category: Principal judgment Parties: BCEG International (Australia) Pty Ltd (Plaintiff) Yu Xiao (First Defendant) Yanying Chen (Second Defendant) Interlink Laboratory Pty Ltd (Third Defendant) Interlink Wagga Central Pty Ltd (Fourth Defendant) West Wyalong Marketplace Pty Ltd (Fifth Defendant) Representation: Counsel: Mr DL Williams SC / Mr ND Riordan (Plaintiff) Mr FP Hicks SC / Mr B Le Plastrier (Defendants) Solicitors: Thomson Geer (Plaintiff) HWL Ebsworth (Defendants) File Number(s): 2019/310768 TABLE OF CONTENTS WITNESSES DOCUMENTS ONUS AND STANDARD OF PROOF FACTS A corporate predecessor: BCEG (Australia) West Wyalong project and Trojjan Varsity Lakes project Inflation of design and construction price Funding West Wyalong expenses Pre-BCEG funding Incorporation of BCEG Varsity Lakes project contracts Company management BCEG China's accountant Varsity Lakes facility Drawdown requests First drawdown Diversion of first drawdown Using Varsity Lakes facility to pay for West Wyalong Second drawdown Diversion of second drawdown Sham sub-contracts Third drawdown Beijing Dragon payments More West Wyalong payments Fourth drawdown Completion of West Wyalong project More Beijing Dragon payments Fifth drawdown Wagga project contracts and facility Final Beijing Dragon payments 2014 agreement An audit Change of accounting treatment 2017 agreement Piercy and Xiao part ways These proceedings CONTRACT CLAIM AGAINST INTERLINK LABORATORY Claim based on BCEG invoices Claim based on 2014 and 2017 agreements BREACH OF DIRECTORS' DUTIES De facto director Directors' duties Claim in respect of West Wyalong payments Claim in respect of sham sub-contracts Claim in respect of Beijing Dragon Diversion of first and second drawdowns DEFENCES CAUSATION AND REMEDIES Relief against directors: West Wyalong payments Relief against directors: sham sub-contracts Relief against directors: Wagga project Relief in respect of Beijing Dragon payments ACCESSORIAL LIABILITY Relief against West Wyalong Marketplace Relief against Interlink Wagga Central Alternate relief against Ms Chen ORDERS Judgment 1. HER HONOUR: This is a fraud case. The plaintiff, BCEG International (Australia) Pty Ltd (BCEG), is the Australian subsidiary of BCEG International Investment Co Ltd (BCEG China) and part of the Beijing Construction Engineering Group. From 2010 to 2017, BCEG was run by the first and second defendants, Yu Xiao and wife Yanying Chen. BCEG was then engaged in developing a private hospital on the Gold Coast (the Varsity Lakes project) using US$35 million finance provided by the Export-Import Bank of China (Exim Bank) to BCEG China and on-lent to BCEG. BCEG was also engaged in a commercial and residential development in Wagga Wagga (the Wagga project), using US$3.9 million finance provided in the same manner. In a corporate arrangement that was vulnerable to exploitation, the development land in Varsity Lakes and Wagga was owned by Mr Xiao and Ms Chen's companies (the third and fourth defendants respectively, Interlink Laboratory Pty Ltd and Interlink Wagga Central Pty Ltd). In addition, BCEG engaged a builder on both projects, Trojjan (BCEG) Pty Ltd (Trojjan), which was also controlled by Mr Xiao and Ms Chen. 2. At the same time, Mr Xiao and Ms Chen were developing a shopping centre and medical centre in West Wyalong (the West Wyalong project) through their company, the fifth defendant, West Wyalong Marketplace Pty Ltd. Mr Xiao and Ms Chen paid the construction costs for the West Wyalong project by diverting some $3.4 million of the Varsity Lakes loan facility. They did so by causing the builder, Trojjan, to render false invoices – ostensibly for the Varsity Lakes project but in fact for the West Wyalong project – which Ms Chen approved and paid using the Varsity Lakes facility. 3. Mr Xiao and Ms Chen also used $1.28 million from the first drawdown of the Varsity Lakes loan facility to pay a deposit on an apartment for themselves in the Rocks, Sydney and also reimburse themselves for the costs of a corporate predecessor, BCEG (Australia) Pty Ltd, albeit any amount so reimbursed was likely a small portion of the amount asserted by Mr Xiao. From the second drawdown, Mr Xiao and Ms Chen used $2.05 million to pay for the Wagga land. When applying for subsequent drawdowns of the Varsity Lakes loan facility, Mr Xiao and Ms Chen justified upcoming construction costs by reference to sham sub-contracts between Trojjan and sub-contractors. The genuine sub-contracts were for fixed prices totalling some $1.7 million but, when altered, totalled some $29.7 million. By these means, some $23 million was advanced by BCEG China which would not otherwise have been forthcoming. Some $1.7 million was also transferred from BCEG to Beijing Dragon International Design & Construction Co Ltd, a company associated with Mr Xiao, for no apparent, legitimate purpose. 4. BCEG sought equitable compensation in respect of breaches of fiduciary duty committed by former director, Mr Xiao, and Ms Chen, who BCEG says was a de facto director. BCEG pursued accessorial claims against Interlink Wagga Central and West Wyalong Marketplace for knowing involvement in these breaches and knowing receipt of the proceeds of these breaches in accordance with the two limbs in Barnes v Addy (1874) LR 9 Ch App 244. These claims were defended on several bases: the other directors of BCEG were said to have approved the diversion of funds from the Varsity Lakes facility to the West Wyalong project and the payments to Beijing Dragon; Mr Xiao and Ms Chen denied preparing the false Trojjan invoices and claimed to be unaware of the sham sub-contracts. 5. BCEG sued Interlink Laboratory in contract for monies owed in connection with construction of the Varsity Lakes project. Quantification of this claim was problematic given the unreliability of the invoices rendered by BCEG at the time. BCEG relied instead on settlement agreements reached in 2014 and 2017, either as admissions of indebtedness or accounts stated in respect of the amounts owed by Interlink Laboratory. In particular, in 2017, Interlink Laboratory agreed to pay BCEG $5,695,475.13 but paid only $50,000. The defendants contended that Interlink Laboratory had repaid BCEG in full. For the reasons which follow, BCEG is entitled to succeed. WITNESSES 1. BCEG relied on the evidence of Wenjing Dong, an accountant and director of BCEG, and Xuchen (Eunson or Ethan) Yang, now general manager and company secretary of BCEG. Ms Dong was professional and pleasant, listened carefully and gave straightforward answers. Ms Dong made reasonable concessions. No issues of credit arose. I accept her evidence. Mr Yang was straightforward, made reasonable concessions and gave clear answers. I accept his evidence. 2. BCEG relied on the evidence of former BCEG directors, Qing Yang (the father of Eunson Yang) and Tieshan Ma. Both gentlemen are now retired. Mr Yang was calm and comfortable and gave fulsome answers. He appeared straightforward and made reasonable concessions. I have no reason to doubt his evidence. Mr Ma was an impressive senior executive who gave evidence in a straightforward, dignified and authoritative manner. He was a credible witness, whose evidence I accept. Another former BCEG director, Yan Xing, was unable to be located, having left BCEG China since his affidavit had been served earlier in the proceedings. Mr Xing's affidavit was read under section 63 of the Evidence Act 1995 (NSW). 3. BCEG also called Jing Zhang, a BCEG China employee who was seconded to BCEG at the time of these events. Ms Zhang was a quiet, demure witness who was clearly distressed by events in Australia, in particular, her dealings with Ms Chen. Ms Zhang frankly accepted her shortcomings in performing her role. Ms Zhang appeared honest and I accept her evidence. The defendants sought a Jones v Dunkel inference in respect of BCEG's failure to call the BCEG China accountants who replaced Ms Zhang. Ms Dong gave evidence that these accountants no longer worked for BCEG China, but there was no evidence of any steps taken to locate these gentlemen. In an abundance of caution, I infer that the evidence of these witnesses would not have assisted BCEG. This inference does not assist the defendants greatly: see [98]. 4. BCEG subpoenaed Paul Piercy, a former BCEG employee and director of Trojjan, who gave evidence and was cross-examined over two days. Mr Piercy is a likeable fellow who was keen to describe what had gone on. Mr Piercy was at ease and gave evidence in a clear and emphatic manner. He answered readily and simply. He made reasonable concessions. However, the fact that Mr Piercy was involved in business with Mr Xiao over several years when the suggested frauds occurred begs the question whether Mr Piercy was aware of what was going on at the time or assisted Mr Xiao; Mr Piercy's original signature appeared on one of the drawdown requests sent to BCEG China. Against this, overall, I had the impression that Mr Piercy was focussed on building; paperwork does not appear to have been his strong suit. He and Mr Xiao had clearly fallen out. Having regard to these matters, I have approached Mr Piercy's evidence with caution. 5. BCEG also relied on the evidence of Trojjan's former external accountant, David Hodge, and expert accountant, Jennifer Exner of Deloitte Risk Advisory Pty Ltd. Neither were required for cross examination. In addition, sub-contractors named in the sham sub-contracts gave evidence: James Williams of AJA Electrical Pty Ltd, David Foster of Fosters Joinery Pty Ltd, Alexandra Dalglish of Somewhere Landscape Architects, Jason Bonney of Concrete Systems Pty Ltd, Scott Wood of Action Formwork (Australia) Pty Ltd, Earl Reid of Reid Plumbing Pty Ltd, Andrew Priest of Primat Glass, Craig Przibella of C&C Fire Protection and Nadine Gunning of Riverina Terrazzo. None were required for cross-examination. I accept their evidence. 6. The defendants called former BCEG accountant, Anthony Smith, and expert accountant, Tony Samuel of Sapere Research Group Ltd. No issues of credit arose. The defendants also relied on an affidavit by former employee, Tristan Kell, who was not required for cross examination. I accept their evidence. 7. Mr Xiao gave evidence and was cross-examined. He was a most unsatisfactory witness. Mr Xiao was evasive and prone to non-responsive answers and unsolicited self-serving speeches. His evidence was riddled with inconsistencies, both with his affidavits and other evidence given in cross-examination. Mr Xiao readily supplemented what he had said in his affidavits, including in respect of important matters and key conversations which one would expect to see recorded in his affidavits. Mr Xiao's most common responses were "I deny!" or "I do not have knowledge, first time I see this paper." He denied having seen documents which were attached to emails to him and were likely to have been of keen interest to him at the time. Mr Xiao was, however, able to readily explain the documents and schedules in question. Mr Xiao denied having seen bank statements before, being documents exhibited to his affidavit. Mr Xiao blamed everything on others, especially Mr Piercy, for whom Mr Xiao exhibited some hostility, "I have no interest in this guy … I don't want to see this guy". I was left with considerable disquiet and unease in relying on anything Mr Xiao said without corroborative evidence. 8. Ms Chen did not give evidence. There was no suggestion that she was unable to do so; when Mr Xiao was being cross-examined, he said that his wife was at their home in the Rocks. I infer that Ms Chen's evidence would have not assisted the defendants: Jones v Dunkel (1959) 101 CLR 298 at 320-321 (per Windeyer J). DOCUMENTS 1. In an ordinary case, the surest guide to the resolution of factual disputes is by reference to the contemporaneous business records. Here, the reliability of many of the business records was in question. The plaintiff suggested that some of the business records were able to be relied upon – usually when the subject of an email – while many of the accounting records should be treated with caution, particularly those purportedly signed by representatives of BCEG China. Having now spent many hours reviewing the documents, four features are noteworthy. 2. First, there are few emails involving Mr Xiao and, indeed, few emails at all. Eunson Yang said Mr Xiao's practice was rarely to write emails or prepare documents himself but to ask someone else to send a communication once he had approved its contents. 3. Second, a significant portion of the documents did not appear to bear the correct date. Documents apparently sent by, sent to, or executed by BCEG could not have come into existence on the date these documents bore as the company had yet to be incorporated: see [70]. Documents contained address details which could not be correct on the date of the document, as BCEG did not move into the premises for months or years later: see [156]-[157]. This problem was endemic, such that I have generally referred to documents at a time when it seems likely that the document was brought into existence, rather than according to its date. 4. Third, documents apparently signed by BCEG directors and officers other than Mr Xiao, in particular, by Qing Yang, are unlikely to have been signed on that date or at all: see [119]. Generally, the signatory was not in Australia on the date they were said to have signed a document, apparently whilst in Australia. 5. Fourth, the transactions in question occurred long ago. The bulk of the alleged fraudulent activity occurred from 2010 until 2013, that is, up to 12 years earlier. Business records were incomplete, in particular, BCEG China no longer retained complete records from the initial loan drawdowns. There was also some evidence that, once the Varsity Lakes project was complete, Mr Xiao arranged for documents and emails to be wiped from Mr Piercy's laptop. 6. Given the incompleteness of BCEG China's records, the defendants contended that there was no evidence that fraudulent documents were provided to BCEG China or Exim Bank. In this regard, an important piece of evidence was a black folder labelled "Documents to China Exim – Bank", obtained by Mr Piercy from the Wagga site office in 2017 and kept until BCEG began investigating Mr Xiao, when Mr Piercy handed the folder to BCEG's solicitors. Fairly obviously, the black folder was not Mr Piercy's: it contains handwriting, mostly in Chinese and some English, none of which belongs to him. The black folder contains documents filed behind dividers, with a handwritten table of contents at the front. According to the table of contents, the documents behind the dividers were provided to Exim Bank on various dates or comprised the documents in respect of particular drawdowns. 7. Another important piece of evidence in this regard was the MYOB records for Trojjan. Mr Hodge was Mr Piercy's accountant and also the external accountant and tax agent for Trojjan from 2008 to 30 September 2015. After Trojjan changed accountants, Mr Hodge retained copies of the MYOB accounts, financial statements and tax returns, storing the data on his firm's computer server. After BCEG began investigating Mr Xiao, Mr Hodge was able to provide the MYOB data, which proved illuminating in respect of the West Wyalong payments. 8. It should not be thought, however, that there was a paucity of documents. Rather, there was a large volume of documents and bank statements, including drafts, duplicates and similar versions of the same document. Multiple bank accounts were maintained for each of the corporate entities, as well as for Mr Xiao and Ms Chen; some 3,500 pages of bank statements are in evidence, albeit incomplete. Indeed, determining the ultimate source of funds for any particular payment was no easy matter as funds were transferred backwards and forwards between multiple bank accounts. As BCEG's senior counsel put it, "there is money flying around everywhere". Not infrequently, funds paid by the defendants to BCEG were immediately repaid to themselves. Sprinkled amongst this voluminous material were invoices, sub-contracts, spreadsheet items, accounting entries and transfers said to be of a fraudulent nature. There remained significant gaps in documents, not only in BCEG China's archives but also to support propositions sought to be advanced by the defendants. 9. A party's failure to produce documentary evidence to corroborate their account, where they might be expected to be in possession of such documents, may give rise to an inference that such documents as they may be expected to have would not support their account: Jones v Dunkel at 320 (per Windeyer J), citing with approval Wigmore on Evidence (3rd ed., 1940, Little, Brown and Co.), ("the failure to bring before the tribunal some circumstance, document or witness…"); Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (per Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (per Eames JA, with whom Buchanan JA agreed, noting that "the Jones v Dunkel principle can equally apply to missing documents as to missing witnesses"); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]–[132]; Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112]. I have drawn this inference, generally adversely to the defendants where, particularly, documents concerning their personal finances or their other corporate entities may have been expected to be brought forward to corroborate their defence, but were not. ONUS AND STANDARD OF PROOF 1. Drawing on my judgment in In the matter of Anna Bay Resort Pty Ltd [2022] NSWSC 331 at [11]-[17], the burden of proof rests on the plaintiff. The standard of proof is the civil standard, being proof on the balance of probabilities but qualified having regard to the gravity of the questions to be determined: section 140(2), Evidence Act; Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 (per Dixon J). Further, at 361: "The truth is that, 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." 2. Here, BCEG contends that a large number of payments were unauthorised. As to whether BCEG has discharged its onus, it has been said that the "difficulty of proving a negative is well known": A v New South Wales (2007) 230 CLR 500; [2007] HCA 10 at [60] (per Gleeson CJ, Gummow, Kirby, Hayne, Heydon and Crennan JJ). As Campbell JA (with whom McColl JA and Handley AJA agreed) explained in Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 at [78]: If a plaintiff has the onus of proving a negative proposition, the fact that the defendant has greater means to produce evidence which contradicts that negative proposition, does not mean that the plaintiff ceases to have the onus of proof of that negative proposition. However, once the plaintiff establishes sufficient evidence from which, if that evidence is accepted, the negative proposition may be inferred, an evidential onus shifts to the defendant to adduce evidence that tends to show that the negative proposition is incorrect. If a defendant adduces such evidence, the plaintiff must then, as part of its overall burden of proof, deal with that evidence either by submission or argument. … 1. Whilst the plaintiff bore the onus in proving that payments were unauthorised, "where material evidence is peculiarly within a party's knowledge, it may be sufficient for the opposing party to adduce slight evidence of a matter in issue": Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWSC 453 at [26] (per Beazley P), citing Lord Mansfield CJ's maxim in Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969 at 970. As Gleeson J likewise summarised in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227 at [125]: All evidence "is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted": Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said: [I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision … In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so … 1. Of course, the principle from Blatch v Archer does not alter the onus of proof, nor the position that "the circumstances in which … the absence of evidence may be taken to account are confined by known and accepted principles …": Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [165] (per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). The Court may draw inferences to choose between competing versions of events. As Buchanan J explained in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151 at [31]: (citations omitted) Inference does not mean conjecture, even in a civil case. In civil proceedings the inferential process "may fall short of certainty, [but] must be more than an inference of equal degree of probability with other inferences, so as to avoid guess or conjecture" … A court is not authorised to choose between guesses, even on the ground that one guess seems more likely than another or others. See also Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 at [84]-[88] (per Spigelman CJ). 1. In this case, it is a matter of some significance that, during the years in which these fraudulent transactions were said to have occurred, BCEG was under the control of Mr Xiao and Ms Chen. They were responsible for the company's records and accounts. Other directors of BCEG were based in Beijing and reliant on information provided by, in particular, Mr Xiao. BCEG China was in the same position. In these circumstances, whilst BCEG bears the onus of proof, it had limited means to prove what had happened from 2010 to 2013, where Mr Xiao and Ms Chen were not removed from their positions until August 2017 and the company's business records were then secured: see [298]. The defendants had greater means to contradict BCEG's contentions, having created and been responsible for records at the time of these events. In these circumstances, it may be sufficient for BCEG to adduce slight evidence if that is all it has the ability to advance, such that the evidential onus may shift to the defendants to adduce evidence to show what they say really happened. FACTS 1. Mr Xiao and Ms Chen hail from Beijing, China. Mr Xiao came to Australia in 1988 and trained in architecture before returning to Beijing in 1994. There, he worked with various Beijing real estate development companies. Mr Xiao also had a long association with Beijing Dragon, being executive director and part owner of the company. 2. In 2000, Ms Chen brought the couple's children back to Australia to attend school. Mr Xiao and Ms Chen settled in Sydney. In 2002, Mr Xiao and Ms Chen established CX & DN Holdings Pty Ltd, of which Mr Xiao and Ms Chen are directors and equal shareholders and through which they hold interests in property and other corporate entities. In 2006, ACX Project Management Pty Ltd was incorporated: Mr Xiao was a director and CX & DN Holdings was the sole shareholder. 3. Mr Xiao continued to move back and forwards between Sydney and Beijing. While in Beijing, Mr Xiao met from time to time with senior executives of the International Department of Beijing Construction Engineering Group, including Mr Ma and Qing Yang. (Beijing Construction Engineering Group included a large number of companies which changed over time. Broadly, the parties referred indiscriminately to these different corporate entities as "BCEG China". Generally nothing turns on the precise identity of the company in question and I have adopted the same approach unless it is necessary to specifically identify the company.) A corporate predecessor: BCEG (Australia) 1. In 2008, according to Mr Ma, Mr Xiao initiated a discussion about projects in Australia. Mr Xiao said he had potential projects in Australia and asked whether BCEG had any interest in participating in such projects. 2. According to Mr Xiao, Qing Yang also attended a meeting at which this was discussed, including the possibility of BCEG China borrowing funds from Exim Bank and lending the money to an Australian subsidiary to undertake projects. Either Mr Ma or Mr Yang said there were government restrictions on funding an offshore company with foreign currency before the company was set up and before there was a project that they could invest in. Mr Xiao said: (emphasis added) "I have set up a company in Australia. We could use this company to start looking for opportunities in Australia, in the interim. I would be happy to put in my own money initially as well as funding from [Beijing] Dragon, and once BCEG gets the bank funding we can be reimbursed." Mr Ma and Mr Yang are said to have agreed, and offered Ms Dong's assistance to register a company in Australia. 1. Mr Ma denied such a conversation, noting that the arrangement suggested by Mr Xiao would be "in violation of our company protocol". Qing Yang does not recall the meeting but denied accepting any suggestion that Mr Xiao would use his own money or funds from Beijing Dragon, to be reimbursed later: "There were no such words". Nor did Mr Yang have authority to approve such an arrangement. Ms Dong does not recall Mr Ma or Mr Yang reporting to her at the time on such a discussion, but does not deny that she may have communicated with Mr Xiao in relation to the incorporation of BCEG (Australia) Pty Ltd. (I will refer to this company as BCEG (Australia), not to be confused with BCEG.) 2. On 24 September 2008, Ms Chen applied for the registration of BCEG (Australia). Ms Chen was appointed as director and secretary of the company. The sole shareholder was Beijing Construction Engineering Group Co Ltd. BCEG (Australia) opened a bank account with the Commonwealth Bank of Australia. The company's offices were in Bathurst Street, Sydney, sharing premises with ACX Project Management. In October 2008, Mr Ma, Mr Xing and Mr Yang were also appointed directors of BCEG (Australia). Given the composition of the board and its shareholding, it is reasonable to conclude that BCEG (Australia) was established to identify development projects in Australia to be undertaken for the benefit of BCEG China. West Wyalong project and Trojjan 1. Mr Piercy is a construction project manager from Wagga Wagga. Mr Piercy was a director and shareholder in Trojjan Pty Ltd and Trojjan Constructions Pty Ltd, each of which had contractor licences. The West Wyalong project was originally Mr Piercy's project and West Wyalong Marketplace was his company. West Wyalong Marketplace purchased a development site for $300,000. The site was considered suitable for a shopping centre anchored by a major supermarket together with speciality shops and a petrol station. Work began to develop the site; a traffic impact assessment was obtained in November 2007. But Mr Piercy did not have funds to advance the project. 2. In 2009, Mr Xiao continued to visit Australia with reasonable frequency and look for possible projects and opportunities for BCEG China. Mr Xiao said that, although BCEG (Australia) ran a campaign for over a year, it was difficult to get into the design and construction market as the company did not have a builder's licence and had no local experience; the BCEG brand was not known in Australia. Mr Xiao decided that BCEG (Australia) needed a project manager to manage the projects which he was trying to secure. During a trip to Wagga to look at a potential project, Mr Xiao met Mr Piercy and offered him the position of project manager, which Mr Piercy accepted. 3. Mr Piercy told Mr Xiao about the West Wyalong project. According to Mr Piercy, Mr Xiao reviewed the plans and said, "I'll buy it off you and I'll fund it. You build it. And that can be the first one to kick off." In September 2009, CX & DN Holdings purchased all of the shares in West Wyalong Marketplace. Mr Piercy ceased to be a director and secretary of West Wyalong Marketplace, replaced by Mr Xiao. As such, Mr Xiao and Ms Chen now owned and controlled the West Wyalong project. 4. In October 2009, Mr Xiao was appointed a director of BCEG (Australia) and Mr Piercy signed a contractor agreement with the company. In February 2010, Ms Chen became a director of Trojjan. BCEG (Australia) acquired a 40% shareholding in Trojjan and CX & DN Holdings acquired a 30% shareholding. (Over time, CX & DN Holdings became the majority shareholder of Trojjan.) As such, Mr Xiao and Ms Chen now controlled Trojjan, either through directorships or shareholdings. The name of the company was changed from Trojjan Pty Ltd to Trojjan (BCEG) Pty Ltd. Trojjan now also conducted its business from BCEG's office in Bathurst Street. 5. In March 2010, a Project Co-ordinator at BCEG (Australia), Henri Mariasson, provided CAD drawings for the West Wyalong project to Mr Piercy, with some suggested changes to the plans. That is, BCEG (Australia) employees were working on the West Wyalong project, where the company had no apparent interest in the development. Small expenses related to the West Wyalong project were also paid from BCEG (Australia)'s bank account. In February and March 2010, West Wyalong Marketplace opened its own bank accounts, from which such expenses were then paid. It may be that BCEG (Australia) was investigating the West Wyalong project with a view to involving BCEG China in due course. It may also suggest a lack of delineation between Mr Xiao and Ms Chen's personal interests and those of BCEG (Australia). 6. However, the other directors of BCEG (Australia) were unaware of the West Wyalong project. Qing Yang only became aware of the West Wyalong project after the Varsity Lakes project had been completed and BCEG was asked to repay the finance provided by BCEG China for the project. Mr Xiao then mentioned the project as a mechanism of repayment, "once the sales of this project is finished, then he can actually make repayments." Mr Ma only became aware of the West Wyalong project during the course of these proceedings. (Mr Xing did not address this subject, having sworn his affidavit before Mr Xiao went into evidence.) 7. Consistent with the fact that BCEG China was unaware of the West Wyalong project, numerous letters of invitation from BCEG to BCEG China and Exim Bank are in evidence, inviting representatives to visit Australia and inspect various projects. An early example, being a letter of invitation sent by BCEG in October 2010 to Mr Ma, stated: While you are in Australia we would also like you to attend a number of meetings regarding two other developments that currently we are in negotiation with. These are as follows. 1. High Street Maitland Mall re-development 2. Provision of Man Camps to Western Australia The objective of your attendance to these meetings is to meet the principal managers and decision makers of these developments and have a better understanding of the project themselves. You would also visit our head office in Sydney and visit out ream that we have put together to carry out these exciting new projects. Also you can see firsthand BCEG International (Australia) Pty Ltd strategic plans for growth in 2011. 1. Neither the letter nor the attached itinerary suggested a visit to West Wyalong. Further letters of invitation were sent on 11 and 17 January 2011, 22 February 2011, 25 March 2011, 15 June 2011, 2 August 2011, 12 September 2011, 8 and 16 November 2011, 6 July 2012, 9 and 12 September 2014, 14 October 2014 and 15 December 2014 in like terms. The fact that none of these letters ever invited a representative of BCEG China or Exim Bank to see the West Wyalong project, notwithstanding repeated invitations to inspect the Varsity Lakes and Wagga projects, suggests that the West Wyalong project was not a BCEG (Australia) project or, later, a BCEG project. Ms Dong said she never visited West Wyalong as she had no reason to do so as there was no project there which was authorised or financed by BCEG. Mr Xiao agreed that BCEG China delegates never visited the West Wyalong project. 2. There is also no evidence that BCEG China was formally involved in the West Wyalong project. Ms Dong said that, before BCEG China would make a decision to pursue a project, detailed project information and a feasibility analysis was required. A board meeting of BCEG China's directors would need to be called, at which proposed contracts, loan agreements, guarantees and project feasibility analyses would need to be presented to the board. Ms Dong is not aware of any of these steps having been taken in relation to the West Wyalong project: see also [100]. 3. There is evidence that some staff were aware of the West Wyalong project, but the evidence largely relates to when the project was being completed in 2012 and 2013: see [244]. The staff were not, however, aware which corporate entity was undertaking the project or the funding arrangements. In particular, Mr Kell worked for BCEG as a project coordinator from June 2012 until March 2013, and was aware of the West Wyalong project through his regular discussions with other members of the projects team and attendance at team meetings, where the West Wyalong project was an agenda item. Mr Kell understood that BCEG was carrying out this project, although he was not aware of BCEG's contractual position in this regard. Against this, Eunson Yang worked for Trojjan from April 2011 but denied participating in any meeting relating to the West Wyalong project and was not aware how the West Wyalong project was financed. Their differing evidence may reflect their different roles in the various companies. 4. Whatever staff may have known, BCEG's Beijing-based directors were unaware of the West Wyalong project until after it was completed and BCEG was in default of its obligation to repay BCEG China for the Varsity Lakes facility: see [272]-[276]. The West Wyalong project was clearly a private venture of Mr Xiao and Ms Chen. Varsity Lakes project 1. In 2009, Mr Xiao and Ms Chen incorporated the third defendant, Interlink Laboratory. Both became directors. The sole shareholder was CX & DN Holdings. On 19 February 2010, Interlink Laboratory acquired land in Varsity Lakes on the Gold Coast, Queensland. The land had the benefit of development consent for the construction of a three-storey hospital and medical centre and basement car parking. As such, Mr Xiao and Ms Chen effectively owned and controlled the development site. 2. On 24 February 2010, Interlink Laboratory issued a Letter of Acceptance to BCEG (Australia), accepting BCEG (Australia)'s tender for design and construction of Varsity Lakes Private Hospital for a Contract Sum of $48,152,669 plus GST. The letter itemised seven components of the Contract Sum, comprising design fees, council charges, site clearing/infrastructure upgrade, construction, construction management fee, project management fee and BCEG administration fee. The letter stated the contract sum was the "'Guaranteed Maximum Lump Sum' price submitted by BCEG (Australia) … This sum will not be subject to re-measurement and is not subject to price fluctuation, currency exchange fluctuations, labour processes or any other reasons unless expressly provided in the Contract Conditions." 3. On 4 March 2010, Interlink Laboratory entered into heads of agreement with Platinum Blue Healthcare Pty Ltd, proposing to lease the Varsity Lakes private hospital development to Platinum Blue. Under the heads of agreement, Platinum Blue was to procure a private hospital licence from Queensland Health while Interlink Laboratory was to construct the works and some fit-out. Rent was to be a percentage of "Gross Development Costs", then estimated to be $42 million, with such costs to be quantified by an independent Quantity Surveyor. Inflation of design and construction price 1. On 9 March 2010, Mr Mariasson sent an email to Mr Piercy, advising that he had been asked by Richard Ziff to revise the Varsity Lake costs by increasing architect and consultants' fees to around 12% of construction costs. (Mr Ziff was an employee or consultant of BCEG (Australia)). Mr Mariasson asked "if this is ok as the costs provided are already high for worst case scenario." Mr Piercy forwarded Mr Mariasson's email to Mr Xiao and Mr Ziff, adding: (emphasis added) Please explain why you need us to change our quoted figures from our Architects and consultants I will make clear now that myself or anyone working with me will not exaggerate figures, due to once the independent Quantity Surveyor goes through the costings at the start it will look like we are trying to rip people off. Not a good business strategy in the construction industry. The figures that you have been supplied by Henri [Mariasson] at this point are actually higher than what they should be. I am happy to authorize any of the staff to supply you with the exact figures of what this construction is going to be. Richard, remember that at the end of the day it doesn't matter what you put the figures at the independent QS officer will tell you how much the rent will come in at. 1. Two things are apparent from this exchange. First, there was an attempt to increase the rent under the heads of agreement with Platinum Blue by inflating the Gross Development Costs (which Mr Xiao denied), and Mr Piercy was having none of it. Second, the estimated construction costs, also reflected in the Letter of Acceptance referred to at [47], were inflated. Whilst Mr Mariasson described the costs as "already high for worst case scenario", Mr Piercy was more emphatic, stating that the figures were "actually higher than what they should be" and offered to supply "the exact figures of what this construction is going be". That is, there was a difference between the expected cost of construction and the figures being cited to Platinum Blue. 2. The degree of inflation is not known but was likely significant having regard to two matters. First, when the contract was re-executed on the incorporation of BCEG, the price was $11.7 million less, being $36.458 million: see [70]. Second, Mr Piercy said that, on completion of the Varsity Lakes project, only $12 million had been spent on construction to lock-up stage, to which 5% was to be added. 3. BCEG (Australia) began to enter into sub-contracts in relation to the Varsity Lakes project, starting with a contract with an architect on 15 March 2010 signed by Ms Chen. Interlink Laboratory began paying invoices rendered by BCEG (Australia), presumably in connection with the Varsity Lakes project: invoices BA00001 and BA00002 in January 2010 (totalling $14,716.92) and BA00003 to BA00007 in April 2010 (totalling $208,592.40). 4. On 7 April 2010, Qing Yang arrived in Australia. On 12 April 2010, Mr Yang replaced Ms Chen as a director of Trojjan. Mr Yang said he was not aware that he became a director of Trojjan. Mr Yang can't read English and said he had not seen the ASIC document, "The signature looks like it's mine, but … those things shouldn't be there. Can I add … my birthday was incorrect." Mr Yang departed Australia on 13 April 2010. He had no involvement in the management of Trojjan, nor did he attend any director's meetings. Funding West Wyalong expenses 1. On 29 April 2010, West Wyalong Marketplace engaged Trojjan to construct the shopping centre in West Wyalong for $4.2 million in two stages. Work was to commence on 3 May 2010. 2. West Wyalong Marketplace's bank account then had a balance of some $17,000. On 11 May 2010, $200,000 was transferred from BCEG (Australia)'s bank account to West Wyalong Marketplace's bank account. On 27 May 2010, Trojjan issued its first invoice (TR0001) to West Wyalong Marketplace for $115,151.33. The invoice was paid on 1 June 2010 from West Wyalong Marketplace's bank account, which contained the funds recently provided by BCEG (Australia). 3. In evidence is a detailed spreadsheet dating from 2 July 2010 – which appears to be a contemporaneous business record – stating that BCEG (presumably a reference to BCEG (Australia)) had paid $127,038.18 in 2009 for West Wyalong Marketplace and itemising further expenses paid in 2010. Total expenses for the West Wyalong project up to 2 July 2010 were stated to be $465,060, of which "BCEG AUSTRALIA" had paid $232,480. Given that BCEG (Australia) had deposited $200,000 into West Wyalong Marketplace's account in May 2010 (see [55]), it is unremarkable that, two months later, the total expenses were $232,480. 4. Mr Xiao said that he had authority as a director of BCEG (Australia) to use its funds on the West Wyalong project. Further, the funds were money which he had put into BCEG (Australia). As to Mr Xiao's first explanation, it is not entirely clear why his authority as a director of BCEG (Australia) extended to using the company's funds on a project in which BCEG (Australia) had no interest other than, perhaps, by way of its shareholding in Trojjan. Mr Xiao's second explanation is more likely to provide a valid basis for the payments, to which I now turn. Pre-BCEG funding 1. An important part of the defence was that funds transferred by BCEG to the defendants were said to be the repayment of funds earlier advanced by the defendants to BCEG (Australia) and BCEG in its early days. 2. Mr Xiao said that, from October 2008 to June 2009, BCEG (Australia) was provided with $819,589.35 by entities associated with Mr Xiao, being CX Partners Engineering Consultants Pty Ltd (CX Partners), Beijing Dragon, China National Aero-Technology Import & Export Corporation and Interlink (Asia) Investment Pty Ltd, to cover BCEG (Australia)'s operating costs. Mr Xiao identified these deposits on a BCEG (Australia) bank statement. Certainly, some of the deposits appear, according to the bank statement, to have been deposited by Beijing Dragon (totalling $85,574.27) or "China National Aero", while others are simply described as "deposit". There are no bank statements for the entities said to have provided the funds. 3. From October 2009 to September 2010, Mr Xiao said that he and his wife, Interlink Laboratory and China National Aero-Technology Import & Export Corporation provided a further $1,990,155.06 to BCEG (Australia) to cover its operating costs. Again, Mr Xiao identified these deposits on a BCEG (Australia) bank statement. 4. Ms Dong said she was not aware that these monies were transferred into the account of BCEG (Australia). Nor was Ms Dong aware that the company had opened a bank account or incurred significant expenses. Nor was the accounting department of BCEG China provided with the bank statements exhibited to Mr Xiao's affidavit. Ms Dong was not aware of Mr Xiao having provided BCEG China with copies of any contracts entered into on behalf of BCEG (Australia), nor BCEG (Australia)'s accounting and financial reports from 2008 to 2010. Ms Dong expected that, if Mr Xiao or his entities had provided funds to BCEG (Australia), such transactions would have been documented by a loan agreement. If Ms Dong had been informed that significant sums were paid into BCEG (Australia) before June 2010, she would have been concerned as the company had not been engaged in any projects during that period. 5. Mr Samuel did not consider whether the defendants had provided funds to BCEG (Australia). BCEG (Australia)'s bank statements for the first period described by Mr Xiao (October 2008 to June 2009) indicate that travel, office and employee expenses were paid from this account, totalling some $17,400. A large number of cheques were also presented, but the payee's details are not recorded on the bank statements. The descriptions on the bank statement suggest that preliminary steps were being taken to set up an office, leasing an item of office equipment and paying some employees. That is, for this period, only a small portion of the funds deposited to BCEG (Australia)'s account were obviously used to pay travel, office and employee expenses. There is no evidence – beyond Mr Xiao – that the additional $800,000 was used to cover BCEG (Australia)'s operating costs. 6. For the second period described by Mr Xiao (October 2009 to September 2010), bank statements for some of the payees are in evidence from January 2010, from which four features may be observed. First, no further funds were deposited by Beijing Dragon during this period, such that its entire suggested contribution to BCEG (Australia)'s operating costs was $85,574.27. 7. Second, a comparison between BCEG (Australia)'s bank statements and the available bank statements of Mr Xiao and Ms Chen, Interlink Laboratory, Trojjan and West Wyalong Marketplace, indicates that BCEG (Australia)'s bank account was the account used to pay office and staff expenses, this being the office from which, it will be seen, all of these businesses were conducted: see [34], [38], [86], [88]. That is, to the extent that the funds were deposited to BCEG (Australia)'s account to fund operating costs, it is unclear what portion of those costs related to BCEG (Australia) as opposed to the couple's other businesses. 8. Third, some of the deposits identified by Mr Xiao were in fact payments of invoices rendered by BCEG (Australia) to Interlink Laboratory (totalling $223,309.32) and Trojjan (totalling $19,490.64). Obviously, the payment of invoices is not the same thing as providing funding for operating costs; these funds represented BCEG (Australia)'s revenue. If the payment of invoices is deducted from the $314,174.36 which Mr Xiao says Interlink Laboratory provided to the company to fund operating costs, only $71,374.40 remains. 9. Fourth, a comparison of BCEG (Australia)'s bank statements with those of Mr Xiao and Ms Chen's bank account reveals that regular, small transfers were made from the former to the latter to reimburse expenses incurred for BCEG (Australia) totalling, by my count, $11,953.59. This suggests that Mr Xiao and Ms Chen ensured that any funds outlaid for the company were promptly reimbursed. Further, one of the payments identified by Mr Xiao ($9,443.94 on 13 May 2010) was only received into their account two days earlier, described as "FCA Adjustment", and transferred to BCEG (Australia), from which I infer that the funds likely belonged to BCEG (Australia). In addition, on 11 May 2010 and 9 August 2010, $270,450 and $250,000 respectively was transferred from BCEG (Australia)'s bank statements to Mr Xiao and Ms Chen's bank account and, according to the descriptions on the bank statements, was in repayment of their loan to the company. Ignoring the reimbursement of expenses, if the loan repayments and $9,443.94 are deducted from the amount which Mr Xiao says he and his wife provided to the company to fund operating costs, being $1,112,311.76, $582,417.82 remains. If one is trying to gauge how much Mr Xiao and Ms Chen may have provided to fund BCEG (Australia)'s operating costs, one should also deduct BCEG (Australia)'s funds used on their own project in West Wyalong as at 2 July 2010 (see [56]), leaving some $350,000. 10. There is no doubt that, prior to the incorporation of BCEG, BCEG (Australia) engaged a number of consultants from March 2010 on, who provided services in connection with the design development and development approval of the Varsity Lakes Project during the early stages of the project: see [52]. There is no evidence that BCEG China provided funds to BCEG (Australia) at the time. Some initial working capital was likely needed and it is likely that Mr Xiao and Ms Chen provided these funds, albeit BCEG (Australia) was also generating income by rendering invoices to Interlink Laboratory and Trojjan. But I am not satisfied that funding was provided in the amounts suggested by Mr Xiao, nor it is clear what amounts of funding were provided, nor is it clear whether any funding remained unpaid when BCEG was incorporated. Incorporation of BCEG 1. In about 2010, there was a restructure of Beijing Construction Engineering Group's arrangements in respect of international projects. Qing Yang said that a decision was made to establish new subsidiaries for international operations, with BCEG China as the parent company. In Mr Yang's experience, the Exim Bank would not lend directly to an overseas entity. Under the new structure, BCEG China would become the borrowing entity and Beijing Construction Engineering Group could be the guarantor. Ms Dong said that it was the preference of Beijing Construction Engineering Group that contracts entered into from 2010 involve the new subsidiary companies. 2. As a consequence, on 11 June 2010, BCEG was incorporated. Mr Xiao, Mr Ma, Qing Yang and Mr Xing were appointed directors. The sole shareholder was BCEG China. BCEG's principal place of business was in Bathurst Street, Sydney, being the same office as BCEG (Australia). Noteworthy, whilst Ms Chen had been a director of BCEG (Australia), she was not a director of BCEG. An issue in these proceedings is whether Ms Chen was, however, a de facto director: see [329]. Varsity Lakes project contracts 1. Likely at about this time, various documents were issued concerning BCEG, albeit the documents ostensibly pre-dated the incorporation of the company. Presumably, these documents were executed in order to effect the re-structure and, effectively, transfer the Varsity Lakes project from BCEG (Australia) to BCEG. In short, Interlink Laboratory engaged BCEG as head contractor to project manage the construction works on a costs plus basis; BCEG entered a building contract with Trojjan to carry out the construction works; Trojjan later engaged third party sub-contractors as necessary to undertake components of its contracted works. 2. More specifically, Interlink Laboratory and BCEG entered into an (undated) "Main Contract" in respect of the design, material supply and construction of the Varsity Lakes project. Special conditions noted that Interlink Laboratory had established a budget estimate for the project of $36,458,000: special condition 2.1. Although described as a "budget estimate", special condition 9.1 provided that the Contract Value was a fixed firm price, not to be varied due to changes in the cost of labour or materials for the duration of the project. As already observed, the budget estimate was some $11.7 million less than the Contract Sum in the Letter of Acceptance dated 24 February 2010. 3. As to the funding arrangements for construction, BCEG was obliged to self-fund 80% of the contract value using a drawdown facility: special condition 6.3. Each month, BCEG was to provide a progress claim to Interlink Laboratory, to be assessed by a quantity surveyor, "Upon the signed-off agreement of the Quantity Surveyors assessment by [BCEG, Interlink Laboratory] and the Chinese bank (who facilitates the funding through the contractor) the money will be drawn-down to [BCEG] to facilitate payment to the sub-contractors and suppliers that make up the claim. The monthly values will be total[l]ed at the end of the project to form the final contract value": special condition 6.4. Interlink Laboratory was to refinance the project no later than September 2013: special conditions 6.5 and 7.1. 4. Second, on (ostensibly) 12 April 2010, Trojjan issued a letter to BCEG, addressed to Mr Xiao, submitting an initial budget proposal for the Varsity Lakes project for his review. (Somewhat confusingly, the footer of the document refers to "Private Hospital Varsity Lakes Tender Submission 30/6/2010 – REF: VLPH-001). The letter was apparently from Mr Piercy as general manager of Trojjan, but unsigned. The letter was initialled "PP" on the bottom of each page, but Mr Piercy said he didn't sign the document. Mr Piercy said it was not his practice to initial a document but then not sign it. Further, "We didn't do a quote… Just telling the truth, mate." Mr Piercy also disclaimed the contents of the letter as the description of the works was inaccurate: there were no sprinklers or "heavy duty residential-grade windows" in the project, nor did the structure have a steel roof. In any event, the tendered price was $35,185,185. 5. Third, on (ostensibly) 15 May 2010, BCEG and Trojjan executed Conditions of Contract in respect of the Varsity Lakes project. The contract was for a fixed lump sum price, being the $35,185,185 contained in Trojjan's quotation of 12 April 2010. However, Mr Piercy said that, whilst he may have signed the document at an early stage in negotiations, it was overtaken by a different arrangement, which was construction cost plus 5%, and that does appear to be the case: see [156]. Mr Xiao agreed that the arrangement was cost plus 5%; there was no fixed price arrangement. 6. Negotiations with Platinum Blue had also progressed. On 9 July 2010, Mr Xiao was provided with an Agreement for Lease executed by Platinum Blue and its guarantors. Relevantly, Platinum Blue was obliged to provide a security deposit of $500,000 prior to commencement of construction: clause 2.1. Company management 1. It is timely to describe the manner in which BCEG was managed, and by whom. Apart from Mr Xiao, the directors of BCEG were based in Beijing. Australian immigration records confirm that Mr Xiao was the only director of BCEG who spent significant amounts of time in Australia. The other directors visited infrequently and for short visits only, usually for a couple of days. For practical purposes, the Beijing-based directors could have no day-to-day role in the operations of BCEG. Mr Xiao does not suggest otherwise. 2. According to Mr Xiao, he oversaw the operations of BCEG – "Everyone report to me" – but, as he was overseas a lot, day-to-day operations were carried out by others. As to the construction and development side of things, Mr Piercy was the project manager responsible for contract administration, programming and performance of works. Mr Xiao said Mr Piercy kept him informed, as needed, on the project side of things. As to the financial side of the business, Mr Xiao said the accounts department consisted of a number of people, including an accountant from BCEG China, and he left the accounts department to deal with the accounting side of the business. All invoicing and expenditure was supervised and authorised by the BCEG China accountant, who was also responsible for communications with, and reporting to, BCEG China. Mr Xiao did not have access to, or know how to operate, the company's MYOB records. 3. Mr Xiao said that his wife's role in the company was administrative, carrying out the bank transfers for payments of invoices rendered after approval of the payment by the relevant person in the projects team and the accounts team. Ms Chen had access to the bank accounts, to be operated in accordance with his instructions. Mr Xiao said that, when he was overseas, "I put Yanying as my eye in the company, tell me how's the progressing, how's things done? … More like a office manager. So, if she tell me something inappropriate in the office I will speak to that division." But Ms Chen did not have authority to give approvals in his absence. Whilst Ms Chen did not give evidence, Ms Chen admitted that she prepared and approved invoices and other transactional documents, but under the supervision and direction of the BCEG China accountant. 4. Mr Xiao's description – and the admission made by Ms Chen – is not supported by other witnesses. Mr Piercy said that Mr Xiao was in Sydney about 70% of the year whilst Ms Chen was there unless she was away on holidays. (That was an accurate description of Mr Xiao's time spent in the office in later years but, in earlier years, Mr Xiao was there less: see [335]-[338].) Mr Xiao worked longer than usual business hours whilst Ms Chen usually left the office at 5.00 pm. Mr Xiao and Ms Chen had adjoining offices, whilst Mr Piercy worked in an open plan area. Mr Piercy said that the door to Ms Chen's office was locked when she was not there, "It was the only one that got locked". 5. According to Mr Piercy, Mr Xiao "ran the whole ship. He was the boss. … everything had to be approved by him before anything got done or sent away or contract sign[ed] or anything. It was right from … the developments to the building, it was all approved 100% by Yu Xiao. … We'd do … the work, we'd get to a certain point, and then have to be approved by him." Mr Piercy agreed that Mr Xiao did not micro-manage the operations of BCEG or Trojjan, and left it to other staff to prepare documents and make operational decisions, but said that Mr Xiao approved all works, "It got prepared but he had to approve them at the end of the day. I even had to … get approval for everything." 6. Mr Piercy said that all staff regularly attended staff meetings. Mr Xiao always chaired the meeting and Ms Chen took minutes. When matters turned to finance, only Mr Xiao, Ms Chen and either the BCEG accountant or the Trojjan accountant (Gary Oconer) would remain. Mr Piercy agreed that, when Mr Xiao was overseas, Mr Piercy was one of the more senior members of staff in the office but did not agree that he convened meetings while Mr Xiao was away, "We never had our meetings without Yu Xiao in them." 7. Of Ms Chen, Mr Piercy said "I thought she had a lot of authority behind the scenes myself, you know, … talking with Yu Xiao … and they'd made decisions together, but it was all in Chinese so I can't say if it was or wasn't. But any invoices that needed to be paid through Trojjan or through BCEG had to go to Yanying, and she paid them. But it had to be approved by Yu Xiao and that first." So far as Mr Piercy was aware, only Mr Xiao and Ms Chen had authority to operate BCEG's bank accounts. When Ms Chen was away in China, it was difficult to get invoices paid. 8. As to who conducted the accounting functions for Trojjan, Mr Piercy said, "If Yanying wasn't pressing the button she was coordinating Gary to, to, you know, put it in the computer, et cetera." Ms Chen had authority to use the tax portal on behalf of Trojjan and dealt with ASIC, together with the accountant David Hodge. (Mr Xiao also said that the registered offices of the companies were organised by his wife and the accountant). Ms Chen was responsible for superannuation and workers' compensation. Ms Chen approved and paid wages. 9. As to Mr Piercy's role, during his first year working for BCEG, Mr Piercy attended the Sydney office but as construction began on the West Wyalong project and, later, the Varsity Lakes project, he spent more time on site. As Mr Piercy said, "… my main thing was construction … Not paperwork, project management." As to invoices, Mr Piercy said that he approved construction invoices on site, to note that the work had been done, and the invoice was then sent to the Sydney office to get paid. "That was on all projects. … no matter it was Trojan or BC[E]G it all had to go back to Yu Xiao for approval and then goes across to Yanying for payment. It was the process every time. It didn't matter - and sometimes you'd have to wait 'cause Yu Xiao hadn't seen it, which is - I suppose he run the company, he hadn't seen it so it couldn't get paid and then Yanying would pay it once he seen it." 10. Mr Piercy said he had no involvement in the preparation of invoices from Trojjan to BCEG. He was not aware of the bank accounts held by Trojjan, nor the transactions on the bank accounts, "No … it was [the] structure of the company. So I looked after the site, and Yu Xiao and Yanying looked after finance. That is my fault. And I say that out loud." Although some of Trojjan's bank statements referred to Mr Piercy and his home address, Mr Piercy said he "didn't receive them, no, I didn't look at them, because, once again, it wasn't my [part] of … our agreement." "I'm just being honest. I didn't see any of [the bank statements]. I am now and I'm seeing stuff in here that I'm, yeah." He never accessed Trojjan's bank accounts. 11. Ms Zhang worked at BCEG's offices in 2011 and 2012. The office was shared with Trojjan; employees of both companies shared the same office space. Ms Zhang said that Mr Xiao ran the office. Mr Xiao prepared reports in connection with the Varsity Lakes project for BCEG China. Whenever Ms Zhang was asked to provide information to BCEG China, she asked Ms Chen where was the information that had been requested, and Ms Chen told her that Mr Xiao would manage it. Ms Zhang said that Ms Chen ran the office in Mr Xiao's absence, delivering instructions to employees and approving annual leave. Ms Zhang said the couple worked in close proximity to one another, although Ms Chen had her own office. 12. Ms Zhang said that Mr Xiao and Ms Chen were the signatories to BCEG's bank accounts. Ms Chen controlled BCEG's bank accounts, which Ms Zhang was unable to access. Ms Chen was the head of the accounting team and Ms Zhang regarded Ms Chen as her supervisor. Ms Zhang saw Ms Chen regularly reviewing and prepare invoices, reviewing timesheets and expense claims, preparing documents to be provided to banks, preparing cheques and payment requisitions and making payments from bank accounts. Ms Zhang assisted Ms Chen but had limited access to requisition payments or cheques, prepare invoices or access BCEG's bank accounts to process payments or reconcile banking transactions. Ms Chen almost always performed these tasks herself. 13. In April 2011, Eunson Yang arrived in Australia. He worked for Trojjan on the Wagga project in Trojjan's Sydney office, which was shared with BCEG, Interlink Laboratory and Trojjan Constructions. Mr Yang said that Mr Xiao, Ms Chen, Colin Riske (who Mr Piercy described as Mr Xiao's "main man for many years") and Mr Piercy each had their own office (although Mr Piercy rarely used his office), whilst he worked in an open plan area. Mr Yang said he was then a junior member of staff and reported to Mr Piercy and Mr Xiao. From April 2011 until 2017, Eunson Yang observed that Mr Xiao was in charge of the day to day business of all of the entities which shared the office, reviewing invoices received from sub-contractors, performing project cost calculations and approving project expenses. Mr Xiao instructed staff in relation to these matters, even when he was travelling, when he would call other project managers and set up conference calls on the Skype platform. Mr Yang observed Ms Chen taking Mr Xiao's calls. Mr Yang understood that, if an invoice required payment when Mr Xiao was travelling, Mr Xiao would call Ms Chen to approve the payment if it related to construction or consultant costs, Ms Chen would process payments which had been approved by Mr Xiao. 14. Whilst Mr Xiao said that he had nothing to do with communications sent to BCEG China, Eunson Yang said that Mr Xiao was involved in any communications with his superiors in China. Mr Xiao often asked Mr Yang to prepare emails or letters on Mr Xiao's behalf. Mr Xiao would give instructions to Mr Yang in Mandarin. Mr Xiao would then review the proposed communication that Mr Yang had prepared and confirm his approval or suggest further changes before Mr Yang was permitted to send it. Mr Yang understood that no one, himself included, was to contact anyone within the BCEG group of companies in relation to substantial matters without first obtaining Mr Xiao's approval. 15. The evidence of Mr Piercy, Ms Zhang and Eunson Yang give a consistent picture of Mr Xiao and Ms Chen's role with BCEG. Mr Xiao ran the company with the assistance of his wife, who was in charge of finance, including the bank accounts, invoicing and accounting. Mr Xiao approved all contracts and invoices for payment, as well as all communications with BCEG China. Mr Xiao and Ms Chen closely supervised the project and finance sides of the business respectively. When Mr Xiao was away from Sydney, he continued to be involved in the company's activities through conference calls and relied on his wife and, no doubt, other staff, to continue to run the office in his absence. BCEG China's accountant 1. Mr Xiao blamed the preparation of false invoices on the accountant seconded from BCEG China to Sydney being, initially, Ms Zhang. Before coming to Sydney, Ms Zhang was employed by BCEG China as a tax manager, responsible for export tax, tax rebates and management of foreign exchange. Ms Zhang was informed by BCEG China's Financial Department that she was being sent to Sydney as Exim Bank had agreed to loan funds to BCEG for use in relation to a project. A temporary business visa was approved on 20 December 2010. On 24 February 2011, BCEG International Co Ltd sent a letter to Ms Zhang, clarifying her job responsibilities at BCEG as follows: (emphasis added) Based on the discussion with the financial department, hereby to clarify your job responsibilities in the Australian branch: 1. Complete the preparation of the financial statements of the Australian branch in accordance with the requirements of the General Affairs and Finance Department … 2. Assist in providing various information of the Australian branch as required by the head office (including the engineering management department and the finance department). 3. Assist the head office to complete the post-loan inspection of the Export-Import Bank of China. 4. While completing the above three tasks, follow the instructions of the Australian branch leaders XIAO Yu and CHEN Yanying, and complete other tasks that the Australian branch leaders require. 1. Ms Zhang said she did not complete the full requirements and responsibilities of her job as she believed that she was obliged to follow the directions of Mr Xiao and Ms Chen. Ms Zhang said her work was "hindered" and she had no substantial work, "My work was more geared towards administration." Ms Zhang did not prepare any financial statements for BCEG, nor have access to financial statements. Ms Zhang was not permitted to access the MYOB software. Ms Zhang had no access to the bank accounts. Ms Zhang never provided any financial reports to BCEG China. In the beginning, she would ask Qing Yang, who would speak to Mr Xiao and Mr Xiao would communicate directly with the financial department in China. Contrary to Mr Xiao's evidence, Ms Zhang denied that she managed the financial side of the BCEG business. Rather, her access to financial information was restricted by Mr Xiao and Ms Chen. 2. Ms Zhang raised this issue with Mr Ma and Hu Lie (chief financial director of BCEG China) in Australia, shortly before she returned to China. Ms Zhang complained that she could not properly perform her role as she was being restricted from accessing accounting information. Ms Zhang also said that she had not been in good health, because she felt isolated in the office and under a lot of pressure. Mr Ma recalled speaking with Ms Zhang about this. Ms Zhang told him, "I feel like I am under a lot of pressure here. Mr Xiao and Ms Chen control everything and do not let me touch financial matters. I am also suffering ill health." Mr Ma notified the other directors of BCEG, being Qing Yang and Mr Xing, and asked Mr Yang to formerly notify Mr Xiao to rectify his practice. Mr Ma also charged Ms Zhang to investigate the issue. 3. Some corroboration of Ms Zhang's account also comes from Mr Piercy, who said of Ms Chen's working relationship with the BCEG China accountant, "I 100% thought she controlled the accountants from overseas. … She'd have meetings with them or go down to their office and stand there and explain stuff to them through the door and leave again, so it just looked like … she was controlling, like, she was the boss of them. … I dead [se]t thought that she was." 4. The defendants relied on a description of the role of the BCEG China accountant in a letter from Mr Ma to the Department of Immigration in 2015 in which Mr Ma explained that BCEG China required, "… a well-trained accounting staff from head office, who is familiar with both the accounting standards in China and overseas … to be assigned to each subsidiar[y] across the world, taking charge of business financial reporting to head office, as well as translating the financial report from the local standard to the standard required by Chinese government. … It is extremely important position for both subsidiaries and parent company, since that position can eliminate information mismatch and improve internal control." 5. Ms Dong agreed that Mr Ma's description was certainly what the company aimed for but, in reality, the person sent to BCEG China's subsidiary offices was often a junior person. Ordinarily, the role of the accountant was limited to checking that a payment to be made was supported by necessary documentation and met internal approval requirements. The role was clerical in nature and performed by accountants not yet capable of performing sophisticated accounting work. Ms Dong expected that the accountant needed to be capable of facilitating communication with BCEG China through their links with BCEG China's accounting department, but Mr Xiao would still be required to oversee their work. Mr Ma also said that it was not the accountant's responsibility to approve financial reports given to BCEG China; this was Mr Xiao's responsibility. Mr Ma said the role of the BCEG China accountant was to report operational issues or problems, but the forms and documents needed to be approved by Mr Xiao before being sent to BCEG China. 6. As to the level of expertise of the BCEG China accountant, I prefer Ms Dong's evidence to Mr Ma's letter to the Department of Immigration. Ms Dong was working in the accounting department and likely to have a more detailed knowledge on this subject than Mr Ma. As to what happened to Ms Zhang, she was a credible witness, whose evidence I accept without hesitation. The evidence of a contemporaneous complaint that Ms Zhang was unable to perform her assigned duties, as Mr Xiao and Ms Chen "control everything and do not let me touch financial matters", is significant. The absence of Ms Chen from the witness box, together with the corroborative evidence of Mr Ma and Mr Piercy, lead me to conclude that, whatever the intended role of the BCEG China accountant, in fact, Mr Xiao and Ms Chen prevented the accountant from performing their role by restricting their access to accounting information and processes such that the safeguards intended to be achieved by that role were not achieved. 7. After Ms Zhang returned to China in March 2012, the BCEG China accountant was Ziping (Frank) Lu until March 2014 and then Junrui (Allen) Zhang. When Mr Lu began working at BCEG's offices, the finishing touches were being put on the West Wyalong project; the diversion of funds from the Varsity Lakes facility to the West Wyalong project had largely already occurred (twelve of the 16 payments had been made). The fourth drawdown request was then underway, where BCEG had already used sham sub-contracts to support the third drawdown. By the time Mr Zhang joined the company, all relevant transactions had been completed; BCEG was then in negotiations with the defendants to repay monies owed. Where Ms Chen hindered BCEG China's first accountant, Ms Zhang, from performing their assigned task – to the extent that Ms Zhang suffered ill-health and asked to go back to China – it is unlikely that Ms Chen became more open and transparent when subsequent BCEG China accountants arrived and where fraudulent transactions were either already completed or in train. Varsity Lakes facility 1. The Varsity Lakes project was largely funded by BCEG through a drawdown loan facility established with Exim Bank. On 25 August 2010, BCEG China entered into a loan agreement with Exim Bank to implement the Varsity Lakes project. The loan was for US$35 million, to be used for project design, engineering, materials and the like. The loan was to be repaid on 24 October 2013. 2. Ms Dong said that, in order to obtain financial support from BCEG China, the subsidiary was required to sign an internal loan agreement. (Ms Dong noted that such an internal loan agreement exists in relation to the Varsity Lakes project and, later, the Wagga project but not in respect of the West Wyalong property.) In an Internal Loan Agreement entered into on 25 August 2010 between BCEG and BCEG China, BCEG borrowed US$35 million for the construction of the Varsity Lakes Private Hospital, with the loan to be repaid on 30 October 2013. BCEG was obliged to use the loan in compliance with this purpose and not for any other purpose: article 4.1. 3. The structure of the loan is perhaps best understood from a coloured spreadsheet in the black folder, filed amongst documents described as having been provided to Exim Bank (the Bank spreadsheet). The Bank spreadsheet is partly in Chinese characters; currency is in US dollars. According to the Bank spreadsheet, the Varsity Lakes project would have two phases: the Design Stage (from April 2010 until November 2010) followed by the Construction Stage (from December 2010 to August 2012). For each month of the project, the spreadsheet set out the projected expenses – design, council, site clearing/infrastructure upgrade, construction and internal fitout – together with regular monthly fees to be charged for construction management, project management and a BCEG Head Contractor Fee. The Bank spreadsheet also included a drawdown schedule. The first drawdown was scheduled for July 2010 (US$8.1 million), being early in the Design Stage, followed by drawdowns throughout the Construction Stage in March 2011 (US$5.1 million), June 2011 (US$9.9 million), February 2012 (US$8.9 million) and August 2012 (US$3.4 million). 4. Key to understanding the various invoices and payments at issue in these proceedings is a BCEG spreadsheet, which followed the structure of the Bank spreadsheet but in English, in Australian dollars and containing greater detail on the components of the forecast expenditure (BCEG spreadsheet). The black folder contains a BCEG spreadsheet dated 24 January 2011, which is clearly a well-used document bearing highlighting, handwriting and obviously worn. Whilst Mr Xiao denied any knowledge of the BCEG spreadsheet, the table of contents to the black folder records documents behind this divider (of which the spreadsheet is the first document) as "3rd Bank drawdown (bring back by Yu Xiao)". The BCEG spreadsheet was also emailed to Mr Xiao from time to time. On 28 January 2011, Mr Riske sent an email to Qing Yang, copied to Mr Xiao, attaching a project report on the Varsity Lakes project which included the BCEG spreadsheet. (Mr Xiao said the first time he had seen the spreadsheet was in cross-examination.) See also [232]. 5. Whilst the earliest version of the BCEG spreadsheet in evidence is dated 24 January 2011, it appears that the figures in the spreadsheet were unchanged from when first created, likely when funding was initially sought. I say this because the BCEG spreadsheet contains figures which match the seven components of the lump sum price in the Letter of Acceptance of 24 February 2010. Further, invoices rendered by Trojjan to BCEG – and apparently supplied in support of the first drawdown request in late 2010 – precisely match the spreadsheet dated 24 January 2011: see [111]. 6. The initial columns of the BCEG spreadsheet itemise each of the expenses and trades comprising the Contract Sum of $48.152 million contained in the Letter of Acceptance of 24 February 2010. There follows columns for each month from April 2010 to August 2012, itemising the expenses to be incurred each month. Of particular interest are the components concerning construction and internal fit-out, being: Construction Site Set-out $170,000 Excavation $2,147,700 Concrete Works $4,352,650 Blockwork $2,150,000 Plumbing Works $3,950,000 Electrical Works $2,087,300 Mechanical Works $2,587,350 Fire $1,784,100 Lifts $1,347,350 Façade $2,297,350 Roofing $2,605,000 Landscaping $1,510,000 Final Clean $98,000 TOTAL $27,086,800 Internal Fitout Plumbing Works $495,000 Electrical Works $405,000 Mechanical Works $635,000 Internal Walls $415,500 Ceiling $392,500 Flooring $390,000 Joinery $619,000 Final Clean $85,000 TOTAL $3,437,000 1. An immediate disparity emerges: the BCEG spreadsheet is based on the Contract Sum of $48.152 million contained in the Letter of Acceptance of 24 February 2010 between Interlink Laboratory and BCEG's corporate predecessor, BCEG (Australia). But this figure had been superseded, and substantially reduced, by the Conditions of Contract dated 15 May 2010 between Interlink Laboratory and BCEG, being a fixed lump sum price of $35,185,185. However, the earlier, higher figure was used in the BCEG spreadsheet and formed the basis of the drawdown requests and supporting documents. Given the inflated nature of this figure, it was always going to be difficult to justify drawdown requests based on legitimate sub-contracts, particularly where the figure had been reduced by $11.7 million. Drawdown requests 1. Having established the Varsity Lakes facility, Ms Dong said that BCEG China would advance funds to the subsidiary upon the subsidiary making interim applications for further funds to be drawn down from the loan facility. These applications ordinarily consisted of documents related to the intended purpose of the loan, such as the anticipated immediate future costs of a building and construction project. 2. Ms Dong was then working for BCEG China in the position of financial manager. In this role, Ms Dong was in charge of the accounting department within BCEG China. Ms Dong was aware that BCEG provided drawdown documents to BCEG China from time to time in relation to the Varsity Lakes project, by email. These documents included status letters as to the progress of the works, copies of contracts, sub-contracts and invoices rendered by sub-contractors and suppliers. In addition and separately to the drawdown documents, BCEG China received 'payment certificates', being progress claims issued by BCEG to Interlink Laboratory under the Main Contract: see [72]. 3. It was BCEG China's practice to review and file the documents electronically before printing and submitting hard copies to the bank in support of a drawdown of the facility. Ms Dong said she handled the drawdown documents herself, summarising the material and putting it in the form requested by Exim Bank, before the company stamp was applied to the material and she personally handed the documents to the bank. 4. Mr Xiao said he had no knowledge of the drawdown documents or what they contained; he had "no idea" the documents which were being provided to BCEG China, "I do not approve any documents supplied to BCEG China for Export Bank". Having now reviewed the documents, he assumed that the documents were authored by BCEG China's accountant and sent to BCEG China as part of their reporting function. Ms Zhang said compiling documents in support of drawdown requests "was not my responsibility." 5. I consider Mr Xiao's evidence to be highly unlikely. The Varsity Lakes project was the first project undertaken by BCEG; obtaining funds to progress the project would be a core concern of BCEG's director in charge of operations. The evidence concerning company management indicates that Mr Xiao was responsible for all communications with BCEG China. Further, Mr Xiao's evidence is not supported by the contemporaneous documents, which indicate that drawdown documents, or queries arising from those documents, were emailed to him from time to time: see [111], [167], [222]-[231], [261]. First drawdown 1. According to the Bank spreadsheet, the first drawdown of the Varsity Lakes facility was scheduled for July 2010. On 12 July 2010, Mr Mariasson sent an email to Mr Xiao, copied to Mr Piercy, "Please find attached invoices for Varsity Lakes for the drawdown paperwork. Is this format ok?". Attached to the email were five Trojjan invoices addressed to BCEG for each month from May 2010 to September 2010, consecutively numbered from VLPH-001 to VLPH-005. A description of the work which was the subject of each invoice precisely matched the work to be undertaken that month, and the amount, in the BCEG spreadsheet, together with the construction management fee specified in the BCEG spreadsheet. The invoices totalled some $9,085,000. 2. Mr Xiao disclaimed having seen the draft invoices before, notwithstanding that the invoices were attached to an email addressed to him. "I saw these documents the first time in Court. … I didn't see the attachment at that time. Because that's a Paul Piercy job." I do not accept Mr Xiao's evidence in this regard. The Varsity Lakes project was the first project for which funding had been obtained from Exim Bank; this was the first drawdown. It is inherently likely that Mr Xiao approved the format of these invoices "for the drawdown paperwork". 3. Once Mr Xiao approved the format of the invoices – and it is inherently likely that he did – it would have been a simple matter for staff to prepare further "VLPN" invoices for the other months covered by the first drawdown; the Bank spreadsheet anticipated that the second drawdown would not occur until March 2011. In evidence are further Trojjan invoices issued to BCEG – numbered VLPH-006 to VLPH-009 – in respect of the months from October 2010 to January 2011. These invoices replicate the descriptions and figures set out in the BCEG spreadsheet for those months. It is likely that BCEG submitted invoices covering the whole period in which the first drawdown was to be used, in support of the first drawdown request. 4. Whether these invoices were ever sent to BCEG China is in issue, as BCEG China did not have a copy of the invoices in its remaining records. That said, BCEG China had very few records for the first drawdown. As is apparent from the black folder and BCEG China's surviving records, batches of "VLPH" invoices were sent as part of subsequent drawdown requests. Having regard to the email sent to Mr Xiao on 12 July 2010, together with the fact that such invoices formed part of the documents submitted in subsequent drawdown requests, it is likely that invoices VLPH-001 to VLPH-009 formed part of the documents submitted in the first drawdown request. 5. None of the "VLPH" invoices are recorded in Trojjan's MYOB records, where invoices generally began with "TR". Nor is there any record that the invoices were paid. As such, it would appear that these invoices were prepared to accompany the drawdown request, but were not treated as Trojjan sales, nor paid by BCEG, as true invoices. Further, as the figures in the BCEG spreadsheet now exceeded the budget estimate in the Main Contract and the lump sum price in the building contract between BCEG and Trojjan, Trojjan invoices prepared by reference to the BCEG spreadsheet exceeded the construction costs which BCEG was (ostensibly) obliged to pay. 6. On 6 September 2010, BCEG received the first drawdown of funds, being US$8,099,965. This reflected the first drawdown in the Bank spreadsheet of US$8.1 million, presumably less a fee. The funds were deposited into BCEG's foreign currency account with the Commonwealth Bank ending 5601 (BCEG Foreign Currency Account). 7. On 14 September 2010, Mr Xiao and Ms Chen applied to the Commonwealth Bank for a new BCEG bank account, ending 8462 (BCEG Holding Account). Mr Xiao and Ms Chen were the authorised signatories on the account. On 16 September 2010, US$4 million was transferred from the BCEG Foreign Currency Account to BCEG's Commonwealth Bank account ending 4568 (BCEG Operating Account), converting to AU$4,255,771.89. On 17 September 2010, $4.2 million of this was transferred to the BCEG Holding Account. From the BCEG Holding Account, funds were periodically transferred back to the BCEG Operating Account to meet the payment of bills and expenses, including invoices subsequently rendered by Trojjan to BCEG in respect of the Varsity Lakes and West Wyalong projects. 8. In evidence are three invoices issued at this time. On 7 September 2010, Trojjan rendered its first invoice to BCEG in respect of the Varsity Lakes project (TR0008) for expenses in applying for a Queensland builder's licence in the amount of $4,430.40. There is no doubt that this invoice was genuine. The letterhead contains the Bathurst Street address; the invoice is marked with a stamp "entered" and a handwritten note "MYOB". A licence search obtained from the Queensland Building and Construction Commission confirms that Trojjan obtained a builder's licence on 10 September 2010. The paperwork completed by BCEG's accounting staff in respect of this invoice indicates the process followed to pay such expenses. A cheque requisition form was completed (numbered 10001) on 13 September 2010, providing comprehensive details in respect of the amount to be paid. The lower portion of the form was for the Accounts Department to complete, where details were added in handwriting of the date and details of payment. Accompanying the form was a bank receipt, showing that the Trojjan invoice had been paid on 24 September 2010. Diversion of first drawdown 1. BCEG (Australia) also rendered two invoices to BCEG (BA00014 and BA00015) for, respectively, preparation costs paid from September 2009 to March 2010 ($708,843.84) and project costs paid from April to August 2010 ($572,419.37). The invoices make no reference to the Varsity Lakes project. The invoices were both dated 3 September 2010 and appear to have been initialled by Mr Yang on 5 September 2010. Mr Yang agreed that the signature looks like his signature but he had never seen the documents before. Nor was Mr Yang in Australia at the time. Mr Xiao agreed that he did not see Mr Yang sign the invoice. 2. These invoices came to light when Mr Xiao attached copies of the invoices to his first affidavit. Mr Xiao there said the invoices pre-dated any work carried out on the Varsity Lakes project and related to non-Varsity Lakes costs. (Certainly, the invoices do not refer to the Varsity Lakes project but the descriptions do suggest that the invoiced amounts related to a project, and there was only one project on foot.) In cross-examination, Mr Xiao said he was not personally involved in the preparation of the invoices, "You have to ask Mr Yang who is the person [who] signed this paper how this paper being prepare[d] … and who prepare." He denied that the invoices were prepared under Ms Chen's supervision and said invoices of this type were prepared by Mr Oconer or Ms Zhang, "It's all through accountant. My wife, she is not accountant. Why is she doing accounting work?" As Ms Zhang had yet to arrive in Australia, and Mr Oconer worked under the supervision of Ms Chen, it is obviously the case that these invoices were prepared by Ms Chen. 3. Ms Dong does not recall seeing the invoices BA00014 and BA00015 before being served with Mr Xiao's affidavit in these proceedings. Had she been aware of the invoices, Ms Dong said she would have objected to payment on the basis that the expenses should be borne by Interlink Laboratory or one of Mr Xiao's companies. Ms Dong and Mr Ma said there was no agreement that BCEG would take over the assets and liabilities of BCEG (Australia). Mr Ma said that such an arrangement would require formal documentation and approval at board level and he did not attend any board meeting where this was approved. 4. No cheque requisition form is in evidence for the invoices BA00014 and BA00015. Rather, these invoices were paid as follows: 1. On 24 September 2010, $350,000 was transferred from the BCEG Holding Account to the BCEG Operating Account, from which $282,810.24 was transferred to BCEG (Australia)'s account in part-payment of invoice BA00014, from which $290,000 was withdrawn. The withdrawal is described on the bank statement as "BCEG Online". No bank statements have been produced for an account by that name. 2. On 5 October 2010, $350,000 was transferred from the BCEG Holding Account to the BCEG Operating Account, from which $358,383.60 was immediately transferred to BCEG (Australia)'s account in further part-payment of its invoice BA00014. On 6 October 2010, $350,000 was withdrawn from BCEG (Australia)'s account on presentation of a cheque "000180". The payee is not known. 3. The same pattern is observed on 15 October 2010, when $140,000 was transferred from the BCEG Holding Account to the BCEG Operating Account from which $67,650 was transferred to BCEG (Australia)'s account in final payment of its invoice BA00014. The same day, $70,000 was transferred from BCEG (Australia)'s account to "BCEG Online sav", in respect of which no bank statements have been produced. 1. The funds transferred from BCEG to BCEG (Australia) in these transactions totalled $708,843.84. According to a loan application completed by Mr Xiao and Ms Chen five months' later, they purchased an apartment in the Rocks on 23 October 2010 for $6,399,000. If the deposit on exchange was the customary 10%, then funds transferred in these transactions would have covered that amount. It was suggested to Mr Xiao that these funds were paid out at his direction, or by his wife, to fund the purchase of the apartment: Mr Xiao said he had "no knowledge". 2. The same pattern of funds transfers described at [122] occurred on 29 October 2010, resulting in $270,233.11 being deposited to BCEG (Australia)'s account in part-payment of invoice BA00015 and $280,000 transferred out of the account the same day into an account described as "BCEG Aus Online" in respect of which no bank statements have been produced. The same pattern occurred on 5 November 2010, resulting in $302,186.26 being deposited to BCEG (Australia)'s account in final payment of invoice BA00015 and $300,000 transferred out of the account the same day into an account described as "BCEG Online sav" in respect of which no bank statements have been produced. 3. In total, by the transfers described at [122] and [124], some $1.28 million of the funds advanced to BCEG for the Varsity Lakes project were transferred to BCEG (Australia) and onwards to accounts unknown. The absence of any bank statement evidencing where the funds were paid is significant. There are bank statements for 17 bank accounts in evidence for the months of October and November 2010 – in the names of BCEG, BCEG (Australia), Interlink Laboratory, Trojjan, Mr Xiao and Ms Chen, West Wyalong Marketplace and CX Partners – none of which contained entries which correspond with the transfers from BCEG (Australia)'s account. 4. By rendering such invoices at the time of the first drawdown, BCEG (Australia) may have sought reimbursement of expenditure on the Varsity Lakes project, for which finance had now been obtained. (The position is further confused by additional invoices rendered by BCEG (Australia) and BCEG – ostensibly in September and October 2010 but more likely after March 2011 – described at [157]-[158].) However, this was done without the knowledge or agreement of Mr Ma, Qing Yang or Ms Dong. Mr Yang's signature on the invoices was not his. More importantly, there is no evidence that BCEG (Australia) had expended $1.28 million on the Varsity Lakes project for which it ought be reimbursed nor, for that matter, on BCEG (Australia): see [58]-[67]. It may be that BCEG (Australia) was entitled to seek a portion of the $1.28 million from BCEG, but what portion is unknown and unlikely to be in the order of $1.28 million. Using Varsity Lakes facility to pay for West Wyalong 1. Steps were also taken to use the funds advanced to BCEG for the Varsity Lakes project to pay for the West Wyalong project. On 19 October 2010, Trojjan issued two invoices, both numbered TR0010 and for the same amount, being $415,737.26. There were two differences between the invoices: 1. One invoice was issued to West Wyalong Marketplace and entitled "Stage 1 Payment for September 2010 (According to Cash Flow)". The invoice contained a detailed description of works undertaken and corresponding line items. 2. The other invoice was addressed to BCEG and entitled "Expenses for Varsity Lakes Hospital end September 2010". The invoice simply described the works as "Earthwork Sep Expenses". This invoice was located by Ms Dong amongst BCEG China's records. 1. In evidence is a BCEG cheque requisition (10065) in respect of Trojjan invoice TR0010. The form is said to have been signed by Ms Chen, albeit her signature does not appear but only her typed name. The cheque requisition is described in the Commercial List Statement as "a transfer request to BCEG China", presumably based on the document's title; the particulars to the pleading, however, specifically identify the document. It was not suggested at trial that the document was sent to BCEG China but, rather, formed part of BCEG's records. Attached to the cheque requisition was the Trojjan invoice addressed to BCEG. On 19 October 2010, $415,000 was transferred from the BCEG Holding Account and deposited to the BCEG Operating Account, to which funds were transferred to Trojjan's bank account to pay the invoice in full. The payment of Trojjan invoice TR0010 in this matter was the first of 16 such payments. I will refer to these as the "West Wyalong payments". 2. Trojjan recorded payment of the invoice in its MYOB accounts. On 19 October 2010, a general journal entry was made, described as "take-up Sept. Constr. & development costs for SG 1". Presumably this was a reference to Stage 1. A debit was made to an asset account, "Other Debtors – WWMP loan". A credit was made to an income account, "Income-WWMP". The receipt was also recorded in the cash receipts journal, with the description "BCEGI-trf. Of funds to cover wyalong exp.". The accounting entry applied the funds to reduce an account "Other Debtors-WWMPloan". Clearly, finance obtained by BCEG for the Varsity Lakes project was used to pay costs in respect of the West Wyalong project. 3. The falsity of Trojjan invoice TR0010 addressed to BCEG is even clearer when it is known that no earthworks had then been conducted on the Varsity Lakes project. Rather, on 26 October 2010, Mr Piercy emailed Mr Xiao a proposed contract between BCEG and Trojjan to conduct earthworks at the site, with work to commence on 1 November 2010. Also attached were invoices for the first two monthly progress claims dated 30 October 2010 (numbered, again, TR0010, for $605,072.16) and 30 November 2010 (TR0011). On 28 October 2010, Mr Mariasson emailed Mr Xiao, copied to Ms Chen and Mr Piercy, attaching a revised invoice TR0010 for $542,471.39. (Although these draft Trojjan invoices for earthworks were emailed to Mr Xiao twice and his wife once, Mr Xiao denied that the documents were emailed to him and his wife: "It's first time I saw this invoice … I have no knowledge that paper you show me, first time see." Given Mr Xiao's role in approving contracts and invoices, and Ms Chen's role in paying invoices, I do not accept Mr Xiao's evidence.) Further, on 29 October 2010, BCEG invited Mr Ma to attend a ground breaking ceremony on the Varsity Lakes Private Hospital site, noting "The construction works with regards to the 1st stage works in earthworks will commence on site on the 30th November 2010". 4. Mr Xiao sought to explain this in his affidavit by saying that, in September 2010, BCEG had begun the earthworks on the Varsity Lakes project. Mr Piercy informed him that a contractor near the site was willing to take the landfill, "so Trojjan does not have to do earthworks this month, but so that we don't lose out on their margin, I'll have Trojjan submit an invoice for the budgeted amount for September." Mr Xiao's evidence is unlikely. First, it is apparent from the documents referred to at [130] that BCEG had not begun earthworks on the Varsity Lakes project in September 2010. Second, it was not until 23 November 2010 that the sub-contractor attending to bulk excavation at the Varsity Lakes site substantially reduced their price, having secured a suitable receiving arrangement for the excavated material. 5. Mr Xiao admitted that he caused the Trojjan invoice TR0010 which referred to the Varsity Lakes project to be generated and issued. Mr Xiao did accept that the invoice was, in fact, for the West Wyalong project, but said he made the representations in the invoice on the instructions of Qing Yang. Mr Xiao said that, in about October 2010, BCEG was having difficulties negotiating a contract with the hospital operator. Mr Xiao had numerous meetings at BCEG's China offices in Beijing with Mr Yang, Mr Ma, Ms Dong and Hu Lie, in which he told them of problems being experienced with Platinum Blue, such that the Varsity Lakes project was being delayed and would not be completed within the three years, "as we have yet to sign an operator for the hospital." Mr Xiao suggested that the funds for the project be used for other projects to recoup fees to meet the obligations to the Exim Bank and said he had another project in West Wyalong that could be used. Qing Yang apparently said, "I don't care what project you use the money for, as long as we make the same margin as the hospital and that payment is made." Mr Yang said he would need to show the West Wyalong works as expenses for the Varsity Lakes Hospital, given the terms of BCEG China's loan with the Exim Bank until the loan is repaid; BCEG China's accountant in BCEG's office could help with this. 6. Mr Xiao said he understood that BCEG China did not want Exim Bank knowing that any of the funds for the Varsity Lakes project were being used on any other project. Mr Xiao says he told Mr Piercy of this funding arrangement, and asked him to talk to the BCEG accountant and work it out. The invoicing and accounts in respect of the West Wyalong and Varsity Lakes projects was then handled by Mr Piercy and Ms Zhang. Mr Xiao said that he asked Mr Piercy to prepare the invoices issued by Trojjan to BCEG, "All invoice Trojjan been prepared by Paul Piercy". Mr Xiao denied that his wife prepared the invoices. Further, "That's not my job to know who prepare the invoice. My job is approve." 7. Whilst Mr Xiao was prepared to accept that Trojjan invoices concerning the Varsity Lakes project in fact were for the West Wyalong project, he denied all knowledge of matching Trojjan invoices addressed to West Wyalong Marketplace. When shown Trojjan invoice TR0010 addressed to West Wyalong Marketplace, Mr Xiao said this was the first time he had seen it and "I deny it". As to how Mr Xiao identified which Trojjan invoices in respect of the Varsity Lakes project, in fact, related to the West Wyalong project, Mr Xiao said he instructed Mr Piercy to bill West Wyalong expenses to BCEG as earthworks. "So, other than earthwork all the rest of the invoice[s] is the hospital." This demarcation between the invoices is not referred to in Mr Xiao's affidavits and, as will be seen, several of the false invoices did not refer to earthworks at all. Mr Xiao also said that, if he had approved an invoice or it came from BCEG's files, then it was real; if the invoice came from somewhere else, "people fraud". 8. Mr Xiao's version of events is potentially corroborated by an email sent later on 19 October 2010 from Eunson Yang to Mr Piercy. Mr Yang introduced himself as a colleague from the Beijing office and advised that there was a meeting at the Beijing office with Mr Xiao, "Mr Xiao wants me pay more attention to the project West [W]yalong and Maitland and let me contact you to ask for some information of the two projects." (Emphasis in original.) However, Mr Yang explained that he sent this email because he had been working at Beijing Dragon whilst completing further study. He had decided to move to Australia. Either Mr Xiao or Mr Riske instructed him to send the email to learn about construction and project management in Australia before moving here. That is, the email does not reflect a change in direction to the West Wyalong project with the agreement of BCEG China. 9. There is a substantial body of evidence which contradicts Mr Xiao's version of events. First, there is no contemporaneous evidence that problems were then being experienced with Platinum Blue such that a new operator was needed for the hospital. Rather, it will be recalled that heads of agreement were executed with Platinum Blue in March 2010: see [48]. (Mr Xiao denied having seen the heads of agreement – "first time I see this letter" – although did agree that he was a director of Interlink Laboratory and very interested in the arrangements being put into place with the operator, Platinum Blue.) Further, in July 2010, an Agreement for Lease was executed by Platinum Blue: see [75]. However, Mr Xiao said that, after entry into the Agreement for Lease, the operator suddenly disappeared. At odds with this suggestion, from 8 to 12 March 2011, Mr Xiao hosted a visit with representatives of Exim Bank, which included a meeting with Platinum Blue, described in the agenda as "The Operator", on 9 March 2011. 10. The first sign of trouble with Platinum Blue, as recorded in the contemporaneous documents, is January 2012: see [161]. Nonetheless, Mr Xiao insisted "I did tell them we fail because at that time I already realise Platinum Blue is not the operator can achieve this goal for the hospital, which I'm correct, if we follow the Platinum Blue, BCEG or Interlink will go bankrupt." Mr Xiao did not accept that there was no delay in commencing the earthworks on the hospital by reason of any failure to sign an operator for the hospital, or that the earthworks had always been planned to commence in November 2010. 11. Second, Mr Ma denied discussing, agreeing, or approving the use of money advanced for the Varsity Lakes project on the West Wyalong project or any other project. Mr Ma said he had never heard of any delay with the Varsity Lakes project, "Xiao Yu had always been saying there were no problems. … What I heard was that there was no problem. If I heard that there were problems I would definitely go ahead and investigate. … From my memory the progress of the hospital project had been smooth." Further, Mr Ma would not have agreed to the facility for the Varsity Lakes project being used on another project "because according to our company charter the funding for a project can definitely not be used … for other projects. … And also that's against our regulation, namely using the funding for other projects before the designated project is completed." 12. Third, Qing Yang does not recall a meeting as described by Mr Xiao and denies the words attributed to him. Mr Yang denied that Mr Xiao said anything like the words described in his affidavit "and we wouldn't agree to something like that either. … It's impossible for me to say that, because the funding from the bank is allocated for special purposes. So, it cannot be used for other projects. So, it's impossible for me to say that." Qing Yang said that, in his experience, Exim Bank had a very strict management system to secure the proceeds for a specific project and he knew the money could not be used on other projects. He did not approve the use of funds under the facility for the Varsity Lakes project to be used on another project, nor did he have authority to do so. 13. Fourth, Ms Dong said, "I do remember Mr Xiao was continually introducing us new project[s] that our company might be interested in, but th[ere] was nothing in relation to … the delay of the hospital project." Ms Dong did not know that the invoices in question related to the West Wyalong project. Ms Dong was unaware that any funds from the loan facility for the Varsity Lakes project were used for the benefit of the West Wyalong project. 14. Fifth, Mr Piercy denied agreeing to render Trojjan invoices in respect of the West Wyalong project to the Varsity Lakes project, adding "we do not invoice". Mr Piercy said he understood the West Wyalong Project was solely owned by Mr Xiao and had nothing to do with BC[E]G, "we always got told that. Like, BC[E]G didn't fund it." Mr Piercy said that Mr Xiao told him how he was funding the West Wyalong project himself, "I don't ask personal [questions] as long as they are paying the bills." Mr Piercy denied knowledge that BCEG was funding the West Wyalong project, "all I know is the bills were getting paid." 15. I am comfortably satisfied that Mr Xiao and Ms Chen were the architects of the arrangement to render Trojjan invoices to BCEG in respect of the Varsity Lakes project when, in fact, the amounts related to the West Wyalong project, in which BCEG had no interest and of which BCEG China had no knowledge: see further at [350]. 16. The second West Wyalong payment occurred in November 2010. On 1 November 2010, $100,000 was transferred from the BCEG Holding Account to the BCEG Operating Account, from which the funds were transferred to Trojjan's bank account, with the description "BCEGI Inv Oct2010". On 8 November 2010, Trojjan issued two invoices numbered TR0011: one to West Wyalong Marketplace and the other to BCEG. As before, the former invoice was itemised and detailed, seeking payment for Stage 1 of the West Wyalong project for October 2010 in accordance with the cashflow, whilst the latter sought expenses for the Varsity Lakes project for earthworks for October 2010. The invoices sought payment of the same amount, being $548,639.95. Only the latter invoice was amongst BCEG China's records. 17. On 8 November 2010, a BCEG cheque requisition was prepared (10087), on which Ms Chen's name appears. The form noted that $100,000 had already been paid on 1 November 2010. Attached to the cheque requisition form was the version of the Trojjan invoice addressed to BCEG. Of the Trojjan invoice addressed to West Wyalong Marketplace, Mr Xiao said, "First time I've seen this". On 9 November 2010, BCEG paid the balance of Trojjan's invoice TR0011. The funds followed the same pathway earlier described in respect of the $100,000. 18. The manner in which the payment was recorded in Trojjan's MYOB accounts is significant. On 9 November 2010, a general journal entry was made with the description "Oct.dev.& constr. costs incurred for WWMP Stage 1". The asset account "Other debtors – WWMP loan" was increased by the amount of the invoice and income for West Wyalong Marketplace was also recognised. The two payments, being the $100,000 received on 1 November 2010 and the balance of the invoice were recorded in the cash receipts journal. It is clear from these documents that the funds advanced to BCEG to be used in the Varsity Lakes project were being used to pay the costs of the West Wyalong project. 19. Mr Xiao agreed that he caused the invoice TR0011 to be issued and knew that, although it referred to the Varsity Lakes project, it was for the West Wyalong project. He intended the invoice to be sent to BCEG China. However, he did not accept that the invoice contained a false representation given his discussion with Mr Yang. Mr Xiao denied causing the invoice to be prepared in order to conceal the existence of the West Wyalong project from the Exim Bank, even though he suggested in his affidavit that Mr Yang had told him to prepare the invoice in this way for that reason. I do not accept Mr Xiao's explanation for his actions. 20. The third West Wyalong payment occurred in December 2010. On 14 December 2010, Trojjan issued two invoices numbered TR0013, one addressed to West Wyalong Marketplace and the other addressed to BCEG. Both were in the same amount, being $210,966.47. The former was in respect of the West Wyalong project; the latter was in respect of the Varsity Lakes project. The latter invoice appears in BCEG China's records. The latter invoice was attached to a BCEG cheque requisition (10147), on which Ms Chen's name also appeared. The invoice was paid on 15 December 2010. In Trojjan's cash receipt journal, the receipt was described as "BCEGI payt. of Wyalong exp." A general journal entry was also made the same day, in the manner earlier described, with a description "Nov.recoverable costs for WWMP SG 1". Again, funds obtained by BCEG to be used in the Varsity Lakes project were used for the West Wyalong project. Mr Xiao agreed that he made this invoice happen, then said he asked Mr Piercy to prepare the invoice, "All invoice Trojjan been prepared by Paul Piercy" then said he instructed Ms Zhang to do so, then said he prepared the invoice in this manner on the instructions of Mr Yang. 21. The fourth West Wyalong payment occurred in January 2011. On 10 January 2011, Trojjan issued invoice TR0015. Following a pattern now familiar, BCEG issued two invoices numbered TR0015: one issued to West Wyalong Marketplace in respect of the West Wyalong project and another issued to BCEG in respect of the Varsity Lakes project, both being for the same amount of $92,122.83. The invoice addressed to BCEG was located in BCEG China's records. A BCEG cheque requisition (11008) attached the invoice addressed to BCEG. This time, the cheque requisition form was signed by Ms Chen. Funds were transferred, following the pattern earlier described. Trojjan received funds advanced to BCEG in respect of the Varsity Lakes project but used to pay expenses in relation to the West Wyalong project. The general journal entry made in Trojjan's MYOB accounts on 31 December 2010 in respect of the transaction contained the description "Dec.constr. costs rec. 4. WWMP SG1". The accounting treatment was otherwise as already described. 22. In evidence is a Trojjan spreadsheet dated 6 January 2011, apparently finalising the payment claim for the West Wyalong project which became TR0015. The spreadsheet lists each of the sub-contractors, their state of progress and progress claims. The total, including GST, generated by the spreadsheet was $74,760.75. The spreadsheet bears extensive handwritten notes, including (in respect of the total) "Yanying's fig[ure] is 92122.83". The handwritten note indicates that Ms Chen was involved in preparing Trojjan's monthly payment claim for the West Wyalong project. Of this, Mr Xiao said it was the first time that he had seen the spreadsheet and he did not recognise the handwriting as that of his wife. At least the latter proposition seems correct. 23. Importantly, on 10 March 2011, Ms Chen emailed Mr Piercy TR0015 (addressed to West Wyalong Marketplace) and another (legitimate) Trojjan invoice TR0016, addressed to BCEG. Ms Chen stated: (emphasis added) Please look attached invoices I did for Trojjan for BCEG International. Whilst both invoices were legitimate, the fact that Ms Chen was preparing Trojjan invoices to West Wyalong Marketplace, on the one hand, while also processing cheque requisitions for Trojjan invoices to BCEG in respect of the same amounts but ostensibly for the Varsity Lakes project, points to Ms Chen apprehending the falsity of her actions. Ms Chen sent a similar email on 7 September 2011 and was copied on another such email on 20 September 2011. The email is also inconsistent with Mr Xiao's evidence that such invoices were prepared by Mr Piercy. When asked about his wife's email, Mr Xiao said, after Mr Piercy set out the form in November 2010, "since then everyone follow the West Wyalong bill [of] earthwork[s] to BCEG." 1. The fifth West Wyalong payment occurred in February 2011. On 9 February 2011, Trojjan rendered invoice TR0018 to BCEG in respect of Varsity Lakes for $362,499.96 and another invoice TR0018 for the same amount to West Wyalong Marketplace in respect of the West Wyalong project. Of this invoice, Mr Xiao said in cross-examination, "First time I've seen". Only the invoice rendered to BCEG is amongst BCEG China's records. The BCEG cheque requisition (11065) was signed by Ms Chen and Ms Zhang. Trojjan invoice TR0018 addressed to BCEG was attached to the cheque requisition form. 2. As this was the first time that Ms Zhang was involved in approving such an invoice, it is timely to consider her evidence on the subject. Ms Zhang said the only projects which she understood that BCEG was undertaking while she was in Australia were the Varsity Lakes and Wagga projects. Ms Zhang said, "I did not participate in the preparation of any invoice for the Trojjan company and I did not participate in preparation of any invoice together with Mr Paul Piercy." Whilst Ms Zhang signed many of the cheque requisitions, the forms and accompanying documents were prepared by Ms Chen and Mr Oconer, with whom Ms Chen worked closely. Ms Chen approved the documents before providing them to Ms Zhang and, for the most part, Ms Chen had already signed the cheque requisition form. Ms Zhang was often asked to sign the cheque requisition forms after the transfers had already been made. Ms Zhang knew that the transfers had been made as she was given a copy of the bank transfer receipt generated by the bank after the payment. 3. Ms Zhang said she followed Ms Chen's instructions to sign the cheque requisition forms but did not approve invoices prior to being provided with the cheque requisition bundles which included the invoices. Ms Zhang checked that the amounts in the invoices matched the amount recorded for payment but was not provided with any materials underlying the costs claimed in the Trojjan invoices and was not aware that the invoices included costs attributed to the West Wyalong project. Had she been aware that this was occurring, Ms Zhang said she would have reported it to BCEG China and sought instructions as to whether this was permissible. Ms Zhang said, "I didn't know whether [the payments] were proper". 4. This was also the first time that there was any delay between the cheque requisition and the transfer of funds. On 23 February 2010, more than two weeks after the invoice was rendered, funds were transferred from the BCEG Holding Account to the BCEG Operating Account, from which funds were transferred to Trojjan's account in payment of the invoice on the same day. A general journal entry was made in Trojjan's MYOB accounts on 23 February 2011, describing the transaction as "jan.constr. costs rec.fro WWMP SG-1". The accounting treatment was as previously described. It may be that Ms Zhang was not as ineffective as she thinks: her arrival at BCEG's offices does appear to have resulted in delays between the issue of a false invoice and its payment and, as will be seen, also a change in the process so that, instead of a genuine and a false invoice being issued, only a false invoice was issued. Ms Zhang appears to have interrupted the process that had been underway before her arrival, but did not stop the process. 5. On 10 February 2011, Qing Yang arrived in Australia. Mr Yang and Mr Xiao executed a lease on behalf of BCEG for new premises in Market Street, Sydney, to commence on 1 March 2011. On 1 March 2011, ASIC's records were updated to record that the principal place of business for BCEG was now the Market Street premises. 6. On 3 March 2011, Mr Riske emailed Mr Xiao and Mr Piercy an amended contract between BCEG and Trojjan for the Varsity Lakes project "for Costs Plus 5%". Mr Piercy forwarded the proposed contract to site supervisor, Jamie Hubbard, "Cost+5% CONSTRUCTION CONTRACT INSTEAD OF A LUMP SUM CONTRACT". As executed, the Conditions of Contract was dated 15 November 2010 but clearly post-dated 1 March 2011, as it referred to the Market Street address. The contract was executed by Mr Xiao and Mr Piercy. Unlike the Conditions of Contract dated 15 May 2010 (see [74]), the contract price was not a fixed lump sum of some $35 million; the construction fee was specified as 5% on all construction costs associated with the works. Mr Piercy said that this was the contract under which Trojjan performed the works. 7. Some time after moving to the new premises, two invoices were rendered by BCEG to Interlink Laboratory with the same invoice numbers and amounts as BA00014 and BA00015. First, an invoice was rendered by BCEG to Interlink Laboratory dated 30 September 2010 (BA00014). The invoice is unlikely to have been rendered on the date it bears as the footer to the invoice gives the Market Street, Sydney address, to which BCEG did not move until six months later in March 2011. The amount of the invoice is identical to an invoice bearing the same number rendered by BCEG (Australia) to BCEG, apparently on 30 September 2010 and part-paid from the first drawdown and likely used to pay a deposit on an apartment in the Rocks apartment: see [119]-[123]. The invoice noted "cost paid thru loan a/c". 8. On (ostensibly) 5 October 2010, BCEG rendered invoice BA00015 to Interlink Laboratory, which broadly corresponded with the invoice earlier rendered by BCEG (Australia) to BCEG on 3 September 2010. Again, the invoice footer refers to an office address at which BCEG did not then occupy. The invoice noted "cost paid thru loan a/c". It appears that the invoices were more in the nature of a receipt, recording transfers which had already taken place. As I read it, BCEG, having paid BCEG (Australia), was now seeking to recover these costs from Interlink Laboratory, or at least add these costs to the cost of the project. 9. The sixth and seventh West Wyalong payments occurred in March 2011. On 3 March 2011, Trojjan rendered invoice TR0019 to BCEG in respect of the Varsity Lakes project for $323,692.02. Another TR0019 invoice was rendered to West Wyalong Marketplace for the same amount. The invoice addressed to BCEG was attached to a cheque requisition form (11082), signed by Ms Chen and Ms Zhang. It is that invoice which is amongst BCEG China's records. The same day, BCEG part-paid the invoice by transferring $50,000 to Trojjan's bank account, following the pathway earlier described. A general journal entry was made in Trojjan's MYOB accounts on 3 March 2011, described as "feb.2011 constr.costs rec.forWWMP SG=1". The accounting treatment was as earlier described. On 10 March 2011, the balance of TR0019 was paid in the same manner. 10. On 31 March 2011, a BCEG cheque requisition (11145) was signed by Ms Chen and Ms Zhang in respect of Trojjan invoice TR0022 (curiously dated 12 April 2011) for earthworks at Varsity Lakes for March 2011 in the sum of $163,980.44. There is no copy of a Trojjan invoice TR0022 issued to West Wyalong Marketplace. However, the manner in which the receipt was treated in Trojjan's MYOB records indicates that the invoice related to the West Wyalong project. On 15 April 2011, a general journal entry was made in Trojjan's MYOB records, recognising this sale as income on the West Wyalong Marketplace project, with the description "Recoverable constr. costs rec. for WWMP-SG1". Interestingly, the cheque requisition was not processed for some time. On 20 April 2011, Mr Ma and Ms Dong arrived in Australia, departing two days later. On 28 April 2011, the invoice was paid following the same patterns as earlier described, and accounted for in the usual manner. This was, to that point, the longest delay between a cheque requisition and payment; perhaps payment was delayed until after BCEG China's representatives had gone. 11. Problems were then being experienced with the proposed operator of the Varsity Lakes hospital, Platinum Blue. On 26 November 2010, Interlink Laboratory advised Platinum Blue that site establishment had been commenced and requested the second instalment of the security deposit. (Of this letter, Mr Xiao said, "First time I've seen this document".) On 29 April 2011, Interlink Laboratory terminated the Agreement for Lease as payment of the second instalment of the security deposit had not been received. Mr Xiao denied that it was plain from this letter that there was a hospital operator in place until the agreement was terminated. 12. The eighth West Wyalong payment occurred in May 2011. On 27 May 2011, Trojjan rendered invoice TR0024 to BCEG in respect of the Varsity Lakes project for "Earthwork Apr 2011 Expenses" in the sum of $185,088.05. This invoice was amongst BCEG China's records. A cheque requisition was prepared (11211), signed by Ms Chen and Ms Zhang. On 27 May 2011, a general journal entry was made in Trojjan's MYOB accounts, recording income in respect of West Wyalong Marketplace and describing the transaction as "take-up recoverable costs for WWMP-SG1". On 30 May 2011, the invoice was paid in the same flow of funds as earlier described. Again, funds advanced to BCEG for the Varsity Lakes project were being used for the West Wyalong project, in which BCEG had no interest. 13. The ninth and tenth West Wyalong payments occurred in June 2011. On 24 June 2011, Trojjan issued an invoice TR0026 to BCEG for Varsity Lakes, being earthworks for May 2011, in the sum of $204,252.43. Trojjan also issued another invoice TR0026 addressed to West Wyalong Marketplace, in the same amount. A cheque requisition was prepared (11253), and signed by Ms Chen and Ms Zhang. The Trojjan invoice addressed to BCEG was attached to the cheque requisition and was located in BCEG China's records. The invoice was paid the same day, using funds advanced to BCEG in respect of the Varsity Lakes project, as earlier described. The general journal entry made in Trojjan's MYOB accounts describe the transaction as "take-up recoverable costs for May 2011", recognising the income in respect of the West Wyalong project. The cash receipts journal recorded the payment as "trf.funds to cover WWMP exp." 14. On 30 June 2011, Trojjan rendered invoice TR0030 to BCEG, for earthwork expenses for Varsity Lakes in the amount of $93,508.68. Another invoice TR0030 was rendered to West Wyalong Marketplace, in the same amount. A cheque requisition was prepared (11289), signed by Ms Chen and Ms Zhang, attaching the version of the invoice addressed to BCEG, which is also located in BCEG China's records. In Trojjan's MYOB accounts, a general journal entry was made on 30 June 2011 recognising income in respect of the West Wyalong project, with the description "recoverable charges fr. WWMP for June 2011". On 8 August 2011, the invoice was paid in the usual manner. Second drawdown 1. Tab 4 of the black folder, according to the table of contents, contains "2nd Bank drawdown" material, which included a construction program for the Varsity Lakes project, the BCEG spreadsheet and Trojjan invoices to BCEG numbered from VLPH-010 (for February 2011) to VLPH-015 (for July 2011). A handwritten note on the first of these invoices, "10% less sheet to allow for GST", reflects the fact that these invoices aligned with the BCEG spreadsheet. Ms Exner found that none of the "VLPH" invoices were recorded in Trojjan's MYOB records, nor has she identified any receipts in respect of these invoices in Trojjan's MYOB records nor payment of these invoices in BCEG's bank statements. As such, it would appear that these invoices were prepared by Trojjan to accompany the drawdown request but were not treated as sales, nor paid by BCEG as true invoices. 2. The "VLPH" invoices were not amongst BCEG China's surviving records. What is in BCEG China's records, however, is the drawdown request entitled "Expenditure Schedule Format" dated 24 May 2011. The document refers to the loan agreement of 25 August 2010 (see [114]) and sets out "the expenditure schedule for this drawing of the loan, based on the arrangement of our company." There follows a table listing sub-contractors, the amount to be paid to each sub-contractor and the payment date, being "The second lending to 31 August 2011". The total payments to the sub-contractors totalled $6,399,852,38. Amongst the sub-contractors were Concrete Systems Australia ($243,600), AJA Electrical ($220,167) and Action Formwork ($1,368,822). 3. In June 2011, Ms Dong sent an email to Mr Xiao with various questions about the costings of sub-contractors. On 9 June 2010, Mr Piercy replied, copied to Mr Xiao, attaching contracts with consultants and sub-contractors as requested. Mr Piercy suggested that, if Ms Dong had any questions, she should not hesitate to contact Mr Xiao or himself. Of this email, Mr Xiao denied all knowledge, even though he was the recipient of the first email and copied on the second email. I do not accept Mr Xiao's evidence in this regard. It is unsurprising that queries arising from the second drawdown request would involve Mr Xiao, as the director in charge of BCEG's operations. 4. This was the only time that Mr Piercy communicated directly with Ms Dong. The attached sub-contracts were legitimate, including sub-contracts with Concrete Systems of 23 March 2010 for $348,000, with AJA Electrical of 28 March 2011 for $39,985 and Reid Plumbing of 30 March 2010 for $178,620. An exception may be the contract with Action Formwork of 9 May 2011 for $2,073,800, although I have concluded it was likely legitimate: see [182]. A table summarising the anticipated expenditure for August 2011 was also provided, together with the pro-forma sub-contracts for both Trojjan and BCEG. 5. On 22 June 2011, a further Expenditure Schedule Format document was prepared for Exim Bank, which proposed a smaller figure for sub-contractors of $4,386,494.65. The same sub-contractors were included, but for smaller amounts. The second drawdown of funds arrived on 12 July 2011, of US$4 million (less minor processing fees). Diversion of second drawdown 1. On 6 May 2011, CX & DN Holdings, as trustee for Interlink Wagga Central Unit Trust, exchanged contracts to buy a development site in Wagga for $6.5 million. Completion of the purchase was to take place on 17 June 2011. According to accounts presented by the receivers and managers of the vendors, completion of the purchase took place on 15 July 2011, with finance provided by National Australia Bank to CX & DN Holdings. 2. A bank statement for CX & DN Holdings (National Australia Bank account ending 5717) records the funds used to pay for the Wagga land. Of some $5.2 million paid on completion, $2.05 million came from BCEG: 1. $1,850,000 came from a Westpac BCEG account ending 7415; 2. a further $200,000 came from the same Westpac BCEG account, with the deposit described in the CX & DN Holdings NAB bank statement as a loan from BCEG. 1. Ms Dong, who only became aware of these payments during the course of these proceedings, reviewed BCEG's accounting records and said that these funds have not been repaid to BCEG. 2. Mr Xiao explained his actions by saying that Qing Yang had told him, "You can use monies from BCEG to offset the monies which you previously transferred to BCEG (Australia) to fund that company." Qing Yang denied the conversation; rather, the first time Mr Yang became aware that Mr Xiao had used BCEG funds to finance the purchase of the Wagga land was during the course of these proceedings. 3. The defendants did not disclose that BCEG's funds had been used to purchase the Wagga land. When funding was later sought from the Exim Bank for construction, a report prepared by BCEG represented that the funds to buy the land were "raised by the proprietor": see [263]. Mr Piercy understood that Mr Xiao owned the Wagga project and was funding the development, "I didn't know BC[E]G was involved in it." Mr Piercy said he was always told that BCEG had nothing to do with the Wagga project, "Yu Xiao, he told me straight. … He was funding it. He owned it and he was funding it." 4. I prefer Mr Yang's evidence to that of Mr Xiao. In addition, Mr Xiao's evidence is not supported by the description in the NAB bank statement in respect of the second payment of $200,000, described as a loan from BCEG. The fact that a BCEG report later represented that the funds to buy the Wagga land were "raised by the proprietor" indicates that the company was not aware that its funds had been used for that purpose. Further, any pre-BCEG funding provided by Mr Xiao and Ms Chen is of uncertain amount, may have been reimbursed in the first drawdown and was unlikely to be of sufficient quantum to warrant further reimbursement of $2.05 million. 5. On 29 September 2011, the fourth defendant, Interlink Wagga Central Pty Ltd was incorporated. Mr Xiao and Ms Chen are directors of the company. CX & DN Holdings is the sole shareholder. CX & DN Holdings transferred the Wagga land to Interlink Wagga Central. Sham sub-contracts 1. BCEG complains that the third and subsequent drawdown requests were supported by sham sub-contracts. The defendants appeared to accept that the sub-contracts were shams, but denied that Mr Xiao and Ms Chen knew this at the time or were involved in the preparation of the documents. Before turning to the extent of the defendants' involvement (to which I will return at [358]), the evidence in respect of the sham sub-contracts will be considered. 2. Trojjan used a standard Construction Sub-contract, a draft of which was amongst BCEG China's records (and provided by email from Mr Piercy to Ms Dong in June 2010: see [167]). The standard form was a 22 page document: the first page contained the essential details, being the date and the name of the sub-contractor; page 20 comprised a schedule with details of the works and price; page 22 was the execution page. Copies of sub-contracts appearing in the black folder and, more importantly, BCEG China's records, generally comprised only these select pages. The suggestion is that the last page was taken from a genuine sub-contract and added to new pages 1 and page 20, which contained false information. As will be seen, this became a licence to print money. Action Formwork 1. The black folder contains a copy of a Construction Sub-contract dated 9 May 2011 between Trojjan and Action Formwork Pty Ltd, signed by Mr Piercy, being a lump sum contract for $2,073,800. Action Formwork appears in Trojjan's sub-contractor register contained in the black folder, behind Tab 1, described in the index as "Documents to China (Exim Bank) 25/03/2011, 19/05/2011", albeit the contract price is there listed as $1,983,800. The second drawdown request also referred to this sub-contractor: $1,368,822 was expected to be paid. This contract was provided by email to Ms Dong on 9 June 2011 by Mr Piercy, copied to Mr Xiao. 2. Scott Wood is a director of Action Formwork. He recalls that the company entered into a contract with Trojjan in relation to the Varsity Lakes project in 2011, but has not been able to locate a copy of the sub-contract. Mr Wood cannot confirm the value of the Construction Sub-contract between Trojjan and Action Formwork, nor confirm whether the contract in evidence is the contract that he signed. He can confirm, however, that Action Formwork did not carry out works to a value of $2,073,800. Rather, Trojjan terminated the services of his company at an early stage of the project. 3. Mr Wood described the company's MYOB accounting records and procedures and, having reviewed the MYOB records, said that Action Formwork received payment from Trojjan in the total amount of $144,303.51. Ms Exner said Trojjan paid $131,185 to Action Formwork in respect of the Varsity Lakes project. On 29 July 2011, Action Formwork rendered an invoice to Trojjan in respect of the Varsity Lakes project for $20,900. On 31 August 2011, Action Formwork rendered an invoice to Trojjan for $38,500 for the Varsity Lakes project. Mr Wood said these invoices are consistent with Action Formwork's MYOB records, reflecting 5% retention amounts withheld by Trojjan and paid out at a later date. 4. Having reviewed the documents provided to BCEG China and Exim Bank in respect of the second drawdown, I consider that the sub-contract with Action Formwork was genuine as it was submitted amongst a significant amount of material, none of which is said to have been false. Any falsity would arise from submitting the sub-contract in support of drawdown requests after Action Formwork's contract had been terminated, when it would not have been expected that further sums would be payable to this sub-contractor. Given the dates on which the retention monies were invoiced by Action Formwork – in August 2011 – this would suggest that the sub-contractor's work was then complete. This sub-contractor was not referred to in the third or subsequent drawdowns. Thus, I am not satisfied that the sub-contract was a sham, nor that it was provided after the sub-contract had been terminated. AJA Electrical 1. On 28 March 2011, Trojjan entered into a Construction Sub-contract with AJA Electrical Pty Ltd to supply works to the Varsity Lakes project for a lump sum of $39,985. The contract was signed by Mr Piercy. The sub-contract is in the black folder and BCEG China's records pre-dating the third drawdown. The contract was included in Trojjan's sub-contractor register of 23 March 2011, found in BCEG China's records. AJA Electrical is also included in the schedule of Trojjan's construction costing as at 15 March 2011 for sub-station work in the amount of $180,182. This costing is contained behind Tab 1 in the black folder, described in the index as "Documents to China (Exim Bank) 25/03/2011, 19/05/2011". The second drawdown request also referred to this sub-contractor: $220,167 was expected to be paid. 2. According to James Williams, a director of AJA Electrical since 1994, he believes that he signed this contract, although has been unable to locate any documents in relation to the Varsity Lakes project amongst AJA Electrical's surviving records. Mr Williams recalls that the scope of works was reduced and AJA Electrical was ultimately not paid the full amount of the contract but some $15,000. The works carried out consisted primarily of the supply and installation of external electrical conduits. According to Ms Exner, Trojjan's accounting records reveal that Trojjan paid AJA Electrical $19,130 in respect of the Varsity Lakes project. 3. The black folder also contains – behind an unlabelled divider – a Construction Sub-contract dated 27 May 2011 between Trojjan and AJA Electrical, apparently signed by Mr Piercy, for internal electrical works for the Varsity Lakes project in the lump sum of $405,000. This contract was not found amongst BCEG China's records. Mr Williams said he did not sign this sub-contract and first saw the document when approached by BCEG's solicitors in the course of these proceedings. Nor did AJA Electrical carry out the works described in the contract, "I would have certainly remembered performing works worth $405,000." 4. The black folder – and BCEG China's documents in respect of the third and fourth drawdowns – also include a contract between Trojjan and AJA Electrical dated 30 August 2011 for the lump sum of $2,087,300. The contract is apparently signed by Mr Piercy. Mr Williams said he did not sign this sub-contract and first saw the document when approached by BCEG's solicitors in the course of these proceedings. Nor did AJA Electrical carry out the works described in the contract, "I would have certainly remembered performing works worth $2,087,300". 5. It is clear that the sub-contracts with AJA Electrical of 27 May 2011 ($405,000) and 30 August 2011 ($2,087,300) were shams. C&C Fire Protection 1. On 25 October 2010, C&C Fire Protection provided a quotation to Trojjan in respect of the West Wyalong project for the installation of fire safety systems in the amount of $241,879. According to Ms Exner, Trojjan paid $220,790 to C&C Fire Protection in respect of West Wyalong Marketplace, but made no payments to this sub-contractor in respect of the Varsity Lake project. 2. In the black folder and BCEG China's records, there are five copies of a Construction Sub-contract between Trojjan and C&C Fire Protection dated 28 March 2011, by which the sub-contractor was to supply fire works for the Varsity Lakes project for a lump sum of $1,784,100 plus GST. More particularly, pages 1, 20 and 22 of the sub-contract, signed by Mr Piercy, were amongst the bundle of records provided in support of the third and fourth drawdowns. 3. Craig Przibella was part-owner of the business trading as C&C Fire Protection and has examined this sub-contract, which appears to have been signed by Todd Gunning, who previously worked for the business as a fitter. Mr Przibella is familiar with Mr Gunning's signature and said that the signature on the sub-contract does not look like Mr Gunning's signature. (Mr Przibella provided an example of Mr Gunning's signature on a document signed by him in July 2016.) 4. Further, Mr Przibella said that C&C Fire Protection did not carry out any works for Trojjan on the Varsity Lakes project. Whilst the business did submit a quotation for works relating to an automatic fire sprinkler system, for a value of $416,680, C&C Fire Protection did not proceed to perform the works. Mr Przibella decided not to enter into a contract with Trojjan as he had concerns that the business would not be paid for the works in a timely manner. C&C Fire Protection had done work for Trojjan on the West Wyalong project and monies were, and continue to remain, outstanding in relation to the project. (In October 2014, C&C Fire Protection rendered a statement to Trojjan noting that it was then owed $13,083.95.) C&C Fire Protection also did not have the licences required to complete the works in Queensland and would have had to invest funds to obtain the necessary licence before it could have taken on the project. 5. The sub-contract with C&C Fire Protection dated 28 March 2011 in the sum of $1,784,100 was clearly a sham, both as to the amount of the contract and as to the suggestion that this sub-contractor had agreed to undertake works on the Varsity Lakes project, as opposed to the West Wyalong project. Concrete Systems Australia 1. On 23 March 2010, Trojjan entered into a Construction Sub-contract with Concrete Systems Australia Pty Ltd for the Varsity Lakes project, being a lump sum contract in the sum of $348,000 plus GST. The contract was signed by Mr Piercy for Trojjan. Two copies of this sub-contract are in the black folder and BCEG China's records. The lump sum figure is included in Trojjan's sub-contractor register for the Varsity Lakes project as at 23 March 2011, found in the black folder and in BCEG China's records. The second drawdown request referred to this sub-contractor: $243,600 was expected to be paid. 2. Jason Bonney is a director of Concrete Systems. He agrees that the company signed this contract and recalls it well as the value of the contract was of a magnitude that was significant. He attended meetings with Trojjan and fellow director Darren Blundell to settle the contract. According to Ms Exner, who has examined Trojjan's accounting records, Trojjan paid Concrete Systems Australia $364,367 in respect of the Varsity Lakes project. 3. Also in evidence is a Construction Sub-contract between Trojjan and Concrete Systems Australia dated 23 March 2010, but for a lump sum of $4,352,650 plus GST. Again, the contract was signed by Mr Piercy for Trojjan. Five copies of this sub-contract or, more precisely, pages 1, page 20 and page 22 only, are in the black folder and BCEG China's records, amongst documents provided in respect of the third and fourth drawdowns. 4. Mr Bonney disavows the signature of this contract as by his fellow director, Mr Blundell. Such a contract was not discussed at any meetings he attended with Trojjan in relation to Varsity Lakes projects and, given the significant value of the second sub-contract, Mr Bonney said he would recall if Concrete Systems had been contracted by Trojjan to perform works for that sum. Nor is there any copy of such a contract in the books and records of Concrete Systems. Having regard to the unchallenged evidence of Mr Bonney and Ms Exner, I find that the sub-contract with Concrete Systems Australia dated 23 March 2010 for a lump sum of $4,352,650 was a sham. Fosters Joinery 1. The black folder contains a Construction Sub-contract between Trojjan and Fosters Joinery dated 16 May 2011, signed by Mr Piercy, for the sum of $619,000 for the Varsity Lakes project. A copy of this contract is not amongst BCEG China's surviving records. 2. David Foster is a director of Fosters Joinery. Mr Foster observed that the address of his company, as stated in the Construction Sub-contract, was 212 Urana Street, Mermaid Waters, Queensland. However, the company's place of business was then 212 Urana Street, Wagga Wagga. Mr Foster said he did not sign the sub-contract; the first time he saw it was when it was shown to him by BCEG's solicitors. This was also the first time he heard of the Varsity Lakes project. Mr Foster said that his company did not do any work for Trojjan on the Varsity Lakes project, nor submit a quotation referred to in the schedule to the sub-contract. 3. Mr Foster said that Fosters Joinery did do some work on the West Wyalong project. Foster Joinery's accounting records record payments from Trojjan on 17 February 2011 ($4,600) and 15 April 2011 ($8,998). According to Ms Exner, Trojjan's accounting records indicate that Trojjan paid Fosters Joinery $12,362 in respect of the West Wyalong project. 4. Obviously enough, the sub-contact with Fosters Joinery of 16 May 2011 in the sum of $619,000 is a sham, both as to amount and as to the suggestion that this sub-contractor was retained to provide services in relation to the Varsity Lakes project. Lafarge PlastaMasta 1. In the black folder are two Construction Sub-contracts both dated 21 April 2011 between Trojjan and Lafarge PlastaMasta, one for $392,500 and the other for $415,500, both in respect of the Varsity Lakes project. There is no copy of these contracts in the records of BCEG China. 2. Mr Piercy said that he did not enter into a contract with Lafarge PlastaMasta in the sum of $392,500 or $415,000. Whilst he agreed that the signatures on the last page of the sub-contract were his and Mark Fleming's, who owns PlastaMasta in Wagga, "That would be from the West Wyalong project, 'cause that's the only job he done … for me." Mr Piercy said that Lafarge PlastaMasta did not do any work on the Varsity Lakes project but did "a couple [of] hundred grand" on the West Wyalong project. Mr Piercy also said that the address of Mr Fleming's business was 2 Rabaul Place in Wagga, while the address on the sub-contract was 2 Rabaul Place, Mount Gravatt in Queensland. Mr Piercy was not challenged on this evidence in cross-examination. 3. According to Ms Exner, Trojjan paid $36,547 to Lafarge PlastaMasta in respect of the West Wyalong project. A further $51,338 was paid to Lafarge PlastaMasta in respect of a medical centre (likely also at West Wyalong, where fitout work was undertaken for a medical centre), but nothing was paid by Trojjan to this sub-contractor in respect of the Varsity Lakes project. 4. No witness was called on behalf of the sub-contractor. There are, however, some common features between these sub-contracts and other sham sub-contracts. First, the amounts paid by Trojjan to the sub-contractor are a fraction of the sums referred to in the sub-contracts. Second, the sub-contractor in question supplied services on the West Wyalong project but, apparently, not on the Varsity Lakes project. Third, as for some of the other sham sub-contracts, the sub-contractors' true address has been modified and re-used in the sham sub-contract. Taking these common features into account, together with the unchallenged evidence of Mr Piercy, I find that the two sub-contracts with Lafarge PlastaMasta dated 21 April 2011 ($392,500 and $415,500) were shams. Primat Glass 1. In the black folder and BCEG China's records in respect of the fourth drawdown is a Construction Sub-contract dated 3 February 2012 between Trojjan and Primat Glass Pty Ltd for a lump sum of $2,297,350. Of some concern, the contract in the black folder is the original document, signed by Mr Piercy. That said, only pages 1, 20 and 22 of the document are in the black folder; whether the execution page was attached to the contract containing the page with the lump sum of $2,297,350 is unclear. Certainly, it was not put to Mr Piercy in cross-examination that he executed any sham sub-contracts. 2. Andrew Priest was a director of Primat Glass and said the Australian Business Number on the Construction Sub-contract was not associated with the company. He did not sign the sub-contract and did not provide the quotation referred to in it. Primat Glass did not perform works in relation to the supply and installation of aluminium windows and doors, automatic sliding doors and louvres on the Varsity Lakes project. Rather, the approximate value of the works done was between $330,000 and $340,000. 3. According to Ms Exner, Trojjan paid $448,919 to Primat Glass, being $337,280 in respect of the Varsity Lakes project and a further $111,639 in respect of the West Wyalong project. Having regard to the unchallenged evidence of Mr Priest and Ms Exner, I find that the sub-contract with Primat Glass of 3 February 2012 in the sum of $2,297,350, was a sham. Reid Plumbing 1. On 30 March 2011, a Construction Sub-contract was executed between Trojjan and Reid Plumbing Pty Ltd in respect of the Varsity Lakes project for the lump sum of $178,620. The contract was signed by Mr Piercy. This contract appears in the black folder and BCEG China's records. Earl Reid is the sole director of Reid Plumbing and said that Reid Plumbing performed hydraulic works and civil stormwater works on the Varsity Lakes project; the schedule to this sub-contract is amongst Reid Plumbing's records. 2. Also in evidence is another version of this contract, where the contract sum is $3.95 million for hydraulic work and $2.605 million for roofing work. Extracts of this sub-contract (page 1, 20 and 22) appear in both the black folder and BCEG China's records in support of the third and fourth drawdowns. Mr Reid said there is no record of such a contract in Reid Plumbing's records; he has no recollection of signing the sub-contract and does not believe that he did so. 3. In the black folder and BCEG China's records for the third and fourth drawdown was a Construction Sub-contract dated 1 April 2011 between Trojjan and Reid Plumbing for a lump sum of $2,587,350, executed by Mr Piercy on behalf of Trojjan. Also in the black folder (but not BCEG China's records) is a further sub-contract with Reid Plumbing dated 4 April 2011 in the lump sum of $2,605,000. The black folder also contains two contracts between Trojjan and Reid Plumbing dated 19 May 2011, one for $635,000 and the other for $495,000, and both for the Varsity Lakes project. Mr Reid said there is no record of such contracts in Reid Plumbing's records; he has no recollection of signing the sub-contract and does not believe that he did so. 4. Amongst BCEG China's records is an unsigned contract between Trojjan and Reid Plumbing dated 11 May 2011, for a price of $134,580. The contract bears a handwritten note indicating that the contract was sent on 11 May 2011 but "still not be mailed back to Sydney office yet." Mr Reid said the schedule to such a contract is amongst Reid Plumbing's records. In addition, the company retains a Construction Sub-contract dated 18 February 2013 for an amount of $534,320 in respect of the Varsity Lakes project. Mr Reid said that the combined value of the three construction sub-contract of which Reid Plumbing has any records total $847,520, whilst the further sub-contracts of which the company has no record total almost $13 million. Mr Reid said, "$13 million is a significant sum and I would have recalled if Reid Plumbing had been contracted to perform works to that value." I accept Mr Reid's evidence which is, with respect, completely unsurprising. 5. In evidence are a large number of invoices, progress claims and statements rendered by Reid Plumbing in respect of the Varsity Lakes project. According to Ms Exner, Trojjan paid Reid Plumbing a total of $855,235 in respect of this project. Having regard to the unchallenged evidence of Mr Reid and Ms Exner, I find that the sub-contracts with Reid Plumbing of 30 March 2010 ($3.95 million for hydraulic work and $2.065 million for roofing work), 1 April 2011 ($2,587,359), 4 April 2011 ($2,605,000) and 19 May 2011 ($635,000 and $495,000) are sham sub-contracts. Riverina Terrazzo 1. In the black folder, but not apparently in the records retained by BCEG China, is a Construction Sub-contract dated 13 April 2011 between Trojjan and Riverina Terrazzo Pty Ltd for internal flooring of $390,000 plus GST. Nadine Gunning was a director of T&N Gunning Pty Ltd, trading as Riverina Terrazzo. Ms Gunning saw the sub-contract for the first time when shown by BCEG's solicitors in the course of these proceedings. Ms Gunning does not know of the entity Riverina Terrazzo Pty Ltd referred to in the sub-contract. Whilst the signature on the final page of the sub-contract appears to be her signature, Ms Gunning said she at no stage signed the sub-contract, nor recalls submitting the quotation referred to in it. Further, Riverina Terrazzo was located at 258 Hammond Avenue, Wagga Wagga whilst Riverina Terrazzo Pty Ltd is described in the sub-contract as having an address of 258 Hammond Avenue, Gold Coast, Queensland. Nor did Riverina Terrazzo perform "internal flooring works" as described in the contract. 2. Ms Gunning said she would not have permitted Riverina Terrazzo to accept a sub-contract valued at $390,000 as the business did not have the resources to handle such a large job. Ms Gunning said that Riverina Terrazzo supplied some tiles, glues and grout to Trojjan in relation to the West Wyalong project, totalling $15,742.20. Ms Gunning has located three orders amongst the company's records which appear to relate to the Varsity Lakes project and total $12,949 inclusive of GST. Riverina Terrazzo also supplied tiles for the Wagga project totalling $6,028. In evidence are a number of modest invoices rendered by Riverina Terrazzo, ranging from $22 to $6,523.55. According to Ms Exner, a total of $33,047 was paid by Trojjan or Trojjan Constructions to Riverina Terrazzo, all in relation to the Wagga project, albeit two of the order forms referred to the Varsity Lakes project. 3. Having regard to the unchallenged evidence of Ms Gunning and the contemporaneous business records, I find that the sub-contract with Riverina Terrazzo of 13 April 2011 in the sum of $390,000 was a sham. Somewhere Landscape 1. In the black folder is a Construction Sub-contract dated 4 May 2011 between Trojjan and Somewhere Landscape Architects for $1.51 million, signed by Mr Piercy. Pages 1, 20 and 22 are the only pages of the contract in the folder. This contract does not appear to have been located in BCEG China's records by Ms Dong. 2. Alexandra Dalglish is a director of Somewhere Landscape Architects and said she did not sign the sub-contract but first saw it, and heard of the Varsity Lakes project, from BCEG's solicitors. Ms Dalglish said Somewhere Landscape did not perform any works for Trojjan on the Varsity Lakes project nor submit a quotation referred to in the sub-contract and has never operated from the address stated in the Construction Sub-contract of Old Milong, Mapleton, Queensland. 3. Somewhere Landscape did provide a quote in relation to the Wagga project. On 11 June 2011, Somewhere Landscape provided a quote to Trojjan for landscape consultancy for the Wagga Mill redevelopment for $29,920. In evidence is the first page only of a contract between Trojjan and Somewhere Landscape dated 24 June 2011, signed by Mr Piercy. The page of the contract containing details of the price is not in evidence. Ms Dalglish said that she signed this contract. On 13 September 2011, BCEG wrote to Somewhere Landscape, advising that it had been appointed as head contractor for the Wagga Mill project and a new contract would be sent out, replacing the existing contract with Trojjan. A handwritten note records that a new contract was sent on 15 September 2011. Ms Dalglish agreed that the party with which Somewhere Landscape dealt in relation to the Wagga project changed several times and, ultimately BCEG terminated Somewhere Landscape's services. Somewhere Landscape was paid for landscape documentation for the development application only. 4. There is no record of any payments to this supplier in Trojjan's accounting records. Having regard to the unchallenged evidence of Ms Dalglish and the available contemporaneous documents, I find that the sub-contract dated 4 May 2011 with Somewhere Landscape Architects for $1.51 million was a sham. Third drawdown 1. BCEG China's records in respect of the third drawdown, and the documents in the black folder behind the divider labelled "3rd Bank drawdown (bring back by Yu Xiao)", contain essentially the same documents, including: 1. the BCEG Spreadsheet, still dated 24 January 2011; 2. a letter from BCEG dated 24 June 2011, signed by Mr Piercy providing a status report on the Varsity Lakes project; 3. Trojjan invoices issued to BCEG, numbered VLPH-016 to VLPH-022, for the months from August 2011 to February 2012 and containing a description of work done, and amounts claimed, together with a statement issued by Trojjan tallying the invoices (the amounts invoiced were higher than those in the BCEG Spreadsheet, with the exception of "concrete works", which was consistent); 4. a BCEG table, partially in English and partially in Chinese, listing sub-contractors and the contract price and claim amount, signed by Mr Piercy. The total of each of the items of work listed in Trojjan invoices VLPH-016 to VLPH-022 tallied with this table in respect of each trade. Amongst the sub-contractors listed in the table were Concrete Systems Australia ($4,352,560), Reid Plumbing (hydraulic works $3.95 million, mechanical works $2,587,350 and roofing $2.605 million), C&C Fire Protection ($1,784,100) and AJA Electrical ($2,087,300). 5. Copies of Construction Sub-contracts including with Reid Plumbing ($3.95 million for hydraulic work and $2.605 million for roofing work), AJA Electrical ($2,087,300), Reid Plumbing ($2,587,350), Concrete Systems Australia ($4,352,560) and C&C Fire Protection ($1,784,100). 1. Mr Xiao denied approving this information being sent to the bank or BCEG China. The description of this material in the table of contents to the black folder suggests otherwise, identifying these documents as "bring back by Yu Xiao". Mr Xiao also said he had no knowledge of the "VLPH" invoices but was readily able to explain the Trojjan statement containing each of the invoiced amounts. Despite his denials, Mr Xiao appeared familiar with the documents. 2. On 22 July 2011, a contract administrator at Trojjan, Queenie Zhong, sent two emails to Mr Xiao, copied to Mr Piercy, providing details in respect of the bank drawdown. The first email attached Mr Piercy's letter of 24 June 2011, Trojjan's invoices VLPH-016 to VLPH-018 and Trojjan's statement in respect of invoices from August 2011 to February 2012 totalling $8,587,220.94. In her second email, as translated by Mr Xiao, Ms Zhong wrote "That's the last drawdown information of the bank". 3. Attached to the second email was the BCEG spreadsheet, together with an attachment described as "Cost Summary up to Feb 2011". This attachment was a Trojjan schedule listing the cost of consultants and construction, including: Company Contract Price % completed up to Feb 2012 Concrete Systems Australia $4,352,650 100% Reid Plumbing $3,950,000 47% Mr Xiao denied seeing the Trojjan schedule, "That's a Paul Piercy job". 1. A copy of the Trojjan schedule is in BCEG China's records for the third drawdown, and it is thus likely that Mr Xiao approved the document being provided to BCEG China. It is also apparent that Ms Dong received and reviewed it. On 29 July 2011, Ms Dong sent an email to Mr Xiao requesting additional information: But there are a few concerns stated below: ... 2) In relation to sub-contracts, many of the sub-contractors were paid less than 50% in the last Payment Plan, but none of them appeared in this Payment Plan. Have their contracts all been terminated? 3) The sub-contract payments this time are all for new contracts which I have not seen before, and a total of 15 million will need to be paid before February. I think this amount seems to exceed way beyond the 6 million that we are going to apply for. You can think about reducing it appropriately. 1. Mr Xiao said Ms Dong's email was of no concern to him. "I don't have any concern. She just accountant. I'm a director. She's - at that time, she's just accounting manager." Mr Xiao passed the letter onto Mr Piercy and the project team. On 1 August 2011, Mr Xiao forwarded Ms Dong's email onto Ms Zhong, who forwarded the email to Eunson Yang. Mr Xiao said he did not check any of the information sent by his staff to Ms Dong, but simply instructed them to answer her requests. "I do not have interest anything Paul Piercy or Queenie sending information to Ms Dong … I … ask him to follow Ms Dong request. I don't need to be checking." Mr Xiao's evidence is inherently unlikely and I do not accept it. 2. On 9 August 2011, Ms Zhong sent an email to Ms Dong, copied to Mr Xiao and Mr Piercy, attaching the information requested, including "the Project Cost Summary requested by you and Director Xiao in the email". Attached was the Trojjan schedule as previously provided, together with the additional information, italicised below: Company Contract Price % completed up to Feb 2012 Concrete Systems Australia $4,352,650 100% Reid Plumbing $3,950,000 47% Reid Plumbing $2,587,350 47% Reid Plumbing $2,605,350 54% C & C Fire $1,784,100 47% AJA Electrical $2,087,300 47% Mr Xiao denied seeing the attached Trojjan schedule, "First time I see". 1. Ms Dong was not satisfied. On 9 August 2011, Ms Dong sent an email to Ms Zhong, copied to Mr Xiao, Mr Piercy and Qing Yang: (emphasis added) … I have a question for you. Last time when Mr. Xiao returned to China, he gave me the electronic copies of both the subcontracting contract and the consultancy contract, but the figures don't match in the subcontracting contract based on the cost summary you sent to me. Of these contracts, I don't have a copy of the C&C FIRE contract. None of the prices in the other 7 subcontracting contracts is the same as the amount in your spreadsheet. … I have looked through the contract of concrete systems Australia, which said it was a lump sum contract, and the contract amount was only more than three hundred thousand Australian dollars. But it was 1.45 million Australian dollars in your spreadsheet. 1. That is, Ms Dong had identified that the sub-contracts provided in support of the third drawdown request differed markedly from those provided in support of the second drawdown. Mr Xiao denied having given Ms Dong copies of the sub-contracts, as stated by Ms Dong in her email, although there is no reason to doubt Ms Dong's contemporaneous observation that he had done so. In any event, Ms Zhong forwarded the email to Mr Piercy, translating Ms Dong's question from Chinese into English and advising that Ms Dong wanted an explanation, "I will talk with you and Yu Xiao tomorrow." Clearly, the persons at BCEG with whom Ms Zhong was consulting in order to answer Ms Dong's queries were Mr Xiao and Mr Piercy. 2. On 5 September 2011 at 11.26 am, Ms Zhong sent an email to Mr Xiao and Mr Piercy attaching contracts requested by Ms Dong the previous week. Five minutes later, at 11.31 am, Ms Zhong sent an email to Xin (Tim) Chen: Could you please restrict everyone's access to the following linked folder, except Yu Xiao, Yanying and Paul (3 people only) Z:\BCEG (Aus)\Projects\8003 Varsity Lakes\19.0 Site Report\Documents sent to china\8. Varsity Lakes Contract 05092011 1. Mr Xiao denied any knowledge or awareness of this instruction. Whether Mr Xiao was aware of the instruction or not, it is significant that access to the sub-contracts was confined to three people only, being Mr Xiao, Ms Chen and Mr Piercy. This suggests that only these three people were centrally involved in the "Documents sent to china". The documents included sham sub-contracts. The persons included Ms Chen. 2. At 12.47 pm, Mr Piercy forwarded Ms Zhong's email to Mr Xiao again, that is, an hour later. Attached to the email was the Construction Sub-contracts between Trojjan and AJA Electrical of 30 August 2011 ($2,087,300), C&C Fire Protection of 28 March 2011 ($1,784,100), Concrete Systems Australia of 23 March 2011 ($4,352,650), Reid Plumbing of 30 March 2011 ($3.95 million for hydraulic work and $2.605 million for roofing work) and 1 April 2011 ($2,587,350). Also attached to the email was a BCEG drawdown request, listing the sub-contracts, signed by Mr Piercy. Mr Xiao denied receiving the email – which, it must be noted, was sent to him twice – and said he did not open the attachments and "did not have that knowledge". I do not accept his evidence. It is perfectly obvious that Mr Xiao was aware of the sham sub-contracts, which were sent to him on more than one occasion, together with the Trojjan schedule and BCEG drawdown requests, each of which summarised the contract price in the sham sub-contracts. Importantly, of the total construction costs now sought for this drawdown, being $7,132,105.78, some 73% ($5,206,894.30) was claimed in respect of sham sub-contracts. 3. At 12.55 pm, Ms Zhong sent an email to Mr Xiao, copied to Mr Piercy, attaching the BCEG spreadsheet. Mr Xiao said he did not recall receiving it and did not know what was in the attachment. I do not accept his evidence. The BCEG spreadsheet was a central document on which the drawdown requests and supporting invoices were based. 4. It will be recalled that, under special condition 6.4 of the Main Contract between Interlink Laboratory and BCEG in respect of the Varsity Lakes project, BCEG was to render monthly progress claims to Interlink Laboratory, to be assessed and certified for payment. BCEG China's records include BCEG forms entitled "Application and Certification for Payment" addressed to Interlink Laboratory, seeking payment for each month. (Mr Xiao denied any knowledge that these forms were being sent to BCEG China.) The 'Applications and Certifications for Payment' had Ms Chen's name in type and were often signed by her on behalf of Interlink Laboratory, accepting that the funds sought were payable. Mr Xiao denied that these forms were prepared by his wife, but said the forms were prepared by the BCEG accountant and reported to the BCEG China accountant. This seems unlikely where the certification was prepared in respect of Interlink Laboratory, with which the BCEG accountant and BCEG China accountant were not concerned. 5. It became apparent from these 'Applications and Certifications for Payment' that two sets of books were being maintained. Mr Xiao agreed – "The paper [l]ooks like" – but denied knowing this at the time. Mr Xiao also denied that his wife told him about the second set of books, "My wife is not accountant for bookkeeping. So if that's a document that exists it must be [the] BCEG accountant." The next day, Mr Xiao denied any knowledge "of the paper you show me of the duplication as you said". The two sets of books are summarised in the following table: Period Set One Set Two September 2011 Cumulative Sum: $12,183,863.94 Cumulative Sum: $12,183,863.94 New Amount: $1,555,415.68 New Amount: $493,258.68 October 2011 Cumulative Sum: $13,739,279.62 Cumulative Sum: $12,677,122.62 New Amount: $1,595,959.29 New Amount: $213,653.16 November 2011 Cumulative Sum: $15,335,238.90 Cumulative Sum: $12,890,775.78 New Amount: $1,707,545.46 New Amount: $91,959.88 December 2011 Cumulative Sum: $17,042,784.36 Cumulative Sum: $12,890,775.78 New Amount: $1,108,826.62 New Amount: $91,959.88 January 2012 Cumulative Sum: $18,151,610.99 Cumulative Sum: $12,982,735.66 New Amount: $1,058,868.19 New Amount: $199,583.09 February 2012 Cumulative Sum: $19,210,479.18 Cumulative Sum: $13,182,318.75 New Amount: $1,935,179.08 New Amount: $208,867.08 March 2012 Cumulative Sum: $21,145,658.26 Cumulative Sum: $13,391,185.83 New Amount: $441,282.95 New Amount: $1,295,655.08 April 2012 Cumulative Sum: $21,586,941.21 Cumulative Sum: $14,686,840.91 New Amount: $442,037.35 New Amount: $344,660.69 May 2012 Cumulative Sum: $22,028,978.56 Cumulative Sum: $15,031,501.60 New Amount: $318,195.85 New Amount: $138,464.61 June 2012 Cumulative Amount: $22,347,174.41 Cumulative Amount: $15,169,966.21 New Amount: $483,316.19 New Amount: $247,964.84 July 2012 Cumulative Amount: $22,830,490.60 Cumulative Amount: $15,417,931.05 New Amount: $526,899.87 New Amount: $370,539.01 1. That is, there was no divergence between the two sets of books until September 2011, being the period covered by the third drawdown. From September 2011 on, 'Applications and Certificates for Payment' forms with a higher figure were provided to BCEG China (from 'Set One'). From November 2011 onwards, only the higher figure documents from 'Set One' were provided. By June 2012, the cumulative total of the 'Application and Certification for Payment' forms was, according to 'Set Two' documents, some $15.4 million whilst, using the other 'Set One' documents, some $22.8 million. As there was no apparent need to provide these documents to BCEG China at all, it is likely that the 'Applications and Certificates for Payment' forms with the higher figures were supplied to BCEG China to assist in the overall justification of figures in drawdown requests. 2. On 19 September 2011, the third drawdown arrived, being US$6.8 million less bank fees. As 73% of the funds sought by BCEG were supported by sham sub-contracts, it follows that at least this portion of the third drawdown was advanced as a consequence of the information contained in the sham sub-contracts being proffered in a drawdown schedule, together with copies of the sub-contracts. More likely, if BCEG China had been aware that the third drawdown request was largely supported by false documents, no funds would have been advanced at all, at least, until the true position had been clarified. 3. Qing Yang said he was unaware that BCEG over-stated its payment claims in respect of the Varsity Lakes project or submitted sham sub-contracts. Had he been aware of these matters, he would have brought them to the attention of the General Manager of BCEG China and insisted that they be investigated. Further, if any investigation had indicated that Mr Xiao and Ms Chen were responsible for improper conduct, he would have insisted and taken steps to ensure that they were dismissed. Mr Ma gave similar evidence. Further, Mr Ma would have sought to pursue and recover any amounts that BCEG had paid which ought not to have been paid. Mr Xing gave like evidence. This evidence is inherently likely and I accept it. Beijing Dragon payments 1. Mr Xiao deposed that, in late 2011, Beijing Dragon had some liquidity issues (although denied it in cross-examination). Mr Xiao said he raised this with Qing Yang and Ms Dong; Mr Yang said Mr Xiao could transfer monies from BCEG to Beijing Dragon to offset the monies which Beijing Dragon had previously transferred to BCEG (Australia). Qing Yang denied this: "Never happened and it's impossible to acknowledge that … This is against the protocol or policy at the time." 2. On 2 November 2011, Mr Xiao provided the bank account details for Beijing Dragon's account to Ms Chen. Mr Xiao agreed that he gave the bank account details to his wife so that the money could be paid into the account. On 3 November 2011, Ms Chen wrote to the Commonwealth Bank of Australia, as the "financial controller" of BCEG, instructing that US$30,000 be transferred from BCEG's Foreign Currency Account to Beijing Dragon's bank account. The funds were so transferred. On 25 November 2011, Ms Chen sent a further letter to the Commonwealth Bank, instructing that US$300,000 be transferred to Beijing Dragon's account. Mr Xiao agreed that his wife send the letter with his knowledge and approval. The funds were so transferred. 3. As to whether payments were made to Beijing Dragon with the permission of Mr Yang, I prefer Mr Yang's evidence. Further, the only evidence of funds provided by Beijing Dragon to BCEG (Australia) – or, at least, deposited into BCEG (Australia)'s account – is $85,572.27: see [63]. Whether these funds were in fact used for BCEG (Australia)'s operating costs is unclear. Given that Mr Xiao and Ms Chen had already reimbursed themselves $1.28 million from the first drawdown and $2.05 million from the second drawdown, it is difficult to see why Mr Yang would have agreed to any further reimbursement. Rather, I find that the payments from BCEG to Beijing Dragon were fraudulent transactions effected by Mr Xiao and implemented by Ms Chen, in full knowledge that these payments were fraudulent. More West Wyalong payments 1. The eleventh West Wyalong payment occurred in December 2011. On 9 December 2011, BCEG transferred $360,000 from the BCEG Holding Account to the BCEG Operating Account, from which $350,000 was transferred to Trojjan; the deposit was described on the bank statement as "Project Inv Prepai[d]". In Trojjan's cash receipt journal, the cash receipt was recorded as a prepayment; the funds were allocated to a liability account, "customer deposit". 2. On 30 January 2012, Trojjan issued tax invoice TR0047 to BCEG in respect of the Varsity Lakes project, for $134,036.47. In the Sales & Receivables Journal for Trojjan, an entry was made on 31 January 2012 recording this sale, but apportioning part of the income ($69,929) to the West Wyalong Marketplace project. The job number (8005) indicates that the income related to fitout of the medical centre at West Wyalong. Rather than transfer funds from BCEG to pay this invoice, an entry was made in the cash receipts journal on 29 February 2012, applying part of BCEG's prepayment of $350,000 made on 9 December 2011 to pay the invoice. In this rather convoluted manner, a portion of the funds advanced to BCEG in respect of the Varsity Lakes Project were used to pay bills concerning the West Wyalong project. Mr Xiao denied this. 3. The twelfth West Wyalong payment occurred in February 2012. On 29 February 2012, Trojjan issued invoice TR0048 to BCEG in respect of Varsity Lakes for $152,416.53. However, an entry was made in the Sales & Receivables Journal of Trojjan in respect of the sale, recognising part of the income as referable to West Wyalong (being $13,754). On 7 March 2012, a cheque requisition was prepared (12084), signed by Ms Chen. The invoice was paid on 8 March 2012, following the usual transfer of funds earlier described. Again, the job number (8005) suggests that the income was earned in respect of the fitout of the medical centre at West Wyalong. Mr Xiao denied this. 4. The finishing touches were then being done for the West Wyalong project. On 28 March 2012, Ms Zhong emailed photographs of the West Wyalong site to Mr Xiao, Mr Piercy and Eunson Yang, where some gardening work appears to have been underway. Mr Yang said he was directed by Mr Piercy to travel to West Wyalong and assist with landscaping labour; he stayed there for three or four days and undertook the work with Mr Piercy and Kimi You. Otherwise, Mr Yang said his involvement in relation to the West Wyalong project was administrative in nature, together with some tasks related to fit-out which were given to him in his role of assisting Mr Xiao and Mr Piercy. 5. The thirteenth West Wyalong payment occurred in April 2012. On 4 April 2012, BCEG transferred $100,000 to Trojjan, following the usual funds pathway. In Trojjan's accounts, the $100,000 was recorded as a prepayment by BCEG. On 30 April 2012, Trojjan issued invoice TR0053 to BCEG in respect of Varsity Lakes for $267,504.23. An entry was made in Trojjan's Sales & Receivables Journal, recognising the income as partially West Wyalong Marketplace ($231,276). On 16 May 2012, a cheque requisition was completed (12169) and signed by Ms Chen. The invoice was paid the same day, following the usual transfer of funds between BCEG accounts and on to Trojjan. Mr Xiao denied that this invoice in fact related to monies spent on West Wyalong. Fourth drawdown 1. The black folder and BCEG China's documents in respect of the fourth drawdown both include the following documents: 1. the BCEG spreadsheet; 2. a letter from Mr Piercy dated 13 March 2012, providing a status report on the Varsity Lakes project (Mr Piercy reported that Somewhere Landscape had completed 5% of its work; Somewhere Landscape, in fact, did no work on the Varsity Lakes project: see [216]). 3. Trojjan invoices to BCEG from VLPH-021 to VLPH-028, for the months from March 2012 to August 2012, as per the BCEG spreadsheet; 4. a BCEG table of sub-contractors, signed by Mr Piercy, including Reid Plumbing ($3.95 million, $2,587,350 and $2.605 million), C&C Fire Protection ($1,784,100) AJA Electrical ($2,087,300) and Primat Glass ($2,297,350); and 5. copies of the Construction Sub-contract with Concrete Systems Australia ($4,352,650), Reid Plumbing ($3.95 million and $2.605 million), Reid Plumbing ($2,587,350), AJA Electrical ($2,087,300), C&C Fire Protection ($1,784,100) and Primat Glass ($2,297,350). 1. The sham sub-contracts were the same as submitted for the third drawdown, with the addition of Primat Glass and the absence of Concrete Systems Australia. In total, $5,978,366.79 was sought for payments to be made to sub-contractors in the coming months, of which $5,637,506, or 94%, of the drawdown request related to sham sub-contracts. 2. Also amongst this material is a table of invoices rendered by Trojjan to BCEG in respect of the Varsity Lake project from September 2010 to November 2011 (TR00010 to TR00043), including invoices which, as earlier described, in fact concerned the West Wyalong project. In particular, the table included TR0010, TR0011, TR0013, TR0015, TR0018, TR0019, TR0022, TR0024, and TR0030, totalling $2,600,487.80 including GST. 3. The fourth drawdown was received on 4 May 2012, being US$5.8 million. Where 94% of the funds sought by BCEG were supported by sham sub-contracts, it is extremely unlikely that BCEG China would have permitted the fourth drawdown and thereby become liable to Exim Bank for the funds and interest, if it had been aware of the false information supporting the drawdown request. In addition, had Qing Yang, Mr Ma and Mr Xing known that the third drawdown request was supported by false documents, Mr Xiao and Ms Chen would have already been under investigation and, most likely, there would have been no fourth drawdown at all. Completion of West Wyalong project 1. The fourteenth West Wyalong payment occurred in May 2012. On 31 May 2012, Trojjan rendered invoice TR0055 to BCEG in respect of the Varsity Lakes project for $57,353.44. In Trojjan's Sales & Receivables Journal, an entry was made recognising the income as, in part, the West Wyalong project ($35,340) and effectively paying the invoice by reducing the prepayment made by BCEG on 4 April 2012. On 19 June 2012, a cheque requisition was completed (12213), signed by Ms Chen. No funds were transferred, as the invoice had already been paid in the manner described. Mr Xiao denied that the invoice falsely stated that it was for the Varsity Lakes project when in fact it was for the West Wyalong project. 2. The fifteenth West Wyalong payment occurred in June 2012. On 30 June 2012, Trojjan rendered invoice TR0057 to BCEG in respect of the Varsity Lakes projects in the amount of $89,566.73. In Trojjan's Sales & Receivables Journal, the sale recognised income in respect of both the Varsity Lakes project and the West Wyalong project ($42,504). On 27 July 2012, a cheque requisition was completed (12282) and signed by Ms Chen. The invoice was paid on 31 July 2012, following the now familiar flow of funds. Mr Xiao denied that these costs were in fact carried out in relation to the West Wyalong project. 3. On 28 July 2012, Trojjan rendered invoice TR0059 to BCEG in respect of the Varsity Lakes project for $509,022.49. In Trojjan's Sales & Receivables Journal, the sale included income in respect of the West Wyalong project ($958.17). On 28 August 2012, a cheque requisition was prepared (12344) and initialled by Ms Chen. The funds were transferred the same day, following the usual pathway, save that the funds originated from a BCEG account held with Westpac. Mr Xiao denied these that these costs related to the West Wyalong project. 4. This was the last West Wyalong payment. Ms Exner has reviewed Trojjan's MYOB records and concluded that Trojjan invoiced BCEG a total of $19,802,377 from 7 September 2010 to 31 December 2013, of which BCEG paid $18,170,442. Of these payments, $3,033,053 was allocated to the West Wyalong project. For all of these payments, the corresponding hard copy invoices stated that the payments related to the Varsity Lakes project. More Beijing Dragon payments 1. Mr Xiao said that, in mid 2012, Beijing Dragon again ran into liquidity issues. On 2 August 2012, Beijing Dragon rendered an invoice for $23,600 in respect of the Varsity Lakes project. BCEG paid the account on 22 August 2012. Ms Dong is not aware of Beijing Dragon undertaking any works in relation to the Varsity Lakes project and has not seen any documents authorising these payments. Nor is she aware of any services being provided by Beijing Dragon to BCEG. Mr Xiao agreed that Beijing Dragon did not do any work for BCEG, then said that Beijing Dragon did do work for BCEG for the design and contract for fit-out, then said the payments to Beijing Dragon were to repay pre-BCEG funding. 2. There is a record of a purchase by BCEG from supplier Beijing Dragon in BCEG's MYOB accounts, but not until later in the financial year, on 12 April 2013. The description of the transaction referred to an interior design contract for $85,000, of which US$65,000 had been prepaid. (The remaining account appears to have been closed on 1 June 2013, when the balance of the contract, being $22,500, was paid.) The fact that this purchase does not match the Beijing Dragon invoice for $23,600 paid on 22 August 2012, either as to date or amount, combined with the fact that no entry was made in BCEG's MYOB accounts for such a purchase suggests that it was not, in fact, a valid invoice. 3. On 20 September 2012, Ms Chen gave instructions to the Commonwealth Bank to transfer US$300,000 from BCEG's Foreign Currency Account to Beijing Dragon. This was done. 4. For the same reasons as earlier stated, I am not satisfied that the payments to Beijing Dragon were authorised by Qing Yang nor referable to pre-BCEG funding nor, indeed, services rendered by Beijing Dragon to the Varsity Lakes project. Fifth drawdown 1. The black folder has a divider containing bank drawdown documents for the period from September 2012 to January 2013. The material includes a letter from Mr Piercy of 3 August 2012 reporting on the current status of the Varsity Lakes project; Mr Piercy reported that Somewhere Landscape had completed its work, as had the construction sub-contractors. The documents include a BCEG table, listing sub-contractors, contract prices and claims amount for the final drawdown to 31 January 2013. The table is signed by Mr Piercy. The table included the following (with new additions from previous tables in support of the fourth drawdown italicised): Construction Contract Price Concrete Systems $4,352,650 Reid Plumbing $3,950,000 Reid Plumbing $2,587,350 Reid Plumbing $2,605,000 C & C Fire $1,784,100 AJA Electrical $2,087,300 Primat Glass $2,297,350 Somewhere Landscape $1,510,000 Internal fitout Reid Plumbing $495,000 AJA Electrical $405,000 Reid Plumbing $635,000 PlastaMasta $415,500 PlastaMasta $392,500 Fosters Joinery $390,000 Riverina Terrazzo $619,000 1. Of the amount sought for sub-contractors, totalling $8,060,684.05, $7,640,313.70 (or 95%) related to sham sub-contracts. 2. Also included in this material were Trojjan invoices to BCEG from VLPH-029 to VLPH-033 for the months of September 2012 to January 2013, together with a statement covering the period. The BCEG spreadsheet was, again, provided together with copies of the Construction Sub-contracts, including C&C Fire Protection ($1,784,100), Concrete Systems Australia ($4,352,650), Lafarge PlastaMasta ($392,500 and $415,500), Primat Glass ($2,297,350), Riverina Terrazzo ($390,000), Fosters Joinery ($619,000), Reid Plumbing ($2,587,350, $3.95 million and $2.605 million, $635,000, $2.605 million, $495,000), AJA Electrical ($2, 087,300 and $405,000) and Somewhere Landscape ($1.51 million). BCEG China's records only retain the drawdown request being, effectively, the BCEG table already described. 3. On 10 August 2012, Mr Piercy sent an email to Mr Xiao, attaching documents in relation to the bank drawdown, being those already described. Mr Xiao said he did not recall this and had no knowledge of the sham sub-contracts. I do not accept Mr Xiao's evidence. 4. On 14 September 2012, BCEG received the final drawdown under the Varsity Lakes BCEG facility in the amount of some $10.3 million. As 95% of the amount claimed in the drawdown request related to sums payable under sham sub-contracts, it is obviously the case that, if the sham sub-contracts had not been proffered to BCEG China and, through BCEG China, to the Exim Bank, then the final drawdown would not have been advanced, either as to 95% or at all. Wagga project contracts and facility 1. On 10 October 2011, BCEG China requested approval for an engineering and construction contract in the amount of $38.61 million for the Wagga project, which involved a mixed use development including commercial and retail premises, car parking and 52 residential apartments. In support of the application was a risk assessment report prepared by BCEG, signed by Qing Yang. According to the report, the source of funds – apparently to buy the land – was said to be "raised by the proprietor". No mention was made that part of the purchase price for the Wagga land had been provided by BCEG. This suggests that Qing Yang was unaware of this fact and, thus, had not agreed that Mr Xiao could use BCEG's funds in this manner. The submission was reviewed by a number of officers in the America & Atlantic division of BCEG China including the contract manager, person in charge of the organiser, business branch manager, chief financial officer, contract supervisor and general manager. The final signature was given on 22 November 2011. 2. On 1 July 2012, Interlink Wagga Central entered into a contract with BCEG to design and construct the Wagga project for an estimated $34 million. Qing Yang said that, if he had been aware of the West Wyalong payments and sham sub-contracts, he would have declined to approve or further participate in any projects or proposed projects for BCEG which involved Mr Xiao and Ms Chen or entities related to them, such as the Wagga project. Mr Ma and Mr Xing gave evidence to the same effect. This evidence is unsurprising and was not challenged in cross-examination. 3. By now, BCEG had become the majority shareholder of Trojjan Constructions, which changed its name to Trojjan (BCEG) Constructions Pty Ltd. Mr Xiao became a director of the company. In evidence is a Head Construction Contract between BCEG and Trojjan Constructions dated 25 February 2013, by which Trojjan Constructions agreed to build the Wagga project for a fixed sum of $25,454,677.50. Although the copy in evidence appears to have been initialled and signed by Mr Piercy, he said he did not sign this contract, nor was it the actual contract, which was "construction plus five, and it's black and white". (That does appear to be the case. In an application for finance lodged by Mr Xiao and Ms Chen with the National Australia Bank in respect of the Wagga project, the application recorded that copies of contracts with Trojjan had been provided to the bank "Contracts are Costs + 5% profit"). 4. Fortunately for BCEG, the primary source of funding for the construction of the Wagga project was obtained from the National Australia Bank. In March 2013, an Internal Loan Agreement was executed between BCEG and BCEG China in respect of the Wagga project, as BCEG was "currently short of funds to pay the construction costs for Wagga Project due to the delay of the funding from local bank". BCEG China provided an interest free loan of US$3.9 million, to be repaid on 28 February 2014. Ms Dong said that the funds advanced under the Internal Loan Agreement have not been repaid. Final Beijing Dragon payments 1. On 18 March 2013, BCEG transferred US$600,000 from its foreign currency account with the National Australia Bank to Beijing Dragon. 2. On 29 July 2013, BCEG transferred $10,000 from the BCEG Operating Account to Beijing Dragon. Mr Xiao said this was to reimburse himself for a travel ticket; he said he did not need authority from Mr Yang or Ms Dong to make the payment as he had authority as a director. Experience suggests that travel tickets are not issued in precisely rounded figures such as $10,000. 3. On 9 August 2013, the National Australia Bank reviewed its finance facilities with Mr Xiao and his companies, noting his interest in Beijing Dragon, "by visiting the website you appreciate the experience and professionalism of Yu Xiao and his associated business. … excellent customer who is close to being the ideal customer. … we know for a fact that ANZ, Westpac and CBA are knocking on their door to try and dislodge us." On 27 August 2013, BCEG transferred $6,607.60 from the BCEG Operating Account to Beijing Dragon. This is the final payment which BCEG seeks to recover as fraudulent. 4. For the same reasons as earlier stated, I am not satisfied that the payments to Beijing Dragon were authorised by Qing Yang nor referable to pre-BCEG funding. I will assume in Mr Xiao's favour that the final payment of $6,607.60 was the travel ticket to which he referred. I will also assume in his favour that the travel ticket was a legitimate expense incurred on behalf of BCEG. 2014 agreement 1. In September 2013, Interlink Laboratory applied to the National Australia Bank for finance to repay the Varsity Lakes facility provided by BCEG China to BCEG. It will be recalled that BCEG was obliged to repay the US$35 million in October 2013, when BCEG China was to repay Exim Bank. 2. Ms Dong was then becoming concerned that Mr Xiao had not indicated when or how the funds loaned would be repaid. On 24 September 2013, Eunson Yang forwarded Mr Xiao a letter from BCEG to BCEG China, "as your request", which Mr Xiao forwarded to Ms Dong. Mr Xiao agreed that he told Mr Yang what should go in the letter. By the letter, BCEG noted that the Varsity Lakes project "will soon enter the loan repayment stage" and proposed a repayment plan, to be funded, primarily, by the National Australia Bank. In addition: (emphasis added) After negotiations between BCEG … and the owner of the hospital, currently the owner has agreed to sell his/her fixed assets as a guarantee for the repayment of part of the balance. The fixed assets that the owner can sell include the completed West Wyalong supermarket and the medical center project, as well as [part of the Wagga project]. … The owner has already listed the above fixed assets on the market for sale. … Of note, the West Wyalong project was described as owned by Interlink Laboratory, not BCEG. 1. On 30 June 2014, Interlink Laboratory and BCEG executed an agreement. Mr Xiao said, "I don't have a good recollection of this document, but I recall that it was an internal document that Ms Dong wanted me to sign." The document is not signed but bears the company seals for both companies, where Mr Xiao had possession and control of BCEG's company seal. By then, Interlink Laboratory had paid $16.94 million to BCEG, apparently funded by the National Australia Bank. The agreement provided: Settlement Agreement for Varsity Lakes Private Hospital Project The total cost (including the management fee) of this project from start to completion is $33,977,608.79 Australian dollars, which has been approved by the owner. By the project settlement day of 30 June 2014, the owner has paid $16,100,000.00 US dollars in total for the project cost with $17,030,240.37 Australian dollars of project cost still unpaid. … Now a letter of intent in relation to the payment of unpaid project cost has been reached with the owner. … 1. Interlink Laboratory proposed to pay US$2 million in November 2014 and US$9.5 million in May 2015. Further: (emphasis added) The owner has confirmed that another of its properties West Wyalong, a comprehensive business centre, has been put to market for sale. The owner has already offered quotations to and started negotiations with two purchasers. If they make a deal without a hiccup, the owner is expected to pay back five million US dollars in loans at the end of 2014 after local taxes and the project loans. 1. Again, the West Wyalong project was described as the owner's property, not BCEG's. The agreement continued to summarise the loan repayment plan, including "The owner will also pay back five million US dollars with the proceeds from selling its West Wyalong comprehensive business centre." Attached to the agreement was a table entitled "Financial Settlement Sheet of the Project" and "Loan Repayment Sheet of the Project". According to this document, the project cost was $32,359,627.42. The unpaid loan for the Varsity Lakes project then stood at AUD$17,030,240.37 (or US$16,514,224.09) plus interest. The repayments in the agreement provided for US$16.5 million to be paid in discharge of the amount owing. 2. Both the letter of 24 September 2013 and the 2014 agreement make plain that the West Wyalong project was not one in which BCEG held an interest but was owned by Mr Xiao and Ms Chen's corporate entities. The West Wyalong project was offered as a means of repaying the Varsity Lakes facility. The letter and agreement contain admissions against interest by the defendants of this fact, and also of the amount then owing by Interlink Laboratory to BCEG. An audit 1. In January 2015, Qing Yang retired. From 12 to 17 January 2015, Qing Yang, Ms Dong and Ping He travelled to Australia to audit BCEG, given Mr Yang's retirement. Mr Yang ceased to be a director of BCEG on 12 January 2015, replaced by Ms Dong. 2. On 7 January 2015, Eunson Yang sent an email to Mr Xiao, attaching a draft Head Design & Construction Contract in respect of the fitout for the Varsity Lakes project "prepared for BCEG Beijing [as] requested." Presumably, the document was prepared in anticipation of the visit from Qing Yang, Ms Dong and Ms He. According to the contract, the estimated project cost was $6 million. Ms Dong was provided with a copy of this contract by Mr Xiao during her visit, to explain why further amounts had been incurred since 2014. However, the fitout contract was not, in fact, the correct version of the contract. On 14 November 2014, Eunson Yang had scanned and sent the contract signed by Qing Yang, for a lump sum price of $9.027 million; Qing Yang was in Australia at the time. This version of the contract was emailed to the National Australia Bank, copied to Mr Xiao, on 9 December 2014, in support of an application for finance. Why Mr Xiao provided Ms Dong with the fitout contract which understated the contract price by some $3 million is unclear. It was, however, a recurring theme that few formal contractual documents reflected the actual arrangements in place. 3. During the audit, Mr Xiao showed Ms Dong various accounting records and said that BCEG should be responsible for all the costs of BCEG (Australia). Ms Dong was surprised to learn that Mr Xiao had apparently caused BCEG (Australia) to incur so many operating expenses. Mr Xiao does not appear to have told Ms Dong – as he now contends in these proceedings – that he had already taken steps to obtain reimbursement from BCEG for BCEG (Australia)'s costs. 4. On 19 January 2015, Ms He sent four audit confirmations to Mr Xiao, raising various queries with the accounts of BCEG as at 31 December 2014. In particular, payments made to Beijing Dragon were queried. Ms He sought a letter of confirmation from Beijing Dragon in respect of the payments, including the payment of US$300,000 in September 2012 and US$300,000 (in fact, $600,000) in March 2013. Whether a letter of confirmation was provided by Beijing Dragon is not known. The other Beijing payments now sought to be recovered by BCEG in these proceedings were not referred to in the audit letter. Change of accounting treatment 1. On 19 January 2015, Ms Dong was provided with a draft financial report for BCEG for the year ended 31 December 2014 from BCEG's external accountant. These accounts contained a change of accounting treatment in respect of the West Wyalong project from previous financial statements, which had reported as follows: 1. Financial statements for BCEG for the 2011 financial year were signed by the directors Mr Ma, Qing Yang and Mr Xing on 1 December 2011. (Mr Xiao did not sign the financial statements, which he said "first time I see this document with the signature. … I think this is a fraud"). No reference was made to any particular development project. BCEG's loans from BCEG China were then $12,076,066. 2. A financial report for BCEG for the period 1 July 2010 to 31 December 2011 was signed by the external accountant on 18 January 2012. The profit and loss statement reported income from the Wagga project and expenses for the Varsity Lakes project. Loans from BCEG China stood at $16,135,398. 3. BCEG changed external accountants. On 11 May 2012, the new accountant signed financial statements for BCEG for the 2011 financial year (noting that financial statements had already been prepared and signed for this reporting period: see (a)). In any event, the financial statements were essentially the same; BCEG China's loan was reported as $11,661,808. 4. The external accountant prepared a financial report for BCEG for the year ended 31 December 2012, signed by the accountant on 17 January 2013. The financial statements refer to the Varsity Lakes project and Wagga project. BCEG China had then lent the company $33,667,148. 5. Mr Xiao signed financial statements for BCEG for the 2012 financial year in about 2013. The balance sheet recorded a loan from BCEG China of $23,860,124. 6. Mr Xiao signed financial statements for BCEG for the 2013 financial year, which referred to the Varsity Lakes and Wagga projects. BCEG then owed BCEG China $36,523,010. None of these financial statements made reference to the West Wyalong project nor, for that matter, any loan from Beijing Dragon. 1. The financial statements provided to Ms Dong on 19 January 2015, however, included, for the first time, reference to West Wyalong Marketplace, as income ("Recoverable Costs From WWMP" of $3,406,804), a current asset ($3,716,703) and non-current liability ("W/C West Wyalong Marketplace" of $3,423,739). Whilst the accounting treatment is not easy to understand, a general journal entry was made in BCEG's accounts for 30 June 2014, reallocating construction costs for the West Wyalong – apparently for two prior financial years – to an asset account in name of West Wyalong Marketplace. 2. On 21 January 2015, financial statements for BCEG for the 2014 financial year were signed by Mr Xiao, broadly similar to the draft provided to Ms Dong. BCEG China's loans had disappeared being, in the previous year, some $36.5 million in respect of the Varsity Lakes project and some $4 million, presumably in respect of the Wagga project, replaced by separate non-current liabilities for inter alia Varsity Lakes ($11,349,014), Wagga ($8,249,974) and West Wyalong ($3,423,739). 3. Mr Xiao said the West Wyalong project did not appear in the financial statements for BCEG until June 2014, being after BCEG China had repaid its loan to the Exim Bank. This was said to be in accordance with Mr Xiao's agreement with Qing Yang to conceal the fact that the Varsity Lakes funding was being used for another project until after the facility had been repaid. After the Varsity Lakes facility was repaid in October 2013, there was no need to conceal the existence of the West Wyalong project. 4. Mr Xiao's explanation is certainly possible but, for the reasons outlined at [136]-[142], unlikely. More likely, Mr Xiao was prompted by the audit and the departure of Qing Yang (with the attendant loss of corporate memory) to bring the West Wyalong project onto the balance sheet of BCEG. Mr Xiao could then maintain that the West Wyalong project formed part of BCEG's assets and liabilities, to which the company could look to repay its indebtedness to BCEG China. Of course, Mr Xiao had already offered the West Wyalong project to BCEG China in his personal capacity, as an asset which he intended to sell in order to repay the loan. It is apparent that Ms Dong did not detect this change in accounting treatment at the time. Ms Dong said she did not review the 2014 financial report on becoming a director of BCEG, as it related to a prior year. 5. The Varsity Lakes project was completed on 24 June 2015. On 19 January 2016, Interlink Laboratory sold the site for $44,261,263.96. From the proceeds of sale, Interlink Laboratory paid $12 million to BCEG. 6. On 20 May 2016, Ms Dong emailed Mr Xiao, copied to Eunson Yang, requesting a report in respect of projects being conducted in Australia. On 23 May 2016, Eunson Yang emailed Mr Xiao a report on BCEG's Australian projects, which Mr Yang then forwarded to Ms Dong. The report referred to the Varsity Lakes project, the Wagga Mill project and the West Wyalong project. Ms Dong said reference to the West Wyalong project gave her some assurance of getting back the funds loaned for the Varsity Lakes project. In October 2016, Interlink Laboratory made a further payment to BCEG of $890,678. 7. BCEG retained a new accountant, Anthony Smith of RSM Australia Pty Ltd, who prepared financial reports and tax returns for the 2015 year. Mr Smith said he did not make any inquiry as to what had occurred between 2013 and 2014 (described at [282]), "I have no idea … what happened there. … I have no idea whether the prior year loan was correct, either." Mr Smith took the figures forward from the previous year. On 23 August 2016, Mr Xiao signed financial statements for BCEG for the 2015 financial year, reporting the West Wyalong project amongst its assets and liabilities, with the same balances as the 2014 financial year. 8. BCEG asked Mr Smith to amend the accounting year to 31 December to align with BCEG China; he prepared an interim December 2016 report. The accounts were emailed to BCEG, copied to Ms Chen and Mr Xiao, on 8 February 2017. Consistent with Mr Smith's evidence, his cover letter to BCEG advised, "We relied on the financial statements for the calendar year ending 31 December 2015 which were prepared by your previous external accountants. … we have assumed that the opening balances are reasonabl[y] stated." Mr Smith said that his firm also prepared draft reports for BCEG for June 2016, but his retainer ended before finalising the accounts. 2017 agreement 1. By March 2017, BCEG China was increasingly concerned about the amounts owed by BCEG. A general manager of BCEG China requested a special report on Australian projects. On 10 March 2017, Ms Dong emailed Mr Xiao and Eunson Yang, asking Mr Xiao to work over the weekend to answer a series of questions, "Hopefully the attached information I've found in previous files and reports can help prevent the amount of work and burden landing on the desks". Ms Dong prepared the draft report by cutting and pasting from reports that had previously been provided to her; the report described the Varsity Lakes, Wagga and West Wyalong projects. Ms Dong said she was then dealing with some 20 countries and 50 projects and "was not up to speed", which is why Ms Dong asked Mr Xiao to review and amend the report. 2. On 13 March 2017, Eunson Yang replied, copied to Mr Xiao, providing the information requested in a draft report, entitled "Explanation of the use of Australian funds for profit and loss". Mr Yang recalled Mr Xiao asking him to send the email and telling him exactly what to include in the email and its attachments. Using this information, Ms Dong prepared a report, which she emailed to Mr Yang on 17 March 2017, copied to Mr Xiao, asking for the report to be reviewed and blanks completed. In respect of the West Wyalong project, the draft report stated: 2. Occupation and repayment of funds The project has no capital occupation during the construction process, but because the AUD 3.42 million of the private hospital project were transferred to this project, the current capital occupation of the project is AUD 3.42 million. This is the first contemporaneous record of any suggestion that the Varsity Lakes facility had been "transferred" to the West Wyalong project. 1. Eunson Yang provided a further report on 21 March 2017, copied to Mr Xiao, prompting comments and suggested amendments from Ms Dong. On 22 March 2017, a further draft was provided by Eunson Yang, copied to Mr Xiao. Ms Dong enquired whether there were settlement statements for the Wagga and West Wyalong projects, and was informed: Based on what I have explained above, since the fund in WEST WYALONG project is transferred from the hospital project, there is no settlement amount, and it is only responsible for the repayment on the final account. 1. This prompted a further email from Ms Dong, who said she was confused about the information that she had been given. In respect of the West Wyalong project, Ms Dong enquired: Is there a special agreement stipulating that the 5.03 million owed by the hospital project shall be repaid by Wagga and West Wyalong projects. Or is there a document stating that owner has used the above two projects as collateral to secure the payment of the remaining amount. If not, is it possible to negotiate and sign agreements with the owners to provide necessary guarantee for our receivables. 1. Further questions were posed by Ms Dong later that day: In your report sent in May 2016, West Wyalong was demonstrated as our construction project. Please confirm if the project is related to BCEG. If it is only the asset of the owner which was developed by the owner and irrelevant to BCEG and is viewed as the asset for repaying the Private Hospital Project, I will not include it as one of our own projects in the report. That is, Ms Dong had identified a change in the suggested character of the West Wyalong project, from being "the asset of the owner [to be] viewed as the asset for repaying" the Varsity Lakes loan to being a BCEG asset. No response to Ms Dong's enquiry is in evidence. 1. Ms Dong visited Australia in July 2017, when Mr Xiao told her that he had no intention of denying his repayment obligation and intended to reduce the amount. Mr Xiao asked Eunson Yang to prepare a document setting out his position, being a letter from Interlink Laboratory and Interlink Wagga Central to BCEG proposing a new repayment plan. Eunson Yang said Mr Xiao directed him to prepare this communication and instructed him precisely as to its contents. By the letter, Interlink Laboratory and Interlink Wagga Central confirmed repayment of the funds advanced for the Varsity Lakes and Wagga projects, as advised to Ms Dong, including: As determined by the relevant departments of both sides, from 2010 until now, the total project funds used by our company is $37,116,825.79, of which the funds used for the hospital project is $32,359,627.00, and the total funds used for the WAGGA residential project is $4,757,198.79. 1. The letter did not suggest that any of the loan funds had been used in the West Wyalong project. The letter stated that funds had been repaid totalling some $29.6 million, of which details were given. Project management fees were stated and interest calculated, "Which means we currently still have $12,305,257.17 repayable to you." In addition, the letter stated that $2,082,877.69 had been advanced to BCEG (Australia), of which $538,069.48 had been included in the 2014 audit "but we are still owed $1,544,808.21. … [We are] hereby sending this letter confirming that the project payment amount that we need to repay to you is $10,760,448.96." 2. It is not entirely clear how it was said that the 2014 audit confirmed that some $538,069.48 was properly payable to BCEG (Australia). As I read Ms He's letter, the auditor sought confirmation from Beijing Dragon that it had paid this sum being, apparently, interest owed by the defendants in respect of the BCEG China loan. The auditor was not, by this enquiry, acknowledging that BCEG was liable to reimburse BCEG (Australia) for this, or any, amount. The nature of these funds was clarified by Mr Xiao in these proceedings. On 6 June 2013, Beijing Dragon completed an application form with a Chinese bank, to transfer RMB ¥3,025,453.33 to Beijing China. Mr Xiao said this was some $530,000, and was payment by Beijing Dragon on behalf of Interlink Laboratory for monies owed by Interlink Laboratory in respect of invoices rendered by BCEG. As such, it could not on any view be characterised as monies payable to BCEG (Australia). The fact that Mr Xiao sought reimbursement of these monies from BCEG was certainly audacious. 3. On 25 August 2017, Mr Xiao ceased to be a director of BCEG. Ms Chen ceased to be secretary of the company. Eunson Yang accepted a position with BCEG as a business development manager. BCEG's business records were collected and stored in a garage. Ms Dong prepared a report of issues identified during the 2015 audit, including the amount of $1,374,743.36 which Mr Xiao claimed as BCEG (Australia) expenses. Emails ensued between Ms Dong and BCEG, endeavouring to reconcile these figures. On 13 September 2017, Ms Dong emailed a reconciliation to BCEG, copied to Mr Xiao, stating: BCEG Australia has incurred a total of AUD $1,374,700 in consultation fees from 2008 to 2010, and it is impossible to judge the necessity and rationality of this part of the expenses. Even it if is reasonable, the consultation fees paid for the project should be borne mainly by the owner. Payment from the BCEG account cannot be the basis for BCEG to bear this part of the expenses. Please verify the reasonableness of the expenses with the person in charge of the company, the negotiate the proportion of the cost with the owner. 1. In November 2017, Ms Dong and Peng Zeng visited Australia and attended meetings, beginning on the afternoon of 2 November 2017 and continuing until the afternoon of the following day. Ms Dong said the purpose of the meetings was to reach an agreement on terms to settle the amounts outstanding from Interlink Laboratory and Interlink Wagga Central to BCEG. Discussions included the proposed sale of Mr Xiao's Beijing apartment. 2. On 5 November 2017, a Memorandum of Loan Repayments was signed by Interlink Laboratory (by Mr Xiao) and BCEG (by Ms Dong). The memorandum noted that Interlink Laboratory and BCEG had reviewed the Varsity Lakes project from 1 to 4 November 2017. Notwithstanding the length of these meetings, Mr Xiao described the document as being signed in rushed circumstances, prepared by Ms Dong, "I was not sure the document was for or what it meant." According to Mr Xiao, Ms Dong assured him that the document was not legally binding but she needed to take something back to the board in BCEG China; Ms Dong said it would be unwise to refuse to sign the document. Mr Xiao said he did not have sufficient time to verify the figures in the document. I prefer Ms Dong's evidence to that of Mr Xiao, particularly where the length of negotiations was specifically recorded in the signed agreement. I will return to the precise terms of this document at [319]. 3. On 8 November 2017, BCEG received $50,000 from Interlink Laboratory, being the first repayment contemplated under the Memorandum of Loan Repayments. According to Ms Dong, no further repayments were made. Ms Dong said that Mr Xiao suggested transferring his Beijing apartment directly to BCEG to minimise the tax implications of the sale but, whilst Ms Dong was consulting BCEG's lawyers in this regard, Mr Xiao sold the property without her knowledge. On 9 July 2018, BCEG sent letters of demand. Ms Dong said that $5,695,475.13 remains outstanding. Piercy and Xiao part ways 1. By then, Mr Piercy and Mr Xiao had fallen out. Eunson Yang contacted Mr Piercy and said that BCEG and Mr Xiao were having an argument. Mr Piercy told him about the black folder, which Mr Piercy had found in the Wagga site office in 2017. Mr Piercy dropped the black folder off at BCEG's solicitors. The defendants submit that Mr Piercy's evidence as to how he came across the black folder was fanciful. "Rather, he prepared the documents that are contained within the folder; held on to the material, and then deployed it for the benefit of the plaintiff out of spite or anger at Mr Xiao arising from the Wagga project." This serious accusation was not squarely put to Mr Piercy; the submission should not have been made. 2. On 15 May 2019, Mr Piercy signed a statutory declaration declaring that all sub-contracts in relation to the Varsity Lakes project were true and correct in all material respects. Mr Piercy said that the statutory declaration was prepared by Mr Xiao and signed as part of a share sale and "just a full separation, you know. To get [out] of the company with Yu Xiao, I had to sign it …" Mr Piercy said that the statutory declaration was true and correct. On 6 June 2019, Mr Piercy ceased to be a director of Trojjan. 3. In the result, BCEG completed Buildings 1, 2 and 3 of Stage 1 of the Wagga project in July 2016 but did not complete Building 4 (Stage 1) nor any of Stage 2. In February 2019, West Wyalong Marketplace sold the West Wyalong property for $2.01 million. In March 2019, Interlink Wagga Central transferred the Wagga site to ILC Commercial Pty Ltd. In March 2020, liquidators were appointed to Trojjan and Trojjan Constructions. These proceedings 1. In October 2019, these proceedings were commenced. The procedural history of this matter was laborious, taking two and a half years to reach trial, an unusual delay in the Commercial List. Initially, after obtaining further and better particulars of the Commercial List Statement, the defendants asserted a right to their privilege against self-incrimination and exposure to civil penalty and, in November 2019, filed a bare Commercial List Response. BCEG filed a motion to strike out the Commercial List Response on the grounds that it did not properly raise or plead the existence and basis for the privileges against self-incrimination and exposure to penalties. The motion was heard by Stevenson J in August 2020, when directions were made for the defendants to file an Amended Commercial List Response, with the defendants to pay BCEG's costs thrown away: BCEG International (Australia) Pty Ltd v Xiao [2020] NSWSC 1234. 2. In September 2020, the defendants filed a motion seeking to set aside subpoenas then issued by BCEG, which motion was dismissed by Stevenson J in October 2020 with costs: BCEG (Australia) v Xiao (No 2) [2020] NSWSC 1403. BCEG proceeded to serve its lay and expert evidence. An unsuccessful mediation was conducted before Mr McDougall QC in February 2021. Various motions were then filed by the parties: the plaintiff sought to set aside subpoenas and notices to produce issued by the defendants; the defendants sought additional security for costs; BCEG sought to amend its pleadings and asset preservation orders. In August 2021, Williams J dismissed the defendants' motion for security for costs, granted leave to BCEG to amend its pleadings and otherwise dealt with the subpoenas, notices to produce and asset preservation orders: BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027. BCEG filed its amended pleadings on 23 August 2021. 3. Shortly before trial in November 2021, the defendants abandoned their claims for privilege and sought to vacate the hearing which, by reason of the defendants' change of approach, was necessary in order that BCEG's case on liability not only be heard, but also their defence. The hearing was vacated and listed instead for three weeks commencing on 4 April 2022. The defendants filed an Amended Commercial List Response in December 2021. The defendants served lay and expert evidence in January 2022, including an affidavit from Mr Xiao. On 31 January 2022, the defendants provided discovery of some 280,000 documents, which BCEG's legal representatives were still reviewing when the trial began on 4 April 2022. 4. Further asset preservations were made during the trial, when it became apparent during the course of Mr Xiao's cross-examination that, during a lunch adjournment, he was executing documents to encumber his assets. Indeed, the matter was re-listed for a further freezing order whilst judgment was reserved, when it appeared that Mr Xiao had encumbered his assets notwithstanding the order made by consent following BCEG's urgent application during the hearing. CONTRACT CLAIM AGAINST INTERLINK LABORATORY 1. I will deal with the most straight forward cause of action first. The Main Contract between BCEG and Interlink Laboratory in respect of the Varsity Lakes project was described as "Cost Plus", being cost plus 12%, with 5% payable to Trojjan and 7% payable to BCEG: special condition 2.2. It will be recalled that BCEG was to provide a progress claim to Interlink Laboratory each month, where "The monthly values will be total[l]ed at the end of the project to form the final contract value": special condition 6.4. Interlink Laboratory was also obliged to pay the final 5% of the contract value to BCEG, as a form of retention, on practical completion or 30 months from the commencement date of 22 March 2010, whichever was the earlier of the two: special condition 6.6. These obligations form the basis of BCEG's claim in contract against Interlink Laboratory, being the balance of unpaid progress claims plus 7% of the final contract value. Claim based on BCEG invoices 1. One way to establish BCEG's entitlement under the Main Contract is to rely on BCEG's progress claims provided to Interlink Laboratory in respect of the Varsity Lakes project. BCEG tendered all such invoices, which revealed some curious features. The invoices adopted a variety of invoice numbering systems (00000002, Inter-03, 00311210), the last apparently reflecting the invoice date. A number of invoices had the same invoice number despite being for different amounts and issued on different dates. Many of the invoices said to have been issued prior to 1 March 2011 had the Market Street address in the footer, and thus were likely issued after 1 March 2011 rather than the date of the invoice. Invoices from 31 August 2011 to 31 March 2014 used a different letterhead, referring to an address in Day Street, Sydney, although BCEG never occupied such premises. 2. In total, BCEG invoiced Interlink Laboratory for construction costs of $38,162,995.94 and construction management costs of $308,000 in respect of the Varsity Lakes project. As the margin payable to BCEG under the Main Contract was 7% of the costs of construction, BCEG was also entitled to $2,671,409.74. Alternatively, BCEG relied on the construction costs of $32,359,627.42 referred to in the 2014 agreement, of which 7% was $2,265,173.92. BCEG contended that, in breach of the Main Contract, Interlink Laboratory had not paid BCEG these amounts on the earlier of the date of practical completion or 22 September 2012. Rather, various repayments were made from October 2013 to November 2017 totalling $29,880,678, leaving an outstanding amount of $14,652,983.95 (based on the invoices) or $11,261,728.68 (based on figures in the 2014 agreement), on which pre-judgment interest was also sought. 3. The defendants' accounting expert, Mr Samuel, was instructed to reconcile monies paid by Interlink Laboratory, West Wyalong Marketplace or Mr Xiao or Ms Chen to BCEG. After reviewing bank statements, Mr Samuel concluded that Interlink Laboratory had paid $37,114,387 to BCEG, West Wyalong Marketplace had paid $267,436 while Mr Xiao and Ms Chen had paid nothing. As such, the defendants submitted that all amounts owed had been paid, both according to the invoices or under the 2014 agreement. 4. However, Mr Samuel agreed that he "only looked at the money going one way". Mr Samuel was not instructed to look at monies being paid from BCEG to the defendants and agreed that his report "doesn't tell you anything about the monies paid by BCEG to the other parties." Mr Samuel readily accepted that payments made by Interlink Laboratory to BCEG were transferred back to Interlink Laboratory the same day or the next day, but were not referred to in his report. 5. To this, the defendants submitted that the fact that BCEG paid these monies out, in many cases immediately and back to Interlink Laboratory or other companies associated with Mr Xiao and Ms Chen, was of no moment as each were distinct legal entities. If BCEG decided to pay those monies out, that was a matter for BCEG and did not detract from the fact that Interlink Laboratory had paid BCEG. There was an air of unreality to this submission. The bank accounts of BCEG and Interlink Laboratory were operated by Mr Xiao and Ms Chen. Decisions as to what money was paid and to where were made by them, in respect of both companies. The flow of funds evident from the bank statements may be described as watching a ball ricochet in a pinball machine. Funds deposited into BCEG's accounts were frequently withdrawn the same or next day. Tracing any particular payment to its ultimate destination – and there were a great number of payments – would require the investment of significant time. Ultimately, the only person who is likely to know what went where is Ms Chen. In short, repayments by Interlink Laboratory were often notional as the funds were immediately retrieved. 6. Mr Samuel also did not consider whether payments made to BCEG were in respect of monies then owed under the fit-out contract in respect of the Varsity Lakes project (see [278]), or monies owed in respect of the Main Contract. Mr Xiao had made a statutory declaration on 22 April 2015 in support of a progress claim (apparently provided to the National Australia Bank) recording that Interlink Laboratory had paid BCEG $9,017,896 under the fit-out contract. This amount should probably also be deducted from Mr Samuel's calculations. 7. The defendants submitted that BCEG could not seek to recover on the basis of these invoices, which were said to give rise to multiple queries. BCEG fairly acknowledged that it was not confident that the invoices were of sufficient validity to enable BCEG to claim outstanding monies from Interlink Laboratory. It was for this reason that BCEG relied on the 2017 agreement or, alternatively, the 2014 agreement as subsuming all interrelated transactions that had occurred up until that point in time. As a consequence, Mr Samuel's analysis was otiose as it concerned the transfer of funds preceding the 2017 agreement. 8. There is much to commend BCEG's approach. Whilst BCEG's invoices are business records on which the Court would be entitled to rely, it is also the case that the methods by which these invoices were calculated and rendered engenders little confidence in the veracity of the figures. Mr Samuel's analysis does not advance matters; this is not to criticise Mr Samuel but to recognise that the limited instructions he was given rendered his conclusions largely irrelevant. The figures documented in the 2014 and 2017 agreements, following contemporaneous and lengthy negotiations, are more likely to reflect the amounts then acknowledged as owing by Interlink Laboratory and, in respect of the 2017 agreement, post-dates the period reviewed by Mr Samuel such that his analysis can be put to one side. As BCEG's claim, under either the 2014 or 2017 agreements, is substantially less than that based upon the invoices, proceeding in this manner may also be to the defendants' benefit. Claim based on 2014 and 2017 agreements 1. There was no dispute that, by the 2014 agreement, Interlink Laboratory and BCEG entered into a contract to settle an outstanding dispute relating to the Varsity Lakes' Main Contract. Under the contract, the parties agreed on the construction costs of the Varsity Lakes project and the amount of Interlink Laboratory's indebtedness, together with the repayments by which that indebtedness would be discharged. The point of difference is that BCEG contends that Interlink Laboratory failed to make the agreed repayments whilst the defendants say that, according to Mr Samuel's analysis, all repayments were made and, indeed, the defendants paid more than they should have by some $3.2 million. 2. The defendants' submission cannot be accepted, for two reasons. First, Mr Samuel's analysis is of limited utility, for reasons already given. Second, if the defendants had already paid – and over-paid – the repayments due under the 2014 agreement, it begs the question why Mr Xiao signed the Memorandum of Loan repayments on 5 November 2017 – after lengthy meetings – which acknowledged that Interlink Laboratory continued to owe substantial sums. The Memorandum of Loan Repayments stated: The private hospital project was settled with signing of a settlement sheet and agreement on 30 June 2014 [the 2014 agreement]. … Given the fact that [Interlink Laboratory] failed to make the repayments to [BCEG] as required by the settlement agreement, [Interlink Laboratory] and [BCEG] have held a negotiation on the outstanding principals, management fees and interest and have reached a consensus in the following matters: 1. By 31 October 2017, the outstanding principal of the private hospital project to be paid by [Interlink Laboratory] to [BCEG] was 2,528,949.42 Australian dollars (this principal amount was calculated based on the 50 thousand Australian dollars [Interlink Laboratory] will pay to [BCEG] on 6 November). [Interlink Laboratory] will also pay [BCEG] 1,617,981,37 Australian dollars of management fees and 1,548,544.34 Australian dollars in interest. Adding the three items, [Interlink Laboratory] will pay [BCEG] a total of 5,695,475.13 Australian dollars (hereafter referred to as "the total outstanding amount"); 2. [Interlink Laboratory] agrees to be cooperative in loan repayment and will put forward a repayment plan two weeks after signing this memorandum. The repayment plan will be based on the following principles: 1) [Interlink Laboratory] agrees to pay back the total outstanding amount … 2) Before the loan is paid out, [Interlink Laboratory] will provide material asset and shareholder rights as a collateral … [including an office in Beijing] … 3. [Interlink Laboratory] and [BCEG] will sign the legal documents … before 30 November 2017 that clearly set out the relationship between the creditor and debtor and loan repayment schedule. … 1. The agreement also provided that interest would accrue at 4% per annum on the principal of $2,528,949.42 and, after 30 June 2018, 5% per annum against the unpaid amount. 2. BCEG contended that, by the memorandum, Interlink Laboratory and BCEG entered into a contract to settle their dispute, by which the parties agreed that Interlink Laboratory was indebted in the sum of $5,695,475.13 and agreed that interest would be payable on the unpaid sum. Interlink Laboratory breached the 2017 agreement by failing to repay the debt and accrued interest. Alternatively, by the 2017 agreement, Interlink Laboratory settled upon an account stated by which Interlink Laboratory admitted and acknowledged that it was indebted in the amounts recorded in the agreement. Either way, BCEG sought judgment against Interlink Laboratory in the amount of the agreed debt, together with interest. 3. The defendants submitted that the 2017 agreement was not, in fact, an agreement: Masters v Cameron (1954) 91 CLR 353 at 361; Skilled Group Ltd v CSR Viridian Pty Ltd [2012] VSC 290; GC NSW Pty Ltd v Galati [2020] NSWCA 326 at [58]-[60] (per Gleeson JA). Whilst the document indicated some consensus, it left unresolved essential terms of the security to be provided and the loan repayment schedule. The document was subject to the parties, by their legal representatives, preparing and executing legal documents by 30 November 2017. It was 'subject to contract', such that there was no binding agreement unless and until formal documentation is executed. The defendants denied that there was any account stated as any inference of the debt was rebutted by Interlink Laboratory's defence of the proceedings. 4. I agree with the defendants that the Memorandum of Loan Repayments does not constitute a binding agreement in respect of when and how Interlink Laboratory would repay monies then owed to BCEG. This was to be the subject of a repayment plan to be put forward by Interlink Laboratory within two weeks, which plan was to proffer security over property and shares and to be documented by the end of the month in "legal documents". That part of the Memorandum of Loan Repayments did not eventuate and, as Ms Dong said, Mr Xiao proceeded to sell the Beijing apartment which had been discussed as security, without her knowledge. I do consider, however, that the Memorandum of Loan Repayments recorded a concluded agreement in respect of interest, which was not dependent on the repayment plan to be put forward, nor security, nor 'legal documents'. 5. As to whether the Memorandum of Loan Repayments gave rise to an account stated, in Lockyer v Macready (1965) 66 SR (NSW) 369, Brereton J observed that an account stated "involves no more than an admission of liability for a specified sum. An IOU is a simple instance of this type of account stated": at 371. In Commonwealth Dairy Produce Equalisation Committee Ltd v McCabe (1938) 38 SR (NSW) 397, Jordan CJ explained at 401: An action for money found to be due on accounts stated may take one of two forms. It is always essential in such an action that there should have been before action brought an admission by the defendant or his agent to the plaintiff or his agent that the sum claimed is due by the defendant to the plaintiff: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 135. But this admission may be so framed as to be merely an acknowledgment of indebtedness, in which case although it supplies evidence of the debt the evidence may be rebutted by proof that no debt in fact existed. Or it may take the form of an account stated and agreed to between two parties, by which it is in effect agreed that the items on both sides shall be set off and the balance paid. In the latter type of case, the agreement for set-off supplies good consideration for the promise to pay the amount of the balance; and the account stated is itself an agreement for valuable consideration constituting a cause of action, and not merely evidence of liability: Siqueira v Noronha [1934] AC 332 at 337-338; Camillo Tank Steamship Co Ltd v Alexandria Engineering Works (1921) 38 TLR 134. 1. In Lewis v Wilson (1997) 42 NSWLR 228, where the first form of the action on an account stated was in issue, Sperling J noted that all that was required was "an admission or acknowledgement of a debt for a sum certain … the certainty of the sum admitted may be established by the express terms of the admission or by other evidentiary material such as a bill that has been sent which is expressly or impliedly referred to in the admission": at 232. 2. I understood BCEG to rely on the second type of account stated, but I do not consider that it makes a difference in this case. The Memorandum of Loan Repayments contains a clear and unequivocal admission of indebtedness on the part of Interlink Laboratory to BCEG of $5,695,475.13. The clarity of this admission is confirmed by the fact that Interlink Laboratory proceeded to pay BCEG the first repayment described in the document, on which "the total outstanding amount" of $5,695,475.13 depended. Whilst this admission supplies evidence of a debt which may be rebutted by proof that no debt in fact existed, this evidence has not been rebutted. The last payment referred to in Mr Samuel's report was the $50,000 anticipated by the Memorandum of Loan Repayments. There is no doubt that no further payments were made to BCEG after that date. 3. As such, BCEG is entitled to judgment against Interlink Laboratory in the sum of $5,695,475.13 together with pre-judgment interest under section 100(1) of the Civil Procedure Act 2005 (NSW). Where the parties agreed, in the Memorandum of Loan Repayments, that interest on unpaid amounts was 4% per annum on $2,528,949.42 to 30 June 2018 and 5% per annum on $5,695,475.13 thereafter, BCEG is also entitled to interest on this basis. Such interest should be calculated from 8 November 2017, when the $50,000 was paid. Interest should be calculated on the basis of simple interest, where the Memorandum of Loan Repayments did not specify compound interest. BREACH OF DIRECTORS' DUTIES 1. BCEG sued Mr Xiao and Ms Chen for breach of their duties as directors of BCEG, as a consequence of which BCEG claimed to have suffered loss and damage for which equitable compensation or, alternatively, an account of profits was sought. Whilst Mr Xiao was a director of BCEG, Ms Chen was not. Thus, the first issue is whether Ms Chen was a de facto director of BCEG. De facto director 1. Ms Chen was appointed as secretary of BCEG on 15 June 2011, but not a director. Section 9 of the Corporations Act 2001 (Cth) provides: director of a company … means: … (b) … a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. 1. There is no suggestion that Mr Xiao was accustomed to act in accordance with Ms Chen's instructions or wishes and, thus, the question is whether Ms Chen "act[ed] in a position of a director". In considering this question, the courts apply an objective test; the intention of the purported de facto director and the subjective thoughts of others involved in the corporation are irrelevant: Binetter (No 4) at [241]. The following factors assist in determining this question: 1. Does the person exercise the "top level of management functions": Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 at 569. Did they make high level management decisions on matters that affect the company's financial standing: Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129; (2010) 28 ACLC 10-073 at [199]. Has the person "involved [themselves] in the affairs of [the company] as only a director of the company would have been expected to do": Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173 at 182. 2. Did the company hold out a person as a director: Grimaldi v Chameleon Mining NL (No 2) (2012) [2012] FCAFC 6; (2012) 87 ACSR 260 at [130]-[131]. 3. Did outsiders reasonably perceive the person to be the manager or director of the company: Murchison Metals at [200]-[201]. 1. As Madgwick J noted in Austin, "Whether a person does so act will often be a question of degree, and requires consideration of the duties performed in the context of the operations and circumstances of the particular company involved": at 570. The size of the company, the "internal practices or structure of the company may be relevant": at 570. Further, specific actions by the person purported to be the de facto director should not be looked at in isolation. Rather, regard should be had to the actual functions and duties undertaken by the person, rather than the job title they have been given; the Court "should look at all the circumstances 'in the round' … [and] in their context. A single act might lead to liability in an exceptional case": Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 WLR 189 at [38]-[41]. Where a person signs their name on documents with the job title "director", such representation may be determinative: Forkserve Pty Ltd v Jack [2000] NSWSC 1064; (2001) 19 ACLC 299 at [38]-[42]. 2. The defendants submitted that Ms Chen was not a de facto director as she did not exercise "top level" management functions or act unilaterally: section 9(b)(i), Corporations Act; In the matter of Swan Services Pty Ltd (in liq) [2016] NSWSC 1724 at [27]–[32]; In the matter of ACN 092 745 330 [2017] NSWSC 241 at [110]–[113]. Whilst the evidence supported a conclusion that Ms Chen had a day-to-day financial management role within BCEG, this was not enough. Ms Chen was not performing tasks of great importance but a role of bookkeeper, accounts manager or financial controller. Ms Chen acted on Mr Xiao's instruction and lacked independence to make decisions of substance. 3. I do not consider that, in order to be a director, a person must make decisions independently of other directors. Where a corporation has more than one director, it is unremarkable that decisions are made by the directors in consultation with one another, including at board meetings. Further, as the Full Court observed in Grimaldi, the fact that a company has an active director apart from the alleged de facto director does not preclude a finding that that person was a de facto director: at [74]; Swan Services at [29]. As Barrett AJA described it in ACN 092 745 330, "The focus is thus upon the way the person operates within the particular corporate governance context, the degree of autonomy exercised and the appearance (and reality) of authoritative operation as a primary level decision-maker for the company": at [113]. 4. It is obviously more difficult to assess whether Ms Chen was a de facto director, where she did not give evidence. Mr Xiao's description of his wife's role in BCEG can be put to one side as self-serving and unreliable. As to whether Ms Chen engaged in "top level" management functions and decisions, the evidence has been reviewed at [76]-[90]. BCEG was a small company. Mr Xiao and Ms Chen worked closely together, having adjoining offices and regularly consulting with each other. As mentioned, the evidence of Mr Piercy, Ms Zhang and Eunson Yang gave a consistent picture: Mr Xiao ran the company with the assistance of his wife, who was in charge of finance, including the bank accounts, invoicing and accounting. Mr Xiao approved all contracts and invoices for payment, as well as all communications with BCEG China. Mr Xiao and Ms Chen closely supervised the project and finance sides of the business respectively. 5. According to immigration records, after BCEG was incorporated in 2010, Mr Xiao was in Australia for 92 days of the rest of the year, or 45% of the time. During this time, the first drawdown of the Varsity Lakes facility was received and $1.28 million disbursed to the defendants and used inter alia to purchase an apartment in the Rocks. The first, second and third West Wyalong payments were made. 6. In 2011, Mr Xiao was in Australia for 162 days, or 44% of the year. The company moved to new premises in Market Street. West Wyalong payments continued; the evidence indicates that Ms Chen prepared, or supervised the preparation of, Trojjan invoices and approved the West Wyalong payments: see [148]-[150]. The second drawdown occurred, from which $2.05 million was used to fund the purchase of the Wagga land by CX & DN Holdings. The third drawdown request was submitted, supported by sham sub-contracts and, after questions were raised by Ms Dong, computer access to a folder containing "Documents sent to china" was confined to three people, being Mr Xiao, Ms Chen and Mr Piercy. Also as part of the third drawdown, the 'Applications and Certificates for Payment' forms with the higher figure from the second set of books were prepared, certified by Ms Chen, and submitted to BCEG China. The first payments to Beijing Dragon were made. 7. In 2012, Mr Xiao was in Australia for 188 days, or 51% of the year. During this time, the West Wyalong project was completed and the final West Wyalong payments made. The fourth and fifth drawdowns of the Varsity Lakes facility took place, almost entirely supported by sham sub-contracts. Further payments were made to Beijing Dragon. 8. In 2013, Mr Xiao spent 238 days, or 65% of the year, in Australia. By now, work was underway on the Wagga project. The remaining payments were made to Beijing Dragon. Negotiations began with BCEG China to repay the Varsity Lakes facility, ultimately leading to the 2014 agreement. Mr Xiao's time spent in Australia increased markedly in the following years (84% in 2014 and 87% in 2015). 9. In short, while Mr Xiao was often at BCEG's offices, Ms Chen was always there. More significantly, during the years where the bulk of the fraudulent transactions occurred, Mr Xiao was in Australia less than half the time. When Mr Xiao was overseas, he described Ms Chen as "my eye in the company"; Ms Zhang said that Ms Chen ran the office in Mr Xiao's absence. As a matter of practicality, it must have fallen to Ms Chen to make the decisions necessary to support the day-to-day activities of the company. Whilst there is no doubt that Mr Xiao remained in contact whilst he was overseas and participated in, or even dominated, decision-making, it is inherently likely that Ms Chen involved herself in the affairs of BCEG as only a director of the company would have been expected to do. 10. In internal BCEG communications, Ms Chen was not referred to as a director. A BCEG Payment Authorisation Sheet in respect of the Varsity Lakes project, signed in April 2013, included, at the bottom, a place for a number of BCEG employees to note that they had prepared, checked or approved the payment. The form included provision for the signature of Ms Chen, listed as "director". However, the word "director" was crossed out. Ms Chen did not sign the form; Mr Xiao approved the payment. Generally, Ms Chen either did not sign these forms or no position was marked against her name. 11. Externally, Ms Chen often described herself as "financial controller", and there is no doubt she performed this role, albeit Mr Xiao said he was not aware that his wife described herself as such. On 10 August 2011, 30 September 2011 and 14 May 2012, Ms Chen wrote to the Commonwealth Bank as Financial Controller of BCEG. A customer particulars report printed by the National Australia Bank on 25 November 2014 described Ms Chen's employment with BCEG as "financial controller". The report is signed by Ms Chen. 12. On occasion, Ms Chen also described herself as a director. On 19 August 2011, Ms Chen sent a letter on behalf of BCEG, describing herself as director. The letter concerned a trivial matter – opening a post office box – and is not signed. More significantly, on 29 April 2013, Ms Chen wrote a letter to the Commonwealth Bank as director of BCEG, giving instructions to transfer US$2.6 million from BCEG's Foreign Currency Account. 13. How was Ms Chen reasonably perceived by outsiders of the company? The letter from BCEG China of 24 February 2011 referred to Mr Xiao and Ms Chen as "the Australian branch leaders". In June 2011, a submission prepared by a bank officer in support of an application for finance (to purchase the Wagga land) observed, "Yu Xiao and his wife Yanying Chen are the economic buying influences and public face for the BCEG Group in Australia." These contemporaneous documents reveal that, externally at least, Mr Xiao and Ms Chen were viewed as occupying comparable positions of seniority with the company. 14. Whilst I would have preferred to reach a conclusion on this question having heard from Ms Chen, I am entitled to infer that her evidence would not have assisted her. Of course, the rule in Jones v Dunkel does not permit the Court to infer that the uncalled evidence would have been damaging, nor to fill gaps in the evidence: Cubillo v Commonwealth of Australia (No 2) (2000) 103 FCR 1; [2000] FCA 1084. Overall, I am satisfied that Mr Xiao and Ms Chen both acted as directors of BCEG. Mr Xiao was clearly the primary liaison with BCEG China whilst Ms Chen ran the financial side of the business. Mr Xiao was in charge of decisions made in respect of the projects being undertaken by the company, whilst Ms Chen was in charge of funds, invoicing and payments, albeit Ms Chen would not pay an invoice until Mr Xiao had approved it, presumably because Mr Xiao had a detailed knowledge of the underlying project. I consider that Ms Chen acted in the position of a director of BCEG and owed duties to the company as such. Directors' duties 1. There was no dispute between the parties as to the duties and obligations owed by a director. The relationship between a director and corporation is one of the archetypal categories of fiduciary relationships: Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 46 (per Gibbs CJ), 96-97 (per Mason J), 141 (per Dawson J). The strict standard applicable to trustees of traditional trusts applies equally to directors due to the inherently vulnerable nature of a corporation. As Spigelman CJ noted in O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 277: Policy favours a stringent test in the circumstances of this case. It is the vulnerability of a company which places its property in the power of directors, that makes it appropriate to adopt the approach to causation applicable to the trustee of a traditional trust in deciding issues of causation for the contravention by a company director of his or her duty not to exercise the power to dispose of property for an improper purpose. As McLachlin J put it in Canson Enterprises v Boughton (at 154): "… equity is concerned, not only to compensate the plaintiff, but to enforce the trust which is at its heart". 1. The director, as fiduciary, has a duty not to promote their personal interests by making or pursuing a gain in circumstances where there was a conflict or a real or substantial possibility of a conflict between those personal interests and the interests of the company (the "no conflict" rule). Directors have a duty not to obtain any unauthorised benefits or profits from their positions as directors (the "no profit" rule): Chan v Zacharia (1984) 154 CLR 178 at 198-199 (per Deane J, Brennan and Dawson JJ agreeing); Clay v Clay (2001) 202 CLR 410; [2001] HCA 9 at [56] (per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ); Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31; Breen v Williams (1996) 186 CLR 71; [1996] HCA 57. Directors have a duty to exercise their powers and discharge their duties in good faith in the best interests of the company: Mills v Mills (1938) 60 CLR 150 at 185 (per Dixon J); Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307; (2016) 339 ALR 659 at [75] (per Meagher JA; Bathurst CJ and Beazley J agreeing); BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597 at [597]. These fiduciary duties operate alongside the statutory duties in sections 180 to 183 of the Corporations Act: section 185. 2. The defendants did not accept that Mr Xiao or Ms Chen had breached any fiduciary duties owed to BCEG in the circumstances of this case, where each project accommodated the inherent conflict between their interest in the land owner, BCEG and Trojjan. This structure assumed that they would occupy positions of conflict and would profit from the project; the fiduciary relationship was said to be modified accordingly. To establish a breach and loss, BCEG must show that the scope of the duty extended to a prohibition on the conduct the subject of these proceedings and, it was said, BCEG had failed to do so. 3. Certainly, the content and subject matter over which the fiduciary duty extends will depend on the circumstances of the case at hand: Mudgee v Mudgee Dolomite & Lime Pty Ltd (in liq) [2022] NSWCA 12; (2022) 398 ALR 658 at [81] (per Leeming JA). As French CJ and Keane J held in Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [34]: (emphasis added) Despite their broad judicial formulations fiduciary duties are not infinitely extensible. That point was made in Chan v Zacharia, which concerned the content of the fiduciary duties of members of a partnership inter se. The limits of those duties were to be determined by the character of the venture for which the partnership existed, the express agreement of the parties and the course of dealings actually pursued by the firm. The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be 'moulded according to the nature of the relationship and the facts of the case'. See also Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166; (2011) 285 ALR 93 at [206] (per Jacobson J); Boardman v Phipps [1967] 2 AC 46 at 127 (per Lord Upjohn); United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11; Hospital Products at 69 (per Gibbs CJ), 102 (per Mason J). 1. For example, a fiduciary may overcome the operation of the "no profit" rule by making a full and frank disclosure of their material interest in the outcome of the relationship subject to that duty and seeking the active consent of the other party: Parker v McKenna (1874) LR 10 Ch App 96. However, the mere fact that fiduciary duties tailor themselves to a particular factual situation or relationship does not leave them devoid of content, nor does it excuse a fiduciary from endeavouring to comply with those duties. It remains to consider whether the directors' fiduciary duties were modified to permit the alleged breaches in respect of the specific transactions for which relief is sought. Claim in respect of West Wyalong payments 1. When Trojjan rendered an invoice in respect of the West Wyalong project, a fake invoice was prepared for the same amount but said to be for the Varsity Lakes project. The true nature of the invoice was recorded in Trojjan's MYOB accounts, being income in respect of the West Wyalong project. The fake invoice was attached to BCEG's cheque requisition. Finance obtained by BCEG for the Varsity Lakes project, and to be used only on that project, was in fact used on the West Wyalong project without the knowledge or agreement of Exim Bank, BCEG China or BCEG's Beijing-based directors. 2. I am comfortably satisfied that Mr Xiao and Ms Chen were the architects of this arrangement. Mr Xiao was the principal decision-maker for BCEG whilst Ms Chen was clearly in charge of the preparation of invoices, operation of the bank accounts and maintaining accounting records. Ms Chen, assisted by Mr Oconer, prepared the relevant documents. Ms Zhang was not involved in the payment of these invoices until February 2011, by which time four West Wyalong payments had already been made; Ms Zhang subsequently counter-signed cheque requisition forms on occasion, subject to the constraints described at [152]-[153]. Mr Xiao and Ms Chen owned and controlled the West Wyalong project and were the only persons who benefitted from this arrangement. 3. The two explanations proffered by Mr Xiao to justify his actions do not bear close scrutiny: there was no deferral of earthworks on the Varsity Lakes project in September 2010 (it was never anticipated that earthworks would commence that month); there were no difficulties with Platinum Blue which delayed in the Varsity Lakes project. It is also unlikely that funds advanced by a bank for a particular construction project would be permitted to be used on another construction project, where the Beijing-based directors of BCEG, on Mr Xiao's version of events, knew nothing about the West Wyalong project other than that it was his. 4. In respect of each of the West Wyalong payments, Mr Xiao and Ms Chen caused Trojjan to issue a false invoice to BCEG, which purported to be in respect of the Varsity Lakes project but, in fact, concerned the West Wyalong project. Each invoice contained fraudulent representations: that Trojjan had performed works on the Varsity Lakes project, when it had not, and that Trojjan was owed monies in respect of that work, when it was not. Ms Chen then caused BCEG to complete a cheque requisition form, repeating the fraudulent representations. BCEG transferred funds to Trojjan accordingly, where this was not in the best interests of BCEG. 5. Mr Xiao and Ms Chen knew the representations to be false. Their conduct was intentional, undertaken in the knowledge that it was not in the best interests of BCEG and for an improper purpose, where BCEG had no interest in the West Wyalong project. The funds were to be used for the Varsity Lakes project only; using the funds in this manner resulted in BCEG incurring liabilities to BCEG China to which it would not otherwise have been subject. They did not act in good faith in the best interests of BCEG but in pursuit of self interest, where Mr Xiao and Ms Chen held an interest in, and stood to profit from, the West Wyalong project. Their self-interest conflicted with their duties to BCEG. By acting in this manner, Mr Xiao and Ms Chen breached their duties as directors of BCEG. 6. There is little scope to modify the fiduciary duties owed by the directors to BCEG in respect of the West Wyalong payments where I have found that BCEG China was unaware of the West Wyalong project at the time. No full and frank disclosure was made by Mr Xiao or Ms Chen of any conflict between their personal interests and the interests of BCEG before diverting the Varsity Lakes facility to their own project. Claim in respect of sham sub-contracts 1. BCEG's pleading came under scrutiny in respect of its allegation that Mr Xiao and Ms Chen had breached their directors' duties in respect of sham sub-contracts. For each of the sham sub-contracts, BCEG pleaded that Mr Xiao and/or Ms Chen caused the sham sub-contracts, including the false representations embodied therein, to be created, "with the intention that they would form the basis of a request for funding from BCEG China. Any transfer requests submitted by BCEG to BCEG China purportedly including the cost of works performed by [the sub-contractor] in excess of [amounts payable under legitimate sub-contracts] were caused, directed or ratified" by Mr Xiao and/or Ms Chen. 2. The pleading did not particularise what was meant by "transfer request" – and the defendants submitted that there was no evidence of a transfer request – but I consider that drawdown requests fall comfortably within the pleading. Further, whilst the defendants submitted that there was no evidence that the sham sub-contracts were ever provided to BCEG China (noting that I have found otherwise), nor does the pleading allege that the sham sub-contracts were so provided. Rather, BCEG simply alleged that transfer requests submitted by BCEG to BCEG China included the cost of works in the sham sub-contracts. As I have endeavoured to describe, the drawdown requests itemised these amounts. I do not accept the defendants' submissions in respect of the pleading. 3. As to whether Mr Xiao and Ms Chen were involved in the sham sub-contracts, Mr Xiao did not respond, in his affidavits, to the suggestion that sham sub-contracts had been used in support of drawdown requests. In cross-examination, Mr Xiao maintained that he had no knowledge of the sub-contractors and no involvement in the sham sub-contracts. Mr Xiao said he simply approved whatever Mr Piercy had approved in respect of sub-contractors. Against this, Mr Xiao agreed that it was his job to keep a close eye on the invoices coming in for the Varsity Lakes project, "I do my best" and, when he was in the office, was familiar with the costs being expended on the project including by sub-contractors. 4. Mr Piercy said sub-contracts were prepared in the office and approved by Mr Xiao. Mr Piercy then executed contracts on behalf of Trojjan. Mr Piercy denied signing any of the sham sub-contracts; nor was it squarely put to him in cross-examination that he was responsible for the sham sub-contracts. In closing submissions, the defendants accepted that Mr Piercy was not on a frolic of his own and, in any event, the extent of Mr Piercy's role in the creation of sham sub-contracts was not particularly relevant to BCEG's claim against the defendants. 5. There is no doubt that Mr Xiao and Ms Chen were active participants in the creation and dissemination of the sham sub-contracts. As far as Mr Xiao is concerned, he was provided with the sham sub-contracts by email on several occasions as documents to be submitted to BCEG China in support of a drawdown request. The suggestion that he had no knowledge of the sham sub-contracts cannot be accepted. Obtaining these funds would have been a matter of keen interest to him as the director of BCEG; the Varsity Lakes project was a major project then underway. Ms Dong squarely queried the sham sub-contracts when submitted and it is clear that Mr Xiao was involved in giving instructions to his staff to formulate a response. 6. Ms Chen did not give evidence and thus ascertaining her position is more difficult. However, it is apparent that Ms Chen was centrally involved in the provision of sham sub-contracts to BCEG China. Of particular significance, when Ms Dong queried the sham sub-contracts submitted in support of the third drawdown request, access to these documents was immediately restricted to only three people, including Ms Chen: see [229]. In addition to the sham sub-contracts, BCEG China was also provided with 'Applications and Certifications for Payment', often signed by Ms Chen on behalf of Interlink Laboratory or otherwise with her name in type and, from the third drawdown on, from a second set of books containing higher figures. Where provision of these documents to BCEG China appears to have been done to assist in the overall justification of figures in these drawdown requests, and where these documents were clearly prepared or, at least, approved by Ms Chen, this is consistent with Ms Chen being aware that inflated figures were being put forward to BCEG China in the drawdown requests, which needed to be supported by documents, including documents authorised by her. These matters, together with Ms Chen's absence from the witness box, lead me to conclude that Mr Chen was aware that sham sub-contracts were being provided in support of drawdown requests. 7. Each of the sham sub-contracts made fraudulent representations that any work claimed to have been undertaken on the Varsity Lakes project which answered the description in the sub-contract was authorised by Trojjan, when it had not, and that any progress claim submitted by Trojjan to BCEG in respect of the works had a proper basis, when it did not. Mr Xiao and Ms Chen knew that the representations were false. Mr Xiao and Ms Chen knowingly caused BCEG to submit drawdown requests to BCEG China for amounts referable to sub-contracts which they knew to be shams in order to support drawings under the Varsity Lakes facility in amounts which exceeded that which was in fact necessary to undertake the Varsity Lakes project. This was not in the interests of BCEG, as it caused the company to incur a liability to BCEG China to which it would not otherwise have been subject. The conduct of Mr Xiao and Ms Chen was intentional, undertaken in the knowledge that it was not in the interests of BCEG but actuated by self-interest. How the funds advanced in the third, fourth and fifth drawdowns were used is not known. 8. The defendants submitted that, even if Mr Xiao was aware of the sham subcontracts and they were of import in the drawdowns, the sham subcontracts were simply a means by which an authorised end was to be achieved – being to divert funds to West Wyalong – and therefore permitted by BCEG China and BCEG directors. I have already found that there was no agreement with Qing Yang to divert the Varsity Lakes facility to the West Wyalong project. I also note that the funds advanced by BCEG China as a consequence of the sham sub-contracts far exceeded the funds required to construct the West Wyalong project. This breach of directors' duties has been established. Claim in respect of Beijing Dragon 1. BCEG held no interest in Beijing Dragon, which was controlled by Mr Xiao. The defendants contended that the payments made by BCEG to Beijing Dragon were justified as reimbursement of pre-BCEG funding and made with the knowledge and agreement of Qing Yang. I considered the evidence in respect of pre-BCEG funding at [58]-[67]; I was not satisfied that funding was provided in the amounts suggested by Mr Xiao, nor was it clear what amounts of funding were provided. I also preferred Qing Yang's evidence, who said he did not agree that Mr Xiao could transfer monies from BCEG to Beijing Dragon to offset monies which Beijing Dragon has previously transferred to BCEG (Australia). Rather, I found that the payments from BCEG to Beijing Dragon were fraudulent transactions effected by Mr Xiao and implemented by Ms Chen, in full knowledge that the payments were fraudulent. 2. The payments to Beijing Dragon were not made for any purpose advancing the interests of BCEG and were not made for valuable consideration, albeit I have assumed in Mr Xiao's favour that the last payment was reimbursement of a travel ticket purchased for the purposes of BCEG. As a result of the interest Mr Xiao held in Beijing Dragon at the time, he and Ms Chen were in a position of conflict when they caused BCEG to make the payments. The only apparent purpose of the payments was to benefit Mr Xiao. By reason of their positions as directors of BCEG or their day-to-day role in managing the affairs of the company, Mr Xiao and Ms Chen knew this. Their conduct and actions were not undertaken in good faith and the best interests of BCEG but actuated by the pursuit of self-interest, in conflict to their duties to BCEG. Mr Xiao and Ms Chen acted in breach of their fiduciary duties to BCEG on each occasion they caused BCEG to make unauthorised payments to Beijing Dragon. Diversion of first and second drawdowns 1. This brings us to the final allegations of breach of directors' duties, being the diversion of $1.28 million from the first drawdown and $2.05 million from the second drawdown. The defendants rightly complained that these matters were not pleaded. The defendants submitted that, as the monies used to pay for the Rocks apartment and the Wagga land were paid before the third drawdown, and thus before any sham sub-contracts had been deployed in support of a drawdown request, no claim for breach of fiduciary duty could be sustained in respect of these payments. Nor were the funds obtained as a consequence of the West Wyalong payments. 2. BCEG did not seek an account of profits, nor tracing, in relation to the Rocks apartment. Rather, BCEG submitted that it sought equitable compensation; it did not matter where the money had been spent, although it seemed that the money had, in fact, been spent to purchase an apartment. As to the funds used to buy the Wagga land, BCEG submitted that the fact that funds were applied in this manner entitled BCEG to an account of profits, which was sought in respect of the Wagga project. The appropriation of these funds to the project could be taken into account in that exercise. 3. As to the extent to which BCEG should be held strictly to its pleading, parties are under an obligation to plead their case with sufficient particularity so that their cases may be fully understood and so that no party is taken by surprise: rule 14.14, Uniform Civil Procedure Rules 2005 (NSW). This obligation is heightened in fraud cases, where "[a]n allegation of fraud should be clearly and distinctly pleaded and put": Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) (2003) 214 CLR 514; [2003] HCA 25 at [38] (per McHugh, Kirby and Callinan JJ); Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279; Magill v Magill (2006) 226 CLR 551; [2006] HCA 51; Ritchie's Uniform Civil Procedure NSW at [14.14.25]. 4. Commercial list statements and responses are not, in the formal sense, "pleadings" for the purposes of Part 14 of the Uniform Civil Procedure Rules, as Part 14 applies only to "proceedings commenced by statement of claim and to proceedings in which a statement of claim has been filed": rule 14.1. But while the commercial court "does not operate as one of strict pleading, it is also not one of no pleading": Swiss Re International SE v Simpson [2018] NSWSC 233; (2018) 354 ALR 607 at [34] (per Hammerschlag J). Accordingly, while rule 14.14 does not technically apply to commercial list statements and responses, parties to litigation in this List must still comply with the obligations in sections 56 to 58 of the Civil Procedure Act, which require parties to co-operate to articulate the issues clearly and precisely, such obligation continuing during trial: Nowlan v Marson Transport Pty Limited (2001) 53 NSWLR 116; [2001] NSWCA 346. 5. Procedural fairness also requires that the parties be held to their pleaded case and that any relief be confined to that properly pleaded: Banque Commerciale SA at 286-287; Gould & Birbeck & Bacon v Mount Oxide Mines (1916) 22 CLR 490 at 517 (Issacs and Rich JJ). However, the factual substratum of a case may change during trial as further evidence is given during cross-examination or existing documentary evidence takes on a new light when viewed against the body of evidence as a whole. In that event, Allsop P observed in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors [2008] NSWCA 243 at [164]: Litigation is a dynamic human activity. Changes in how a case is put can be expected. This often occurs in large commercial cases. Such change, and the potential for it, makes it, however, all the more important that legal practitioners and parties ensure that the clear enunciation of issues keeps pace with that growth and change. This responsibility will encompass parties and their legal representatives making clear what is being put and also what they regard as not legitimately part of the controversy, if it is apparent to them that an issue not pleaded or presented is being relied on. 1. A divergence from the facts which emerge during trial, and those pleaded, does not necessarily disentitle a plaintiff from the relief sought. In Leotta v Public Transport Commission of New South Wales (1976) 9 ALR 437, the evidence of negligence that emerged during trial was different to that pleaded and particularised. However, Stephen, Mason and Jacobs JJ considered that, if the cause of action upon which the plaintiff sued had emerged at the conclusion of the evidence, the trial judge was right to put the matter to the jury. Whilst the pleadings should have been amended to make the facts alleged and the particulars of negligence precisely conform to the evidence which had emerged, their Honours considered at 446: Now, and for many years past, a plaintiff does not fail … through failure formally to apply for amendment, where the evidence has disclosed a case in the cause of action fit to be determined by the tribunal of fact. Particularly is this so when the action finally determines the rights of the parties in the cause of action. 1. Likewise in Dare v Pulham (1982) 148 CLR 658 at 664: (citations omitted, emphasis added). … the relief which may be granted to a party must be founded on the pleadings. But where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Particulars may be amended after the evidence in a trial has closed, though a failure to amend particulars to accord precisely with the facts which have emerged in the course of evidence does not necessarily preclude a plaintiff from seeking a verdict on the cause of action alleged in reliance upon the facts actually established by the evidence. 1. It is certainly the case that the facts which emerged during the trial were somewhat different than those pleaded. Documents which appeared, on their face, to record the arrangements between the parties turned out, following evidence given by Mr Piercy on subpoena and by Mr Xiao during cross-examination, to bear no relationship to the contractual arrangements in place. Many documents were backdated, bore false signatures or were difficult to understand in the absence of a person 'speaking' to the document. Further transactions, also fraudulent in nature, were revealed during the course of the trial. The plaintiff's pleading probably described what the plaintiff thought had happened, whilst a clearer picture of what had happened emerged at trial. 2. It is not difficult to see how this unfolded. Until shortly before trial, Mr Xiao and Ms Chen asserted a right to their privilege against self-incrimination and exposure to civil penalty such that there was neither a detailed defence nor evidence served by the defendants to shed light on what had occurred. Shortly before trial, the defendants abandoned their claims for privilege, the hearing was vacated, the defendants filed an Amended Response and proceeded to serve evidence, including an affidavit from Mr Xiao on 25 January 2022. It was Mr Xiao's affidavit that provided the first hint of misappropriation of monies from the first and second drawdowns, when Mr Xiao referred to and annexed bank statements and invoices said to evidence pre-BCEG funding. BCEG served affidavits in reply on 22 and 23 March 2022, to which Mr Xiao also replied on 1 April 2022, before the trial began on 4 April 2022. BCEG's ability to get to the bottom of the matter may have been hampered by the defendants' discovery of some 280,000 documents on 31 January 2022, which BCEG's legal representatives were still reviewing when the trial finally began, two and a half years after the commencement of proceedings and after a difficult procedural history: see [305]-[307]. 3. Having regard to the fact that the matters which gave rise to these additional claims of breach of directors' duty was Mr Xiao's first affidavit, any surprise which the defendants might otherwise experience by reason of these allegations is necessarily lessened. The contrary factual position advanced by BCEG was disclosed in the affidavits in reply served by its witnesses, to which Mr Xiao responded. These matters were canvassed in cross-examination. BCEG's cause of action remained the same, being a claim for breach of directors' duties as against Mr Xiao and Ms Chen. The relief sought was also the same, being either equitable compensation or an account of profits. The additional misappropriations from the first and second drawdown were in the same vein as the West Wyalong payments and the sham sub-contracts, albeit less complex and without any documentation and thus more akin to the Beijing Dragon payments. 4. The fact remains that the allegations now sought to be relied upon by BCEG in respect of the diversion of $1.28 million from the first drawdown and $2.05 million from the second drawdown are not pleaded. Ideally, BCEG should have sought leave to amend its pleadings on becoming aware that it had a basis to contend that these funds had been misapplied, either shortly before the commencement of the trial or during the course of the hearing. It did not do so but contended that it was entitled to seek relief in respect of these matters given its existing pleading. Balancing the need to clearly put an allegation of fraud to a defendant with the need to finally resolve all issues between the parties, including after protracted litigation, I have concluded that BCEG is not entitled to seek relief in respect of these additional allegations. 5. To be clear, however, the defendants put forward a case which concerned these payments, being generally that BCEG payments to them were justified by reference to pre-BCEG funding or Qing Yang's endorsement. In considering these matters, I have made findings of fact which are not precluded by the absence of any reference to these payments in BCEG's pleading. Further, to the extent that BCEG already sought an account of profits in respect of the Wagga project, the findings of fact which I have made in respect of the $2.05 million continue to apply in that exercise, being that the funds were provided by BCEG and not the defendants. BCEG is not however entitled to any findings that these payments amounted to a breach of directors' duties nor specific relief in respect of these payments. DEFENCES 1. Mr Xiao and Ms Chen relied upon four defences to any breach of fiduciary duty. First, BCEG by its shareholder, BCEG China, was said to have manifested fully informed consent to Mr Xiao's conduct. This was said to have been demonstrated by Mr Xiao's dealings with Qing Yang over the years. In addition, informed consent was said to be demonstrated by the inclusion of West Wyalong in the financial reports of BCEG and reports provided to Ms Dong. 2. As the defendants' submitted, a fiduciary who obtains informed consent from her or his principal cannot be held to account for profits made by her or his position or in circumstances of conflict: Maguire v Makaronis (1997) 188 CLR 449 at 466 (per Brennan CJ, Gaudron, McHugh and Gummow JJ). To obtain informed consent, the fiduciary must give full and frank disclosure of the material facts that give rise to the conflict or opportunity to profit: Breen v Williams (1996) 186 CLR 71 at 125-126 (per Gummow J) citing Boardman v Phipps [1967] 2 AC 46 at 104, 105, 112 and 117. What constitutes adequate disclosure depends upon the facts and circumstances of the particular case: Maguire at 466 (per Brennan CJ, Gaudron, McHugh and Gummow JJ). It may also depend upon the sophistication and intelligence of the person to whom disclosure must be made: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [107]. Disclosure may be a composite of information conveyed at different times and in different ways: Farah Constructions at [107]; Mualim v Dzelme [2021] NSWCA 199; (2021) 157 ACSR 367 at [115] (per Gleeson JA, with whom Bathurst CJ and Brereton J agreed). The consent must be that of the sole shareholder: North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589, 593–4 (per Bagallay LJ); Furs Ltd v Tomkies (1936) 54 CLR 583; Hogg v Cramphorn Ltd [1967] Ch 254; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378; Bamford v Bamford [1970] Ch 212; [1968] 2 All ER 655; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666. 3. This defence critically depended on an acceptance of Mr Xiao's evidence over the evidence of Qing Yang and other witnesses. As I have preferred the evidence of Qing Yang and found that there was no agreement that the defendants could use BCEG funds as they did, the evidential basis for fully informed consent has not been established. 4. Nor did the belated inclusion of the West Wyalong project in BCEG's financial reports and reports provided to Ms Dong evidence the fully informed consent of BCEG China to the defendants' actions. As to the financial reports, these representations were made from January 2015 onwards and post-date the diversion of funds to the West Wyalong project. The change in accounting treatment does not prove that BCEG China gave fully informed consent before the funds were diverted. As to the BCEG reports, it is apparent that, on becoming a director of BCEG following Qing Yang's retirement, Ms Dong accepted what she was then told by Mr Xiao in relation to the activities of BCEG and its projects. The inclusion of the West Wyalong project in BCEG reports from May 2016 on clearly confused Ms Dong. In any event, these representations, made by Mr Xiao, post-dated the diversion of funds to the West Wyalong project and do not prove that BCEG China gave fully informed consent before the funds were diverted. This defence fails. 5. Second, BCEG China is said to have ratified the actions of Mr Xiao. The defendants submitted that, on the basis of the same evidence, BCEG China was aware that the West Wyalong project was a BCEG project funded by the allocation of funds earmarked for the Varsity Lakes project. Otherwise, it was said that BCEG China was aware that the West Wyalong project was a BCEG project and implicitly aware that the West Wyalong project was funded in this manner as there was nothing to suggest that West Wyalong Marketplace was funding the project itself, or that Trojjan was funding the project, "There was simply no other source of funds available." I note that the defendants appear to accept that the funding for the project came entirely from the Varsity Lakes funding. 6. As the defendants submitted, ratification can only come from the sole shareholder of the plaintiff. The relevant person must be fully informed. The first that BCEG China became aware that the West Wyalong project was said to be an asset of BCEG, or a BCEG project, was from January 2015 onwards. The representations then made, in particular, in reports provided to Ms Dong describing BCEG's Australian projects, were less than fullsome. The first reference to the West Wyalong project in a report was in May 2016: see [287]. The first reference to the diversion of funds from the Varsity Lakes facility to the West Wyalong project was in March 2017: see [291]. Ms Dong was confused by this information and sought clarification, but there is no evidence that her questions were answered: see [292]-[294]. To the extent that any of these reports were drafted by Ms Dong, an explanation has been given: Ms Dong prepared the draft report by cutting and pasting from reports that had previously been provided to her by BCEG. This does not amount to ratification by BCEG China having been fully informed of the circumstances in which the defendants diverted the Varsity Lakes facility to the West Wyalong project, including by preparing false Trojjan invoices approved by Ms Chen for payment. 7. The defendants also submitted that BCEG ratified the West Wyalong payments by seeking, in these proceedings, to recover invoices rendered by BCEG to Interlink Laboratory for the Varsity Lakes project, which included the false invoices relating, in fact, to the West Wyalong project. The defendants' submissions included a table setting out the connection between the false Trojjan invoices and the corresponding BCEG invoice rendered to Interlink Laboratory. Assuming that the table correctly states the position, I can only say that the connection is not apparent on the face of the BCEG invoices and was likely not apparent to BCEG when commencing these proceedings. There is no other evidence that BCEG was otherwise aware, before commencing these proceedings, of the suggested connection between BCEG's invoices to Interlink Laboratory and the West Wyalong payments. The defence of ratification fails. 8. Third, the defendants relied on promissory estoppel. The defendants were said to have been induced, or the plaintiff acquiesced in the adoption of, an assumption that the plaintiff would not assert its strict legal rights, such that it would now be unconscionable for the plaintiff to insist on its strict legal rights: Moratic Pty Ltd v Gordon [2007] NSWSC 5 at [33] (per Brereton J); Waltons Stores at 428. Alternatively, the defendants relied on estoppel by convention, where parties make an assumption about the conventional basis of their relationship: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226 at 244-5; Legione v Hateley (1983) 152 CLR 406 at 430 (per Mason and Deane JJ); Moratic at [32]; Taouk v Assure (NSW) Pty Ltd [2017] NSWSC 534 at [90] (per Sackar J). 9. The defendants submitted that Mr Xiao had assumed a particular legal relationship existed between the parties (or expected that it would): the West Wyalong project would be funded by BCEG using the Varsity Lakes facility. To facilitate the receipt of those monies, Mr Xiao would prepare and render invoices which recorded the work the subject of the invoices as pertaining to Varsity Lakes project. Mr Xiao relied on the assumption by acting in a manner that would otherwise constitute fraudulent conduct; such reliance was said to have been known to Ms Dong and others at BCEG. For BCEG to depart from this assumption would occasion detriment to the defendants coextensive with their liability in relation to the West Wyalong project. To depart from the assumption would be unconscionable. The defendants relied on the same evidentiary premise to submit that a conventional estoppel arose as to how the West Wyalong project was to be funded. The parties were said to have conducted their relationship based on the common assumption. For BCEG to depart from this common assumption would occasion detriment to the defendants. 10. These defences critically depend on an acceptance of Mr Xiao's evidence over the evidence of other witnesses as to the diversion of funding from the Varsity Lakes facility to the West Wyalong project. I have found otherwise. These defences fail accordingly. 11. Fourth, BCEG was said to have acquiesced: Halford v Halford [2022] WASCA 1 at [147]; Hourigan v Trustees Executors & Agency Co Ltd (1934) 51 CLR 619 at 651 (per Dixon J); Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601 at 614-615 (per Isaacs J); Orr v Ford (1989) 167 CLR 316 at 345 (per Deane J). The defendants submitted that, on receipt of the financial statements for BCEG in January 2015, or the report on Australian projects in May 2016, BCEG became aware of the West Wyalong project but did not commence legal proceedings until 2019 (which I note was less than six years after becoming aware of the project). The same submission was made in respect of the Beijing Dragon payments, where it was said that BCEG became aware of these payments during the audit (although I note that, by and large, the audit did not refer to the payments in question). This was said to amount to acquiescence. To allow the claim in these circumstances was said to be unfair and unjust. 12. BCEG submitted that the defence of acquiescence requires the defendants to establish calculated (that is, deliberate and informed) inaction by BCEG or standing by, which encouraged them reasonably to believe that their conduct was accepted or not opposed: Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 at [79] (per French CJ). There was no evidence that BCEG was aware, when West Wyalong came to be included in the financial statements or reports on Australian projects provided to Ms Dong, of the breaches of fiduciary duty that Mr Xiao and Ms Chen had committed. BCEG was not well-informed and cognisant of their wrongdoing, nor stood by so as to encourage Mr Xiao and Ms Chen to believe that they would take no action against them. It was said to be evident from Ms Dong's email of 22 March 2017 that BCEG remained in the dark as to whether West Wyalong was a BCEG project or not. I agree. For the reasons advanced by BCEG, this defence also fails. CAUSATION AND REMEDIES 1. The principles in respect of causation and remedies following a breach of fiduciary duty were not in dispute and set out in BCEG's written submissions, which I gratefully adopt. Where the fiduciary owes custodial duties, such as a trustee or a company director, the causation inquiry is a strict one: O'Halloran at 277 (per Spigelman CJ). In such a case, a sufficient connection will exist, irrespective of whether separate or concurrent causes can be identified, when the loss would not have occurred if there had been no breach of duty: O'Halloran at 276-277; Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 215. In O'Halloran, Spigelman CJ reasoned that the strict standard of causation applicable to a trustee of a traditional trust with respect to the improper application of trust property applies equally to the case of a director of a company who has the power to dispose of company property and who does dispose of such property for an improper purpose: at 277. 2. The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation: Nocton v Lord Ashburton [1914] AC 932 at 952; Hill v Rose [1990] VR 129 at 144; O'Halloran at 272. Where the loss suffered by the plaintiff is the misapplication of company money or property, the obligation is on the defaulting fiduciary to restore or pay to the company either the assets which have been lost by reason of the breach or compensation for such loss: Maguire at 469, approving Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434; Re Dawson at 214. The amount of compensation is to be assessed at the time of trial, with the full benefit of hindsight and common sense, not at the date of breach: Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]; O'Halloran at 273, 276. Where a defendant's actions have made the assessment of loss difficult, doubtful questions should be resolved against that party: Armory v Delamirie (1722) 1 Stra 505; (1772) 93 ER 664; Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324; (2014) 101 ACSR 415 at [122]. It is also open to the Court to order an assessment of equitable compensation: Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027; (2015) 107 ACSR 445 (per White J). 3. When assessing causation for the purposes of disgorging a fiduciary of profits he or she has obtained as a result of a breach of duty, all that need be shown is that the profit would not have been made but for the wrongdoing: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [9] (per Kiefel CJ, Keane and Edelman JJ) and [88] (per Gageler J). As the policy underlying causation for breach of fiduciary duty is to vindicate the equitable obligation that has been breached, the 'but for' connection will suffice even where there are other contributing causes: Ancient Order at [84]. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the plaintiff by the gain of the defaulting fiduciary: Furs Ltd at 592. 4. The measure of the profit or benefit does not require mathematical exactness but only a reasonable approximation, with the purpose being to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty: Warman International Ltd v Dwyer (1995) 182 CLR 544 at 558. A court may make assumptions against the interests of the wrongdoer in determining the appropriate measure of an award, and in cases where an asset has fluctuated in value over a period of time, the court may value the asset at its highest value: Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681; [2014] HKC 368 at [171] (per Lord Millett NPJ). 5. Where the breach of fiduciary duty involves the misapplication of trust property (or company property, by analogy: O'Halloran at 277-278) to the use of the defaulting fiduciary, compound interest is appropriate: Hagan v Waterhouse (1991) 34 NSWLR 308 at 392-393, Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45 at 47; Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10 at [303]-[304]. The purpose of an award of compound interest is not to punish the defendant but to ensure that no profit should remain in the hands of the defaulting fiduciary "from so gross a breach of trust": Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 at 848; Wallersteiner v Moir (No 2) [1975] QB 373 at 388; Harris v Digital Pulse at [303]. Whether an order for interest ought to be made is a matter which remains entirely within the discretion of the court: Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480 at [11]. In Hagan, Kearney J concluded that the appropriate rate of interest was that specified in the Supreme Court practice note applicable at the time and that interest should be compounded on yearly rests: at 393. The same formula was used in Lewis v Nortex in similar circumstances at [13]. Relief against directors: West Wyalong payments 1. As a consequence of Mr Xiao and Ms Chen's breach of their directors' duties in respect of the West Wyalong payments, each of the West Wyalong payments was made which, according to Trojjan's MYOB records as considered by Ms Exner, totalled $3,033,053. The figure of $3,033,053 likely understated the amounts that were applied in satisfaction of Trojjan's liabilities in connection with the West Wyalong project because, in BCEG's 2014 financial statements, the figure of $3,423,739 is given as "Working Capital – WWMP". The defendants also relied, in their submissions, on the entry in the financial statements as reporting the borrowings in respect of the West Wyalong project. The entry appears to have recorded the proportion of the Varsity Lakes facility that was diverted to this project. 2. The defendants submitted that there was no evidence that false Trojjan invoices were issued to BCEG China or Exim Bank. Thus, it was said that there was no proof that these documents were causative, nor evidence that the false Trojjan invoices led to any loss. As already described, some of the false Trojjan invoices were amongst BCEG China's records, but the question is not whether the false invoices were causative of loss but whether the breach of fiduciary duty caused loss. It is clearly the case that funds advanced to BCEG for its corporate activities were diverted to the directors' personal project, with the result that BCEG was liable to repay funds which it did not use and which it would not otherwise have been obliged to repay. 3. As to how much the West Wyalong project actually cost, Mr Piercy said the construction costs, excluding fit-out, were "one four, one four one two at the most", which I took to mean between $1.4 million and $1.412 million. On 13 December 2010, Steve Mao of Trojjan emailed Mr Xiao, copied to Mr Piercy, regarding progress on the West Wyalong project, noting "We roughly paid 77.65% of the budget which is $2.9m." Using either figure, the funds diverted from the Varsity Lakes project to the West Wyalong project covered the entire cost of construction. 4. Against this, I note that the construction contract with Trojjan was for $4.2 million: see [54]. However, National Australia Bank reports in respect of applications for finance by Mr Xiao and Ms Chen record that the construction costs of the West Wyalong project were "paid out of cashflow" and that the "customer paid cash for construction of this centre". A finance submission prepared by a bank officer on 20 March 2013 noted, "Customer paid [in] full the entire centre from their own cash funds." 5. I note also that the defendants submitted that there was nothing to suggest that West Wyalong Marketplace was funding the project itself, or that Trojjan was funding the project, "There was simply no other source of funds available." That is, the defendants appear to accept that the funding for the West Wyalong project came entirely from the Varsity Lakes funding. This is consistent with the contemporaneous documents, save for Trojjan's construction contract. Where the contracts in evidence appear to have routinely over-stated contract sums, I conclude that the construction of the West Wyalong project was entirely funded by the Varsity Lakes facility. 6. As such, BCEG submitted that $3,423,739 was the proper measure of equitable compensation against Mr Xiao and Ms Chen, on which compound interest should be paid. The defendants submitted that it would be precipitate to make any award of compensation against West Wyalong Marketplace until an inquiry and account of profit had been completed. 7. Where the object of equitable compensation is to restore BCEG to the position it would have been in if there had been no breach of the directors' fiduciary obligations, the amount of compensation is the amount of the Varsity Lakes facility diverted to the West Wyalong project. The best evidence of the final amount is recorded in BCEG's 2014 financial statements, presumably on the instruction of Mr Xiao and Ms Chen: Ms Chen was responsible for the financial side of the business and Mr Xiao provided the financial statements to Ms Dong, following a change of accounting treatment in respect of the West Wyalong project. The figure of $3,423,739 thus provides a starting point for quantifying appropriate compensation. But is it not the end of the matter. 8. The West Wyalong payments added to BCEG's indebtedness to BCEG China under the Varsity Lakes facility. But by the trial, BCEG's indebtedness had been reduced by the defendants' repayments, in particular, by Interlink Laboratory. The only evidence of the balance owing under the Varsity Lakes facility was BCEG's financial statements or, more recently, the 2017 agreement where "the outstanding principal of the private hospital project" was agreed to be $2,528,949.42. Awarding equitable compensation in excess of this amount would, on the limited evidence available, do more than restore BCEG to the position it would have been in if there had been no breach of the directors' fiduciary obligations. 9. I agree that an award of compound interest is also appropriate in the circumstances. The breach of fiduciary duty involved the misapplication of company property; no profit should remain in the hands of the defaulting fiduciaries from so gross a breach of trust. I will return to whether awarding equitable compensation in this sum will involve double-counting having regard to equitable compensation awarded in respect of sham sub-contracts and Beijing Dragon payments at [412]. Relief against directors: sham sub-contracts 1. In making drawdown requests which included the cost of works derived from sham sub-contracts, Mr Xiao and Ms Chen intended that BCEG China would act on the requests and make the payments. From the third drawdown, 73% of the funds sought, being some $5.2 million, were referrable to sham sub-contracts. From the fourth drawdown, 94% of the funds sought, being some $5.6 million, were referrable to sham sub-contracts. From the fifth drawdown, 95% of the funds sought, being some $7.6 million, were referrable to sham sub-contracts. In response to each of the drawdown requests, BCEG China advanced the funds sought. Applying the percentage of the drawdown request referrable to sham sub-contracts, the funds advanced by BCEG China in response to these drawdown requests was at least $18.4 million, which would not otherwise have been forthcoming. More likely, if BCEG China had known that the drawdown requests were supported by false documents, it would not have advanced any funds. All of the funds advanced in the third, fourth and fifth drawdowns totalled US$22.9 million. Using the exchange rates evident from the BCEG Foreign Currency Account and BCEG Holding Account at the time of each drawdown, this equated to $23,205,444. 2. The defendants submitted that there was no evidence that sham sub-contracts were issued to BCEG China or Exim Bank (I have found otherwise). Thus, it was said that there was no proof that these documents were causative, nor evidence that the sham sub-contracts led to any loss. BCEG was said to have failed to identify the actual construction cost of the Varsity Lakes project or elucidate the causal connection between the sum comprising the difference between that figure and the figure obtained through the drawdowns and associated breaches of fiduciary duty. There was said to be no evidence that BCEG paid additional interest on the borrowings in respect of the Varsity Lakes as a consequence, nor that Mr Xiao and Ms Chen obtained monies and derived profits from these drawdowns. 3. There is no doubt that BCEG incurred additional indebtedness to BCEG China as a result of the sham sub-contracts than would otherwise have been the case. However, the only evidence of what BCEG owed BCEG China was BCEG's financial statements maintained during the period when Mr Xiao and Ms Chen ran the company. BCEG owed BCEG China $36,523,010 in the 2013 financial year, after receipt of the final drawdown: see [281]. It is difficult to say precisely what portion of this figure was referrable to the sham sub-contracts but it was likely at least $18.4 million and, more likely, $23.2 million. 4. After the 2013 financial statements, it will be recalled that Mr Xiao and Ms Chen brought the West Wyalong project onto the balance sheet in January 2015, merged BCEG China's loans in respect of the Varsity Lakes project and the Wagga project and then apportioned BCEG China's loans across five projects including the Varsity Lakes, Wagga and West Wyalong projects. The position was now as clear as mud. But nor did BCEG China adduce evidence of the funds which it said remained owing from BCEG in respect of the Varsity Lakes facility, where one would think such a record would be readily available to BCEG China. 5. As such, the most likely repository of the amount owing from BCEG to BCEG China, following the defendants' repayments, is the 2014 and 2017 agreements. I say this because, whilst the lending relationship between BCEG China and BCEG was different from Interlink Laboratory's obligation to refinance the facility, negotiations between Ms Dong and Mr Xiao do not appear to have drawn any clear distinction between these obligations. Under the 2017 agreement, $2,528,949.42 remained outstanding in respect of the Varsity Lakes facility. 6. What portion of this remaining indebtedness is referable to the third, fourth and fifth drawdown, obtained using sham sub-contracts? One could approach the matter on the basis that repayments are applied on a first-in, first-out basis, relying on Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572; (1816) 35 ER 781 (per Sir William Grant MR). As the High Court explained, this is "the ordinary rule of appropriation of debits against credits (and vice versa) in a single running account between banker and customer": Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 676; see also In the matter of French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 at [20]–[34] (per Campbell J). 7. The rule in Clayton's Case was not applied in Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109, where Chernov JA, with whom Warren CJ agreed, found, "the parties conducted their affairs on the basis that each of the six loans constituted a separate transaction, as distinct from a current account. Similarly, each loan was subject to separate documentation, and the communications between the parties relevantly bear out that they treated each loan as being independent of the other loans": at [26]. Here the Varsity Lakes facility was a single loan. Thus, I propose to proceed on the basis of the rule in Clayton's Case, noting also that, where a defendant's actions have made the assessment of loss difficult, doubtful questions should be resolved against that party: Armory v Delamiri. Applying this rule, repayments made by the defendants repaid amounts advanced under earlier drawdowns, such that the remaining indebtedness is entirely referable to the later drawdowns. 8. No figure was proffered by BCEG as to an appropriate amount of equitable compensation. No account of profits was sought. I consider that the amount of equitable compensation which will restore the plaintiff to the position it would have been if there had been no breach of Mr Xiao and Ms Chen's equitable obligations is to require them to pay compensation sufficient to discharge BCEG's remaining indebtedness to BCEG China under the Varsity Lakes facility. The parties agreed, in the 2017 agreement, that this figure was $2,528,949.42. BCEG is also entitled to compound interest given the egregious breach of fiduciary duties. 9. Equitable compensation in respect of the sham sub-contracts appears to me to overlap with equitable compensation in respect of the West Wyalong payments. The West Wyalong payments were made from funds obtained in the first to fourth drawdowns. Applying the rule in Clayton's Case, the West Wyalong payments – and the associated increase to BCEG's borrowings from BCEG China – have been repaid by the defendants, in particular, Interlink Laboratory already. Relief against directors: Wagga project 1. If BCEG had known that Mr Xiao and Ms Chen had diverted the Varsity Lakes funding to the West Wyalong project by rendering false invoices from Trojjan to BCEG, or known of the sham sub-contracts, then BCEG would not have entered into contracts with Interlink Wagga Central and Trojjan Constructions in respect of the Wagga project; BCEG would not have been willing to commit to an ongoing commercial relationship with entities associated with the couple. This is an unremarkable proposition and it was not suggested to BCEG's witnesses that they would have proceeded otherwise. BCEG was ignorant of the fraud at the time it approved the Wagga project in November 2011 and continued to be so at the time it assumed contractual liabilities in connection with the project between July 2012 and February 2013. 2. BCEG advanced amounts to Trojjan or Trojjan Constructions that it would not otherwise have been required to advance, but for the breaches of duty committed by Mr Xiao and Ms Chen. The best evidence of the sums advanced in connection with the Wagga project is contained in the 2014 financial statements, which record the value of the 'Working Capital The Mill Resid' as $8,249,974. (The defendants also relied on this figure.) BCEG sought equitable compensation of $8,249,974, together with compound interest or, alternatively, a taking of accounts and an account of profits in respect of the Wagga project. 3. The defendants submitted that there was no evidence of any loss suffered by BCEG in relation to the Wagga project. While BCEG identified an amount stated in the 2014 financial statements for working capital of $8,249,974, it ignored the sum stated in the 30 June 2014 financial report of $3,241,526 as income received from that project. This, with respect, made no sense. Figures appearing in a profit and loss statement cannot be readily offset against balance sheet items. It does appear that, as at 31 December 2014, some $8.25 million had been used on the Wagga project. Further, it was said that this was a 'no transaction' case and there was no pleaded claim for relief in the form of a taking of accounts. That is incorrect. BCEG clearly sought equitable compensation or, alternatively, an order for the taking of accounts and an account of profits in respect of the Wagga project. 4. The plaintiff must elect between equitable compensation and an account of profits when (but not before) judgment is given. BCEG said it was presently unable to make an election, given the paucity of information available in respect of the Wagga project and thus sought an order for the taking of accounts. Where the plaintiff does not know which remedy is more favourable at the time of judgment on liability, the court may order discovery or other orders designed to give the plaintiff the information it requires to make its election: GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113 (per Warren CJ, with whom Chernov JA and Dodds-Streeton JA agreed) at [56]. As there was very little information available at trial concerning the status and fate of the Wagga project, I consider that BCEG is entitled to this relief. 5. BCEG also sought orders rescinding or avoiding the contract with Interlink Wagga Central and Trojjan or Trojjan Constructions, and an order indemnifying BCEG for any liabilities it may occur to third parties by reason of the contracts with Interlink Wagga Central, Trojjan or Trojjan Constructions in respect of the Wagga project. I consider whether the contract with Interlink Wagga Central should be rescinded at [440]-[442]. As to Trojjan and Trojjan Constructions, these companies are in liquidation and were not parties to these proceedings. The liquidators should be appraised of the relief sought and given an opportunity to consent or oppose rescission of any contractual arrangements with these companies. Relief in respect of Beijing Dragon payments 1. BCEG sought equitable compensation against Mr Xiao and Ms Chen in the AUD amount equivalent (at the time of judgment) of the total of the Beijing Dragon transactions, where BCEG suffered loss as soon as the monies were paid without authority: Youyang at [63]. BCEG is clearly entitled to this relief, with compound interest. 2. I am again concerned whether such an order will result in duplication, to the extent that the Beijing Dragon payments increased BCEG's indebtedness under the Varsity Lakes facility, which has since been reduced by the defendants' repayments. Having regard to the bank statements, the following emerges: 1. The third drawdown was deposited to BCEG's Foreign Currency Account on 19 September 2011, resulting in a credit balance of US$6,880,325.30. Payments to Beijing Dragon on 3 and 25 November 2011 (US$30,000 and US$300,000) were made from this account, that is, with funds from the third drawdown. 2. The payment of $23,600 on 22 August 2012 was made from the BCEG Operating Account. The connection with the Varsity Lakes facility or any particular drawdown is unclear. 3. The fifth drawdown was deposited to BCEG's Foreign Currency Account on 14 September 2012 and the payment to Beijing Dragon on 21 September 2011 (US$300,000) was made from this account, that is, with funds from the fifth drawdown. 4. On 11 March 2013, BCEG China's loan in respect of the Wagga project was deposited to BCEG's foreign currency account opened with the National Australia Bank ending "AUSD01". On 18 March 2013, a payment was made from this account to Beijing Dragon of US$600,000, that is, with funds from the Wagga loan. 5. The final payment on 29 July 2013 ($10,000) was made from the BCEG Operating Account. The connection with the Varsity Lakes facility or any particular drawdown is unclear. (I have assumed in the defendants' favour that the payment on 28 August 2013 ($6,607.60) was legitimate). 1. As such, where equitable compensation awarded in respect of the sham sub-contracts will already cover the Beijing Dragon payments referred to in sub-paragraphs (a) and (c), an amount of equitable compensation in respect of the remaining Beijing Dragon payments only is appropriate, together with compound interest. ACCESSORIAL LIABILITY 1. BCEG relied on the rule in Barnes v Addy to pursue claims against Interlink Wagga Central and West Wyalong Marketplace. In Barnes v Addy itself, Lord Selborne LC (with whom James and Mellish LJJ agreed) said, after referring to trustees de son tort and fraudulent participants in breach of trust: (emphasis added) But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. 1. The emphasised portion is said to give rise to the two "limbs" of Barnes v Addy: "knowing receipt" and "knowing assistance": Farah Constructions at [112]. As the learned authors of Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis) note at [13-34], the essential characteristic of the first limb is transfer of property in breach of a fiduciary obligation, whilst the second limb deals with assistance by a third party not involving the receipt of property. As Jacobs' explains, the remedies available on a Barnes v Addy claim include (citations omitted): A defendant who retains property or its traceable proceeds will be subject to a constructive trust of a proprietary kind, and will be liable to restore what is retained. The defendant is also liable to pay equitable compensation or to an account of profits, subject to questions of election. Interest may be payable at mercantile rates on a compound basis. The defendant may be jointly and severally liable with the fiduciary in relation to money remedies, and may be jointly and severally liable to account for profits made by the fiduciary. 1. In Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405; (2014) 17 BPR 33,717, Gleeson JA, with whom Beazley P and Barrett JA agreed, summarised what needs to be proved to establish a claim for equitable compensation under the first or second limb of Barnes v Addy at [88], [90], [92] and [111]-[115]. In cases of knowing receipt, it is necessary to establish: 1. breach of fiduciary duty by the primary wrongdoer; 2. the third party received property by reason of the breach of duty; and 3. at the time of receiving that property, the third party knew of the "trust" (or duty) and of the misapplication of the relevant property. 1. The knowledge requirement contemplated by the third element in knowing receipt claims encompasses: 1. actual knowledge; 2. the wilful shutting of one's eyes to the obvious; 3. wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and 4. knowledge of circumstances which would indicate the facts to an honest and reasonable person. 1. As to the knowledge of corporations such as Interlink Wagga Central and West Wyalong Marketplace, knowledge may be imputed through the principles of agency law or the directing mind and will theory. In either case, it is the knowledge of natural persons that is to be attributed to the corporation. In relation to the latter, the focus is on the connection between the natural persons with knowledge and the corporation for which they are acting: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 582-583 (per Brennan, Deane, Gaudron and McHugh JJ); El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (per Hoffman LJ). Mr Xiao and Ms Chen were directors of Interlink Wagga Central and West Wyalong Marketplace. Their knowledge is to be imputed to the companies such that each company received funds or other benefits, knowing that those funds or benefits were a consequence of a breach of directors' duties by Mr Xiao and Ms Chen. 2. In claims for knowing receipt of property in relation to which fiduciary duties existed, the cause of action is complete when it is established that the defendant received the property with the requisite knowledge without having to examine causation questions: Farah Constructions at [199]. Where the action is to recover profits obtained by a knowing participant in a breach of fiduciary duty, the focus of the causation inquiry centres on whether the knowing participant's benefit or gain would not have been obtained but for the fiduciary's breach of duty: Ancient Order at [9] and [88]. In such cases, as the breach of fiduciary duty necessarily involves fraud, a defendant cannot avoid liability to disgorge profits dishonestly obtained by showing that those profits might have been made honestly: Ancient Order at [9]. Equally, where the case involves non-disclosure, "it is neither here nor there to speculate whether, if [the fiduciary] had done his duty, [the knowing participant] would not have been left in possession of the same amount of profit": Ancient Order at [9]. 3. If the directors of the company in breach of their fiduciary duties misapply the funds of the company so that they come into the hands of a stranger to the trust who receives them with knowledge (actual or constructive) of the breach, the third party cannot conscientiously retain those funds (or property acquired with those funds) unless the third party has some better equity. It becomes a constructive trustee of the misapplied funds or property acquired with those funds: Grimaldi at [563]; Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027. The Full Court in Grimaldi held (at [567]) that "a court would ordinarily as of course award proprietary relief against a knowing recipient where the property received (or its proceeds) was still extant." And to similar effect: "A knowing recipient will ordinarily be liable to hold what is trust property in the strict sense (or its traceable proceeds) as well as any profit received which is attributable to the trust property, to the extent that these remain extant and to return these to the claimant": at [510], quoting Hospital Products at 108 (per Mason J). Relief against West Wyalong Marketplace 1. BCEG submitted that West Wyalong Marketplace was liable to BCEG as a knowing recipient within the first limb of Barnes v Addy and sought orders to denude West Wyalong Marketplace of the profits made from its unconscientious receipt of the benefits of BCEG's funds that were wrongfully paid to Trojjan to meet expenses on the West Wyalong project, which expenses would otherwise have been passed on to West Wyalong Marketplace. 2. The defendants submitted that there was no accessorial liability as there was no primary wrongdoing: I have found wrongdoing, thus this argument fails. Further, it was said that BCEG had not established causation as a result of the conduct and knowledge of that conduct: Gray v National Crime Authority [2003] NSWSC 111 at [254]-[255]. I have also concluded otherwise: see [396]. 3. Mr Xiao was a director of West Wyalong Marketplace; his knowledge was also the knowledge of the company. As such, West Wyalong Marketplace received the benefit of the West Wyalong payments with actual or constructive knowledge of Mr Xiao's breaches of his fiduciary obligations owed to BCEG, which gave rise to the payments. West Wyalong Marketplace was liable as a knowing recipient of property in breach of fiduciary duty; the West Wyalong project constituted the traceable proceeds of the West Wyalong payments made in consequence of the company's knowing receipt. West Wyalong Marketplace held the West Wyalong project on constructive trust for BCEG and was liable to account for the benefits obtained since completion of the project, including any proceeds of sale. 4. BCEG sought two items of profit: the capital gain on the sale of the property and the rental income, together with compound interest from the date the profit was received until to the date of judgment, calculated at yearly rests: Warman International at 570; Hagan v Waterhouse at 392-393, approved in Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45 at 47 (per Handley JA). 5. As to capital gain, West Wyalong Marketplace bought the land for $300,000 and sold it for $2,010,000 on 28 February 2019. That represented a capital gain of $1,710,000. As BCEG paid the whole cost of construction, it should have the full capital gain, where the defendants had not led any evidence to establish why the full value of this advantage should not be disgorged: Warman at 561-562; Ancient Order at [13] (per Kiefel CJ, Keane and Edelman JJ) and [91] (per Gageler J). 6. As to rent, on 6 July 2012, West Wyalong Marketplace leased the West Wyalong site to Khaled El Sheikh Pty Ltd for ten years, with initial rent of $144,813 per annum, for a medical centre. The registered lease contemplated rental increases of 3.5% per annum. By BCEG's calculations, West Wyalong received rent from Kahled El-Sheikh totalling $1,234,632.72 from July 2012 until the sale of the property. 7. The defendants submitted that the calculation of capital gain was superficial, omitting the costs of construction paid by Interlink Laboratory. The claim for rent of $1,234,632.72 was said to be equally superficial, where there was no evidence that the rents had been paid nor of the costs of leasing. To this, BCEG submitted that no account need be taken of the costs of construction where those costs had been paid by BCEG. Rather, the defendants had simply omitted to put on evidence to reduce the profits it should otherwise be ordered to pay. 8. Where the claim is for the disgorgement of profits or benefits obtained by the fiduciary, once causation is established, the onus shifts to the fiduciary to establish why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged: Warman International at 561-562; Ancient Order at [13] and [91]. The burden of proof on the defendant is persuasive, and it falls to the defendant to justify his or her gains or the private advantage that has been obtained: Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 398 (per Isaacs J). The onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer: Ancient Order at [13] (per Kiefel CJ, Keane and Edelman JJ). Whilst BCEG's calculation of the profits enjoyed by West Wyalong Marketplace is certainly simple, it is a reasonable calculation of the full value of the advantage obtained by the company as a consequence of Mr Xiao's breach of fiduciary duties. No evidence has been adduced by the defendants to reduce this figure by reason of, say, managing agent fees or repairs and maintenance. In the absence of such evidence, BCEG is entitled to the amount calculated, together with interest. 9. There is no obstacle of principle standing in the way of a plaintiff making a split election where there are multiple defendants: Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [37]. BCEG has sought equitable compensation from the directors and an account of profits from West Wyalong Marketplace. BCEG is entitled to both remedies in principle, although I have concluded that no particular award of equitable compensation will be made in respect of the West Wyalong payments where it overlaps with equitable compensation in respect of the sham sub-contracts and where, applying the rule in Clayton's Case, the West Wyalong payments should be regarded as having been repaid by the defendants. That must also have consequences for the profit for which an account must be given: if the defendants have already repaid the West Wyalong payments, then these payments should be deducted from the profit as having been, effectively, made by the defendants. Where the sum of the capital gain and rental income is $3,244,632.70, before interest is added, then it may be that there is nothing left after accounting for the West Wyalong payments. I will wait to hear from the plaintiff in this regard, once the relevant interest calculations have been done. Relief against Interlink Wagga Central 1. As Mr Xiao and Ms Chen were directors of Interlink Wagga Central, their knowledge was also the knowledge of the company. Interlink Wagga Central, as the owner of the site, benefitted from BCEG's advances to the Wagga project, which funded the construction of Buildings 1, 2 and 3. While Interlink Wagga Central received the benefit of these improvements to its land, the company had actual or constructive knowledge of Mr Xiao and Ms Chen's breaches of their fiduciary duties owed to BCEG. As such, Interlink Wagga Central is liable as a knowing recipient of property in breach of financial duty; the profits derived by the company as a result of the improvements to the Wagga land constituted traceable proceeds of its knowing receipt. 2. A profit or a benefit made or obtained in breach of fiduciary duty may be held by the defaulting fiduciary on constructive trust: Furs Ltd at 592 (per Rich, Dixon and Evatt JJ); Hospital Products at 107-110 (per Mason J). The remedy especially will be appropriate where the gain takes the form of an identifiable asset: Grimaldi at [583]; Hospital Products at 107-108; Furs Ltd at 592 (per Rich, Dixon and Evatt JJ). A constructive trust ought not to be ordered if a less drastic form of relief is capable of doing full justice or if such an order will go beyond the necessities of the case: John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [128]-[129]. It will not be appropriate where it will affect the rights of innocent third parties: Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 at [10] (per Gleeson CJ, McHugh, Gummow and Callinan JJ). The personal remedy (compensation) as opposed to the constructive trust remedy is usually needed where the recipient has not retained the property: Grimaldi at [254]. 3. BCEG is entitled to a constructive trust over the profits derived from the proceeds of sale of the residential apartments, the construction of which was funded by BCEG. Interlink Wagga Central holds the profits of the Wagga project on constructive trust for BCEG and is liable to account to BCEG for these profits. BCEG sought an order that Interlink Wagga Central account to it for these profits. BCEG also sought an order that compound interest be paid on these profits. In either case, an inquiry was necessary to ascertain the profits that Interlink Wagga Central in fact derived in connection with its liability as a knowing recipient. 4. As the plaintiff submitted, rescission is another remedy available to a plaintiff to answer a breach of fiduciary duty: McKenzie v McDonald [1927] VLR 134 at 146; Maguire at 467; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 387-390 (per Brennan J). Its object is to restore the plaintiff to its former position before the breach of duty occurred. Unlike in common law, recission in equity is not constrained by the strict requirement of restitutio in integrum. Instead, equity retains its flexibility through the exercise of its powers to make such adjustments as may be necessary upon setting aside the transaction to achieve practical justice, with a view to the parties being restored substantially to their former position, even though perfect restitution may no longer be possible: Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 at [29]-[30]; Alati v Kruger (1955) 94 CLR 216 at 223-224. In equity, unlike at law, rescission is achieved by the decree of the court. In this case, the debate does not matter because even if the former view were to prevail, the act of claiming rescission in a pleading is sufficient notice: Ripani v Century Legend Pty Ltd [2022] FCA 242 at [246], citing Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 570 (per Brennan J). 5. Rescission will not be awarded where the order will adversely affect the rights of third parties who took their interest without notice, or where the party claiming rescission has, with full knowledge of the circumstances giving rise to the right to rescind, affirmed the transaction: Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [2003] NSWCA 71 at [73]-[74] (per Mason P, with whom Stein JA and Giles JA agreed); Giumelli at [10] (per Gleeson CJ, McHugh, Gummow and Callinan JJ); Grimaldi (2012) 200 FCR 296 at [277]; Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; [2000] WASCA 29 at [193]-[194]. 6. BCEG is entitled to rescission of its contract with Interlink Wagga Central in respect of the Wagga project. BCEG would not have entered into the contract if it had known of Mr Xiao and Ms Chen's breaches of fiduciary duty, of which Interlink Wagga Central had constructive knowledge. BCEG should be restored to the position it would have been in if the breaches of fiduciary duty had not occurred. The company should be released from any obligations under this contract where Interlink Wagga Central had full knowledge of the circumstances in which the contract was entered into. Alternate relief against Ms Chen 1. If I am wrong about the fact that Ms Chen was a de facto director of BCEG, I am comfortably satisfied that Ms Chen was an accessory to the misconduct of Mr Xiao. Ms Chen was intimately involved in the financial operations of the company, including its invoicing, payments, transactions on its bank accounts and the accounting treatment given to these transactions. Ms Chen worked closely with her husband in running the company. Ms Chen either prepared, or supervised the preparation of, false invoices for the West Wyalong payments. Ms Chen approved the West Wyalong payments and must have known that the Varsity Lakes facility was being used for an impermissible purpose. The funds so obtained benefited her and her company, CX & DN Holdings. Most likely, Ms Chen had actual knowledge but, at the very least, knew of circumstances which would indicate these facts to an honest and reasonable person. Ms Chen was knowingly involved in Mr Xiao's breach of fiduciary duties which he owed to BCEG and a knowing recipient of the proceeds of these breaches. 2. Mr Xiao's actions in respect of the sham subcontracts transgressed ordinary standards of honest behaviour amounting to dishonest and fraudulent breaches of his fiduciary duties. Ms Chen knew that Mr Xiao was a director owing fiduciary duties to BCEG but assisted Mr Xiao to give effect to his fraudulent design: Ms Chen was one of only three people at BCEG to whom access to a folder containing the sham sub-contracts was restricted. Ms Chen also certified BCEG invoices for payment by Interlink Laboratory and provided certifications to BCEG China from a 'second' set of books containing higher figures, apparently to corroborate the inflated figures sought in the drawdown requests supported by sham sub-contracts. 3. Likewise in respect to the Beijing Dragon payments, Ms Chen had actual knowledge that Mr Xiao's conduct in respect of the Beijing Dragon payments amounted to dishonest and fraudulent breaches of his fiduciary duties owed to BCEG. Ms Chen assisted Mr Xiao to give effect to this dishonest and fraudulent design as she controlled BCEG's bank accounts and effected the payments. Ms Chen had knowledge of circumstances which would indicate Mr Xiao's dishonesty to an honest and reasonable person. As a result, I would have made orders for equitable compensation against Ms Chen as an accessory. ORDERS 1. For these reasons I make the following orders, directions and notations: Claims against directors 1. Award equitable compensation against the first and second defendants in the amount of $2,528,949.42 (sham sub-contracts) together with $23,600, US$600,000 and $10,000 (Beijing Dragon payments) together with interest as specified in the Supreme Court Practice Note at the applicable time, such interest to be compounded on yearly rests. 2. NOTE that the plaintiff has yet to elect between equitable compensation and an account of profits against the first and second defendants in respect of the Wagga project, as that term is described in the judgment of Rees J. 3. Direct the plaintiff to provide a copy of this judgment to the liquidators of Trojjan (BCEG) Pty Ltd and Trojjan (BCEG) Constructions Pty Ltd within 14 days, together with a request that the liquidators provide their consent or advise their opposition to an order rescinding any contract between the plaintiff and the company in respect of the Wagga project within 14 days thereafter. 4. Grant liberty to apply in respect of the rescission of any contracts between the plaintiff and Trojjan (BCEG) Pty Ltd and Trojjan (BCEG) Constructions Pty Ltd. Claim against Interlink Laboratory 1. Judgment against the third defendant in the sum of $5,695,475.13 plus interest under section 100(1) of the Civil Procedure Act 2005 (NSW) at 4% per annum on $2,528,949.42 from 8 November 2017 to 30 June 2018 and 5% per annum on $5,695,475.13 thereafter, calculated on the basis of simple interest. Claim against Interlink Wagga Central 1. Rescind the contract between the plaintiff and the fourth defendant dated 1 July 2012. 2. Order the taking of accounts and an account of profits in respect of the Wagga project. 3. Declare that any benefits, profits or traceable proceeds derived or received by the fourth defendant in connection with the Wagga project are held on constructive trust for the plaintiff. 4. Order the fourth defendant to account for the benefits, profits or traceable proceeds derived or received by the fourth defendant in connection with the Wagga project. Claim against West Wyalong Marketplace 1. Declare that any benefits, profits or traceable proceeds derived or received by the fifth defendant in connection with the West Wyalong project are held on constructive trust for the plaintiff. 2. Order the fifth defendant to account to the plaintiff for the benefits, profits or traceable proceeds derived or received by the fifth defendant in connection with the West Wyalong project, if any, in the sum of $1,710,000 for capital gain and $1,234,632.72 rental income less the West Wyalong payments, as described in the judgment of Rees J, together with interest as specified in the Supreme Court Practice Note at the applicable time, such interest to be compounded on yearly rests. 3. Direct the plaintiff to provide a calculation of equitable compensation or profits in Australian dollars, together with interest calculations within 14 days, such that Orders 1, 5, 11 may be varied accordingly. 4. Order the defendants to pay the plaintiff's costs of these proceedings. 5. In the event that either party seeks to vary Order 13, direct: 1. the party seeking a variation to provide any affidavits and submissions (limited to three pages) within 28 days; 2. the other party to provide any affidavits and submissions in reply (limited to three pages) within 14 days of receipt of the material in Order 14(a); 3. such application to be determined on the papers. 1. Grant liberty to the plaintiff to re-list the matter for further directions in respect of the taking of accounts in respect of the Wagga project. 2. Direct the parties within 14 days to notify any errors or omissions. 3. The exhibits are to be returned forthwith. ********** POSTSCRIPT On 5 August 2022, the plaintiff filed a notice of motion seeking variation of Order 11 of this judgment pursuant to rule 36.16(3A) of the Uniform Civil Procedure Rules 2005 (NSW). Order 11 was originally cast in terms ordering West Wyalong Marketplace to account to the plaintiff for the benefits, profits or traceable proceeds it derived in respect of the West Wyalong project in sums less the West Wyalong payments. The variation sought was to delete the emphasised words from this order, such that no deduction should be made from the payments for which the account was sought. BCEG contended that, at [436] of this judgment, I should not have conflated the defendants and instead only limited the deduction of payments to be disgorged to payments actually made by West Wyalong Marketplace. On 17 August 2022 I heard that application and, for the reasons in that judgment, granted the application and made the variation sought: BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102. Amendments 23 August 2022 - Postscript explanation regarding [436] and variation of Order 11 of the judgment. 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: 23 August 2022