D & A Property Group Pty Ltd v Sonar Investments Pty Ltd [2014] NSWSC 1800

Supreme Court New South Wales

Medium Neutral Citation: D & A Property Group Pty Ltd v Sonar Investments Pty Ltd [2014] NSWSC 1800 Hearing dates: 5 December 2014 Date of orders: 08 December 2014 Decision date: 15 December 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Freezing orders made. Catchwords: EQUITY – interlocutory injunctions – freezing orders – whether freezing order should be made to preserve assets to meet claims under share sale agreement – where claim relates to forecast profits under the agreement – where potential GST liability may be payable – held, freezing order should not extend to forecast profits, but should include potential GST liability. Category: Procedural and other rulings Parties: D & A Property Group Pty Ltd (first plaintiff) Yan Zhang (second plaintiff) Qingrong Gu (third plaintiff) Sonar Investments Pty Ltd (first defendant) Sonar Australia Pty Limited (second defendant) Xiaofeng Li (third defendant) Liming Zhu (fourth defendant) Wei Zhu (fifth defendant) Representation: Counsel: I G Archibald (plaintiffs) M A Ashhurst SC (defendants)

Solicitors: McQiu Lawyers (plaintiffs) Swaab Attorneys (defendants) File Number(s): 2014/327487

Judgment (ex tempore) 1. HIS HONOUR: The third plaintiff David Gu holds 50 of 200 issued shares in the first defendant company Sonar Investments Pty Limited, the other shareholders being the second defendant Sonar Australia Pty Limited as to 110 shares, and the third defendant Li Xiao Feng as to 40 shares. The directors of the company are the said David Gu and Li Xiao Feng, together with one Li Ming Zhu and Xue Qin Chen. Sonar Australia Pty Limited has 100 issued shares of which 40 are held by Li Ming Zhu and 60 by Xue Qin Chen. Li Ming Zhu is the fourth defendant and his relative Wai Zhu is the fifth defendant. 2. Sonar Investments was incorporated as a result of an agreement between David Gu, Li Ming Zhu and Wai Zhu to acquire and develop a property at Hornsby. Mr Gu contributed by way of loan, $2.5 million and the Zhus roughly $7.5 million dollars. It appears to have been that their loans would bear interest, and that the participants would also be remunerated by consultancy fees. 3. On 1 May 2014, the Zhu interests informed Mr Gu that they wished to sell the development property. After some alternative proposals were explored, on 27 June 2014 Mr Gu and his business partner, who was represented by the second plaintiff Yang Zhang, as trustee for the Chen Family Trust, entered into a share sale agreement for the acquisition of the 75 percent of the shareholding in the company not held by Mr Gu. The parties to the share sale agreement were Sonar Australia and Li Xiao Feng, as vendors, and the first plaintiff D & A Property Group Pty Limited, and the second plaintiff Yang Zhang, as purchasers. D & A Property Group was held by Mr Gu and his business partner Mr Chen. 4. The share sale agreement provided for the acquisition of the subject shares for a total price of $11,625,000, of which $369,552 was consideration for the shares and $11,255,448 was the amount of the shareholders' loans owed by the company to the vendors at completion. Accordingly, the share sale agreement was founded on the concept that the vendors' shareholder loans would be discharged by payment of the purchase price. 5. It was also a condition of the share sale agreement that completion would not occur until the company's third party debts, totalling approximately $4.8 million, had been paid by the company. Under clause 6.2, a condition could be waived, but only in writing and by the party entitled to the benefit of that condition, and in the case of this condition, both the vendors and the purchasers were entitled to the benefit of the condition. 6. By clause 6.3, each party was required to use all reasonable endeavours within its own capacity to ensure that each condition was fulfilled by the time specified for completion. Clause 6.4 provided that, if a party had complied with its obligations under clause 6.3, it may terminate the agreement by giving notice in writing to the other parties if one or more of the conditions had not been fulfilled by the time specified for completion or otherwise agreed in writing. Clause 7.1 provided that, subject to the satisfaction of the condition which I have mentioned, completion would take place on 19 September 2014. 7. The purchasers paid a deposit under the share sale agreement of $1.05 million, and additional amounts of about $110,000 in respect of the deposit or on account of the purchase price. The condition in clause 6.1 was not satisfied and had not been satisfied by the completion date, 19 September 2014. David Gu requested an extension of the time for settlement within which the purchasers might complete arranging their finance. On or about 22 September, at least according to the plaintiffs' evidence, the defendants agreed to permit an extension to 3 October 2014, and the purchasers paid a further $600,000 on account of the balance purchase price. According to the plaintiffs' evidence, which at this stage has not been challenged or contradicted, a further representation was made on behalf of the vendors that no action would be taken by the vendors to terminate the agreement before 10 October, and yet a further such representation was made on 29 September to the effect that no action would be taken to terminate the agreement prior to 15 October 2014. The plaintiffs say that they relied on these representations in not seeking urgent sources of finance which they contend would have been available to enable them to complete the agreement. 8. On 1 October 2014, the defendants proposed selling the subject property to a third party, to which for the sake of convenience I will refer to as the "Tong consortium". The plaintiff, by Mr Gu, said that he was open-minded about a sale, but needed to speak to his partner David Chen. On the same date, the vendors served notice of termination of the share sale agreement. Thereafter, Mr Gu and Mr Chen sought to persuade the vendors to proceed with the share sale agreement and not to sell to the Tong group, but while they advanced a number of objections, including the additional costs of such a sale, there does not appear to have been any suggestion that the sale to the Tong group was at an undervalue. 9. On 9 October 2014, at what the plaintiff describes as a purported board meeting of Sonar Investments, the directors resolved by majority, with Mr Gu dissenting, to sell the property to the Tong consortion for $15.5 million. That sale was ultimately completed on 27 November 2014 and as a result, $13,881,262.12 is held in the trust account of Swaabs, the former solicitors for the defendants. The difference between that amount and the selling price of $15.5 million, other than usual adjustments, reflects that 10 percent of the purchase price was retained pending completion of the pre-sales of the units in the development. 10. On 6 November 2014 – that is to say, after the sale to the Tong consortion had been negotiated, but before it had been completed – the plaintiffs commenced these proceedings claiming recovery of the loans made by the first plaintiff and third plaintiff to the company together with interest and consultancy fees and a sum representing their equity in the company, and, in connection with the share sale agreement, recovery of the deposit and other moneys paid under the agreement and damages for breach of the agreement. By way of interlocutory relief, the plaintiffs claim a freezing order in respect of the entirety of the balance proceeds of sale. 11. On the same day, a consensual interim arrangement was negotiated before Slattery J as duty judge who, upon the plaintiffs giving the usual undertaking as to damages, noted the defendants' undertaking to the Court, without admission, that the first defendant would deposit the proceeds of the property after deducting payments for fees or disbursements payable to consultants engaged in the development or the sale and stamp duty or other taxes payable by the first defendant, into an interest bearing deposit with a major Australian bank in the joint names of the solicitors for the plaintiffs and the solicitors for the defendants, to be held in that account pending further order of the Court. The defendants' undertaking was given without prejudice to their right to seek withdrawal of the deposited funds at the next hearing date. Notwithstanding that undertaking given on 6 November, and notwithstanding that the proceeds of $13.8 million were held by the defendants' former solicitors Swaabs by 28 November, when the proceedings returned before the Court on 5 December 2014, the undertaking had not been performed. 12. Presently before the Court is the question what interlocutory relief should be in place pending the final hearing of the proceedings. That in turn really reduces to whether and, if so, to what extent, the balance proceeds of sale of the Hornsby property should be "frozen". The need for a freezing order is propounded by the plaintiffs on the basis that the individual defendants are nationals and residents of the People's Republic of China; that there is some evidence that their apparently relatively sudden decision to sell the Hornsby property was triggered by what they described as cash flow problems; that after making a series of representations about extending the time for settlement, they failed to act in accordance with those representations; that they failed to comply with their undertaking to the Court to deposit the balance proceeds into an account in the name of the solicitors; and no explanation has been offered for that failure; and that the company prima facie has unpaid creditors in the order of $500,000. 13. As the hearing developed, it was not seriously disputed that some of the proceeds should be preserved and the real question was how much. As will be seen, that ultimately reduced in turn to whether an amount should be preserved on account of a claim for damages for breach of the share sale agreement, to which I shall return. 14. First, it was not seriously disputed that the plaintiffs had a sufficiently arguable claim to be entitled to certain amounts in respect of their shareholding in, or loans to, the first defendant company to justify the preservation of a total of $5,185,935.25, made up of Mr Gu's loan to the company of $2,500,000, interest on that loan of $557,141, consultancy fees payable to him of $550,000, and 25 per cent of the residual equity in the company, being $1,578,794.25. As this was not seriously in dispute for the purposes of interlocutory relief, it is unnecessary that I say much more about it, save to note that upon examination of the balance sheet of the company and the calculation of outstanding liabilities of the company it was clear that provision for the interest to which I have referred, together with interest on the loans made by the defendant shareholders and for Mr Gu's consultancy fees, together with consultancy fees payable to certain of the defendants, had been included in the liabilities before calculation of net equity. 15. In addition to that amount, the share sale agreement and the financial statements indicate that the company had unpaid creditors of $465,382, and Mr Gu has adduced evidence, not presently the subject of challenge or contradiction, that he has paid $69,045 to creditors of the company to meet their claims and, accordingly, he claims to be entitled to that amount on the basis of moneys paid at the request and for the benefit of the company. Those amounts total $534,427 and, in my view, should also be preserved, subject to the proviso that they may be applied to payment of the company's liabilities which they cover. 16. It is in respect of the claims arising under the share sale agreement that there is controversy. The plaintiffs say that the vendors were not entitled to terminate the share sale agreement because a condition referred to in clause 6.1 had not been satisfied and the defendants had not, as required by clause 6.3, used all reasonable endeavours within their own capacity to ensure that it was fulfilled. Alternatively, they say that the defendant vendors were estopped from terminating when they did by reason of the representations to which I have referred. The plaintiffs say that they have suffered damages, being the profit that would have been generated by the development. That profit has been calculated at a little under $13 million, and the plaintiffs claim 75 per cent of that, presumably being the 75 per cent attributable to the shares the subject of the share sale agreement. 17. The defendants dispute that they were in breach of clause 6.3 and say that they were entitled to rescind under clause 6.4; but that even if they were not, there is no evidence that the plaintiffs, who when termination took place had already had to seek extensions because they were not in a position to complete, in fact had the ability to complete, nor any evidence that there are any loss of bargain damages. 18. It seems to me that, at the least, it must be acknowledged that the plaintiffs have, on the current state of the evidence, a seriously arguable case that the defendants were not entitled to terminate when they did, arising by way of equitable estoppel founded on the representations to which I have referred and the plaintiffs' detrimental reliance on them – including the payment of $600,000 on account of the balance purchase price. It also is clear enough that, even if the defendants were entitled to rescind, they would have to give restitution by repaying the deposit and other amounts paid on account of the purchase price. Thus, it was not seriously, if at all, in dispute that a sum of $1,760,000 should be preserved, representing the deposit of $1,050,000, the additional payments in connection with the deposit or on account of the purchase price of $110,000 and the payment on account of the balance purchase price of $600,000. 19. The remaining dispute, then, was in respect of the plaintiffs' claim for 75 per cent of the forecast profit on the development of $9,684,832. 20. It needs to be borne in mind that the subject agreement was a share sale agreement, not an agreement for the sale of land, nor a development contract. The subject of the agreement was shares in the company. In the case of a share sale agreement where there is breach by the vendor in failing to deliver the shares as contracted, prima facie the measure of damages is the market value of the shares minus the contract price; alternatively put, the difference between the true value of the shares and the contract price – if, in fact, the purchaser bargained for a price better than the true value of the shares. Those damages are assessed as at the date when the shares ought to have been delivered. While precision is not necessary, that must have been at or about the date of completion, September 2014, not at the end of the period of development, construction, and sale of the units in the development. 21. As it seems to me, what the plaintiffs' case really is in this respect, or must be if it could succeed, is that the shares were, in truth, worth more in September, or even October or November, 2014, than the contract price of $11.625 million. They seek to make that case by contending that the underlying assets of the company would not have been merely $15.5 million but something in the order of $28 million upon completion of the development and, accordingly, that the shares would have been worth significantly more than the amount they contracted to pay for them. 22. But there are a number of problems with that argument. The first is that that looks at the value the shares would have had after completion of the development, not at the date for delivery of the shares. 23. The second is that in a contract for sale of shares, like a contract for sale of land, the present value of the property is treated as a proxy for its future earning capacity. One does not get both the present value of the property the subject of the sale and its future earnings, because its present value is presumed to reflect its earning capacity. 24. Next, prima facie, in the absence of a stock exchange-like market for shares in a company of this kind, the contract itself provides a starting point for the value of the subject shares. As the evidence reveals that Mr Gu's offer initially was to purchase the shares based on a valuation of the underlying asset at $15 million and was negotiated up to $15.5 million by the Zhu interests, that is not a promising basis for a contention that its true value was at that time $28 million. More significantly, though, the value of the underlying asset at $15.5 million derives very strong confirmation from the fact that it was at that price that the sale to an arm's length third party, the Tong Consortion, was negotiated. 25. In those circumstances, it seems to me a difficult argument to contend that the true value of the shares at the date at which they should have been delivered was vastly in excess of the contract price. When one adds to that the lack of evidence of the purchaser's ability to complete in circumstances where they had already twice or thrice had to seek extensions because they had not been able to do so, and the fact that prima facie the defendants' interests are as entitled to the return of their loans and 75 per cent equity as the plaintiff is to his, and the circumstance that what is sought is a freezing order in this respect, not on account of a liquidated claim but on account of damages, where what will have to be proven is, in effect, that the sale to the Tong Group was at an undervalue, a matter which does not appear to have been at any time suggested by the plaintiffs, it seems to me that that is insufficient to justify denying the defendants their prima facie entitlement to their share of the proceeds of sale after making provision for the other amounts to which I have referred. 26. Accordingly, while I will afford counsel an opportunity to consider and address on the precise form of the order, if they wish, I propose to order that, upon the plaintiffs by their counsel giving to the Court the usual undertaking as to damages, the defendants be restrained until the hearing or further order from by themselves, their servants or agents, removing from Australia or in any way disposing of, diminishing the value of or dealing with any of their assets in Australia up to the unencumbered value of $7,780,362.25 otherwise than by payment of the same into an interest bearing account with a major Australian bank in the name of their solicitors, provided that the defendants are at liberty to pay from the said sum up to $465,382 to creditors of the first defendant and up to $69,045 to Mr Gu in respect of moneys paid by him to creditors of the first defendant. 27. The Court notes the undertaking of the defendants that they will, within 28 days, pay all outstanding creditors of the first defendant that are not disputed by it, and provide to the plaintiffs' solicitors a list of all creditors so paid, and a further list of any creditors whose claims are disputed by the defendants, and consider the plaintiffs' claim to have paid $69,045 to creditors of the first defendant and reimburse them any sums so paid that are not disputed by the first defendant. 28. The Court further orders that there be liberty to apply on three days notice, any such notice to specify the issues to be raised and the relief to be sought.