Papers referred 2

In his recent decision Chen v Zhang Justice Rein has struggled with some rather complicated sets of facts as well as a lot of Chinese names in a case involving a claim by Mr (“Peter”) Chen to ownership of “a business known as “Heaven on Earth”, a Chinese Karaoke restaurant and “hostess” lounge, as it was described, at Crows Nest.”

It was Mr Chen’s case that he had initially held 20% of the business and had purchased an additional 50% share in about October 2006 for $130,000. For various reasons which he advanced, mostly to do with requirements for a liquor licence and his capacity to give security for a guarantee of the lease, he said that the lease for the business and the business itself were put in the name of a company, Global Goldstar Pty Ltd, which was owned by Shun Xuan (William) Zhang, who was the brother of his longstanding friend, Wei (Vincent) Zhang. It was Mr (Peter) Chen’s case that William was to receive a payment for the use of his company, including for his giving a guarantee to secure the lease. Chen’s wife, Carol Liu, remained involved in the management of the business up to July 2008. At this point, she was excluded from the operation of the business.

The Zhangs’ case was that the business was theirs, and that they had sacked Ms Liu when they found that she was taking more than the $1,000 per week which they said she was entitled to be paid.

The judge clearly thought that the real reason that the business was put in the hands of Global and the Zhangs was that at the time Chen said he bought the additional share in the business, he was facing charges of money laundering and investigation under proceeds of crime legislation. This was in relation to a series of what were ultimately found to be 333 international money transfer transactions from 14 January 2003 to 4 November 2003 transferring various amounts of money, all less than $10,000, in cash and totalling $3,088,311 in all, to the accounts of six people, one of whom was his brother, at four banks in Hong Kong with the apparent intention of avoiding paying income tax on that money. On 27 March 2008 Chen received a swingeing sentence for this of fifteen years six months ten days (which was a reduction already after taking into account eleven months twenty days spent on remand) and a non-parole sentence of nine years six months ten days from 22 October 2007 (when he was found guilty) to 1 May 2017.

At the time Chen claimed to have purchased the business in October 2006, he had already been charged, and was facing requirements to provide affidavits of his assets and liabilities under the proceeds of crime legislation. In February 2007 Chen provided such an affidavit. That affidavit did not refer to any interest in the business, and nor did it include some other liabilities which were relevant to his account as to how he acquired the business.

Mr Chen said that this was because the affidavit only had to deal with his assets as at 18 October 2006, because the requirement to file the affidavit related to a claim by a Mr Au to the return of a sum of $130,000 found by Australian Federal Police in a vehicle driven by Mr Au and in which Peter was a passenger and seized by them. The judge didn’t buy this.

The Zhangs said that the fact that Mr Chen didn’t mention his interest was because he didn’t own any share in the business. The judge wasn’t so sure about that either.

There is a lot more detail in the judgment which if you are interested you will have to read yourself.

His Honour was not convinced by any of the critical witnesses on either side:

There were a number of aspects of the evidence of each of Peter, Carol, Ms Kuen [Peter’s sister, who he said had lent him money], William and Vincent which make it difficult to accept their credibility. I was left with the impression that they have each endeavoured to present a version of events that avoids the truth, because, for differing reasons, the truth is uncomfortable for them.

Whoever owned the business, the proceedings exposed that double accounts had been maintained and that large amounts of money had been taken out of the business which had not been disclosed to the relevant authorities, including (no surprise here) the tax office. There were also questions of whether the arrangement was entered into to conceal the involvement of Mr Chen, who had a criminal record, from the liquor licencing authorities.

71 Given that neither Peter, on the one hand, or the Zhangs on the other, assert that what was done was part of a scheme to permit Peter to retain his interest but to avoid the business falling under the scrutiny of or within the grasp of authorities, or to preclude rejection or termination of the liquor license, I am left with two competing versions of events as to what occurred, neither of which, in my view, is supported by credible evidence. The plaintiff bears the onus of proof and has failed to establish the agreement asserted. In my view, the plaintiff’s summons should be dismissed.
72 If I had been persuaded that an agreement was reached between Peter and William in the terms alleged by Peter, then, in my view the obvious inference and the one which I would draw, is that it was made in an endeavour to hide Peter’s involvement in the business in order to avoid the prospect of scrutiny and possible seizure of assets by the AFP/ACC and to enable the business to obtain and retain a liquor license that would not have been able to be obtained or retained, had his involvement been disclosed. In my view, the Court should not grant equitable relief in such circumstances: see the discussion in Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (4th edn) 3:110-135 and Kettle and Gas Appliances Ltd v Anthony Hordern and Sons Ltd (1934) 35 SR (NSW) 108, 51 WN (NSW) 190 per Long Innes J, p 93, which although dealing with a different type of case, provides an example of misconduct or deception that will suffice to enliven the operation of the maxim. This lack of “clean hands” or illegality argument was not advanced by the defendant (it is inconsistent with their version of what occurred) but I raised the point during the hearing and in my view it is not dependent on the position taken by the defendant for their own forensic reasons. Mr Gracie argued that to preclude relief would leave the business in the hands of a wrongdoer and that referral of the matters to the relevant authorities would suffice. I do not accept that the Court, exercising its equitable jurisdiction, should grant relief where a party has entered upon a scheme of deliberate deception of public authorities.

But this did not mean that the defendants should get off scot-free:

75 It seems clear on the balance of probabilities that Peter has not provided full details of his assets and liabilities to this Court, and to the AFP or ACC even on his evidence, because he says he owed his sister a further $117,0000 as at 27 February 2007. From the copy of the taxation return of Global in evidence, and Exhibits including H, 9 and 10, it appears that Global may not have declared all of its earnings to the Australian Taxation Office and it is possible on Carol’s evidence that insufficient payroll tax has been paid by Global in respect of wages. I think that the evidence of William and Vincent concerning the deposit of $46,000 in five separate payments raises issues as to possible breaches of the Financial Reporting legislation. I direct the Registrar to provide a copy of this judgment to:
(1) the Australian Federal Police
(2) the Australian Crime Commission
(3) the Australian Taxation Office
(4) the Registrar of the Liquor Licensing Court
(5) the Office of State Revenue (in relation to possible payroll tax issues)
so that these matters can be investigated, should the relevant authorities regard that as appropriate.

76 I direct that Exhibits be held by the Court for a period of six months to allow any of the above authorities to make applications to the Court for access to the documents.

Note about money laundering sentences

Mr Chen is appealing the money-laundering conviction. [Postscript: the appeal, including an appeal against the sentence, has since been dismissed.] As to that stiff sentence, the reasons for this can be followed up in the Court of Criminal Appeal’s judgment in a rare crown appeal against the sentence dished out to the subordinate who actually carried out the transactions. In this they increased the sentence at first instance of 3 years (one year and nine months non-parole) to five and a half years with 3 years and 4 months non-parole. The offence hinges around knowing or being reckless that the funds are to be an instrument of crime. If the crime in question is tax evasion (Mr Chen had a legitimate business exporting seafood, in particular abalone, to Asia, and the subordinate at least was sentenced on the basis that he believed that this was the source of the funds) then these sentences for money laundering seem pretty stiff in comparison to the actual sentences that are generally dished out for tax offences themselves, let alone other white collar crimes involving much larger amounts of money.

For further explanation of the title of this post, see Papers referred.

Further postscript:

This is more a nuts and bolts point from the perspective of a practitioner and the perrennial problem of being paid.

Mr Chen also appealed Rein J’s decision, unsuccessfully, as it turned out. This morphed into a disciplinary complaint against his solicitor, brought following a complaint by his barrister, who wasn’t paid for the appeal (Ms Liu ducked out of the appeal hearing at lunch time, ostensibly to get a cheque from the Bank, but never returned) which was ultimately dismissed in August 2012. It doesn’t look as if the solicitor got paid at all, as the money which was paid into trust at the start to pay the costs of the trial at first instance all went to the barrister, and the appeal thereafter seems to have been conducted on spec.

2 Responses to “Papers referred 2”

  1. Phillip S. Glanville Says:

    I would like to use this article in Equity & Trusts, but how do I reference this article?

    • marcellous Says:

      The usual mode is [url reference – in this case “” ] plus [date retrieved – whenever you read it]. If you need an author field and title, then I suggest “Marcellous [pseudonymous] and “Papers referred 2.”

      There is an “a dog he stole a sausage” problem about your comment and my reply, but I think you can just deal with that by putting the date when you originally read the post, provided you are satisfied that it has not changed since then (as opposed to having acquired your comment and my reply).

      Good luck! Posterity is waiting for me!

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