Zong v Lin [2022] NSWCA 136

19 Sep Zong v Lin [2022] NSWCA 136

This case is a rare example of the application of s 232 of the Corporations Act 2001 (Cth) (“the Act”) of oppression of a majority shareholder by a minority shareholder, who is also a director, and breach of fiduciary duties by a director representing the minority shareholder.

Facts

Mr Jason Zong and Ms Hui Lin founded a company with the purpose of conducting boat tours called the ‘Australian International Yacht Club Pty Ltd’ (“AIYC”). Mr Zong and Ms Lin were directors and shareholders of the company, with Mr Zong holding a 45% share and Ms Lin holding 55%. Although Ms Lin was the majority shareholder in this case, Mr Zong was given authority to manage the day-to-day operations of AIYC under the shareholders agreement. Courts have found cases of oppression by minority shareholders to be satisfied in rare circumstances, usually where the minority shareholder has operational control over the company.

Ms Lin alleged that Mr Zong in breach of s 232 of the Act, engaged in oppressive conduct by using company funds to purchase a motor cruiser (“the Dauphin”) from his wife without Ms Lin’s knowledge or consent. This conduct was also alleged to be a breach of fiduciary duties to his company which conflicted with his personal interests. Additionally, he transferred money out of the company bank account without Ms Lin’s consent or knowledge, including $55,000 to Mr Junn who was a solicitor acting for Mr Zong.

Ms Lin brought a statutory derivative action under s 237 of the Act against Mr Zong as a minority shareholder of AIYC, alleging breach of director’s duties against Mr Zong. At first instance in the New South Supreme Court, the primary judge found in favour of Ms Lin. Mr Zong appealed this to the New South Wales Court of Appeal.

Decision

The Court of Appeal comprising of Justices Gleeson, Leeming, and Kirk considered the following issues:

1. The proper amount required to reimburse for the overvalued Dauphin purchase.
2. Whether the transfer of company funds by Mr Zong to an account ending in ‘33664’ constituted a breach of fiduciary duty.
3. Whether the primary judge erred in finding that Mr Zong breached his fiduciary duty by transferring $55,000 to his solicitor from company funds.
4. Whether the primary judge erred in his decision to order Mr Zong’s 4,500 shares in the company be acquired by Ms Lin without any sort of payment in exchange.

The Court of Appeal agreed with the primary judge, in that AIYC was entitled to compensation regarding the overvalued motor cruiser. The compensation amount was to be calculated in relation to the ‘…amount by which the purchase price exceeded the Dauphin’s present realisable value, as distinct from its then market value, given any diminution in value flowed from the fact that it was purchased in breach of duty’ [at 12]. Ms Lin’s expert, Mr MacDonald made an assessment that the Dauphin had a value of $110,000. The loss to the company regarding the purchase of the Dauphin amounted to $205,200, with the purchase price being $315,200 and its present realisable value being $110,000. Unsurprisingly, the Court found that an unauthorised transfer from a company account to a personal account breached fiduciary duties.

In 2018, Mr Zong transferred $20,584.01 to himself and $11,999.00 to his wife, claiming these as wages. The Court found that this was in breach of his fiduciary duty as he faced a real and substantial conflict between his duties to AIYC and his personal interests to advance his and his wife’s position. The Court held that the no conflict rule in respect of the fiduciary duty owed by Mr Zong had been breached. This rule illustrates that ‘…the no conflict rule prohibits conduct where a fiduciary has a personal interest or duty owed to a third party which gives rise to a real and sensible possibility of a conflict’ – see Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 at [351].

Similarly, the $55,000 paid to Mr Junn was a breach of Mr Zong’s fiduciary duty due to the no conflict rule. Mr Junn in an email dated 29 April 2019 attempted to inform Ms Lin that he was retained by Mr Zong in the ordinary course of the company’s business affairs. Ms Lin’s solicitors replied on 1 May 2019, stating that Mr Junn’s firm was paid by Mr Zong in breach of his fiduciary duties and in breach of AIYC shareholders agreement which does not ‘…authorise Zong to engage a solicitor to act on behalf of the company in relation to a dispute with the other director’ [at 39]. Mr Junn failed to respond to a subpoena served on 9 October 2020 requesting documents pertaining to a costs disclosure, costs agreement, records of the $55,000 payment, and the services provided to AIYC. This further supported Ms Lin’s claim that Mr Zong retained Mr Junn in his personal capacity. Additionally, the Court found that because Mr Zong had retained Mr Junn as AIYC’s solicitor without Ms Lin’s consent, Mr Junn could not have been appointed for AIYC’s general business dealings. Therefore, a breach of fiduciary duty was found as there was a conflict between Mr Zong’s duties to AIYC, and his personal interest in paying Mr Junn for his services.

The Court upheld the trial judge’s orders including that Mr Zong pay the company $254,535, and dismissed the appeal. Mr Zong’s 4,500 shares in AIYC were ordered to be transferred to Ms Lin without payment. Additionally, Mr Zong was removed as director of AIYC as per s 233(1)(c) of the Act, and costs were ordered against him.