New South Wales Supreme Court CITATION : Lym International Pty Limited v Chen [2010] NSWSC 875 HEARING DATE(S) : 23 July 2010 JUDGMENT DATE : 23 July 2010 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 23 July 2010 1. Make order in para 1(A) of the notice of motion filed on 16 June 2010 adding after the words "first plaintiff" at the end of the substituted order four "but not so as to interfere with the completion of any contract for sale of a Unit entered into by the second defendant or any receiver appointed by the second defendant." DECISION : Refuse order 1(C) in the notice of motion. The plaintiffs do not press for order 1(B). 2. Order that the first defendant pay the second defendant's costs of the notice of motion filed 16 June 2010. 3. As between the plaintiff and the first defendant, order that the costs of the notice of motion be the plaintiff's costs in the proceedings for the taking of accounts. CATCHWORDS : PRACTICE AND PROCEDURE – application by plaintiffs to discharge or vary orders that have become otiose by way of changing circumstances – where defendant acquired property in breach of fiduciary duty – where orders made for taking of an account and reconveyance of property – where defendant not in jurisdiction and prevented from travelling – where defendant failed to take all necessary steps to allow account to proceed – whether to stay taking of account – orders for account not otiose – court has power to make appropriate orders to complete taking of account if defendant does not participate CATEGORY : Procedural and other rulings CASES CITED : Lym International Pty Limited v Chen [2009] NSWSC 167 Plaintiff: Lym International Pty Limited PARTIES : 1st Defendant: Yu Po Chen 2nd Defendant: Westpac Banking Corporation FILE NUMBER(S) : SC 2006/259402 Plaintiff: T Unsworth (sol'r) COUNSEL : 1st Defendant: n/a 2nd Defendant: M Thomas Plaintiff: Unsworth Legal Pty Ltd SOLICITORS : 1st Defendant: n/a 2nd Defendant: Henry Davis York IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Friday, 23 July 2010 2006/259402 Lym International Pty Limited v Yu Po Chen & Anor JUDGMENT 1 HIS HONOUR: On 2 March 2009, Hamilton J gave reasons for judgment in relation to two proceedings concerning a property at [xxxxx xxxx xxxxxx] Mona Vale. The registered proprietor of the property is the first defendant, Mr Chen. I am concerned with the first of those proceedings between Lym International Pty Limited ("Lym International") and two other plaintiffs against Mr Chen and Westpac Banking Corporation, which was joined as the second defendant. 2 In short, Hamilton J found that a transfer of the property from the first plaintiff, Lym International, to Mr Chen was obtained in breach of fiduciary duty. On 18 March 2009, his Honour made extensive orders to give effect to his reasons for judgment. His Honour ordered that a contract for sale and transfer from Lym International to Mr Chen be rescinded and set aside. His Honour declared that Mr Chen held the lots in the strata plan that then comprised the property on trust for Lym International. 3 His Honour ordered that Mr Chen transfer the units representing the property to Lym International, subject to the existing mortgage to Westpac, and ordered that if Mr Chen failed to do so, the Registrar execute the documents required to be executed by him. His Honour made consequential orders in relation to the payment of the Westpac mortgage after the transfer. 4 His Honour also made detailed orders for the taking of an account, including as to sums advanced by Westpac to Mr Chen secured by the Westpac mortgage that were paid to discharge an earlier mortgage over the property held by Kingsway Finance Company Pty Ltd ("Kingsway") at the time of its transfer by Lym International to Mr Chen. The enquiry is also to determine the sums, if any, advanced to Mr Chen by Westpac that were used in the construction of the townhouses on the property; any sums advanced to Mr Chen by Westpac that were not applied, either in the discharge of the earlier mortgage or in completion of the development; any sums advanced by Mr Chen from his own money to discharge the Kingsway mortgage; any sums paid by Mr Chen out of his own money to complete the construction of the townhouses; the sums, if any, paid by Mr Chen out of his own money in respect of the principal or interest arising from advances secured by the Westpac mortgage to discharge the earlier mortgage or to complete the townhouses; any income received by Mr Chen in relation to the occupation or use of the property; the sums, if any, paid by Mr Chen out of the income from the property for the discharge of the Kingsway mortgage or to complete the townhouses; the value of any benefit derived by Mr Chen from occupying the property or from any other persons doing so with his authority, less any income received in respect of that occupation; any liability Lym International may have for GST in respect of the contract for the sale or the transfer of the property from it to Mr Chen, or GST or stamp duty for the transfer of the units from Mr Chen to Lym International pursuant to his Honour's orders; and the value of any benefit derived by Lym International by reason of having net GST input tax credits after the transfer of the units to it. 5 His Honour refused an application by Mr Chen that on the taking of accounts, Mr Chen be entitled to make a claim for just allowances for his work and skill in completing the development of the property. His Honour ordered that upon a transfer of the units by Mr Chen to Lym International, the units should be charged in respect of any sums that might be found and certified by an associate judge in respect of the amounts which might, on enquiry, be found to be appropriate to be credited to Mr Chen, less the amounts found on enquiry appropriate to be debited to him, and also less any sum payable in favour of the plaintiffs for costs and interest pursuant to any other orders. 6 His Honour gave judgment in favour of the second and third plaintiffs against Mr Chen in the sums of $1,118,000 and $120,000 respectively, plus interest in amounts which in aggregate exceeded $300,000. 7 His Honour directed that the sum to be subject to the charge over the units in favour of Mr Chen be reduced to the extent that he failed to pay amounts due to the second and third plaintiffs under those judgments. 8 Orders were also made upon Mr Chen giving the usual undertakings as to damages that Lym International be restrained until further order from encumbering the units and that Lym International was required to place the net proceeds of sale of any of the units it received into a controlled moneys account to abide further order of the court. 9 On appeal to the Court of Appeal, his Honour's principal findings were upheld, but the orders in relation to the taking of accounts were varied. Of particular significance, for present purpose, is that it was held in the Court of Appeal that the units should not be transferred from Mr Chen to Lym International subject to the existing mortgage to Westpac. Young JA (who gave the principal judgment) said that the tendency of the cases was to indicate that where a plaintiff seeking to set aside a transaction procured in breach of fiduciary duty had a benefit obtained for which it must account, then the benefit should be neutralised when the contract is set aside, rather than there merely being inquiries as to adjustments that should be made with a charge in the meantime. 10 Nonetheless, the Court of Appeal made orders which contemplated that the units could be transferred to Lym International before the taking of accounts and the determination of what sum, if any, would be secured by the charge ordered by Hamilton J. 11 So far as the transfer of the property from Mr Chen to Lym International was concerned, the Court of Appeal made an order in the following terms in substitution for the corresponding relevant orders made by Hamilton J: " Order that upon the plaintiffs and Westpac Banking Corporation agreeing that there can be an assignment of registered mortgage AC548062S to the first plaintiff with no future liability on the first defendant or upon the first plaintiff tendering to the first defendant the amount of money necessary to discharge the said mortgage, the first defendant forthwith execute a transfer in registrable form of the Units in favour of the first plaintiff, and do all things and take all other steps necessary to convey the Units to the first plaintiff. " 12 Hamilton J's orders were varied in other respects. In particular, the Court of Appeal found that Mr Chen was entitled to seek just allowances. The orders were varied to require the associate judge to determine the amount of just allowances. That amount is to be brought into account as a credit in favour of Mr Chen on the determination of the sum to be secured by the charge. No relevant amendment was made to the orders imposing a charge upon the units to secure the sum found to be due to Mr Chen. 13 The Court of Appeal also varied the orders by providing that the judgments in favour of the second and third plaintiffs against Mr Chen were not to be taken into account in determining the amount secured by the charge. There was no variation to the orders restraining Lym International from encumbering the units without first giving Mr Chen notice in writing of its intention to do so. Nor was there any variation of the order requiring Lym International to place the proceeds of sale of any of the units it might receive into a controlled moneys account to abide the further order of the court. 14 The Court of Appeal added a new order as follows: " Liberty to any party to apply to a Judge of the Equity Division on 5 days' notice to discharge any order that may have become otiose by way of changing circumstance and generally including liberty to apply to vary any of these Orders in the event that the second defendant takes possession of or sells any of the units referred to in the declaration in Order 3 ." 15 The second part of the grant of liberty to apply is not relevant, but Lym International moves pursuant to the first part of the grant of liberty to apply in two respects. 16 In lieu of the order quoted earlier in these reasons concerning the tender of the moneys necessary to discharge the mortgage, and the execution of a transfer by the first defendant, the plaintiffs seek an order in the following terms: " Order that upon the plaintiffs and Westpac Banking Corporation agreeing that there can be an assignment of registered mortgage AC548062S to the first plaintiff with no future liability on the first defendant or upon the first plaintiff paying to the second defendant the amount of money necessary to discharge the said mortgage, the Registrar be appointed to execute for and on behalf of the first defendant a transfer in registrable form of the Units in favour of the first plaintiff and do all things and take all other steps necessary to convey the Units to the first plaintiff. " 17 Secondly, the plaintiffs seek a stay of the orders of 18 March 2009 for the taking of the account, and for the imposition of a charge upon the transfer of the units by Mr Chen to Lym International to secure any sum that might be found owing to Mr Chen on the taking of accounts. The plaintiffs also seek a stay of the orders restraining Lym International from dealing with the properties and requiring it to place the proceeds of sale of any of the unit into a controlled moneys account. 18 The plaintiffs point to a change of circumstances from the time the orders were made by the Court of Appeal on 12 November 2009 as justifying this course. That change of circumstances, it is said, is the failure by Mr Chen to take the steps he is required to take to allow the account to proceed. 19 On 19 January 2010, orders were made by the registrar as follows: " 1. Order that the proceedings be referred to an Associate Judge for the hearing of the taking of accounts and inquiry referred to in Order 8 of the Orders made [on] 18 March 2009 as amended by the orders of the Court of Appeal made on 12 November 2009 ... 2. On or before 2/3/10 the parties are to file and serve their detailed accounts verified by affidavit of all moneys received and disbursed by them and any other person on their behalf in relation to the following categories specified in Order 7 of the Orders: (a) plaintiffs: Orders 7(j) and (k); (b) defendants: Orders 7(a), (b), (c), (d), (e), (f), (g), (h), (i), and (i) [sic] . 3. Such accounts shall specify in respect of each payment or receipt the date and amount thereof and list such payments or receipts under each category specified by Order 7. 4. The items in such accounts to be numbered consecutively. 5. Any subpoenas or notices to produce to be issued by the parties to be served within 14 days of the service upon them of the said accounts. 6. The parties have liberty to apply within 28 days of the production to the Court of any documents pursuant to subpoenas or notice to produce issued pursuant to order 4 [sic] to apply to the Associate Justice [sic] to examine the other party or serve upon the other party interrogatories in respect of the account served. If no such subpoenas or notices to produce are issued, the parties may make such application within 28 days of service of the account upon them. 7. Within 28 days of the service of the said accounts upon them, or within 28 days of the completion of any examination or service of answers to interrogatories referred to in order 5, the parties are to file and serve on the other party any notice of charge or error. 9. The parties have liberty to relist the proceedings for the purpose of obtaining a date for the hearing of the inquiry by an Associate Justice [sic] into the said accounts pursuant to Order 8 of the orders of this Court made on an 18 March 2009. ..." 20 I am told that Mr Chen may not have had legal representation at the time those orders were made, as his then solicitor gave notice of ceasing to act at about that time. 21 The plaintiff's solicitor endeavoured to give notice of the orders to Mr Chen when the orders were made. The plaintiff's solicitor sent a letter to Mr Chen at his last known address, and being the address stated in Mr Chen's former solicitors notice of ceasing to act in Waterloo, but the letter was returned unclaimed. 22 Mr Chen did not file or serve detailed accounts verified by affidavit of all moneys received and disbursed by him in relation to each of the categories specified in order 2 of the orders made on 19 January 2010. 23 I am told that the plaintiffs served an affidavit to the extent they were able to do so, as required by them pursuant to the orders of 19 January 2010. 24 The plaintiff's solicitor deposes that it is not practicable to conduct an inquiry without Mr Chen's accounts, because the matters under inquiry are within his knowledge, and not within the knowledge of the plaintiffs. So far as I understand the position (and that understanding is hindered by the fact that the court file has been misplaced), Mr Chen has not appeared in the proceedings since his solicitor filed a notice of ceasing to act, although on one occasion before Bergin CJ in Eq, a friend, Mr Machee, was given leave to appear for him. On that occasion, her Honour noted that Mr Machee indicated to the court that legal practitioners would be instructed to appear for Mr Chen when the matter was next before the court on 23 July, that is, today. However, today there was no appearance for Mr Chen. Mr Machee was in court and indicated to the court that he was present as an observer. He did not seek leave to appear. 25 It appears from affidavits on the court file, one sworn by Mr Machee and two apparently sworn by Mr Chen, which were forwarded to the Registry by email, that Mr Chen is presently resident either in New Zealand or in China. 26 Mr Machee deposes on 28 June 2010 that Mr Chen was prevented from leaving China by Chinese authorities and he produced a judgment of Allan J of the High Court of New Zealand in proceedings concerning, amongst others, Mr Chen and the second and third plaintiffs, which supported that contention. 27 There has been extensive litigation in New Zealand between the second and third plaintiffs and Mr Chen. The details of that litigation are not presently relevant. In that litigation Mr Chen had been represented by a New Zealand solicitor, Mr Beveridge, who has communicated with the plaintiffs' solicitor in relation to the current proceedings. 28 Indeed on 17 May 2010 Mr Beveridge wrote to the Registrar requesting an adjournment. It also appears from Mr Chen's affidavits that he does not have the funds, or does not have access to funds, to enable him to pay for legal representation in these proceedings. He says that that position is brought about by Mareva type orders made against him in New Zealand. 29 I deal first with the application to vary the orders to allow for the transfer of the units from Mr Chen to Lym International upon Lym International tendering to Westpac the amount of money needed to discharge the mortgage, rather than its being required to pay such amount to Mr Chen. 30 Mr Chen is not present in this State to attend at a settlement to accept the payment from Lym International which he would then pass to Westpac to obtain a discharge of the mortgage. It is clear that the intention behind the orders of the Court of Appeal was that the moneys tendered by Lym International to Mr Chen would have to be applied by him to discharge the mortgage. 31 There is no real difference in substance between the payment being dealt with in that way and the payment been made directly by Lym International to Westpac. 32 In his affidavit of 19 July 2010, Mr Chen said: " 9. I understand that the Plaintiffs' [sic] have lodged an amount seeking to satisfy the Westpac Mortgage and take back the property at Mona Vale. 10. I do not see any reason to object as this was already ordered by the Trial Judge ... I will ... abide by a decision to be made by the Court ... ... 13. I do not object to the Plaintiffs' satisfying the Mortgage so long as such action will fully release me from further obligation (all debt) to the bank in respect of that mortgage and that the bank will provide myself and the Plaintiffs' [sic] with a financial account of the 3 units sold by its Liquidator. " 33 I take the reference to a liquidator to be to receivers appointed by the bank, which, I am told, have entered into the contract for the sale of three of the units. 34 There has not only been a change of circumstances since the orders were made by the Court of Appeal, but the changes are such as to render the order in question otiose, in the sense that it can have no practical function where Mr Chen is not present and able to accept a payment then to be used to be paid to Westpac to discharge the mortgage. 35 Mr Chen is not in the jurisdiction to provide an executed transfer and has made no offer to execute the necessary transfer or transfers himself. 36 In these circumstances it is appropriate to make the first order sought in para 1(A) of the plaintiffs' notice of motion of 16 June 2010. However I think it desirable to add some words to the order so as to make it clear that the transfers executed by the Registrar of the units will not interfere with the completion of any contract for sale entered into by receivers appointed by Westpac, or any sale which Westpac itself might have entered into in the exercise of its powers as mortgagee. 37 The order cannot confer any greater rights on Mr Chen or on Lym International than Mr Chen presently has. That is to say, his powers as registered proprietor are subject to the rights of Westpac as mortgagee and the order will not affect Westpac's position. 38 Accordingly I make the order in para 1(A) of the notice of motion filed on 16 June 2010 adding after the words "first plaintiff" at the end of the substituted order four "but not so as to interfere with the completion of any contract for sale of a Unit entered into by the second defendant or any receiver appointed by the second defendant." 39 The second question is whether the orders for the taking of account, the imposition of a charge and restraining the dealings by Lym International with the units should be stayed until further order. The only power I have to order such a stay is if the orders of Hamilton J as varied by the Court of Appeal have become otiose because of a change of circumstances. 40 Whilst there has been a change of circumstances, I do not consider that change has rendered the orders for the taking of accounts otiose. 41 It is true that no steps have been taken to progress the taking of accounts and I accept that the reason for that is because Mr Chen has not complied with the orders of 19 January 2010. It does not follow that the orders for the taking of accounts and the consequential orders are otiose. 42 The court has power to make appropriate orders to complete the taking of accounts even if Mr Chen does not participate, or does not properly participate. 43 It is likely that if Mr Chen does not comply with the orders for the taking of accounts he may not be able to establish the various matters referred to in earlier affidavits sworn by him or by its former solicitor for which he seeks credit. The earlier affidavits to which Mr Chen has referred in his affidavit of 19 July 2010 cannot be relied upon as compliance with the orders made in para 2 of the orders of 19 January 2010, although it is no doubt possible to discern from some of the paragraphs of that affidavit some of the claims Mr Chen makes. 44 Nonetheless, the orders specifically require him to identify with particularity the receipts and disbursements which he says fall within each of the separate categories for which an account is to be had. If that is not done, it becomes well nigh impossible for the plaintiffs to seek to falsify or surcharge such accounts, or to test whether in respect of some of the previous claims by Mr Chen the payments were, as he claims, made with his money. I understand the plaintiffs to contend that moneys Mr Chen may say were spent by him on the project were moneys which were misappropriated by him from them. 45 It should be possible to conclude the taking of accounts either with Mr Chen's full participation or without it. The orders would have become otiose only if it were not possible to take accounts. 46 Moreover I am not satisfied that it would be just to stay the taking of accounts and the orders imposing a charge and restraining dealings with the proceeds of sale of properties on the present evidence. 47 The plaintiffs submit that they should not be put to the expense of taking accounts because any such inquiry is bound to lead to a finding in their favour. They refer to observations of Hamilton J of 16 March 2009 (Lym International Pty Limited v Chen [2009] NSWSC 167 at [7]) when his Honour said that it was clear that Mr Chen would have to pay the plaintiffs sums larger than Lym International would have to reimburse to him. 48 His Honour was dealing with judgments to be entered in favour of the second and third plaintiffs. The Court of Appeal has made it clear that those judgments are to stand outside the calculation of the sum to be the subject of a charge. Moreover, Hamilton J refused Mr Chen's claim for a just allowance whereas the Court of Appeal allowed it. 49 There is also some prima facie force in Mr Chen's statement that he is presently without funds and that he has been fully occupied in what is evidently substantial litigation which has just concluded in New Zealand. 50 For these reasons, I refuse order 1(C) in the notice of motion. The plaintiffs do not press for order 1(B). 51 So far as the costs of the notice of motion are concerned, subject to hearing from the solicitor for the plaintiffs, my prima facie view is that Mr Chen ought to be ordered to pay the costs of the second defendant, and that the costs of the plaintiffs should be their costs on the taking of accounts. 52 I say that because the application has been partly unsuccessful, but the plaintiffs have been partly successful and their success in part is due to the fact that Mr Chen has not taken any step to enable the orders made by the Court of Appeal on 12 November 2009 for the transfer of the units to be implemented. 53 There remains the question as to how to progress the taking of accounts. 54 I propose to give some further consideration to that over the weekend. I will make further orders in relation to the taking of accounts to deal with the non-compliance by Mr Chen with the existing orders when I have given further consideration to the matters raised in his affidavit. 55 I stand the other matter over to 9.30 on Tuesday 27 July. [The plaintiffs' solicitor addressed on costs.] 56 I order that the first defendant pay the second defendant's costs of the notice of motion of 16 June 2010. 57 As between the plaintiffs and the first defendant, I order that the costs of the notice of motion be the plaintiffs' costs in the proceedings for the taking of accounts. ****** 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.