Li v Yu [2018] NZHC 3248 (11 December 2018)

Last Updated: 14 December 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2017-404-000939 [2018] NZHC 3248

BETWEEN	ZHONG LI Plaintiff
AND	YORK BUYUN YU Defendant
	(continued over)

Hearing:	20-22 August 2018
Appearances:	B O’Callahan & K Puddle for Plaintiff No Counsel for First, Second, Third Defendants K Burkhart & G Beresford for Fourth Defendant D Salmon & C Upton for Fifth Defendant W L Aldred & E J Couper for Sixth Defendant
Judgment:	11 December 2018

JUDGMENT OF VAN BOHEMEN J

This judgment was delivered by me on 11 December 2018 at 2pm Pursuant to Rule 11.5 of the High Court Rules

..............................

Registrar/Deputy Registrar

Counsel:

WL Aldred, Wellington

Solicitors:

K3 Legal Limited, Auckland Kennedys, Auckland

Lee Salmon Long, Auckland Crown Law, Wellington

LI v YU & Ors [2018] NZHC 3248 [11 December 2018]

(continued)

AND HARV PROPERTIES LIMITED
Second Defendant


AND KE CHENG
Third Defendant


AND WINLAW LIMITED
Fourth Defendant


AND HENRY FENG LAWYERS LIMITED & HENRY YU FENG
Fifth Defendant


AND ATTORNEY-GENERAL
Sixth Defendant

Introduction

[1] The question for determination is whether four properties owned by the plaintiff, Zhong Li, were transferred without his agreement to the second defendant, Harv Properties Ltd, in circumstances that amounted to fraud such that:

(a) The one property still held by Harv Properties – at 109 Tauroa Street,
Whangarei (Tauroa property) – should be re-vested in Mr Li; and

(b) Harv Properties and the third defendant, Ke Cheng, who at all relevant times was the sole director of Harv Properties, should be required to account to Mr Li for the equity Mr Li held in the other three properties

• – three apartments at 12-14 Schnapper Road, Auckland (the three apartments) – which have since been transferred to third parties for value and without notice of the fraud.

Procedural history

[2] This proceeding initially involved a larger cast of parties and covered a broader scope than is dealt with in this judgment, although all transactions at issue related to the relationship between Mr Li and the first defendant, York Yu, who agreed to work together in developing a property at 12-14 Schnapper Road, Albany.

[3] In his second amended statement of claim dated 21 May 2018, Mr Li pleads 12 causes of action against six defendants:

(a) First cause of action – against first defendant, Mr Yu –interference by unlawful means;

(b) Second cause of action – against Mr Yu – breach of fiduciary duty;

(c) Third cause of action – against second defendant, Harv Properties – recovery of Tauroa property;
(d) Fourth cause of action – against Harv Properties – knowing receipt;

(e) Fifth cause of action – against third defendant, Ms Cheng – dishonest assistance;

(f) Sixth cause of action – against Mr Yu, Harv Properties, Ms Cheng and fifth defendant, Henry Feng Lawyers – conspiracy to injure by unlawful means;

(g) Seventh cause of action – against Harv Properties – breach of contract;

(h) Eighth cause of action – against Mr Yu – breach of partnership;

(i) Ninth cause of action – against fourth defendant, Winlaw Ltd – negligence;

(j) Tenth cause of action – against Henry Feng Lawyers – negligence;

(k) Eleventh cause of action – against Henry Feng Lawyers – dishonest assistance;

(l) Twelfth cause of action – against sixth defendant, the Attorney-General

• – damages pursuant to s 172(b) of Land Transfer Act 1952.

[4] The proceeding against the first defendant, Mr Yu, is stayed because Mr Yu has been declared bankrupt. Mr Yu took did not attend and was not represented at the hearing. The second defendant, Harv Properties, has taken no step in the proceeding. The third defendant, Ms Cheng has not participated in the proceeding since she filed a statement of defence dated 2 March 2018 to Mr Li’s amended statement of claim dated 15 December 2017.

[5] On 20 August 2018, following the opening of the case for Mr Li, counsel for Mr Li and for the fourth, fifth and sixth defendants, Winlaw Ltd, Henry Feng Lawyers Ltd, and the Attorney-General, held settlement discussions which resulted in a settlement among those parties on 21 August 2018. Because time was required by one
of those parties to implement its part of the settlement, I adjourned the case against Winlaw Ltd, Henry Feng Lawyers Ltd, and the Attorney-General and excused counsel for those parties from attending the balance of the hearing.

[6] On 22 August 2018, the hearing resumed to hear Mr Li’s claims against Harv Properties and Ms Cheng.

[7] Following the settlement with the other parties, Mr O’Callahan, Mr Li’s counsel, confirmed that Mr Li no longer alleges conspiracy to injure by unlawful means against Ms Cheng (the sixth cause of action) and that Mr Li’s claim against Ms Cheng is limited to alleged dishonest assistance (the fifth cause of action). While Mr Li did not withdraw any of his claims against Harv Properties, the focus of the Mr O’Callahan’s submissions was on the fourth cause of action, knowing receipt.

[8] Mr O’Callahan handed up drafts of the orders that Mr Li is seeking against Harv Properties and Ms Cheng following the settlement with the other parties. As indicated in those drafts and as confirmed by Mr O’Callahan, Mr Li no longer seeks loss of opportunity damages from Harv Properties or Ms Cheng.

[9] Because Harv Properties has taken no step in the proceeding and because Ms Cheng did not participate in the proceeding after filing her amended statement in March 2018, the rest of the hearing proceeded by way of formal proof.

[10] Mr Li and Mr Foote, a valuer, filed briefs of evidence which they confirmed on affirmation or oath, and which I took as read. Mr Li’s brief was prepared in Mandarin Chinese and a certified translation into English was prepared by Yu Wei, who affirmed the accuracy of his translation. I asked some questions of Mr Li and Mr Foote. Their answers are taken into consideration in my decision.

[11] On 7 September 2018, counsel for Mr Li filed a notice of discontinuance of Mr Li’s claims against the fourth, fifth and sixth defendants, Winlaw Ltd, Henry Feng Lawyers Ltd, and the Attorney-General following completion of the settlement agreement among those parties.

Relevant facts and allegations

[12] Because of the more limited scope of the formal proof hearing, it is not necessary to rehearse all the facts pleaded in Mr Li’s second amended statement of claim and in his brief of evidence. The key facts and assertions in Mr Li’s evidence and in documents produced as evidence are as follows.

[13] Mr Li is a businessman who carried out property development in China before he moved to New Zealand. He has continued to invest in real estate since moving to New Zealand sometime after the events that gave rise to this proceeding.

[14] Mr Li states in his brief of evidence that he and his wife had first tried to immigrate to New Zealand with their children in 2005. In that year, he deposited
$1,000,000 into a New Zealand bank in support of his visa application. Even though his initial visa application was not accepted, he left that money in New Zealand and made several visits to New Zealand in the following years.

Cooperation Agreement and Power of Attorney signed

[15] On 11 June 2007, during one such visit to New Zealand, Mr Li signed a joint venture or cooperation agreement with Mr Yu in respect of a development to be undertaken at 12-14 Schnapper Road, Auckland. Under the cooperation agreement, which was written in Mandarin Chinese, Mr Li agreed to invest $1,000,000 in the development which was to be carried out at the direction of Mr Yu, who agreed to invest $200,000 in the development and accepted the liabilities from the development. The agreement also provided for Mr Li to get back his $1,000,000 plus $400,000 in an initial distribution of the proceeds of the development and for the allocation of the balance between Mr Li and Mr Yu, with different arrangements to apply depending on the level of profit achieved.

[16] Also on 11 June 2011, Mr Li granted a power of attorney in favour of Mr Yu. The power of attorney was in English, which Mr Li does not understand. For the most part, the power of attorney followed the form and content of the standard power of attorney of the Auckland District Law Society (ADLS). The differences between the
power of attorney and the standard ADLS form are not relevant to Mr Li’s claims against Harv Properties and Ms Cheng.

[17] Under the power of attorney, Mr Li:

(a) Appointed Mr Yu to be Mr Li’s attorney in relation to all of Mr Li’s property;

(b) Authorised Mr Yu to act in Mr Li’s name and to sign and use Mr Li’s name in any manner in any document;

(c) Authorised Mr Yu to purchase, sell, exchange, mortgage, charge or pledge any real or personal property, either jointly or with any other person.

[18] Despite the breadth of the terms of the power of attorney, Mr Li’s evidence was that, as far as he was concerned, the purpose of the power of attorney was to enable Mr Yu to progress the Schnapper Road development.

[19] After the cooperation agreement and power of attorney had been signed in June 2007, Mr Li returned to China and largely left Mr Yu to get on with the Schnapper Road development for the next four years, although Mr Li visited New Zealand one or twice a year between 2007 and 2011 for periods of between five and 19 days.

[20] By late 2009, the Schnapper Road development was completed and subdivision consent granted for the issue of 14 unit titles for the development. Sales of the 14 apartments making up the development took place over a more extended period. Mr Li’s brief of evidence discusses issues that arose over the completion of the development and the sales process, and challenges the bona fides and legality of actions taken by Mr Yu and others in relation to the development and other properties without Mr Li’s knowledge up until April 2011. It is unnecessary for me to make findings on those matters. It is relevant to note, however, that Mr Yu used the power of attorney to enter into several transactions on behalf of Mr Li that extended well beyond the Schnapper Road development.
[21] For present purposes, it is sufficient to record that by April 2011, in transactions undertaken by Mr Yu in Mr Li’s name under the power of attorney:

(a) 11 of the apartments had been sold, leaving the three apartments (Numbers 6, 8 and 14) – unsold and in Mr Li’s name but with loans from ASAP Finance Ltd and Pickwood Ltd, and a loan guarantee to Yes Finance Ltd, secured by mortgages and caveats registered against their titles; and

(b) The Tauroa property had been bought in Mr Li’s name in April 2010, using proceeds from the sale of one of the units in the Schnapper Road development, and a loan from ASAP Finance taken out in Mr Li’s name and secured against the title to the property. Mr Li’s evidence was that he had no knowledge of this purchase until 2013.

[22] The loan guarantee secured against the title to the three apartments was in respect of a loan by Yes Finance to New Zealand New Oak Ltd (NZ New Oak), a company owned by Mr Yu’s wife, Shan Ling.

Revocation of power of attorney

[23] Mr Li’s evidence was that by early 2011, he and his wife, who by then was living in New Zealand and in regular contact with Mr Yu and Ms Ling, were concerned about what Mr Yu might have been doing with regard to the Schnapper Road development, the exercise of Mr Yu’s powers under the power of attorney, and Mr Yu’s failure to provide Mr Li with the accounts for the development despite several requests for the accounts from Mr Li over the previous two years.

[24] On 27 April 2011, Mr Li flew to Auckland to discuss these matters with Mr Yu. Mr Li met several times over the next few days with Mr Yu who continued to find reasons not to provide Mr Li with the financial information about the Schnapper Road development. Mr Li says that at one of those meetings he told Mr Yu he was going to revoke the power of attorney.
[25] On 5 May 2011, at a meeting attended by Mr Yu at the offices of the solicitor who had prepared the power of attorney, Mr Li signed a formal revocation of the power of attorney. Mr Li’s evidence was that he had no doubt Mr Yu understood the power of attorney had been revoked at that meeting.

[26] Despite Mr Li’s oral communication to Mr Yu in late April 2011 that he intended to revoke the power of attorney and despite Mr Li’s formal revocation of the power of attorney on 5 May 2011, Mr Li says that Mr Yu continued to act as Mr Li’s attorney in relation to the sale of the three apartments and the Tauroa property and in associated security arrangements which resulted in the properties being transferred to Harv Properties with no value being returned to Mr Li and in circumstances Mr Li says were fraudulent and would have been known by Mr Yu, and by Ms Cheng as Mr Yu’s agent, to be fraudulent.

[27] It is convenient to consider the transfer of the properties from three perspectives:

(a) The transfers themselves;

(b) The associated security arrangements that Mr Yu entered into on behalf of Mr Li, including a variation of a loan agreement between Yes Finance and NZ New Oak;

(c) The relationship of Ms Cheng to Mr Yu and Harv Properties.

The transfers of the three apartments and the Tauroa property

[28] The transfers took place pursuant to two sale and purchase agreements dated 8 February 2011. Mr O’Callahan invites the Court to infer that the agreements were backdated and were, in fact, concluded after Mr Li had communicated to Mr Yu his intention to revoke the power of attorney.

[29] Except for the descriptions of the properties to which they related and the purchase prices, the sale and purchase agreements were materially the same:

• (a) Both transfers were by private treaty;

(b) No deposit was payable;

(c) Mr Yu’s signature was written in the place for the vendor’s signature;

(d) Ms Cheng’s signature appears to have been written in the place for the purchaser’s signature;

(e) The vendor’s solicitor was Winston Wang & Associates;

(f) The purchaser’s solicitor was Henry Feng Lawyers;

(g) The settlement date was 30 April 2011.

[30] The purchase price for the three apartments was $1,620,000 (including GST if any) with no value apportioned among the three apartments. The purchase price for the Tauroa property was $200,000 (including GST if any). The total purchase price of the three apartments and the Tauroa property was $1,820,000.

[31] Notwithstanding the stated settlement date of 30 April, settlement took place in May 2011.

[32] A settlement statement prepared on 4 May 2011 by Ganda & Associates, solicitors for ASAP Finance, stated that the amount then owing on the loans secured by the ASAP Finance mortgages against the three apartments stood at $1,033,865.36.

[33] However, settlement was delayed until 13 May 2011 because Henry Feng Lawyers, solicitors for Harv Properties, required an apportionment of the outgoings of the properties. A revised settlement statement prepared on 12 May 2011 by Ganda & Associates stated that the amount then owing on the loans secured by the ASAP Finance mortgages against the apartments stood at $1,036,830.97. A similar settlement statement also prepared on 12 May 2011 by Ganda & Associates in respect of the Tauroa property stated that the amount then owing under a loan secured by the ASAP Finance mortgage on that property stood at $203,226.54.
[34] A settlement statement prepared on 6 May 2011 by Neilsons Lawyers, solicitors for Pickwood, stated that the amount then owing to Pickwood, which was secured by a caveat against the titles to the apartments, was $35,000.

[35] As at the date of settlement on 13 May 2011, therefore, the total amount owing to ASAP Finance and Pickwood and secured against the three apartments was
$1,071,830.97. The total amount owing to ASAP Finance and Pickwood and secured against the three apartments and the Tauroa property was $1,275,057.51.

[36] A settlement statement prepared on 12 May 2011 by Winston Wang & Associates, who were purporting to act for Mr Li, stated that settlement of the agreements for the sale and purchase of the three apartments and the Tauroa was to be achieved by:

(a) An amount of $620,000 said to have been previously credited to the vendor, Mr Li;

(b) Payment of $1,203,258.59, required to meet the balance of the purchase price and the purchaser’s share of the outgoings.

[37] The 12 May 2011 settlement statement replaced an earlier statement prepared by Winston Wang & Associates on 5 May 2011 which also stated that the purchase was to be settled in part by $620,000 previously credited to the vendor.

[38] Settlement proceeded in accordance with the settlement statement prepared by Winston Wang & Associates. The discharges of the mortgages to ASAP Finance and caveat in favour of Pickwood, and the transfer of the three apartments and the Tauroa property to Harv Properties were registered on the titles to the four properties on 13 May 2011.

[39] Mr Li says:

(a) He had no knowledge of these agreements and he did not agree to sell the three apartments or the Tauroa property to Harv Properties;
(b) He had no knowledge of and did not receive any advance payment from Harv Properties;

(c) He received no value as a result of the sales because the only money that changed hands was that required to meet the value of the loans secured against the properties.

The associated security arrangements

[40] On 4 May 2011, Mr Yu signed a number of security documents to enable Harv Properties to complete the purchase of the three apartments and the Tauroa property. These documents, all of which Mr Yu signed on behalf of Mr Li as Mr Li’s attorney, included:

(a) A declaration of loan purpose signed by Ms Cheng on behalf of Harv Properties as borrower, ASAP Finance as lender, and Mr Li as guarantor of the loan;

(b) A term loan agreement under which ASAP Finance agreed to lend
$1,200,000 to Harv Properties with Mr Li as guarantor;

(c) A general security agreement under which Mr Li granted ASAP Finance a security interest over all of his present and after acquired property;

(d) A deed of guarantee and indemnity under which Mr Li unconditionally and irrevocably guaranteed to ASAP Finance the due payment of all indebtedness of Harv Properties to ASAP Finance;

(e) A guarantee acknowledgment which included an acknowledgment by Mr Li as guarantor that he had been advised to obtain legal advice and had independently elected not to obtain such advice;
(f) A guarantor’s waiver under which Mr Li is said to have been informed by his solicitor that it was advisable to seek independent legal advice before executing the deed of guarantee and indemnity;

(g) A mortgage apparently signed by Ms Cheng for Harv Properties in favour of ASAP Finance securing the sum of $2,400,000 to be registered against the titles of the three apartments and the Tauroa property, and signed by Mr Li as covenantor.

[41] The mortgage to ASAP Finance was registered on the titles to the four properties on 13 May 2011.

[42] Mr Li says he had no knowledge of and did not consent to Mr Yu signing these documents on his behalf, that he had no connection to Harv Properties and would never have willingly guaranteed its debts. He also says he only learned of the existence of these documents in 2017 as part of discovery in these proceedings.

[43] When signing the above documents as Mr Li’s attorney, Mr Yu signed several certificates of non-revocation of power of attorney, all dated 4 May 2011. Those certificates stated that as at the date of signature, Mr Yu had not received any notice of the revocation of his appointment as Mr Li’s attorney.

[44] On 10 May 2011, following an agreement by Yes Finance to release its caveat registered against the titles to the three apartments provided Harv Properties provided a new guarantee, a variation of the term loan agreement between NZ New Oak and Yes Finance was concluded. The variation provided, among other things, that Mr Li was an “additional covenantor” and Harv Properties a “further additional covenantor” to the loan. Mr Yu signed the variation on behalf of Mr Li. Mr Yu also signed certificates of non-revocation of power of attorney dated 10 May 2011, despite the fact the power of attorney had been revoked on 5 May 2011. Mr Li says he had no knowledge that the variation was being signed and did not consent to being an additional covenantor to the loan.
[45] Pursuant to the variation of the loan agreement, Harv Properties granted a second mortgage with a priority of $200,000 over the three apartments and the Tauroa property and an unlimited guarantee and indemnity in favour of Yes Finance. Ms Cheng did not sign on behalf of Harv Properties. The company’s signature was given by the “attorney of the company”.

The relationship of Ms Cheng to Mr Yu and Harv Properties

[46] The pleadings and the documents produced as part of the common bundle establish the following:

(a) Ms Cheng worked for Mr Yu in April and May 2011. Mr O’Callahan described her as Mr Yu’s personal assistant and I have no reason to doubt that description.

(b) Harv Properties was a company set up by Henry Feng, (the fourth defendant and a solicitor who acted for Mr Yu); all the shares in Harv Properties were held by Henry Feng, Amy Feng (Mr Feng’s wife), and Li Wang. Mr O’Callahan described Harv Properties as a shelf company established by Henry Feng and I have no reason to doubt that description.

(c) On 29 April 2011, all the shares in Harv Properties were transferred to Ms Cheng.

(d) Also on 29 April 2011, Mr Yu and Ms Cheng signed a deed of trust which recorded that:

(i) As at that date and at Mr Yu’s request, Ms Cheng acquired all the shares of Harv Properties and became the sole shareholder of the company, and was appointed and became the sole director of Harv Properties;

(ii) Ms Cheng held the shares on trust for Mr Yu and at all relevant times agreed to act as trustee or agent for Mr Yu;
(iii) Ms Cheng would deal with the shares and manage Harv Properties as Mr Yu required;

(iv) Mr Yu undertook to indemnify Ms Cheng against all loss or liability arising out of her performance of the deed except in the case of fraud or other wilful misconduct on her part.

[47] Because of these arrangements, as at the transfer of the three apartments and the Tauroa Property to Harv Properties on 13 May 2011, Ms Cheng was the sole director and shareholder of Harv Properties but was the trustee and agent of Mr Yu who, in his claimed capacity as Mr Li’s attorney, had executed the documents for the sale of the properties and the security documents by which Mr Li had undertaken to guarantee the loans taken out by Harv Properties to purchase the properties.

Relevant developments since the sale of the properties to Harv Properties

[48] The titles to the three apartments show that each of the apartments has been transferred to third parties. Mr Li accepts that the transfers were to bona fide purchasers for value and that the purchasers had no notice of his interest in the properties.

[49] Harv Properties remains the registered proprietor of the Tauroa property.

[50] Mr Yu became the sole director of Harv Properties in February 2013.

Mr Li’s claims against Harv Properties and Ms Cheng

[51] In his second amended statement of claim, Mr Li alleges that Mr Yu either falsely or dishonestly misrepresented that he had authority under the power of attorney after it had been revoked on 5 May 2011, or dishonestly breached his fiduciary duties to Mr Li under the power of attorney when he gave instructions to Winston Wang & Associates and Henry Feng Lawyers in relation to the transfer of the three apartments and the Tauroa property. In his submissions, Mr O’Callahan stated the case more broadly, namely that the transfers had been fraudulent.
[52] In any event, Mr Li says that because of Harv Properties’ close association with Mr Yu, Harv Properties:

(a) Acquired the Tauroa property with notice of the fraud and notice that its acquisition of the property would be adverse to Mr Li’s interest in the property; and

(b) Did not acquire the Tauroa property as a bona fide purchaser for value without notice and acquired the Tauroa property with the intent to defraud Mr Li of his interest in the property.

[53] Accordingly, Harv Properties is not protected against ejectment from the Tauroa property by s 63 of the Land Transfer Act 1952.

[54] Mr Li also says Mr Yu and Harv Properties were entities closely associated with each other, and that:

(a) The transfer of the three apartments and the Tauroa property comprised a breach of Mr Yu’s fiduciary duties to Mr Li and defeated Mr Li’s interests in the properties; and

(b) Harv Properties obtained title to the three apartments and the Tauroa property with knowledge and an intention to defeat Mr Li’s interests.

[55] Mr Li also says that Ms Cheng was acting on Mr Yu’s instructions in giving effect to the agreements for the sale and purchase of the three apartments and the Tauroa property, that Ms Cheng either had knowledge of or was wilfully blind to Mr Yu’s breaches of his fiduciary duties to Mr Li under the power of attorney and that she dishonestly assisted Mr Yu and Harv Properties in Mr Yu’s breach of his fiduciary duties.

[56] For the above reasons, Mr Li seeks:

(a) An order revesting title to the Tauroa property in Mr Li;
(b) Orders directing Harv Properties and Ms Cheng to account to Mr Li for the losses he incurred from the sale of the three apartments, as well as interest and costs.

Analysis of Mr Li’s claims

[57] The essential issues for determination are whether the transfers of the three apartments and the Tauroa property were fraudulent, and if so:

(a) Whether the Tauroa property may be transferred back to Mr Li;

(b) What was the loss suffered by Mr Li with respect to the transfer of the three apartments;

(c) Whether orders should be made against Harv Properties and Ms Cheng in respect of those losses.

Were the transfers fraudulent?

[58] Mr O’Callahan says there is reason to believe the sale and purchase agreements for the three apartments and the Tauroa property were concluded after the power of attorney had been revoked and were backdated.

[59] I accept Mr Li’s evidence that the three apartments and the Tauroa property were sold without his knowledge and without his authority. Whether or not the agreements had been backdated, it is clear they were settled after the power of attorney had been revoked and in circumstances where any bona fide fiduciary in the position of Mr Yu would not have proceeded with the transactions given that the purchaser, Harv Properties, was a bare trustee for Mr Yu.

[60] It is also clear from the security documents that Mr Yu signed on behalf of Mr Li on 4 May 2011 that Mr Yu was continuing to purport to act on Mr Li’s behalf even after Mr Li had told Mr Yu that he intended to revoke the power of attorney. In signing the variation to the term loan agreement with Yes Finance on 10 May 2011, Mr Yu
continued to purport to act as Mr Li’s attorney on 10 May 2011 despite the revocation of the power of attorney on 5 May 2011.

[61] I find, therefore, that Mr Yu acted dishonestly and fraudulently and in breach of his fiduciary duties to Mr Li in signing the security documents and the variation of the term loan agreement with Yes Finance, and in directing Ms Cheng to make arrangements for the transfers of the properties from Mr Li to Harv Properties. I also find that Mr Yu’s knowledge that the transfers were fraudulent can be imputed to Harv Properties since Mr Yu effectively controlled Harv Properties through Ms Cheng who was required to act on Mr Yu’s instructions.

Consequences regarding Tauroa property

[62] I accept that because of Harv Properties’ close association with Mr Yu, Harv Properties:

(a) Acquired the Tauroa property with notice of the fraud and notice that its acquisition of the property would be adverse to Mr Li’s interest in the property; and

(b) Did not acquire the Tauroa property as a bona fide purchaser for value without notice and acquired the Tauroa property with the intent to defraud Mr Li of his interest in the property.

[63] For these reasons, I find that:

(a) Harv Properties is not protected against ejectment from the Tauroa property under s 63 of the Land Transfer Act 1952 because Mr Li was deprived of the Tauroa property through fraud by Harv Properties which remains the registered proprietor of the Tauroa property; and

(b) The Tauroa property should be transferred back to Mr Li.

[64] For completeness, I record that, in accordance with clause 2(4) of the First Schedule to the Land Transfer Act 2017, the repeal of the Land Transfer Act 1952 with
effect from 12 November 2018 does not affect the making of an order revesting title to the Tauroa property in Mr Li.

Extent of loss by Mr Li from transfer of the three apartments

[65] Because the three apartments were transferred to bona fide purchasers for value without notice of the fraud, the registered proprietors of the apartments are protected from ejectment. Accordingly, Mr Lee seeks compensation for the losses he suffered because of the transfer of the apartments to Harv Properties.

[66] Mr Li says that his loss was the equity in the apartments as at the date of sale, 13 May 2011. I accept that is an appropriate basis on which to calculate Mr Li’s loss.

[67] Mr Lee says he did not receive any value from the transfer of the three apartments and the Tauroa property and, in particular, did not receive any credit from Harv Properties for $620,000 as stated in the settlement statement of 12 May 2011 prepared by Winston Wang & Associates.

[68] I accept that because Harv Properties was a shelf company owned by Mr Feng and related parties prior to 29 April 2011, it is highly unlikely that Mr Li would have received any such advance payment prior to 5 May 2011, the date of the first settlement Winston Wang settlement statement that refers to a previous credit of $620,000 to the vendor. I find, therefore, that no such credit was made to or received by Mr Li.

[69] As a corollary, I find that Mr Lee received no value from the sale of the properties because, once the purported credit is removed from consideration, the sum required to settle ($1,203,258.59) was less than the total of the loans that had to be repaid to discharge the ASAP Finance mortgages and to secure the removal of the Pickwood caveat ($1,275,057.51).

[70] Mr Foote, a registered valuer, said he considered the sale of the three apartments in May 2011 for a total price of $1,620,000 to be at a significant undervalue given that the real estate market was taking off in 2011. Mr Foote gave evidence that the value of the three apartments as at 13 May 2011 was $1,730,000 comprised as follows:

(a)	Unit 6:	$570,000
(b)	Unit 8:	$560,000
(c)	Unit 14:	$600,000.

[71] I accept Mr Foote’s figures as the best available evidence of the value of the three apartments.

[72] Mr Li calculates that his equity in the three apartments as at the date of sale at
$661,000, being approximately the difference between Mr Foote’s valuation and the loans owing to ASAP Finance and Pickwood with respect to the apartments. In reaching that figure, however, it appears that Mr Li has relied on the figure stated on the settlement statement prepared on 4 May 2011 by Ganda & Associates. That statement stated that the amount then owing on the loans stood at $1,033,865.36. A deduction of this figure, plus the $35,000 owed to Pickwood, from Mr Foote’s valuation of $1,730,000 results in a balance of $661,134 – the figure used in Mr Li’s second amended statement of claim to establish Mr Li’s lost equity.

[73] However, the Ganda & Associates settlement statement of 4 May 2011 was superseded by the revised settlement statement prepared by Ganda & Associates on
12 May 2011 which stated that the amount then owing on the loans stood at
$1,036,830.97. Deducting that figure, plus the $35,000 owed to Pickwood, from Mr Foote’s valuation of $1,730,000 results in a balance of $658,169.03.

[74] Using this last figure, I calculate Mr Li’s lost equity at the date of sale was
$658,169.03 – which I round to $658,100.00.

Claim against Harv Properties with respect to the three apartments

[75] I have already found that Mr Yu acted dishonestly and fraudulently and in breach of his fiduciary duties to Mr Li in signing the security documents and in directing Ms Cheng to make arrangements for the transfers of the properties from Mr Li to Harv Properties, and that Mr Yu’s knowledge that the transfers were fraudulent can be imputed to Harv Properties. It follows that Harv Properties received the three apartments with knowledge and an intention to defeat Mr Li’s interests and
can be held to account for the losses that Mr Li suffered because of the fraudulent transfer of the three apartments.

Claim against Ms Cheng

[76] Mr Li says Ms Cheng either had knowledge of or was wilfully blind to Mr Yu’s breaches of his fiduciary duties to Mr Li under the power of attorney and that, in her role as sole director of Harv Properties, Ms Cheng dishonestly assisted Mr Yu and Harv Properties in Mr Yu’s breach of his fiduciary duties.

[77] Mr O’Callahan referred me to the decision of the Privy Council in Royal Brunei Airlines v Tan, in which Lord Nicholls canvassed the law concerning the liability of third parties who assist a trustee in breach of the trustee’s duties. In that case, the Privy Council held that the managing director and principal shareholder of a travel agency, which was in a fiduciary relationship with Royal Brunei Airlines, was liable for knowingly assisting in a breach of trust owed to the Airlines.¹

[78] Mr O’Callahan also referred me to the Court of Appeal’s decision in Watson v Dolmark Industries Ltd where the Court held the director of a company who was knowingly implicated in his company’s breach of a fiduciary duty to the appellant was personally liable for the consequences of the breach, and to the Privy Council’s decision in Wah Tat Bank Ltd v Chan to which Cooke P referred in Dolmark Industries.² In Wah Tat Bank, the Privy Council held the managing director of a company personally liable for knowingly causing his company to hand over the claimant’s goods to others in circumstances that constituted conversion of the goods.

[79] Mr O’Callahan also referred me to Westpac New Zealand Ltd v MAP and Associates Ltd where the Supreme Court considered the Privy Council’s decision in Barlow Clowes International Ltd v Eurotrust International Ltd in which Lord Hoffman reviewed and summarised the law on dishonest assistance and reaffirmed the

¹ Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378 (PC).

² Watson v Dolmark Industries Ltd [1992] 3 NZLR 311 (CA) at 316, Wah Tat Bank Ltd v Chan

[1975] 2 AC 507 (PC).

law as stated by Lord Nicholls in Royal Brunei Airlines.³ In Barlow Clowes, the Privy Council held that a director of a trust company, which received payments that the director strongly suspected came from monies invested with the payer by investors in an investment scheme, was liable for losses suffered by the investors upon the collapse of the scheme. In Westpac New Zealand v MAP Industries, the Supreme Court held that the appellant could not show that any breach of trust would have occurred so, on the facts of that case, the Court did not make any findings of dishonest assistance.

[80] The essential common element in Royal Brunei Airlines, Dolmark Industries and Wah Tat Bank was the knowing dishonesty of the directors of the companies held to have breached their duties as fiduciaries.⁴ In Barlow Clowes, the director was found to have strongly suspected that the funds passing through his hands had come from investors who thought they had been investing in gilt-edged securities. The Court held that if those suspicions were correct, no honest person would have assisted in the transaction but the director consciously decided not to make inquiries because he preferred in his own interest not to run the risk of discovering the truth.⁵

[81] Mr O’Callahan says, in effect, that Ms Cheng, as sole director of Harv Properties, was in a similar position to the directors in those cases. He says Ms Cheng must have known that no credit of $620,000 had been given by Harv Properties to Mr Li. He says when Ms Cheng signed the agreements for sale and purchase of the three apartments and the Tauroa property and the security documents, she knew Mr Yu had power of attorney for Mr Li and that she knew that the transfer of the three apartments and the Tauroa property from Mr Li to Harv Properties was to Mr Yu’s benefit and Mr Li’s detriment.

[82] Mr O’Callahan submits that Ms Cheng, knowing of that breach of Mr Yu’s fiduciary duties to Mr Li, nevertheless assisted Mr Yu and Harv Properties to deprive

3. Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751; Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476.
4. Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378 (PC) at 393; Watson v Dolmark Industries Ltd [1992] 3 NZLR 311 (CA) at 316; Wah Tat Bank Ltd v Chan [1975] 2 AC 507 (PC) at 515.
5. Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476 at [11]- [12].

Mr Li of the three apartments and the Tauroa property and says this comprises dishonest assistance.

[83] In Royal Brunei Airlines, Lord Nicholls made various observations about the meaning of dishonesty in this context. He stated:⁶

... in the context of the accessory liability principle, acting dishonestly ... means simply not acting as an honest person would in the circumstances. This is an objective standard.

...

Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective.

...

In most situations, there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take other people’s property. Unless there is a good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misappropriation of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.

[84] After making these general statements, Lord Nicholls acknowledged that in some situations the position is not always so straightforward and he considered the approach to be taken in those situations. Lord Nicholls said:⁷

Acting in reckless disregard of others’ rights or possible rights can be a tell- tale sign of dishonesty. A dishonest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one of more of the possible course should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained.

⁶ Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378 (PC) at 389.

⁷ Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378 (PC) at 390-391.

He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.

Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to the personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.

[85] In Barlow Clowes, Lord Hoffman reaffirmed the law as stated by Lord Nicholls and reaffirmed that although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective, and that, if by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant has different standards and does not appreciate that his or her conduct, by ordinary standards, would be regarded as dishonest.⁸

[86] In Westpac New Zealand v MAP Industries, Tipping J for the Supreme Court reaffirmed the above statement by the Privy Council, recording that in that respect the Privy Council had said that the necessary state of mind for dishonest assistance could consist in suspicion combined with a conscious decision not to make inquiries that might result in knowledge.⁹ Tipping J went on to elaborate on the requirements for a cause of action for dishonest assistance:¹⁰

[27] The key ingredient in the cause of action for dishonest assistance is the need for a dishonest state of mind on the part of the person who assists in the breach of the trust. We agree with the statement in Barlow Clowes that such a state of mind may consist in actual knowledge that the transaction is one in which the assistor cannot honestly participate. But it may also consist in what we would describe as a sufficiently strong suspicion of a breach of trust, coupled with a deliberate decision not to make inquiry lest the inquiry result in actual knowledge. For the purpose of this alternative, it is necessary that the strength of the suspicion that a breach of trust is intended makes it dishonest not to make inquiry. The state of mind, which equity equates with actual knowledge, is usually referred to as wilful blindness. It involves shutting one’s eyes to the obvious and can thus fairly be equated with the dishonesty involved when there is actual knowledge.

8. Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476 at 10.
9. Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 at [26].

¹⁰ Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751.

[87] I conclude from the above principles as stated in Royal Brunei Airlines, Barlow Clowes and Westpac New Zealand v MAP Industries that in order to decide whether Ms Cheng acted dishonestly in assisting Mr Yu in the breach of his fiduciary obligations to Mr Li, I must decide whether in the circumstances known to Ms Cheng at the time, and having regard to Ms Cheng’s position and experience, it has been established on the balance of probabilities that Ms Cheng either:

(a) Had actual knowledge that the transfers of the three apartments from Mr Li to Harv Properties were transactions in which no honest person would participate; or

(b) Had a sufficiently strong suspicion of a breach of trust that made it dishonest for her not to make inquiry when she signed the various documents that resulted in the transfers of the three apartments.

[88] I also conclude that in considering the above questions I should consider whether Ms Cheng was in a position to decline to be involved in the transfers or to make inquiries that may have helped her to decide whether the transfers or her participation in them would offend the normally accepted standards of honest conduct.

[89] It is clear from the decisions in Royal Brunei Airlines and Barlow Clowes that dishonesty is to be assessed objectively. However, there still needs to be a sufficient factual basis upon which the Court can make that assessment. The difficulty for the Court in the present case is that Ms Cheng took no part in the proceedings other than filing a statement of defence to Mr Li’s amended statement of claim. The only direct information of Ms Cheng’s knowledge of the transfers of the properties, therefore, is that contained in the admissions in that statement of defence and in the documents she signed in relation to the transfers.

[90] In her statement of defence Ms Cheng admits that the signature on the trust deed of 29 April 2011 appears to be her signature. In response to Mr Li’s allegation that she was Mr Yu’s secretary, assistant or that she was otherwise employed by Mr Yu, Ms Cheng admits that she worked for Mr Yu in April and May 2011. Ms Cheng also
admits that from 29 April 2011 to 18 February 2013 she was the sole director of Harv Properties.

[91] Ms Cheng does not make any admissions with respect to the signatures on the agreements for sale and purchase of the three apartments and the Tauroa property or with respect to signatures on the security documents, including the variation to the of the term loan agreement between NZ New Oak and Yes Finance, that she is said to have signed. However, with the exception of the variation to the term loan agreement (which Ms Cheng did not sign), the signatures on those documents appear to be the same as the signature on the trust deed of 29 April 2011. I am satisfied on the balance of probabilities that Ms Cheng also signed those documents.

[92] Beyond that information, however, I have little evidence about Ms Cheng. In particular, I do not know how long she worked for Mr Cheng before April 2011, the extent of her knowledge of Mr Yu’s business or of the manner in which he conducted his business. I do not know whether her role extended beyond being Mr Yu’s secretary or personal assistant. I do not know her level of proficiency in English or her understanding of business dealings. Therefore, I do not know whether she understood the nature and content of the documents she signed. For that reason, I do not know if she understood that Harv Properties was claiming to have already paid a credit of
$620,000 to Mr Li in part satisfaction of the transfers of the three apartments and the Tauroa property. Nor do I know if Ms Cheng understood the concept of power of attorney and the nature of the responsibilities that Mr Yu owed to Mr Li.

[93] This lack of information makes it very difficult for the Court to reach any conclusions on whether, when signing the documents for the transfers of the three apartments from Mr Li to Harv Properties, Ms Cheng would have had either:

(a) Actual knowledge of a breach of trust by Mr Yu; or

(b) A sufficiently strong suspicion that the transfers involved a breach of trust and that her failure to make inquiry was wilful blindness.
[94] One matter is very clear. Ms Cheng’s circumstances were very different position from those of the directors in Royal Brunei Airlines, Dolmark Industries, Wah Tat Bank and Barlow Clowes. In each of those cases, the director was in effective control of the company. In Dolmark Industries, the director instigated the company’s breach of its fiduciary duties.¹¹ In Barlow Clowes, the director had actual knowledge of previous dishonesty by one of the persons involved in the investment scheme.¹²

[95] Ms Cheng, however, was a secretary or personal assistant who had been asked by her employer, Mr Yu, to take on the position of director and who had agreed to act at the direction of Mr Yu. It is possible that she paid little attention to the documents she was asked to sign. Whether that amounts to wilful blindness depends on whether Ms Cheng had any reason to suspect that Mr Yu was intending to act fraudulently and in breach of his fiduciary obligations to Mr Li. However, the evidence available to the Court does not provide a sufficient basis for reaching a conclusion on that question.

[96] Nor does the Court have sufficient information to assess whether it was really open to Ms Cheng, in the circumstances of her employment, to decline to sign the documents relating to the transfers of the properties, to ask Mr Yu to obtain further advice or to ask other questions to satisfy herself that the transfers or her participation in them, would not offend normally accepted standards of honest conduct.

[97] I have taken into consideration that Ms Cheng has chosen not to take part in this proceeding after having filed her statement of defence and therefore has chosen not to take the opportunity to defend herself against Mr Li’s claims. I am aware that such inaction may itself provide a basis for inferring that Ms Cheng had knowledge that the transfers of the three apartments were made in breach of Mr Yu’s fiduciary obligations to Mr Li.¹³ Had Ms Cheng been in control of Harv Properties and had directed the transfers, there may have been sufficient basis for drawing that inference from her failure to take part in the proceeding. However, given Ms Cheng’s position as Mr Yu’s trustee or agent who was required to act on Mr Yu’s direction, and given

¹¹ Watson v Dolmark Industries Ltd [1992] 3 NZLR 311 at 316.

12. Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476 at 22.

¹³ See Johnston v Mapp [2013] NZHC 2858 in footnote at [71].

the lack of information about the duration and nature of Ms Cheng’s role in Mr Yu’s business, her understanding of English, of business dealings and of the nature and content of the documents she signed, I do not consider failure to take part in the proceeding can provide an adequate basis for drawing that inference.

[98] For these reasons, Mr Li has not satisfied me that, on the balance of probabilities, Ms Cheng knew or ought to have known that Mr Yu was acting to his own benefit and to Mr Li’s detriment when she signed the various documents that resulted in the transfers of the three apartments from Mr Li to Harv Properties. The documents themselves and Ms Cheng’s signatures on them do not provide a sufficient basis for the Court to reach the conclusion that, in Ms Cheng’s circumstances at the time, Ms Cheng was acting dishonestly. Therefore, I cannot conclude that Ms Cheng’s behaviour amounted to dishonest assistance.

[99] I emphasise that this does not mean that a person who is a secretary or personal assistant and who agreed to act in a business capacity such as a director of a company cannot be held liable for dishonest assistance. My findings in this case are based on the information or, more accurately, the lack of information available to the Court.

Result

[100] I find that the second defendant, Harv Properties Ltd:

(a) Received the property at 109 Tauroa Street, Whangarei (Certificate of title NA118A/45) and three apartments (Numbers 6, 8 and 14) at 12-14 Schnapper Road, Auckland with knowledge and an intention to defeat Mr Li’s interests in those properties;

(b) Is not, under s 63 of the Land Transfer Act 1952, protected from ejectment against an order for possession of the property at 109 Tauroa Street, Whangarei;

(c) Is liable to the plaintiff, Mr Li, for the sum of $658,100.00 as equitable compensation for the losses Mr Li suffered because of the transfer of
the three apartments (Nos 6, 8 and 14) at 12-14 Schnapper Road, Auckland.

[101] I also find that the second defendant, Harv Properties Ltd, is liable to pay Mr Li interest at five per cent from 13 May 2011 on the sum of $658,100.00, and Mr Li’s costs and disbursements on a 2B basis.

[102] Mr Li’s claim against Ms Cheng for compensation for the losses Mr Li suffered from the transfer of the three apartments has not been proven.

Orders

[103] I make the following orders:

(a) Certificate of Title NA118A/45 is to be revested in the name of the plaintiff, Zhong Li;

(b) The Director-General of Land is directed to enter a memorandum in the register on Certificate of Title NA118A/45 vesting the certificate of title in the name of Zhong Li;

(c) The second defendant, Harv Properties Ltd is to pay the plaintiff, Zhong Li:

(i) Equitable compensation of $658,100.00;

(ii) Interest at five per cent per annum from 13 May 2011 on the sum of $658,100.00;

(iii) Mr Li’s costs and disbursements on a 2B basis.







G J van Bohemen J