Credit Suisse AG v Gu (No 3) [2026] FCA 439

Original Word Document (435.3 KB) Federal Court of Australia

Credit Suisse AG v Gu (No 3) [2026] FCA 439

| File number: | NSD 211 of 2022 |

| Judgment of: | CHEESEMAN J |

| Date of judgment: | 17 April 2026 |

| Catchwords: | BANKRUPTCY AND INSOLVENCY – avoidance of transfer of property – mortgage – s 121 of the Bankruptcy Act 1966 (Cth) – purpose to defeat creditors – transferee’s good faith defence – value of consideration – s 121(5) restitution – assignment of trustee’s rights – distribution of surplus proceeds of sale of real property – competing claims following discharge of registered mortgage –

SECURITIES – mortgages – registered mortgage – unregistered mortgage – caveat – effect of avoidance in bankruptcy –

CONTRACTS – construction – deed of guarantee and indemnity – construction of security provisions – commercial contracts – surrounding circumstances –

EQUITY – equitable charge – whether contractual provision conferring “caveatable interest” creates proprietary security – distinction between caveat and security interest –

EQUITY – trusts – purchase money resulting trust – application of company funds to acquisition of property –

EQUITY – constructive trust – misappropriation of company funds – Black v S Freedman trust – tracing into proceeds of sale of real property –

EQUITY – fiduciary duties – directors – misuse of company property – proprietary consequences –

EQUITY – subrogation – subrogation to discharged registered mortgage – payments applied to secured debt – priority preserved –

PRIORITIES – competing equitable interests – timing of equitable interests – postponement – alleged representation by silence – failure to caveat – better equity – |

| Legislation: | Bankruptcy Act 1966 (Cth) ss 120, 121, Sch 2 (Insolvency Practice Schedule (Bankruptcy)) s 100-5

Evidence Act 1995 (Cth) s 140

Federal Court of Australia Act 1976 (Cth) s 51A

Explanatory Memorandum, Bankruptcy Legislation Amendment (Anti-Avoidance) Bill 2005 (Cth)

Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 1996 (Cth) |

| Cases cited: | Abigail v Lapin (1934) 51 CLR 58

Aged Care Services Pty Ltd v Kanning Services Pty Ltd [2013] NSWCA 393; 86 NSWLR 174

Austin v Royal [1999] NSWCA 222; 47 NSWLR 27

Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99; 18 BPR 36,683

Australian Guarantee Corp (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129

Banque Financière de la Cité v Parc (Battersea) Ltd & Ors [1999] 1 AC 221

Barnes v Addy (1874) LR 9 Ch App 244

Bellissimo v JCL Investments Pty Ltd [2009] NSWSC 1260

Black v S Freedman & Co [1910] HCA 58; 12 CLR 105

Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269

Bosanac v Federal Commissioner of Taxation [2022] HCA 34; 275 CLR 37

Boscawen v Bajwa [1996] 1 WLR 328

Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336

Calverley v Green [1984] HCA 81; 155 CLR 242

Cannane v J Cannane Pty Ltd (in liq) [1998] HCA 26; 192 CLR 557

Challenger Managed Investments Ltd v Direct Money Corp P/L [2003] NSWSC 1072; 59 NSWLR 452

Clark v Raymor (Brisbane) Pty Ltd (No 2) [1982] Qd R 790

Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; 149 CLR 337

Coleman v London County and Westminster Bank Ltd [1916] 2 Ch 353

Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300

Craythorne v Swinburne (1807) 33 ER 482

Daly v Sydney Stock Exchange Ltd [1986] HCA 25; 160 CLR 371

Devaynes v Noble (1816) 35 ER 781

Express Loans and Finance Pty Ltd v Hunter [2004] NSWSC 142; 11 BPR 21,451

Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA; 91 NSWLR 732

Fox v Percy [2003] HCA 22; 214 CLR 118

Ghana Commercial Bank v Chandiram [1960] AC 732

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296

Heid v Reliance Finance Corporation Pty Ltd [1983] HCA 30; 154 CLR 326

Hu v Blue Whale Entertainment Pty Ltd [2020] NSWSC 562

Hu v Gu [2020] NSWSC 1193

Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370; 148 ACSR 30

IWC Industries v Sergienko [2021] NSWCA 292; 20 BPR 41,785

J & H Just (Holdings) Pty Ltd v Bank of New South Wales [1971] HCA 57; 125 CLR 546

Jones v Dunkel [1959] HCA 8; 101 CLR 298

Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; 63 ACSR 557

Kellas-Sharpe v PSAL Ltd [2012] QCA 371; [2013] 2 Qd R 233

Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265

Luxton v Vines [1952] HCA 19; 85 CLR 352

Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 3 All ER 747

Masters v Cameron [1954] HCA 72; 91 CLR 353

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104

Muschinski v Dodds [1985] HCA 78; 160 CLR 583

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; 110 ALR 449

Nguyen v Sage Consultant Group Pty Ltd; Dang v Nguyen [2021] NSWSC 753; 20 BPR 41,989

Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109; 129 FCR 234

Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26; 127 FCR 217

Ong v Lottwo Pty Ltd (in liq) [2013] SASCFC 57; 116 SASR 280

Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; 258 CLR 525

Padovan and Anor v M GG Group Pty Ltd (In Liq) and Ors [2011] NSWSC 1080

Phillips v Phillips (1862) 45 ER 1164

Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335; 279 FLR 80

Re French Caledonia Travel [2003] NSWSC 1008; 59 NSWLR 361

Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696

Ryan v Dries [2002] NSWCA 3; 10 BPR 19,497

Schmierer v Taouk [2004] NSWSC 345; 207 ALR 301

Stone Leaf Capital Pty Ltd v Daly [2014] NSWSC 477

Sutherland v Brien [1999] NSWSC 155; 149 FLR 321

Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584

Sze Tu v Lowe [2014] NSWCA 462; 89 NSWLR 317

Ta Lee Investment Pty Ltd v Antonios [2019] NSWCA 24; 19 BPR 39,153

The Property Investors Alliance Pty Ltd v C88 Project Pty Ltd (in liq) [2023] NSWCA 291; 21 BPR 44,483

Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577

Troncone v Aliperti (1994) 6 BPR 13,291

Tyler v Thomas [2006] FCAFC 6; 150 FCR 357

Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669

Weston v Sanna (No 4) [2021] FCA 287

Weston v Sanna [2019] FCA 32; 16 ABC(NS) 410

JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (8 th ed, LexisNexis Butterworths, 2016) |

| Division: | General Division |

| Registry: | New South Wales |

| National Practice Area: | Commercial and Corporations |

| Sub-area: | General and Personal Insolvency |

| Number of paragraphs: | 476 |

| Date of last submission/s: | 5 February 2025 |

| Dates of hearing: | 4-15 March 2024, 29 July 2024 and 5 December 2024 |

| Counsel for the Applicant: | Did not appear |

| Counsel for the First Respondent: | Did not appear |

| Counsel for the Second Respondent: | Mr S Lawrance SC and Mr J Wherrett |

| Solicitors for the Second Respondent: | Lionheart Lawyers |

| Counsel for the Third to Sixth Respondents: | Mr S Docker SC, Mr D Meyerowitz-Katz and Ms L Cooper-Hackman |

| Solicitor for the Third to Sixth Respondents: | MJF Law |

| Counsel for the Seventh Respondent | Did not appear |

| Counsel for the Eighth Respondent | Ms E Beechey and Ms E Dunlop |

| Solicitor for the Eighth Respondent: | Norton Rose Fulbright |

| Counsel for the Ninth Respondent: | Did not appear |

| Counsel for the Tenth Respondent | Did not appear |

| Counsel for the Eleventh Respondent: | Did not appear |

ORDERS

| NSD 211 of 2022 |

| BETWEEN: | CREDIT SUISSE AG ABN 17 061 700 71

Applicant | |
| AND: | MENGHONG GU

First Respondent

GREAT LANDS INVESTMENT PTY LTD

Second Respondent

ZHI HUANG (and others named in the Schedule)

Third Respondent | |
| First Cross-Claim |
| AND BETWEEN: | ZHI HUANG (and others named in the Schedule)

First Cross-Appellant | |
| AND: | MENGHONG GU (and others named in the Schedule)

First Cross-Defendant | |
| Second Cross-Claim |
| AND BETWEEN: | i-Prosperity Pty Ltd ACN 142 091 585 (in liquidation)

Cross-Appellant | |

First Cross-Defendant | |
| Third Cross-Claim |
| AND BETWEEN: | Great Lands Investment Pty Ltd

Cross-Appellant | |

First Cross-Defendant | |

| order made by: | CHEESEMAN J |
| DATE OF ORDER: | 17 April 2026 |
THE COURT ORDERS THAT:

Declarations

1. It is declared that cl 7.2 of the Deed of Guarantee and Indemnity dated 2 June 2020 did not create an equitable charge or other equitable proprietary interest in favour of the Third to Sixth Respondents (the Hu Parties) over the property known as 10 Superba Parade, Mosman, New South Wales (the Superba Property), or the proceeds of sale of that property.

2. It is declared that the mortgage granted by the First Respondent (Mr Gu) in favour of the Second Respondent (Great Lands Investment Pty Ltd), dated 28 June 2019 (the Great Lands Mortgage) is void against the trustee in bankruptcy pursuant to s 121(1) of the Bankruptcy Act 1966 (Cth).

3. It is declared that pursuant to s 121(5) of the Bankruptcy Act and s 100‑5 of Sch 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy)), Great Lands is entitled to $2,193,209.62 from the surplus proceeds of sale of the Superba Property (Surplus F unds) being the amount equal to the value of the consideration of $3,000,000 given by Great Lands for the transfer avoided under Order 2, less $806,791 repaid.

4. It is declared that the Eighth Respondent, i‑Prosperity Pty Ltd (in liquidation) (IPPL), is subrogated to the rights formerly held by Credit Suisse AG as registered mortgagee to the extent of $280,000.

5. It is declared that IPPL holds an equitable proprietary interest in the Surplus Funds to the extent of $1,045,246.14 and any traceable accretions to that amount which interest arose on the settlement of the purchase of the Superba Property by Mr Gu, which occurred shortly before 3 May 2017.

6. It is declared that IPPL has not established any presently enforceable right of subrogation to any rights formerly held by Great Lands under the Great Lands Mortgage.

7. It is declared that the interests of IPPL identified in Orders 4-5 are not postponed to any interest claimed by the Hu Parties.

8. It is declared that the imposition of the “Higher Interest Rate” stipulated in cll 5.4, 5.5 and 5.7(a)(ii) of the Great Lands Loan Agreement executed on 28 June 2019 is void and unenforceable as a penalty.

Form of Final Orders – Priority, Payment and Costs

1. By 4.00pm on 15 May 2026, the parties are to confer and email the Associate to Cheeseman J proposed joint short minutes of order to give effect to the reasons for judgment and which address:

(a) the release of the Surplus Funds from the controlled monies account;

(b) costs; and

(c) any other matter necessary to finalise the proceeding.

1. If the proposed short minutes of order are not agreed, then:

(a) by the time specified in Order 9, the parties are to email the Associate to Cheeseman J:

(i) short minutes marked-up to show any areas of disagreement and each party’s competing formulation of each order; and

(ii) written submissions (limited to 5 pages) in support of any order(s) not agreed; and

(b) the dispute as to the form of final orders will be determined on the papers.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

CHEESEMAN J:

INTRODUCTION

1 This proceeding concerns competing claims to surplus sale proceeds from the sale of residential property at Mosman, New South Wales (the Superba Property), formerly owned by Menghong (Michael) Gu, following discharge of the registered mortgagee Credit Suisse AG. The Superba Property was sold on or about 18 January 2021 by receivers appointed by Credit Suisse. The proceeds of sale remaining after payment of the registered mortgagee and the receivers’ costs (the Surplus Funds) are in a controlled monies account. The Surplus Funds are in excess of $5.5 million.

2 The active parties are the second respondent, Great Lands Investment Pty Ltd; the third to sixth respondents, Zhi Huang, Ying Qin, Zhenhua Zhang and Po Hu (together the Hu Parties); and the eighth respondent, i-Prosperity Pty Ltd (In Liquidation) (IPPL).

3 Each of the active parties asserts an entitlement to payment from the Surplus Funds by reference to an interest formerly said to affect the Superba Property and now said to attach to the Surplus Funds. Each of the active parties has lodged a cross-claim by which their respective claims are pursued. I will refer to the cross-claims by reference to the moving party on each cross-claim.

4 Credit Suisse no longer claims any interest in the Superba Property or the Surplus Funds, and certain other respondents who earlier asserted interests likewise no longer press any claim.

5 Mr Gu departed Australia for New Zealand on or about 26 July 2020 and has not returned. His whereabouts are not presently known to any of the active parties. Although he is a party to this proceeding, he has not at any time taken any active part in the proceeding.

6 Mr Gu was a director of IPPL at the time of the transactions in 2017 by which IPPL says its funds were applied towards the acquisition of the Superba Property and, in that capacity, owed fiduciary duties to IPPL and duties under ss 180, 181 and 182 of the Corporations Act 2001 (Cth). Zhou Xiang (Harry) Huang was IPPL’s Chief Financial Officer and was a director of IPPL between 10 June 2011 and 15 March 2018. Mr Huang left Australia on the same day as Mr Gu. Mr Gu was IPPL’s sole director at the date the administrators were appointed on 15 July 2020. In their investigation of the affairs of IPPL, the liquidators have not been assisted by either Mr Gu or Mr Huang.

7 In the events leading to the Deed of Guarantee and Indemnity dated 2 June 2020 (the Hu Deed), which relevantly required IPPL to comply with court orders requiring it to disclose its assets and liabilities, IPPL relied on affidavits sworn by Mr Gu, in his capacity as a director of IPPL, and Mr Huang, in his capacity as IPPL’s Chief Financial Officer. Mr Gu and Mr Huang provided instructions on behalf of IPPL to IPPL’s solicitors in the litigation that preceded entry into the Hu Deed. The composition of IPPL’s board changed over time. To the extent it is relevant, I will address it in the section of these reasons addressed to IPPL’s cross-claim.

8 The principal question is the order in which the active parties are entitled to be paid from the Surplus Funds, if at all.

THE PARTIES’ COMPETING CLAIMS IN SUMMARY

9 By its liquidators, IPPL asserts equitable interests in respect of the net sum of $1,046,246.14 based on allegations of a purchase money resulting trust; a Black v S Freedman & Co [1910] HCA 58; 12 CLR 105 constructive trust; a constructive trust following breach of fiduciary or directors’ duties; and in respect of the sum of $280,000 in reliance on alleged rights of subrogation to the Credit Suisse Mortgage (registered from about 24 April 2017) and in respect of the sum of $1.2 million to the Great Lands Mortgage (granted to it by Mr Gu as a second mortgage).

10 Great Lands claims an interest arising from the Great Lands Loan Agreement (by which it lent $3 million to Mr Gu) and the Great Lands Mortgage (which secured the funds advanced pursuant to the Great Lands Loan against the Superba Property), which were both executed on 28 June 2019. The Great Lands Mortgage was not registered; instead, Great Lands lodged caveat AP356435, which was registered over the Superba Property on 28 June 2019 (the Great Lands Caveat).

11 The Hu Parties claim on two alternative bases. First, and primarily, that cl 7.2 of the Hu Deed created an equitable charge over the Superba Property and now over the Surplus Funds. Seco nd, and in the alternative, the Hu Parties claim as assignees of rights acquired on 17 January 2022 from Mr Gu’s trustee in bankruptcy, including the right to assert a claim that the Great Lands Mortgage is void under s 121(1) of the Bankruptcy Act 1966 (Cth).

STRUCTURE OF THESE REASONS

12 The list of issues agreed by the parties identifies the questions arising under the Hu Parties’ cross-claim, IPPL’s cross-claim and Great Lands’ cross-claim.

13 Before addressing the issues identified by the parties, I will make factual findings that inform my consideration and determination of the issues raised.

BACKGROUND

14 Findings of fact made in this brief outline of the background to this proceeding were largely agreed, or were otherwise not controversial on the documentary evidence.

15 On 27 February 2017, Mr Gu entered into a contract to purchase the Superba Property for $10 million.

16 On 20 March 2017, Credit Suisse agreed to advance $6 million to Mr Gu. The Superba Property was later registered in Mr Gu’s name subject to the Credit Suisse Mortgage.

17 Between March and April 2017, a number of payments were made out of IPPL bank accounts and into bank accounts associated with Mr Gu and Brighton Lawyers’ trust account. Those payments form part of IPPL’s present proprietary claims.

18 Between about 26 and 28 June 2019, the Great Lands Loan and the Great Lands Mortgage, along with a number of documents related to these transactions, were executed.

19 On 2 June 2020, the Hu Parties, Mr Gu, IPPL and i-Prosperity Capital Management Pty Ltd (IPCM) executed the Hu Deed, under which the Hu Parties contend that Mr Gu granted them a caveatable interest in the Superba Property.

20 On 10 August 2021, Mr Gu was made a bankrupt on application of David Gong, one of his creditors. David John Kerr was appointed trustee of his bankrupt estate.

21 On 17 January 2022, a Deed of Assignment and Sale was executed by which Mr Gu’s trustee in bankruptcy assigned to the Hu Parties (among other things) the trustee’s right to pursue claims under ss 120 and 121 of the Bankruptcy Act against Great Lands (among others). The Hu Parties, as assignees of the trustee’s choses in action, assert that the Great Lands Mortgage over the Superba Property is void pursuant to s 121(1) of the Bankruptcy Act.

22 As mentioned, the Superba Property was later sold by receivers appointed by Credit Suisse, the caveats over the Superba Property were removed pursuant to court orders, and the Surplus Funds which are now in contest were paid into a controlled monies account.

BACKGROUND – HU PARTIES’ JUDGMENT DEBTS

23 It is convenient to address the background that gave rise to the Hu Deed in brief chronological sequence before moving to detailed consideration of the Hu Parties’ cross-claim.

24 The Hu Parties’ claims arise out of an existing judgment debt owed by entities associated with Mr Gu, and the steps taken by the Hu Parties to secure payment of that debt. The judgment debt arose from proceedings in the Supreme Court of New South Wales. That proceeding was commenced on 10 March 2020 by the Hu Parties against Blue Whale Entertainment Pty Ltd and IPPL. The Hu Parties sought repayment of monies invested pursuant to a convertible debenture arrangement. At the time of commencing proceedings, the Hu Parties sought and were granted an ex parte freezing order in the sum of $5,750,000.

25 The proceeding was settled by agreement reached on 15 April 2020 but the defendants did not make any payment under the settlement agreement. The Hu Parties then sought to obtain an order for specific performance of the settlement agreement but instead, on 14 May 2020, obtained judgment in the amount of $5,761,972.60 in their favour in those proceedings (the First Judgment and/or First Judgment Debt): Hu v Blue Whale Entertainment Pty Ltd [2020] NSWSC 562 (Ball J). On 15 May 2020, orders were entered by consent that provided for the existing freezing order made on 10 March 2020 against Blue Whale and IPPL to continue to operate until the First Judgment Debt was paid in full. The existence of the First Judgment, and concern on the part of the Hu Parties that the First Judgment Debt would not be satisfied, formed the immediate commercial setting in which the subsequent arrangements were made.

26 Following entry of the First Judgment, the Hu Parties began to pursue available enforcement options and engaged in negotiations directed to obtaining guarantees and indemnities in exchange for forbearance from further enforcement action. A live issue in this proceeding is the extent of the security that was given to the Hu Parties under the Hu Deed.

27 On or about 2 June 2020, the Hu Parties (described as the Beneficiaries), Mr Gu and IPCM (described as the Guarantors), and IPPL entered into the Hu Deed. The Hu Deed was entered into against the backdrop of the First Judgment Debt. This is reflected in Recitals A to C. The Hu Parties’ concern that the First Judgment Debt would not be paid and their desire to pursue further relief including in relation to the freezing order was recorded in Recital D. By Recital E, the parties described the standstill agreement embodied in the deed that was set to last until 30 June 2020.

28 By cl 1.1 of the deed, Mr Gu and IPCM unconditionally and irrevocably guaranteed due and punctual payment to the Hu Parties of the First Judgment Debt on or before 30 June 2020 in the event Blue Whale and IPPL failed to pay by that date. By cll 5 and 8, Mr Gu and IPCM also unconditionally indemnified the Hu Parties against any loss, liability, damage, cost or expense arising from non-payment of the judgment debt by that date, and unconditionally and irrevocably undertook not to dissipate assets pending payment. The Hu Deed also contained cl 7 under the heading “Security”. The clause was structured in three parts. Clause 7.1 provided for IPCM to enter into a general security deed granting the Hu Parties security over its property. By contrast, cl 7.2 provided for Mr Gu to grant the Hu Parties a caveatable interest and consent to the lodging and maintenance of a caveat by them over his Superba Property until the First Judgment Debt was paid and discharged in full. The proper construction of cl 7.2 is an issue that arises on the Hu Parties’ cross-claim. The Hu Parties agreed to forbear from enforcement of the First Judgment Debt, or commencing proceedings in relation to it or the freezing order, including by seeking to cross-examine Mr Gu, up to and including 30 June 2020.

29 On or about 3 June 2020, the Hu Parties lodged the Hu Caveat against the title of the Superba Property, consistent with the consent given by Mr Gu in cl 7.2 of the Hu Deed.

30 The Hu Deed contemplated that the Hu Parties’ forbearance from enforcement was conditional and time‑limited. It did not extinguish the First Judgment Debt. Rather, it preserved the Hu Parties’ rights in the event of non‑payment, while regulating the manner in which enforcement could occur during the forbearance period and providing for guarantees, indemnities and some security to support payment of the First Judgment Debt.

31 The First Judgment Debt was not paid by 30 June 2020, and the Hu Parties became entitled to pursue their rights under the Hu Deed, including by enforcing the guarantees given by Mr Gu and IPCM and any security provided.

32 On 8 July 2020, the Hu Parties commenced proceedings against Mr Gu and IPCM in the Supreme Court of New South Wales to enforce the guarantees arising from the Hu Deed. On 21 August 2020 judgment was entered against Mr Gu for $5,929,897.86 in reliance on the Hu Deed: Hu v Gu [2020] NSWSC 1193 (Ball J) (the Second Judgment and/or the Second Judgment Debt). The Second Judgment Debt reflected the liabilities arising under the Hu Deed, including the amount of the First Judgment Debt and associated liabilities as determined by the court. The entry of judgment had the effect that the contractual liabilities under the Hu Deed merged in the judgment, with the consequence that the Hu Parties’ enforceable claim thereafter took the form of the Second Judgment Debt.

33 The present proceeding concerns, among other matters, the consequences of the Second Judgment for the Hu Parties’ asserted security interests and their entitlement to the Surplus Funds. In particular, Issues 6 and 7 address whether cl 7.2 of the Hu Deed created a proprietary security interest in favour of the Hu Parties and, if so, the scope of the liabilities secured by that interest following entry of the Second Judgment against Mr Gu. Issue 8 then addresses the priority of any such security interest as against competing claims.

34 The narrative facts relating to the First Judgment Debt and Second Judgment Debt are not in dispute. The dispute lies not in the existence of the First Judgment, the entry of the Second Judgment in reliance on the Hu Deed, or the sequence in which those events occurred. The dispute in relation to the Hu Deed is concerned with the character and scope of the Hu Parties’ security on the proper construction of the Hu Deed, and the Hu Parties’ entitlement to recover from the Surplus Funds.

THE HU PARTIES’ CROSS-CLAIM

Issue 6 – Whether cl 7.2 of the Hu Deed created an equitable charge

Overview

35 The first issue is whether cl 7.2 of the Hu Deed created an equitable charge in favour of the Hu Parties over the Superba Property and, if so, whether that interest now attaches to the Surplus Funds. Clause 7.2 provided that Mr Gu “hereby grants to the Beneficiaries a caveatable interest” in the Superba Property and “consents to the Beneficiaries lodging and maintaining a caveat on the title to the [Superba] Property until such time as the Judgement Debt has irrevocably been paid and discharged in full”. Clause 7 is extracted in full at paragraph [40] below.

Applicable principles

36 Whether cl 7.2 of the Hu Deed created an equitable charge is a question of construction. The question is to be determined objectively by reference to the text of that clause, its context and its purpose, which requires a reading of the instrument as a whole: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 at [46]-48.

37 The parties were substantially aligned as to that approach. The dispute was whether the language of “caveatable interest”, read in the setting of the Hu Deed as a whole, sufficed to create a proprietary security interest or conferred no more than a right to lodge and maintain a caveat.

38 The authorities establish that a clause authorising the lodgement or maintenance of a caveat does not necessarily create an equitable charge or other proprietary security interest. Whether it does so depends upon the proper construction of the particular instrument. In that regard, the parties referred, among other cases, to: Ta Lee Investment Pty Ltd v Antonios [2019] NSWCA 24; 19 BPR 39,153 at [97]-104; The Property Investors Alliance Pty Ltd v C88 Project Pty Ltd (in liq) [2023] NSWCA 291; 21 BPR 44,483 at [85]-[108], 112; Troncone v Aliperti (1994) 6 BPR 13,291 (Mahoney, Priestley and Meagher JJA); Aged Care Services Pty Ltd v Kanning Services Pty Ltd [2013] NSWCA 393; 86 NSWLR 174 at [82]-85; Bellissimo v JCL Investments Pty Ltd [2009] NSWSC 1260 at 13; Express Loans and Finance Pty Ltd v Hunter [2004] NSWSC 142; 11 BPR 21,451 at 8.

39 The authorities also indicate that the use of the expression “caveatable interest” may, depending on the text and context in which it appears, support the conclusion that a proprietary interest was intended, but it does not compel that conclusion. The inquiry remains one of construction. Relevant considerations include the presence or absence of familiar language of charge or mortgage, the place of the clause within the instrument, the evident commercial purpose of the transaction, and whether the clause is directed only to the practical support of a caveat or to the conferral of a present security interest.

Consideration

40 Clause 7.2 forms part of cl 7 which provides:

7 Security

7.1 Security for Beneficiaries

The Beneficiaries agreeing to the Guarantee Proposal at the request of the Guarantors is subject to and conditional upon I[P]CM entering into a general security deed under which I[P]CM agrees to grant a security interest in and over all of the I[P]CM's present and after-acquired property to the Beneficiaries and otherwise on such terms and conditions as may be reasonably required by the Beneficiaries.

7.2 Caveat

Gu hereby grants to the Beneficiaries a caveatable interest in the property – 10 Superba Pde, Mosman 2088, folio identifier: B/313930 (Property) and consents to the Beneficiaries lodging and maintaining a caveat on the title to the Property until such time as the Judgement Debt has irrevocably been paid and discharged in full.

7.3 No security for the Guarantors

The Guarantors have not taken, and will not take, security from the Debtors for or in consideration of the Guarantors assuming their obligations or any part of them under this document.

41 The Hu Parties submitted that cl 7.2 is properly construed as creating an equitable charge. They rely on what they submitted was the evident commercial purpose of the Hu Deed and the factual background preceding its execution. I have already detailed the First Judgment Debt, the concern on the part of the Hu Parties that Blue Whale and IPPL would not pay, and the Hu Parties’ agreement to enter into the Hu Deed to obtain the benefit of guarantees and indemnities and, in return, to forbear from enforcement of the First Judgment Debt and seeking further relief which they had foreshadowed, until 30 June 2020. Read in that context, the Hu Parties submitted that cl 7.2 was part of the security package for which they bargained in exchange for that forbearance.

42 The circumstances immediately preceding entry into the Hu Deed included continuing interrogation by the Hu Parties of the financial information provided by IPPL and Mr Gu, discussion from late May 2020 as to what security would be provided, and a title search of the Superba Property conducted on 22 May 2020 which disclosed the Credit Suisse Mortgage and the Great Lands Caveat. The evidence supports the proposition that the Hu Parties were insisting that any guarantee proposal be supported by security and, by that stage, the Hu Parties were not prepared to proceed on the basis of unsecured guarantees alone.

43 The Hu Parties also relied on the nature of the obligations undertaken by Mr Gu and IPCM under the Hu Deed as a whole, including obligations to guarantee payment by 30 June 2020, to indemnify the Hu Parties in respect of non-payment, and provide for security and undertakings directed to the preservation of assets pending payment.

44 In that context, the Hu Parties submitted that the Hu Deed formed part of a forbearance and security arrangement under which each guarantor was to provide security, with cl 7 appearing under the heading “Security”, cl 7.1 requiring IPCM to enter into a general security deed, and cl 7.2 conferring a caveatable interest and right to lodge and maintain the caveat over the Superba Property. The Hu Parties maintained that these were matters on which they relied in entering into the Hu Deed.

45 The lodgement of the Hu Caveat on or about 3 June 2020 was consistent with the consent given by Mr Gu in cl 7.2 to the lodgement and maintenance of a caveat until the First Judgment Debt was paid and discharged in full. It is not, however, determinative of the construction issue.

46 The Hu Parties relied on the language of present grant, the heading “Security”, a contrast between the two operative parts of cl 7.2 preceding and following from the use of the conjunction “and”, and the commercial context of the deed as a forbearance and security arrangement. Their submission was that cl 7.2 contains two operative parts: first, a present grant of a “caveatable interest”; second, consent to the lodgement and maintenance of a caveat. They contended that the first of those parts must have substantive work to do and that, read in the setting of cl 7 as a whole, that work is the creation of an equitable charge.

47 IPPL and Great Lands submitted that cl 7.2 of the Hu Deed did not create an equitable proprietary interest in the Superba Property, whether by way of equitable charge or otherwise. They accepted that the question was one of construction, but contended that the proper construction of the clause, read in the context of the deed as a whole and the surrounding circumstances on which they relied, yielded no more than a right to lodge and maintain a caveat.

48 Great Lands placed particular reliance upon the proposition that there is no rule of law by which an authority to lodge a caveat, granted in connection with an obligation to pay money, necessarily carries with it an equitable charge. Its submission was that the Court must construe the particular instrument according to its terms and implications, and that in the present case cl 7.2 was properly construed as granting only a right to lodge a caveat. IPPL advanced the same essential point by relying upon the discussion in The Property Investors Alliance to the effect that an agreement to lodge a caveat does not necessarily imply a grant of an interest in land.

49 IPPL directed attention to the Hu Parties’ submission that the expression “caveatable interest” must have “some work to do” and that such work must be the creation of an equitable charge. IPPL countered, by reference to Express Loans, that a clause authorising the lodgement of a caveat may have practical utility without conferring a proprietary charge, because the caveat itself operates as an impediment to dealings with the property. On that analysis, the work performed by cl 7.2 was said to be no more than the conferral of a contractual basis for the lodgement and maintenance of a caveat so as to impede any disposition of the Superba Property or the grant of further interests over it.

50 IPPL also relied upon the structure of the Hu Deed. It submitted that the Hu Parties received multiple forms of security under the broader arrangement, namely a guarantee from Mr Gu, a guarantee from IPCM, and an agreement by IPCM to enter into a general security deed over all of IPCM’s present and after-acquired property. Against that background, the fact that IPCM was expressly required to grant orthodox security, whereas Mr Gu was said only to grant a “caveatable interest”, was said to be a deliberate and significant distinction. IPPL submitted that the parties knew how to stipulate for orthodox security when that was intended, yet did not do so in relation to what Mr Gu gave in respect of the Superba Property.

51 Relatedly, Great Lands submitted in reply that the Hu Parties’ characterisation of cl 7.2 as containing “two limbs” overstated the effect of the clause. Great Lands submitted that cl 7.2 in its proper construction should not be read as containing two distinct operative grants, the first of which had to perform separate work. Rather, on its proper construction, the clause gave effect to one operative idea: the grant of a “caveatable interest”, with the reference to lodging and maintaining a caveat being an explanatory gloss on what the parties meant by that expression. Great Lands further submitted that the presumption against surplusage was weak or of little utility in the construction of a commercial contract, and that the Court should not force a proprietary charge out of the clause in order to avoid an asserted redundancy.

52 IPPL further submitted that cl 7.2 lacked the ordinary indicia of an equitable charge over real property. It pointed to the absence from the deed of any express right to take possession of the property, to procure its sale, or to seek the appointment of a receiver. It contrasted that omission with the description of an equitable charge in Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 595 (Buckley LJ), namely as a disposition by which property is made liable, or specially appropriated, to the discharge of a debt and which carries with it a right of realisation by judicial process. IPPL submitted that, in the absence of language specially appropriating the land to the debt, and in the absence of any express realisation mechanism or right to take possession and sell the Superba Property, cl 7.2 should not be construed as creating an equitable proprietary interest in it.

53 IPPL submitted that the significance of the features of the deed was reinforced by the fact that the deed was solicitor-drafted. Relying on Bellissimo, IPPL submitted that, if the parties had intended to create a charge or mortgage over the Superba Property, one would expect that arrangement to be expressed clearly in a deed prepared by lawyers in an adversarial commercial setting directed to securing payment, rather than left to implication.

54 Great Lands also relied on surrounding circumstances said to favour the narrower construction. It submitted that the Credit Suisse Mortgage prohibited the grant of a further security interest over the Superba Property without consent, and that, in the absence of any evidence of such consent, the parties should not readily be taken to have intended the Hu Deed to place Mr Gu in breach by granting an additional equitable mortgage or charge over the property. That same point was made orally by IPPL, which adopted its written submissions and those of Great Lands and added that the existence of the first mortgage prohibition formed part of the surrounding circumstances explaining why the Hu Parties were willing to accept no more than a caveatable interest.

55 In substance, therefore, the case advanced by IPPL and Great Lands was that cl 7.2 operated as a contractual mechanism supporting the lodgement and maintenance of a caveat, and thereby restraining dealings with the Superba Property, but did not expressly or impliedly appropriate that property to the discharge of the First Judgment Debt in a manner sufficient to create an equitable charge or other equitable proprietary interest. On that basis, they submitted that the Hu Parties’ proprietary case on Issue 6 should be rejected.

Determination

56 Issue 6 turns on whether cl 7.2 created an immediately operative equitable proprietary interest in the Superba Property in favour of the Hu Parties. If it did, further questions arise as to attachment to the Surplus Funds, the extent of the secured amount, and priority. If it did not, the Hu Parties do not have a proprietary interest in the Superba Property, nor the Surplus Funds.

57 The construction question is finely balanced.

58 Viewed at a general level, the Hu Parties’ construction draws support from the words of present grant in cl 7.2, the heading “Security”, the linkage between the caveat and payment in full of the First Judgment Debt, and the commercial purpose of the Hu Deed as a forbearance and security arrangement. Those matters support the conclusion that cl 7.2 was intended to have operative legal work to do.

59 However, those considerations are not determinative. While the Hu Parties emphasised that what they said were the two operative parts of cl 7 both had to be given “work to do”, the task of construction does not require that every phrase be forced to perform independent proprietary work. In the construction of commercial instruments, the starting point remains the legal effect actually produced by the text read as a whole, not the avoidance of semantic redundancy.

60 The competing construction advanced by IPPL and Great Lands also draws support from substantial textual and contextual features. In particular, cl 7.2 does not employ the familiar language of charge or mortgage; it does not expressly confer any right of realisation; and it is capable of operating according to its terms as a provision supporting the lodgement and maintenance of a caveat as a practical restraint on dealings with the Superba Property.

61 I accept that the reference to a “caveatable interest” cannot be ignored. But the difficulty for the Hu Parties is that the clause does not say that the Superba Property is charged, mortgaged, or otherwise specifically appropriated as security for payment of the debt due to the Hu Parties under the Hu Deed. Nor does it provide the ordinary incidents one would expect if an equitable charge over land had been intended, including any express mechanism for realisation. In the setting of a solicitor-drafted commercial deed concerned at least in part with the provision of security, those omissions are significant. Moreso when one considers the immediate adversarial setting that gave rise to the Hu Deed as a negotiated standstill. These factors tell against reading the clause as silently achieving what the text does not expressly say.

62 The text and structure of cl 7 tell against the construction advanced by the Hu Parties. Clause 7.1 expressly required IPCM to enter into a general security deed granting a security interest in and over all its present and after-acquired property. By contrast, cl 7.2 did not require Mr Gu to grant security in those terms, providing only that he grant a “caveatable interest” in the Superba Property and consent to the Hu Parties lodging and maintaining a caveat until the First Judgment Debt had been irrevocably paid and discharged in full.

63 Clause 7.3 reinforces that contrast in the way in which the subclauses of cl 7 are framed. Clause 7.3 provides that the Guarantors have not taken, and will not take, “security” from Blue Whale and IPPL for or in consideration of assuming their obligations under the Hu Deed. Read in that setting, the more persuasive construction is that the words “caveatable interest” in cl 7.2 were used to support, and give contractual footing to, the right to lodge and maintain a caveat, rather than to create a distinct equitable charge over the land.

64 That conclusion is reinforced, not weakened, by the proved commercial setting and the course of negotiations. The Hu Parties were insisting on a package of protections rather than merely personal promises of payment. Before the Hu Deed was executed, Mr Gu proposed express “security” in relation to the company, namely that “iProsperity Capital Management Pty Limited is prepared to grant a security interest over the assets of the company in favour of your clients”, and the Hu Parties’ solicitor responded by seeking particulars of those assets and their value. Thereafter, when the Hu Parties’ solicitor circulated revised formal documentation on 29 May 2020, he identified “two additional material provisions” being  “clause 7.2 – caveat” and “clause 8 – undertakings.”

65 On 1 June 2020, Mr Gu’s solicitor sought to “Delete Clause 7.2” while otherwise preserving the broader package of the proposed deal. The contemporaneous communications from the Hu Parties’ show why that was resisted. In the screenshot exchange of messages between the Hu Parties and their English translations, the issue was expressed in terms of “the right to put a ‘nail’ (Caveat) on his house”; it was said that Mr Gu was “not ok with taking any action on his personal assets”; that “[w]e can’t take action against him, and we can’t put a ‘nail’ (Caveat)”; and that “[t]he ‘nail’ (Caveat) must be put, and we are definitely going to take action against him, if he does not repay the money.”

66 The Hu Parties’ solicitor’s file note of his telephone conference with Mr Gu’s solicitor on the same day is to similar effect. The file note records (as written):

…

[Hu Parties’ solicitor]: my client wanted some form of security to cover MG, we believe this was the most uninvasive until we are paid 30 june and remove caveat straight away. your clients are so confident done by 30 june didnt think big deal, my clients position is no caveat no deal.

[Mr Gu’s solicitor]: so you will accept all other amendments, other than the deletion of clause 7.2 -

[Hu Parties’ solicitor]: that is correct, and if need another sentence saying need to remove caveat within x days of payment. if your cliwent has intention and ability then what is the difference. We put it on take it off and nothing furthetr to it.

…

[Mr Gu’s solicitor]: clause 7.2 - caveat clause remains, on condition everything else is accepted.

67 On 2 June 2020, the Hu Parties’ solicitor confirmed by email to Mr Gu’s solicitor that all requested amendments had been accepted “with the exception of the deletion of clause 7.2 (Caveat)” and that the other side had “subsequently accepted our clients’ position.”

68 In that setting, the practical purpose of the right to lodge and maintain a caveat is readily understood. The Hu Parties were being asked to forbear until 30 June 2020. They were continuing to seek information about the proposed company security, and were plainly not prepared simply to rely on Mr Gu’s assurances of payment or that there would be no undisclosed dealings with the Superba Property. That informational concern had already found expression in the earlier request for undertakings that assets not be transferred or dissipated without consent or 14 days’ written notice “together with full particulars of the proposed transaction”. Although cl 8.2 of the Hu Deed as finally executed is framed as a restraint on dissipation rather than as a notice provision, it formed part of that broader protective response by the Hu Parties in relation to their lack of visibility over Mr Gu’s dealings with his property. A right to lodge and maintain a caveat would likewise go some way to addressing that position by operating as an independent impediment to dealings with the Superba Property and thereby reducing the informational disadvantage under which the Hu Parties were operating during the standstill. That commercial purpose helps explain why cl 7.2 was insisted upon and retained.

69 But it does not follow that the clause thereby created an equitable charge. On the contrary, the negotiations bring into sharper focus the fact that the Hu Parties’ draft used express language of “security” in relation to the company, whereas the clause ultimately retained in relation to the Superba Property (in wording advanced by the Hu Parties and accepted by Mr Gu after negotiation) spoke only of a “caveatable interest” and a right to lodge and maintain a caveat. The more persuasive inference from that history is that, in relation to Mr Gu personally and the Superba Property, this was the protection the Hu Parties were able to obtain as the negotiated price of temporary forbearance: not an orthodox charge or mortgage, but the practical protection afforded by a caveat during the standstill period. That reading gives cl 7.2 real commercial work to do, while recognising that the clause stopped short of employing the language ordinarily used to create an equitable charge over land.

70 The broader structure of the Hu Deed supports that conclusion. Recital E and cl 1.4 record that the Hu Parties agreed, in exchange for obtaining the benefit of the guarantees and indemnities in the deed, to forbear from taking further proceedings or enforcement action only up to and including 30 June 2020. Recital E does not refer to security as forming part of the consideration given by Mr Gu to obtain the Hu Parties’ forbearance – the consideration specified is limited to “certain guarantees and indemnities”.

71 Clause 1.1 required payment of the First Judgment Debt by 30 June 2020. Clauses 8.1 and 8.2 then imposed negative undertakings preventing IPCM and Mr Gu from transferring, disposing or otherwise dissipating assets until the First Judgment Debt had been irrevocably paid and discharged in full. Clause 1.3 describes the deed (as a whole) as a “continuing security”, but does not identify the legal character of the interest in the Superba Property created by cl 7.2. Read as a whole, the deed is apt to establish a regime of guarantees, forbearance and preservation of assets pending payment. In that setting, cl 7.2 is more naturally understood as part of that preservation regime than as the conferral of a proprietary security interest in the land.

72 The existence of the Credit Suisse Mortgage supports the conclusion that cl 7.2 should not be construed as creating a further equitable charge over the Superba Property. In particular, the requirement in cl 5.7(c) that Credit Suisse’s written consent be obtained before any further interest in the property was granted is consistent with a construction of cl 7.2 confined to the lodgement and maintenance of a caveat, rather than the creation of an additional proprietary interest. It is true that there is no direct evidence that, when the Hu Deed was entered into, the Hu Parties had a copy of the Credit Suisse Mortgage or actual knowledge of that particular prohibition. However, the Hu Parties did know of the existence of the Credit Suisse Mortgage. I accept Great Lands’ submission that a restriction of that kind may be treated as part of the objective commercial context. As Mason J observed in Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; 149 CLR 337 at 352, facts existing when a contract was made will generally not be receivable as surrounding circumstances unless known to both parties, “although … if the facts are notorious knowledge of them will be presumed”. In that sense, the existence of such a prohibition assists in identifying the commercial setting in which the Hu Deed was made, and confirms that a construction under which the Hu Parties were to receive no more than a caveatable interest was both intelligible and commercially coherent. The Credit Suisse Mortgage therefore provides contextual support for the conclusion that cl 7.2 did not create an equitable charge.

73 Issue 6 turns on whether, on its proper construction, cl 7.2 of the Hu Deed effected a present proprietary appropriation of the Superba Property as security for payment of the First Judgment Debt, as distinct from conferring a contractual right to lodge and maintain a caveat as a means of protection pending enforcement.

74 Standing back, I am not persuaded that the language of cl 7.2 goes far enough to create an equitable charge over the Superba Property. The express conferral of a “caveatable interest”, coupled with a consent to lodge and maintain a caveat until the First Judgment Debt has been paid, is apt to confer a right to support the lodgement and maintenance of a caveat. It is not sufficient, in this context, to create an immediately operative equitable proprietary interest in the nature of a charge.

75 I accept that the Hu Parties wanted security in exchange for forbearance. They obtained the security provided for by cl 7.1. But the question remains what was the nature of the right granted to the Hu Parties under cl 7.2 on its proper construction. Nor does the more general machinery of the deed alter that question. Clause 12.11, which requires the Guarantors to do what is necessary to give full effect to the deed, facilitates implementation of rights otherwise created. It does not identify the legal nature of the interest created by cl 7.2, or supply the missing language of charge, mortgage or realisation. The absence from cl 7.2 of comparable language of charge or mortgage, together with the express conferral only of a “caveatable interest” and a right to lodge and maintain a caveat, persuades me that cl 7.2 did not create an equitable charge over the Superba Property.

76 I therefore conclude that cl 7.2 of the Hu Deed did not create an equitable charge or other equitable proprietary interest over the Superba Property. It conferred no more than a right to lodge and maintain a caveat, with the practical consequence of restraining dealings with the Superba Property pending payment of the First Judgment Debt without notice to the Hu Parties. It follows that the Hu Parties’ proprietary claim based on cl 7.2 fails.

77 Because I have reached that conclusion, the further questions framed on the basis that cl 7.2 created an equitable charge, including questions as to attachment to the Surplus Funds, the scope of the secured amount, and priority as against the interests asserted by Great Lands and IPPL, do not arise for determination in that form. The remaining issues must instead be addressed on the basis that no equitable charge was created by cl 7.2.

Issue 7 – What the Hu Parties’ charge, if established, secures

78 In light of my conclusion on Issue 6, Issue 7 does not arise for determination. It is nevertheless convenient to record my view on the question on a conditional basis, in case I am wrong in concluding that cl 7.2 of the Hu Deed did not create an equitable charge.

79 If, contrary to my conclusion on Issue 6, cl 7.2 created an equitable charge in favour of the Hu Parties, the next question would be what liabilities were secured by that charge. That question is one of construction of the Hu Deed read as a whole, applying the construction principles identified earlier in connection with Issue 6.

80 The Hu Parties submitted that the charge secured all amounts owing by Mr Gu under the Hu Deed, including the liability later reflected in the Second Judgment Debt, being the First Judgment Debt together with post-judgment interest and legal costs of obtaining the Second Judgment, or, at the least, the First Judgment Debt and associated interest. Great Lands accepted, in substance, that if the Hu Parties established an equitable charge, it secured Mr Gu’s liability under the Hu Deed. IPPL did not seek to be heard on the issue.

81 In my view, if cl 7.2 created an equitable charge, that charge secured at least the “Judgment Debt” as that term was defined in the Hu Deed. Clause 7.2 authorised the Hu Parties to lodge and maintain a caveat “until such time as the Judgement [sic] Debt has irrevocably been paid and discharged in full”. Recital C of the Background to the Hu Deed defined the “Judgment Debt” as the sum of $5,761,972.60 together with “any and all post-judgment interest” accruing on that amount. At that level, the text of cl 7.2 was expressly tied to payment in full of that defined liability.

82 However, if contrary to my conclusion on Issue 6 cl 7.2 created an equitable charge, I would construe the Hu Deed as giving that charge a broader operation than one confined to the First Judgment Debt viewed in isolation. Clause 1.3 provided that the deed operated as a “continuing security” until “the Judgment Debt and any other moneys payable under this document have been paid in full”. Clause 4.1 proceeded on the same footing by distinguishing between the “Judgment Debt” and “other moneys payable under this document”. Clauses 5.1 and 5.2 imposed indemnity obligations requiring the Guarantors to answer for loss, liability, damage, cost or expense suffered by reason of non-payment, including amounts that were not, or might not be, recoverable from Blue Whale and IPPL. Clause 9.1 more specifically required the Guarantors to indemnify the Hu Parties against “all losses, liabilities, costs and expenses (including, without limitation, legal expenses on a full indemnity basis)” in connection with the enforcement or attempted enforcement of rights under the deed. Read together, those provisions indicate that the Hu Deed established a security arrangement of wider operation than one confined to the First Judgment Debt alone.

83 That construction is reinforced by the commercial purpose and structure of the Hu Deed. Recital E recorded that the Hu Parties entered into the deed to obtain the benefit of guarantees and indemnities and, in return, agreed to forbear from enforcement action for a limited period. The deed was therefore framed as an integrated forbearance, guarantee, indemnity and security arrangement. On that footing, it would be commercially incongruent if the security in cl 7.2 were confined to the First Judgment Debt viewed in isolation, while the guarantees and indemnities secured by the deed extended more broadly to losses, liabilities and costs arising from non-payment.

84 If it were necessary to decide the point, I would therefore conclude that the better view is that the equitable charge, if established, secured all amounts for which Mr Gu became liable to the Hu Parties under the Hu Deed. That would include the First Judgment Debt and interest, together with liabilities arising under the indemnity in cl 5, including legal costs properly falling within that indemnity.

85 That conclusion sits consistently with the manner in which the Hu Deed was enforced. In the Second Judgment, Ball J entered judgment against Mr Gu in the sum of $5,929,897.86. His Honour proceeded on the basis that Mr Gu was liable under the Hu Deed, and that the judgment amount properly included, in addition to the unpaid First Judgment Debt and interest, legal costs of the proceedings to obtain the Second Judgment recoverable under cll 5.1 and 5.2 of the Hu Deed.

86 In those circumstances, if it were necessary to decide the matter, I would conclude that although the contractual liabilities under the Hu Deed merged in the Second Judgment such that the Hu Parties could not sue again on the underlying causes of action, the security was not lost by that merger while the judgment remained unsatisfied. The equitable charge created by cl 7.2, if established, would continue to secure the liabilities of Mr Gu as crystallised in the Second Judgment.

87 It would follow that, if I am wrong on Issue 6, the Hu Parties’ charge would attach to, and secure, the Second Judgment Debt.

Issue 8 – Priority of the Hu Parties’ charge

88 In light of my conclusion on Issue 6, Issue 8 likewise does not arise for determination. It is nevertheless convenient to address the matter briefly on a conditional basis, in case I am wrong in concluding that cl 7.2 of the Hu Deed did not create an equitable charge.

89 If, contrary to my conclusion on Issue 6, the Hu Parties established an equitable charge arising in June 2020, the next question would be whether that charge ranked ahead of, or behind, any competing interests asserted in respect of the Surplus Funds.

90 As between the Hu Parties and Great Lands, Great Lands contended that its right under the equitable mortgage in respect of which it had lodged its caveat, arising in June 2019, was earlier in time than the Hu Parties’ charge created and caveated in June 2020. The Hu Parties did not advance a separate postponement case against Great Lands. Rather, their position was that Great Lands’ asserted interest was invalid, unenforceable or liable to be displaced by operation of the statutory and other challenges advanced by the Hu Parties, with the consequence that it should not be treated as a competing interest for priority purposes. The statutory and other challenges on which the Hu Parties relied in this contest comprise the s 121 Bankruptcy Act claim and their contention that the Great Lands Loan and Great Lands Mortgage were void, unenforceable or should not be enforced by reason of contraventions of the People’s Republic of China (PRC) foreign-exchange and criminal law, and the Australian public-policy consequences said to follow from that illegality.

91 As between equitable interests, priority is ordinarily governed by the order of creation, subject to the qualification that an earlier interest may be postponed where the conduct of its holder makes it inequitable to assert priority over a later interest. The Court’s task is to identify the better equity having regard to the whole of the circumstances: Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 at 276 (Kitto J). Mere failure to protect an interest, including by the non-lodgement of a caveat, is not of itself sufficient to warrant postponement.

92 On that basis, if Great Lands otherwise established the validity and enforceability of its earlier equitable mortgage and caveat, and if those interests were not displaced by the Hu Parties’ statutory or other challenges, Great Lands’ interest would prima facie rank ahead of any equitable charge in favour of the Hu Parties arising only on 2 June 2020. As I have said, no separate case was advanced that Great Lands should nevertheless be postponed to the Hu Parties on general equitable grounds.

93 As between the Hu Parties and IPPL, priority would depend upon whether IPPL established any proprietary or equitable interest in the Surplus Funds and, if so, on what basis. In particular, if IPPL succeeded in a claim by way of subrogation to an existing security, different considerations would arise because a claimant subrogated to a security stands in the position of the original secured creditor, including as to the priority of that security from the time of its creation.

94 It follows that, if I am wrong on Issue 6, the Hu Parties’ charge would secure the liabilities identified under Issue 7 on the conditional basis I have explained. Its ultimate priority, however, would remain subject to the conclusions reached elsewhere in these reasons concerning the validity, enforceability and effect of the competing interests asserted by Great Lands and IPPL. To that extent, no further separate determination of Issue 8 would be necessary beyond applying those later conclusions to the Hu Parties’ conditional charge.

95 Given my conclusion on Issue 6, the Hu Parties have not established that they hold any equitable interest in the Superba Property or the Surplus Funds. They therefore do not participate in the priority analysis as claimants asserting a proprietary interest in those funds.

THE HU PARTIES’ BANKRUPTCY ACT CLAIM AGAINST GREAT LANDS

96 I turn now to the Hu Parties’ claim, as assignees of Mr Gu’s trustee in bankruptcy, that the Great Lands Mortgage is void against the trustee under s 121 of the Bankruptcy Act. That claim is analytically distinct from the Hu Parties’ failed proprietary interest claim. It requires consideration of whether the grant of the Great Lands Mortgage is void under s 121 and, if so, the consequential entitlement to restitution under s 121(5), read with s 100‑5 of Sch 2 to the Bankruptcy Act (the Insolvency Practice Schedule (Bankruptcy)).

97 The issues raised by this part of the case are therefore different in kind from those addressed in Issues 6 to 8. The first question, which the Hu Parties bear the onus of establishing, is whether the grant of the Great Lands Mortgage answers the description of a transfer of property by Mr Gu that is void against the trustee under s 121. That inquiry directs attention to the statutory requirements for avoidance, including whether the impugned transfer was made with the proscribed purpose identified in s 121. If that question is answered in the affirmative, it then becomes necessary to consider whether Great Lands nevertheless brings itself within the protection afforded by s 121(4), on which Great Lands bears the onus. If the mortgage is void against the trustee, a further question arises as to the relief to which the trustee, and thus the Hu Parties as assignees, are entitled under s 121(5).

98 The structure of s 121 makes it necessary to address those questions sequentially. It is important to keep firmly in view the allocation of onus under s 121. The Hu Parties bear the onus of establishing that the grant of the Great Lands Mortgage answers the description of a transfer that is void against the trustee under s 121(1). If that is established, the onus then shifts to Great Lands to establish each element of the good faith defence in s 121(4). Each element of s 121(4) is cumulative. Failure to establish any one of them is fatal to the defence.

99 It is also necessary to keep steadily in view the legal basis of this claim. The Hu Parties do not, by force of s 121 alone, succeed to the position of a mortgagee or other proprietary claimant in relation to the Surplus Funds. Rather, the statutory question is whether the Great Lands Mortgage is void against the trustee and, if so, whether the trustee’s statutory right to recover property or obtain restitution has been validly assigned to the Hu Parties and may now be enforced by them. The focus of the inquiry is therefore on the validity of the Great Lands Mortgage as against the trustee, and on the statutory consequences that follow if avoidance is established.

100 Against that background, I turn first to the Hu Parties’ case that the Great Lands Mortgage is void against the trustee under s 121 of the Bankruptcy Act.

Issues 9-11 – Insolvency and purpose under s 121

Overview

101 Mr Gu was made bankrupt on 10 August 2021 by a sequestration order of this Court, and the trustee was appointed. On 17 January 2022, the trustee and the Hu Parties entered into the Deed of Assignment. On 28 January 2022, the Hu Parties’ solicitor gave notice that the trustee had assigned to them Mr Gu’s rights, title and interest in the Surplus Funds and the trustee’s rights to sue in relation to the Surplus Funds, transfers of property by Mr Gu to Great Lands and others, and transactions in relation to such transfers.

102 The Hu Parties advance, as assignees, their claim that the Great Lands Mortgage is void under s 121 of the Bankruptcy Act. The underlying events of the bankruptcy, the assignment and the giving of notice are not in dispute. The dispute between the Hu Parties and Great Lands concerns the legal effect of the assignment and the availability and operation of the statutory claim thereby asserted against Great Lands. IPPL did not seek to be heard on the Bankruptcy Act claim.

Applicable principles

103 Section 121(1) of the Bankruptcy Act renders void against the trustee in bankruptcy a transfer of property made by a person who later becomes bankrupt if the property would probably have become part of the transferor’s estate or have been available to creditors if not for the transfer, and the transferor’s main purpose in making the transfer was to prevent the transferred property from becoming divisible among the transferor’s creditors, or to hinder or delay the process of making that property available for division among creditors. For the purposes of s 121, the grant of a mortgage or charge may constitute a transfer of property: s 121(9)(b); Peldan v Anderson [2006] HCA 48; 227 CLR 471 at 26.

104 The requisite purpose of the transferor may be established directly from the facts and circumstances of the transaction, or indirectly by operation of statutory presumptions. Relevantly, s 121(4A) gives rise to a rebuttable presumption that the transferor was, or was about to become insolvent if, at the time of the transfer, the transferor had not kept, or had not preserved, such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position. The inquiry under that provision requires attention to the nature of the business carried on by the transferor, the books and records usual and proper for a business of that kind, and whether such books and records were in fact kept or preserved.

105 If insolvency, or impending insolvency of the transferor, is established, that circumstance bears directly upon the purpose inquiry under s 121(1). A transfer made when the transferor was insolvent, or about to become insolvent, is by virtue of s 121(2) taken to have been made for the main purpose of putting the property beyond the reach of creditors or to hinder or delay its availability for distribution among them.

Consideration

106 Issues 9 to 11 were directed to anterior matters bearing upon the operation of s 121 of the Bankruptcy Act, namely whether the rebuttable presumption in s 121(4A) arose by reason of any failure by Mr Gu to keep or preserve usual and proper books and records, whether it could reasonably be inferred from all the circumstances that, at the time of the Great Lands Mortgage being granted, Mr Gu was or was about to become insolvent such that the presumption in s 121(2) applied, and whether the requisite purpose under s 121(1)(b) was otherwise to be inferred. In earlier submissions, the Hu Parties addressed those issues relying on s 121(4A) and, alternatively, upon s 121(2), supported by expert evidence as to Mr Gu’s solvency.

107 By the time of closing submissions, however, the dispute in relation to Issues 9 to 11 had largely resolved. Great Lands conceded that the Hu Parties had established that Mr Gu was in fact insolvent or about to become insolvent when the Great Lands Mortgage was granted, with the consequence that the presumption in s 121(2) applied and Mr Gu’s main purpose in granting the mortgage was taken to be the purpose described in s 121(1)(b).

108 In those circumstances, Issues 9 to 11 were no longer pressed as live issues for separate determination and the Bankruptcy Act claim falls instead to be determined on the premise that s 121(1) is engaged.

Issue 12 – Great Lands’ good faith defence under s 121(4)

Overview

109 The remaining question is whether Great Lands has established the good faith defence in s 121(4) of the Bankruptcy Act. Before moving to the applicable principles, I will briefly address the transactional chronology relevant to this issue.

110 The relevant transactions were structured through a series of related agreements involving Great Lands made at the end of June 2019. First, a loan agreement between Gong J u Hui Enterprises Management Consulting Co Ltd of Lhasa Economic and Technological Development Zone (as Lender) and Great Lands (as Borrower) dated 27 June 2019. This upstream loan to Great Lands was referred to in the evidence as the Gong Ju Hui Loan. Second, the Great Lands Loan between Great Lands (as Lender), Mr Gu (as Borrower) and others dated 28 June 2019, together with the corresponding Great Lands Mortgage between Great Lands (as Mortgagee) and Mr Gu (as Mortgagor) dated 28 June 2019, the Authority & Direction to pay, and the Deed of Acknowledgement between Great Lands and Mr Gu dated 28 June 2019 by which Mr Gu acknowledged receipt of the advanced funds (together, the Great Lands transaction documents). There were also four “General Security Agreements” executed on 28 June 2019 by the corporate guarantors of the Great Lands Loan – I-Prosperity Capital Group Pty Ltd, iProsperity Cornerstone Management Pty Ltd, i-Prosperity Holding Group New Pty Ltd and Cornerstone Capital Investment Group Pty Ltd – in favour of Great Lands.

111 The steps leading to those agreements began the week prior to their execution. Various title searches, including for the Superba Property, were undertaken on 18 June 2019, there was email correspondence on 19 June 2019 concerning the proposed loan transaction, and additional communications and title searches on 21 June 2019 concerning the removal of two caveats that a third party at that time held on the Superba Property (the Liao caveats) and the proposed securities for the loan. On 25 June 2019, an email from Patricia Tsang, Special Counsel at Landerer & Company (the firm acting for Mr Gu) to Judiel Garcia, solicitor at Lionheart Lawyers (the firm acting for Great Lands), titled “Loan from Great Lands Investment Pty Ltd to Mr Gu”, attached the Great Lands transaction documents with counterparts executed by Mr Gu. On 26 June 2019, there was further related correspondence from Landerer & Company and a further title search conducted.

112 On 27 and 28 June 2019, the funding and security steps were then completed. On 27 June 2019, following execution of the Gong Ju Hui Loan, the original Bank of China transfer remittance slips and NAATI English translations show three transfers of RMB 5 million each (totalling RMB 15 million) were made by Gong Ju Hui to the account Mr Gu nominated in the Authority & Direction to pay.

113 On 28 June 2019, the Great Lands transaction documents (other than the Authority & Direction to pay which only required Mr Gu’s signature) were finally executed by both parties; the Great Lands Caveat was registered over the Superba Property; and a further title search of the Superba Property was conducted. Finally, there is a later letter dated 14 October 2019 enclosing the exchanged Great Lands Loan re-signed by Mr Gu and witnessed in Australia by a solicitor from Landerer & Company, as his earlier signature was signed and witnessed overseas.

Applicable principles

114 Where s 121(1) is engaged, a transfer is not void against the trustee if the transferee establishes each of the matters identified in ss 121(4)(a), (b) and (c). The transferee bears the onus of establishing each element of that good faith defence. The elements are cumulative. If any one of them is not established, the defence fails.

115 The good faith defence is cast in the following terms:

Transfer not void if transferee acted in good faith

(4)    Despite subsection (1), a transfer of property is not void against the trustee if:

(a)    the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and

(b)     the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and

(c)     the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

116 Section 121(4)(a) requires the transferee to establish that the consideration given for the transfer was at least as valuable as the market value of the property transferred. By s 121(9)(c), the market value of the property transferred is its market value at the time of the transfer.

117 Section 121(4)(b) requires the transferee to establish that it did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in s 121(1)(b), namely to prevent the transferred property from becoming divisible among the transferor’s creditors or to hinder or delay that process.

118 Section 121(4)(c) requires the transferee to establish that it could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

119 The requirements in ss 121(4)(b) and (c) are expressed in objective terms. The statutory question is not exhausted by the transferee’s assertion of its subjective belief. The inquiry is whether, on the facts known to the transferee at the time, the transferee has proved that the relevant inference was not one that could reasonably be drawn by it. The use of the term “reasonably” directs attention to an objective standard and prevents the defence from succeeding by reason of wilful blindness, although it may be possible, in certain circumstances, to succeed on the defence even in the case of honest ineptitude on the part of the transferee: Explanatory Memorandum, Bankruptcy Legislation Amendment (Anti-Avoidance) Bill 2005 (Cth) at [10]-[11]; Cannane v J Cannane Pty Ltd (in liq) [1998] HCA 26; 192 CLR 557 at 597-8 (Kirby J in dissent).

120 In applying ss 121(4)(b) and (c), the ordinary principles governing the drawing of inferences from proved facts apply. Where direct proof is unavailable, an inference may be drawn from proved facts, but it must be a reasonable and definite inference on the balance of probabilities and not a matter of conjecture, guesswork or surmise.

121 In the case of a corporate transferee, the inquiry under ss 121(4)(b) and (c) proceeds by reference to the knowledge of the natural persons who acted on its behalf in negotiating, arranging or implementing the transaction, applying ordinary principles of attribution.

122 It is therefore necessary to consider, in turn, whether Great Lands, as the transferee, has established: first, the element of value for the purposes of s 121(4)(a); second, the absence of knowledge or a reasonably available inference of Mr Gu’s (as the transferor) impugned purpose for the purposes of s 121(4)(b); and third, the absence of a reasonably available inference of insolvency for the purposes of s 121(4)(c).

123 It is only if Great Lands establishes each of these matters that it will make out the good faith defence under s 121(4).

Consideration

Equivalent value – s 121(4)(a)

124 The first question is whether Great Lands established, for the purposes of s 121(4)(a), that the consideration it gave for the transfer was at least as valuable as the market value of the property transferred. That requires identification of the property transferred and of the consideration said to answer the statutory description.

125 The parties accepted that the property transferred was the mortgage itself, that is, the proprietary interest granted over the Superba Property to secure the $3 million advanced under the Great Lands Loan. The “property transferred” for the purposes of s 121(4)(a) was not merely a chose in action to recover a fixed principal sum. It was a proprietary security interest securing a bundle of monetary rights defined by the Great Lands transaction documents, including contingent and accruing interest liabilities.

126 The real issue between the parties was as to how the market value of this interest is to be assessed.

127 Great Lands submitted that the market value of a mortgage securing a loan of a principal sum is no more than the principal sum, and less if the underlying property value is less. Here, it is submitted that the transferred property was a charge over the Superba Property, granted at arm’s length, securing the Great Lands Loan in the principal sum of $3 million (or RMB 14.5 million treated by the parties as equivalent for the purpose of the principal sum), and that the charge permitted Great Lands to recover no more than what it had advanced. On that footing, Great Lands submitted that the consideration it gave was at least as valuable as the market value of the transferred property.

128 Great Lands relied on the ordinary meaning of “market value”, citing the Macquarie Dictionary (online) definition of market value as “the price at which a commodity, security, or service is selling in the open market”. Great Lands also quoted the Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 1996 (Cth) at [84.13] as saying that “market value” was intended to mean the value of the property if disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the same kind, without discount or incentive. Great Lands submitted that this definition was in accordance with the authorities, including: Tyler v Thomas [2006] FCAFC 6; 150 FCR 357 at 108, [202]-203; Sutherland v Brien [1999] NSWSC 155; 149 FLR 321 at 19.

129 The parties agreed that the term “consideration” in s 121(4)(a) should be interpreted the same way as that term is used in the materially similar context of s 120(1)(b) (pertaining to transactions voidable for undervalued consideration) where it has been held to import its ordinary legal and commercial meaning: Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109; 129 FCR 234 at [94]-96 referring to Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26; 127 FCR 217 (Wilcox, Branson and Merkel JJ).

130 Great Lands maintained that expert valuation evidence was not required because the market value of the proprietary interest conferred by the Great Lands Mortgage was effectively capped by the amount advanced. Great Lands relied expressly on s 121(9)(c) for the proposition that market value is assessed at the time of the transfer. The Hu Parties did not dispute that temporal premise. Their submissions addressed the position as at 28 June 2019, the day the Great Lands Mortgage was granted.

131 On that basis, Great Lands submitted that the $3 million consideration was equivalent to the market value of what it received on the date the Great Lands Mortgage was executed and that the first element of the defence was therefore made out.

132 The Hu Parties first identified the consideration said to have been given by Great Lands as the principal sum, defined as AUD $3 million and RMB 14.5 million, and that Mr Gu had acknowledged receipt of that sum. On the Hu Parties’ case, the Superba Property was worth $10.25 million when the Great Lands Mortgage was granted, and Credit Suisse’s registered mortgage secured $6 million. The Hu Parties maintained that in circumstances where there was therefore approximately $4.25 million equity in the Superba Property as at the date the mortgage was granted and the mortgage secured “all liabilities” – not only as to the repayment of the principal sum but also as to the payment of interest, including default-rate interest – there was no obvious limit bringing the mortgage’s market value below the consideration that was given. The Hu Parties therefore submitted that the amount recoverable under the mortgage exceeded principal alone, and Great Lands had not proved that the proprietary interest transferred had a market value equivalent to or below $3 million. They further submitted that the upper limit of the market value of the Great Lands Mortgage was the amount that could be recovered under it. Because the Great Lands Mortgage secured more than principal alone, the amount recoverable under it could exceed, and likely would significantly exceed, the $3 million advanced.

Determination – s 121(4)(a) - equivalent value

133 I do not accept Great Lands’ submission that, for the purposes of s 121(4)(a), the mortgage should be treated as securing no more than the principal sum advanced. That submission assumes, incorrectly, that the value of a mortgage for the purposes of s 121(4)(a) is necessarily capped at the amount of principal advanced. Where, as here, the mortgage secures an expanded and potentially escalating set of liabilities, the market value of the proprietary interest transferred cannot simply be equated with principal alone. The submission that it was so confined is contrary to the terms of the Great Lands Mortgage.

134 By cl 2.1, the mortgage was granted as a continuing security for payment of the “Secured Moneys”. Clause 1.2 defines “Secured Moneys” broadly to mean all liabilities due and/or payable by Mr Gu to Great Lands, including liabilities under, in relation to or in connection with the Great Lands Loan, and expressly extending to liabilities by way of principal, interest, cost, indemnity, tax, damages or monetary judicial order, including liabilities arising as a result of default under a Security Agreement. “Security Agreement” includes the Great Lands Loan, the mortgage itself and the other identified security agreements.

135 The same conclusion follows from the Great Lands Loan. Under that agreement, the “Secured Monies” include the “Advanced Moneys” (paid by Great Lands to Mr Gu, including the principal sum), plus all interest payable under cll 5 and 14 and all other monies payable by Mr Gu to Great Lands under any “Security Agreement” (defined to include the Great Lands Mortgage, the loan itself, and other security agreements). Clause 3 provides that the Security Agreements secure the Secured Monies. The agreement permits early repayment of the Advanced Moneys in full before the “Repayment Date” being two months after commencement: cl 8(a). However, cl 8(b) provides, notwithstanding any other term, that the aggregate amount of interest payable under cl 5 must be no less than $124,786.67. Early repayment therefore did not remove liability to pay at least that minimum amount of interest. The agreement also provided for interest at 2% per month and, in the circumstances identified in cll 5.4 and 5.5, for interest thereafter at the higher rate of 4% per month, with unpaid interest becoming part of the Secured Monies.

136 In those circumstances, the Great Lands Mortgage was not confined, on its proper construction, to securing repayment of principal alone. It secured liabilities extending beyond the $3 million sum advanced, including interest liabilities of the kind identified above. Great Lands led no evidence establishing that the market value of that proprietary interest, assessed at the time of transfer, was equal to or less than the consideration of $3 million it gave. It follows that Great Lands failed to discharge its burden of establishing that s 121(4)(a) was satisfied.

Knowledge of Mr Gu’s main purpose – s 121(4)(b) & reasonable inference of insolvency – s 121(4)(c)

137 The remaining cumulative requirements of the good faith defence concern: first, whether Great Lands established, for the purposes of s 121(4)(b), that it did not know, and could not reasonably have inferred, that Mr Gu’s main purpose in granting the Great Lands Mortgage was the purpose described in s 121(1)(b); and, second, whether Great Lands established, for the purposes of s 121(4)(c), that it could not reasonably have inferred that, at the time of the transfer, Mr Gu was, or was about to become, insolvent.

138 Great Lands submitted that there was nothing known to it from which either Mr Gu’s proscribed purpose or his insolvency or impending insolvency could reasonably have been inferred. It relied principally on the impression formed by Mingjie (Jason) Zhang (who I will refer to as Mr Zhang – and who is not to be confused with Mr Zhenhua Zhang, one of the Hu Parties), and to a lesser extent Lanshan (Phillip) Gao (who was the business manager of Great Lands), that Mr Gu appeared to be a successful businessman of substantial means, with a valuable property and no evident difficulty in obtaining secured finance. The Hu Parties submitted that Great Lands, through Mr Zhang and others acting for it, knew a body of facts from which it could reasonably have inferred both that Mr Gu’s purpose in granting the Great Lands Mortgage was to place value beyond the reach of creditors or to hinder or delay that process, and that he was, or was about to become, insolvent.

139 There is substantial factual overlap between the evidence relevant to those two inquiries. It is therefore convenient to set out, once, the facts and circumstances known to Great Lands that bear on both questions before turning to the separate determinations under ss 121(4)(b) and (c).

Facts and circumstances known to Great Lands relevant to ss 121(4)(b) and (c)

140 On the evidence there was a marked disjunction between the role of the sole director and the exercise of substantive control of Great Lands. Although Qinru (Shirley) Zhu was Great Lands’ sole director at the time of execution of the Great Lands transaction documents and was the person who signed them for Great Lands, she had no substantive role in negotiating the Great Lands Loan or the related arrangements. She authorised Mr Zhang to take the relevant steps, and he was the operative actor for Great Lands in the discussions with Mr Gu, the arrangements for funding (through Gong Ju Hui), the dealings with Lionheart Lawyers, and the steps leading to execution of the Great Lands transaction documents and lodgement of the Great Lands Caveat (as well as being delegated responsibility for ensuring repayment of the Great Lands Loan). Mr Gao said that he and Mr Zhang made the decision to proceed with the transactions, but accepted that, for most of the time, Mr Zhang was the person negotiating with Mr Gu. In those circumstances, the relevant state of knowledge of Great Lands is to be assessed principally by reference to what was known to Mr Zhang and, to the extent presently relevant, Mr Gao and Lionheart Lawyers.

141 Mr Zhang’s evidence was that, between March and June 2019 before the transaction was made, he had heard of Mr Gu referred to by other investors in the Chinese community as a “good guy”, a “rich guy” and a “big boss”, had read articles and social media material concerning substantial investments associated with Mr Gu and the i‑Prosperity group of companies, had attended Mr Gu’s large and luxurious CBD office, had visited the Superba Property and regarded it as a valuable property with substantial equity over and above the debt secured by the Credit Suisse Mortgage, and had socialised with Mr Gu at expensive dinners and events. Mr Gao gave evidence to similar effect. Great Lands relied on those matters as forming the impression it held, through Mr Zhang and Mr Gao, that Mr Gu was a successful businessman of substantial means.

142 However, Great Lands did not undertake any substantial inquiry into Mr Gu’s actual financial position or repayment capacity. Mr Zhang’s views were informed by matters of appearance and impression, rather than any examination of Mr Gu’s assets, liabilities, cash flow or ability to meet debts as they fell due. Apart from awareness of the Credit Suisse debt secured over the Superba Property, the evidence did not disclose any attempt by Great Lands, through Mr Zhang, to ascertain Mr Gu’s personal debt position or capacity to repay the proposed short‑term borrowing.

143 The circumstances in which Mr Gu sought funds were themselves striking. Mr Zhang’s evidence was that, in around mid‑June 2019, Mr Gu sought a short‑term loan of $3 million to be repaid within two months and, between that request and the advance, called him “almost every day”, saying that he really needed the money and that it was urgent. That urgency was not an isolated feature of a single approach by Mr Gu. Before the June 2019 transaction, Mr Zhang had already been asked to entertain two earlier substantial short‑term loan proposals associated with Mr Gu or companies connected with him, and neither proposal proceeded. In May 2019 there was a request for a $15 million short‑term loan and, on 29 May 2019, a further request for a loan of $10-15 million to Blue Whale, to be guaranteed by Mr Gu personally (along with others). Mr Zhang declined both proposals.

144 The negotiations that culminated in the Great Lands Loan also involved a shifting and unstable course as to the proposed security. As Great Lands itself relied on Mr Zhang’s evidence of the course of negotiations, it is relevant that Mr Gu first proposed in mid-June that his companies would provide guarantees. Then, on 20 June 2019, asked that no security be registered over those companies. In mid-June, Mr Gu offered his mother’s property as security and then, on 21 June, said that it was not available. He also refused to seek permission from Credit Suisse for Great Lands to register a second mortgage despite Mr Zhang clearly requesting a registered mortgage over real property in return for a loan and proceeded on the footing that Great Lands would instead take the unregistered Great Lands Mortgage and lodge a caveat. Mr Zhang’s own evidence disclosed that he expressed concern in the course of those dealings.

145 Lionheart Lawyers expressly advised Great Lands on 19 June 2019 that they had not been instructed to undertake or arrange any due diligence in respect of Mr Gu’s or the corporate guarantors’ capacity to repay the amounts advanced, and recommended that Great Lands satisfy itself on that issue. No evidence was led that Great Lands undertook any meaningful inquiry in response to that advice.

146 On the same day, a property search disclosed the Superba Property as the only identified New South Wales real property asset of Mr Gu. Further title searches undertaken on 26 and 28 June 2019 confirmed the state of the title and, on 28 June 2019, the Great Lands Caveat was lodged.

147 By 21 June 2019 the title searches still disclosed the Liao caveats. Their immediate removal was sought. The material circulated to Mr Zhang and Lionheart Lawyers in response showed that loans totalling $1.2 million had been advanced to Mr Gu by the holders of the Liao caveats between 1 and 3 April 2019 and repaid on 12 April 2019 in the sum of $1.5 million. Objectively, that material disclosed recent resort by Mr Gu to very expensive short‑term borrowing.

148 The urgency of the June 2019 transaction was further demonstrated by the steps taken to accelerate completion. On 20 June 2019, Mr Huang asked Lionheart Lawyers to remove from the drafted agreement a condition precedent Great Lands had proposed, requiring registration on the Personal Properties Security Register (PPSR) of security over the corporate guarantors because that step would take additional time, and it was said there was already an in‑principle agreement that the loan would be advanced that day or the next. Mr Zhang instructed Lionheart Lawyers to agree to that course. That request is significant because it involved the abandonment of an additional protective step in order to permit the advance to proceed without delay.

149 The structure of the transaction also bore the marks of an arrangement that called for explanation if Great Lands wished to demonstrate that the proscribed purpose and insolvency were not reasonably inferable. In anticipation of the Great Lands Loan and Great Lands Mortgage being executed, Mr Gu signed an Authority & Direction to pay under which the principal sum of AUD $3 million, stated to be RMB 14.5 million, was to be paid into the bank account of Wu’an Rui Feng Trading Co Ltd in China. On 27 June 2019 Mr Zhang arranged for Gong Ju Hui to lend RMB 15 million to Great Lands, with that sum to be deposited directly into Wu’an Rui Feng Trading’s account. Gong Ju Hui did not transfer funds from China to Australia. Great Lands did not lead evidence disclosing any substantial contemporaneous commercial explanation for why the transaction was structured in that way, or why it regarded that structure as consistent with an ordinary commercial secured loan to Mr Gu.

150 Great Lands relied on evidence that Mr Zhang did not think that Mr Gu was in financial difficulty, did not know of other creditors apart from Credit Suisse, and did not know before September 2019 of the scale of Mr Gu’s gambling losses. Mr Zhang also gave evidence that he knew Mr Gu drove expensive cars, including a Ferrari and a Bentley, and liked to spend large amounts of money, including $10,000 on dinners. He said that he first became aware in September 2019 that Mr Gu had lost about $10 million gambling.

151 Ms Zhu’s evidence was confined principally to execution of documents, what she was told by Lionheart Lawyers about the state of title, and her asserted lack of knowledge of any competing beneficial interest or illegality under PRC law. That evidence was directed to her subjective appreciation of those matters. It did not concern any substantive commercial assessment by Great Lands of Mr Gu’s financial position or of his purpose in seeking the transaction. Given her limited involvement, I attach limited weight to her evidence on the wider question of what Great Lands could or could not reasonably have inferred.

152 Mr Gao’s evidence was to similar effect that it did not occur to him that Mr Gu was trying to stop or delay the Superba Property from becoming available to creditors. However, his evidence was in many respects reactive and peripheral. It did not materially address the absence of meaningful inquiry by Great Lands into Mr Gu’s actual financial position or explain why, in light of the circumstances known to Great Lands, the inferences for which Great Lands contended were not reasonably open.

Determination – s 121(4)(b)

153 I am not satisfied that Great Lands established, for the purposes of s 121(4)(b), that it did not know, and could not reasonably have inferred, that Mr Gu’s main purpose in granting the Great Lands Mortgage was to prevent the transferred property from becoming divisible among his creditors or to hinder or delay that process.

154 The outward and impressionistic indicators of affluence on which Great Lands relied – reputation, media reports and social media, the appearance of Mr Gu’s office, the apparent value of the Superba Property, and his social spending – do not answer the more immediate and concrete features of the transaction known to Great Lands itself. Those features included Mr Gu’s repeated and urgent requests for short‑term funds, the fact that earlier substantial loan proposals had not proceeded, the shifting and unstable course of the negotiations as to security, the absence of any meaningful inquiry into repayment capacity despite Lionheart Lawyers’ express advice that Great Lands should satisfy itself on that issue, the disclosure of recent very expensive short‑term borrowing through the Liao caveat material, and the adoption of a transaction structure under which funds were advanced in RMB in China without any substantial commercial explanation from Great Lands for why that structure was adopted.

155 The statutory inquiry is not whether those matters were subjectively reassuring to Great Lands, but whether, viewed objectively, the totality of the circumstances known to it rendered the proscribed purpose and insolvency not reasonably inferable. The evidence does not support that conclusion.

156 Considered as a whole, those circumstances made it reasonably open to infer that Mr Gu’s purpose in granting the Great Lands Mortgage was to secure the Superba Property in favour of Great Lands and thereby put value beyond the reach of his general creditors, or at least to hinder or delay that process. The evidence relied upon by Great Lands did not disclose the kind of substantial commercial inquiry, objective assessment or coherent explanation of the transaction that would support the conclusion that such an inference was not reasonably open to Great Lands. Even if the current form of the good faith defence in s 121(4) can, in some cases, be relied on even by an honestly inept transferee (which it is not necessary to determine here), I would not consider this to be such a case.

157 I do not accept that Great Lands discharged its onus merely by pointing to Mr Zhang’s and Mr Gao’s asserted impression that Mr Gu appeared wealthy or successful. The question under s 121(4)(b) is not answered by impression of reputation. It is answered by reference to what Great Lands knew, and what was reasonably inferable from those facts. On that footing, Great Lands did not establish that the proscribed purpose was not reasonably inferable. Rather, the objective position is that Great Lands proceeded in circumstances that called for inquiry and explanation, without undertaking the former and without providing the latter.

Determination – s 121(4)(c)

158 I am also not satisfied that Great Lands established, for the purposes of s 121(4)(c), that it could not reasonably have inferred that, at the time of the transfer, Mr Gu was, or was about to become, insolvent.

159 The question is not whether Mr Gu was in fact insolvent, but whether insolvency or impending insolvency was reasonably inferable from the facts known to Great Lands at the time. In the circumstances set out in the factual compendium above, I am satisfied that such an inference was reasonably open to Great Lands. The repeated urgent requests for short‑term funds, the failure of earlier substantial loan proposals, the absence of meaningful inquiry into repayment capacity notwithstanding Lionheart Lawyers’ express advice, the abandonment of an additional protective step in the form of PPSR registration in order to expedite the transaction, the search results identifying the Superba Property as Mr Gu’s only identified New South Wales real property asset, and the Liao caveat material revealing recent very expensive short‑term borrowing together pointed to acute financial pressure on Mr Gu. Those circumstances were not merely consistent with commercial haste. They pointed to a borrower pressing urgently for short-term accommodation in circumstances where an inability to meet existing or imminent obligations was at least a reasonably available explanation. Those matters materially weaken Great Lands’ attempt to show that insolvency, or impending insolvency, was not reasonably inferable.

160 Those matters were not displaced by the appearance-based indicators on which Great Lands relied. Outward signs of wealth and social expenditure do not negate a reasonable inference of insolvency. In context, they sat alongside, rather than undermined, the more probative features of the transaction known to Great Lands. Nor did the evidence of Ms Zhu or Mr Gao cure that difficulty. Their evidence did not establish that insolvency or impending insolvency was not reasonably inferable from the circumstances actually known to Great Lands through those who arranged and implemented the transaction.

161 In those circumstances, I am not satisfied that Great Lands proved that it could not reasonably have inferred that Mr Gu was, or was about to become, insolvent. Great Lands therefore failed to discharge its onus under s 121(4)(c).

Conclusion – Issue 12

162 For those reasons, I am not satisfied that Great Lands established any of the cumulative requirements in s 121(4). Great Lands failed to establish the requirement in s 121(4)(a) because it did not prove that the consideration it gave was at least as valuable as the market value of the property transferred. Independently, it failed to establish the requirement in s 121(4)(b) because the proscribed purpose was reasonably inferable from facts known to it. It also failed to establish the requirement in s 121(4)(c) because insolvency or impending insolvency was reasonably inferable at the time of the transfer. The good faith defence therefore fails.

Issue 13 – Consequential statutory refund under s 121(5)

163 Issue 13 concerns consequential relief. It arises because I have concluded that the Great Lands Mortgage is void against the Hu Parties, as assignees of the trustee’s claim under s 121(1) of the Bankruptcy Act. The agreed issue for determination is what, if any, consideration must be repaid to Great Lands under s 121(5) and s 100‑5 of the Insolvency Practice Schedule in consequence of the avoidance of the transfer under s 121(1).

Overview

164 The parties were substantially aligned as to the existence of the statutory mechanism, but not as to its operation in the circumstances of this case. In particular, they disagreed as to the amount properly to be brought to account for two payments previously made to Mr Zhang by IPPL, whether any interest should be allowed on the statutory refund, and whether the statutory refund should be met by the Hu Parties, as assignees of the trustee, out of the Surplus Funds before or contemporaneously with any release of those funds to the Hu Parties, including in respect of their own claim dealt with under Issue 6.

Applicable principles

165 The consequence of the Great Lands Mortgage being void against the trustee under s 121(1) is that the trustee must pay to the transferee an amount equal to the value of any consideration given by the transferee for the transfer pursuant to s 121(5). The inquiry under s 121(5) concerns the identification and value of the consideration given for the transfer of a proprietary interest to the transferee that has been avoided.

166 Section 100‑5(1) of the Insolvency Practice Schedule permits the trustee to assign a right to sue conferred by the Bankruptcy Act, and s 100‑5(4) provides that, if such a right is assigned, a reference in the Bankruptcy Act to the trustee in relation to the action is taken to be a reference to the assignee. Accordingly, if the trustee’s right under s 121 has been assigned, the assignee stands in the trustee’s place for the purposes of s 121(5). Relevantly, pursuant to the Deed of Assignment, the Hu Parties stand in the trustee’s place for the purposes of s 121(5).

167 As transferee, Great Lands bears the onus of proving the value of the consideration to be refunded: Weston v Sanna [2019] FCA 32; 16 ABC(NS) 410 at [135]-136.

168 If s 121(5) is engaged, the Court’s task is to determine the value of the consideration given for the avoided transfer and to make such orders as are necessary to give effect to that statutory entitlement. Questions as to the form of any order, including whether the amount payable should be adjusted to avoid double recovery, are to be considered as part of the application of those principles in the circumstances of the individual case.

Consideration

169 Great Lands contended that the value of the consideration it gave for the transfer avoided under s 121(1) was $3 million. That is the principal sum advanced under the Great Lands Loan which was secured by the Great Lands Mortgage. Great Lands further contended that interest should be allowed on the statutory refund under s 121(5). Great Lands also submitted that the statutory refund should be paid out of the Surplus Funds before, or contemporaneously with, any release of funds to the Hu Parties.

170 The Hu Parties submitted that, if the Great Lands Mortgage is void under s 121(1), Great Lands is entitled under s 121(5) only to the value of the consideration it gave for the transfer, and that Great Lands bears the onus of proving that value. The Hu Parties contended that two payments in the total sum of $1.2 million, made by IPPL on behalf of Mr Gu in reduction of the Great Lands Loan, had to be brought to account in relation to the statutory refund under s 121(5). The relevant payments were: first, a payment of $700,000 on 20 September 2019; and second, a payment of $500,000 on 6 February 2020. The Hu Parties further submitted that the Court could mould relief so as to avoid double recovery, including by preventing Great Lands from both retaining the benefit of those repayments and obtaining a refund of the full amount advanced. They also disputed that Great Lands was entitled to interest on any statutory refund under s 121(5).

171 Great Lands disputed that the two payments were paid pursuant to any arrangement that they were to be appropriated in discharge of Mr Gu’s obligations under the Great Lands Loan. Great Lands maintained that the payments from IPPL were partial redemptions of a fund investment made by Mr Zhang and were not payments in reduction of Mr Gu’s liability under the Great Lands Loan. In the alternative, Great Lands submitted that if the payments were to be treated as repayments of the Great Lands Loan, any such arrangement had to be taken “warts and all”, including by observing that part of the arrangement (said to be evidenced through an email from Mr Zhang) which allocated the payments to the reduction of specified amounts of principal and interest.

172 The central factual issue is whether the contemporaneous communications establish that the payments of $700,000 and $500,000, although made by IPPL to Mr Zhang, were accepted and treated by those concerned as being on account of Mr Gu’s indebtedness under the Great Lands Loan. If so, it is then necessary to determine the content of that arrangement, including whether the payments were to be applied wholly to principal or in part to interest. Great Lands contended, to the contrary, that the $1.2 million represented redemption payments referable to Mr Zhang’s unit holding in the Cornerstone New SIV Bond Fund (Cornerstone Fund).

173 An important matter of context, and a focal point in the evidence, was the email of 23 April 2020 from Mr Zhang to Jinan Zhai. Ms Zhai was an employee of IPPL involved in investment administration and the contact on the IPPL side for Mr Zhang’s correspondence concerning his investment and redemption in the Cornerstone Fund. That email assumed importance for both party’s competing characterisations of the two payments.

174 The 23 April 2020 email was not itself said to constitute the alleged arrangement, but it bore directly on the competing explanation that the two payments were made in respect of Mr Zhang’s Cornerstone Fund investment, rather than as repayments of the Great Lands debt. It also gave rise to a translation dispute to which it is necessary to turn.

175 The original 23 April 2020 email is in Mandarin Chinese in Simplified Chinese script. The court book extract reproduces the original Chinese text and an English translation beneath it provided by a NAATI-accredited translator, Issa He. The dispute concerns the meaning of the first sentence.

176 Ms He was called by the Hu Parties and translated the sentence in affidavit evidence as: “It has been four months since I requested the investment redemption, but no funds have been redeemed, nor have the interest been paid”. Ms He explained that the expression she translated as “no funds have been redeemed” literally meant “funds have not been redeemed”.

177 Dr Kenny Wang, who was called by Great Lands, translated the sentence as: “In regards to my application for redemption of investment, it’s been four months already, the funds have not been redeemed, and the interest has not been paid”. Great Lands submitted that Dr Wang’s translation that “the funds have not been redeemed”, if taken to mean that all of the funds had not been redeemed, was not inconsistent with some of the funds having been redeemed. A fair reading of Dr Wang’s evidence is that he did not treat the Chinese sentence as necessarily conveying an absolute proposition that none of the money had been returned. His position was that the better translation was “the funds have not been redeemed”, not “no funds have been redeemed”, because the word “no” does not appear in the original Chinese and the sentence does not express negation in an absolute sense. He explained, by analogy, that a person might say “I haven’t got my money back” even where some money had in fact been repaid, and for that reason he did not equate the sentence with a statement that no money at all had been paid back. At the same time, Dr Wang accepted that there was nothing in the sentence that said anything about a partial redemption of the funds. In his affidavit, he further expressed the view that the email treated the redemption application as the unitary subject under discussion, but that this did not preclude the composer from regarding the matter as unresolved even if some funds had already been repaid.

178 By contrast, Mr Zhang’s own rendering of his email into English during re-examination was: “I have applied for the fully redemption for a long time – more than … four months, but the money didn’t come back to my account fully and, together, [with] the interest – I haven’t received that”. He gave evidence as to what he meant by the email. He said, in substance, that he had asked Mr Gu for redemption but “he did not redeem 100 per cent. That’s the truth.”

179 The difference is material because, if it were correct that Mr Zhang was saying on 23 April 2020 that none of his investment had been redeemed despite a prior request having been made, the earlier payments of $700,000 on 20 September 2019 and $500,000 on 6 February 2020 are not coherently characterised as fund-redemption payments. On the other hand, if Mr Zhang’s own oral gloss were accepted, the email would be capable of being read as referring to only an incomplete redemption. The translation dispute therefore bears directly on the rival explanation advanced by Great Lands that the earlier payments were fund-redemption payments rather than repayments referable to the Great Lands Loan.

180 I do not accept Mr Zhang’s own oral rendering of the 23 April 2020 email as stating that he had applied for redemption “more than” four months earlier and that the money had not come back to his account “fully”. Those notions are not expressed in either expert translation. Although Dr Wang did not treat the Chinese sentence as necessarily conveying an absolute proposition that none of the money had been returned, he also accepted that there was nothing in the sentence that said anything about a partial redemption of the funds. In my view, the better reading of the sentence, particularly when read with the later contemporaneous emails, is that as at 23 April 2020 Mr Zhang was complaining that the funds had not been redeemed and that interest had not been paid, not that a partial redemption had already occurred. That conclusion weakens the rival explanation that the earlier $700,000 and $500,000 payments were, at the time they were made, understood as partial redemptions of the Cornerstone Fund investment.

181 The principal contemporaneous document relied upon in support of the Hu Parties’ contention is the email of 27 April 2020 from Mr Zhang to John Landerer of Landerer & Company and Nazih Touma, copied to Mr Gu. Under the heading “1. concerning the loan of 3,000,000 between GREAT LANDS AND MICHAEL GU”, that email referred to the payments of $700,000 and $500,000 from IPPL “on behalf of” Mr Gu, treated those payments as repayments referable to the Great Lands Loan, and set out what Mr Zhang calculated would be required to discharge the Great Lands Loan by 30 May 2020. In the same email Mr Zhang also specified how much of each of those two payments was said to have been applied to principal and to interest: first, with $500,000 of the $700,000 payment going to principal and $200,000 to interest; and second, with $50,000 of the $500,000 payment going to principal and $450,000 to interest. Importantly, the same email dealt separately, under a different heading numbered “2. Matters relating to investment of $3,000,000…”, with Mr Zhang’s Cornerstone Fund investment, stating that Mr Zhang had applied for redemption in December 2019 and that the investment had not so far been redeemed. Read as a whole, the email treated the Great Lands Loan repayment proposal and the Cornerstone Fund investment as distinct subjects, and its terms support my above reading of the 23 April 2020 email.

182 The subsequent contemporaneous communications proceeded on the same footing. In the email of 9 June 2020 from Mr Touma to Mr Landerer, copied to Mr Zhang, reference was made to a meeting on 12 May 2020 and it was recorded that Mr Gu had agreed to pay Great Lands $3 million in satisfaction of the monies owing under the Great Lands Loan dated 28 June 2019, and that it appeared IPPL had made part repayment of the monies owing under that loan. That same email separately referred to Mr Gu agreeing to acquire Mr Zhang’s units in the Cornerstone Fund. The further email of 12 June 2020 from Mr Touma to Mr Landerer referred to a meeting on 10 June 2020 and recorded that Mr Gu had confirmed that he was proceeding with the arrangements set out in the 9 June 2020 email. The contemporaneous documents therefore disclose a coherent sequence in which the $700,000 and $500,000 payments were treated as repayments referable to the Great Lands Loan, while the acquisition or redemption of Mr Zhang’s Cornerstone Fund units was treated as a separate matter.

183 Those communications were also between persons able to bind the relevant companies in relation to the matters under discussion. On the evidence, Mr Zhang was the person within Great Lands who had authority (delegated by Ms Zhu) to act in relation to the Great Lands Loan, including arranging the loan, organising the upstream funding, instructing the solicitors and seeking repayment. At the same time, Mr Gu was, at the relevant time, the sole director of IPPL, with the means to pay – from company funds – the amounts to Mr Zhang in repayment of his personal loan (although the propriety of this is another question, addressed below in relation to IPPL’s cross-claim). In those circumstances, the contemporaneous dealings were not exchanges by peripheral actors lacking authority; they were dealings between the persons through whom Great Lands and IPPL were acting in relation to the loan and the payments said to have been made in repayment of it. That bears directly on Great Lands’ submission that there could be no reduction to be brought to account unless there was assent by those whose rights and obligations were affected.

184 Great Lands, through Mr Zhang, nevertheless sought in oral evidence to characterise the 27 April 2020 email as no more than an attempted “re‑categorisation” of the two payments, denying that any concluded arrangement had been reached that they be treated as repayments of the Great Lands Loan. I do not accept that characterisation. It sits uneasily with the terms of the 27 April email itself, with the later emails of 9 and 12 June 2020, and with the fact that each communication treated the alleged loan repayments and the Cornerstone Fund investment as distinct matters. The contemporaneous documents are more probative than Mr Zhang’s later oral attempt to recast them.

185 I also approach Mr Zhang’s later oral evidence with caution because he was not a disinterested observer. On Great Lands’ case, he was centrally involved in arranging the Great Lands Loan, organising the funding, giving instructions to the solicitors, and thereafter pursuing repayment. Ms Zhu did nothing in relation to organising the funds for the Great Lands Loan and left those matters to Mr Zhang. She delegated recovery of the Great Lands Loan to him, and he accepted that it was his role on behalf of Great Lands to procure repayment and that, from September 2019 onwards, he had asked Mr Gu to repay the Great Lands Loan many times. In those circumstances, his later attempt to explain away the 27 April email as merely a proposed re‑categorisation is less persuasive than the contemporaneous documentary sequence.

186 I therefore find that the contemporaneous communications establish that the payments of $700,000 on 20 September 2019 and $500,000 on 6 February 2020 were accepted and treated by those concerned as being on account of Mr Gu’s indebtedness under the Great Lands Loan, and not as partial redemptions of Mr Zhang’s Cornerstone Fund investment. It follows that those payments must be brought to account in determining the value of the consideration to be refunded to Great Lands under s 121(5).

187 The further question is the content of that arrangement as to allocation of those loan repayments between principal and interest. That is distinct from the anterior question whether an arrangement was reached that the two payments were to be brought to account against Mr Gu’s indebtedness under the Great Lands Loan. Great Lands’ submission that no binding arrangement arose unless and until a written agreement was executed should be rejected because, objectively assessed, this was not a case of the “third class” described in Masters v Cameron [1954] HCA 72; 91 CLR 353 at 11 (where the intention of the parties is not to make a concluded bargain until they execute a formal contract). The parties had reached finality on the relevant arrangement, intended it to operate forthwith, and had in fact acted upon and performed it in material respects. In those circumstances, any contemplated written instrument was no more than a fuller record of an arrangement already concluded and implemented.

188 In my view, the contemporaneous materials support a further finding that, at the relevant time, Mr Zhang for Great Lands and IPPL under the control of Mr Gu were proceeding on the footing that the relevant interest provisions governing that indebtedness were those contained in the Great Lands Loan, including the “Higher Interest Rate”. The agreement defined the Lower Interest Rate as 2% per month and the Higher Interest Rate as 4% per month. Clause 5.2 provided for interest at the Lower Interest Rate on the balance of the Secured Monies; cl 5.3 provided that interest accrued daily; and cll 5.4-5.5 (and, by extension in designated circumstances, cl 5.7(a)(ii)) introduced the higher-rate default regime which came into effect when Mr Gu defaulted because the “Advanced Moneys” were not repaid on the “Repayment Date” (being two months after the conditions precedent of the agreement were met). That higher-rate default regime included that when the Higher Interest Rate applied, interest compounded daily and was subject to capitalisation. Further, although not directed specifically to the present payments, cl 15.6 of the agreement confirmed that, until all amounts payable under or in connection with the “Security Agreements” had been irrevocably paid in full, Great Lands could apply moneys, security or rights held or received by it in such manner and order as it saw fit. In that setting, I infer that the parties’ contemporaneous understanding was that the debt was then to be worked out by reference to the contractual regime for interest, including the Higher Interest Rate, and that the payments were to be allocated accordingly as between principal and interest.

189 Adopting what I infer were the operative assumptions at the time as to the efficacy of the Higher Interest Rate on default, the allocation recorded in the contemporaneous materials is readily understood. On those assumptions, as at 20 September 2019 accrued interest was in excess of approximately $255,000, with the consequence that the payment of $700,000 could sensibly be treated as $200,000 in reduction of accrued compound interest and $500,000 in reduction of principal (as Mr Zhang stated in his 27 April 2020 email). On the same assumptions, by 6 February 2020 the outstanding principal would have been $2.5 million and accrued interest in excess of approximately $575,000, with the consequence that the payment of $500,000 could sensibly be treated as $450,000 in reduction of accrued compound interest and $50,000 in reduction of principal (as Mr Zhang stated in his 27 April 2020 email). Those assumptions accord with the only contemporaneous indication of the parties’ agreement as to how the two payments would be applied, which is found in Mr Zhang’s 27 April 2020 email as described above. I am satisfied that on the contemporaneous documents there was an agreement as to allocation, and that the allocation then adopted was made on the footing that the contractual default-rate provisions were effective.

190 The difficulty for Great Lands is that I have found the higher-rate default provisions in cll 5.4-5.5 (as well as cl 5.7(a)(ii)) to be void as penalties (see below: Issue 56). That conclusion does not deny the existence of the contemporaneous agreement as to allocation. Rather, it means that the parties’ agreed allocation must now be brought to account according to the rights which the law recognises as valid. To the extent that part of either payment was allocated to interest only because the debt was then being worked out by reference to the void higher-rate regime, that excess cannot remain treated as interest for the purposes of the statutory refund. In my view, the Court may and should bring those excess amounts to account instead as reductions of principal in fixing the amount payable under s 121(5).

191 On that basis, and applying the valid lower-rate regime, the position is as follows. Under cll 5.2 and 5.3 of the Great Lands Loan, interest accrued daily at the Lower Interest Rate of 2% per month, that is, 24% per annum simple interest. The Hu Parties’ calculation that, on that basis, accrued interest as at 20 September 2019 was $167,671.23 should be accepted. It follows that, of the $200,000 then received that was allocated to interest (according to Mr Zhang’s 27 April 2020 email), only $167,671.23 was legitimately so allocable, and the balance of $32,328.77 should be brought to account as a reduction of principal. The first payment therefore reduced principal not merely by $500,000 but by $532,328.77, leaving principal outstanding of $2,467,671.23 as at 20 September 2019.

192 Interest thereafter accrued on that reduced principal at the valid lower-rate regime. Applying the same daily-accrual method reflected in the figure of $167,671.23 and calculating simple interest on $2,467,671.23 from 21 September 2019 to 6 February 2020, accrued interest as at 6 February 2020 was $225,538.39. It follows that, of the $450,000 then allocated to interest, only $225,538.39 was lawfully so allocable, and the balance of $224,461.61 should be brought to account as a further reduction of principal at that time. The second payment therefore reduced principal not merely by $50,000 but by $274,461.61, leaving principal outstanding of $2,193,209.62 as at 6 February 2020. After both payments are brought to account on that basis, the total reduction of principal by reason of the September 2019 and February 2020 payments is $806,790.38.

Determination

193 I therefore conclude that, although there was a contemporaneous agreement as to the allocation of the two payments as between principal and interest, that agreement proceeded on the mistaken footing that the higher-rate default provisions were effective. Because those provisions are void as penalties (as found below in Issue 56), the excess amounts treated by the parties as interest above what was lawfully recoverable at the lower-rate must be brought to account instead as reductions of principal. On that basis, the value of the consideration given by Great Lands for the transfer of the mortgage to them over the Superba Property which has been voided, must be reduced by the value of those reductions of principal, for the purposes of fixing the statutory refund to which Great Lands is entitled under s 121(5). Great Lands submitted, and I accept, that the value of the consideration given for the mortgage was $3 million. Subtracting from that value the total reduction of principal by the September 2019 and February 2020 payments, the amount to which Great Lands is entitled to be paid under s 121(5) is therefore $2,193,209.62. For the sake of clarity, I am addressing here the value of the consideration given, not the market value of the interest transferred. That latter issue is addressed earlier in these reasons in consideration of s 121(4)(a) of the Bankruptcy Act.

194 In giving effect to that statutory entitlement, it is appropriate that I mould the relief to which Great Lands is entitled to avoid double recovery and to ensure that Great Lands does not both retain the benefit of those payments and obtain a refund of the same value. This remedial outcome follows from the absence of any surviving proprietary security interest held by either Great Lands or the Hu Parties in the Surplus Funds. The statutory consequences of avoidance must therefore be worked out on an unsecured basis. Because the Hu Parties prosecute the assigned s 121 claim in the trustee’s place, the consequences of avoidance – including the obligation to restore to Great Lands the value of the consideration it gave for the avoided transfer – fall to be worked out in this proceeding against the fund representing the realised property. Consistently with the effect of s 100-5(4) of the Insolvency Practice Schedule, any amount payable under s 121(5) is payable from the Surplus Funds.

195 It is therefore significant that, on the findings I have made, the Hu Parties and Great Lands are both unsecured creditors of Mr Gu. In those circumstances, any entitlement of either to participate in the Surplus Funds is subject to the statutory order of payment in bankruptcy. To the extent that Surplus Funds remain available for distribution after satisfaction of higher-ranking claims, neither has established any basis for priority over the other in respect of the outstanding debt owed by Mr Gu to each of them.

196 Finally, the amount to which Great Lands is entitled under s 121(5) does not include any interest that Great Lands might otherwise have recovered had it enforced its personal rights under the Great Lands Loan, rather than receiving the statutory repayment of the value of the consideration it gave for the transfer avoided under s 121(1). I am not satisfied that interest should be allowed on the amount payable under s 121(5). The subsection requires the trustee to pay to the transferee “an amount equal to the value of any consideration” given for the avoided transfer. It does not provide for any further amount by way of interest. The Hu Parties relied upon Weston (Trustee) v Sanna (No 4) [2021] FCA 287 at [54]-55 for the proposition that s 121(5) itself confers no power to award interest, and I accept that submission. In my view, the statutory text is directed to restoration of the value of the consideration given for the avoided transfer, not to enlargement of that amount by an award of interest.

197 Nor am I persuaded that interest should be awarded under s 51A of the F ederal C ourt of A ustralia Act 1976 (Cth). The Hu Parties submitted that a claim under s 121(5) is not a proceeding for recovery of money in respect of a cause of action in the relevant sense and, alternatively, that any payment obligation under s 121(5) arises only once the Court has held the transfer void and fixed the amount to be repaid. At the least, those submissions demonstrate that the claim to interest is not one that follows automatically from the engagement of s 121(5). In circumstances where the statute is silent, where the refund entitlement is compensatory and confined to the value of the consideration given, and where the better view is that the subsection itself does not authorise interest, I refuse the claim for interest.

GREAT LANDS’ CROSS-CLAIM

Overview

198 The issues raised by Great Lands in its cross-claim are Issues 56 to 74. Those issues proceed on the premise that Great Lands has an enforceable mortgage securing its claim to an interest in the Surplus Funds. However, for the reasons given in addressing the Hu Parties’ Bankruptcy Act claim against Great Lands, I have concluded that the Great Lands Mortgage is void against the Hu Parties (as assignees of the trustee) under s 121(1), and that Great Lands has not established the statutory good faith defence in s 121(4). It follows that Great Lands cannot succeed, as against the Hu Parties, on the basis that it holds an enforceable mortgage entitling it to participate in the Surplus Funds as a secured creditor. The consequence of the avoidance of the Great Lands Mortgage was determined in accordance with Issue 13, namely what, if any, amount is payable to Great Lands under s 121(5), read with s 100-5 of the Insolvency Practice Schedule.

199 To the extent the matters raised by Great Lands in Issues 57 to 60 bear upon that consequential question, they have already been addressed in determining Issue 13. I have determined that any amount payable to Great Lands under s 121(5) is to be reduced by that part of the two payments of $700,000 and $500,000 that is properly understood to have been applied to principal reduction and should exclude interest. Those matters do not require separate determination as freestanding issues under the Great Lands’ cross-claim.

200 On the view I have reached, save for one exception, it is unnecessary to determine separately the balance of the issues raised by Great Lands in its cross-claim. The exception is as to whether the 4% interest rate provided for under the Great Lands Loan is unenforceable as a penalty (Issue 56). That issue remains live because it will inform the amount for which Great Lands may prove as an unsecured creditor in relation to the Surplus Funds. I will first address that issue.

201 I will then address, in case I am wrong in my determination of the Hu Parties’ Bankruptcy Act claim, whether the amount otherwise owing under the Great Lands Loan and Great Lands Mortgage included further interest or secured costs beyond the matters already addressed for the purposes of Issue 13 (Issues 57-60) and whether the Great Lands transaction documents are unenforceable or should not be enforced by reason of alleged contraventions of PRC law, public policy, clean hands or related matters (Issues 61-74).

Issue 56 – Whether the 4% rate is a penalty

202 Regardless of whether Great Lands’ debt under the Great Lands Loan is secured by the Great Lands Mortgage, this issue bears upon the amount for which Great Lands is entitled to prove in respect of the Surplus Funds. More particularly, Great Lands contended that the amount of principal and interest owing on the Great Lands Loan depends upon the validity of the higher-rate regime in cll 5.4 and 5.5 of the Great Lands Loan, whereas the Hu Parties contend that those provisions are penal and therefore unenforceable. Great Lands contended that, if cll 5.4 and 5.5 were not held to be a penalty, the amount of principal and interest owing at the time of closing submissions was $29,893,405.39.

203 The Great Lands Loan provided for interest at 2% per month in the ordinary course, but at 4% per month upon default, with compounding and capitalisation in the default regime, as described above.

204 A provision requiring payment upon default is not penal merely because it is engaged by breach. The question is whether the stipulated consequence is out of all proportion to, or exorbitant or unconscionable having regard to, the legitimate interest which the provision is designed to protect: Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; 258 CLR 525 at [29], 53, [111], 153, [256], 270. There is no absolute rule that a clause increasing the rate of interest on default, or one providing for compound interest, is necessarily penal: Kellas-Sharpe v PSAL Ltd [2012] QCA 371; [2013] 2 Qd R 233 at 48. The inquiry is fact specific.

205 I have concluded that the impugned clauses that give effect to the Higher Interest Rate are penal because they did not merely increase the interest rate upon default, but also introduced a materially more onerous interest regime. The relevant clauses are cll 5.4, 5.6 and 5.7(a)(ii) (the Penalty Clauses). On its proper construction, the Great Lands Loan provided for interest at 2% per month before default, accruing daily under cll 5.2-5.3, but did not provide for that interest to compound. Before default, interest accrued only on the balance of the Secured Monies. The agreement introduced compounding only as part of the default regime. Clause 5.4(a) expressly imposed interest on “Outstanding Interest” at the “Higher Interest Rate” of 4% per month, compounding daily, and cl 5.4(b) provided that each compounded amount immediately formed part of the Secured Monies. Clause 5.5 then applied that higher rate where a default event occurred, whether by non‑payment (as at the Repayment Date and Date for Payment of Interest, both being 2 months after the conditions precedent in cl 9 were met) or non‑performance of various other obligations under the agreement.

206 Clause 5.6 must be read in that context. It is not confined to default interest and provides, in general terms, that any Interest not paid by the Date for Payment of Interest is capitalised and forms part of the Secured Monies, whether that Interest accrued at the Lower Interest Rate or the Higher Interest Rate. However, cl 5.6 does not itself impose interest on unpaid interest or provide for compounding. Its effect is to re‑characterise unpaid interest as principal. Only cl 5.4 introduced a distinct regime under which interest was payable on unpaid interest and compounded daily. That distinction is critical. The default provisions did not simply continue the pre‑default interest arrangements at a higher rate, but for the first time subjected the borrower to interest on interest through daily compounding at 4% per month, producing a materially more oppressive outcome.

207 Great Lands submitted that the higher rate under cll 5.4 and 5.5 of the Great Lands Loan reflected its legitimate commercial interests because the funds advanced to Mr Gu were sourced from the upstream Gong Ju Hui Loan, under which Great Lands itself was obliged to pay interest at 15% per annum, calculated daily, for the first 120 days, increasing to 30% per annum after 120 days. That submission is not without relevance, because it provides some commercial context for the higher-rate regime. However, the comparison between the two instruments does not closely support the proposition that the default regime in the Great Lands Loan was a proportionate reflection of Great Lands’ own increased funding exposure. Under the Great Lands Loan, Mr Gu was obliged to pay interest at 2% per month before default under cll 5.2 and 5.3, with the loan repayable after two months, and Great Lands was therefore charging a pre-default rate materially above the 15% per annum payable by it under the Gong Ju Hui Loan during the first 120 days. More significantly, upon default the Great Lands Loan moved to the “Higher Interest Rate” of 4% per month, together with compounding and capitalisation under cll 5.4-5.5, whereas the upstream Gong Ju Hui Loan increased only to 30% per annum and only after 120 days. In that respect, the Great Lands default regime could operate both earlier and more severely than the asserted increase in Great Lands’ own funding cost.

208 In those circumstances, the upstream Gong Ju Hui Loan provides some evidence of the commercial interests relied upon by Great Lands, but it does not by itself resolve whether the combined effect of the higher-rate, compounding and capitalisation under cll 5.4-5.6 was out of all proportion to the interests those provisions were designed to protect.

209 I am satisfied that the combined effect of the increase from 2% per month to 4% per month, together with compounding and capitalisation upon default, imposed a substantially more onerous liability than that operating before default, and that Great Lands did not establish a legitimate interest sufficient to justify that additional burden. In my view, the consequences arising from the Penalty Clauses are out of all proportion to, or exorbitant or unconscionable having regard to, Great Lands’ legitimate interest in repayment which the provisions were designed to protect. On that basis, the Penalty Clauses of the Great Lands Loan are penal and unenforceable.

Issues 57-60 – The payments to Mr Zhang and the amount secured

210 The next issues concern the effect of the two payments made by IPPL to Mr Zhang in September 2019 and February 2020, the amount presently owing to Great Lands, and whether Great Lands’ costs are secured by the Great Lands Mortgage.

211 The factual controversy concerning the IPPL payments to Mr Zhang overlaps with the matters addressed under Issue 13. Here, however, those payments are considered on the assumption, contrary to my findings under the Bankruptcy Act claim, that the Great Lands Mortgage remains operative, and the question is the extent to which the payments reduced the indebtedness secured by that mortgage.

212 On that basis, if it were necessary to decide Issues 57 to 60 on the alternative footing that the Great Lands Mortgage remains enforceable against the Hu Parties, I am satisfied that the two payments totalling $1.2 million were to be brought to account in reduction of the indebtedness owed by Mr Gu to Great Lands under the Great Lands Loan. The critical question is not the form of the payments, as payments by a third party to a third party, but whether there was an arrangement assented to by those whose rights were affected that they would be treated in that way. For the reasons I have given in addressing Issue 13, I am satisfied that the payments were treated as referable to Mr Gu’s indebtedness to Great Lands, rather than as independent payments between third parties (related to the Cornerstone Fund investment, or otherwise).

213 I would further conclude that the Great Lands Mortgage is, in terms, capable of securing costs of the kinds described in its secured moneys and indemnity provisions, but only to the extent that the particular costs claimed are shown to answer that description. Consistent with the calculations and reasoning above in Issue 13, the two payments would be allocated between principal and interest in the way identified. It follows that Great Lands’ recoverable secured claim on that alternative footing would be the amount otherwise owing under the Great Lands Loan, reduced to $2,193,209.62 together with any costs properly proved to be secured by the Great Lands Mortgage.

Issues 61-74 – PRC law, public policy and related matters

214 Issues 61 to 74, which arose from the Hu Parties’ amended defence to Great Lands’ cross‑claim, concern whether the Great Lands transaction documents are unenforceable or should not be enforced by reason of alleged contraventions of PRC law, public policy, clean hands or related considerations. Issue 64 was not pressed.

215 These issues arise only on the hypothesis that Great Lands has a surviving secured claim under the Great Lands Loan and the Great Lands Mortgage. If, contrary to the conclusions I have reached above, it were necessary to determine Issues 57 to 60 on that footing, it would then be necessary to consider whether the Great Lands transaction documents should nevertheless be denied enforcement. On the premise that the Great Lands Mortgage is void, these issues also arise in relation to the Great Lands Loan in isolation, and whether it should be denied enforcement.

216 I further note that the way in which the evidence unfolded – particularly in relation to the expert evidence called by the Hu Parties – may bear upon the costs orders that will ultimately be made.

217 The starting point in addressing the further issues concerning PRC law and the enforceability of the Great Lands transaction documents is to identify the structure of the transaction. As detailed above, on 28 June 2019, Great Lands entered into the Great Lands Loan, which was a secured loan agreement with Mr Gu under which Great Lands agreed to advance $3 million to Mr Gu, repayable after two months. The agreement was supported by security granted by Mr Gu over the Superba Property and by guarantees and general security agreements given by corporate entities within the i-Prosperity group of companies. The Great Lands transaction documents also contained provisions for interest at a lower rate in the ordinary course and a higher-rate upon default, and defined the “Secured Monies” (or “Secured Moneys”) broadly to include principal, interest and other amounts payable under the agreement and the associated security documents.

218 Great Lands’ case was that the funds it advanced to Mr Gu were not drawn from pre-existing funds of its own, but used funds obtained by it under the Gong Ju Hui Loan, a separate upstream loan agreement dated 27 June 2019 between Gong Ju Hui and Great Lands. Under that agreement, Gong Ju Hui agreed to lend RMB 15 million to Great Lands. Great Lands relied on evidence that Mr Zhang arranged that borrowing; that Gong Ju Hui then made three transfers of RMB 5 million into an account in China held in the name of Wu’an Rui Feng Trading; and that Mr Gu later acknowledged via the Deed of Acknowledgement dated 28 June 2019 receipt of the principal sum (which was defined in the Deed of Acknowledgement to be AUD $3 million, with the RMB equivalent “being RMB 14,500,000”, notwithstanding that the transfers by Gong Ju Hui in fact totalled RMB 15 million) by that method of payment. In this way, the borrowing from Gong Ju Hui was the source of the funds advanced under the Great Lands Loan.

219 As to the difference of RMB 500,000 between what was actually advanced (RMB 15 million) and what was recorded as the RMB equivalent of AUD $3 million (RMB 14,500,000), Mr Zhang explained that he believed the exchange rate was 5 to 1 and that RMB 15 million was equivalent to AUD $3 million.

220 The Hu Parties contended that the RMB 500,000 difference was in reality a commission or fee for a foreign currency exchange. I will return to this issue.

221 It is next necessary to understand the relationships between the entities and individuals involved in these transactions, which formed an important part of the factual context for the foreign law issues. Gong Ju Hui was a mainland Chinese company. Its sole shareholder was Nianji (Shanghai) Investment Partner Enterprise LP, which was in turn substantially owned by Beijing Zhongrui Rongchuang Investment Fund Management Co Ltd. It was common ground that Mr Zhang held a 90% shareholding in Beijing Zhongrui Rongchuang Investment Fund Management, while the partnership interest in Nianji was held by his younger brother, Jun Zhang.

222 Great Lands relied on Mr Zhang (Mingjie (Jason) Zhang) as the person who arranged the upstream funding and the downstream advance to Mr Gu. Mr Zhang denied that the Gong Ju Hui funds were effectively his own funds. The evidence as to the relationship between Mr Zhang and Mr Gu did not establish any formal partnership or pre-existing legal relationship, but did show a course of dealings (business and social) preceding the impugned loan.

223 It was against that background that the foreign law issues arose.

224 The Hu Parties contended that, properly characterised, the arrangements involved the movement and use of RMB funds in China in a manner that engaged PRC foreign exchange controls and related provisions of PRC law, with consequences for the enforceability of the transaction documents and the relief available to Great Lands.

225 Great Lands, by contrast, contended that the arrangements were no more than an ordinary commercial loan transaction and that the relevant PRC provisions were not contravened. It was in this context that the Hu Parties and Great Lands led expert evidence about the content and operation of the relevant PRC legal framework. Before addressing the competing expert evidence, I will first address the competing factual characterisations of the transactions advanced by the parties. The characterisation placed on the transactions informs the parties’ competing submissions on the application and operation of PRC law.

226 The necessary premise of the Hu Parties’ PRC law case was that the steps by which the funds lent by Great Lands were sourced, routed and advanced were not to be viewed in isolation, but rather as elements of a single integrated arrangement. In the Hu Parties’ submission the proper characterisation, at a substantive level, involved the movement and deployment of RMB funds within China for the purpose of effecting what was, in substance, the provision of value to Mr Gu in Australia outside the ordinary channels contemplated by PRC foreign exchange regulation. On that footing, the Hu Parties characterised involvement of the Chinese companies of Gong Ju Hui and Wu’an Rui Feng Trading, the routing of funds through Chinese accounts, and the ownership and control links leading to Mr Zhang as forming part of one overarching PRC connected transaction, the legal character of which was to be assessed at that macro level rather than by disaggregating it to its constituent steps.

227 Great Lands countered by submitting that no such overarching characterisation was available on the evidence and that the relevant dealings were properly analysed as a series of discrete transactions involving different parties: an upstream borrowing by Great Lands from Gong Ju Hui, and the subsequent advance by Great Lands to Mr Gu, with the payment made in the manner directed by Mr Gu. On that analysis, Great Lands contended that the involvement of Chinese entities and accounts, and the relationships between Mr Zhang and the upstream entities, did not alter the essential character of the component Great Lands transactions as an ordinary secured loan arrangement. Great Lands maintained that the Hu Parties did not establish a sufficient evidentiary foundation for treating the component transactions as one integrated transaction which contravened PRC law.

228 The parties were agreed that the content of PRC law was a question of fact to be proved by expert evidence, but they were not agreed either as to the applicable principles by which alleged foreign illegality may affect the enforceability of a contract regulated by Australian law or as to the proper characterisation of the Great Lands arrangements for that purpose.

229 The Hu Parties submitted that, on the premise that the relevant dealings were properly characterised as a single integrated PRC-connected transaction, an Australian court would not enforce a contract whose performance involved violation of foreign law on foreign soil and that, separately, equity would refuse relief where the moving party was driven to rely on acts done in contravention of foreign law, as an application of the “unclean hands” doctrine. They further submitted that, although foreign law was to be proved by expert evidence, the application of that law to the facts was for the Court, with any expert opinion directed to that latter question to be treated as submission rather than evidence, save to the extent it concerned how a foreign court would exercise a discretion.

230 Great Lands, by contrast, submitted that the Hu Parties’ formulation of the public policy principle was too broad and that, at least where a contract was capable of lawful or unlawful performance, enforcement would be refused only where the parties intended that it be performed in an illegal manner. Great Lands submitted that, in such a case, knowledge of the foreign law and of the alleged illegality was important. Great Lands further submitted that, even if the Great Lands Loan was wholly unenforceable, restitutionary relief would remain available for total failure of consideration.

231 In this way, although the parties accepted that PRC law was to be proved by expert evidence, they were not agreed on the scope of the public policy principle, whether knowledge or intention was required, whether equitable relief was denied simply upon proof of contravention of foreign law, or whether the relevant dealings were to be characterised as one overarching transaction or as a series of discrete transactions involving different parties.

232 The Hu Parties relied on expert evidence from Shen Xiangman (in accord with the parties’ practice, I will refer to this expert as Mr Shen). Mr Shen is a partner of Jingtian & Gongcheng, based in Guangzhou in the PRC. He obtained an LLB degree in 1987, undertook a training program in foreign related economic affairs under the Ministry of Justice of the PRC, and became a licensed PRC lawyer in 1989. His professional experience includes practice at Hubei Foreign and Maritime Affairs Law Firm, senior positions at Wang Jing & Co, a period as a senior partner at Stephenson Harwood-Wei Tu (China) Association, and, from early 2020, practice as a partner at Jingtian & Gongcheng. In his first report he described his work as focusing on general corporate and commercial law, stated that he had handled hundreds of civil, commercial and criminal cases over more than 30 years, referred to substantial experience in court and arbitral proceedings in the PRC including recognition and enforcement of foreign arbitral awards, and identified a particular focus on ship construction and ship finance matters, including cross-border transactions in which foreign exchange issues arise. He also stated that he had from time to time been invited to give PRC law opinions to foreign courts and arbitral tribunals.

233 Mr Shen prepared four reports: an expert report dated 11 October 2021; a supplementary expert report dated 28 February 2022; a report dated 20 January 2023 in reply to the report of an expert engaged by Great Lands, Wei Sun; and a further report dated 11 March 2024 which responded to oral evidence of Mr Sun.

234 Great Lands relied on expert evidence from Mr Sun. Mr Sun is a partner at Zhong Lun Law Firm and is qualified to practise in the PRC and in New York State. In his report, Mr Sun stated that he had LLM degrees from New York University and University of London, and an LLB from China University of Political Science and Law. He further identified a series of professional appointments and memberships in arbitral and academic bodies, including roles connected with UNCITRAL, the ICC International Court of Arbitration, and China University of Political Science and Law. Mr Sun described himself as having extensive experience in litigation, arbitration and civil enforcement in matters relating to construction, energy, finance, corporate equity and real estate, including significant commercial disputes across a number of jurisdictions, and stated that he had published books and articles in his field and had received professional recognition including listings in Who’s Who Legal, Benchmark Litigation, Chambers Global and The Legal 500. Mr Sun prepared one report dated 25 August 2022.

235 The experts also participated in an expert conclave and produced a joint report dated 12 October 2023 which addressed a joint list of expert issues. The joint report addressed questions concerning the proper characterisation of the Great Lands and Gong Ju Hui transactions, the relevance of PRC foreign exchange control laws, and the application of particular provisions of PRC law, and it recorded, issue by issue, whether Mr Shen and Mr Sun agreed or disagreed.

236 Where the opinions of Mr Sun and Mr Shen differed, I preferred the evidence of Mr Sun. In my view, Mr Sun’s qualifications and experience in litigation, arbitration and civil enforcement in commercial fields including finance, corporate equity and real estate, and across a number of jurisdictions, gave his evidence greater persuasive force on the issues raised by this cross-border commercial financing dispute. Although Mr Shen was also an experienced PRC lawyer, his described practice was more general and included a particular focus on ship construction and ship finance, which I considered less directly apposite to the present issues.

237 The Hu Parties relied on Mr Shen’s evidence to identify the particular PRC provisions said to be engaged by their characterisation of the transactions. By the time of closing submissions, the Hu Parties submitted that the arrangements contravened the following provisions of PRC law:

(1) Article 32 of the Administrative Regulations on Settlements, Sales and Payments in Foreign Exchange (Regulations on Foreign Exchange Settlement), said to permit the settlement or sale of foreign exchange only at designated foreign exchange banks;

(2) Article 45 of the Administrative Regulations of the People’s Republic of China on Foreign Exchange (Regulations on Foreign Exchange), said to prohibit direct or disguised foreign exchange trading without permission;

(3) Article 20 of the Regulations on Foreign Exchange, which they said required approval from the PRC State Administration on Foreign Exchange (SAFE) for the provision by a domestic institution of an overseas commercial loan; and

(4) Article 225 of the Criminal Law of the People’s Republic of China, which Mr Shen regarded as creating a criminal offence of illegal business operation, including disguised foreign exchange sale or purchase.

238 The Hu Parties submitted that, on Mr Shen’s evidence, those provisions were engaged because the Great Lands arrangements were, in substance, an exchange of currency designed to convert RMB in China into AUD in Australia and thereby to avoid PRC foreign exchange controls, with the consequence that the relevant contracts were void and unenforceable under PRC law or otherwise tainted for the purposes of the relief sought in this Court. The Hu Parties further submitted that, on the proper construction of the Great Lands transaction documents, the advance and repayment obligations were in AUD, with the result that the payment of RMB in China pursuant to the contemporaneous Authority & Direction to pay and Deed of Acknowledgement dated 28 June 2019 engaged the PRC provisions on which the Hu Parties relied. In that respect, the Hu Parties placed weight on the difference between the amount of RMB 15 million which was actually transferred to Mr Gu (via Wu’an Rui Feng Trading), and the indication in the Authority & Direction to pay and Deed of Acknowledgement that the principal sum to be transferred and in fact acknowledged as received by Mr Gu, in RMB, was RMB 14.5 million. The Hu Parties submitted that Mr Gu was therefore sent RMB 500,000 more than what he was entitled to be advanced as the principal sum under the Great Lands Loan, which equated to AUD $125,000 (essentially the same as the minimum interest payable under cl 8(b) of the Great Lands Loan), which the Hu Parties alleged was a “commission” or “fee” paid to Mr Gu in return for facilitating the transaction converting RMB in China to AUD in Australia.

239 By contrast, Great Lands relied on Mr Sun’s evidence and the joint expert report to submit that the Hu Parties had not established that the PRC provisions on which they relied had been contravened by the Great Lands Loan and the related transactions. Great Lands’ position was that the evidence did not establish that the Great Lands Loan was a scheme for exchange of currency designed to convert RMB in China into AUD in Australia, but rather showed an ordinary commercial loan funded by an upstream borrowing.

240 In response to the contention that the differential of RMB 500,000 was a fee for foreign exchange conversion, Great Lands submitted that the Hu Parties had not established the factual findings necessary to support such a finding. Great Lands submitted the evidence did not demonstrate that it was the subjective intention of the parties nor an objective feature of the transaction that the loan be advanced in RMB in China and repaid in AUD in Australia. The Great Lands Loan could be repaid in either AUD or RMB and the Gong Ju Hui Loan was a loan in RMB. Further, that the Court should accept Mr Zhang’s explanation that he regarded RMB 15 million as equivalent to AUD $3 million on the exchange rate he had in mind at the time, with the result that there was no basis to infer either a disguised currency-conversion scheme or a commission of RMB 500,000 paid to Mr Gu.

241 It is unnecessary to determine Great Lands’ additional contention that some of the PRC provisions relied upon by the Hu Parties were inapplicable because Mr Zhang was not, at the relevant time, a Chinese citizen. That point emerged only at a late stage, was accompanied by an attempted reliance on expert evidence served out of time which was not accepted into evidence, and, in the context of the way the expert evidence was otherwise developed, was peripheral.

242 Great Lands also submitted that the Great Lands Loan itself was not unlawful, being an Australian-dollar loan by an Australian company to an Australian citizen, and that the transaction documents should be construed as treating AUD $3 million and RMB 14.5 million as equivalent expressions of the principal sum for the purposes of the Great Lands Loan. Great Lands submitted that, on that footing, any alleged PRC illegality arose only because Great Lands accepted a direction from Mr Gu that the principal sum be advanced by payment in RMB into an account in China. Great Lands contended that, even if that mode of performance engaged PRC law, the case was at most one of an allegedly unlawful performance of a contract capable of lawful performance, with the consequence that enforcement should not be refused absent an intention to perform the contract in an illegal manner.

243 Great Lands contended that a fundamental difficulty with Mr Shen’s reasoning was that, for the purpose of giving his opinions, he had proceeded on the basis that the criminal law of China could apply to Chinese citizens within the sovereign territory of Australia (which Great Lands said was inaccurate). Great Lands submitted that this premise undermined the reliability of the opinions expressed by Mr Shen on the criminal law aspects of the Hu Parties’ case.

244 Great Lands also challenged the reliability of Mr Shen’s evidence. Great Lands submitted that there were substantial areas of disagreement between Mr Sun and Mr Shen and that the Court should take into account its impression of those witnesses in resolving the contest between the experts. In this context, Great Lands made detailed submissions about the issue described in argument as relating to “Case 181”, a decision of the People’s Court of Taishan City, Guangdong Province, dated 5 November 2020.

245 Case 181 concerned a prosecution of two defendants under Art 225 of the Criminal Law of the People’s Republic of China arising from foreign exchange transactions conducted through so‑called “matched order” arrangements. The judgment considered a number of separate transactions or acts by the defendants and, relevantly, drew a distinction between profit‑seeking foreign exchange trading constituting illegal business operations and transactions which, on the evidence, could not be excluded as ordinary commercial settlements lacking a profit‑making purpose. In a discrete part of the judgment referring to one of the transactions, the trial court found in one of the defendant’s favour on the basis that the prosecution had not disproved that the transaction was referable to the settlement of goods between related commercial parties rather than an independent profit‑seeking exchange activity.

246 I pause now to consider an ancillary issue which arose in the course of the trial concerning the form in which Case 181 was deployed through the evidence of Mr Shen. In his supplementary report of 28 February 2022, Mr Shen annexed a four-page English version of Case 181. In Mr Sun’s expert report, it was suggested that this annexed version of Case 181 omitted the discrete part of the judgment in which the trial court found in the defendant’s favour. In his reply report of 20 January 2023, Mr Shen denied any intentional omission and stated that the document had been retrieved from an online database, Wolters Kluwer. He then annexed what he described as the original Chinese version provided to him by the Hu Parties’ solicitors. By that stage, the completeness and reliability of the version of Case 181 relied upon by Mr Shen had been squarely raised, and the Hu Parties were on notice that this was an issue to be addressed.

247 That issue was explored in detail in Mr Lawrance SC’s cross‑examination of Mr Shen on 14 and 15 March 2024. Mr Shen was taken to a longer, 20‑page version of Case 181 which he said he had not previously seen but which was accessible via the hyperlink appearing on the Chinese version annexed to his reply report. His attention was drawn to passages in the longer judgment that did not appear in either the English or Chinese versions on which he had relied, which were suggested to have been incomplete. Mr Lawrance SC called for production of all communications to or from Mr Shen attaching or referring to Case 181, and the topic required further attention when cross-examination resumed on the following day.

248 The fact of the omitted material was not peripheral to the topic addressed in the expert evidence. Great Lands relied upon the missing material as bearing directly on the operation of Art 225 of the Criminal Law of the People’s Republic of China, particularly the distinction between profit‑seeking conduct and ordinary business conduct. Whether or not Great Lands’ ultimate reliance on that material is accepted, its omission altered the meaning of the judgment and its significance as authority for the propositions on which the Hu Parties relied. In those circumstances, the issue was not merely an immaterial discrepancy of translation or presentation.

249 After the problem became apparent in cross-examination, the Hu Parties took steps to explain the provenance of the version that had been supplied to Mr Shen. The explanation advanced was that the version sent to Mr Shen in 2022 had been downloaded from the Wolters Kluwer database and was said to be the complete version then available, and that publicly available versions of Chinese judgments may later be edited, supplemented or otherwise differ. Great Lands did not seek findings of dishonesty against the solicitors involved, nor did it submit that they knowingly misled the Court. I do not consider it necessary to make a finding that the Hu Parties, whether through their representatives or otherwise, deliberately edited the version of Case 181 that was supplied to Mr Shen or knowingly misled the Court.

250 The fact that the version of Case 181 annexed to Mr Shen’s report was an incomplete report of that case, that Mr Shen did not make further inquiries after the point was raised by Mr Sun, and the way Mr Shen dealt with the issue in cross-examination undermined Mr Shen’s credibility and reliability as an expert.

251 An incomplete version of Case 181 remained in play through Mr Shen’s reports until the problem was explicitly exposed in cross-examination. That course caused a material diversion of hearing time, necessitated a call for further documents, required additional cross-examination, and then led to the adducing of further affidavit evidence and an application to reopen directed to explaining the provenance of the shorter version of Case 181. I will address any application for costs in relation to this issue if it is raised.

252 Leaving that ancillary issue I now return to the substantive consideration of the Hu Parties’ PRC law case. For the reasons which follow I reject the Hu Parties’ case based on PRC civil law.

253 I do not accept the Hu Parties’ premise that the Great Lands arrangements should be treated, for present purposes, as a single integrated foreign exchange transaction to which the civil law of the PRC attaches so as to deny effect to the Great Lands Loan and Great Lands Mortgage. The better view, consistently with Great Lands’ submissions and Mr Sun’s evidence, is that the relevant documents recorded two distinct loan agreements (being the Gong Ju Hui Loan and the Great Lands Loan), with different parties, different principal sums, different interest rates and different repayment periods, and that the parties’ choice of New South Wales law (pursuant to cl 2 of the Gong Ju Hui Loan and cl 20.1 of the Great Lands Loan) validly governed those foreign-related civil contractual relationships. I also note, but do not place particular weight on, Item 6 of the Gong Ju Hui Loan, which states that the borrower, Great Lands, “declares and acknowledges that the Loan Agreement is for business and commercial purposes”. Nothing in this conclusion should be understood as characterising the transaction as free of suspicion or commercial pressure for other legal purposes. The conclusion is confined to whether the Hu Parties established a contravention of PRC law of the kind alleged.

254 I also do not accept that the facts relied upon by the Hu Parties required the transaction to be characterised, in civil law terms, as a disguised sale or purchase of foreign exchange. On Mr Sun’s analysis, which I accept, the arrangements bore the characteristics of lending rather than currency trading: Mr Gu sought funds because he lacked liquidity, Great Lands and Gong Ju Hui sought interest over time rather than an exchange fee, and the transaction did not involve a direct or indirect sale or purchase of foreign exchange of the kind said to attract the PRC regime relied upon by the Hu Parties.

255 I am not satisfied that the evidence established the requisite profit‑seeking element for the purposes of Art 225. The materials relied on by Great Lands, including the opinion of Mr Sun and the authorities to which he referred, supported the view that a purpose of profit‑seeking formed part of the conception of an illegal business operation under that provision, and that occasional or temporary dealings between identified parties undertaken to raise funds in the ordinary course of business were not thereby to be characterised as a profit‑seeking business. In circumstances where Great Lands’ case was that the impugned arrangements were no more than an ordinary commercial loan transaction, and where the evidence did not demonstrate repetitive activity or that the transactions formed part of a profit‑making exchange business, I am not satisfied that Art 225 was engaged on that basis.

256 I do not accept the Hu Parties’ contention that the RMB 500,000 was an exchange fee or commission. The Hu Parties relied on the daily exchange rates published by the Reserve Bank of Australia, and on Mr Zhang’s evidence that the rate in his mind was 5 to 1, to contend only at an approximate level that on 27 June 2019 RMB 15 million was about AUD $3.125 million and thus exceeded the AUD $3 million principal, but they did not prove any precise contractual or otherwise independently operative RMB/AUD exchange rate beyond that approximate arithmetical comparison. In these circumstances, the contention that an exchange rate or commission of AUD $125,000 or RMB 500,000 was paid as part of what the Hu Parties characterised as a single overarching transaction did not rise above conjecture.

257 In those circumstances, I am not persuaded that the Hu Parties established any applicable PRC civil law illegality bearing upon the enforceability of the Great Lands Loan and Great Lands Mortgage. For the same reasons, I would not accept that the Hu Parties established any basis in public policy or clean hands for refusing enforcement of those agreements.

258 Separate questions arise in relation to the Hu Parties’ further contention that the transactions were tainted by PRC criminal law. It is to that distinct issue that I now turn.

259 I do not accept that the involvement of Chinese entities, RMB transfers within China, and accounts held in China required the arrangements to be characterised as matched-order foreign exchange trading or the carrying on of a foreign exchange business in China, in the way described in the PRC cases relied upon by the Hu Parties. Properly analysed, the arrangements remained, in substance, an upstream borrowing by Great Lands and a downstream secured loan from Great Lands to Mr Gu, implemented in the manner directed by Mr Gu.

260 I also accept Great Lands’ submission that the Criminal Law of the People’s Republic of China relied upon by the Hu Parties was not engaged on the basis submitted. The expert evidence did not establish any principled basis for the application of the Criminal Law of the People’s Republic of China extraterritorially to the conduct relied on by the Hu Parties in the circumstances of these transactions, nor was any persuasive analogy drawn with the limited categories of extraterritorial criminal jurisdiction recognised under PRC law.

261 Further, even if the Criminal Law of the People’s Republic of China was otherwise capable of application, I would not accept that the evidence established the essential element of profit‑seeking conduct. Consistently with the analysis in Case 181, properly understood in light of the omitted material addressed above, the evidence did not compel a conclusion that the transactions were undertaken as profit‑making exchange operations. Instead, they were ordinary commercial or funding arrangements. At the least, the evidence left open the reasonable possibility that the transactions lacked the requisite profit motive, a conclusion which would appear to be inconsistent with characterisation as criminal conduct under Art 225 of the Criminal Law of the People’s Republic of China.

262 For those reasons, if contrary to my primary conclusion on the Bankruptcy Act claim it were necessary to determine Issues 61 to 74, I would reject the Hu Parties’ contentions that the Great Lands transactions were unenforceable or should be denied enforcement by reason of PRC law, criminal law, public policy, clean hands or related matters. On that alternative footing, Great Lands’ secured claim would not be displaced or postponed on that basis.

IPPL’S CROSS-CLAIM

Overview

263 By its cross-claim, IPPL advanced several alternative bases on which it says it has a proprietary interest in the Surplus Funds. Those bases comprise: first, trust-based claims arising from the payments said to have been made from IPPL funds towards the acquisition of the Superba Property, namely a purchase money resulting trust (Issues 14-19), a Black v S Freedman constructive trust (Issues 20-21), and a constructive trust said to arise from breaches of fiduciary duty or directors’ duties by Mr Gu (Issues 22-25); second, a claim to be subrogated to the rights formerly held by Credit Suisse by reason of three payments totalling $280,000 (Issues 26-34); and third, a more limited claim to be subrogated to Great Lands’ position by reason of the two payments of $700,000 and $500,000 made to Mr Zhang (Issues 35-39).

Trust-based claims

Overview

264 The first of the alternative bases on which IPPL claims a proprietary or equitable entitlement to the Surplus Funds comprises its trust‑based claims arising from payments said to have been made from IPPL funds towards the acquisition of the Superba Property. It is an agreed fact that at all relevant times, Mr Gu was a director of IPPL and in that capacity owed fiduciary duties to IPPL under ss 180, 181 and 182 of the Corporations Act.

265 IPPL’s case is that four funds transfers sourced from IPPL, together totalling $1,065,246.14, formed part of the purchase price of the Superba Property and were not loans. On that basis, IPPL contended that it had a proprietary interest in the Superba Property and hence in the Surplus Funds. The Hu Parties’ primary answer is that the payments were advances to Mr Gu under a director’s loan arrangement, or at the least, were payments that were made to him to use as he chose and not for the specific purpose of being applied to the purchase of the Superba Property. The Hu Parties contend that in these circumstances, Mr Gu owed a personal obligation to repay IPPL and that IPPL had no proprietary interest in the Superba Property or, upon sale of the property, the Surplus Funds. Great Lands’ position aligns with the Hu Parties in that it submitted that the evidence supports a finding that there was an oral loan agreement or a loan agreement inferred from the conduct of IPPL and Mr Gu, with the result that IPPL’s right to repayment is personal and not proprietary.

266 Before turning to the individual trust-based claims advanced by IPPL, it is necessary to make a series of anterior findings of fact. Those findings address three questions. The first is whether, and to what extent, funds sourced from IPPL were applied in the acquisition of the Superba Property. The second is whether the relevant payments were advanced to Mr Gu by way of loan, or were applied on a footing inconsistent with IPPL acquiring any beneficial interest. The third is whether the later accounting and ledger material reliably reflects the legal character of the underlying transactions. The resolution of those questions informs each of IPPL’s trust-based claims and also bears upon the competing submissions advanced by the Hu Parties and Great Lands.

267 The competing legal constructs depend upon the anterior factual question of whether IPPL has established that its funds were used by Mr Gu to acquire the Superba Property and, if so, what was the basis on which the funds were advanced by IPPL to Mr Gu. That inquiry is anterior to, and informs, each of the trust‑based claims that follow. I will address it first.

268 I will then consider IPPL’s claim based on a purchase money resulting trust and the alleged director loans (Issues 14-19). IPPL’s purchase money resulting trust claim depends upon establishing that the relevant sums formed part of the amount paid towards the purchase of the Superba Property in a sense sufficient to engage the resulting trust presumption, and that the presumption is not rebutted. The Hu Parties and Great Lands submit that no resulting trust arose because the payments were not relevantly contributions to the purchase price in the requisite sense and, in any event, that any resulting trust presumption is rebutted by the accounting and ledger material recording the director loans, the nature or timing of the transfer of funds, and IPPL’s conduct after the resulting trust was said to be created which in turn was said to be inconsistent with the existence of that trust.

269 Next, I will address IPPL’s alternative claim based on a Black v S Freedman constructive trust (Issues 20-21). That claim depends upon IPPL establishing that the relevant monies were not merely contributions towards acquisition, but monies misappropriated by Mr Gu from IPPL, with the consequence that they remained impressed with a trust and that the Superba Property, as substitute property acquired with those monies, became subject to the same trust as did the Surplus Funds. Where money is misappropriated and passes into the hands of a volunteer, equity permits the true owner to follow and recover it; notice is unnecessary in the case of a volunteer.

270 The Hu Parties respond to the claim based on a Black v S Freedman constructive trust by submitting that the impugned payments were made by Mr Gu acting within the scope of his authority as a director of IPPL to make payments to himself from company funds, so that any impugned transaction was, at most, voidable rather than void and did not, without more, give rise to the immediate constructive trust for which IPPL contended. Great Lands likewise resisted that claim and relied in part on ledger entries said to show repayments by Mr Gu to IPPL as evidence which is inconsistent with the absence of intention to repay on the part of Mr Gu.

271 I will next address IPPL’s claim based on alleged breaches by Mr Gu of fiduciary duties and statutory duties owed to IPPL (Issues 22-25). On this aspect of the case, it is necessary to distinguish between the existence of a fiduciary or statutory duty, breach of such a duty, and the proprietary consequences, if any, that follow from the breach. A breach of duty does not, without more, establish that the impugned property or its traceable proceeds are held on constructive trust for the company. Australian law does not recognise a constructive trust imposed merely because that result appears fair or because justice and good conscience are thought to require it: Muschinski v Dodds [1985] HCA 78; 160 CLR 583 at 594-5 (Gibbs CJ), 615 (Deane J). Nor does the existence of a fiduciary relationship and breach itself transmute money or property received under a transaction into trust property. In Daly v Sydney Stock Exchange Ltd [1986] HCA 25; 160 CLR 371, the High Court accepted that a fiduciary duty had been breached but held that it was not necessary to find a constructive trust and that the ordinary obligation of a debtor to repay was sufficient to answer the suggested unjust enrichment: at 379 (Gibbs CJ, Wilson and Dawson JJ agreeing at 381, 391). Consistently, in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, the House of Lords rejected the proposition that money paid under a contract void ab initio was for that reason held on resulting trust, emphasising that equity operates on the conscience of the holder of the legal interest, that a person cannot be a trustee while ignorant of the facts said to affect conscience, and that a trust requires identifiable trust property: at 828-829 (Lord Browne-Wilkinson).

272 That position is to be contrasted with cases of direct misappropriation, theft, or other conduct apt immediately to attract proprietary consequences. In Black v S Freedman, O’Connor J said that where money has been stolen “it is trust money in the hands of the thief, and he cannot divest it of that character”. The same distinction is reflected in Sze Tu v Lowe [2014] NSWCA 462; 89 NSWLR 317, where the Court described a Black v S Freedman claim as attaching immediately to stolen money and its traceable product, and referred to equitable obligations arising at the time of theft or, in the case of a volunteer recipient, upon acquisition of knowledge: at 460. On the hypothesis that informs the last of IPPL’s trust-based claims, the operative premise is that IPPL has not established an immediate proprietary claim of that kind, whether by purchase money resulting trust or by a Black v S Freedman institutional constructive trust.

273 Where, by contrast, a director or fiduciary enters into a transaction within the scope of their authority, but does so in breach of duty by reason of conflict, misuse of position, or failure to act in the company’s interests, different considerations arise. In such a case the transaction may be voidable in equity, and the company may have a right to rescind, to set the transaction aside, or to seek other equitable relief. But it does not follow, merely from the existence of the breach, that the company thereby acquires an equitable proprietary interest in the property transferred or in its traceable proceeds. The distinction between property-based claims and conscience-based liabilities is important. In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 (Finn, Stone and Perram JJ), the Full Court emphasised that claims based on title are distinct from personal liabilities arising under principles associated with Barnes v Addy (1874) LR 9 Ch App 244, and that recipient liability is fault-based: [251]-[254], [267], [555]. Similar distinctions were drawn in Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA; 91 NSWLR 732, where Leeming JA distinguished claims based on title from conscience-based liabilities and explained that the two should not be conflated: at 44.

274 It follows that, on Issues 22 to 25, the critical inquiry is not whether Mr Gu owed and breached fiduciary or statutory duties to IPPL, that may be accepted or assumed for present purposes. Instead, the critical inquiry is whether the particular payments and acquisitions relied upon were of a character that gave IPPL an immediate proprietary interest in the monies or property, or whether they left IPPL with no more than a right in equity to impeach the transactions and obtain personal or ancillary equitable relief. Only in the former case would a constructive trust constituting an equitable proprietary interest arise. If the latter characterisation is correct, the most that IPPL would establish is a mere equity or other personal equitable claim, rather than a proprietary interest capable of attaching to the Surplus Funds and competing in priority with other established interests. That conclusion is consistent with Muschinski v Dodds, Daly, Westdeutsche, Grimaldi and Fistar. The question for present purposes is therefore whether IPPL has shown more than breach of duty: it must show an entitlement to proprietary relief recognised by principle. Whether the impugned payments fall into the former or the latter category depends upon the objective character of the transactions proved by the evidence. I now address that question.

Approach to the anterior factual issues

275 The anterior factual issues are to be determined by reference to the whole of the evidence bearing upon the movement, application and character of the relevant monies, including the agreed facts, the contemporaneous banking records and solicitors’ trust account records, the witness evidence concerning those records, and the later accounting and ledger materials.

276 The inquiry is one of inference from the proved facts and the documentary record considered as a whole. Where direct proof is unavailable, findings of fact may be made by inference from proved facts, including contemporaneous documents, but the inference must be a reasonable and definite inference on the balance of probabilities and not a matter of conjecture, guesswork or surmise; it is not enough that the evidence permits competing inferences of equal probability, because in that event the choice is one of conjecture rather than inference: Luxton v Vines [1952] HCA 19; 85 CLR 352 at 358 (Dixon, Fullagar and Kitto JJ); Jones v Dunkel [1959] HCA 8; 101 CLR 298 at 305 (Dixon J). Where contemporaneous documents are available, primary recourse should ordinarily be had to them, and findings should so far as possible be reasoned from contemporary materials, objectively established facts and the apparent logic of events rather than from demeanour alone: Fox v Percy [2003] HCA 22; 214 CLR 118 at 31.

277 To the extent that the competing characterisations include an allegation of misappropriation or other serious wrongdoing, the evidence must be scrutinised with appropriate care before such an inference is drawn, consistently with Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336, as reflected in s 140 of the Evidence Act 1995 (Cth). Although, such an approach does not alter the standard of proof in a civil case. Instead, that approach directs that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of serious wrongdoing: Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; 110 ALR 449 at 450 (Mason CJ, Brennan, Deane and Gaudron JJ). Later bookkeeping descriptions and ledger labels are relevant, but they are not conclusive of the underlying legal character of a transaction; the weight to be given to them depends upon their provenance, consistency and objective reliability: Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; 63 ACSR 557 at [141]-146.

278 In particular, to characterise a payment as a loan it is necessary to identify objective facts supporting the conclusion that the payment was made on terms that it be repaid. The essence of a loan is an advance of money coupled with an obligation of repayment: Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 (Lee J); Schmierer v Taouk [2004] NSWSC 345; 207 ALR 301 at 43. A formal written loan agreement is not essential, nor is an agreement for interest: Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370; 148 ACSR 30 at [58]-61. But nor does the mere use of expressions such as “director loan”, without more, establish that a concluded loan arrangement existed. Where, as here, monies passed through an intermediate mixed account before being transferred to the solicitors’ trust account, the tracing inquiry is to be undertaken by reference to orthodox equitable principle and not by treating later ledger classifications as dispositive: see Re French Caledonia Travel [2003] NSWSC 1008; 59 NSWLR 361 at [19], [61], [85], [153]-156.

Issues 14-16 – Anterior factual determination: application and characterisation of the IPPL sums

279 Against that approach, I turn first to the contemporaneous movement and application of the relevant monies, and then to the question whether the evidence establishes that those payments were loans or advances to Mr Gu rather than monies of IPPL applied in the acquisition of the Superba Property.

280 The agreed list of issues directs attention to three anterior factual questions. The anterior factual questions are: whether the IPPL payments relied on by the liquidators were in fact applied in the acquisition of the Superba Property (Issue 14); whether those payments were properly characterised as loans or advances to Mr Gu or instead as payments capable of supporting the proprietary interests asserted by IPPL (Issue 15); and whether the first three IPPL sums formed part of the $3.2 million transferred from the Gu HSBC #118 account to Brighton Lawyers’ trust account on 18 April 2017 (Issue 16).

281 The resolution of those questions also informs the later subrogation issues, because the competing submissions on those issues proceed in part by reference to whether the relevant monies were trust monies or only funds advanced to Mr Gu by way of loan. I will deal first with the contemporaneous payments and their application, then with the specific question whether the first three IPPL sums were included in the $3.2 million trust account transfer, and finally with the accounting and ledger materials relied on by the Hu Parties and Great Lands in support of the contention that the payments were loans or advances to Mr Gu.

282 The starting point is the sequence of payments on which IPPL relied as having been applied in the acquisition of the Superba Property. The movement of funds is largely the subject of agreed facts. The principal factual dispute is whether those payments, once traced into the acquisition chain, are to be treated as purchase money applications of IPPL’s funds capable of supporting the proprietary interests asserted by IPPL (including the purchase money resulting trust, the Black v S Freedman constructive trust and the constructive trust said to arise from breach of fiduciary duty) or instead whether those payments are to be treated as loans or advances to Mr Gu conferring no more than personal rights of repayment. The Gu HSBC #118 account is central to that inquiry because IPPL says it was an intermediate vehicle through which the first three IPPL sums passed into the purchase, whereas the Hu Parties and Great Lands contend that use of that account is equally consistent with those monies having first been advanced by way of loan to Mr Gu. The evidence relevant to that dispute includes the contemporaneous banking and solicitors’ trust account records, the agreed facts, and the affidavit and oral evidence of Mr Wight, who gave evidence as one of IPPL’s liquidators on the basis of the liquidators’ review of IPPL’s books and records, bank records, email data and other material obtained in the course of the administration and liquidation.

283 Mr Wight is a chartered accountant and registered liquidator and a partner of Cor Cordis. He was appointed, along with Jeremy Nipps and Alan Walker, as a joint and several administrator of IPPL on 15 July 2020 and, following the creditors’ resolution on 19 August 2020, became one of its liquidators. Mr Wight was similarly appointed as an administrator of other entities within the i-Prosperity group of companies, including IPCM as well as iProsperity Underwriting Pty Ltd (Receiver and Manager Appointed), iProsperity Australia Pty Ltd, iProsperity Group Holdings Limited, i-Prosperity Group Pty Ltd, iProsperity Holding Group Pty Ltd, G&H Partners Co Pty Ltd (Receiver and Manager Appointed), Cornerstone Capital Investment Group Pty Ltd, IPG Fund Services Pty Ltd, I-Prosperity Capital Management Pty Ltd, I-Prosperity Cornerstone Management Pty Ltd, and IPG Asset Services Pty. On 17 September 2020, Mr Wight, along with Mr Nipps and Mr Walker, were appointed liquidators of another related entity of the i-Prosperity group of companies: IPG Chats SPV Pty Ltd.

284 Mr Wight’s evidence was given in that capacity and was based on the liquidators’ review of the available books and records, including email data, bank trace information, subpoenaed material and information obtained from other parties and creditors. Mr Wight affirmed three affidavits on 13 August 2021, 28 February 2022 and 8 August 2023. Mr Wight was also cross-examined by Mr Meyerowitz-Katz for the Hu Parties and briefly by Mr Lawrance SC for Great Lands.

Chronology – the acquisition of the Superba Property

285 By mid-February 2017, Mr Gu was taking steps to acquire the Superba Property. On 21 February 2017 he forwarded to Brighton Lawyers a copy of the draft contract for the purchase and asked that the transaction be progressed, stating that, once he received the “go-ahead” following his solicitor undertaking due diligence on the property, he would arrange the 10% deposit and exchange contracts.

286 On or about 27 February 2017, Mr Gu entered into the contract to purchase the Superba Property from Teresa Biet for $10 million. The contract identified Brighton Lawyers as acting for Mr Gu, that $1 million had been paid as a deposit, and that settlement was to occur some weeks after the contract date.

287 On or about 20 March 2017, Mr Gu and Credit Suisse entered into a facility under which Credit Suisse agreed to advance $6 million to Mr Gu, to be secured by a registered mortgage over the Superba Property. Mr Wight deposed that Mr Gu accepted that facility in writing on or about 31 March 2017.

288 Against that background, the first of the four IPPL sums was transferred on 3 March 2017. It is an agreed fact that $505,246.14 (the First IPPL Sum) was transferred out of IPPL’s NAB account #5855 and paid into the Gu HSBC #118 account, an account held jointly by Mr Gu and Ms Yingzi Xu. Mr Wight deposed that on his understanding Ms Xu was Mr Gu’s spouse and his investigations suggest that Ms Xu is ordinarily resident in China. Mr Wight deposed to this funds transfer, and to trace information obtained from NAB confirming that destination account.

289 On 15 March 2017, a further amount of $169,285.84 was transferred out of IPPL’s NAB account. Of that amount, $30,000 (the Second IPPL Sum) was paid into the Gu HSBC #118 account. That transfer is an agreed fact and Mr Wight deposed to NAB trace material confirming that the larger payment included a $30,000 component that was paid into the Gu HSBC #118 account.

290 On 13 April 2017, a third payment of $245,826.95 was made from IPPL’s NAB account. It is an agreed fact that $30,000 of that amount (the Third IPPL Sum) was paid into the Gu HSBC #118 account. Again, Mr Wight deposed that NAB trace material confirmed a $30,000 transfer on that date into the Gu HSBC #118 account.

291 On 12 April 2017, shortly before settlement, Mr Gu asked Brighton Lawyers what amount he needed to transfer into their trust account. Mr Wight deposed that Brighton Lawyers replied by asking Mr Gu to arrange for $3.7 million to be transferred into the trust account to meet stamp duty, adjustments and legal fees, and provided the relevant trust account details.

292 On 18 April 2017, two further payments relevant to the purchase were made. First, $500,000 (the Fourth IPPL Sum) was transferred from IPPL’s NAB account and paid directly into Brighton Lawyers’ trust account. Second, $3.2 million was transferred from the Gu HSBC #118 account and paid into the Brighton Lawyers’ trust account. The fact of the making of those two transfers are agreed facts, and Mr Wight also deposed to them in his description of the funding of settlement.

293 On 21 April 2017, Brighton Lawyers applied the funds that had been paid into their trust account on 18 April 2017 towards the balance of the purchase price and costs associated with the acquisition of the Superba Property. It is an agreed fact that the total amount paid out by Brighton Lawyers for Mr Gu to acquire the Superba Property was $3,654,987.14.

294 It is agreed that the total amount paid by Mr Gu to acquire the Superba Property included the $1 million deposit, the $6 million advanced by Credit Suisse and the $3,654,987.14 paid out by Brighton Lawyers on his behalf, together with further amounts including legal fees. Mr Wight deposed that settlement of the sale had occurred by late April 2017.

295 On or about 3 May 2017, the Superba Property was registered in Mr Gu’s name and the Credit Suisse Mortgage was registered on title.

296 Taken at face value, those contemporaneous banking and trust account records establish that monies originating from IPPL’s account were applied in the acquisition of the Superba Property. The remaining issues are whether the first three IPPL sums were included in the $3.2 million transferred from the Gu HSBC #118 account to Brighton Lawyers’ trust account on 18 April 2017 and whether the later accounting materials support a finding that the relevant payments be treated as loans or advances to Mr Gu.

297 The fact that funds sourced from IPPL can be traced into the acquisition of the Superba Property does not, of itself, determine the legal character of those payments. The critical issue is whether, at the time they were made, the payments were advances made by way of loan to Mr Gu, or were otherwise applied on a basis capable of supporting a proprietary interest in the property. It is to that question that I now turn.

Whether the ledger material demonstrates a loan to Mr Gu

298 The Hu Parties and Great Lands relied heavily on the accounting and ledger material to contend that the relevant payments were loans to Mr Gu. It is therefore necessary to consider whether that material provides a reliable basis for drawing a definite inference, on the balance of probabilities, that a concluded loan arrangement existed at the time the payments were made.

299 The next theme in the evidence is addressed to the accounting treatment of the four IPPL sums and in particular what inferences may be drawn from two documents which I will refer together as the Director s Loan Ledgers. These documents formed part of IPPL’s management accounts. The significance of the accounting materials lies in the submission by the Hu Parties and Great Lands that the Directors Loan Ledgers show the relevant payments were loans or advances to Mr Gu rather than applications of IPPL’s funds capable of supporting the proprietary interests asserted by IPPL.

300 Because the Directors Loan Ledgers span the period from 1 July 2014 to 15 July 2020, the shifting composition of IPPL’s board over that longer period bears on the weight that can be given to entries identifying the counterparty only as “Director”. The historical company search shows that Mr Gu was appointed a director on 17 February 2010 and remained a director at the date the liquidators were appointed to IPPL. Gary Sue Fong and Yinjun Lu were each appointed directors on 17 February 2010 and each ceased to hold office on 11 March 2011. From 17 February 2010 until 11 March 2011, IPPL therefore had three directors, namely Mr Gu, Mr Fong and Mr Lu. From 11 March 2011 until 10 June 2011, Mr Gu was the sole director. Mr Huang and Chun Zhou were each appointed directors on 10 June 2011. Mr Zhou ceased to hold office on 19 October 2015 and Mr Huang ceased on 15 March 2018. Accordingly, between 10 June 2011 and 19 October 2015, IPPL had three directors, being Mr Gu, Mr Huang and Mr Zhou; between 19 October 2015 and 15 March 2018, it had two directors, Mr Gu and Mr Huang; and after 15 March 2018 Mr Gu appears to have been its sole director.

301 In relation to the office of secretary, Mr Fong was appointed secretary on 17 February 2010 and ceased on 11 March 2011. Mr Gu was appointed secretary on 11 March 2011 and appears to have remained secretary thereafter.

302 That chronology is material because, across substantial parts of the period covered by the Directors Loan Ledgers, IPPL had more than one director. In those circumstances, entries identifying the counterparty only as “Director”, without naming the individual, do not, without more, permit a reliable inference that a particular entry recorded a loan to Mr Gu rather than to another director, or indeed that the entry recorded a genuine loan transaction at all.

303 The later accounting treatment of the First to Fourth IPPL Sums is the subject of the Directors Loan Ledgers which were tendered through Mr Wight, and upon which he was cross-examined. An essential difference between the two documents is that the first is extracted from IPPL’s management accounts maintained using QuickBooks software (the QuickBooks Directors Loans Ledger), whereas the second is extracted from IPPL’s management accounts maintained using Xero software (the Xero Directors Loans Ledger). IPPL appears to have ceased using QuickBooks for this purpose on 30 June 2018 and commenced using Xero with effect from 1 July 2018. The QuickBooks ledger is the earlier record. Both were relied upon in support of the loan contention, but their provenance and reliability require separate attention.

304 Mr Wight gave evidence that IPPL’s management accounts, including the Directors Loan Ledgers, were affected by a number of issues. Mr Wight identified a large volume of generic narrations such as “Investor Loan”, “Unknown”, “Investment Loan”, “IL”, “Director Loan” and “DL”.

305 The first of the Directors Loan Ledgers is a transaction report for 1 July 2014 to 30 June 2018 drawn from the QuickBooks software used by IPPL. The first heading in the transaction report table is “Directors Loans”.

306 The QuickBooks Directors Loans Ledger records, over time, a large number of entries coded in the “Transaction Type” column as deposits, expenses and journal entries against that account. Immediately beneath the heading “Directors Loans” is a “Beginning Balance” in the amount of $9,035,587.04. The First to Fourth IPPL Sums are in this transaction report. The QuickBooks Directors Loans Ledger is structured to include columns headed: Date, Transaction Type, Name, Memo/Description, Account, Split, Amount and Balance. There is also a “No.” column but it is rarely populated. The Account column is populated for all rows with “Directors Loans”.

307 The Name column does not consistently give the name of the director to whom the loan, if that is what it was, was made. The Name column sometimes includes only the word “Director”. Sometimes the Name column includes a reference to either Mr Gu or Mr Huang but that is infrequent. There are large numbers of transactions in the QuickBooks Directors Loans Ledger that are either blank or include information in the Name column that is not explained by the evidence. Many entries just state “Director” with no indication of to which of the directors the entry refers. Other entries refer to third parties, for example, “Cruz & Co Services”, IPPL’s accountants or “National Bank”. If this document is in fact a ledger of loans to directors, it would be difficult to ascertain from it which director was obliged to repay the amounts recorded in it as having been advanced as “Directors Loans”.

308 The Split column appears to have been used to identify the destination of the funds transferred from IPPL. It does not consistently identify the destination and instead sometimes uses the word “Split”. Where a transfer from IPPL was made to multiple destinations, this column appears to have been completed by inserting the word “Split”.

309 As mentioned, the First to Fourth IPPL Sums are included in the QuickBooks Directors Loans Ledger. The salient details taken from the relevant entries are as follows:

First IPPL S um

| Column Name | Content |
| Date | 03/03/2017 |
| Transaction Type | Expense |
| No. | |
| Name | Director |
| Memo/Description | TRANSFER DEBITS Internet Transfer PYMT-ID 93385957 Qian Miao |
| Account | Directors Loans |
| Split | iProsperity Pty Ltd NAB Online-1 |
| Amount | -505,246.14 |
| Balance | 40,359,311.69 |
Second IPPL S um

| Column Name | Content |
| Date | 15/03/2017 |
| Transaction Type | Expense |
| No. | |
| Name | Director |
| Memo/Description | TRANSFER DEBITS Internet Transfer PYMT-ID 93944778 iProsperity |
| Account | Directors Loans |
| Split | iProsperity Pty Ltd NAB Online-1 |
| Amount | -169,285.84 |
| Balance | 44,029,922.17 |
Third IPPL S um

| Column Name | Content |
| Date | 13/04/2017 |
| Transaction Type | Expense |
| No. | |
| Name | Cruz & Co Services |
| Memo/Description | TRANSFER DEBITS Internet Transfer PYMT-ID 95467578 iProsperity |
| Account | Directors Loans |
| Split | iProsperity Pty Ltd NAB Online-1 |
| Amount | -245,826.95 |
| Balance | 44,527,673.62 |
Fourth IPPL sum

| Column Name | Content |
| Date | 18/04/2017 |
| Transaction Type | Expense |
| No. | |
| Name | Cruz & Co Services |
| Memo/Description | TRANSFER DEBITS Internet Transfer PYMT-ID 95599478 M GU |
| Account | Directors Loans |
| Split | iProsperity Pty Ltd NAB Online-1 |
| Amount | -500,000.00 |
| Balance | 43,980,153.65 |
310 The Name and Memo/Description columns on these entries were inconsistent. The entries do not speak with one voice. On their face, they do not disclose a clear bilateral loan transaction between IPPL and Mr Gu.

311 Mr Wight’s evidence was that the QuickBooks Directors Loans Ledger did not read as a straightforward record of borrowings by directors. He said that the narrations recorded in that ledger referred to about 421 different parties, although IPPL had at most three directors during that period. As mentioned above, for a significant part of the period IPPL had only two directors and Mr Gu was the only director from 15 March 2018.

312 Mr Wight also deposed that the QuickBooks Directors Loans Ledger contained about 1,840 transactions from 1 July 2014 to 30 June 2018 and involved very substantial inflows and outflows.

313 Mr Wight also gave evidence that the QuickBooks Directors Loans Ledger originally captured both “director” and “investor” transactions and that a retrospective reclassification exercise was later undertaken in the period when IPPL was still under Mr Gu’s control. As a result of the 2019 reclassification, new ledgers were prepared which classified transactions by reference to the categories of director loans or investor loans, amongst other things.

314 Mr Huang oversaw the reclassification exercise in his capacity as IPPL’s Chief Financial Officer. He was assisted in that exercise by PricewaterhouseCoopers (PwC) who were advising Mr Huang in relation to an audit by the Australian Taxation Office (ATO) into his personal affairs. Mr Wight gave evidence of communications between PwC on Mr Huang’s behalf and the ATO in relation to Mr Huang’s responses to various ATO Information Requests during the period preceding Mr Huang making voluntary disclosures in respect of certain payments made by IPPL to him. The ATO audit of Mr Huang appears to have been the genesis for the 2019 reclassification exercise and led to Mr Huang applying to the Commissioner to exercise the discretion under s 109RB of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) in Mr Huang’s favour in relation to payments he had received from IPPL.

315 Mr Wight said that, between about February 2019 and January 2020, Mr Huang, with the assistance of PwC, attempted to separate the commingled director and investment loan ledger into two ledgers (one being the Directors Loan Ledgers and the other the Investor Loan Ledger). He identified Exhibit BW‑57 as an extract from the spreadsheet used in that exercise and said that the cover page of that spreadsheet recorded a weighted average conclusion that only 2% of the transactions within the Directors Loan Ledgers were attributable to directors. In oral evidence, Mr Wight accepted that he was aware of the communications between Mr Huang, PwC and the external accountants, and of the “two per cent” outcome, but that he did not know the basis on which any particular transaction had been assigned to the Directors Loan Ledger as opposed to the freshly created Investor Loan Ledger. That evidence supports the conclusion that the later classifications in the ledgers were the product of a retrospective reworking exercise, not a stable contemporaneous record of the contemporaneous legal character of the transactions.

316 In his later affidavit of 8 August 2023, Mr Wight described further investigations undertaken by the liquidators into the Directors Loan Ledgers and related records. Those investigations were targeted rather than exhaustive, reflecting the volume of transactions and the limits of the available records. The evidence and submissions also show that IPPL’s accounts reflected a very large volume of mixed transactions over an extended period, including investor-related inflows and outflows, transfers to or for the benefit of directors, casino-related payments, and other movements the source or character of which could not always be identified with certainty. The ledger material also included entries said to record payments from Mr Gu back to IPPL, a matter relied on in oral submissions as bearing on intention to repay. In that setting, care is required before treating later ledger labels, or the recurrence of similar transaction descriptions, as decisive of the original legal character of any particular payment.

317 That context supports the need to assess the First to Fourth IPPL Sums by close reference to the contemporaneous transfer records and the objective circumstances of their application, rather than by assuming that their legal character is established by the accounting treatment later adopted in the books and records. Mr Wight said that the investigations did not identify any evidence that Mr Gu had repaid, or attempted to repay, the IPPL sums, and did not identify any formal loan agreement between IPPL and Mr Gu. He also concluded that the Directors Loan Ledgers and the Investor Loan Ledger could not be treated as reliable or conclusive evidence of any genuine loan between IPPL and Mr Gu.

318 In support of that conclusion, Mr Wight said that amounts previously treated as “Gu” inflows materially overstated payments received from Mr Gu, that the updated analysis showed substantially more payments out to Mr Gu than payments back, and that payments to Mr Gu appeared in some instances in the Investor Loan Ledger rather than the Directors Loan Ledgers. His evidence also indicated serious uncertainty as to the source and character of a number of inflows and reallocations. In particular, some credits recorded in the ledgers could not be identified or explained by the liquidators, and a large body of funds remitted to IPPL through New Century 2001 Pty Ltd (trading as Supay – a foreign currency exchange provider) had an ultimate source that Mr Wight could not identify. He also gave evidence that many entries carried generic descriptions such as “Director Loan”, “DL”, “Investor Loan” or similar descriptions, and that searches of IPPL’s books and records and email data did not identify any concluded written loan agreement between IPPL and Mr Gu.

319 In cross-examination, Mr Wight accepted important limits on his knowledge of the 2019 reclassification exercise. He did not know the basis upon which Mr Huang had assigned particular transactions to the Directors Loan Ledgers or Investor Loan Ledger, and accepted that some entries were no more than journal or bookkeeping adjustments rather than records of cash movement. He also accepted that the true source of some substantial inflows could not be identified with certainty. Those matters do not undermine the contemporaneous bank and trust account records concerning the application of funds to the acquisition of the Superba Property. They do, however, materially reduce the probative value of the later ledger classifications as evidence of the original legal character of the relevant payments. That is because the existence of a loan depends upon the objective incidents of the transaction, including an obligation of repayment, and not merely upon a later bookkeeping label. I accept Mr Wight’s evidence that the QuickBooks Directors Loans Ledger should not be read as a reliable record of genuine director borrowings and repayments. The QuickBooks Directors Loans Ledger contained a mixture of transactions involving directors, investors and other parties. That conclusion weakens the submission that the inclusion of the First to Fourth IPPL Sums in that account establishes that those sums were advanced pursuant to a concluded loan arrangement with Mr Gu. It does not itself resolve whether the effect of these payments was to give IPPL a proprietary interest in the Superba Property, the best evidence of which is that which establishes the contemporaneous movement and application of the funds.

320 Having regard to these matters, I am not persuaded that the Directors Loan Ledgers provide reliable evidence that the First to Fourth IPPL Sums were advanced to Mr Gu pursuant to a concluded loan arrangement. The form and content of those ledgers, their internal inconsistencies, and the circumstances in which they were later reconstructed prevent them from supporting a definite inference as to the original legal character of the transactions.

321 The content of the QuickBooks Directors Loans Ledger does not, however, conclude the inquiry as to what weight can properly be given to the later accounting treatment of the First to Fourth IPPL Sums. It is therefore necessary to consider in some more detail the evidence concerning the later reworking of that account.

Whether the later reclassification exercise reflects the original legal character of the payments

322 The inquiry does not end with the content of the first version of the ledgers. The Hu Parties and Great Lands also relied on the subsequent reclassification exercise undertaken in 2019 and thereafter. It is therefore necessary to consider whether that later exercise sheds reliable light on the legal character of the payments when they were made.

323 As mentioned, the evidence shows that, by late 2018 and into 2019, there were attempts to separate “director” and “investor” entries and reconstruct the Directors Loan Ledgers and Investor Loan Ledgers for tax and accounting purposes, including in connection with a review of Mr Huang’s affairs by the ATO. As mentioned, PwC was involved and were advising Mr Huang. The significance of 2019 reclassification is not that it is decisive in determining the legal character of the First to Fourth IPPL Sums, but that it bears upon whether the later balances and classifications (post reclassification) are reliable evidence from which the legal character of the First to Fourth IPPL Sums can be inferred.

324 Mr Huang appears to have been concerned as a result of the ATO audit about potential consequences he may be exposed to under Division 7A of Part III of the ITAA 1936. The potential application of Division 7A appears to have been unclear because of the fact that Mr Huang was relevantly both a director and shareholder of IPPL. Part of what Mr Huang was attempting to do at this time was reclassify “loans” he and others had received by reference to whether the loans were made to them as directors or as shareholders.

325 Some detail is required in addressing this evidence, because the competing submissions place significant weight on the circumstances and purpose of the reclassification exercise. It is therefore necessary to explain why I do not accept that that exercise displaces the conclusions drawn from the contemporaneous evidence.

326 On 25 February 2019, Andrew Dibden of PwC sent Mr Huang a proposed “Tranche 2 response” to the ATO for review. The next day, Mr Huang sent to Mr Dibden, copied to others at PwC, and to Ritchie Cruz, IPPL’s external accountant and tax agent, what he described as a “Director’s loan account reclassification worksheet”. In his covering email, Mr Huang said that it was “very difficult to now have to recall every single transaction”, that he had “[b]asically” split the transactions into “Director vs Investor’s loan”, that “obvious” transactions had been assigned against directors and “all others” were put under the investor loan account, and that the “net result” was “circa $3M of director’s loan provided by the company within the 3 year period”. He added that he was uncertain whether any investor loan deposits made to the company were in fact repayments of director loans. Mr Huang then forwarded the email and the attachments to Mr Gu, with the message “FYI... I've dropped Kai off the email list for obvious reasons”. That email indicates that the exercise was undertaken retrospectively, by reference to what appeared “obvious” to Mr Huang at the time, and in response to the tax issue then under consideration.

327 That is important because it shows that the later separation of the ledger was not presented, even by those undertaking it, as a straightforward extraction based on the identification of pre-existing legal rights from a settled accounting record. Rather, the separation was undertaken because the original “director loan” ledger was said to contain a mixture of materially different dealings, and because there was concern that some amounts recorded there might, on one view, attract Division 7A consequences for Mr Huang. Mr Huang’s reference to what was “obvious” to him, read with the surrounding correspondence, indicates that the exercise proceeded by retrospective tax-risk and accounting classification rather than by reference to a settled contemporaneous record from which the original legal character of each transaction could reliably be discerned.

328 The emails sent in July 2019 reinforce that conclusion. They show that the process of splitting the ledger was still being worked through months later. On 21 and 22 July 2019, Mr Cruz and Sarah Ng (Accounts Manager at iProsperity Pty Ltd) discussed whether “client loan” entries should be directed to the directors loan or investment loan, Mr Cruz said that “$4.1m Dr directors loan is a Div 7A issue”, and Ms Ng said she had obtained “the split up of director loan and investment loan” from Mr Cruz, thought it had been prepared by Mr Huang, and intended to “prepare a journal entry”. The same chain also records Mr Cruz saying that, for FY18, Mr Huang had already gone through the exercise with PwC and that it had been submitted to the ATO, and that the numbers should be journalled into QuickBooks. The correspondence is consistent with an ongoing process of retrospective reconstruction directed to accounting and tax outcomes. That impression is reinforced by Ms Ng’s email of 22 July 2019 to another IPPL employee, Andrea Gangi, copied to Mr Huang, stating: “Let me go through this right now and prepare a journal entry. I really hope this work provide us a better outcome”.

329 The evidence indicates that the later ledger classifications were neither fixed nor stable. Earlier record-keeping was loose and inconsistent. The later reclassification involved retrospective journal entries and reallocation of entries over an extended period for accounting and tax purposes. Those matters substantially reduce the weight that can be given to the post-2019 ledger classifications as evidence of the original legal character of the First to Fourth IPPL Sums.

330 Exhibit BW‑57 is an extract from a spreadsheet located by the liquidators in IPPL’s books and records which, on Mr Wight’s evidence, appears to have been prepared by Mr Huang for the purpose of assisting PwC to identify those transactions that were payments to or from directors and those that were payments to or from investors. The “Summary” sheet records a weighted average percentage of cash movement of approximately 2.489% for “Director Loan” and approximately 97.511% for “Investor Loan”. It also records annual percentages for FY15, FY16 and FY17 and uses those weighted averages to produce an “Estimated opening balance based on weighted averages”.

331 The significance of that material is limited. The “2%” figure was a global weighted allocation applied across ledger movements and used in the related accounting and Division 7A analysis. It did not result from, and does not itself reveal, any transaction-by-transaction determination of the original legal character of the underlying payments. Read with Mr Huang’s statement that he had assigned “obvious” transactions against directors and placed “all others” under the investor loan account, and with Mr Wight’s acceptance in cross-examination that he did not know how the calculation had been reached, the weighting supports the conclusion that the exercise was an ex post facto reclassification proceeding by broad retrospective allocation rather than by reference to reliable contemporaneous documentary support from which transaction-specific inferences could reasonably be drawn.

332 The exercise was directed to the possibility that amounts recorded in the books as “director loans” might, for tax purposes, be treated as loans to a shareholder and therefore deemed dividends unless relief were obtained. The draft Division 7A loan agreement points in the same direction. Properly understood, it formed part of the retrospective taxation and accounting exercise undertaken in response to the ATO review and the involvement of PwC in the 2019 reclassification process. It was not contemporaneous evidence of a concluded 2017 agreement by which the First to Fourth IPPL Sums were advanced to Mr Gu on agreed terms of repayment. Rather, it was an ex post facto attempt to regularise or characterise earlier dealings for taxation purposes. That was a materially different exercise from the question presently arising, namely whether the relevant 2017 payments were, in equity and as a matter of underlying fact, loans or advances to Mr Gu or instead payments capable of supporting the proprietary interests asserted by IPPL.

333 The later records demonstrate that substantial manual adjustments were made retrospectively as at 30 June 2018, including an entry described as “Investment loan @ 30 June 2018” in the amount of $34,316,846.24, which reduced the balance then coded to the Directors Loans Ledger. The apparent balance reflected in the QuickBooks Directors Loans Ledger was thus materially altered. The willingness to alter the earlier record in that way tells against treating the later balances and classifications as reliable evidence of the original legal character of the relevant entries. The subsequent accounting remediations undertaken in July and August 2019 reinforce the inference that IPPL’s own books and records were not inherently reliable and were treated as malleable to future events.

334 It is also material that, on 15 May 2020, and in the context of an asset disclosure dispute in the Supreme Court of New South Wales proceedings brought by the Hu Parties against Blue Whale, Les Pozniak of Landerer & Company sent an email to Mark Fester of MJF Law Pty Ltd. In his email, Mr Pozniak indicated that the balance sheet as at 29 February 2020 was “‘a work in progress’ management accounts only”, “a mere extract of data from the bookkeeping system”, and the “Directors loan” account was said to be “not yet finalised”, with a formal commercial arrangement document to be entered into upon finalisation. That description tells against treating the balance sheet or the directors’ loan account, at least at that point, as a final or independently reliable statement of the legal character of the entries recorded in it. It materially undermines the weight that could be attached to these documents as supporting any agreement in relation to repayment of the funds advanced.

335 The later Xero Directors Loans Ledger is a reconstruction. Given the circumstances in which it was created, I do not consider it to be a record capable of supporting a definite inference of a concluded loan agreement between IPPL and Mr Gu. I am not satisfied that the inclusion of the First to Fourth IPPL Sums in this ledger in the account headed “Directors Loan” establishes that those sums were, when paid in March and April 2017, advanced to Mr Gu on the basis that he was obliged to repay IPPL. The best evidence remains the agreed facts and the contemporaneous bank and trust account records, which demonstrate that monies originating from IPPL’s account were applied in the acquisition of the Superba Property.

336 For those reasons, I do not accept that the later reclassification and accounting exercise provides a reliable guide to the original legal character of the payments made in March and April 2017. That exercise was retrospective, undertaken for accounting and tax purposes, and does not rest on transaction-specific findings capable of displacing the inferences drawn from the contemporaneous banking and trust account records.

Conclusion on anterior factual determination

337 For those reasons, I am not satisfied that the inclusion of the First to Fourth IPPL Sums in IPPL’s accounting ledgers provides a reliable basis on which to draw a reasonable and definite inference on the balance of probabilities that the funds were advanced by IPPL to Mr Gu pursuant to a concluded loan agreement and were relevantly subject to an obligation that Mr Gu would repay IPPL. The later ledger classifications do not rest on a coherent transaction-by-transaction analysis of contemporaneous material capable of displacing the inference arising from the contemporaneous movement and application of the funds. I reject the contrary submissions of the Hu Parties and Great Lands.

338 I therefore find, as matters of fact, that: first, funds sourced from IPPL were applied in the acquisition of the Superba Property in the amounts identified; second, those funds were not advanced to Mr Gu pursuant to any concluded loan agreement; third, the passage of funds through the Gu HSBC #118 account does not alter their character as IPPL funds applied toward the acquisition; and fourth, the later accounting records and reclassification exercise do not reliably reflect the legal character of the underlying transactions at the time the payments were made.

339 I am satisfied that, subject to one minor exception, the agreed facts together with the contemporaneous banking records and solicitors’ trust account records establish that the First to Third IPPL Sums formed part of the $3.2 million transferred from the Gu HSBC #118 account to Brighton Lawyers’ trust account on 18 April 2017, and that the Fourth IPPL Sum was paid directly into that trust account on the same day. The exception is that IPPL accepts that $20,000 was withdrawn from the Gu HSBC #118 account after deposit of the First IPPL Sum and was not applied toward the acquisition.

340 It follows that the total amount of IPPL Funds traced into the acquisition of the Superba Property is $1,045,246.14, comprising the balance of the First to Third IPPL Sums after deduction of that $20,000 together with the Fourth IPPL Sum paid directly to Brighton Lawyers. I am satisfied that those monies retained their character as IPPL Funds and were applied in the acquisition of the Superba Property. That conclusion accords with orthodox tracing principles applicable where trust money passes through a mixed account: Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696 at 707-710 (Jessel MR). To the extent that the issue is the allocation of any deficiency within a mixed trust fund as between competing trust claimants, French Caledonia supports proportionate distribution rather than a first-in, first-out application of Clayton’s Case (Devaynes v Noble (1816) 35 ER 781): see [169], [176], [193]. I am not persuaded that the fact that the monies passed through the Gu HSBC #118 account, or the reliance placed by the Hu Parties and Great Lands on the accounting and ledger materials, alters that conclusion.

341 Those findings resolve the anterior factual contest. It is therefore necessary to consider the proprietary consequences, if any, that follow from those facts in relation to the purchase money resulting trust claim and the alternative constructive trust claims advanced by IPPL.

Issues 17-19 – The purchase money resulting trust

342 The first of IPPL’s trust-based claims is its purchase money resulting trust case. That claim depends upon the anterior factual findings as to whether the relevant IPPL-sourced transfers were applied towards the acquisition of the Superba Property and, if so, whether they were provided on a basis sufficient to engage the resulting trust presumption. The inquiry at this stage is confined to that question. It is distinct from IPPL’s alternative case that the monies were misappropriated in a sense attracting the immediate proprietary consequences associated with a Black v S Freedman constructive trust, and also from its separate claim to proprietary relief following breach of fiduciary or statutory duty. Those alternative bases are addressed later in these reasons.

343 The issues raised by the purchase money resulting trust claim are identified in Issues 17 to 19 of the agreed list of issues. They require determination of: whether each of the First to Fourth IPPL Sums formed part of the total amount paid towards the purchase of the Superba Property (Issue 17); whether there is evidence to displace any presumption of a purchase money resulting trust (Issue 18); and whether Mr Gu held the property pursuant to such a trust for IPPL to the extent of the relevant contribution (Issue 19).

344 IPPL submitted that, once it was shown that its funds were used as part of the purchase price of property taken in Mr Gu’s name, a purchase money resulting trust was presumed unless the objective evidence showed that the funds were advanced on some other basis, including by way of gift or loan, and relied in that regard on Calverley v Green [1984] HCA 81; 155 CLR 242; Ong v Lottwo Pty Ltd (in liq) [2013] SASCFC 57; 116 SASR 280 and Bosanac v Federal Commissioner of Taxation [2022] HCA 34; 275 CLR 37. IPPL further submitted that costs incidental to the acquisition, such as stamp duty and legal fees, may form part of the relevant contribution. On IPPL’s case, no affirmative intention to create a trust is required; rather, the presumption operates unless displaced by objective evidence of a contrary intention, and does not fail merely because the evidence is neutral, equivocal or otherwise uninformative as to objective intention.

345 The Hu Parties submitted that it is not sufficient merely to show that money originating with IPPL was later used in connection with the acquisition. They submitted that the asserted contributor must have contributed to the purchase in the requisite sense, that is, in the character of a purchaser, and any presumption otherwise arising may be displaced by evidence inconsistent with an intention that the contributor obtain a beneficial interest in the property. In oral closing, the Hu Parties also put the Directors Loan Ledgers, financial statements and draft loan documentation as evidence said to support an intention to treat advances by the company to Mr Gu as loans.

Applicable principles – purchase money resulting trust

346 The question raised by this part of IPPL’s case is whether, at the time of acquisition, the relevant monies were provided by IPPL as purchase money for property taken in Mr Gu’s name, or on some other footing. Where property is acquired in the name of one person with money provided by another, equity may presume a resulting trust; but the presumption is rebuttable by evidence showing that the provider intended that the recipient take a beneficial interest, or that the money was provided on some different basis: Muschinski v Dodds at 589-590 (Gibbs CJ); Sze Tu v Lowe at [178]-183. The critical inquiry is the actual intention of the provider at the time of the purchase, objectively ascertained from the facts and circumstances of the transaction: Muschinski v Dodds at 593 (Gibbs CJ).

347 In determining that question, the Court is concerned with the objective character of the contribution at the time of acquisition. The relevant evidence includes the acts and declarations of the parties before or at the time of the purchase, or so immediately thereafter as to form part of the transaction, and the provider’s intention at the time may be proved by admissible evidence directed to that question: Muschinski v Dodds at 590 (Gibbs CJ). The presumption cannot prevail over proved intention one way or the other; but nor is it displaced by material that is merely neutral, equivocal, or otherwise incapable of demonstrating an intention inconsistent with beneficial acquisition: Muschinski v Dodds at 612 (Deane J); Sze Tu v Lowe at [194]-[195].

348 If the monies were provided on a footing inconsistent with beneficial acquisition, no resulting trust arises merely because the monies were later applied in the purchase. Conversely, if the monies were not provided on such a footing and were applied as purchase money for property taken in another’s name, equity gives effect to the beneficial consequences that follow from that contribution. The inquiry at this stage is confined to that question and is distinct from the separate issues whether the monies were misappropriated in a sense attracting the immediate proprietary consequences associated with a Black v S Freedman constructive trust, or whether some other proprietary relief may arise by reason of breach of fiduciary or statutory duty.

Consideration

349 The anterior factual findings resolve the first of the questions identified in Issues 17 to 19 (whether each of the First to Fourth IPPL Sums formed part of the total amount paid towards the purchase of the Superba Property). Subject to the deduction of the $20,000 withdrawn from the Gu HSBC #118 account after deposit of the First IPPL Sum and not applied toward the acquisition, I have found that the First to Fourth IPPL Sums formed part of the monies applied in the acquisition of the Superba Property. It follows that the issue is not whether monies originating from IPPL were used in connection with the acquisition, but whether those payments were contributions to the purchase price in the requisite sense and, if so, whether there is evidence sufficient to displace the presumption of a purchase money resulting trust. Once that contribution is established, a purchase money resulting trust is presumed unless displaced by objective evidence of a contrary intention. I am not satisfied that any such contrary intention has been established.

350 In light of the findings already made, I am satisfied that the relevant IPPL payments were applied toward the acquisition in the requisite sense. They were not shown to have been advances by way of loan to Mr Gu. That conclusion is significant because, as the parties’ submissions recognised, if the payments were loans the purchase money resulting trust claim would fail; conversely, if they were not loans, the inquiry turns to whether there is objective evidence sufficient to displace the presumption said by IPPL to arise from their application to the purchase.

351 I do not accept that the matters relied on by the Hu Parties and Great Lands displace that conclusion. The fact that the first three payments passed through the Gu HSBC #118 account before the transfer of $3.2 million to Brighton Lawyers’ trust account does not, in the circumstances found, alter their character as IPPL funds applied toward the acquisition. Nor do the accounting and ledger materials carry sufficient weight to establish that the payments were, objectively, loans to Mr Gu or otherwise made on a basis inconsistent with IPPL acquiring a beneficial interest. For the reasons given in the anterior factual determination, those materials do not provide a reliable basis for inferring a contrary objective intention.

352 I now turn to Issue 18 and consider whether there is evidence sufficient to displace the presumption of a purchase money resulting trust. Where it is shown that a claimant provided money which was used as part of the price for property taken in another’s name, a purchase money resulting trust is presumed unless the objective evidence shows that the money was provided on some other basis, including by way of gift or loan: Calverley v Green at 246-247 (Gibbs CJ); Ong v Lottwo at [28]-30. The inquiry is directed to objective intention at the time of acquisition, and the presumption cannot prevail over proved objective intention one way or the other: Bosanac at 13, 111; JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (8 th ed, LexisNexis Butterworths, 2016) at [12-13].

353 In those circumstances, I am not satisfied that there is evidence sufficient to displace the presumption of a purchase money resulting trust arising from the application of IPPL’s funds to the acquisition. Neutral or equivocal material does not suffice to displace the presumption. What is required is objective evidence showing that, at the time of acquisition, the contribution was made on some other basis, such as gift or loan: Calverley v Green at 246 (Gibbs CJ); Bosanac at 109; Jacobs’ Law of Trusts in Australia at [12-13]. The present case is not one in which the evidence establishes an objective intention inconsistent with IPPL obtaining a beneficial interest proportionate to its contribution. Rather, the anterior findings establish that the relevant payments were applied toward the acquisition of the Superba Property in Mr Gu’s name, and that the competing loan characterisation is not made out.

Determination

354 For those reasons, I am satisfied that Mr Gu held the Superba Property pursuant to a purchase money resulting trust in favour of IPPL to the extent of the IPPL funds found above to have been applied in its acquisition, namely $1,045,246.14. To that extent, IPPL acquired a proportionate beneficial interest in the property, and that interest is reflected in the Surplus Funds standing in place of the property. Costs incidental to the acquisition may be treated as part of the relevant contribution: Ryan v Dries [2002] NSWCA 3; 10 BPR 19,497 at [52]-53. To the extent necessary, I am satisfied that the payments applied through Brighton Lawyers’ trust account in completion of the purchase were of that character. Issue 19 should be answered accordingly. The agreed list of issues framed Issue 19 as whether the trust arose to the extent of $1,065,246.14 “or any other amount”, which accommodates the adjusted amount now found.

355 In light of that conclusion, it is unnecessary to determine IPPL’s alternative trust-based claims. However, in deference to the way the case was argued, I will address them on the assumption that I am wrong as to the purchase money resulting trust claim.

The relationship between IPPL’s constructive trust claims

356 The two constructive trust claims advanced by IPPL proceed on related but distinct bases. The claim based on Black v S Freedman treats the relevant payments as monies misappropriated from IPPL and therefore as trust property in Mr Gu’s hands from the time of the misappropriation, with the asserted trust then attaching to the Superba Property, and now to the Surplus Funds, as substitute property.

357 The alternative claim based on breach of fiduciary duty and directors’ duties proceeds differently. It does not necessarily depend upon the proposition that an institutional trust arose immediately upon receipt of the funds. Rather, it raises the separate question whether Mr Gu’s use of IPPL’s funds in breach of the duties he owed to the company gives rise, in the circumstances, to a constructive trust as a remedy, as distinct from personal relief such as an account of profits or equitable compensation. In Grimaldi, the Full Court treated the imposition of a constructive trust in that setting as a matter of appropriateness and discretion, and not as relief available as of right.

358 That distinction is material here. If IPPL establishes the Black v S Freedman claim, the case is put on the footing of an immediate proprietary consequence of the misappropriation itself. If, however, IPPL fails on that basis and relies instead on breach of fiduciary duty and directors’ duties, a further inquiry arises as to whether a constructive trust should be imposed, having regard to the principles discussed in Grimaldi concerning constructive trust relief, tracing, and the availability of alternative personal remedies.

359 It is for that reason that the Black v S Freedman claim and the fiduciary duty constructive trust claim, though arising from the same payments, require separate consideration.

Issues 20-21 – Black v S Freedman constructive trust

360 IPPL’s next trust-based case is its alternative claim founded on Black v S Freedman. The question at this stage is whether the relevant monies were misappropriated in a sense sufficient to attract the immediate proprietary interest recognised in that line of authority, so that the monies remained impressed with trust character and could be followed into substitute property. That is a different inquiry from the purchase money resulting trust claim already addressed. It is also different from the broader question whether proprietary relief may arise by reason of breach of fiduciary or statutory duty where the impugned transaction was within authority but wrongful. That latter question is addressed separately in Issues 22 to 25.

361 IPPL submitted that where money is stolen or misappropriated, equity treats the money as trust property in the hands of the wrongdoer, and that trust attaches to substitute property into which the money is traced. On that case, the trust is institutional rather than remedial, arising immediately upon the misappropriation.

362 The Hu Parties disputed that those principles resolve the present case. They submitted that the impugned payments were made by Mr Gu while acting within the scope of his authority as a director to make payments from company funds, with the consequence that any breach of duty rendered the transactions voidable rather than void and did not, without more, give rise to the immediate constructive trust for which IPPL contended.

363 In reply, IPPL rejected the proposition that Mr Gu had authority to appropriate IPPL’s funds to his own personal use and submitted that the case was not one of a transaction requiring rescission, but of straightforward misappropriation said to attract proprietary relief upon receipt.

Applicable principles

364 Where money has been stolen or misappropriated, equity treats it as trust money in the hands of the wrongdoer, and the wrongdoer cannot divest it of that character by passing it to another. If the money passes to a volunteer, the true owner may follow and recover it in equity, and notice is unnecessary in the case of a volunteer: Black v S Freedman; Sze Tu v Lowe at [142].

365 The same principle extends to traceable substitute property acquired with the money. In that sense, the proprietary interest arises immediately upon the wrongful taking and adheres to the money and its traceable product: Black v S Freedman; Sze Tu v Lowe at [146]-[148].

366 The inquiry at this stage is therefore whether the payments relied upon were, in substance, monies taken from IPPL without any proved basis entitling Mr Gu beneficially to retain or apply them, so that they remained impressed with trust character notwithstanding their passage through an intermediate account and into the acquisition of the Superba Property. That is a distinct inquiry from one concerned only with a transaction effective until avoided for breach of duty, or with personal liability founded on conscience rather than title: Fistar at [44]-[45]; Grimaldi at [267].

Consideration

367 The present issue is whether the relevant monies were misappropriated in a sense sufficient to attract the immediate proprietary consequences recognised in Black v S Freedman, not whether some broader proprietary remedy should arise from breach of fiduciary or statutory duty.

368 In light of the findings already made, the question raised by Issues 20 to 21 is whether the same payments also gave rise to a constructive trust of the kind described in Black v S Freedman. What must therefore be determined is whether the evidence establishes no more than a transaction within authority but later impeachable for breach of duty, or instead establishes that the monies were taken and applied by Mr Gu without any proved consensual basis entitling him beneficially to retain or use them. The anterior factual findings establish that, subject to the deduction of $20,000 withdrawn from the Gu HSBC #118 Account after deposit of the First IPPL Sum and not applied toward the acquisition, IPPL funds in the amount of $1,045,246.14 were applied in the acquisition of the Superba Property and were not shown to have been advanced to Mr Gu by way of loan. The remaining question is whether those facts also established that the monies were misappropriated by Mr Gu in a way that attracted the immediate proprietary interest for which IPPL contended.

369 I am satisfied, to the standard required by s 140 of the Evidence Act and consistently with the caution required by Briginshaw, that the relevant monies were misappropriated by Mr Gu from IPPL and were not merely the subject of a transaction that was effective until avoided. I do not reach that conclusion by reasoning backward from Mr Gu’s later conduct or from later events in the affairs of the i‑Prosperity group of companies. I reach it from the objective circumstances attending the payments and their application. First, the funds originated from IPPL and, subject only to the $20,000 deduction already identified, were applied in the acquisition of property taken in Mr Gu’s name. Second, there is no contemporaneous agreement, record or other objective evidence establishing any loan, gift or other consensual basis upon which Mr Gu was entitled beneficially to take or apply those funds for his own purposes. Third, the proposition that Mr Gu was authorised to make payments to himself from IPPL’s funds for his own personal use is unsupported by any identified reliable evidence. That there is not reliable evidence to support that Mr Gu was authorised to make payments to himself from IPPL’s funds is also consistent with the fiduciary and statutory obligations he owed to the company. Fourth, unlike the position considered in Grimaldi in relation to the two cheque payments, there is here no body of evidence, independent of the later accounting labels, supporting an inference that the payments were made with an expectation or intention that they be repaid if circumstances later permitted. Nor, on the evidence in the present case, is there any basis to characterise the payments as gifts.

370 The Directors Loan Ledgers does not itself establish that the First to Fourth IPPL Sums were advanced by way of loan. It is an internal accounting record and not a loan agreement. No executed loan agreement between IPPL and Mr Gu was identified in the books and records of IPPL or among the records obtained from its external accountants, and there is no corresponding record from Mr Gu’s side evidencing any agreed terms of borrowing or repayment. In that respect, the present case is unlike one in which contemporaneous contractual or other objective material supplies an independent foundation for concluding that the payments were made on terms of repayment.

371 Nor do the later ledger credits and instances of payments to IPPL from Mr Gu require a different conclusion. At their highest, they show that monies were at times paid by Mr Gu to IPPL and recorded in the ledger as credits. They do not establish that the particular sums applied in the acquisition of the Superba Property were originally advanced pursuant to a consensual loan arrangement. Nor do they overcome the absence of any contemporaneous objective evidence of such an arrangement. As IPPL submitted by reference to Grimaldi, there is here no body of evidence independent of the later accounting labels pointing to an intention that the relevant sums be repaid. In those circumstances, the ledger entries and later repayments are not decisive as to the real character of the payments and do not displace the inference otherwise arising from the objective circumstances of their transfer and application.

372 In those circumstances, and where no other legitimate or consensual explanation emerges from the evidence, the proper inference is not merely that Mr Gu acted in breach of duty, but that he appropriated IPPL’s money to his own use engaging proprietary relief in accordance with the principles in Black v S Freedman.

373 Put another way, this is not a case in which IPPL must first set aside a proved transaction, such as a loan or other authorised dealing, before any proprietary interest can arise. The anterior findings I have made exclude the existence of any such proved consensual transaction. Nor is it a case in which the proprietary consequence depends upon a later curial election to impose a remedial constructive trust. On the findings made above, Mr Gu took and retained specifically identifiable property to which he had no beneficial entitlement and which he was not authorised to treat as his own. The fiduciary breach is real, but the case is not adequately explained by breach of duty alone. The better characterisation is that IPPL’s monies were taken and applied by Mr Gu, without proved right and without any proved basis on which he was entitled beneficially to retain them, in the acquisition of property in his own name. On that basis, the case is one of direct misappropriation tracing into substitute property using the robust approach to fact finding warranted in such circumstances, not merely one of voidable self-dealing or abuse of authority: Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577 at [9]-10 citing R v Powell (1837) 173 ER 280, Harford v Lloyd (1855) 52 ER 622, Black v S Freedman, Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 and El Ajou v Dollar Land Holdings Plc [1993] 3 All ER 717.

Determination

374 For these reasons, if and to the extent it is necessary to determine Issues 20 to 21, I am satisfied that Mr Gu held the Superba Property, and the Surplus Funds standing in its place, subject to a constructive trust in favour of IPPL of the Black v S Freedman kind to the extent of the $1,045,246.14 of IPPL funds applied in the acquisition. Because I have already concluded that IPPL succeeds in relation to the purchase money resulting trust claim, it is unnecessary that I rest the disposition of the proceeding on this alternative basis. Nevertheless, were it necessary to do so, I would answer Issues 20 to 21 accordingly.

Issues 22-25 – Constructive trust following breach of fiduciary or directors’ duties

375 I now turn to IPPL’s separate case that proprietary relief arose by reason of Mr Gu’s alleged breaches of fiduciary duties and statutory duties owed to IPPL. At this stage, the inquiry is not whether the monies were misappropriated in a sense sufficient to attract the immediate proprietary relief addressed in Issues 20 to 21. Nor is it whether the resulting trust presumption arose, and if so, whether it was rebutted. The question is whether the impugned transactions, assuming they were within Mr Gu’s authority as director but wrongful by reason of conflict, misuse of position, or failure to act in IPPL’s interests, nevertheless gave IPPL an immediate proprietary interest in the monies or property, as distinct from a right to impeach the transactions and obtain personal or ancillary equitable relief.

376 In light of my conclusion that IPPL succeeds on the purchase money resulting trust claim, and alternatively on the Black v S Freedman constructive trust claim, it is unnecessary to determine Issues 22 to 25 in order to resolve IPPL’s entitlement to a proprietary interest in the Surplus Funds. Those issues would arise only if I were wrong on both of those earlier proprietary bases. Because, however, the parties addressed the issues in written and oral closing, and because they raise a distinct question as to whether IPPL would then have no more than a mere equity, I will address these issues briefly on that conditional basis.

377 IPPL’s case was that the breaches of fiduciary duty and statutory duties alleged against Mr Gu gave rise immediately to a constructive trust constituting an equitable proprietary interest in favour of IPPL, not simply a “mere equity”. In its written closing submissions, IPPL put that case as an institutional constructive trust arising to the extent of the relevant misapplied funds, with remedial constructive trust relief relied on only in the alternative.

378 The Hu Parties contended otherwise. They submitted that where the impugned payments were made within the authority of a director to cause the company to enter a transaction, but in breach of duty, the transaction was at most voidable and no proprietary interest arose unless and until the transaction was set aside. In oral submissions, that point was developed by reference to the distinction between a case of direct misappropriation and a case depending upon the avoidance of a transaction between fiduciary and company, with the consequence said to be that, at least in the latter case, the company initially had no more than a mere equity.

379 In reply, IPPL rejected the proposition that the present case involved any contract, loan or other transaction requiring rescission before proprietary relief could arise. Its case was that Mr Gu had no authority to appropriate IPPL’s funds to his own personal use and that, on the findings for which it contended, the payments were properly characterised as straightforward misappropriations attracting immediate proprietary consequence.

Applicable principles

380 A breach of fiduciary duty or statutory duty does not, without more, establish that the impugned property or its traceable proceeds are held on constructive trust for the company. Australian law does not recognise a constructive trust imposed merely because that outcome appears fair or because justice and good conscience are thought to require it: Muschinski v Dodds at 615 (Deane J). Nor does the existence of a fiduciary relationship and breach itself transmute money or property received under a transaction into trust property: Daly at 377 (Gibbs CJ).

381 In Daly, the High Court accepted that a fiduciary duty had been breached, but held that it was not necessary to find a constructive trust and that the ordinary obligation of a debtor to repay was sufficient to answer the suggested unjust enrichment: at 379-380 (Gibbs CJ). Consistently, in Westdeutsche, the House of Lords rejected the proposition that money paid under a contract void ab initio was, for that reason alone, held on resulting trust, emphasising that equity operates on the conscience of the holder of the legal interest, that a person cannot be a trustee while ignorant of the facts said to affect conscience, and that a trust requires identifiable trust property: at 705.

382 By contrast, cases of direct misappropriation or theft may attract immediate proprietary consequences of the kind recognised in Black v S Freedman. But where the case depends upon impeaching a transaction or dealing said to have been effected within authority, albeit in breach of duty by reason of conflict, misuse of position or failure to act in the company’s interests, different considerations arise. In such a case the company may have no more than a right in equity to impeach the transaction or obtain other equitable relief unless a proprietary basis is otherwise established. Claims based on title are separate from personal liabilities arising under principles associated with Barnes v Addy, and recipient liability is fault-based. On Issues 22 to 25, the question is therefore whether the facts found disclose an immediate proprietary base in the monies or property, or whether they leave IPPL with no more than a right in equity to impeach the transactions and obtain personal or ancillary relief.

Consideration

383 The issue is therefore not exhausted by showing that Mr Gu acted in breach of duty. IPPL must show that the legal character of the impugned transactions was such as to give rise to proprietary relief recognised by principle, rather than merely a right in equity to impeach the transactions or seek personal relief.

384 If, contrary to the conclusions reached above in relation to Issues 17 to 21, the facts found do not support either a purchase money resulting trust or an immediate proprietary interest arising from direct misappropriation of the kind addressed in Black v S Freedman, it becomes necessary to consider IPPL’s further alternative case based on breach of fiduciary duty and directors’ duties. On that conditional footing, the critical question is not whether Mr Gu acted wrongfully, but whether those breaches, without more, gave rise immediately to a proprietary interest in favour of IPPL or whether, as the Hu Parties contended, the most IPPL obtained was a mere equity to seek relief against dealings effected by Mr Gu in breach of duty. Issues 22 to 25 were addressed to that distinct alternative route to proprietary relief.

385 On that hypothesis, I would accept the Hu Parties’ submission that the present claim should not be analysed as giving rise, without more, to an immediate institutional constructive trust. If the case is put aside from direct misappropriation of the Black v S Freedman kind, and if the impugned payments are treated instead as dealings effected by Mr Gu while acting within the scope of his authority to cause IPPL to make payments, albeit in breach of fiduciary and statutory duties, the better view is that those dealings were at most voidable. On that analysis, IPPL’s position would initially be no more than that of a holder of a mere equity to have the relevant transaction set aside or to obtain other equitable relief. That was the substance of the Hu Parties’ position, and Great Lands likewise treated any breach of duty claim as giving rise, at most, to a mere equity rather than an equitable proprietary interest.

Determination

386 If, contrary to the conclusions reached above in relation to Issues 17 to 21, the facts found do not support either a purchase money resulting trust or a constructive trust of the Black v S Freedman kind, I would not uphold IPPL’s further alternative case that an immediate institutional constructive trust arose by reason of Mr Gu’s alleged breaches of fiduciary duty and statutory duty. On that conditional footing, and treating the impugned payments as dealings effected by Mr Gu while acting within the scope of his authority to cause IPPL to make payments, albeit in breach of duty, the better view is that those dealings were at most voidable. On that analysis, the most IPPL would have established is a mere equity to impeach the transactions or obtain other equitable relief, rather than an immediate equitable proprietary interest in the Superba Property or the Surplus Funds. That conclusion would be consistent with the manner in which IPPL framed its written closing submissions, namely by advancing an institutional constructive trust as its primary position but a remedial constructive trust only in the alternative if no institutional trust were found to arise.

387 I now turn to IPPL’s distinct alternative case founded on subrogation.

Issues 26-39 – Subrogation Claims: Applicable Principles

Applicable principles

388 Subrogation is an equitable remedy by which a person who has discharged, in whole or in part, a secured debt owed by another may be treated in equity as standing in the position of the creditor whose debt has been discharged, to the extent of that discharge. In a general sense, subrogation is the process by which one party is substituted for another so that the former may enforce the latter’s rights against a third party for that party’s own benefit. The remedy is not confined to a single fixed category; rather, its application depends upon the nature of the case and the circumstances in which the asserted equity arises: Aged Care Services at [49]-[57]; Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269 at [4]-[9], [90]-94. It is fashioned by reference to the particular circumstances of the case and the nature of the unconscionability said to arise if the benefit of the payment is retained without recognition of the payer’s position: Bofinger at [1], [94].

389 In cases involving the discharge of an existing security, the equitable foundation of subrogation is unconscionability, not unjust enrichment: Bofinger at [85], [90]-[91], [97]-[98]. Where a third party’s funds have been applied in reduction of a secured debt, the relevant unconscionability lies in the mortgagor, or those claiming through the mortgagor, insisting that the effect of the payment was simply to discharge the encumbrance, rather than to preserve for the payer the benefit of the security to the extent of the discharge thereby effected: Aged Care Services at [57], quoting; Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335; 279 FLR 80 at 32.

390 Where a third party pays off a mortgage, the third party is presumed, absent contrary intention, to intend that the mortgage be kept alive for that party’s own benefit: Aged Care Services at [52], citing Ghana Commercial Bank v Chandiram [1960] AC 732 at 745. That presumption is, however, rebuttable, and may be displaced where the objective circumstances show that the payment was made on some other basis, including as an unsecured advance Challenger Managed Investments Ltd v Direct Money Corp P/L [2003] NSWSC 1072; 59 NSWLR 452 at 46, quoting Cochrane v Cochrane [1985] 3 NSWLR 403 at 405 (Kearney J).

391 Apart from cases in which subrogation is supported by that presumption, subrogation may be available where funds have been applied under a defective transaction, or in circumstances that have defeated the position of the person whose money was used. In that class of case, relief does not depend upon proof that the payer subjectively intended to take an assignment of the security. The question is whether, absent subrogation, it would be unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff: Bofinger at [94]; Boscawen v Bajwa [1996] 1 WLR 328 at 335, 338-339 (Millet LJ, Waite and Stuart-Smith LJJ agreeing at 343).

392 If subrogation is established, the subrogated party is treated in equity as standing in the position of the original secured creditor to the extent of the discharge thereby effected: Craythorne v Swinburne (1807) 33 ER 482 at 485. That does not mean that the original charge is assigned or kept alive for all purposes. Rather, equity regulates the parties’ legal relations as if the benefit of the security had been preserved and assigned to the payer to the extent necessary to prevent a result that is prima facie unconscionable. Equity does not treat the claimant as having acquired a wholly new interest at the time of payment. Rather, it treats the existing security as continuing for the benefit of the person whose funds discharged the secured debt. In this way, the subrogated party enjoys, to the extent of the discharge, the benefit of the pre-existing security and its priority: Aged Care Services at [53], [57]; Banque Financière de la Cité v Parc (Battersea) Ltd & Ors [1999] 1 AC 221 at 236-237 (Hoffmann LJ), 245 (Hutton LJ); Austin v Royal [1999] NSWCA 222; 47 NSWLR 27 at [19] (Cole AJA, Meagher and Handley JJA agreeing at [24], [25]; Boscawen v Bajwa at 335, 338-339.

Issues 26-34 – Subrogation to Credit Suisse

393 Issues 26 to 34 concern IPPL’s claim to be subrogated to the rights formerly held by Credit Suisse by reason of three payments totalling $280,000 said to have reduced Mr Gu’s indebtedness to Credit Suisse. IPPL’s case is that those payments gave it, to the extent of the reduction thereby effected, the benefit of the rights formerly held by Credit Suisse as registered mortgagee.

394 The occurrence of the three transfers is not disputed at a general level. It is agreed that the following payments were made from IPPL’s account and transferred to the Credit Suisse account attached to Mr Gu’s client number: $200,000 on 11 May 2017 (the Fifth IPPL Sum), $30,000 transferred out of IPPL’s bank account on 4 July 2019 and credited to the Credit Suisse Gu account on 5 July 2019 (the Sixth IPPL Sum), and $50,000 transferred out of IPPL’s bank account on 21 January 2020 and credited to the Credit Suisse Gu account on 22 January 2020 (the Seventh IPPL Sum). IPPL relied on bank statements and tracing materials to establish that each of the three sums reached Credit Suisse. The Hu Parties and Great Lands did not dispute that the funds were received in the relevant Credit Suisse account. Their point was that proof of receipt into that account did not, without more, establish application of the funds in reduction of the indebtedness secured by the Credit Suisse Mortgage. The Hu Parties further disputed the provenance of the Fifth IPPL Sum. They contended that the evidence did not establish that it was IPPL money at all, but instead comprised funds from Crown Sydney Casino that were then directed to the Credit Suisse account through IPPL’s banking arrangements.

395 The agreed list of issues direct attention to four questions: whether the three payments were applied in reduction of Mr Gu’s indebtedness to Credit Suisse (Issue 26); whether the effect of those payments was to reduce the secured indebtedness by $280,000 or some other amount (Issues 27-30); whether IPPL was required to prove an intention to be subrogated to Credit Suisse’s rights and to keep the security alive (Issue 31); and whether the payments were made in circumstances, including by way of director’s loan, which defeats or answers the subrogation claim (Issues 32-33). The final agreed issue for determination is whether, on those facts, IPPL acquired a proprietary interest in the Surplus Funds by subrogation to Credit Suisse’s rights under the registered mortgage (Issue 34).

396 It is convenient to identify at the outset that the significance of the alleged director’s loan character of the Fifth to Seventh IPPL Sums differs according to how the subrogation is said to arise. IPPL’s position was that those payments were not loans to Mr Gu, and that subrogation was available if IPPL’s funds were applied in reduction of the secured debt without any need to prove a subjective intention to keep the Credit Suisse Mortgage alive. The Hu Parties submitted, by contrast, that if the payments were in substance loans or unsecured advances to Mr Gu, IPPL had not paid the secured creditor but had merely advanced money to Mr Gu, with the consequence that no right of subrogation arose. Great Lands submitted that a loan characterisation might, at least at the threshold, engage the presumption described in Ghana Commercial Bank, but that any such presumption was rebutted on the facts because the payments were indistinguishable from other unsecured advances recorded in the loan materials.

397 The controversy on Issues 26 to 34 is therefore whether the evidence establishes that IPPL’s funds were applied in reduction of Mr Gu’s secured indebtedness to Credit Suisse in a manner sufficient to support a right of subrogation, and, if so, to what extent. Three anterior questions arise. First, the nature of the Credit Suisse account into which the three payments were made. Second, whether the payments were in fact applied in reduction of the indebtedness secured by the Credit Suisse Mortgage. Third, whether the circumstances of the payments otherwise answer the legal requirements for subrogation.

398 As to the first question, IPPL submitted that the Credit Suisse account was not merely an offset account, but the actual loan account by reference to which Mr Gu’s secured indebtedness to Credit Suisse was calculated. In support of that submission, IPPL relied on the facility materials, on Mr Gu’s statement before settlement that there was “no offset account”, and on the Credit Suisse tax summary as evidencing receipt of each of the Fifth to Seventh IPPL Sums into the relevant account and that upon receipt those funds operated to reduce the debt secured by the Credit Suisse Mortgage. IPPL further relied on the later Credit Suisse investment report dated 21 February 2021 and the balance reflected in the orders made by Davies J in the Supreme Court of New South Wales on discharge of the registered mortgage.

399 The Hu Parties disputed that conclusion. They submitted that the materials did not establish that the payments were made into the Credit Suisse account as such, as distinct from a current or associated account connected with Mr Gu’s broader banking arrangements with Credit Suisse. Further, the Hu Parties disputed that the materials established that the three payments were applied in direct reduction of the principal or other secured indebtedness. In reply, the Hu Parties further submitted that Mr Gu’s statement that there was “no offset account” carried no weight and that the Credit Suisse offer letter did not itself preclude the existence of an offset or associated account.

400 Great Lands advanced a distinct case of its own. As already stated, Great Lands submitted that, even if the Fifth to Seventh IPPL Sums were capable of engaging the presumption described in Ghana Commercial Bank, that presumption was rebutted because there was nothing to distinguish those payments from the many other entries in the Directors Loan Ledgers, and no objective indication that they were intended to create or preserve any security rather than to operate as unsecured advances. Great Lands further submitted that, on IPPL’s own primary case that the monies were misappropriated or were trust monies in Mr Gu’s hands, the issue was one of tracing rather than subrogation, and that there was nothing remaining to trace once the monies had been applied to pay down the Credit Suisse debt. Great Lands also sought to distinguish Banque Financière and Boscawen v Bajwa as cases concerned with defective transactions or defeated expectations which had no analogue on the facts alleged by IPPL. Great Lands submitted that the Fifth to Seventh IPPL Sums (totalling $280,000) were no more than undistinguished entries in a running director-loan account and that, if the Ghana Commercial Bank route were reached at all, the inference to be drawn was still that the advances were unsecured.

Consideration

Issue 31 – whether IPPL was required to prove an intention to be subrogated

401 It is convenient to first address the contention advanced by the Hu Parties, and adopted by Great Lands, that IPPL was required to prove that it had a subjective intention, at the time of the payments, to be subrogated to Credit Suisse’s rights or to keep the security alive in order to obtain relief by way of subrogation (Issue 31). That is not the correct legal test. Absence of affirmative proof that IPPL subjectively intended to keep the Credit Suisse security alive is not, of itself, fatal to IPPL’s claim based on subrogation. Instead, the legal test provides a presumption that IPPL intended to keep the Credit Suisse security alive for its own benefit. The Hu Parties and Great Lands carry the onus to rebut the presumption by proving that the objective circumstances show that the payments were made on some other basis. It is for this reason that the objective character of the payments is critical.

Issue 26 – whether the three payments were applied in reduction of Mr Gu’s indebtedness to Credit Suisse & Issues 32-33 – whether the payments were made in circumstances, including by way of director’s loan, which defeats or answers the subrogation claim

402 The legal characterisation of the Fifth to Seventh IPPL Sums in Mr Gu’s hands is not limited to an analysis of the Directors Loan Ledgers in its earliest iteration, being the QuickBooks Directors Loans Ledger. The later accounting materials, including the reclassification and coding documents are also relevant. As are the independent contemporaneous documents in the form of bank narrations and contemporaneous bank records establishing the flow of funds.

403 For the reasons I have given earlier in these reasons addressing the anterior factual issues in relation to the application and characterisation of the IPPL sums, I do not regard IPPL’s internal records in the period the company was under the control of Mr Gu and Mr Huang (including when Mr Huang was the Chief Financial Officer) as a reliable basis upon which to draw a reasonable and definite inference that the relevant IPPL sums were advanced to Mr Gu as unsecured loans. I reject the submissions made to the contrary. The absence of any concluded loan agreement is significant. Further, Mr Wight’s evidence is that the liquidators did not find any repository of information from which the terms on the alleged director loans could be ascertained. I was not taken to any evidence capable of proving that the descriptions included in the Directors Loan Ledgers reflected the true position (that is, that there were underlying loan agreements in place). At the relevant time, the evidence established that IPPL approached the so-called director’s loans recorded in the various iterations of the Directors Loan Ledgers as being malleable and not reliable. That was clear from the communications between Mr Huang and those involved in the 2019 reclassification exercise.

404 The Hu Parties raised an additional argument in relation to the Fifth IPPL Sum to the effect that the $200,000 “appears not to have come from IPPL”. The Hu Parties submit that “the Fifth IPPL Sum did not comprise … IPPL’s funds” and that IPPL’s directors were using IPPL’s account to transfer funds from Mr Chun’s Crown account to Mr Gu’s Credit Suisse account. The contemporaneous materials relied on by the Hu Parties do not go so far as to support the conclusion that the Fifth IPPL Sum did not comprise IPPL’s funds. The contemporaneous materials relied on by the Hu Parties demonstrate that on 11 May 2017, IPPL received into its account a credit described as “Internet Transfer Mike Crown” in the sum of $200,000. Later that same day, IPPL made an internet transfer from its account in the sum of $200,000 with the description “Mike”. It is an agreed fact the Fifth IPPL Sum was transferred from IPPL’s account and paid into “an account at Credit Suisse attached to Mr Gu’s client number of 1001316-10”. The Hu Parties also relied on email correspondence in which Mr Gu requested that “the 200k from crown in chuns [sic] account” be transferred to the relevant Credit Suisse account.

405 Those contemporaneous records support the inference that the $200,000 was credited to IPPL’s account on 11 May 2017 and that $200,000 was one of several debits from this account on that same day. However, I do not accept that the Hu Parties have demonstrated that I should infer that the admitted transfer from IPPL’s account to Credit Suisse of $200,000 was not IPPL’s money.

406 The IPPL bank statement shows that, as at 11 May 2017, the opening balance in the account was $6,865,151.66 and that other debits were applied to this account before the $200,000 was debited.

407 The email chain of 11 May 2017 identifies the person referred to as “chun” as Chun Zhou, a former director of IPPL who ceased to hold office on 19 October 2015. Mr Gu asked Mr Huang “Can you transfer the 200k from crown in chuns account to the below account?”, copying Mr Zhou at the iProsperity email address Chun.Zhou@iprosperity.com.au. In reply, Mr Zhou asked, “Can I transfer to company? Will take 10 days for me to transfer” and “Harry, can you transfer from company account?” The Hu Parties do not point to any evidence that explains why Mr Gu was able to direct Mr Huang, IPPL’s Chief Financial Officer, to transfer $200,000 “from crown in chuns account” or what Mr Zhou meant by his email in reply.

408 The Hu Parties did not cross-examine Mr Wight on their contention that the Fifth IPPL Sum was not IPPL’s funds. Mr Wight’s evidence on this was not challenged.

409 Taking all of the above into account, I am not satisfied that the Hu Parties have established that the Fifth IPPL Sum did not comprise IPPL’s funds. The contemporaneous records on which the Hu Parties relied do not give rise to a reasonable and definite inference to that effect. I therefore accept that IPPL has established that the funds comprising the Fifth IPPL Sum were paid from IPPL’s account to Credit Suisse. I will return to whether that payment, together with the Sixth and Seventh IPPL Sums, gives rise to an equitable right of subrogation in IPPL’s favour.

410 Quite apart from the specific provenance challenge to the Fifth IPPL Sum addressed above, taking all of this into account, I find that the more reasonable and definite inference is that these payments were not made pursuant to any arrangement under which Mr Gu was obliged to repay them as unsecured loan advances. I accept that establishing the Fifth to Seventh IPPL Sums as unsecured loan advances to Mr Gu may rebut IPPL’s claim based on subrogation. However, I am not satisfied that this has been established on the evidence.

Issues 27-30 – whether the effect of those payments was to reduce the secured indebtedness by $280,000 or some other amount

411 The remaining question is whether IPPL established that the Fifth to Seventh IPPL Sums totalling $280,000 were in fact applied in reduction of the indebtedness secured by the Credit Suisse Mortgage.

412 The starting point is the concluded credit agreement. Terms which are defined in that agreement are designated by the use of capitalisation in this section of my reasons. The agreement comprised a facility letter dated 20 March 2017 from Credit Suisse (Sydney Branch) to Mr Gu. Read with cl 1 and Appendix 1 – Details (General), that document identified Mr Gu as both Borrower and Security Party, and it was executed by him in each capacity on 31 March 2017. Although the letter referred generally to a suite of facilities, the only facility for which operative terms were provided was the Real Property Mortgage Facility. The overall Facility Limit was $6 million; the applicable Sub-Limit for the Real Property Mortgage Facility was in that amount; and the detailed schedule in Appendix 1 – Details (General) provided substantive terms only for that facility. The Line of Credit Facility was stated to be “Not Applicable”.

413 The Real Property Mortgage Facility was expressed to be for the purchase of the Superba Property, secured by a First Registered Real Property Mortgage together with the Secured Assets and a Specific Security Deed from Mr Gu. The applicable margin was 1.50%, with interest fixed as the Bank’s Cost of Funds plus 1.50%, then stated to be 3.38% on a one-month interest period. Clause 6 (On-going Conditions) required Total Outstandings at all times not to exceed the lower of the applicable Sub-Limit (which, as stated above, was $6 million) or the relevant Collateral Value, failing which Mr Gu was required to immediately reduce Total Outstandings or provide additional security, with non-compliance constituting an Event of Default. Clause 9.2 (Security) further required Mr Gu to maintain the Aggregate Collateral Value of the Security at or above the Exposure Level, as conclusively determined by the Bank. Clause 14 (Interpretation and Standard Terms) defined Collateral Value for the Real Property Mortgage Facility as the Bank-determined market value of the Secured Property multiplied by the Lending Ratio, which was relevantly fixed at 60%. The Maturity Date was 15 March 2022. The facility also provided for a Fixed Advance in the Acceptable Currency for an amount equal to the Real Property Mortgage Facility Limit, which, as stated above, was $6 million or its equivalent in the Acceptable Currencies. The facility was drawn in AUD and the Fixed Advance was therefore AUD $6 million.

414 Payment of the Fixed Advance was required on the Maturity Date: cl 11.1 (Payment). Prepayment, subject to break costs, was permitted: cl 11.4. Mr Gu was expressly permitted to re-borrow any amount of the Fixed Advance which was repaid or prepaid: cl 11.5. The agreement further provided that it was to be read with the Bank’s Account Opening Terms and Conditions, and that statements of account would be provided at least monthly, but it did not itself identify any particular account number: cl 14. No separate copy of the Bank’s Account Opening Terms and Conditions was identified in the Court Book to which I was taken.

415 The facility agreement is significant for the following reasons. It shows that the only operative lending facility was the Real Property Mortgage Facility. It provides for interest on the facility to be “calculated and paid by reference to interest periods” (cl 7.1), with interest on each Fixed Advance payable in accordance with cl 7 (Interest Rate/Commission): cl 11.1. Consistently with that structure, the Credit Suisse cash-transactions statement for portfolio 1001316-10 records the Fifth to Seventh IPPL Sums not as payments of principal, but as “Deposit Inward Tlx Pymt” entries into the AUD current account. The Credit Suisse cash-transactions statement shows that interest was separately debited by entries such as “Interest Expense Loan Int. Due” and “Interest Expense Debit Interest”. The Credit Suisse cash-transactions statement also demonstrates that principal was separately dealt with by entries such as “Withdrawal Pmt of Principl” followed by “Deposit Loan Drawdown”. Thus, the Fifth IPPL Sum of $200,000 was credited on 12 May 2017 and later reduced by subsequent interest debits; the Sixth IPPL Sum of $30,000 was credited on 5 July 2019 after the account had moved into debit following interest charges on 27 June 2019 and 1 July 2019; and the Seventh IPPL Sum of $50,000 was credited on 22 January 2020 after the account had gone into debit following interest charges on 23 December 2019 and 1 January 2020, and immediately before a further “Interest Expense Loan Int. Due” debit was posted on the same day.

416 The Credit Suisse investment report dated 1 July 2020 is to similar effect. It distinguished “Current Account” ending 0945 from the separate “Fixed Advance” position and thereby treated the current account and the mortgage indebtedness as distinct positions within the same Portfolio Group 1001316-10.

417 The Credit Suisse cash-transactions statement as at 24 April 2017 shows the AUD current account which records two entries in immediate succession: first, “Withdrawal Out. Telex Pymt FT1711130572” for $6,000,000.00, which produced a balance of -$6,000,000.00; second, “Deposit Loan Drawdown LD1711600004” for $6,000,000.00. In this way, the $6 million Fixed Advance was brought to account through the current account by a loan-drawdown entry and matched with a same-day outward telex-payment entry. The statement does not identify the recipient of that outward payment, but it is common ground that the $6 million formed part of the settlement of the Superba Property. The use of the current account as the account in which both entries were recorded is consistent with the facility agreement which fixed the Real Property Mortgage Facility Limit at AUD $6 million or its equivalent in the Acceptable Currencies and defined that facility as the Fixed Advance made available by the Bank to the borrower.

418 The subsequent entries in the Credit Suisse cash-transactions statement show that the same AUD current account remained the ledger through which the facility was administered, recording later inward payments, interest debits, and periodic principal-payment and redraw entries. Thus, after the 24 April 2017 entries, the statement records later inward payments, including the relevant IPPL sums, being $200,000 on 12 May 2017 and $100,000 on 18 May 2017, and then debits for interest such as “Interest Expense Loan Int. Due LD1711600004” on 24 May 2017. Later, when principal was dealt with, the Bank used separate entries such as “Withdrawal Pmt of Principl” followed by a fresh “Deposit Loan Drawdown” for $6,000,000.00, including on 25 September 2017. That treatment is consistent with the 2020 Credit Suisse investment report dated 1 July 2020, which distinguishes Current Account ending 0945 from the separate Fixed Advance position within Portfolio Group 1001316-10. In that sense, the documents show that the $6 million Fixed Advance was reflected in, and thereafter administered through, the current account, rather than the current account itself being the loan facility.

419 The evidence does not support the contention that the current account was an overdraft facility in its own right. The facility agreement provided no operative line of credit. In the email chain of 12 April 2017, Mr Gu said, “Mate credit suise is a private bank” and “Theres no offset account”. Consistently with that statement, the contemporaneous documents show that the settlement monies were transferred to Brighton Lawyers’ trust account ending 0463 as evidenced by the trust account receipts of 18 April 2017, for the reason that a Credit Suisse overdraft account was not available to Mr Gu. In these circumstances, I find that the Fifth to Seventh IPPL Sums were treated by Credit Suisse as credits to the current account associated with Mr Gu’s Real Property Mortgage Facility and, in that capacity, were applied to meet interest as it fell due under that facility, rather than being treated as direct repayments of principal or as transactions in a separate overdraft account.

Determination

420 On the basis that the Fifth to Seventh IPPL Sums were applied to meet interest as it fell due under the Real Property Mortgage Facility, and thereby discharged that secured debt pro tanto, IPPL is in equity subrogated to Credit Suisse’s position under the mortgage to the extent of that discharge.

Determination – Issues 26-34

421 Drawing Issues 26 to 34 together, I am satisfied that the Fifth to Seventh IPPL Sums were applied in reduction of the indebtedness secured by the Credit Suisse Mortgage to the total extent of $280,000. The Credit Suisse records and related facility and account materials support that conclusion. The contrary submissions of the Hu Parties, adopted by Great Lands, do not displace it. That includes the Hu Parties’ challenge to the provenance of the Fifth IPPL Sum. On that basis, the possible characterisation of the payments as loans or unsecured advances to Mr Gu does not defeat IPPL’s claim.

422 What matters is that IPPL’s funds were used to discharge secured debt owed by Mr Gu to Credit Suisse. Equity treats IPPL as standing in the position formerly held by Credit Suisse to that extent. It follows that IPPL was subrogated to the rights formerly held by Credit Suisse as registered mortgagee and acquired a proprietary interest in the Surplus Funds

Issues 35-39 – Subrogation to Great Lands

Overview and determination

423 IPPL’s claim on Issues 35 to 39 is that, by reason of the two payments totalling $1.2 million made by IPPL to Mr Zhang in September 2019 and February 2020, it became entitled to be subrogated to Great Lands’ position under the Great Lands Mortgage to obtain the benefit of that mortgage as against Mr Gu (or his estate in bankruptcy). Those issues now arise in a materially confined way.

424 I have found that the Great Lands Mortgage is void against the trustee under s 121(1) of the Bankruptcy Act, and that, by reason of the assignment made under s 100-5 of the Insolvency Practice Schedule, the Hu Parties stand in the trustee’s place for the purposes of the consequences that follow from that avoidance. I have also found that the two payments made by IPPL to Mr Zhang were to be brought to account in reduction of Mr Gu’s indebtedness to Great Lands, rather than as partial redemptions of Mr Zhang’s Cornerstone Fund investment. Those findings substantially narrow the present controversy.

425 By the close of the parties’ cases, IPPL no longer pressed any present entitlement to compete with Great Lands while Mr Gu’s debt to Great Lands remained unpaid, and accepted that Issue 38 should be answered “no” on that basis. The Hu Parties and Great Lands were in agreement in this respect. In IPPL’s closing submissions, its Great Lands subrogation claim was therefore treated as mattering only if Great Lands’ own entitlement did not exhaust the Surplus Funds and Great Lands had first been paid what it was entitled to receive.

426 In that setting, the principal remaining question is whether any right of subrogation could arise or survive in favour of IPPL in circumstances where Great Lands itself had not been paid out in full and where, further, the Great Lands Mortgage has been held void against the trustee, whose position the Hu Parties now occupy as assignees. Put another way, the question is whether IPPL can derive, by subrogation, any entitlement greater than that which Great Lands itself could assert in the circumstances as now found.

427 IPPL submitted that the two payments to Mr Zhang from it were applied in reduction of the debt owed by Mr Gu to Great Lands and that equity should therefore recognise a subrogation interest in its favour. It submitted that the availability of subrogation to a creditor’s security interest as a restitutionary remedy does not depend on proving that the subjective intention at the time of paying that creditor was to keep the security interest alive, but if such an intention were required, IPPL submitted it should be presumed to exist in this case.

428 Whatever may be the position in other circumstances, IPPL accepted that it could not assert a subrogation interest to Great Lands’ position while Great Lands had not itself been paid in full. That concession accords with principle, and it substantially controls the disposition of Issues 35 to 39. Where the original secured creditor remains unpaid and continues to have use for the security, any entitlement of a third-party payer to stand in that creditor’s position cannot operate in a presently enforceable way in competition with the creditor’s subsisting rights: Nguyen v Sage Consultant Group Pty Ltd; Dang v Nguyen [2021] NSWSC 753; 20 BPR 41,989 at 266; Padovan and Anor v M GG Group Pty Ltd (In Liq) and Ors [2011] NSWSC 1080 at 35, quoting State Bank of New South Wales v Geeport Developments Pty Ltd (1991) 5 BPR 11,947 at 11,953-11,954 (Cohen J). In the present case, that conclusion is reinforced by the further finding already made that the Great Lands Mortgage is void against the trustee, whose place the Hu Parties occupy as assignees. In those circumstances, the decisive obstacle to IPPL’s present claim is not proof of subjective intention, but sequencing and the derivative nature of the entitlement asserted.

429 Nor do the parties’ submissions concerning s 30 of the Bankruptcy Act and the operation of s 121(5) lead to any different conclusion on Issues 35 to 39. The Hu Parties’ submitted that, if the Great Lands Mortgage were avoided, the Court had power under s 30, or as a court of equity, to mould the consequential order so as to avoid unfairness in fixing the amount of any refund payable under s 121(5), including by bringing to account only such part of the payments from IPPL to Mr Zhang as was properly to be treated as repayment of principal. IPPL, for its part, maintained orally that, if the Hu Parties succeeded on their s 121 claim, its subrogation interest would then operate. But those submissions concern the consequences of avoidance of the Great Lands Mortgage and the form of relief as between Great Lands and the trustee or those standing in the trustee’s place. They do not answer the distinct question raised by Issues 35 to 39, namely whether IPPL can derive, by subrogation, a presently operative proprietary entitlement greater than that which Great Lands itself could assert once the Great Lands Mortgage has been held void against the trustee. Nor do they overcome the Hu Parties’ submission that IPPL identified no authority for subrogation to any right to payment arising under s 121(5).

430 It follows that, even accepting that the two payments to Mr Zhang were brought to account in reduction of the indebtedness otherwise owed by Mr Gu to Great Lands, that conclusion does not establish any presently enforceable proprietary interest in favour of IPPL in the Surplus Funds by way of subrogation to the Great Lands Mortgage.

431 I am not satisfied that Issues 35 to 39 establish any presently enforceable right of subrogation in favour of IPPL to the rights of Great Lands under the Great Lands Mortgage. It is not necessary, in order to reach that conclusion, to finally resolve the parties’ contest as to whether subjective intention on IPPL’s part to be subrogated was required or presumed. The claim fails in its presently operative form for the anterior reasons already given.

PRIORITY AND POSTPONEMENT

Overview in light of conclusions on Issues 1-39 and 56-74

432 Having regard to the conclusions already reached, the priority issues are substantially confined. In summary, I have concluded that: first, cl 7.2 of the Hu Deed did not create an equitable charge or other equitable proprietary interest in favour of the Hu Parties; second, the Great Lands Mortgage is void against the Hu Parties, standing in the position of the trustee, by operation of s 121 of the Bankruptcy Act; and third, Great Lands’ secured interest under that mortgage does not attach to the Surplus Funds. Great Lands’ remaining entitlement is confined to the statutory refund required by s 121(5) of the Bankruptcy Act, or otherwise its claim for enforcement of the Great Lands Loan (absent the unenforceable Penalty Clauses) generally as an unsecured creditor. I have also concluded that IPPL has established proprietary interests in the Surplus Funds by reason of a purchase money resulting trust (or, alternatively, a constructive trust of the kind recognised in Black v S Freedman), and separately by subrogation to Credit Suisse to the extent earlier identified. IPPL has not established any presently enforceable right of subrogation to Great Lands.

433 Those conclusions have important consequences for the competing claims of the Hu Parties and Great Lands to the Surplus Funds. Neither holds any secured proprietary interest in those funds. The Hu Parties’ cross-claim did not give rise to any equitable charge or other security, and any claim they make in respect of the Surplus Funds is therefore unsecured. Great Lands’ entitlement under s 121(5) of the Bankruptcy Act is of a different character. It is a statutory right to a consequential payment following the avoidance of its mortgage, rather than a proprietary interest in the Surplus Funds themselves. For the reasons given in respect of Issue 13, that statutory right only entitles Great Lands to payment by the trustee (or the Hu Parties as assignees of the trustee) of the consideration given for the avoided transferred interest adjusted for relevant repayment, but it does not extend to interest. To the extent that Great Lands asserts any further entitlement founded on Mr Gu’s personal liability under the Great Lands Loan (in respect of outstanding principal, as well as interest owing under that agreement), that claim is unsecured.

434 A separate question arises as to whether Great Lands’ entitlement to a statutory refund under s 121(5) (in respect of consideration, which I have found is liable to be adjusted to give credit for repayments of the principal consideration) takes priority over the unsecured personal debt claim of the Hu Parties or other unsecured creditors. In my view, Great Lands’ claim under s 121(5) ranks higher in priority than unsecured personal debt claims. That is because were this not the case, the effect and practical utility of s 121(5) would be materially undermined. Were the s 121(5) entitlement to rank pari passu with unsecured debts in the present context, then this entitlement would be less valuable to Great Lands than its personal debt claim in respect of unpaid amounts under the Great Lands Loan, because the personal claim can include interest whereas s 121(5) does not entitle Great Lands to interest on the value of the consideration. In my view, the purpose of the statutory scheme would be undermined if a party’s entitlement to recovery of consideration for transfers of property voided under s 121 could be eroded by rateable participation with all other unsecured creditors. I consider that the ranking of the s 121(5) entitlement above unsecured debt claims reflects the way the statutory scheme has balanced competing policy imperatives: the cost of voiding transfers of proprietary interests pursuant to s 121(1) and thereby enlarging the pool of unsecured creditors against the transferor is offset by the transferee’s closely confined entitlement to recover lost consideration pursuant to s 121(5), above and beyond the claims of unsecured creditors.

435 In that light, the remaining questions of priority concern the interests established by IPPL. The first question is the timing and character of those interests, because that bears upon any question of priority as between competing proprietary claims. The next question is whether those interests are nevertheless postponed, in whole or in part, to the claims advanced by the Hu Parties. By contrast, the issues framed as between IPPL and Great Lands, and the final issue concerning alleged postponing conduct by Great Lands, arise only on the footing that Great Lands retained an enforceable competing interest in the Surplus Funds. In view of my earlier conclusions, those issues do not arise for determination except on a strictly alternative basis.

436 I will therefore address: first, the timing of IPPL’s surviving proprietary interests; and second, whether those interests are postponed to the claims advanced by the Hu Parties by reason of representation, omission, reliance or otherwise, including the contention that any relevant IPPL interest is no more than a mere equity. It is only if I am wrong in my conclusion that the Great Lands Mortgage is void by operation of s 121 of the Bankruptcy Act that it becomes necessary to consider, on a strictly alternative basis, any further postponement issues raised as between IPPL and Great Lands.

Issue 40 – Timing of IPPL’s asserted interests

437 Issue 40 concerns the time at which IPPL’s surviving equitable interests arose. In light of the conclusions already reached, the relevant inquiry is confined to the interests which IPPL has established, namely, its beneficial interest arising by way of a purchase money resulting trust (or alternatively, a Black v S Freedman constructive trust) and its equitable interest arising by way of subrogation to Credit Suisse referable to the Fifth to Seventh IPPL Sums. The Hu Parties submitted that a purchase money resulting trust and a Black v S Freedman constructive trust would arise at the time of acquisition, whereas a remedial constructive trust for breach of fiduciary duty would stand differently for timing and priority purposes. In light of the findings I have made, it is therefore necessary to identify the legal character and timing of the interests that IPPL has in fact established before turning to the postponement issues.

438 I am satisfied that the relevant interests established in favour of IPPL arose, for priority purposes, at the time each interest came into existence. That is because those interests arose by operation of law upon the application of IPPL’s funds, and were not dependent upon discretionary curial intervention.

439 In the case of the purchase money resulting trust, the beneficial interest arose upon the acquisition of the Superba Property. That is, when the First to Fourth IPPL Sums were brought to bear in completion of the purchase. The First to Third IPPL Sums were transferred on 3 March 2017, 15 March 2017 and 13 April 2017 into the Gu HSBC #118 account, then forming part of the $3.2 million paid from that account into Brighton Lawyers’ trust account on 18 April 2017. The Fourth IPPL Sum was paid directly into that trust account on the same day. Those trust monies were then applied by Brighton Lawyers’ trust account on 21 April 2017 towards the balance of the purchase price and acquisition costs, with the Superba Property thereafter registered in Mr Gu’s name on or about 3 May 2017. A peculiar feature of the evidence in this case is that I was not taken to evidence of the date on which the purchase completed. What is clear is that by 3 May 2017, Credit Suisse had registered its mortgage on the title of the Superba Property. Accordingly, I am satisfied that as a matter of inference, settlement had occurred, with IPPL’s funds being deployed in the settlement, by that date.

440 To the extent that, and in the alternative if, the First to Fourth IPPL Sums are analysed by reference to a Black v S Freedman constructive trust, the relevant equitable interest arose immediately upon their wrongful taking and misapplication, namely on 3 March 2017, 15 March 2017, 13 April 2017 and 18 April 2017, and thereafter adhered to the monies and their traceable product as they passed into the acquisition of the Superba Property.

441 In the case of subrogation to Credit Suisse, the relevant equitable interest arose when IPPL’s funds were applied in reduction of the indebtedness secured by the Credit Suisse Mortgage. That is, upon the crediting of the Fifth IPPL Sum on 12 May 2017, the Sixth IPPL Sum on 5 July 2019 and the Seventh IPPL Sum on 22 January 2020. Credit Suisse treated those sums as credits to the current account associated with the Real Property Mortgage Facility and applied those sums to meet interest as it fell due under that facility.

442 It follows that the priority analysis proceeds on the footing that IPPL’s relevant interests are to be assessed by reference to those earlier times of creation.

443 Given the conclusions already reached, the remaining priority contest is to be resolved by reference to settled equitable principles concerning temporal priority and postponement. The fact that IPPL’s surviving interests arose at the earlier times identified above is an important, but not necessarily decisive, consideration. It is therefore convenient to set out the applicable principles before turning to the Hu Parties’ case that those interests should nevertheless be postponed.

Applicable principles

444 Where competing equitable interests are in contest, the earlier in time will usually prevail if the merits are equal, but that principle is not applied mechanically. The Court must search for the better equity, and the holder of the later equity bears the onus of showing some circumstance sufficient to displace the earlier equitable interest. What is required is not mere lateness or absence of notice, but some act, default or other circumstance of tangible and distinct significance affecting the justice of the competing claims, assessed in light of the whole of the conduct and surrounding circumstances: Latec Investments at 276 (Kitto J); IWC Industries v Sergienko [2021] NSWCA 292; 20 BPR 41,785 at [65]-68; Abigail v Lapin (1934) 51 CLR 58.

445 In Abigail v Lapin, Lord Wright delivering the judgment of the Privy Council said that “[a]part from priority in time, the test for ascertaining which encumbrancer has the better equity must be whether either has been guilty of some act or default which prejudices his claim”: at 68.

446 When assessing the surrounding circumstances, the whole of the conduct of each party with an equitable interest must be taken into account: IWC at [68]; Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99; 18 BPR 36,683 at 233. That is irrespective of the time at which the conduct occurred: IWC at [73]-[75]; Clark v Raymor (Brisbane) Pty Ltd [No 2 ] [1982] Qd R 790 at 797 (Thomas J, Campbell CJ and Andrews SPJ agreeing at 790, 791); Australian Guarantee Corp oration (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129 at 137 (Tompkins J delivering the judgment of the Court of Appeal).

447 The position of the second equitable claimant is not preferred to that of the earlier rival simply because the second claimant took their securities without notice of the first encumbrance, or because of that fact coupled with the fact that the second claimant acquired a later interest for value: Phillips v Phillips (1862) 45 ER 1164 at 1166 (Westbury LC); Coleman v London County and Westminster Bank Ltd [1916] 2 Ch 353 at 361 (Neville J); Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 3 All ER 747 at 768 (Millett J).

Issues 43-55 – Alleged postponement of IPPL’s interests in favour of the Hu Parties

Overview

448 Issues 43 to 55 raise the principal remaining priority contest. The question is whether IPPL’s surviving equitable interests, although earlier in time, should nevertheless be postponed to the position now occupied by the Hu Parties. The Hu Parties contend that IPPL, by omission in circumstances calling for disclosure or otherwise, represented that it had no or claimed no beneficial interest in the Superba Property, and that the Hu Parties relied upon that position in entering into the Hu Deed.

449 IPPL disputes representation, reliance and causation, and says that the Hu Parties acted on the basis of their own title searches and inquiries rather than anything attributable to IPPL. In oral closing submissions, IPPL withdrew reliance on paragraphs 35 and 36 of its closing reply submissions and accepted that, if the Hu Parties had adopted the relevant assumption, it would have been reasonably foreseeable that they would rely upon it. IPPL nevertheless maintained that the reliance and causation said to be necessary for the Hu Parties’ postponement case were not made out.

450 The Hu Parties also contend, in the alternative, that any competing constructive trust claim requiring curial intervention is, for present purposes, no more than a mere equity.

Consideration

451 The dispositive question is whether the Hu Parties have shown any conduct or circumstance sufficient to require IPPL’s earlier interests to be postponed. It is necessary to consider whether there was any representation or omission attributable to IPPL in circumstances calling for disclosure, whether the Hu Parties relied upon that matter in entering into the Hu Deed, and whether, if necessary, any relevant part of IPPL’s claim is to be treated for present purposes as no more than a mere equity. I address those questions in turn.

452 I am not satisfied that the Hu Parties have established a representation or omission of the kind alleged. The present findings do not support the conclusion that IPPL made any positive representation that it had, or claimed, no beneficial interest in the Superba Property. The Hu Parties point to the absence of disclosure of IPPL’s now-established proprietary claims in the course of the events leading to the Hu Deed. In my view, that is insufficient, without more, to constitute a representation attributable to IPPL that it had no such interest, still less a representation of a kind carrying the consequence that its earlier equitable position be displaced.

453 That conclusion is reinforced by the setting in which the Hu Deed was made. By that time, the Hu Parties had obtained The First Judgment and a freezing order against IPPL and Blue Whale; had sought explanations for the apparent disappearance of the substantial “cash and cash equivalents” earlier disclosed in IPPL’s accounts and for the related party loans ; had caused title searches to be undertaken in relation to the Superba Property; and were contemplating further coercive steps in the Supreme Court of New South Wales proceeding, including a notice to produce bank records and an application to cross-examine Mr Gu. The contemporaneous materials also show that the Hu Parties entertained significant doubts about Mr Gu’s reliability and about the competing suggestions of IPPL’s financial position. In that setting, the Hu Deed was not entered into because the Hu Parties were content to repose confidence in Mr Gu or in the accuracy of what they had been told. It was entered into because, within a narrow period of forbearance, they sought to use the leverage then available to them to obtain the most effective security and practical protection they could for satisfaction of the First Judgment Debt.

454 Nor am I satisfied that the Hu Parties have established the necessary reliance or causation. The question is not whether it would have been reasonably foreseeable that a person in the Hu Parties’ position might rely on an assumption of the kind alleged. IPPL accepted as much in oral closing.

455 The question is whether the Hu Parties in fact entered into the Hu Deed in reliance upon some representation or omission attributable to IPPL. On the findings presently made, that has not been established. The objective evidence, already referred to, points instead to the Hu Parties having proceeded by reference to their own position as unsatisfied judgment creditors, the financial information and security proposals then under discussion, and the title position disclosed by their own inquiries.

456 It is also material that the basis on which the Hu Parties are able to press their postponement claim is different to what it would have been had they not failed in their claim that cl 7.2 of the Hu Deed created an equitable charge in their favour. The Hu Parties therefore do not stand as holders of an equitable charge created by cl 7.2 or any proprietary interest that would secure their claim. Their remaining position is different in character. As explained earlier in these reasons, they do not, by force of s 121 of the Bankruptcy Act alone, succeed to the position of a mortgagee or other proprietary claimant in relation to the Surplus Funds; rather, the statutory question is whether the Great Lands Mortgage is void against the trustee and what consequences follow from that avoidance. That difference in legal basis of the claim tells against any broad conclusion that IPPL’s earlier proprietary interests should be deferred simply because the Hu Parties later obtained contractual protections and, as assignees, statutory rights arising from the trustee’s position.

457 I am not persuaded that the Hu Parties have identified conduct of the gravity required to displace IPPL’s earlier equitable position. The governing principles are not applied mechanically, but the displacement of an earlier equitable title requires some tangible and distinct circumstance affecting the justice of the competing claims. Here, the earlier findings establish that IPPL’s surviving interests arose by operation of law from the application of its funds to the acquisition of the Superba Property, and, separately, from the application of its funds in reduction of the debt secured by the Credit Suisse Mortgage. In circumstances where those interests are earlier in time and where the representation and reliance case advanced by the Hu Parties fails, I am satisfied that the better equity lies with IPPL.

458 It is therefore unnecessary to decide the Hu Parties’ alternative contention that any constructive trust claim requiring curial intervention is, for present purposes, no more than a mere equity. However, if it were necessary to do so, I would not accept that contention in the form in which it is presently advanced. On the findings already made, IPPL succeeds on the purchase money resulting trust claim and, in the alternative, on the Black v S Freedman constructive trust claim. Those are proprietary interests arising by operation of law, not merely a remedial claim dependent upon a later curial order. They therefore attract temporal priority in equity by reference to their time of creation, subject only to any postponing conduct of the kind earlier discussed.

459 The “mere equity” analysis would arise only on the further hypothesis that I were wrong as to both of those proprietary bases and that IPPL were left to the more limited case addressed in Issues 22 to 25. That is not the footing on which the priority analysis now proceeds.

Determination

460 For those reasons, I am not satisfied that the Hu Parties have established any representation or omission attributable to IPPL, or any reliance upon such a matter, sufficient to require that IPPL’s earlier-arising interests be postponed to them. In particular, I am not satisfied that the Hu Parties entered into the Hu Deed in reliance upon any representation or omission by IPPL that it had, or claimed, no beneficial interest in the Superba Property. It follows that the Hu Parties have not established the postponement case they advance against IPPL. In light of the proprietary bases already found in IPPL’s favour, it is unnecessary to determine the Hu Parties’ alternative contention that any competing constructive trust claim is, for present purposes, no more than a mere equity. Issues 43 to 55 should therefore be resolved against the Hu Parties.

Issues 41-42 – Alleged postponing conduct by IPPL as against Great Lands

461 If, contrary to the conclusions already reached, Great Lands retained an enforceable competing equitable interest in the Surplus Funds, it would then be necessary to determine Issues 41 and 42. On that alternative basis, Great Lands contended that IPPL’s earlier equitable position should nevertheless be postponed to Great Lands by reason of IPPL’s failure to lodge a caveat and its acquiescence or silence in relation to the Great Lands transaction. IPPL disputes that contention and further submitted that any knowledge of Mr Gu relied upon by Great Lands is not to be attributed to IPPL for that purpose.

Applicable principles

462 Mere failure by the holder of a prior equitable interest to lodge a caveat does not, without more, constitute postponing conduct as against a competing equitable interest. The question remains whether the holder of the earlier equity has engaged in some act, default or other conduct of sufficient significance to make it inequitable, as between the competing claimants, for that earlier interest to prevail: J & H Just (Holdings) Pty Ltd v Bank of New South Wales [1971] HCA 57; 125 CLR 546 at 554-555 (Barwick CJ); Heid v Reliance Finance Corporation Pty Ltd [1983] HCA 30; 154 CLR 326 at 338 (Gibbs CJ), 342 (Mason and Deane JJ); IWC at [118].

463 Thus, in S tone Leaf Capital Pty Ltd v Daly [2014] NSWSC 477, the conduct relied upon included the withdrawal of caveats: at 46; and in Heid, the conduct included the delivery of a completed memorandum of transfer and certificate of title in circumstances apt to mislead a later interest holder: at 336 (Gibbs CJ), 345 (Mason and Deane JJ). Whether conduct of that order is established here depends upon the particular facts, including the basis on which Great Lands seeks to attribute to IPPL any relevant knowledge or silence.

Consideration

Attribution of knowledge

464 To the extent Great Lands relied upon acquiescence or silence on the part of IPPL, it is necessary to consider whether the knowledge of Mr Gu is to be attributed to IPPL for that purpose. IPPL submitted that it should not be, having regard to Mr Gu’s control of the company and the character of the interests now found in IPPL’s favour. If it were necessary to decide the matter, I would not be satisfied that the attribution for which Great Lands contended should be made.

Failure to lodge a caveat

465 If it were necessary to determine the issue, I would not be satisfied that IPPL’s mere failure to lodge a caveat constituted postponing conduct as against Great Lands. The present case does not fit within Stone Leaf and Heid in a way that would make it inequitable for IPPL’s earlier interest to prevail.

Acquiescence or silence

466 Nor, if it were necessary to decide the point, would I be satisfied that Great Lands established postponing acquiescence or silence on the part of IPPL. On the present findings, Great Lands did not establish conduct attributable to IPPL of a kind that conveyed that IPPL had no interest to protect, or that it assented to the creation or priority of the Great Lands Mortgage.

Determination

467 Accordingly, if it were necessary to determine Issues 41 and 42, I would conclude that Great Lands did not establish conduct sufficient to postpone IPPL’s earlier equitable interests to the Great Lands Mortgage.

Issue 75 – Alleged postponing conduct by Great Lands

468 In light of the conclusions already reached, and in circumstances where this issue was ultimately not pressed, it is unnecessary to determine Issue 75. That issue concerned the Hu Parties’ alternative contention that, if Great Lands otherwise retained an enforceable interest in the Surplus Funds, that interest should nevertheless be postponed by reason of delay in enforcement or other conduct. Given my earlier conclusions as to the effect of s 121 of the Bankruptcy Act and the consequences for the Great Lands Mortgage, no occasion arises to determine that further contention.

CONCLUSION

469 For the reasons given, the disposition of this proceeding follows from findings of fact made on the evidence and the application of settled principles of equity, insolvency law and statutory construction and contractual construction.

470 First, cl 7.2 of the Hu Deed did not create an equitable charge or other equitable proprietary interest in favour of the Hu Parties over the Superba Property or the Surplus Funds. That conclusion follows from an objective construction of the text of the deed, read in its commercial context and as a whole, and from the absence of language or incidents sufficient to effect a present appropriation of property as security. The alternative constructions advanced have been considered and rejected for reasons explained.

471 Second, the Great Lands Mortgage granted in June 2019 is void against the trustee in bankruptcy, and the Hu Parties as assignees of the trustee, under s 121(1) of the Bankruptcy Act. That conclusion rests upon the premise that was not ultimately contested by Great Lands that, at the time of the transfer, Mr Gu was insolvent or about to become insolvent and that Great Lands has not established the cumulative requirements of the good faith defence in s 121(4). In particular, Great Lands has not discharged its onus of proving that the consideration it gave was at least as valuable as the market value of the proprietary interest (the mortgage) transferred, and that it did not know, and could not reasonably have inferred, that Mr Gu was insolvent or that his main purpose in making that transfer was the proscribed purpose in s 121(1)(b). The consequences that follow under s 121(5), read with s 100‑5 of the Insolvency Practice Schedule, result in the Hu Parties as the assignees of the trustee being required to pay to Great Lands the value of the consideration it gave for the voided transfer of the mortgage to it. I have determined that the amount to which Great Lands is entitled under s 121(5) is to account for the amounts it received in reduction of the principal sum under the Great Lands Loan: with the entitlement totalling $2,193,209.62.

472 Third, IPPL has established proprietary interests in the Surplus Funds by operation of law. Those interests arise: first, by reason of a purchase money resulting trust (and, in the alternative, a constructive trust of the kind recognised in Black v S Freedman) to the extent of $1,045,246.14 of IPPL funds applied in the acquisition of the Superba Property; and second, by subrogation to the position formerly held by Credit Suisse as registered mortgagee over the Superba Property to the extent of $280,000, being the amount by which IPPL’s funds were applied in reduction of the indebtedness secured by that mortgage. Those interests arose at the times identified in these reasons and are not dependent upon discretionary curial intervention.

473 Fourth, IPPL has not established any presently operative right of subrogation to the position formerly held by Great Lands under the Great Lands Mortgage. In light of the avoidance of that mortgage and the derivative nature of the entitlement asserted, no enforceable proprietary interest arises on that footing.

474 Fifth, it also follows that neither the Hu Parties nor Great Lands has established any secured proprietary claim to the Surplus Funds. To the extent that the Hu Parties and Great Lands compete with each other on the basis of personal debt claims against the estate in respect of the Second Judgment Debt, and Great Lands in respect of principal and interest (accrued without reliance placed on the unenforceable Penalty Clauses) outstanding on the Great Lands Loan – their claims are both unsecured. Great Lands’ entitlement to be repaid under s 121(5) (totalling $2,193,209.62) takes priority over the unsecured personal debt claim of the Hu Parties or other unsecured creditors.

475 Finally, the priority contest falls to be resolved by reference to the temporal creation and character of the surviving equitable interests, and to settled principles governing postponement. No conduct has been shown on the part of IPPL sufficient to require that its earlier‑arising proprietary interests be postponed to the position now occupied by the Hu Parties, whether by representation, omission, reliance, acquiescence or otherwise. The Hu Parties have not established the postponement case they advance.

476 Accordingly, the Surplus Funds are to be distributed in accordance with the interests established and the priorities identified in these reasons. I will make orders for the parties to bring in short minutes to give effect to these reasons. I will make provision for the determination of costs.

| I certify that the preceding four hundred and seventy- six (476) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman. |
Associate:

Dated: 17 April 2026

SCHEDULE OF PARTIES

| | NSD 211 of 2022 |
| Respondents | |
| Fourth Respondent: | YING QIN |
| Fifth Respondent: | ZHENHUA ZHANG |
| Sixth Respondent: | PO HU |
| Seventh Respondent: | HONGYUN LIU |
| Eighth Respondent: | I-PROSPERITY PTY LTD ACN 142 091 585 (IN LIQUIDATION) |
| Ninth Respondent: | JING SPRING HILL PTY LTD |
| Tenth Respondent: | LIYUN LIU |
| Eleventh Respondent: | CHUNSHAN JING |
| First Cross-Claim | |
| Cross-Appellants | |
| Second Cross-Appellant: | YING QIN |
| Third Cross-Appellant: | ZHENHUA ZHANG |
| Fourth Cross-Appellant: | PO HU |
| Cross-Defendants | |
| Second Cross-Defendant | GREAT LANDS INVESTMENT PTY LTD |
| Third Cross-Defendant | HONGYUN LIU |
| Fourth Cross-Defendant | I-PROSPERITY PTY LTD ACN 142 091 585 (IN LIQUIDATION) |
| Fifth Cross-Defendant | JING SPRING HILL PTY LTD |
| Sixth Cross-Defendant | LIYUN LIU |
| Seventh Cross-Defendant | CREDIT SUISSE AG ABN 17 061 700 712 |
| Eighth Cross-Defendant | CHUNSHAN JING |
| Second Cross-Claim | |
| Cross-Defendants | |
| Second Cross-Defendant | Great Lands Investment Pty Ltd |
| Third Cross-Defendant | Po Hu |
| Fourth Cross-Defendant | Zhi Huang |
| Fifth Cross-Defendant | Ying Qin |
| Sixth Cross-Defendant | Zhenhua Zhang |
| Seventh Cross-Defendant | Hongyun Liu |
| Eighth Cross-Defendant | Jing Spring Hill Pty Ltd |
| Ninth Cross-Defendant | Liyun Liu |
| Tenth Cross-Defendant | Credit Suisse AG ABN 17 061 700 712 |
| Third Cross-Claim | |
| Cross-Defendants | |
| Second Cross-Defendant | Zhi Huang |
| Third Cross-Defendant | Ying Qin |
| Fourth Cross-Defendant | Zhenhua Zhang |
| Fifth Cross-Defendant | Po Hu |
| Sixth Cross-Defendant | Hongyun Liu |
| Seventh Cross-Defendant | i-Prosperity Pty Ltd ACN 142 091 585 (in liquidation) |
| Ninth Cross-Defendant | Liyun Liu |
| Tenth Cross-Defendant | Barry Wright as liquidator of i-Prosperity Pty Ltd (in liq) |
| Eleventh Cross-Defendant | Jeremy Nipps as liquidator of i-Prosperity Pty Ltd (in liq) |