Supreme Court New South Wales Medium Neutral Citation: CTI Resort Holdings Group Pty Ltd v Chen [2017] NSWSC 142 Hearing dates: 24 February 2017 Date of orders: 24 February 2017 Decision date: 24 February 2017 Jurisdiction: Equity Before: Kunc J Decision: Proceedings to be dismissed if Plaintiff cannot prove capacity to do equity Catchwords: EQUITY – General principles – "Doing equity" – Plaintiff must demonstrate capacity to "do equity" by payment of purchase price for land alleged to be subject of constructive trust Legislation Cited: Civil Procedure Act 2005 (NSW) s 56 Cases Cited: CTI Holdings Pty Limited v Jingquan Chen [2015] NSWSC 2086 Huang v Wang [2015] NSWSC 510 Huang v Wang (2016) 114 ACSR 586; [2016] NSWCA 164 Category: Procedural and other rulings Parties: CTI Resorts Holdings Group Pty Ltd (ACN 603076026) (Plaintiff) Jing Quan Chen (First Defendant) Full River Pty Ltd (Second Defendant) Representation: Counsel: K.P. Tang (Plaintiff) J. Lee (Defendants) Solicitors: Shohmelian Legal (Plaintiff) SHL & Associates Lawyers (Defendants) File Number(s): 2015/181299 Publication restriction: No eX tEMPORE judgment Summary 1. The defendants, Jing Quan Chen and Full River Pty Ltd ("Full River"), move by amended notice of motion filed in Court today for orders against the plaintiff, CTI Resorts Holdings Group Pty Ltd ("CTI"), including: "1. An order pursuant to UCPR 13.4 (1) that the plaintiff's statement of claim be dismissed. 2. Alternatively, an order pursuant to UCPR 14.28 that the plaintiff's statement of claim be struck out. 2A. An order pursuant to section 74MA of the Real Property Act 1900 (NSW) that the caveat AJ624014 and AJ797203 lodged on the title of the land comprised of folio identifiers 128/754440, 129/754440, 132/754449 and Auto Consol 13267/105 by the plaintiff be withdrawn within 7 days from the date of these orders. 3. An order that the plaintiff pay the defendants (sic) costs of the proceedings, including the costs of this Notice of Motion. 4. An order that the defendants, either upon agreement with the plaintiff or upon filing with the registry of this Court a certificate of assessed costs, be paid its costs out of the money paid into Court by the plaintiff as security for costs." 1. The Court is satisfied that, in broad terms, the defendants are entitled to orders of the kind which they seek. However, for reasons which I will shortly explain, the Court is also satisfied that those orders should be stayed in order to give CTI an opportunity to satisfy the Court, and the defendants, that CTI is ready, willing and able to pay $1,350,000 to Full River if CTI is otherwise successful in the proceedings. Background 1. These proceedings are, in essence, an action for the loss of a corporate opportunity, being to acquire certain land near Old Bar on the north coast of New South Wales. CTI says that it was entitled to acquire that land. It further alleges that Mr Chen, in breach of fiduciary and statutory duties, appropriated that opportunity for the benefit of himself and Full River. 2. In the course of determining an earlier application in these proceedings for leave to lodge further caveats, Brereton J in CTI Holdings Pty Limited v Jingquan Chen [2015] NSWSC 2086 said: "8. If the plaintiff's case is correct, then it is at least arguable that, by taking advantage of the opportunity to acquire the land for a company of which he was a shareholder and director rather than for the plaintiff, the first defendant acted contrary to his fiduciary and, potentially, statutory obligations. Given that he is a 50% shareholder and director of the second defendant, it would seem strongly arguable that the second defendant had notice for relevant purposes of that breach. In those circumstances, it seems distinctly arguable that the second defendant has acquired the property as a result and with notice of the first defendant's breach of fiduciary duty, and thus that it is at least arguable that it acquired the property subject to a constructive trust in favour of the plaintiff. The relief claimed by the plaintiff in the subject proceedings, in seeking a transfer of the property to it, in return for reimbursement to the second defendant of the price it has paid, is consistent with such a case." The defendants' amended notice of motion — consideration 1. The relief claimed by CTI in its statement of claim includes (emphasis added): "1. An order requiring the Second Defendant to deliver up to the Plaintiff, upon the Plaintiff paying to the Second Defendant the amount of $1,350,000.00, all documents required for the Plaintiff to be able to register itself as the legal owner of the Property, including, but not limited to, the Certificate of Titles to the Property and executed Transfers of Land." 1. By that pleading CTI recognises, correctly, that if it is otherwise successful in its claim, it will be necessary for CTI to do equity by paying to Full River the $1,350,000 purchase price (the "Amount") which Full River paid for the property the subject of CTI's claim. The defendants' amended notice of motion relies on the fact that CTI has not demonstrated an ability to pay the Amount. 2. The evidence upon which the defendants have relied demonstrates the truth of that proposition. Furthermore, in an affidavit intended to be relied upon by CTI in response to the defendants' notice of motion, CTI's solicitor said: "9. In response to paragrphs [sic] 9 to 16 of Mr Lu's affidavit, I note that the Plaintiff should not be required to be in a position at the present time to be able to show capacity to pay the sum of $1,350,000.00, nor would it be reasonable or equitable for the orders sought by the Defendant / Applicant to be granted merely because of the position that the Plaintiff currently finds itself in. 10. The actions of Defendants, as pleaded in the Statement of Claim, have put the Plaintiff in an extremely detrimental position. 11. The Plaintiff is in discussions with a number of potential investors and financiers, one of which is MG & APSARAS Pty Limited. 12. The Plaintiff cannot be expected to have a more binding agreement to funds [sic] the purchase of the subject land should it be successful in these proceedings, until such time that the Court has made an order giving it the right to purchase that land from the Second Defendant." 1. The reference in the affidavit just quoted to a "more binding agreement" is in the context of CTI's evidence of a memorandum of understanding apparently relied on by CTI to answer the defendants' complaint. However, that memorandum of understanding for a loan of the Amount to CTI is expressed to be not legally binding and in no way demonstrates that CTI is ready, willing and able to pay the Amount. There is also evidence which suggests that the counterparty to that memorandum is of no financial substance. 2. The requirement for CTI to do equity, if it is successful, by paying the Amount is undeniable. If authority be required for that proposition, it is to be found in the decision of the Court of Appeal in Huang v Wang (2016) 114 ACSR 586; [2016] NSWCA 164. In that decision the Court of Appeal upheld the decision of Black J in Huang v Wang [2015] NSWSC 510. In the context of an application for leave to bring statutory derivative proceedings, Black J declined to grant leave where one of the parties was unable to demonstrate that it was able to do equity by paying a particular sum. His Honour said: "50. It does not seem to me that a sufficient prospect of obtaining such relief has been established to allow a conclusion that the proceedings are in Ismile's best interests. First, it must be recognised that a constructive trust is not necessarily imposed as a remedy for breach of fiduciary duty. The Court will generally only impose a constructive trust if no other appropriate remedy is available which is capable of doing full justice: Bathurst City Council v PwC Properties Pty Ltd [1998] HCA 59; 195 CLR 566 at [42]; Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 at [10]. In John Alexander's Clubs Pty Limited v White City Tennis Club Limited [2010] HCA 19; (2010) 241 CLR 1 at [128] – [129], in a case of alleged breach of fiduciary duty, the High Court observed that a constructive trust "ought not to be imposed if there are other orders capable of doing full justice" and that: "[I]t is not a complete answer to ... reliance on Giumelli that remedies other than a constructive trust may lack practical utility because of the impecuniosity of those against whom they are sought. One point made in the Giumelli line of cases is that care must be taken to avoid granting equitable relief which goes beyond the necessities of the case. Another point in those cases is that third party interests must be borne in mind in deciding whether a constructive trust should be granted ..." 51. Second, the authors of Meagher, Gummow and Lehane's Equity, Doctrines and Remedies, 5th Ed, 2015, [3.060] point to a well-established application of the equitable maxim that those who seek equity must do equity, namely that: "a beneficiary will get no assistance from equity against the trustee in seeking to recover trust property unless the beneficiary is prepared to defray the trustee's legitimate expenses. Those who claim the benefit of a constructive trust of some other sort must also be willing to do equity. A principal who claims an asset bought by a fiduciary on the basis that the asset ought to have been acquired if at all for the principal must be willing to do equity by paying the price of the asset so claimed." The authors there refer to the decision in Cole v Miles [2002] NSWCA 150 at [63], where Heydon JA (with whom Spigelman CJ and Hodgson JA agreed) observed that: "Equitable remedies, including the remedy of equitable compensation, have a flexible character. ... when a court recognises a constructive trust it is normally doing so pursuant to the fashioning, in part, of an appropriate remedial response. That remedial response can vary very considerably depending on the circumstances; it turns on what the wrongdoer did at the time of the wrongdoing, rather than on what the settlor of the trust stipulated well before the time of the wrongdoing. And the remedial response is also controlled by the need to avoid injustice even to the wrongdoer. [On the facts of that case] the wrongdoers had put their superannuation funds into a position in which gains could be made from the permits acquired; but those potential gains depended on the laying out of $400,000 at a time when gains were not certain. If the respondent had sought the imposition of a constructive trust in April 1999, it would only have been imposed if [the plaintiff] had paid [the wrongdoers] the $400,000 ..." 52. In the present case, a requirement for Dr Huang and DHE to do equity, or, as Heydon JA put it, to avoid injustice to WWE and Dr Wang who funded the acquisition of the Premises, requires that Ismile either assume the loan taken out by WWE or indemnify it for future payments under that loan and compensate WWE for the payments it has already made and associated expenses, which Ismile does not itself have the capacity to do without financial support from its shareholders. I can readily infer that WWE and Dr Wang have the capacity to provide financial support for Ismile's assumption of those obligations, since WWE has already acquired the premises with funds contributed by WWE and her husband. However, I cannot draw that inference in respect of Dr Huang and DHE, on the present state of the evidence." 1. In the Court of Appeal, Bathurst CJ (with whom McColl JA and Barrett AJA agreed) said: "65. Nor do I think the primary judge erred in requiring the appellants to affirmatively demonstrate the capacity of Ismile to do equity. Whilst it is true that relief could be moulded to impose a trust subject to a charge or lien in favour of WWE to secure its expenditure and liability under the mortgage, to ultimately obtain the benefit of any relief it would be necessary for Ismile to discharge the charge or release the property from the lien. It seems to me that any consideration of what was in the best interests of the company must include consideration of the capacity of the company to discharge any such charge or lien or, as the primary judge put it, to provide funds to do equity." 1. Mr K P Tang of Counsel, recently briefed for CTI, has, with respect, properly recognised the force of the argument put by the defendants. It is clear that proof of CTI's capacity to pay the Amount is not merely an afterthought or something that can be dealt with after it has otherwise succeeded in the proceedings. It is an essential element of CTI's entitlement to relief that it demonstrate that it is able to pay the Amount. 2. It is not for the Court to advise CTI as to exactly how it should go about satisfying the Court and the defendants that CTI will be able to pay the Amount if it otherwise succeeds. However — without limiting the commercial arrangements that CTI may choose to make — if CTI itself does not have the funds then it will have to provide evidence, at the very least, of a binding and irrevocable obligation on a financier of undoubted capacity to advance the Amount. 3. Mr J Lee of Counsel, who appeared for the defendants, again with respect, properly, did not press in the circumstances for orders today that CTI's claim should be struck out. He adhered to an alternative position foreshadowed in his submissions that some reasonable opportunity should be afforded to CTI to put its house in order on this point. I propose to make orders which allow that to occur. 4. On the other hand, having regard in particular to the provisions of s 56 of the Civil Procedure Act 2005 (NSW), this is not a matter which should be allowed to drag on indefinitely. If, within a reasonable period, CTI is unable to demonstrate that it is able to pay the Amount, then the defendants should not be vexed by this litigation. 5. To make good the Court's conclusion on this point, I propose to make orders dismissing CTI's claim and ordering CTI to pay the defendants' costs of the proceedings. However, I shall stay those orders to give CTI a reasonable opportunity to demonstrate that it can in fact pay the Amount. In my view, a reasonable period to do so is two months and the Court will make orders accordingly. Orders 1. The orders of the Court are: 1. On or before 21 April 2017, the plaintiff is to serve and file by email to the associate to Kunc J evidence of the plaintiff's ability to pay $1,350,000 to the second defendant should the plaintiff be successful in the proceedings. 2. The statement of claim is dismissed. 3. The plaintiff is to pay the costs of the defendants of the proceedings. 4. Orders 2 and 3 are stayed up to and including 27 April 2017. 5. The plaintiff is to pay the defendants' costs of the defendants' motion filed on 31 October 2016. 6. The proceedings including the cross-claim are listed for further directions before Kunc J on 26 April 2017 at 9.30am. 7. There be liberty to any party to apply in the first instance by email to the associate to Kunc J on 3 days' notice. ********** Amendments 09 March 2017 - Initials of Counsel for plaintiff changed from J.P. to K.P. 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: 09 March 2017