Peng v Wang[2021] QCA 113

SUPREME COURT OF QUEENSLAND

1. [1]
   MULLINS JA:  The appellant, Ms Peng, was the unsuccessful second defendant in the proceeding below brought by the respondent, Ms Wang, as plaintiff to enforce the guarantees given in her favour by Ms Peng and her husband, Mr Jackson Gao, who was the first defendant in that proceeding.  Mr Gao was the sole director and shareholder of Kstar Group Australia Pty Ltd which manufactured solar inverters.  Ms Wang lent Kstar $500,000 pursuant to a deed of loan dated 13 January 2012 that included guarantees given by Mr Gao and Ms Peng.  The loan was not repaid on the due date for repayment of 31 December 2014 by Kstar which went into liquidation on 25 August 2016 and was subsequently deregistered.  Ms Wang sued Mr Gao and Ms Peng on their guarantees and was successful in obtaining judgment against each of them in the sum of $660,266.07: Wang v Gao & Anor [2020] QDC 298 (the reasons).
2. [2]
   Ms Peng had defended the proceeding on the basis that it was unconscionable for Ms Wang to enforce the guarantee against her on the basis of the second limb of Yerkey v Jones (1939) 63 CLR 649, 683-684.  Solicitor Mr Zhu who acted for Kstar had explained the deed of loan that included Ms Peng’s guarantee before she signed the document as guarantor and the caveat over Ms Peng’s property that she also signed in Mr Zhu’s presence.  Mr Zhu had with him other documents that had been prepared in support of the transaction which included the share sale agreement, the share call option agreement and the share put option agreement.  Ms Peng’s signature was not required on the share transaction documents and Mr Zhu did not take her through them in detail.  Mr Zhu did explain to Ms Peng the background to the transaction that Ms Wang was looking at some kind of investment arrangement with Kstar in order to satisfy a business visa requirement and that clause 4 of the deed of loan referred to the obligations which Mr Gao and Ms Wang had agreed upon as part of the overall transaction.  Mr Zhu specifically pointed out Kstar’s obligation under clause 4(a) of the deed of loan to keep Ms Wang appointed as a director of the company, but did not draw Ms Peng’s attention to clause 5.2(b) of the share sale agreement.
3. [3]
   The issue before the learned primary judge was whether Ms Peng had discharged the onus she bore of proving she had a material misunderstanding of the transaction.  The primary judge accepted (at [108] of the reasons) that Ms Peng was a volunteer, that she was married and Ms Wang knew of the marriage, but found (at [108] of the reasons) that she had not discharged her obligation to establish she was under a material misunderstanding as to the purport and effect of the transaction which she entered into.  The primary judge preferred (at [109] of the reasons) the evidence of Mr Zhu to that of Ms Peng as to the way in which, and the occasion on which, the documents were signed.  The primary judge found (at [110] of the reasons) that, for the reasons advanced by Ms Wang, the lack of an explanation by Mr Zhu to Ms Peng as to the share sale agreement was not material.  The primary judge had summarised Ms Wang’s submission on this aspect (at [90] of the reasons) to the effect that the lack of explanation about clause 5.2(b)(ii) of the share sale agreement was not material, as a change in governance was always a possibility with any company.

Grounds of appeal

4. [4]
   The focus of the appeal is on the primary judge’s conclusion that an understanding of the related share sale agreement was not material to the transaction that was guaranteed by the appellant.
5. [5]
   The respondent concedes that, if on appeal this court finds the appellant had discharged her onus of demonstrating that she was under a misunderstanding as to the purport and effect of the guarantee of the loan transaction, the remaining three elements identified in Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at [31] are satisfied.
6. [6]
   The appeal is therefore brought on a very narrow basis of whether the concession that Mr Zhu did not explain specifically clause 5.2(b)(ii) of the share sale agreement to Ms Peng meant that the purport and effect of the transaction was not known to Ms Peng.

The deed of loan and related documents

7. [7]
   Under clause 4 of the deed of loan, Kstar was obliged during the whole loan period to observe a number of obligations including, pursuant to clause 4(a), keeping Ms Wang appointed as a company director.  Other obligations under clause 4 included employing at least two full time employees and maintaining the business in a profitable level, an annual turnover of not less than $1m and annual net profit of not less than $200,000 for the 2013 and 2014 calendar years.  Under clause 4(e) of the deed of loan, Kstar was obliged to do all things necessary, and execute all documents necessary, to facilitate Ms Wang’s Australian permanent resident visa application during the loan period, in accordance with the Australian corporations laws and immigration laws and regulations.  Clause 5 of the deed of loan set out the terms of the personal guarantee by Mr Gao and Ms Peng.  Ms Peng acknowledged that she was the legal owner and registered proprietor of the unit which was defined as the Security Property and acknowledged that Mr Gao was an equitable owner of the Security Property.  They irrevocably consented and undertook that Ms Wang was entitled to lodge a second mortgage and/or caveat on the Security Property “as indication and protection of the Lender’s equity interest in the Security Property”.
8. [8]
   The share sale agreement recited that Mr Gao was to transfer some of his shares in Kstar to Ms Wang and in return Ms Wang would loan to the company the sum of $500,000 on the terms set out in another agreement (which was a reference to the deed of loan).  The share sale agreement acknowledged that the issued capital of Kstar was 100 ordinary shares at $1 per share and provided for 30 shares to be transferred for $30 (exclusive of GST).
9. [9]
   Clause 5 of the share sale agreement provided for completion to occur on the completion date which was the later of 31 January 2012, the date which was five business days after fulfilment or waiver of the conditions referred to in clause 3 or any other date agreed upon by the parties before the later of the other dates.  Clause 5.2 set out the obligations of Mr Gao at completion.  Clause 5.2(b) required Mr Gao to ensure “that duly convened meetings of the directors of each group company are held” and that, where applicable, at those meetings the matters then provided for in the clause then occurred.  Clause 5.2(b)(ii) required the meetings of the directors to deal with:

“the appointment as additional directors, secretaries and public officers of the group company of the persons nominated by the purchaser by notice before the completion date who have consented to so act”.

10. [10]
    The concomitant obligation on Ms Wang under clause 5.3(d) of the share sale agreement was, at completion, to “cause sufficient instruments of consent to be available to allow the directors of each group company to pass the resolutions required by cl 5.2(b)(ii)”.  There was no express limitation in the share sale agreement as to the number of additional directors that could be nominated by Ms Wang before the completion date.

Ms Peng’s submissions

11. [11]
    Ms Peng submits that the effect of the share sale agreement was an essential aspect of the overall transaction being guaranteed by the appellant for the following reasons.  At the time she signed the deed of loan, her husband Mr Gao was the sole director and shareholder of Kstar.  The liability Ms Peng was assuming under the deed of loan depended upon Kstar’s ability to perform its obligations under the deed of loan.  The effect of the share sale agreement was to give Ms Wang the power to appoint additional directors to Kstar which meant that the respondent had the power to exercise control over Kstar and its ability to perform its obligations under the deed of loan.  By executing the deed of loan, Ms Peng was guaranteeing the obligations of Kstar over which Ms Wang had a right of control, rather than Mr Gao.  This change of control arose from the share sale agreement and was not explained to Ms Peng.

Was clause 5.2(b)(ii) material to the transaction?

12. [12]
    Ms Peng focuses on the possibility provided for under clause 5.2(b)(ii) of the share sale agreement without considering its operation in the context of the sale of 30 shares out of 100 shares, leaving Mr Gao as the majority shareholder and the implied limitation on the operation of clause 5.2(b)(ii) imposed by clause 4(a) of the deed of loan which imposed an obligation on Kstar only to keep Ms Wang as a director during the loan period.
13. [13]
    As submitted on behalf of Ms Wang, clause 5.2(b)(ii) does not confer a power of appointment on Ms Wang, but requires Mr Gao to convene such meetings of directors to undertake the appointment of directors nominated by Ms Wang before the completion date.  In view of Mr Gao’s retention of the majority shareholding after the completion date, it is therefore not a correct characterisation of Ms Peng’s obligations under her guarantee that she was guaranteeing the obligations of Kstar over which Ms Wang had the right of control by virtue of clause 5.2(b)(ii), rather than Mr Gao.  As submitted by Ms Wang, clause 5.2(b)(ii) did not prevent Mr Gao from retaining control of Kstar.
14. [14]
    There was therefore no error in the primary judge’s conclusion that the lack of explanation by Mr Zhu as to the effect of the share sale agreement, particularly clause 5.2(b)(ii), was material.

Order

15. [15]
    I would therefore order that the appeal be dismissed with costs.
16. [16]
    FRASER JA:  I agree.
17. [17]
    MAZZA AJA:  I agree with Justice Mullins.