DE ALWIS AND ORS V CHEAN HC AK CIV 2007-404-005357 [2009] NZHC 677 (5 June 2009)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
                                                                             
  CIV 2007-404-005357



               BETWEEN                             HERALD VICTOR DE ALWIS
                             
                     First Plaintiff

               AND                                 MARGARET ELIZABETH DE ALWIS
           
                                       AND HERALD VICTOR DE ALWIS
                                                   Second Plaintiffs

               AND                                 JOHN WAH KUM
                                                   Third Plaintiff

               AND                                 CONNIE FAY LING KUM
                                                   Fourth
Plaintiff

               AND                                 MARSHA ADRIENNE TAI PING TAN
                                     
             Fifth Plaintiff

               AND                                 PETER WEE
                                     
             Sixth Plaintiff

               AND                                 PAUL SENG POH KHOR
                            
                      Seventh Plaintiff

               AND                                 AI NEE CHEAN
                       
                           Defendant


Hearing:       1 April and 22 April 2009

Appearances: Mr Neil for Plaintiffs
           
 Mr Orlov for Defendant

Judgment:      5 June 2009 at 11.30 am


                       JUDGMENT OF WINKELMANN J
              [application
for variation of asset preservation orders]


                 This judgment was delivered by me on 5 June 2009 at 11.30 am pursuant
to
                                    Rule 11.5 of the High Court Rules.


                                       Registrar/ Deputy
Registrar



DE ALWIS AND ORS V CHEAN HC AK CIV 2007-404-005357 5 June 2009
[1]    The defendant, Ms Ai Nee Chean, applies to have
the asset preservation order
granted by this Court on 30 August 2007 varied on the ground that it does not allow
her to maintain
her standard of living.


[2]    In the substantive proceedings underlying the asset preservation order, the
plaintiffs seek to recover
a total of $1.68 million invested in Luvit Foods
International Limited (Luvit). The plaintiffs have been pursuing the recovery of
that
amount for approximately six and a half years.


[3]    The defendant's husband, Mr James Chean, was a director of Luvit. He
was
appointed a director upon the incorporation of Luvit on 9 April 1999. The defendant
was also a director, but appointed after
the allotment of the shares.            In earlier
proceedings, Courtney J determined that there was a breach of the Securities Act
in
respect of the allotment of the shares (De Alwis & Ors v Luvit Foods International
 [2007] 10 NZCLC 26,304).         Courtney J ordered that the amounts paid by the
plaintiffs for the shares be refunded.      The defendant was not a
party to those
proceedings. These proceedings were subsequently issued to seek repayment of
these subscriptions from the defendant.
Summary judgment was originally sought
and was granted by Faire AJ. He held that although Ms Chean was not a party to the
Luvit Food
proceedings, issue estoppel applied with regard to the relevant matters
decided by Courtney J, because Ms Chean was a director of
one of the parties, and it
followed that she was bound by Courtney J's findings.


[4]    Faire AJ's decision was appealed to the
Court of Appeal (Chean v De Alwis
 [2009] NZCA 98).       The Court of Appeal allowed the appeal.            Its reasons for
allowing the appeal are set out at paragraphs 12 to 14:

       [12]     Turning now to the merits of the proposed appeal, we would have
       been in agreement with the respondents that
the appeal is wholly without
       merit if Mrs Chean had been a director of Luvit at the time of the issuing of
       the relevant
shares. However, that was not the case. She was only appointed
       formally as a director on 15 October 2001. (We understand that
the
       respondents maintain that Mrs Chean was a de facto director of Luvit before
       that date but accept that this contention
could not be determined on a
       summary judgment application.)
       [13]     In the circumstances, the date of Mrs Chean's
appointment as a
       director may be relevant to the application of the Canadian cases applied by
       the Associate Judge at
[55] of his summary judgment decision. These cases
       held that, in cases of trusts imposed by statute, a person receiving funds
will
       be deemed to have knowledge of the trust as ignorance of the law is no
       defence. There is also the question, in
relation to s 37(6) of the Securities
       Act, of the extent to which there may or may not be a duty to inquire into
       previous
share issues on becoming a director and whether that is relevant to
       the question of whether the proviso is engaged. Further,
there may be an
       issue regarding the extent to which issue estoppel in relation to Courtney J's
       judgment applies, given
that Mrs Chean was not a director at the time of the
       share allotments (although she was a director at the time of the judgment).

       [14]     Although the timing of Mrs Chean becoming a director of Luvit was
       mentioned by the Associate Judge, it does
not appear to have been
       specifically focussed on, particularly with regard to the knowing receipt
       cause of action.
In the circumstances, we consider that it is in the interests of
       justice that the issue as to the date of Mrs Chean's appointment
be canvassed
       on appeal and thus that an extension of time for filing the case on appeal
       should be granted and that
the respondents' application to strike out the
       appeal be declined. However, an application may be made again should the
 
     timetable set out below not be adhered to.

[5]    Prior to the hearing of that application for summary judgment, an asset
preservation
order had been made in respect of the proceeds of sale of a property at
Ramona Mews, Howick. Botany Law, who acted for Ms Chean on
the sale, advised
they held $430,000 pursuant to the sale. The order freezing that amount exempted
from its effect one-half of the
proceeds. This was because of an agreement reached
between Ms Chean and the Official Assignee to enable the sale of the property
to
proceed while preserving the Official Assignee's claim to half of the property as an
asset in the bankruptcy of Mr Chean.


[6]
   Ms Chean now applies to have the asset preservation order varied. The
grounds initially relied upon were first, that the orders
did not allow her to maintain
an adequate standard of living and secondly, that she urgently required funds to
conduct a legal proceeding.
This second ground was withdrawn shortly following
the hearing on the basis that legal aid had been granted. Counsel for Ms Chean,
Mr Orlov, says that a fresh application for payment of legal costs may be brought
should legal aid not be available to pursue some
necessary aspects of the overall
litigation. It is reasonable that such leave is reserved to Ms Chean. Given the inter-
relationship
of the earlier proceedings (to which the judgment of Courtney J relates),
and these proceedings, it is a reasonably complex litigation
landscape that Ms Chean
must navigate if she is ultimately to succeed.


[7]    At the hearing there was an issue between the parties
as to whether old r 239
of the High Court Rules applies or whether the new procedures and new provisions
under Part 32 of the High Court Rules apply.
Counsel for the plaintiff submits that
the application should fall to be decided under r 239 of the old High Court Rules.
Counsel
for the defendant submits that the new rules should apply. The new High
Court Rules came into effect on 1 February 2009, but are
subject to transitional
provisions.


[8]    The transitional provision is found in s 9 of the Judicature (High Court Rules)
Amendment
Act 2008.


       9       Transitional provisions

       (1)    Subsections (2) to (5) of this section apply to a proceeding that
is
       commenced before the commencement of section 8 and that has not been
       completed by that date (a pending proceeding).

       (2)     A pending proceeding must be continued, completed, and enforced
       under the High Court Rules set out in Schedule
2 as substituted by section 8.

       (3)     Subsection (2) is subject to subsection (4).

       (4)     If, -

             
 (a)     on the commencement of section 8, time is running on the
                       period within which the High Court Rules
require or permit
                       a step to be taken in a pending proceeding; and

               (b)     the period prescribed
by the High Court Rules in respect of
                       that step, as in force immediately before that
                    
  commencement, differs from that prescribed on that
                       commencement,-- then the period required or permitted
for
                       that step is the longer period.

       (5)     Subsection (4) does not apply to any order made by a Judge.

       (6)     If judgment has been sealed in a proceeding commenced before the
       commencement of section 8, any enforcement
process permitted by the new
       High Court Rules as substituted by that section may be issued, but any
       execution or enforcement
process that has been issued but not completed
       before that commencement must be completed as if section 8 had not been
  
    enacted.
       (7)     In this section, -

       Judge includes an Associate Judge

       Judgment includes a decree or order
of the court

       Proceeding means any application to the court, however commenced, for the
       exercise of the civil jurisdiction
of the court.

[9]    Under s 9(2) if a proceeding began before the commencement of the new
rules, and it has not been completed,
then the new rules apply. The only situations
where the now repealed rules might apply are set out in subsections (4) and (6).
These
refer to the running of time periods and execution and enforcement processes.
It is clear, therefore, that the provisions of Part
32 apply.


[10]   The principal difference between r 239 and the new Part 32 is that Rule 32.6
expressly provides that the freezing
order must not prohibit the respondent from
using the assets covered by the order to pay ordinary living expenses, or legal
expenses
relating to the freezing order. There is no such express provision in Rule
239.


[11]   Ultimately it makes no difference to the
outcome of this application which set
of rules apply. The stipulation in Rule 32.6 seems to be no more than a codification
of the
existing common law position. Under either rule, it is clear that the defendant
is entitled to her reasonable living expenses, at
least if she has no other means from
which to meet these. As was said in PCW (Underwriting Agencies) Ltd v Dixon
 (1983) 2 All ER 158, 162:

       It was consistent with the policy underlying the Mareva jurisdiction that the
       defendant should be allowed to
pay his debts as they fall due. The purpose of
       the jurisdiction is not to secure priority for the plaintiff; still less, I
would
       add, to punish the defendant for his alleged misdeeds. The sole purpose or
       justification for the Mareva order
is to prevent the plaintiffs being cheated
       out of the proceeds of their action, should it be successful, by the defendant
       either transferring his assets abroad or dissipating his assets within the
       jurisdiction: see Z Ltd v A  [1982] 1 All ER 556 at 561, 571,  [1982] QB 558
       at 571, 584 per Lord Denning MR and Kerr LJ.

[12]   The plaintiff objects that it would be unjust or inappropriate to vary
the order
because the frozen funds represent the only means by which the defendant can
satisfy the judgment. Any variation will substantially
reduce the funds available to
the plaintiff. This could well render the plaintiff's judgment nugatory and cause
further injustice.
Secondly, the frozen funds may be impressed with a trust in the
plaintiff's favour, and any variation would be a breach of that trust.


[13]   In relation to both of these objections, it should be observed that the plaintiffs
have yet to make their case against Ms
Chean, and as is apparent from the Court of
Appeal judgment, it is by no means certain that they will be able to do so.


[14]  
As to the second ground, that the funds were impressed with a trust, Mr Neill
confirmed that notwithstanding lengthy investigations
on the part of the plaintiffs, no
evidence had been identified which suggests any ability at law to trace the
subscription funds
to either the purchase of the house or repayments made under the
mortgage on the house. It is difficult, therefore, to see on what
basis an argument
could be constructed that those funds were impressed with a trust.


[15]   Ms Chean provided affidavit evidence
in which she confirmed that she has
exhausted all alternative means of providing a basic standard of living for her and
her child.
She is not working at present because of the current litigation, and so she
can continue to be a stay-at-home mother. She confirms
that Work & Income have
declined her financial help. She has been forced to borrow from family and friends,
sell everything of value
and exhaust her child's education fund. She has provided an
itemised list of weekly living expenses totaling $1205.


[16]   Counsel
for the plaintiffs accept that based on the Statistics New Zealand
household economic survey for the year ended 30 June 2007, the
average weekly
household and expenditure for the Auckland region was $1046 per week for the year
ending 30 June 2007.       But the
plaintiffs complain that Ms Chean's husband
continues to live with her, and that varying the order would effectively mean that the
plaintiffs would be subsiding his lifestyle. The plaintiffs seek a reduction in the
allowance to remove this possibility.


[17]
  I am satisfied that an allowance of $1205 per week provides a reasonable
allowance for living expenses for Ms Chean and her child.
In the face of such a
modest allowance, I see no justification for a reduction to accommodate the
plaintiffs' concerns. Freezing
orders are not designed to punish defendants, nor are
they intended to allow plaintiffs de facto control over the defendants.


[18]
   The asset preservation orders are hereby varied to allow the defendant to pay
her reasonable living expenses to the extent of
$1205 per week. Counsel for the
plaintiffs and defendant are to make all necessary arrangements to see that these
orders are given
effect forthwith.


[19]    The defendant is entitled to costs on this application on the basis of a 2B
calculation.




       
                                             Winkelmann J



Meredith Connell, Auckland
E Orlov, Barrister, Auckland