Background
Fei Zhao invested $3 million in the QCAX Australian Property Income Fund II (Bensons Series) in October 2017 to satisfy requirements for a Significant Investor visa. He received some, but not all, of the interest due and ultimately lost the entire principal. Before investing, he received a brochure concerning a different QCAX fund and allegedly heard assurances from his migration agent that the investment was low risk, secure, and guaranteed.
Zhao also received the information memorandum for the fund in which he actually invested. It stated that neither the fund entities nor their associates guaranteed the fund’s performance, return of capital, or any specific return, and it disclosed credit, concentration, and other risks. His bilingual application form acknowledged that capital and performance were not guaranteed. Zhao later extended the investment for two years under an updated memorandum containing materially similar terms.
Seeking information to decide whether to sue, Zhao applied under rule 7.23 of the Federal Court Rules 2011 (Cth) for preliminary discovery from the former and replacement fund trustees, the investment manager, an Australian financial services licensee, Bensons Funds Management, and two corporate officers. His proposed claims included misleading or deceptive conduct, breach of trust or fiduciary duty, knowing receipt, and tracing.
The Court’s Holding
Justice Owens dismissed the application with costs. Rule 7.23 required Zhao to hold a subjective belief, supported by an objectively reasonable basis, that he might have a right to relief against each prospective respondent. Suspicion, assertion, and speculation were insufficient. Zhao’s evidence—largely supplied through affidavits from his solicitor rather than Zhao himself—did not adequately establish the primary facts underlying the proposed claims.
The Court found no reasonable basis for believing that the respondents were responsible for statements allegedly made by Zhao’s migration agent or had engaged in misleading conduct. The investment was made consistently with the information memorandum for QCAX Fund II, which disclosed the relevant structure and risks and contradicted any suggestion that Zhao’s capital or returns were guaranteed. Nor was there evidence that investment money had been dealt with contrary to the fund’s terms, that Bensons Funds Management knowingly received misapplied funds, or that the individual officers participated in wrongdoing.
The Court also held that preliminary discovery cannot be used merely to investigate whether a prospective defendant has enough assets to satisfy a judgment. The requested personal asset records, tax returns, financial statements, and bank statements of the individual respondents concerned recoverability rather than whether Zhao had a right to relief. His alternative tracing theory rested on speculation that the individuals had received his money through unlawful conduct.
Key Takeaways
- A preliminary-discovery applicant must show an objectively reasonable basis for a possible claim against each person from whom discovery is sought; speculation about interconnected entities is not enough.
- Contemporaneous investment documents, acknowledgments, and risk disclosures may defeat a claimed reasonable belief that contrary promotional statements created an actionable claim.
- Rule 7.23 does not authorize discovery aimed only at assessing a prospective defendant’s ability to satisfy a future judgment.
Why It Matters
The decision reinforces that preliminary discovery is a targeted procedure for resolving genuine uncertainty about whether a cause of action exists, not a means of searching for wrongdoing after an investment loss. Applicants must connect evidence to a coherent potential claim against every proposed respondent and identify documents directly relevant to that claim.
For investment disputes, the ruling also highlights the importance of the precise fund identified in the application materials, the disclosures made in the governing information memorandum, and the investor’s written acknowledgments. Representations about another product, or unattributed assurances from an intermediary, will not by themselves justify discovery from fund entities without evidence linking those entities to the alleged conduct.