September 09, 2022

Zong v Lin [2022] NSWCA 136

8 minutes

"You made the company pay too much money for that boat!"

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R owned 55% and A owned 45% of shares in a Co that operated a leisure boat business on Sydney Harbour: [2]

R was the “bank”, contributing funds to the venture. A was to contribute sweat equity, earning a wage while running the Co’s business: [3]

A caused the Co to buy a boat from an entity related to A’s spouse for $315K “as is” with no warranties and no commercial configuration: [4]

A also caused $220K to be transferred out of a Co’s bank account and, responding to a demand on behalf of the Co, repaid $204K. A did not account for the $16K difference: [5]

A made payments from the Co to him and his spouse for purported wages, and used the Co’s money to pay for legal fees relating to A’s dispute with R: [6]

The primary judge ordered: A breached duties in causing the Co to make the payments to themselves, their spouse, and the lawyer; the loss in relation to the boat was $205K, being the difference between the purchase price and present realisable value; the spouse was involved in and aware of the breaches: [8]

R’s claim was made out, the order being for judgment against A for the cash amounts, A’s removal as director, and A transferring their shares to R - interestingly - for no payment: [9]

A appealed.

A’s valuation expert was a boat broker who relied on two photographs in relation to the condition of the boat. R relied on a certified valuer with expertise in marine vessels.

After carefully considering the primary judge’s reasons, and the transcript, the CoA found HH had not erred in their finding about the boat’s (under)value: [37]

Regarding the payments A caused to be made to lawyers, A made no response to a subpoena requiring the production of the retainer, cost agreement, and other related documents that would have been produced by the law firm in the course of acting on the matter: [41]

The primary judge found the payments were made where A had a conflict between their duties to the Co and his and A’s spouse’s interest in the litigation A was making the Co fund: [45]

Regardless of whether A was authorised to instruct lawyers, for A to do so was a breach of their duties to the Co: [47]

A appealed on the basis the primary judged ordered transfer of shares for no payment (so not at “fair value”) was erroneous; those orders having been made as A brought no skill or goodwill to the business, and did not make any financial contribution: [70], [73]

The CoA found s233 allows a wide range of possible relief, and no error was made by HH, including where A made no submissions about alternative orders (including a “fair value” transfer): [77]. [78]

The appeal was dismissed: [91], [93], [94]

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By James d'Apice

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