List A barristers Carl Möller, Mark Costello, Xuelin Teo and Anna Batrouney appeared in this case.
The plaintiffs, VicBeef Holdings Pty Ltd and Tabro Meat Pty Ltd, entered into security agreements guaranteeing the indebtedness of a third party (SSIE) to the second defendant, Mr Cai, up to $15 million. The first defendant, Mr Chen, was the director of the plaintiffs and a shareholder and general partner of SSIE.
The plaintiffs sought, inter alia, rescission of the security agreements on the basis that they had been entered into in breach of Mr Chen’s directors’ duties. Mr Chen did not participate in the trial and did not give evidence.
A key issue was whether there was any indirect benefit conferred on VicBeef and Tabro by entering into the security agreements. Mr Cai alleged that VicBeef and Tabro obtained an indirect benefit by way of the provision of a direct benefit (the forestalling of proceedings) to separate entities forming part of the same “group” of companies. Justice Osborne held that there was no indirect benefit to the plaintiffs, and indeed that there was no evidence that the motivating purpose of Mr Chen, or any other director, was to benefit the interests of the relevant group of companies, let alone VicBeef or Tabro.
His Honour concluded that the security agreements were executed to forestall the threatened commencement of litigation in China against SSIE and guarantors of the loan from Mr Cai to SSIE, which included Mr Chen and his wife. The security agreements conferred no benefit on the plaintiffs. The execution of the security agreements placed the plaintiffs in default of security agreements with their bank. Justice Osborne accordingly held that Mr Chen breached the duty of care and diligence, the duty to act in good faith in the best interests of the company, the duty to act for a proper purpose and the “no conflict” rule.
Justice Osborne held that Mr Cai, principally by way of the knowledge of his lawyers which was imputed to Mr Cai, had knowledge of breaches of duty of a fiduciary nature. Accordingly, the plaintiffs were entitled to orders in the nature of equitable rescission.
