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High Court of New Zealand Decisions |
Last Updated: 20 November 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2011-404-001264
UNDER Part 19 of the High Court Rules, sections
178 and 179 of the Companies Act 1993, and
IN THE MATTER OF Section 145A of the Land Transfer Act
1952
BETWEEN LIXIA LIU First Applicant
AND LIANGJI ZHAO Second Applicant
AND GRIFFIN PROPERTY (2004) LIMITED First Respondent
AND ORMISTON HOSPITAL INVESTMENT LIMITED
Second Respondent
AND J AN
Third Respondent
AND ORMISTON CARPARK INVESTMENT LIMITED
Fourth Respondent
Hearing: 29 June 2011
Counsel: M Arthur and J Greer for the Applicants
A Liew for the Respondents
Judgment: 19 July 2011
JUDGMENT OF WOOLFORD J
This judgment was delivered by me on Tuesday, 19 July 2011 at 3:30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
LIU & Ors V GRIFFIN PROPERTY (2004) LIMITED & Ors HC AK CIV 2011-404-001264 19 July 2011
Introduction
[1] The applicants apply, firstly, for orders under ss 178 and 179 of the Companies Act 1993 requiring the first respondent to supply information requested and authorising an investigation of the company records of the first, second and fourth respondents (the companies) and, secondly, for an order under s 145A of the Land Transfer Act 1952 that a caveat on the certificate of title of a property at
125 Ormiston Road, Botany Downs, Auckland, be sustained.
[2] The first applicant is a shareholder of the first, second and fourth respondents. The second applicant is her husband who asserts that he separately contributed funds to the companies.
[3] The third respondent is also a shareholder and director of the companies with responsibility for their day-to-day management.
[4] A dispute has arisen in relation to the companies’ affairs. The first and/or second respondents have contributed almost $6 million to the companies. They maintain that they have been unable to ascertain how their contributions have been utilised by the companies and the current financial situation of the companies. In addition, the second applicant has registered a caveat over the property at
125 Ormiston Road which is owned by the first respondent in order to protect his interests.
Factual background
[5] PricewaterhouseCoopers (PwC) was initially instructed by the applicants in April 2009. The applicants advised PwC that they had both invested money with the third respondent in various property developments in New Zealand but principally for the purchase of land at 125 Ormiston Road upon which a medical centre was being built. The applicants advised PwC that their primary concern was that they had invested a lot of money with the third respondent but they did not have a clear understanding from him as to how the money had been used or the current state of their investment.
[6] From a review of what records were available, PwC ascertained that the first applicant had invested various sums totalling NZ$1.23 million and US$250,000. PwC also sighted transfer statements provided by the second applicant which disclosed payments to the first respondent totalling US$3.25 million. In addition, PwC was advised by the applicants that they had also invested the sum of RMB¥2 million, although no documentation was available to substantiate that payment.
[7] The applicants advised PwC that each of the payments was as a result of an express request by the third respondent. The payments from the first applicant were initially for earlier residential developments but in 2005 the third respondent approached the second applicant about a significant opportunity for a larger scale development in the Ormiston area. The second applicant advised PwC that he then began making payments to the first respondent. In April 2007 the third respondent is said to have asked the second applicant for US$1.5 million to assist with the construction of a medical centre at 125 Ormiston Road and for further funds of RMB¥2 million for the purchase of a property at 24 Fusion Road in order to deal with that particular owner’s objection to resource consent for the medical centre.
[8] After PwC was instructed, there were a number of meetings between PwC, the third respondent and his accountant. Michael Tan of PwC has deposed that PwC did not, however, receive sufficient information from the third respondent to be able to provide any substantive advice to the applicants about the financial affairs of the companies.
[9] In July 2010 the first applicant and the third respondent signed an informal shareholder agreement in the Chinese language. The third respondent agreed to provide the documents and accounts as requested by PwC and both parties were separately to engage accountants to review the companies’ accounts. It was also agreed that once the medical centre was fully let, the second respondent’s family trust would be able to purchase the medical centre at a price to be agreed between the parties.
[10] The applicants assert that they were not provided with the information required for the purposes of review by PwC in breach of the shareholder agreement. On 9 September 2010 the first applicant through her solicitors, Chapman Tripp, therefore formally requested information in respect of the first respondent’s affairs under s 178 Companies Act 1993. The applicants assert that notwithstanding this formal notice the information has still not been forthcoming. In particular, PwC say that they have not been supplied with all the financial accounts, the ledgers, MYOB accounting records and source documents for the companies prior to 1 April 2008. According to PwC, the ledgers of the first respondent prior to 2008 are particularly important as most of the applicants’ investments were made prior to 2008.
[11] A review of the companies’ affairs for the third respondent has been completed in draft by Mr Jerry Li of BNL Consulting Limited. It acknowledges the investment of $5,945,289 by the first applicant and its use in purchasing and developing a number of properties. Mr Li’s report has been criticised in a number of respects by Mr Tan.
[12] On 10 September 2010 a caveat was also registered over the property at
125 Ormiston Road by the second respondent on the basis that he had made contributions directly or indirectly to the improvements on the property. Accordingly, and to the extent the second applicant’s investment funded the purchase and development of the property, the second applicant is said to have a reasonable expectation that the first respondent holds the property on constructive trust for the second applicant’s benefit and will yield an interest in the property to the second applicant to that extent.
Applicants’ submissions
[13] The applicants submit that PwC has been unable to verify that the companies’ accounts are materially correct and a reasonably fair and accurate reflection of the nature of the funds invested by the applicants. To verify and properly understand the current state of the applicants’ investments it is said to be necessary to understand and verify the investments themselves, the inflow of funds from other sources such as the third respondent and the trading activities of the companies.
[14] To carry out these instructions PwC must verify the amount that the companies owe the third respondent and the first applicant as shareholders and the second applicant as an investor respectively. This includes confirming the state of all investors’ current accounts. PwC must also ascertain the solvency of the companies and confirm that the companies’ income and expenditure has been correctly accounted for. To do that, PwC normally undertakes a review of yearly financial accounts and bank statements, reviews the ledgers and then once specific questions and issues are identified from those records reviews the relevant source documents, for example, receipts, contracts, invoices, solicitor trust account statements, etc. The applicants submit it is not possible for PwC to undertake its review without unfettered access to information and documents held by the companies.
[15] The applicants submit that the application requiring the first respondent to supply the information requested and the companion application for inspection are made in good faith and for a proper purpose. They also submit that PwC is the appropriate person to be appointed to facilitate the inspection.
[16] As to the application for an order that the caveat on the property not lapse, the applicants submit that the balance of convenience favours the first applicant retaining the caveat pending the inspection sought by the first applicant and the resolution of all matters arising from that inspection.[1] There are no circumstances where the first respondent can lawfully sell the property at 125 Ormiston Road without the consent of the first applicant as it would be a major transaction under s 129 Companies Act 1993 and require the consent of the first applicant as a
50 percent shareholder. The only possible prejudice that a caveat on the property would produce is to the Westpac Bank as mortgagee and there is no evidence of the bank’s concern with his caveat. A caveat stops nothing but an unlawful sale of the property at the third respondent’s behest. As a consequence, the applicants submit
that the caveat should not lapse.
Respondents’ submissions
[17] The respondents submit that it is common ground that pursuant to the shareholder agreement made on 21 July 2010, each party was to undertake their own review of the financial accounts of the companies with a view to resolving all disputes between the parties regarding the financial accounts and thereafter for the parties to enter into negotiations for the sale of the assets of the first respondent to the family trust of the second applicant.
[18] It is the respondents’ position that full and complete accounting and other information requested by or on behalf of the first applicant has been provided to the first and second applicants. While the application is premised on s 179 Companies Act 1993, the affidavits of Mr Tan of PwC in support speak of the need to obtain records for the purposes of completing the review envisaged by the shareholder agreement. The respondents submit that if that is the case the relief sought should not be an order or orders under s 179 Companies Act 1993 but an order for specific performance of the shareholder agreement.
[19] The respondents submit that the application is not made in good faith or for a proper purpose.[2] They submit that during the period between September and December 2010 there were ongoing discussions and email communications whereby financial information and other information was requested and clarification sought by the second applicant and duly provided.
[20] The respondents also submit that the appointment of Mr Tan of PwC as a proper person appointed to undertake the inspection of the companies’ financial records is not appropriate as the person appointed by the Court should be an auditor or chartered accountant who is independent of the applicants. The person to be appointed must have a perceived and unarguable independence.[3]
[21] As to the application that the caveat not lapse, the respondents submit that particulars in the caveat fall short of stating that funds were provided to the first
respondent, the registered proprietor of the property at 125 Ormiston Road. They submit that the caveat must set out the factual basis on which the alleged constructive trust arose and failure to do so is fatal to the caveat. No amendment is permissible.[4]
[22] Furthermore, the third respondent denies that the second applicant made any payment to the first respondent or to any of the companies associated with the first respondent. The respondents submit that it was the first applicant alone who invested the equivalent of just under NZ$6 million and that those funds were provided by the first applicant in NZ dollars, US dollars and Chinese Renminbi. While funds were remitted through a company, Hongda, the third respondent understood that those funds were provided by the first applicant. That is also consistent with the terms of the shareholder agreement which refers to the NZ$6 million and RMB¥2 million invested by the first applicant. The fact that the first applicant has invested a substantial amount of money in the first respondent and/or its associated companies does not give either of the applicants a caveatable interest in the property even though the first applicant is a shareholder of the first respondent. A shareholder in a company which owns land does not have a
caveatable interest.[5] The caveat should, therefore, not be sustained.
Discussion
Access to company accounts
[23] The draft Li report clearly shows that the unaudited and unsigned annual reports of the first respondent are materially incorrect. As an example, the first respondent’s 2009 financial statements show the first applicant’s current account as
$232,808 while the third respondent’s current account is $3,337,326. Mr Li’s report acknowledges that the first applicant has contributed $5,945,298 to the company. This sum is, however, not recorded in the financial statements for any of the
companies. As another example, Mr Li’s analysis of operating costs incurred by the
first respondent bears little resemblance to the figures in the unaudited and unsigned annual reports.
[24] It is obvious that Mr Li has had access to material which has not been available to the applicants. Apart from bank statements and unaudited and unsigned annual reports, the applicants do not have any ledgers or cash books prior to 2008. Nor do they have a comprehensive collection of source data such as invoices and receipts. Mr Li has however been able, from the material that has been made available to him, to recalculate operating costs. At paragraph 17.3 of his affidavit, Mr Li refers to having reviewed and analysed “all of the available original receipts and invoices” among other material. It is to be inferred that Mr Li also had access to cheque books when he stated in his report “There are some cheque payments outstanding due to cheque books unable to find”. There should also be ledgers and cashbooks available prior to 2008 although when I sought clarification from Mr Liew, he was unable to confirm the existence of ledgers prior to 2008.
[25] Mr Liew did accept that Mr Li had access to material not available to PwC at the time Mr Li completed his draft report but maintained that most of the documents requested had subsequently been supplied. He submitted that the application was premature because the applicants had only to ask for further specific information and it would be supplied.
[26] However, it is my view that specific requests have been made for more than a year which remain unanswered. In particular, in relation to the funds invested by the applicants, information has consistently been sought as to when they were paid to the first respondent, how they were accounted for and how they were utilised. The applicants cannot have been more specific in this request.
[27] Mr Tan of PwC has deposed to a number of telephone conversations with the third respondent regarding the reason for the incomplete MYOB data files and why PwC needed the files. Mr Tan states that the third respondent was not prepared to release the files to PwC and also proceeded to advise them on how PwC should go about the review which essentially involved accepting his word and the summary information provided.
[28] In his draft report Mr Li states in relation to the funds invested by the applicants:
Mrs Li Xia (Lisa) Liu invested in total approx. NZ$5,945,298. The funds were transferred to Griffin Property 2004 Ltd’s US Dollar account. Then the funds were either transferred directly to Griffin Property 2004 Ltd’s BNZ 00 and 025 account or the company’s Term Deposit for investment once the Term Deposit matured or the company need investment, the term deposits are transferred to the company’s BNZ USD and BNZ NZD 00 account ...
Once the funds are transferred from USD account to NZD 00 and 025 accounts, they were used to mainly purchase properties and pay the companies’ everyday operation and administration costs.
In conclusion, Lisa’s investments were involved in purchasing and develop the following projects:
Lot 134, 135, 136 and 142 Coachman Drive, East Tamaki,
Lot 7, 25 Bishop Dunn Pl and Lot 8, 29 Bishop Dunn Pl
16 Wilisa Rise and 7 Bowing Pl, Manukau, 
24 Fusion Road,
Lot 74, 125 Ormiston Road, and
22 Torrens Road, East Tamaki of Seymour 2004 Limited.
[29] The applicants wish to confirm this summary information by reviewing the underlying documentation. That, in my view, is not unreasonable.
[30] The applicants are also concerned about the solvency of the companies having become aware of two separate applications to liquidate the first and second respondents filed by the Inland Revenue Department. Counsel for the respondents has not complied with a specific request from the applicants for information about the liquidation proceedings, stating that the matter had been resolved with the IRD.
[31] Questions have also been asked about possible breaches of the Companies Act 1993. If ledgers prior to 2008 have not been kept, then the companies may at that time have been in breach of s 194(1)(b) of the Act which requires accounting records to be kept that will at any time enable the financial position of a company to be determined with reasonable accuracy.
[32] Annual returns have also been filed declaring that annual meetings or resolutions were completed and that the shareholders voted unanimously not to appoint auditors. Despite requests for a copy of such resolutions, none have been supplied to the applicants. One can only infer that there are no such resolutions. If no resolutions have been passed then the companies are in breach of s 196(1) of the Act which requires a company to appoint an auditor to audit the financial statements of the company. The annual returns may also be false; every person who makes a false or misleading statement in a document required by the Act is liable to conviction under s 377 of the Act.
[33] The applicants also point to possible breaches of s 129 of the Act which requires a special resolution to enter into any major transaction.
[34] A specific request has also been made by the first applicant under s 121 of the Act for a special meeting of shareholders which in terms of the statute must be called by the Board on the written request of shareholders holding shares carrying together not less than five percent of the voting rights entitled to be exercised on the issue. Counsel for the respondents has however replied:
Mr An requires Ms Liu to abide the terms of the Chinese Agreement, and not pre-empt matters by now insisting on the holding of a shareholders’ meeting.
[35] As to the respondent’s submission that if there has been non-compliance with the shareholder agreement, the applicants’ remedy is specific performance, I am of the opinion that an order for the inspection of records under s 179 of the Act is a form of specific performance in the circumstances of this case.
[36] In the end, counsel for the respondents advised the Court that the respondents did not oppose the application for the supply of further documentation. Rather they objected to the manner in which the applicants were seeking to achieve that end. He submitted that it should be done either under the shareholder agreement or by way of consent orders under s 178(7) of the Act. The respondents continued to oppose any order under s 179.
[37] In all the circumstances, I am satisfied that an order under s 179 authorising an inspection of the companies’ records is required. Less formal procedures, such as those in the shareholder agreement or the requests under s 178 of the Act, have proved inadequate to resolve the difficulties between the shareholders. Before making an order under s 179, I need to be satisfied that in making the application the first applicant is acting in good faith, that the inspection is proposed to be made for a proper purpose and that the person to be appointed is a proper person for the task.
[38] Although the respondents submitted that the first applicant was not acting in good faith, and that the inspection is not proposed for a proper purpose, it is my opinion that the first applicant is indeed acting in good faith and that the purpose for which she is requesting an inspection is a proper one, namely, to determine what has become of her substantial investment.
[39] As to the person to be appointed, I have given consideration as to whether or not I should make an order appointing an independent person to undertake the inspection under s 179 of the Act. However, in the circumstances, it is my opinion that Mr Michael Tan of PwC is the proper person to undertake the inspection. The applicants accept that his report will be partisan because he has acted for the applicants to date. His appointment, however, merely facilitates the completion of the review as agreed in the shareholder agreement. The agreement envisages reports by accountants retained by both parties. Although the person appointed to undertake the inspection is required to make a full report to the Court, it is my opinion that this is only for the purpose of the Court exercising a supervisory role over the process. The Court will not be relying on his report for any further action under the Companies Act.
[40] Although the application is for orders under both ss 178 and 179, I am of the opinion that any s 178 order will be encompassed in an order for inspection under s 179. In those circumstances any order under s 178 would be superfluous and I do not intend to make any orders under s 178.
Caveat
[41] Turning now to the caveat, although there is some merit in the argument on behalf of the respondents that the second applicant does not have a cavaetable interest, there is a real factual dispute on the issue which cannot be resolved on the documentation now before the Court. Firstly, although the shareholder agreement signed by the first applicant refers to the sum of almost $6 million as having been invested by the first applicant and not her husband and there are some email communications also referring to the total sum invested as being invested by the first applicant, the second applicant explains this on the basis that the shareholder agreement was only for the purpose of settling a dispute and obtaining an acknowledgement from the third respondent of the total sum invested by him and his wife. He considered the agreement to be a breakthrough because it was the first time since he had started dealing with the third respondent that he had acknowledged the contributions from his wife and himself in writing. As to the references in email communications, the second applicant puts forward a similar explanation. He says that the purpose and reason for the wording was simply to ensure that the third respondent co-operated and provided information to PwC so that PwC could conduct a review and for Mr An to admit in writing that he owed money to them.
[42] Secondly, the respondents also point to an email communication which refers to a loan by the second applicant and rightly submit that a mere debtor does not have any caveatable interest in a property even if the loan was made for the purposes of purchasing the property. There are however also references to an investment rather than a loan and accordingly in the context of this application it is impossible to make any conclusive finding as to the basis under which the money was advanced to the third respondent.
[43] Finally, the respondents also point to the wording of the caveat itself which states:
The above named caveator Liangji Zhao claims a beneficial interest in the property described in the above certificate of title by virtue of a constructive trust arising from, and to the extent that, the above property was acquired, or improvements to the property undertaken, with funds provided by the above named caveator.
[44] The respondents submit that because the statement does not disclose to whom the funds were provided that is fatal to the validity of the caveat. I am of the opinion however that this particular argument lacks merit in that the registered proprietor is clearly identified as being the first respondent on the face of the caveat itself.
[45] In all the circumstances, because there is a relatively low threshold of an arguable case, I am satisfied that the caveat should be sustained. There is no prejudice caused by the caveat remaining on the property. The second applicant has acknowledged that his interests are subordinated to the bank’s interests and would not be a bar to a mortgagee sale. The third respondent has also agreed in the shareholders agreement not to sell the property at 125 Ormiston Road without the consent of the first applicant. In any event a sale without her consent would be a breach of s 129 Companies Act. The effect of the caveat is therefore negligible but I am also satisfied that it is proper that it remain in place until the inspection is complete.
Result/orders
[46] The following orders are made:
(a) Michael Tan and any employee of PwC under the direction of Michael Tan is authorised to inspect (and make copies of) all records and documents of Griffin Property (2004) Limited, Ormiston Hospital Investment Limited and Ormiston Carpark Investment Limited relating to:
(i) any payment by the applicants to, or at the request of, the respondents;
(ii) when and how these monies were received by the companies;
(iii) how these monies were accounted for in the companies’
accounts;
(iv) how these monies were utilised;
(v) any transfer of assets between the companies; and
(vi) the current financial position of each of the companies so as to form a view on (in respect of each company):
1. whether the company is or may be insolvent;
2. whether any debt due to the company is properly accounted for;
3. the balance of any current account or similar held by Ms Liu, Mr Zhao, Mr An or persons or entities connected with any of them.
(b) That Michael Tan and any employee of PwC under the direction of Michael Tan be authorised to inspect (and make copies of) the following records and documents of the companies:
(i) all financial statements (including any audited financial statements);
(ii) all internal accounting records including all ledgers and all
MYOB data files; and
(iii) tax invoices and any supporting documentation that evidences particular transactions identified by Michael Tan (such as agreements for sale and purchase, construction contracts, solicitor’s trust account statements and other transaction records);
(c) That the third respondent (Mr An) produce:
(i) the records and documents referred to in (a) and (b)(i) and (ii) above to Michael Tan at PwC within 10 working days of the order being made;
(ii) the records and documents referred to in (b)(iii) above to Michael Tan at PwC within 10 working days of any request in writing being made by Mr Tan to Mr An.
(d) That Michael Tan diligently carry out an inspection of the companies’
documents, and after having done so, make a full report to the Court;
(e) That caveat no. 8572000.1 registered on Lot 74 on Deposited Plan
360547, Certificate of title 246331 (North Auckland) be sustained.
[47] The applicants are entitled to costs of this application on a 2B basis. The applicants, however, acknowledge that they will be responsible for the costs of the report to be made to the Court.
[48] I will make further directions as to the use of the report and any other
ancillary matters remaining upon receipt of Mr Tan’s report and at the request of the
parties.
Woolford J
Solicitors:
M Arthur, Chapman Tripp, Solicitors, Auckland
Mr A Liew, Solicitor, Auckland
[1] Sims v Lowe
[1988] 1 NZLR 656
(CA).
[2]
Wells v Mega-Merger Housing Ltd (2005) NZCLC 263, 727 (HC) at 263,
733.
[3]
Reaney v Rachmaninov Ltd HC Napier CIV-2007-441-466, 5 May 2008, Asher J
at [29].
[4] Colin Adams Ltd v Baker CA178/98, 5 May 1999; Hartles v Crawford HC Hamilton M59/94,
12 April 1994, Master Hansen.
[5] Waiteitei Angora Farm v Cann HC Auckland M333/89, 17 April 1989, Master Anne Gambrill;
Simperingham v Martin HC Auckland CP316/93, 19 October 1994, Blanchard J.
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