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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2009-404-003620
BETWEEN XUE YING ZHU
Plaintiff
AND HUA CHEN
First Defendant
AND ALI MOHAMMED PARKAR
Second Defendant
AND CHERIE LOUISE PARKAR
Third Defendant
AND THE HAT FACTORY 2006 LIMITED
Fourth Defendant
AND CLASSIC LIVING
LIMITED
Fifth Defendant
AND JIAN
HUA LIAO
Sixth Defendant
Hearing: 13 July 2009
Counsel: F C Deliu
and R Zhao for plaintiff
B M Cunningham for defendants
Judgment: 14 August 2009 at 4:00pm
RESERVED
JUDGMENT OF HUGH WILLIAMS J
This judgment was delivered by
The Hon.
Justice Hugh Williams
on
14 August 2009 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules
............ ......... ......... .........
......... .....
Registrar/Deputy Registrar
ZHU V CHEN AND ORS HC AK CIV-2009-404-003620 14 August
2009
A. Leave is granted to Ms Zhu to bring a derivative action in the name of
The Hat Factory 2006 Limited and Classic
Living Limited against the
individual defendants.
B. There will be freezing orders pending further order of the Court
against
all assets in the name of Mr and Mrs Parkar, or in the names of the
trustees of any trust in which they have
a beneficial interest including
the properties at 113 and 115 Rostrevor Street Hamilton and 16/201
Gore Street, Auckland,
with the details of any assets qualifying under
this order beyond those specifically listed being provided by affidavits by
the second and third defendants to be filed and served within 14 days of
delivery of this judgment.
C. There will
be a freezing order issued against 70A Wheturangi Road,
GreenLane, Auckland, extending to Mr Chen and the proprietors of that
property and the trustees of any trust in which he has a beneficial
interest.
Introduction
[1] Between October/November
2005 and June 2008 the plaintiff, Ms Zhu, made
available to the defendants 13 sums totalling NZD$660,000 plus RMB3.37m.
[2]
The phrase "made available" is used advisedly since one of the issues central
to this proceeding is whether those sums were loans
to defendants or investments in
the two corporate defendants, The Hat Factory 2006 Ltd and Classic Living Ltd, and
whether any of
the sums made available have been repaid or properly dealt with as
investments.
[3] Ms Zhu seeks leave to commence proceedings
against the first three
individual defendants, Mr Chen and Mr and Mrs Parkar, in the names of the
corporate defendants. She also
seeks freezing or charging orders against various
assets of the individual defendants, including Ms Liao, the sixth defendant and
Mr
Chen's wife, and freezing orders against the corporate defendants.
[4] This judgment deals with those applications.
Procedural
[5] The following procedural observations are pertinent:
a) Ms Zhu originally sought the freezing and charging orders
on a
"without notice" basis but Priestley J directed, on 17 June 2009, that
the applications proceed on notice.
b) The individual
defendants have sought an order against Ms Zhu for
security for costs. Mr Cunningham, counsel for the defendants,
sought to argue that application at the hearing on 13 July, but that was
not one of the applications set
down by Asher J on 22 June 2009 for
hearing on 13 July. Accordingly that application remains outstanding.
c)
When judgment was reserved at the conclusion of the 13 July hearing,
counsel were asked if interim arrangements
were in place or needed
pending delivery of the judgment, or whether the Court's assistance
was required.
Nothing further has been heard on that issue.
Accordingly this judgment proceeds on the assumption the parties
have either agreed no interim arrangements are required or have
agreed on such arrangements.
d)
This application proceeded on the assumption that neither of the
corporate defendants were in liquidation. Counsel
informed the Court
at the hearing that there were liquidation proceedings extant against at
least one of
the corporate defendants but they were, at that date,
unresolved. No advice has been received from counsel since then
concerning those or the threatened liquidation proceedings against the
other corporate defendant.
Should either or both the corporate
defendants have been liquidated by the time this judgment is delivered
there will need to be further argument on the Court's powers in that
eventuality as discussed within the body of
the judgment.
Facts
[6] As apart from issues of repayment and corporate investment - there is no
great difference between
the parties on the facts, a relatively brief summary is
sufficient.
[7] Ms Zhu has run businesses in China dealing with vehicle
parts manufacture
over a number of years and has two large companies. She considers herself an
"independently wealthy woman".
[8]
She first met Mr Chen in 2001 when she came to New Zealand to study
English. Shortly afterwards he offered to help her acquire
permanent residency but
she declined his offer and acquired permanent residency in principle in 2003
conditional on her depositing
NZ$1m into a New Zealand account. She decided not
to proceed with permanent residency at that stage. But, back in China, a foundling
baby girl was deposited at her door whom Ms Zhu later adopted. That revived her
interest in New Zealand residency to give her daughter
a better place to learn English
and grow up.
[9] She had maintained contact with Mr Chen and in about 2005 he proposed
they
(as to 25% each) and Mr Parkar (as to the remaining 50%) invest in a new
venture in New Zealand to assist her apply for residence
under the Entrepreneurial
Immigration Category. She declined at that stage.
[10] In October/November 2005 Mr Chen and Ms Liao
sold their Auckland house
and asked Ms Zhu to lend them $100,000 to buy a more expensive replacement. She
says the money was to be
repayable within one month and they offered 7.6% interest
until sale of another property. They say they repaid the advance by "paying
back
money to the business for which she received shares" both in Hat Factory and
Classic Living.
[11] The replacement property
was 70A Wheturangi Road, GreenLane, Auckland,
one of the properties over which Ms Zhu seeks a charging order. It was bought by
the
H Chen Family Trust in January 2006.
[12] In December 2005 Ms Zhu agreed to lend a further $100,000, she says for
one month at
7.6% interest, in order to purchase a New Zealand business. She came
to New Zealand the following month because Mr Chen and Ms Liao
had bought Hat
Factory and Classic Living. During her visit she was given "borrowing notes"
which, she says, are evidence of a loan in China and are valid for two years. The
note, signed by Mr
Chen alone, was for a loan for two years at 7.6% for the first year
and "highest bank interest" for the second, the term commencing
on 11 January
2006. Mr Chen said the whole of the $200,000 lent by Ms Zhu was put into the
businesses.
[13] Ms Zhu said during
her visit to New Zealand Mr Chen told her he had made
her a shareholder of the corporate defendants though without her permission
and
she attended a shareholders' meeting. Mr Chen, she said, suggested she attend
because he "wanted to use the companies as a
conduit to sponsor me for permanent
residency". She thought it was wrong and might affect her residency application
though she agreed
to convert the $200,000 loan into a purchase of 10% of the shares
in each company.
[14] She said she appears to hold 20% of the
shares in each company, though they
were transferred into her name only on 10 August 2006. She put in evidence a
shareholders' agreement
for Classic Living dated 13 March 2006 which lists her as a
party even though the signature for her is plainly that of Mr Chen. Mr
Chen agrees
Ms Zhu holds 200 of the 1000 shares in each company.
[15] Ms Zhu said over the period from early 2006 Messrs Chen
and Parkar
assured her both businesses were running well with high margins of profits, though
promised monthly financial reports
did not arrive. Mr Chen said he kept Ms Zhu
fully informed of the company's affairs. The profit figures she quoted were cash
flow
margins.
[16] On 28 July 2006 Ms Zhu agreed at Mr Chen's request to lend a further
$200,000 for one year at 10% interest. She
said she was told this was a temporary
advance to assist the companies' cash-flow but the document evidencing the loan, on
Classic
Living letterhead, said Messrs Parkar and Chen as directors had borrowed
the funds. She claims the loan was to Mr Chen alone, relying
on a further undated
document in the same form signed by Mr Chen only "following up the old
document" with a start date for the loan
of 1 August 2008.
[17] Mr Chen said Ms Zhu's funds were paid into the joint account for his wife
and himself and he "subsequently
paid that amount into the company accounts" for
both companies.
[18] On 15 September 2006 Ms Zhu agreed to lend more funds as
Mr Chen told
her the businesses were going well but they were again short of cash. She agreed to
lend a further RMB800,000 for three
months at 10%. The loan was evidenced by a
further document on Classic Living letterhead in the same terms as previously,
signed
by both Messrs Parkar and Chen. Despite that, Ms Zhu said the loan was to
Mr Chen alone.
[19] Repayment did not occur at the
end of the term. Ms Zhu taxed Mr Chen to
be told that on 9 December 2006 they had missed some sales. He gave her an IOU
signed only
by himself dated 9 December 2006 saying "today borrowed from Xue
Ying Zhu's friend" RMB800,000 for "two year from 10 December 2006
to 09 March
2007". Ms Zhu had borrowed the funds from a friend for on-lending.
[20] Repayment was not made in March 2007. Again
Ms Zhu taxed Mr Chen on
the topic. She said he told her the companies were going well and were profitable
but were short of money
and asked to extend the loan for a year. After obtaining her
friend's consent, Ms Zhu agreed and confirmation was given in writing,
this time on
Hat Factory letterhead but otherwise identically phrased as with the previous
receipts, signed by both Messrs Parkar
and Chen and saying that as directors they
had borrowed RMB800,000 for 12 months at 13% interest.
[21] A year later, March 2008,
brought no repayment. Ms Zhu telephoned
Mr Chen on a number of occasions. She says he told her he had financial problems
though the
businesses were going well and asked to extend the loan for a further
year. Ms Zhu's friend consented and a further receipt was signed
by Messrs Parkar
and Chen on Hat Factory letterhead in identical terms to the previous receipts.
[22] A year later again, February 2009, Ms Zhu repeatedly asked Mr Chen for
repayment but was told the "money had gone to the companies". He gave her an
undated receipt signed only by himself for RMB904,000
at 13% with a start date of
8 March 2009 "following up the old document".
[23] Despite her later emails and texts asking for
repayment, neither replies nor
payment were received.
[24] She said that in response to Mr Chen's September 2006 request for
a loan of
RMB1m she was only able to lend RMB800,000 and he continued to pester her for
the balance. She sent RMB200,000 on 7 January
2007, evidenced by an identical
receipt on Hat Factory letterhead for RMB200,000 "start 7th of January 2007"
following which there
was, she says, a renewal one year later, this time evidenced by
a receipt signed by Mr Chen alone on Classic Living letterhead for
RMB255,400.00
at 13% "start 7th of January 2009" and again "following up the old document".
[25] Then, in response to Mr Chen's
many requests for her to lend more money to
meet a large order, on 13 March 2007 she lent RMB550,000 for three months at
12%, evidenced
by an identical receipt on Hat Factory letterhead undated but "to
start 13th of March 2007" signed by both Messrs Parkar and Chen
and a renewal,
though on Classic Living letterhead, signed only by Mr Chen, evidencing a loan of
RMB690,000.00 at 12% "start 13th
of March 2009 ... following up the old
document".
[26] In addition, on 19 March 2007, she lent a further RMB100,000
for four
months at 12%. The receipt is on Hat Factory letterhead, undated but signed by both
Messrs Parkar and Chen and records "start
19th of Mar latest return back will be
before 3th of Aug". That, she said, was renewed by another receipt on Classic
Living letterhead
undated but signed by Mr Chen alone, evidencing a loan for
RMB125,500.00 at 12% "start 19th of March 2009 ... following up the old
document".
[27] Ms Zhu said she queried Messrs Chen and Parkar in May 2007 concerning
her immigration application and was told
she needed to have a 25% shareholding in
a New Zealand business so Mr Parkar transferred to her 10% of the joint
shareholding with
his wife in each of the corporate defendants and in return she paid
$200,000 into Classic Living's account. However, on 9 May 2007
she received a
letter from Mr and Mrs Parkar's solicitors saying the two corporate defendants were
to be amalgamated with 25% of
the shareholding to be allocated to a Mr Cavanagh.
Thus all other shareholders' interests would be reduced, Ms Zhu's to 15% of the
companies. A receipt dated 12 May 2009 signed by Mr Parkar alone said that two
days later Ms Zhu transferred $200,000 to him to "purchase
10% (totalling 20% of
shares) of Classic Living" with the funds being invested for Ms Zhu to qualify under
the Investor Category
for Immigration. The receipt said that "funds have been
transferred into the business". That may be supported by a 2008 deed between
Classic Living and Mr and Mrs Parkar evidencing their loan to the company of
$200,000 being the advance made on 1 July 2007, repayable
on demand, to which
were added attached share transfers of 27 shares in Classic Living from each of
Mr and Mrs Parkar to Ms Zhu and
30 shares from each of Mr and Mrs Parkar to
Ms Zhu in Hat Factory.
[28] Exhibited annual returns of both companies show her with
90 shares in each.
[29] The next series of transactions began in June 2007 when, because of the
fluctuating exchange rate, Ms
Zhu wished to exchange funds into US dollars but
Mr Chen persuaded her to lend him the money which would be put into a company
so
if the exchange rate exchanged negatively it could take the loss. On 13 June 2007
she lent RMB600,000 in cash to Mr Chen for one
year at 10% which he then
changed to USD$76,000 with the loan being evidenced by the usual receipt on Hat
Factory letterhead, signed
by both Messrs Parkar and Chen, for RMB600,000 for
12 months at 10%, undated but "start 13 of June 2007" and what she says was a
renewal, this time on Classic Living letterhead
but in the same terms, signed only by
Mr Chen, for RMB660,000 at 10% "start 13th of June 2008 ... following up the old
document".
[30] On 16 July 2007 Mr Chen persuaded Ms Zhu to lend another RMB300,000
for a Chinese supplier. The same process was used as
in the previous month with the
loan being on Hat Factory letterhead, signed by both Messrs Parkar and Chen, for
RMB300,000 for
12 months at 10% "start 16th of July 2007", with the renewal on
Classic Living letterhead as with the previous receipts for RMB330,000
signed by
Mr Chen alone "start 16th of July 2008 ... following up the old document".
[31] She lent a further RMB330,000 on 1
August 2007 at 10% for one year, being
given an IOU for that sum "borrower: Danny" (Mr Chen's English name) followed
by Classic Living's
name. That was renewed by the usual Classic Living receipt
signed by Mr Chen alone for RMB363,000 "start 1st of Aug 2008 ... following
up the
old document". She said on 24 August 2007 Messrs Chen and Parkar told her they
were forming a new company called Pegasus Floats
Limited to sell horse floats.
Mrs Parkar asked for funds to meet an "urgent order of hats" for one month and
Ms Zhu lent $60,000
to Hat Factory on 25 July 2007, receiving a receipt on Hat
Factory letterhead signed by Mr Parkar alone confirming that company was
in
receipt of those funds repayable with 10% interest by 5 November 2007.
[32] The next transaction occurred on 18 June 2008
when Mr Chen told Ms Zhu
the company urgently needed RMB450,000 to overcome a cash-flow problem and
sought a one year loan at 10%.
The receipt was signed again only by "Danny" but
using Classic Living's name and recording the loan of that date. The renewal was
a
Classic Living receipt for RMB450,000 signed by Mr Chen alone "start 18th of June
2008 ... following up the old document".
[33]
Ms Zhu then said that on 13 April 2009 Mr Chen emailed her a documentary
receipt setting out the list of amounts, dates and interest
rates of the loans, but she
said that Mr Chen and Mr and Mrs Parkar had borrowed the funds. The receipt was
signed by all three and
evidences all the loans already detailed.
[34] However, the three signatories claim they signed the document under duress.
Mr
Chen claims Ms Zhu threatened Mr Parkar in New Zealand though in the joint
affidavit of Mr and Mrs Parkar no similar conduct is
asserted and Mr Chen also
claims Ms Zhu told him she would commit suicide if all three did not sign a
document evidencing their
personal liability. He spoke of Ms Zhu's friend claiming
he would keep Mr Chen in a Changzhou hotel until the money was repaid, and
of his
being forced to sign a paper saying Mr Chen had borrowed money from the friend
for the company. All three deponents claim
Ms Zhu asserted she had borrowed
money from people who had kidnapped her daughter and would harm the daughter if
they did not sign
the document evidencing personal liability. Mr and Mrs Parkar
claim Ms Zhu forced them to buy a return ticket from Auckland to Shanghai,
despite
her already having a ticket. They all assert the kidnapping story was later found to
be false. Mr and Mrs Parkar's affidavit
exhibits an email of 23 May 2009 couched
in highly threatening terms.
[35] Ms Zhu's reply affidavit does not discuss this incident.
[36] Ms Zhu put in evidence a letter dated 8 May 2009 sent by Mr Parkar on
Classic Living letterhead apologizing for the fact
that from "September 2007 funds
were transferred to Classic Living and Hat Factory from Pegasus Floats without your
consent ... as
these companies were not performing well" and attaching a schedule of
at least $185,500 transferred. Promises of repayment were made
"as soon as the
companies started to recover" but Mr Parkar said that "Hat Factory and Classic
Living are in serious financial difficulty
and I am unable to repay the debt from these
companies but I undertake to repay these funds as soon as I can through other
business avenues". Repayment by instalments
was promised with the addressees
including Ms Zhu having the "right to revoke this contract at any time".
[37] Ms Zhu also
exhibited a Classic Living letter dated 6 May 2009 signed by
Mr and Mrs Parkar and Mr Chen, saying an attached schedule of borrowings
was
invested into Classic Living and Hat Factory with Ms Zhu having been "informed
that the companies were trading well" but that
"unfortunately in the last two years
the trading has declined and the companies have made a combined loss". The
signatories also
say the information given to Ms Zhu as to the performance of the
companies was "incomplete" and she was "misinformed". The letter
promised the
company (singular) would repay the money "as and when it is able". The schedule is
in Chinese and is untranslated but
it speaks of RMB3.33m, RMB377,900 and
NZD$660,000 being advanced to Classic Living.
[38] Similar letters were in evidence, one
on Classic Living letterhead dated
9 April 2009 in identical terms but proposing instalment repayments and another on
Classic Living
letterhead dated 7 May 2009 "Subject: Pegasus Floats" saying no
funds had ever been transferred from any of the three companies to
Ms Zhu. Ms Zhu
was given the companies' financial statements I May 2009 but doubts their accuracy
as they do not reflect the statements
in the letters just reviewed. They do, however,
show significant loans by Mr and Mrs Parkar and Mr Chen to the companies.
Classic
Living's bank statements show financial intermingling between Hat Factory
and Pegasus Floats with, again, payments being made by
the companies on the
individual defendants' behalf. She also put in evidence an asset sale agreement
dated 26 May 2009 between Hat
Factory and "Anamousity" Limited covering the
stock, equipment and intellectual property of Hat Factory. Settlement was set for the
following day, 27 May 2009.
[39] Ms Zhu sought freezing and charging orders because she understood
Mr Chen was trying to sell
his house and Mr and Mrs Parkar were moving to the
Middle East, assertions she supported by conversations to that effect. In particular
she said Mr Parkar told her "he did not have the money to pay me back and that I
should find a lawyer to sue him".
[40] Mr Chen
denied he was attempting to defeat creditors either of the companies
or himself and said he intended to repay the companies' creditors
though not being
personally liable.
[41] He said his house is owned by the H Chen Family Trust and he has "so few
assets that
I have applied for Legal Aid to fund my defence". He said the trust is
selling the leasehold property at 70A Wheturangi Road as it
cannot meet the
mortgage. He gives details of his considerable indebtedness and said that he has
"lost all of the money I invested
in the companies which amounts to $1,250,000".
[42] Mr and Mrs Parkar make similar comments concerning their financial
position
but acknowledge Mr Parkar is "leaving for the Middle East to see if there
are any business opportunities there so that he can repay
his creditors". Mrs Parkar
and the children will remain. They, too, say that they have "lost everything we own"
with three Hamilton
properties having "borrowings over the value of the share of the
property held in trust for us". Supporting evidence from a Bank
is that the two
commercial properties in Hamilton may be worth $950,000. The registered
proprietors are the Ali
and Cherie Parkar Family Trust and the Hussain and Arifa
Parkar Family Trust as to one-third and two-thirds respectively with mortgages
to
the Horizon Trust of $354,516 as at 3 July 2009 and to the Ali and Cherie Parkar
Family Trust of $518,726. The equity may therefore
be modest but, additionally,
Mr and Mrs Parkar also put in evidence demands by a financier under a trade
finance facility issued
to all three companies for $1,505,500 repayable on 18 May
2009.
[43] Finally, Ms Zhu said she wished to bring derivative claims in the names of
Hat Factory and Classic Living
against Mr and Mrs Parkar and Mr Chen because of
what she regards as intentional reckless conduct in their operation of the companies,
treating them as "sham entities to advance their own interests".
[44] All three deny those assertions and say the businesses
failed because of
declining sales and reduced margins, increased costs of supply and operating costs in
the current financial climate.
Mr Chen says "shareholders' loans to the business
amounting to close to $5 million are lost".
Leave to commence derivative action
under s 165 Companies Act 1993
(1) Law
[45] Section 165 of the Companies Act 1993 empowers the Court on the
application
of a shareholder or director of a company to grant leave to that person to
bring proceedings in the name on and on behalf of the
company if the company does
not intend to bring such proceedings itself such being admitted in this case and
with the Court required,
in subs (2) to:
165 Derivative Actions
...
(2) Without limiting subsection (1) of this section,
in determining
whether to grant leave under that subsection, the Court shall have regard
to--
(a) The
likelihood of the proceedings succeeding:
(b) The costs of the proceedings in relation to the relief likely to be
obtained:
(c) Any action already taken by the company or related company to
obtain relief:
(d) The interests of the company or related company in the proceedings
being commenced, continued, defended,
or discontinued, as the case
may be.
[46] The leading case on the approach to applications for leave to bring derivative
actions is Drij v Boyle [1995] 3 NZLR 763. Although the decision dealt with s 209X
of the Companies Act 1995, that section was effectively identical to s 165 and the
principles
in the case continue to apply and are adopted for this case.
[47] The cases later than Drij dealing with derivative action leave
applications and
as collected in the texts are largely examples of the statutory criteria and the issues
discussed in Drij in action,
but the following are noted.
a) Ms Zhu's position is such that she is unable to allege the shareholders
are in deadlock and accordingly proceedings should issue under
s 174 .
b) Where, as here, the assertions
against directors include alleged breach
of their fiduciary duties, there are authorities suggesting a higher test
should be applied than the "prudent business person" but, if anything,
directors' duties are of such
importance in company law that if an
arguable case for breach of their fiduciary duties is made out by the
proposed plaintiff, it would seem almost inevitable that a prudent
business person test would lead to the
granting of leave.
c) There are authorities suggesting that where, as here, the intended
corporate defendants
are no longer trading, a derivative action should
not proceed but, with respect, that would appear to be simply a
factor
to be taken into account on the leave application.
d) As the authorities discussed demonstrate,
it is by no means clear
whether the appointment of a liquidator removes a shareholder's right
to
bring a derivative action. Section 165 does not cover this situation
but the preferable position appears to be that
discussed in Hedley v
Albany Power Centre Ltd (In Liquidation) [2005] 2 NZLR 196 at para
[55] where Wild J concluded, after a careful and comprehensive
review of the authorities,
that once a company is placed in liquidation
the Court either no longer has jurisdiction under s 165 or, even if
jurisdiction persists beyond liquidation, the Court ought not to
exercise its s 165 powers.
(See generally Brookers Company and Securities Law Vol 1 para
CA165.02-CA165.10 p1-1004(a)-1-1006(f)).
[48] The interests of the corporate defendants must be regarded as being advanced
by a derivative action being taken in their
name and at their cost: s 166 - since, if
their financial affairs are proved to have been mismanaged by the individual
defendants,
it is plainly in the companies' interests for that situation to be uncovered
and rectified.
(2) Submissions
[49]
Mr Deliu, leading counsel for Ms Zhu, reviewed the authorities just discussed
and pointed to what he submitted was a lack of response
by the defendants to issues
such as using the corporate letterheads interchangeably, why they appear to have
accepted personal liability
but later recanted, what use the defendants have made of
Ms Zhu's funds, and the manner of their management of the corporate defendants
and Pegasus Floats.
[50] He also drew attention to procedural deficiencies in the defendants' case,
including breaches of timetables,
failure to serve the plaintiff with full copies of
defendants' affidavits and the contradictions inevitably arising from Mr and Mrs
Parkar ostensibly swearing a joint affidavit but failing to differentiate between
themselves and making statements of which one of
them must have been unaware.
[51] He submitted Ms Zhu has incurred all costs to date relating to the leave
application and, if
the defendants' assertions concerning the companies' financial
circumstances prove to be correct, she will be forced to bear the
costs of bringing the
derivative action and prosecuting it to completion.
[52] For the corporate defendants, Mr Cunningham opposed
leave being granted
for Ms Zhu to commence a derivative action. He submitted there was little
likelihood of the proceedings
succeeding because, he submitted, there was no proof
the individual defendants breached their directors' duties. Thus, he submitted,
no
prudent business person would risk their funds in such a claim. He submitted no
relief sought in the derivative action would increase
any damages payable to Ms Zhu
and her better course would be to issue proceedings as a shareholder under s 174.
Personal and derivative
actions would risk double recovery, he submitted, and he
pointed to the winding-up proceedings issued by two creditors against Classic
Living, with the likelihood one would also issue liquidation proceedings against Hat
Factory. He also made the point that Mr Chen
and Mr and Mrs Parkar have the
power to liquidate the corporate defendants but he appeared to have little satisfactory
answer as
to why such had not occurred if their financial situations were as dire as
the evidence suggested.
(3) Discussion and
Decision
[53] In considering the first criterion in s 165(2), the likelihood of the proceedings
succeeding, Drij makes clear
that the broad discretion conferred by the subsection is
undiminished by the specific criteria set out later in the section, and
the appropriate
test is that which would be "exercised by a prudent business person in the conduct of
his or her own affairs when
deciding whether to bring a claim" (Drij at 765).
[54] In this case, that advances were made by Ms Zhu not being seriously
contested,
there must be a reasonable likelihood of a derivative action succeeding.
But the real question is what has become of her funds and
whether they were loans to
individual defendants or investments in the corporate defendants. That must be
coupled with whether Ms
Zhu's interests might be better advanced by her suing
individual directors in her capacity as a shareholder under s 169, issuing a statutory
demand
to the companies for funds acknowledged to have been invested, and follow
those with liquidation proceedings or a combination of
those forms of action.
Inevitably, it would appear, should Ms Zhu be granted leave to bring the derivative
action, she will also
need to include alternative causes of action against individual
defendants personally lest the litigation discloses her funds were
advanced to them
personally.
[55] That issue laps over into the second consideration, namely the cost of the
proceedings balanced
against the relief likely to be obtained.
[56] In Ms Zhu's case, if she sues in the alternative, it seems likely she will obtain
judgment against the individual defendants should her funds be shown to have been
loans to them but, if the funds were investments
in the corporate defendants, the
return is significantly more in doubt. This is therefore one of those unusual cases
where the personal
and corporate claims may well turn out to be mutually exclusive,
but Court processes are required to establish that fact (Drij at
767).
[57] That is particularly the case when counsel advised there were already
winding-up proceedings brought by other creditors
current against either or both of
the corporate defendants.
[58] This is not a case where either corporate defendant has taken
any step to
obtain relief such as that which might be obtained by Ms Zhu in a derivative action.
[59] Then, the individual defendants
do not appear to contest the fact that over a
lengthy period Ms Zhu made substantial sums of money available either to them
personally
or as an investment or loan to the companies. What is significantly in
doubt is whether they were loans to the individual defendants,
loans to the corporate
defendants or investments in the latter.
[60] As the documentary trail earlier reviewed shows, there are
contradictions not
so much as to whether the funds were made available but as to whom, on what terms,
what has become of them and,
if they were for the corporate defendants, whether
they were handled by Mr Chen and Mr and Mrs Parkar as the companies' directors
in ways required by the Companies Act 1993 or the general law.
[61] In order to sort that out, a combination of personal action
by Ms Zhu and a
derivative action brought by her in the names of the corporate defendants seems the
avenue best designed to resolve
the issue. For her to endeavour to launch liquidation
proceedings requires her to elect that some if not all of her funds were for
the
purchase of shares in the corporate defendants, or investment in them, but that is
antithetical to the stance she currently takes
which is that most if not all of her funds
were loans to the individual defendants, though in some cases for investment in the
corporate
defendants.
[62] Similarly, s 174 proceedings may not be the best avenue to achieve the result
she seeks and she would have
to demonstrate that the companies' affairs have been
or are likely to have been conducted in an oppressive, unfairly discriminatory
or
unfairly prejudicial way as far as she is concerned. Those are substantial evidentiary
hurdles and are coupled with the necessity
for her to prove that the overall affairs of
the companies have been conducted in a way which is "unjustly detrimental" to her
(Thomas
v H W Thomas Ltd [1984] 1 NZLR 686, 693).
[63] The conclusion must accordingly be that it is in the interests of both Hat
Factory
and Classic Living for leave to be granted to Ms Zhu to bring a derivative
action in their names against the individual defendants.
There will be an order to
that effect.
[64] Should either or both have been wound-up by creditors, there will need to be
further
argument as to the effect of that or those liquidations on the derivative
proceeding. Leave is reserved to argue that issue should
it arise.
[65] Counsel not having argued the matter, within 14 days of delivery of this
judgment, counsel are to file a memorandum dealing with
whether the costs of the
derivative action are to be met by the corporate defendants (s 166), either as the case
proceeds or ultimately,
and what conditions should be imposed on the granting of
leave under s 167.
Freezing and Charging Orders
(1) Law
[66] The application for freezing orders was brought under r 32.2. Authorities
show the applicant must demonstrate a good arguable
case and the risk of dissipation
if the orders are not granted (McGechan on Procedure para HR32.2.01 p 1-3404 and
cases there collected).
(2) Submissions
[67] In his submissions Mr Deliu again rehearsed contradictory aspects of the
evidence. In particular
he stressed the documentary evidence under which Mr Chen
and Mr and Mrs Parkar accepted personal responsibility and may have made
improper use of company assets. He was disparaging of their evidence that those
documents were signed under duress. He submitted
the individual defendants had
consistently disguised the true financial position concerning the companies and there
was a real risk,
on the individual defendants' own admission, that they were
disposing of assets and, in Mr Parkar's case at least, proposing to leave
New
Zealand. He particularly relied on the decision in An Ying International Financial
Ltd v Li (HC AKL CIV-2004-404-6952, 9 December
2004, Winkelmann J) where
the Judge made a freezing order on a bank account in the name of the defendant's
family trust. Similarly,
in Allen v Allegra Corp Ltd (HC AKL CP1850/91, 9 March
1992, Tompkins J) a Mareva order was extended not just to a party to the
proceedings
but to third parties in possession or control of assets to which the party
was beneficially entitled.
[68] All defendants oppose
the making of the order on the ground Ms Zhu had no
tenable cause of action against them, and they had bona fide defences to any
claim.
Mr Cunningham submitted there was no proof any of the defendants were removing,
concealing or disposing of assets with the
intention of defeating creditors or leaving
New Zealand. Mr Cunningham argued there was no justification for making
charging
or freezing orders under any of the causes of action currently pleaded.
Mr Parkar's absence from New Zealand was temporary and
there was no evidence,
he submitted, that any defendant would remove assets from New Zealand.
(3) Discussion and Decision
[69] The following is clear from the evidence:
a) As earlier discussed, the plaintiff has made available significant
funds
to the individual or corporate defendants.
b) The corporate defendants have ceased trading and may
be under threat
of liquidation.
c) The corporate defendants' financial position is parlous and the
individual defendants claim to have lost significant sums of money as
a result.
d) Mr Parkar
is proposing to leave New Zealand to work overseas. Even
if his initial absence is only temporary, if his quest for
work is
successful, it is clear he and his family intend to reside out of New
Zealand.
e)
The property owned by Mr Chen's family trust is on the market and
they are unable to meet the outgoings but they
have also borrowed
money from friends and family. Mr and Mrs Parkar's equity in the
Hamilton properties
may be small.
f) Neither Mr Chen nor Mr or Mrs Parkar give any undertaking that any
funds derived from
the sale of assets owned by them or their trusts
will be held or utilized towards meeting the plaintiff's claims.
[70] In all those circumstances, as far as Mr and Mrs Parkar are concerned,
Ms Zhu must be held to have a reasonable cause of
action against them having
regard to the evidence. They are selling up their assets. There must be at least a
reasonable prospect of them leaving New Zealand on a long-term
basis. They give
no undertaking which might give any assurance the proceeds of their asset sales in
this country will be available
to meet the plaintiff's claims. There must accordingly
be a risk of dissipation should no freezing order be made.
[71] In those
circumstances freezing orders will be made pending further order of
the Court against all assets owned by Mr and Mrs Parkar or in
the names of the
trustees of any trust in which they are beneficially interested including the properties
at 113 and 115 Rostrevor
Street Hamilton and 16/201 Gore Street, Auckland, with
the details of any assets qualifying under this order beyond those specifically
mentioned being provided by affidavits by the second and third defendants to be
filed and served within 14 days of delivery of this
judgment (to the extent not
provided since).
[72] As far as Mr Chen is concerned, the evidence suggests greater involvement
on
his part in the obtaining of Ms Zhu's funds and greater potential responsibility.
He acknowledges having lost significant investments
in the corporate defendants and
being now in such reduced circumstances as to qualify for Legal Aid in relation to
these proceedings.
The family home owned by his trust is in the process of sale
because the proprietors can no longer meet the mortgage. There is no
offer by
Mr Chen concerning retention of funds to meet what may turn out to be his liability
to Ms Zhu.
[73] In those circumstances
the conclusion must be that Ms Zhu has made out an
arguable course of action against Mr Chen and a reasonable risk that he and those
associated with him will dissipate funds arising from the sale of assets.
[74] There will accordingly be a freezing order issued
against 70A Wheturangi
Road, GreenLane, Auckland, extending to Mr Chen and the proprietors of that
property and the trustees of any
trust in which he has a beneficial interest. There
appears no justification for extending that order beyond the Chen Family Trust
home. The only other assets owned by Mr Chen in which he has an interest appear
to have negative value.
[75] Within 14 days
of delivery of this judgment Mr Chen is to file and serve an
affidavit setting out all his other assets including bank accounts,
investments and the
like, and giving full details of the same (to the extent not provided since).
[76] There is no justification
for making a freezing order or charging order against
the assets of the corporate defendants in light of the leave granted to Ms
Zhu to bring
the derivative action.
[77] Leave is reserved generally to the parties to apply should there be any
difficulty
in the implementation of the orders made.
Result and General
[78] In the result, there will be orders in terms of this judgment,
particularly
paragraphs [63], [71] and [74].
[79] Ms Zhu is entitled to costs against the individual defendants on a 2B basis,
with disbursements as fixed by the Registrar. Leave is reserved to the parties to
apply by memorandum (maximum 5 pages) in the event
the quantum of this order
cannot be agreed.
[80] Mr Cunningham applied for an order striking out the name of the sixth
defendant,
Ms Liao, Mr Chen's wife. The application was made orally during the
course of the hearing under r 4.56(2) which says that an order
striking out a party
does not require an application.
[81] However, the application was brought without prior notice to Mr
Deliu and
accordingly the Court was not prepared to entertain it at the hearing. But it is to be
noted that the only factual allegation
against Ms Liao in the claim is that she and
Mr Chen asked Ms Zhu to lend them the first $100,000 on 4 November 2005 to
assist them
in buying a home. That may prove to be a somewhat insubstantial basis
for retaining Ms Liao as a party to the proceeding. Ms Zhu
may care to reconsider
her position in that regard should an application be brought to strike out Ms Liao as a
party.
.................................................................
HUGH WILLIAMS
J.
Solicitors:
Royal Reed & Associates, P O Box 305379 North Shore City 0757
Stephen R Anderson P O Box 932 Shortland Street,
Auckland 1140
Copy for:
F C Deliu/Richard Zhao, Amicus Chambers, P O Box 76 899 Manukau City 2241
Brett M Cunningham, P O Box 3599
Shortland Street, Auckland 1140
Case Officer: Indra.Gamage@justice.govt.nz
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URL: http://www.nzlii.org/nz/cases/NZHC/2009/1050.html