Summary of Justice Robson's judgment delivered on 22 November 2018.
The Victorian Supreme Court has found Australia Kunqian International Energy Co Pty Ltd (‘KQ’), a Chinese government-controlled company that agreed to invest $65.8 million in a Bowen Basin coal resource, did not do so by reason of a fraudulent geological report on the coal resources.
Justice Ross Robson said that, on the basis of the scant evidence KQ had provided, he was not satisfied KQ, its Chinese parent company, or the valuer they appointed to value the coal resource were misled or deceived by the false geological report. As a result, judgment will be entered in favour of the plaintiff, Flashing Lighting Company Ltd (‘FLC’).
FLC, a company owned by Mr Xiao and Madam Cui, agreed to sell to KQ, the wholly owned subsidiary of a large state-owned Chinese mining company, Yima, its 40 per cent interest in U&D, that owned a coal mining tenement in Queensland, for $51.6 million. FLC received part payment of the purchase price. It sues KQ for the balance outstanding of $29.2 million.
ANB, an Australian ASX-listed company, owned the remaining 60 per cent of U&D. It was managed by Mr Zhang, a Chinese Australian resident. As part of the agreement for the sale of FLC’s shares, ANB also agreed to sell 11 per cent of the shares in U&D that ANB held, giving KQ a 51 per cent interest in U&D.
Mr Zhang managed ANB, initiated the contact with Yima, and negotiated with Yima for the sale of the shares in U&D to Yima’s subsidiary KQ. Mr Zhang remained a director of U&D after the shares sold by ANB and FLC were transferred to KQ. At this time, U&D was also interested in acquiring Endocoal, an ASX-listed Queensland coal company. To demonstrate that U&D had the ability to acquire Endocoal, U&D was required to show that it held $70 million in cash.
Mr Zhang requested KQ to transfer $70 million to U&D to satisfy that requirement, and to use $29.2 million of that sum to pay FLC the moneys owed to it by KQ. KQ transferred the $70 million to U&D. Mr Zhang, however, did not pay FLC the $29.2 million but misappropriated that sum to himself.
FLC sued KQ for the $29.2 million. KQ refused to pay, raising several defences and counterclaims for the money already paid. Primarily, KQ alleged that Mr Zhang provided to Yima a fraudulent geological report that falsely claimed that the tenement held extensive coal deposits. Under the contract for the sale of the shares by FLC and ANB, the price was to be determined by a Chinese valuer nominated by KQ. KQ alleged that the valuer relied on the report, and that Henan SASAC, the majority owner of Yima, and Yima relied on the report in instructing KQ to purchase the U&D shares.
KQ also alleged that it suffered loss and damage in buying the shares ‘by reason of’ the valuer and Yima being misled and deceived by the fraudulent report, contrary to the Australian Consumer Law. KQ also alleged that FLC had in fact received payment, as its agent, Mr Zhang, had instructed KQ to make the payment to U&D, which bound FLC.
The trial was heard over 33 sitting days, including a week when the Court travelled to Hong Kong to hear evidence from witnesses.
Justice Robson found that in the circumstances he was not satisfied that the valuer, Yima or KQ was misled, as KQ sought the Court to infer. The Court also found that the other defences raised were not made out. Judgment was entered for FLC and the counterclaim was dismissed.
Justice Robson noted that many aspects of the 2011 purchase remained ‘a mystery,’ including why a major corporation such as Yima evidently did not carry out a detailed analysis of the geological and economic aspects of the proposed investment in Queensland.
Justice Robson noted KQ did not call any of the persons responsible for the valuation report. Indeed, one of them is said to have disappeared. KQ called only one of Yima’s directors to give evidence, and the Court did not accept that evidence. KQ failed to produce minutes of meetings and other relevant documents
In a separate proceeding, heard at the same time, FLC made a claim in the alternative, based on KQ’s defence, that FLC had been paid the $29.2 million by KQ, because, U&D held that sum, received from KQ, on trust for FLC. FLC sued U&D for breach of trust, Mr Zhang for misappropriating the trust moneys, and the alleged recipients of the trust moneys, being, Mr Zhang’s wife, Beibei Zhu and her companies, and Australia Wales, a company controlled by a friend of Mr Zhang.
Justice Robson found that the $29.2 million was not held on trust, and accordingly, dismissed FLC’s claim in the separate proceeding.
In the separate proceeding, U&D made a claim against the Zhu parties as knowing recipients and against Australia Wales, on the grounds of receipt as a volunteer. Justice Robson found that the claim made by U&D against the Zhu parties was made out, but dismissed the claim against Australia Wales. U&D also made claims against Mr Zhang and Ms Zhu for breaches of their duties as directors of U&D. Judgment was entered for U&D against Mr Zhang for the misappropriated sums ($29.2 million), and against Ms Zhu and her companies for the misappropriated sum they received ($16.2 million), or their traceable proceeds.
Mr Zhang appears to have vanished. He made no appearance at trial and the Court was told his whereabouts are not known.
NOTE: This summary is necessarily incomplete. The only authoritative pronouncement of the Court’s reasons and conclusions is that contained in the published reasons for judgment.