A company linked to Wagga's multimillion-dollar Murrumbidgee Mill development has sued its former directors over the fraudulent transfer of cash to a personal project via false invoices and sham sub-contracts.
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The NSW Supreme Court last week found BCEG International (Australia) Pty Ltd would not have entered into an agreement to build the Wagga project if it had known of the fraud.
BCEG launched civil action against Yu Xiao and Yanying Chen, as well as three of their companies - Interlink Laboratory Pty Ltd, Interlink Wagga Central Pty Ltd and West Wyalong Marketplace Pty Ltd - in the state's highest court in October 2019.
BCEG sought compensation over alleged breaches of fiduciary duty committed by Mr Xiao and Ms Chen, who ran the company - the Australian subsidiary of BCEG International Investment Co Ltd (BCEG China) - between 2010 and 2017.
At the time the husband and wife were directors, BCEG was engaged in the development of Wagga's The Mill commercial and residential complex and was also responsible for building a private hospital in Varsity Lakes on the Gold Coast.
The Supreme Court heard BCEG used US$35 million in finance provided by the Export-Import Bank of China (Exim Bank) for the Gold Coast project and US$3.9 million for the Wagga development, also financed by Exim Bank.
'VULNERABLE TO EXPLOITATION'
In a judgment handed down last Friday, Supreme Court Justice Kelly Rees found that "in a corporate arrangement that was vulnerable to exploitation", the development land at Varsity Lakes and in Wagga was owned by Mr Xiao and Ms Chen's companies, while the builder engaged by BCEG for both projects - Trojjan (BCEG) Pty Ltd - was also a company controlled by the couple.
At the same time, Mr Xiao and Ms Chen were building a shopping and medical centre development at West Wyalong through a separate company they owned.
The court heard the couple diverted $3.4 million from the Gold Coast development to the West Wyalong project by causing the builder to provide false invoices, which were paid by Ms Chen.
"When Trojjan rendered an invoice in respect of the West Wyalong project, a fake invoice was prepared for the same amount but said to be for the Varsity Lakes project," Justice Rees said.
"Finance obtained by BCEG for the Varsity Lakes project, and to be used only on that project, was in fact used on the West Wyalong project without the knowledge or agreement of Exim Bank, BCEG China or BCEG's Beijing-based directors."
IN OTHER NEWS
The defendants submitted that BCEG China was aware the West Wyalong project was a BCEG project funded by the allocation of funds earmarked for the Varsity Lakes project. Other directors of BCEG were said to have approved the diversion of funds.
However, Justice Rees said she was "comfortably satisfied" Mr Xiao and Ms Chen "were the architects of this arrangement".
"Mr Xiao was the principal decision-maker for BCEG whilst Ms Chen was clearly in charge of the preparation of invoices, operation of the bank accounts and maintaining accounting records," she said.
"Mr Xiao and Ms Chen owned and controlled the West Wyalong project and were the only persons who benefitted from this arrangement."
Justice Rees said the false invoices to BCEG contained "fraudulent representations", including that the builder had worked on the Queensland project when it hadn't and that the builder was owed money for the work when it was not.
"Mr Xiao and Ms Chen knew the representations to be false. Their conduct was intentional, undertaken in the knowledge that it was not in the best interests of BCEG and for an improper purpose, where BCEG had no interest in the West Wyalong project," she said.
"They did not act in good faith in the best interests of BCEG but in pursuit of self interest, where Mr Xiao and Ms Chen held an interest in, and stood to profit from, the West Wyalong project.
"Their self-interest conflicted with their duties to BCEG. By acting in this manner, Mr Xiao and Ms Chen breached their duties as directors of BCEG."
Justice Rees found the construction of the West Wyalong project was funded entirely by the Gold Coast project's facility.
The court heard $1.28 million from one drawdown of the Queensland project's loan facility was used to pay a deposit on an apartment for themselves at The Rocks in Sydney, while a second drawdown resulted in $2.05 million being used to pay for the Wagga land.
The court found that when applying for subsequent drawdowns of the account, Mr Xiao and Ms Chen justified upcoming construction costs by referring to sham sub-contracts between the builder and sub-contractors.
THE BLACK FOLDER
A black folder, labelled "Documents to China Exim - Bank", found in the Wagga site office in 2017 was handed to BCEG's solicitors when the company began investigating Mr Xiao.
The court heard the black folder contained a number of construction sub-contracts, including for the services of a number of Wagga businesses. Some of them had done small-scale work for the building company but said they had not seen the documents prior to the Supreme Court proceedings.
The sham sub-contracts featured altered company names and business addresses, including Wagga street names written as being located in suburbs of Brisbane and on the Gold Coast.
On one occasion, the director of a Riverina flooring company said at no stage did they sign a sub-contract for $390,000 and indicated they would not have accepted it because the business "did not have the resources to handle such a large job".
In court, Mr Xiao did not respond, in his affidavits, to the suggestion that sham sub-contracts had been used in support of drawdown requests. In cross-examination during a hearing held during April, Mr Xiao maintained he had no knowledge of the sub-contractors and no involvement in the sham sub-contracts.
Ms Chen did not give evidence but Justice Rees said it was "apparent that Ms Chen was centrally involved in the provision of sham sub-contracts".
WORK IN WAGGA GETS UNDER WAY
Murrumbidgee Co-operative Milling had run the Edward Street site up until its departure in 1980. The site was then bought by Goodman Fielder, another milling company, in 1987 and operations continued until it closed in 2000.
Mr Xiao and Ms Chen's company Interlink Wagga Central entered into a contract with BCEG to design and construct the Wagga Mill project for an estimated $34 million on July 1, 2012.
The court heard BCEG completed buildings one, two and three of stage one of the Mill project in July 2016. However, it did not complete the fourth building in stage one or any of stage two.
In March 2019, Interlink Wagga Central transferred the Wagga site to ILC Commercial Pty Ltd.
In March the following year, liquidators were appointed to the Trojjan and Trojjan Constructions.
In relation to the Mill development, Justice Rees said if BCEG had known Mr Xiao and Ms Chen had diverted the Varsity Lakes funding onto the West Wyalong project via the false invoices, or had known of the sham sub-contracts, then the company "would not have entered into the contracts with Interlink Wagga Central and Trojjan Constructions in respect of the Wagga project".
"BCEG would not have been willing to commit to an ongoing commercial relationship with entities associated with the couple," she said.
"BCEG was ignorant of the fraud at the time it approved the Wagga project in November 2011 and continued to be so at the time it assumed contractual liabilities in connection with the project between July 2012 and February 2013."
The defendants had submitted there was no evidence of any loss suffered by BCEG in relation to the Wagga project.
Justice Rees said BCEG was required to choose between equitable compensation and an account of profits, which it was presently unable to do "given the paucity of information available in respect of the Wagga project".
The company instead sought an order for the taking of accounts - the process by which the amount of money owed will be determined.
"As there was very little information available at trial concerning the status and fate of the Wagga project, I consider that BCEG is entitled to this relief," she said.
BCEG also sought orders rescinding or avoiding the contract with Interlink Wagga Central and Trojjan or Trojjan Constructions, as well as an order indemnifying BCEG for any liabilities it may occur to third parties through those contracts in relation to the Wagga project.
CONTRACT TORN UP
Justice Rees ordered the contract between the BCEG and Interlink Wagga Central be rescinded and that any benefits, profits or traceable proceeds derived from or received in connection with The Mill project be held on constructive trust for BCEG.
Interlink Wagga Central was also ordered to account for the benefits, profits or traceable proceeds derived or received by them in connection with the project.
"BCEG is entitled to rescission of its contract with Interlink Wagga Central in respect of the Wagga project. BCEG would not have entered into the contract if it had known of Mr Xiao and Ms Chen's breaches of fiduciary duty, of which Interlink Wagga Central had constructive knowledge," Justice Rees said.
"BCEG should be restored to the position it would have been in if the breaches of fiduciary duty had not occurred.
"The company should be released from any obligations under this contract where Interlink Wagga Central had full knowledge of the circumstances in which the contract was entered into."
BCEG will be able to re-list the matter before the Supreme Court for further directions in relation to the taking of accounts for the Wagga project, including the rescission of any contracts with Trojjan and Trojjan Constructions.
Justice Rees also awarded compensation against Mr Xiao and Ms Chen in the amount of $2,528,949.42 for the sham sub-contracts, plus interest. The defendants were also ordered to pay BCEG's court costs.
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