The recent decision of the New South Wales Court of Appeal in City Garden Australia Pty Ltd (in liq) v Meng Dai[1] (‘City Garden’) represents a significant departure from established principles of corporate law, with far-reaching implications for small businesses operating through private limited companies. The judgment, if left uncorrected, risks becoming a “charter for fraud”, as presciently warned in Northside Developments Pty Ltd v Registrar-General[2]. By misapplying key provisions of the Corporations Act 2001 (Cth) (“the Act”), the Court of Appeal has introduced undue complexity and risk for small business entities, while undermining the statutory balance intended by Parliament.

Misapplication of Statutory Assumptions (sections 128–129)

1. Overextension of s 129(5)

Sections 127–130 of the Act operate as an interdependent framework designed to protect companies, shareholders, creditors, and third parties. The Court of Appeal erred by permitting lenders to rely on sections 127(1) and 129(5) (duly executed documents) in isolation from sections 129(2) and 129(3) (valid appointment and authority of officers). This approach contravenes the Act’s purposive structure.

a. Cumulative operation: Sections 129(1)–(3) establish foundational assumptions about authority (e.g. valid appointments), while sections 129(4)–(6) address performance of duties. The Court of Appeal’s reliance on Caratti v Mammoth Investments Pty Ltd[3] to treat section 129(5) as standalone ignores the need for prior validation under sections 129(2)–(3).[4] As noted in Great Investments Ltd v Warner, these provisions are interdependent.[5]

b. Policy implications: The judgment facilitates fraud by allowing third parties to rely on superficially valid documents without verifying underlying authority. This undermines the delicate balance Parliament sought to achieve between corporate governance and third-party protection, as emphasised in Northside.

2. Incorrect Attribution of “Information Provided by the Company”

The Court of Appeal held that ASIC records lodged by an unauthorised agent (SSA/SWA) constituted “information provided by the company” under section 129(2). This conclusion is flawed for three reasons:

a. Lack of board authority: The Form 484 (appointing Zhu as secretary) was lodged by Mr. Dai without director Liang’s approval. In Wood v Inglis[6], such unilateral acts cannot bind the company unless ratified by the board.

b. Incorrect application of Presumption: The Court of Appeal incorrectly applied the operation of the presumption under section 129(2) to the unauthorised appointment of SSA/SWA by Dai.[7]

c. Statutory context: Section 129(2) requires the company itself to provide information. Allowing unauthorised filings to satisfy this requirement renders the phrase “provided by the company” redundant, contrary to statutory interpretation principles: Project Blue Sky Inc v Australian Broadcasting Authority[8].

3. Failure to Properly Apply section 128(4) (Knowledge/Suspicion Exception) The Court of Appeal incorrectly narrowed the scope of section 128(4), which disentitles reliance on assumptions if a party “knew or suspected” they were incorrect:

a. Imputed knowledge: The Court of Appeal dismissed the lenders’ solicitors’ knowledge as irrelevant, citing Correa v Whittingham.[9] However, solicitors acting for lenders in the transaction are agents whose knowledge should be imputed to their clients under general agency principles: Sargent v ASL Developments Ltd.[10] The Court of Appeal’s distinction between “actual” and “imputed” knowledge is artificial and ignores equitable doctrines like wilful blindness: Bank of Credit and Commerce International (Overseas) Ltd v Akindele[11].

b. Factual omissions: The lenders knew the loans benefited Dai’s builder company (MTRP), not City Garden, and involved breaches of fiduciary duty by Dai. The Court of Appeal’s finding that lenders lacked “actual suspicion” overlooks objective evidence (e.g., diversion of funds, exorbitant interest rates) that should have triggered inquiry: Northside[12].

4. Mischaracterisation of “Dealings” under section 128(1)

The Court of Appeal broadly defined “dealings” to include negotiations with a director (Mr. Dai) acting fraudulently. This is erroneous because:

a. No valid authority: A director negotiating in breach of fiduciary duties cannot bind the company: Motor Yacht Sales Australia Pty Ltd t/as Boutique Boat Company v Cheng[13] and Southern Cross Commodities Pty Ltd (in liq) v Ewing[14]. The lenders’ knowledge of Dai’s conflicts should have precluded reliance on statutory assumptions.

b. Policy distortion: The judgment incentivises reckless lending by shielding parties who ignore red flags, contrary to the Act’s aim of balancing corporate integrity and third-party protection.

5. No duty to correct ASIC records

The Court of Appeal misapplied 183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd[15] by suggesting City Garden had a duty to correct ASIC records promptly. Liang had no actual knowledge of the false filings until February 2020 and he acted immediately to rectify them.

6. Consequences of the Errors

The Court of Appeal’s judgment has severe practical implications:

a. Fraud facilitation: It enables rogue directors to exploit statutory assumptions by lodging false documents with ASIC to collude with supine lenders, leaving companies liable for unauthorised transactions.

b. Injustice to creditors/shareholders: City Garden’s creditors and shareholders lost $22 million in assets due to fraudulent loans of $5.3 million procured by Dai with the complicity of supine lenders.

7. Unaddressed Authorities cited by City Garden in its written Submissions

a. Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 454 (what is “actual knowledge”).

b. Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 398 and 412 (what is “actual knowledge”).

c. Motor Yacht Sales Australia Pty Ltd t/as Boutique Boat Company v Cheng [2021] NSWSC 1141, [135] (power of a director to bind the company in contract).

d. Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 14 ACLR 39, 50 (whether a company can consent to and absolve fraudulent misapplication of its property through the knowledge and consent of a fraudulent dominant director and shareholder).

e. Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250, 261-2 (imputation of the knowledge of a fraudulent agent on his principal).

Conclusion

The NSW Court of Appeal in City Garden misinterprets the Corporations Act by:

a. Severing the link between section 129(2)–(3) and sections 127(1) and 129(5).

b. Ignoring the knowledge/suspicion exception in section 128(4).

c. Expanding “dealings” to include fraudulent.

d. Misapplying estoppel.

These errors warrant intervention by the High Court of Australia to clarify the operation of the Act and restore the balance between corporate governance and third-party reliance.

Francis Lim appeared as Solicitor-Advocate for City Garden Australia Pty Ltd (in liquidation) in the above appeal (with David Lim instructing him), and his fees were funded by its major creditors. Unfortunately, City Garden’s liquidators refused to instruct his firm to apply for special leave to appeal to the High Court although as instructed by its major creditors, he had drafted the Application for Special Leave to Appeal to the High Court.

[1] [2024] NSWCA 238 (‘City Garden’).

[2] (1990) 170 CLR 146 (‘Northside’).

[3] (2016) 50 WAR 84, 173 [396] & [400] (Buss JA, Newnes and Murphy JJA agreeing at 219 [627]).

[4]  See [37]-[39] of the City Garden decision.

[5] (2016) 243 FCR 516, 541-2 [98]-[102] (Jagot, Edelman and Moshinsky JJ).

[6]  [2008] NSWSC 1147.

[7]  See [30]-[36] of the City Garden decision.

[8]  (1998) 194 CLR 355, 381-2 [69]-[71] (McHugh, Gummow, Kirby and Hayne JJ).

[9]  [2013] NSWCA 263.

[10]  (1974) 131 CLR 634.

[11] [2001] Ch 437, 454.

[12] Northside (n 2) 183 (Brennan J).

[13] [2021] NSWSC 1141 [135].

[14] (1988) 14 ACLR 39, 50 (Supreme Court of South Australia Full Court).

[15] [2023] NSWCA 72.

A further update on the Mortgage Fraud case in which Francis Lim appeared as Counsel for the Landowner. The Mortgagees’ appeal to the NSW Court of Appeal was dismissed, their registered Mortgages were held by the Court to have secured nothing and therefore their sale of our client’s Lands was unlawful. The Mortgagees through their Solicitors and Counsel had earlier agreed before the learned Judge for the proceeds of sale to be released to the Landowner if the learned Judge finds that the Mortgages secured nothing.

The above did not stop the Mortgagees, with the advice and assistance from their Solicitors (a top-tier boutique law firm who are specialists in mortgage law and commercial litigation) and a Senior Counsel, from applying for an Injunction to further prevent the Landowner from having access to the proceeds of sale held in Court. What they did was similar to the illustration given by Kerr LJ in Z Ltd v A-Z and AA-LL [1982] 1 QB 558 at 585 which his Lordship regarded as an abuse of procedure, is where it is used as a means of enabling a person to do the following:

1. make a payment under a contract… to someone in circumstances where he regards the demand for the payment as unjustifiable; or where he actually believes, or even knows, that the demand is unlawful;
2. he obtains a Mareva injunction ex parte in advance of the payment,
3. then immediately served the Mareva injunction which has the effect of “freezing” the sum paid over.

Fortunately for the Landowner, the learned Judge accepted Francis Lim’s submissions and dismissed the Mortgagees’ application for an Injunction. The judgment is reported as Winau Australia Pty Ltd v LCC Property Development Pty Ltd [2021] NSWSC 612, and can be found here: www.caselaw.nsw.gov.au/decision/179c0b97d4b15896a23c745f

An update on the Mortgagees’ appeal to the NSW Court of Appeal. We have just received the decision of the NSW Court of Appeal where Mr. Francis Lim appeared as Counsel for the innocent landowners. The Court of Appeal comprising MacFarlan, Leeming & Brereton JJA dismissed the appeal.

1. This decision demonstrates the importance of Mortgagees or Solicitors representing Mortgagees ensuring the following matters are carefully attended to:
a) If the Mortgagor is a private individual (not a company), to take reasonable steps to verify the identity of the Mortgagor to ensure that the person who executed the Mortgage is the same person who is the registered proprietor of the land to be mortgaged.
b) If the Mortgagor is a Company, to take reasonable steps to verify the authority of the person(s) who signed the Mortgage to ensure that the person(s) who signed did not hijack the corporate Mortgagor but was duly appointed as its directors or its sole director. If there was a very recent change of shareholding and directorship, proper steps must be taken to verify the changes with the outgoing shareholder/directors and the changes supported by documents.
c) Where possible, register all material terms or special conditions as an annexure to the Mortgage so that these material terms or special conditions are still protected by indefeasibility in the event of forgery of the mortgagor’s signature or the person(s) who executed on behalf of a corporate mortgagor did not have the lawful authority to do so. Apparently in Victoria, electronic conveyancing does not permit any annexure to the Mortgage form, but you can type additional terms in the Mortgage form. In many reported cases where the loan agreement was signed by a fraudster, it was held to be void against the registered landowner because the loan agreement was invariably not registered.

2. This decision also demonstrates the importance of ensuring that the loan amount was indeed advanced to the Mortgagor/Borrower for the following reasons:
a) Money obtained by the fraudster from the Mortgagees by defrauding them and impersonating the Mortgagor is not an “advance”. An “advance” is a voluntary act causing payment to be made to the intended recipient or at its direction.
b) Even if it is assumed that the Mortgage identified the amount intended to be secured and there was acknowledgement of receipt of the amount by the Mortgagor, this constitutes at best prima facie evidence of what is asserted and must yield to the facts as proved.
3. Finally, the Court rejected the Mortgagees’ submission that the Mortgage also secured the liability of the guarantor (the fraudster in this case) because the unregistered Schedule A referred to the Guarantor also as a Debtor and Borrower. The Court held that the unregistered Schedule A was void against the corporate Mortgagor because it was signed by the fraudster without any lawful authority and the registered Schedule A only referred to liabilities of the “Debtor” and the “Borrower”.

Their Honours’ judgment is reported as Ippin Textiles Pty Ltd v Winau Aust Pty Ltd [2021] NSWCA 9, and can be found here: https://www.caselaw.nsw.gov.au/decision/1778e4fdd20b3d51ac6e9aad

In light of the Stage 4 restrictions imposed by the Victorian government to combat COVID-19, many corporate offices (including law firms) must now close their offices and work from home. All of our staff have transitioned to working from home since March 2020 and we reassure you that our service to our valued clients and the wider community will be maintained throughout the pandemic.

We continue to be open for business, and we are contactable by telephone or e-mail. If you require an appointment with us, we can meet with you via video-conference (e.g. Zoom, Skype or WhatsApp video). If it is absolutely necessary for us to have a face-to-face meeting with you at our office, then this can be arranged. Click on the “Contact Us” tab on our website to get in touch with us.

As an update, we are pleased that in April 2020 our client succeeded in its claim against the mortgagees. For a brief summary of the decision of the NSW Supreme Court, have a look at our case file entitled “Case Study 7: Winau Aust Pty Ltd & Ors. v. LCC Property Development Pty Ltd & Ors. [2020] NSWSC 434”.

At the request of the mortgagees, the Court has granted leave for them to make further submissions on whether or not the mortgage has an express acknowledgment of receipt of the loan amount, and whether or not the mortgage is a “freestanding obligation to pay”. On 19 May 2020, His Honour Justice Kunc held that there is no express acknowledgment of receipt of the loan amount in the mortgage, and the mortgage is not a “freestanding obligation to pay”.

His Honour’s judgment is reported as Winau Aust Pty Ltd & Ors. v. LCC Property Development Pty Ltd & Ors. (No 2) [2020] NSWSC 586, and can be found here: https://www.caselaw.nsw.gov.au/decision/5ec3188ee4b0d927f74afec9

We are currently representing clients who have lost lands worth millions of dollars in a case before the Supreme Court of NSW.

The lands were held in the name of a Company. A fraudster forged the signatures of the directors, shareholders and secretary of the Company. With the intentional or reckless assistance of an accountant who is a registered ASIC agent, he lodged with ASIC 2 Forms 484 to register himself as the sole director, shareholder and secretary of the Company.

The fraudster then applied for replacement titles for the lands and mortgaged those lands to private lenders for a multi-million dollar short term loan at a very high-interest rate. The fraudster opened a new bank account in the name of the company to receive the loan amount. The loan was not repaid, and the private lenders sold the lands below the original purchase price the company paid for the Lands.

Fortunately, the proceeds of the sale are being held in Court and not paid to the private lenders. Our clients commenced court proceedings against the private lenders/mortgagees, the accountant and the Registrar General of NSW to recover their losses.

We believe that this case is a first in Australia, in which a fraudster has deprived a corporate landowner of lands by high-jacking a company through forgery and re-mortgaging to private lenders.