Huang v Matakana Wines Limited [2021] NZHC 348 (2 March 2021)

Last Updated: 8 April 2021

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

CIV 2021-404-304 [2021] NZHC 348

BETWEEN	HONGZHAO HUANG First Plaintiff JIEYU LU Second Plaintiff MATAKANA WINES LIMITED Third Plaintiff
AND	WAIHOPAI VALLEY VINEYARD LIMITED Defendant

Hearing:	24 & 26 February 2021
Appearances:	D J Friar and B J Ward for the Plaintiffs D Cooper for the Defendant
Result:	24 February 2021
Reasons:	2 March 2021

JUDGMENT OF DUFFY J

This reasons judgment was delivered by me on 2 March 2021 at 4.45 pm pursuant to

Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Solicitors/Counsel:

Bell Gully, Auckland

D Cooper, Barrister, Auckland

HUANG & LU v MATAKANA WINES LTD & WAIHOPAI VALLEY VINEYARD LIMITED [2021] NZHC

348 [24 February 2021]

• [1] On Wednesday 24 February 2021, counsel for the plaintiffs brought an urgent without notice application for interim freezing and ancillary orders against the defendant (Waihopai). Mr Cooper appeared as counsel for Waihopai on a Pickwick basis. I delivered a result judgment granting the orders sought in the application to remain in force until 5 pm Monday 8 March 2021.

• [2] On Friday 26 February 2021, the plaintiffs made a further urgent without notice application for freezing and ancillary orders against Chris Chen, Don Chen, Yi Lu and the Chris Chen Family Trust. Mr Cooper appeared as counsel for Chris Chen on a Pickwick basis. There was no appearance on behalf of Don Chen (who resides in Australia) or Yi Lu. I delivered a result judgment granting the orders sought in that application with some amendments. Those orders were also to remain in force until 5 pm Monday 8 March 2021.

• [3] Later, on 26 February 2021, the plaintiffs obtained an urgent telephone conference with the Court, and made an urgent oral application for freezing and ancillary orders against Yang Qi, the wife of Yi Lu. Mr Cooper also attended this conference, but he did not represent Yi Lu or Yang Qi. I delivered a result judgment granting those orders, which were also to remain in force until 5 pm Monday 8 March 2021.

• [4] My reasons for granting the various orders now follow.

Background to 24 February application for freezing orders and ancillary orders

• [5] In 2019 the plaintiffs filed proceedings against Chris Chen seeking repayment of $2,376,261 (plus interest and costs) which they allege Chris Chen owes them personally (the Chen claim).¹

• [6] Chris Chen and Yi Lu are shareholders and directors of Waihopai. Don Chen is a shareholder of Waihopai.

¹ Hongzhao Huang & Anor v Chris Chen CIV 2019-404-100.

• [7] The Chen claim is due to go to trial in this Court on 8 March 2021. As part of the trial preparation the plaintiffs received late discovered material and evidence briefs from Chris Chen. This information revealed that Chris Chen intends to argue that the funds from the plaintiffs were capital contributions paid to Waihopai rather than personal loans to him. The documents Chris Chen has recently discovered show Waihopai recorded the funds as loans it received from the plaintiffs. However, Chris Chen intends to argue that the payments were for equity. The plaintiffs now realise they will need to proceed against Waihopai as well, in case Mr Chen’s defence that the funds were not advanced to him personally succeeds at trial.

• [8] Plaintiffs will ordinarily bring proceedings in the alternative against both the company and the shareholder/director where the status of the legal recipient of advanced funds is unclear. However, here, the plaintiffs have only recently been alerted to the possibility that they may be pursuing the wrong defendant. It is now too late to amend the Chen claim to include a cause of action against Waihopai as a defendant. Instead, the plaintiffs have brought the present proceeding against Waihopai alleging that the company has received at least $2,376,261 either by way of loans or money had and received from the plaintiffs.

• [9] The plaintiffs knew that Waihopai’s primary asset was a 150 hectare plot of land in Marlborough (the Waihopai land). In the Chen claim, Chris Chen has disclosed a valuer’s report valuing the Waihopai land at $13.15 million, as at 19 October 2020. The plaintiffs say that they only learned that Waihopai had settled the sale of this land on Friday 19 February 2021 when they received Chris Chen’s brief of evidence in the Chen claim on 22 February 2021. Chris Chen had not previously disclosed the fact the property was for sale or the expected sale price.

• [10] The sale of Waihopai’s primary asset caused the plaintiffs to believe there was a real and immediate risk that Waihopai could dissipate the proceeds of sale. Nothing the plaintiffs learned from the lawyers acting for Mr Chen allayed those concerns. Accordingly, the plaintiffs commenced this proceeding and sought interim freezing and ancillary orders to preserve the proceeds of the sale.

Requirements for freezing and ancillary orders

• [11] The key requirements applicants must establish to obtain freezing and ancillary orders are:

(a) They have a good arguable case;

(b) There are assets to which the order can apply; and

(c) There is a real risk of dissipation.

Do the plaintiffs have a good arguable case?

• [12] There is evidence to show funds of $2,376,261 have moved from the plaintiffs to either Chris Chen or Waihopai. The annual accounts of Waihopai for 2019 and 2020 record those funds as loans from the plaintiffs, which at least is an acknowledgment Waihopai has received those funds.

• [13] Mr Cooper, who appeared for Waihopai on short notice and without time to prepare a notice of opposition or evidence in opposition, submitted that the plaintiffs could not argue that the same funds were due from Chris Chen in one proceeding and Waihopai in the other. Superficially, this argument may have some attraction. However, it overlooks the fact the plaintiffs have responded in this way to counter Chris Chen’s defence, which is essentially that they are pursuing the wrong defendant in the Chen claim.

• [14] Mr Cooper also argued that the plaintiffs’ funds were provided by them to secure an investment in Waihopai rather than as a loan. This submission is contrary to Waihopai’s treatment of the funds in its annual accounts. Commercial parties are free to agree to financial arrangements which are later structured differently and involve associated corporate entities, which may explain why the plaintiffs believe their funds went to Chris Chen whereas Waihopai has treated the funds as a loan to it. In short, the plaintiffs can show their funds were provided either directly or indirectly to Waihopai, and Waihopai has not disputed this. The plaintiffs now seek the return of those funds. Chris Chen disputes any obligation to repay the funds.
• [15] Given that: (a) in this proceeding there is evidence to show Waihopai has recorded the funds from the plaintiffs as a loan in the annual accounts for 2019 and 2020; (which is an acknowledgment that Waihopai has received those funds); (b) Chris Chen’s stance in the Chen claim that he is not personally liable to repay the funds to the plaintiffs, I am satisfied that in this proceeding the plaintiffs have a good arguable case to recover the funds either as a loan to wai, or in the alternative as money had and received by Waihopai.

• [16] Even if Mr Cooper is correct and the plaintiffs have provided the funds to acquire a beneficial interest in Waihopai shares, which is not something I have evidence to support, the conduct of Chris Chen and Yi Lu in the way they as directors of Waihopai have handled the proceeds of sale is consistent with self-dealing directors acting in their personal interests and in breach of their fiduciary duties to Waihopai. This conduct would entitle persons with a beneficial interest in Waihopai shares to take action to stop the dissipation of the sale proceeds. The plaintiffs, therefore, have an available answer to this ground of opposition.

Are there assets to which the orders can apply?

• [17] On 24 February 2021 there was no reason to believe that the freezing and ancillary orders could not apply to the proceeds of the Waihopai land sale, presumed to be held by Waihopai. Evidence that the sale proceeds were no longer in the Waihopai bank account did not become available until later and was not considered until the hearing on 26 February 2021. Accordingly, at the time the decision to grant the orders was made the assets requirement was found to be satisfied.

Is there a real risk of dissipation?

• [18] At the time the freezing and ancillary orders were made on 24 February 2021 the evidence of a real risk of dissipation could be inferred from the conduct of Waihopai’s directors in deciding to sell the company’s primary asset so close to the trial date of the Chen claim as well as the circumstances in which it was sold. Nothing was said to the plaintiffs about the sale until after it had occurred. The property was considered relevant to the Chen claim because the October 2020 valuation was discovered in that claim. This suggests that developments relevant to the property,

particularly a plan to sell it and the execution of a sale and purchase agreement, should also have been discovered as they arose rather than after the sale was settled. The failure to disclose this information earlier on is consistent with Waihopai’s directors wanting to deprive the plaintiffs of the opportunity to stop the sale of the property or to take steps to preserve the proceeds of its sale. As it is the plaintiffs have taken steps in this direction, but under urgency and therefore with more limited opportunity to prepare their case.

• [19] There was another concerning matter. When Mr Cooper appeared on instructions from Waihopai he could not inform the Court about: (a) the sale price; (b) the whereabouts of the proceeds of sale; or (c) proposed use of the proceeds. He had no instructions on those matters. Accordingly, he could offer no comfort to the plaintiffs or the Court that the proceeds were not at real risk of dissipation.

• [20] Mr Cooper challenged the substance of the third plaintiff’s undertaking as to damages, because they are a limited liability company. The second plaintiff has now made an undertaking as to damages and has sufficient assets to support this. Accordingly, this ground of opposition from Mr Cooper fell away.

• [21] It is a well-established principle of evidence that in some circumstances the failure of a party to call a witness may allow an inference that the missing evidence would not have helped that party’s case. The existence of the principle was accepted in Ithaca (Custodians) Ltd v Perry Corporation where the Court of Appeal stated as follows:²
  • [153] ... There is no rule. Rather, there is a principle of the law of evidence authorising (but not mandating) a particular form of reasoning. The absence of evidence, including the failure of a party to call a witness, in some circumstances may allow an inference that the missing evidence would not have helped a party’s case. In the case of a missing witness such an inference may arise only when:

(a) the party would be expected to call the witness (and this can be so only when it is within the power of that party to produce the witness);

(b) the evidence of that witness would explain or elucidate a particular matter that is required to be explained or elucidated

² Ithaca (Custodians) Ltd v Perry Corporation [2003] NZCA 358; [2004] 1 NZLR 731 (CA) at [153]- [154] and [206].

(including where a defendant has a tactical burden to produce evidence to counter that adduced by the other party); and

(c) the absence of the witness is unexplained.

• [154] Where an explanation or elucidation is required to be given, an inference that the evidence would not have helped a party’s case is inevitably an inference that the evidence would have harmed it. The result of such an inference, however, is not to prove the opposite party’s case but to strengthen the weight of evidence of the opposite party or reduce the weight of evidence of the party who failed to call the witness.

• [22] The present circumstances warrant invoking this principle against Waihopai. Mr Cooper was appearing on a Pickwick basis and had little opportunity to prepare a full opposition to the applications. On the other hand, he ought to have been able to inform the Court about: (a) the sale price; (b) the whereabouts of the proceeds of sale; and (c) the proposed use of those proceeds. This information should have been readily obtainable from his client. Instead, Court enquiries were met with a blank wall. This reinforced the plaintiff’s argument regarding a real risk that the sale proceeds would be dissipated.

• [23] Waihopai said nothing about how it might be prejudiced by the freezing and ancillary orders, beyond the general restriction on dealing with assets. Waihopai ought to have given the Court some information about the particular prejudice it would suffer. In the absence of this information, I found that the short duration of the freezing orders (from 24 February 20201 to 5 pm 8 March 2021) would not cause Waihopai any real prejudice. Accordingly, I was satisfied that the general prejudice was outweighed by the very real and significant risk of asset dissipation and the resulting harm to the plaintiffs. I was also satisfied that any harm Waihopai might later identify could be remedied by an award of damages.

Conclusion

• [24] Accordingly, I found the plaintiffs satisfied the three requirements for freezing and ancillary orders and granted the orders against Waihopai sought in the application made on 24 February 2021.

Background to 26 February 2021 first application for freezing orders and ancillary orders

• [25] On 24 February 2021 Mr Cooper undertook to report to the Court by 5pm the following day on:

(a) the sale price of the Waihopai land;

(b) to explain what has happened to the proceeds of sale of this Waihopai land; and

(c) to explain where the balance of the proceeds of sale are.

• [26] The memorandum provided by Mr Cooper on Thursday 25 February 2021 showed that Waihopai had entered into the agreement to sell the land on 10 December 2020. The sale was for $13.613 million for the land and $0.712 million for an associated growing cost reimbursement. Total funds of $14.326 million were paid into the trust account of Botting Legal Ltd (Botting Law). From those funds Botting Law paid $6.136 million to ASB Bank leaving a balance of $8.129 million. Of that balance Botting Law paid at least $7.3 million directly to Chris Chen, Don Chen and Yi Lu either on the same day as the sale or the next business day. The payments purported to repay loans they had made to Waihopai. The balance covered what appeared to be third party creditors of Waihopai.

• [27] At the hearing on 26 February 2021 the plaintiffs submitted the above actions illustrated exactly the risk that they had raised with the Court on Wednesday: Waihopai has been stripped of its assets and is now essentially a shell; approximately $7.3 million has been dissipated through payments to Chris Chen, Don Chen and Yi Lu without any accounting to the plaintiffs for their $2.3 million investment.

• [28] They refer to Waihopai’s company records which show that Chris Chen owns 40 per cent of the shares, his brother Don Chen owns 20 per cent and Yi Lu owns 40 per cent. The plaintiffs referred to documents in evidence where Chris Chen has described himself as having a 60 per cent shareholding in Waihopai. In those circumstances the plaintiffs argue that there is a real question as to whether Don Chen

holds his 20 per cent registered shareholding for his own benefit or for the benefit of Chris Chen.

• [29] The plaintiffs provided a table summarising fund transfers involving the proceeds of sale. They contend that Yi Lu has received 40 per cent of the proceeds and the Chen brothers have received 60 per cent between them. Further, the vast majority of the Chen brothers’ share has been sent offshore to Don Chen, in Australia. Despite his nominal 20 per cent shareholding in Waihopai he has received 46 per cent of the sale proceeds. Chris Chen is facing an imminent trial on 8 March 2021; Don Chen is not. The plaintiffs contend that inferentially these actions are consistent with the purpose of stripping Waihopai and Chris Chen of recoverable assets in New Zealand, which indicates there is a real risk of dissipation.

• [30] The plaintiffs also argue that Mr Cooper’s memorandum of 25 February 2021 fails to disclose where the sale proceeds are now. It only shows transactions up until Monday 22 February 2021. The plaintiffs contend that the proceeds may have been transferred to other persons since that date. In this regard the plaintiffs say Waihopai has not complied with the Court’s minute of 24 February 2021 setting out the undertaking offered by Mr Cooper.

• [31] The plaintiffs further contend that details of where the proceeds are now could have been provided if Waihopai and its principals had wanted to advise the Court. Chris Chen and Yi Lu are directors of Waihopai. Mr Cooper acts for Chris Chen personally in the Chen Claim. Don Chen is Chris Chen’s brother and a shareholder of Waihopai. Given those links between them it should have been possible for instructions to be given to Mr Cooper about where the sale proceeds now are. The plaintiffs submit that the fact this information was not provided, despite the request for it to be provided at the Court hearing on Wednesday 24 February and the Court’s minute of that date, is “alarming”. They say this is a further factor indicating a real risk of dissipation.

• [32] The plaintiffs advise that at 8.33pm on Thursday 25 February 2021 they sent letters to counsel for Chris Chen, Waihopai and Yi Lu on an urgent basis directly requesting them to say where the proceeds of sale are. At the time the plaintiffs filed

their memorandum dated 26 February 2021 in support of the second application for freezing and ancillary orders the requested information had not been provided. The plaintiffs invite the Court to draw an adverse inference from the lack of information from Waihopai and from its delay. They argue that the failure of those persons to respond to requests for information about the present whereabouts of the sale proceeds leaves the plaintiffs in a position where they are chasing the sale proceeds one step behind actions taken by Waihopai and/or the Chen brothers and Yi Lu.

• [33] Further, the plaintiffs argue that this is the second time Waihopai has placed insufficient information before the Court. Accordingly, the plaintiffs argue this is another deliberate attempt by Waihopai to evade court orders until it is too late for such orders to be effective.

• [34] As further evidence of dissipation, the plaintiffs refer to the copy of the Botting Law trust account statement attached to Mr Cooper’s memorandum of 25 February 2021. This shows that $173,000 was paid to Waihopai’s ASB account on Monday as sale proceeds. However, the memorandum does not disclose that those funds have since been removed from Waihopai’s ASB account. Following service of the freezing orders granted on 24 February 2021 on the ASB Bank, it provided the plaintiffs with a recent statement of Waihopai’s account. In summary, the statement shows: (a)

$173,000 was received by Waihopai on Monday from Botting Law as sale proceeds;
(b) by Thursday 25 February 2021 the funds had been removed and the current bank balance was $54.11; (c) this removal of the funds included a single transfer of
$116,000 to an unknown party on Wednesday (the same day the application for freezing orders was served at 5 pm).

• [35] The plaintiffs rely on this information as further support for their argument that Waihopai has been stripped of its assets and is now a shell without funds to pay any claim the plaintiffs may have against it.

• [36] In the absence of any other explanation from Waihopai, the Chen brothers or Yi Lu, the plaintiffs say it is proper for the Court to draw the inference that this is a deliberate scheme by the principals of Waihopai to extract all remaining value from

the company for their own personal interests, leaving the plaintiffs with an empty shell and a worthless judgment.

• [37] Accordingly, at 2.15 pm on Friday 26 February 2021 the plaintiffs’ made a second application for interim freezing orders, which were now sought against Chris Chen and his family trust, Don Chen and Yi Lu as recipients of the proceeds of sale. Updated undertakings as to damages were also filed. The orders were sought until 5 pm 8 March 2021 to align with the existing orders and to provide an immediate but temporary protection pending a more detailed hearing. Orders were sought against all three persons because precise dealings between the parties is unknown. The plaintiffs sought to have the sale proceeds frozen until further disclosures are made.

• [38] The plaintiffs relied on High Court Rule 32.5(4)(b) which permits a court to make a freezing order, an ancillary order or both against third parties. The court must be satisfied that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because the third party removes assets from New Zealand or otherwise causes their dissipation. Under r 32.5(5) the court may make an order where the third party is in possession of, or in a position of control or influence concerning, assets of the judgment debtor or prospective judgment debtor, or where a process in the court is or may ultimately be available to the applicant, as a result of a judgment or prospective judgment, under which the third party may be obliged to disgorge assets or contribute towards satisfying the judgment or prospective judgment.

• [39] The plaintiffs submit orders affecting third parties are common and refer to Laws of New Zealand (Creditor’s Remedies).³ The plaintiffs contend here that rr 32.5(5)(a)(ii) and 32.5(5)(b) may apply. First, because the basis on which Chris Chen, Don Chen and Yi Lu hold the funds is unclear. Second, and in any event, there are a number of causes of action that may ultimately be available to the plaintiffs that might require the payments to be disgorged. For example, the plaintiffs may be entitled to apply to set aside the transactions under s 347 of the Property Law Act 2007, because there may have been dispositions made with intent to prejudice creditors of Waihopai.

³ R Asher QC and G Kohler Laws of New Zealand Creditor’s Remedies (online ed) at [17].

• [40] Further, although the orders were sought without notice the plaintiffs attempted to notify the defendants. On Thursday 25 February 2021 the plaintiffs sent letters to counsel for Chris Chen and Waihopai and to Yi Lu directly advising that the orders would be sought on Friday. The plaintiffs also asked Mr Botting of Botting Law - who made the payments to Don Chen through his trust account last week - to advise Don Chen of the orders sought.

• [41] In addition to those orders, the plaintiffs sought a court order restraining Chris Chen from leaving the country without leave of the Court and requiring delivery up of his passport. The plaintiffs relied on High Court Rule 32.3(1) which provides a court may make such an order ancillary to a freezing order.

• [42] The plaintiffs referred to a decision of this Court in Worldwide Holidays v Wang (No 2) ⁴ where Fitzgerald J made orders restraining Ms Wang from leaving New Zealand and requiring her to deliver up her passport. The Judge was satisfied that whilst the order seemed relatively novel there was jurisdiction to make it. The evidence before the Court demonstrated that Ms Wang had family ties in China and had only recently travelled there. It was not clear to what extent she had family ties in New Zealand and she had stated that she was planning to return to China fairly soon.

• [43] Here the plaintiffs contend that the order is justified against Chris Chen because he has family ties to his brother Don Chen in Australia. Despite the fact that Don Chen is only a 20 per cent shareholder in Waihopai, nearly half of the sale proceeds have already been transferred to him and moved offshore to Australia. The offshore funds transfer occurs very close to the commencement of the trial against Chris Chen personally. Further, the transfer was not disclosed to the plaintiffs until after the event. The order is only sought for a short time until the commencement of the trial on 8 March 2021. Moreover, given the Covid 19 pandemic, it seems unlikely that Chris Chen will be planning legitimate overseas travel before trial commencement. Against that, the plaintiffs contend that if Chris Chen follows the funds overseas (which at the time he was legally free to do) the prejudice to the plaintiffs will be significant.

⁴ Worldwide Holidays v Wang (No. 2) [2017] NZHC 738.

• [44] The plaintiffs have also sought an order that Chris Chen, Don Chen and Yi Lu provide affidavits of their assets and liabilities. They contend that given the rapid movement of the sale proceeds from the trust account of Botting Law to the Chen brothers and Yi Lu it is necessary for the Court to make orders requiring each of those persons to disclose the existence, nature, value and whereabouts of their assets. Further, that if the Court is satisfied such order should be made then it should also order that Chris Chen surrender his passport and not leave New Zealand. This is necessary because should he leave New Zealand it will be more difficult for the plaintiffs to enforce the order requiring Chris Chen to provide an affidavit of his assets and for them to cross-examine him on that affidavit.

• [45] The plaintiffs also sought freezing orders against Don Chen’s bank account in Australia. High Court Rule 32.3 provides that a freezing order may restrain a respondent from removing any assets located in or outside New Zealand or from disposing of or dealing with or diminishing the value of those assets. The plaintiffs relied on the recent Court of Appeal decision in Commerce Commission v Viagogo AG.⁵ This was a test case as to whether the High Court could grant interim injunctions, freezing orders and other forms of interim relief against an overseas defendant without notice before the proceeding had been served and any protest to jurisdiction had been determined. The Court of Appeal held that where the interests of justice required an order could be made on an overseas defendant on a without notice basis.

• [46] On this occasion Mr Cooper appeared for Chris Chen. He argued that the orders should not be made, particularly the orders requiring Chris Chen to surrender his passport and restricting him from leaving New Zealand. Other than the general effect of the orders on Chris Chen’s liberty, Mr Cooper could not identify any specific harm that Chris Chen might suffer between 26 February and 8 March 2021 if the Court made those orders.

⁵ Commerce Commission v Viagogo AG [2019] NZCA 472.

Conclusion

• [47] The submissions I received from the plaintiffs satisfied me that I had authority to make the orders sought against Chris Chen, Don Chen and Yi Lu.

• [48] Further, I was satisfied that the orders should be made, based on the circumstantial evidence the plaintiffs had provided. After the sale proceeds were received into the Botting Law trust account, the actions of Chris Chen and Yi Lu are not consistent with how directors of Waihopai could reasonably be expected to act. Their actions had no reasonable commercial purpose. Rather, their actions were consistent with intentional conduct designed to ensure that any money judgment the plaintiffs secured against either Waihopai or Chris Chen would not be recoverable. Nothing I heard from Mr Cooper undermined this view of their actions. Accordingly, I was satisfied the freezing orders sought against Chris Chen, Yu Li and the Chris Chen Family Trust should be made. As to the latter, I considered there was a real risk that Chris Chen might use the trust bank accounts to hold funds on his behalf and defeat the plaintiffs’ attempts to freeze his available assets.

• [49] In making these orders, I was aware that the Chen claim was set to go to trial on 8 March 2021. For this reason, Chris Chen is likely to want to be in New Zealand preparing his defence. The Covid 19 restrictions on overseas travel (at the time) further decrease the likelihood of travel.⁶ I considered, therefore, that orders requiring surrender of his passport and preventing him from leaving New Zealand between 26 February 2021 and 8 March 2021 would be unlikely to have any real prejudicial impact on Chris Chen. On the other hand, because Chris Chen was legally free to travel overseas, and if he decided against defending the Chen claim, he could travel to meet his brother in Australia and potentially access all the sale proceeds already transferred offshore.

• [50] Mr Cooper appeared for Chris Chen at the hearing on 26 February 2021 on a Pickwick basis. Mr Cooper did not identify any specific harm the orders restricting travel might cause Chris Chen. I considered that had there been any pressing reason

⁶ At the time the result decision was issued Auckland was at level one Covid 19 restrictions.

for Chris Chen to be free to leave New Zealand between 26 February and 8 March 2021 Mr Cooper could have brought that to my attention. He did not do so.

• [51] I considered that the evidence before me suggested there is a good arguable case that Chris Chen has, as a director of Waihopai, acted in a self-dealing manner, and put his personal interests ahead of those of Waihopai and the plaintiffs. There is a good argument this conduct had engaged s 347 of the Property Law Act 2007 and the legal principles relevant to self-dealing described in Sojourner v Robb.⁷ The views of the High Court and Court of Appeal in that case on self-dealing directors who strip a company of its assets and leave it a shell with creditors having no means of recovery are applicable by analogy to the present case. In short, the fiduciary duty directors owe to a company require them to act in the company’s interests. It is not in a company’s interests to strip it of all assets so that creditors cannot be paid. Breaches of equitable duty are a form of equitable fraud, which in my view is sufficient to satisfy the fraud element identified by Fitzgerald J in Worldwide Holidays v Wang (No 2).

• [52] At the hearing on 26 February 2021 I was satisfied that there was a real risk Chris Chen may leave New Zealand for Australia.⁸ Considerations were as follows:

(a) Chris Chen has a familial connection with Don Chen; (b) the vast majority of the sale proceeds transferred to the Chen brothers are now in Australia; (c) the Chen claim is about to go to trial; and (d) Chris Chen was legally free to travel to Australia.

• [53] I was also satisfied that Chris Chen should be required to provide an affidavit disclosing all other assets in New Zealand. Further, I was satisfied that freezing orders should be made against his accounts to preserve the funds remaining in those accounts.

• [54] I was further satisfied there was no reasonably apparent explanation for why the vast majority of the funds the Chen brothers received were transferred to Don Chen, given: (a) he was recorded as holding no more than 20 percent of the shares in wai; and (b) Chris Chen had previously stated that he holds 60 percent of the shares, which suggests Don Chen’s 20 percent shareholding is in fact held on trust for his

⁷ Sojourner v Robb [2007] NZCA 493; [2008] 1 NZLR 751; Sojourner v Robb [2006] NZHC 1676; [2006] 3 NZLR 808.

8. The decision was made before the Covid 19 level 3 lockdown for seven days was put in place on Saturday 27 February 2021.

brother. On this basis there was a good argument for freezing the funds in Don Chen’s Australian bank account.

• [55] Yi Lu received $2,506,744.11 from the proceeds of sale. There was no reasonable explanation why Yi Lu received those funds in preference to other Waihopai creditors. The same arguments for making freezing and ancillary orders against Chris Chen applied to Yi Lu. His conduct was not consistent with that to be expected of a director of Waihopai. The plaintiffs had details of his bank accounts to which the orders sought could attach. I considered there was a real risk of dissipation of the funds Yi Lu had received. He was someone who knew what was happening to the proceeds of sale and he had participated in the plan for a share of those proceeds to be paid directly to his bank account. Such conduct was consistent with that of someone who sought to defeat a creditor of Waihopai.

• [56] The above matters satisfied me that Waihopai had a good arguable case for pursuing Chris Chen, Don Chen and Yi Lu for return of the sale proceeds. The evidence before me on Friday 26 February 2021 informed me as to the whereabouts of the funds to which the orders could apply. I was also satisfied there was a real risk of dissipation of those funds.

• [57] Accordingly, I found that the orders sought in the plaintiffs’ application dated 26 February 2021 should be made against the named third parties, subject to the amendments I made quantifying and limiting the scope of those orders.

Developments after the making of the freezing and ancillary orders against Chris Chen and Don Chen

• [58] After the freezing orders were sealed and served the plaintiffs sought an urgent judicial telephone conference at the end of the working day on 26 February 2021. The plaintiffs had just learnt that Yi Lu had transferred the $2,506,744.11 received from Waihopai on 20 February 2021 to his wife Yang Qi’s bank account. The plaintiffs received this information from the ANZ Bank as a result of serving the freezing orders relevant to Yi Lu earlier that day. They were informed that Yi Lu had a zero bank balance.
• [59] The plaintiffs contend that Yi Lu would have known of their first freezing order application because he was served with the application by email on Tuesday 23 February 2021. He did not attend the hearing on 24 February 2021. Nor did he instruct a lawyer to attend that hearing. However, the plaintiffs say that between Tuesday 23 February 2021 and Wednesday 24 February 2021 Yi Lu transferred all the funds he had received from Waihopai in $50,000 lots to his wife’s bank account. This information caused the plaintiffs to make an urgent oral application at the telephone conference for further freezing and ancillary orders against the bank account of Yi Lu’s wife Yang Qi.

• [60] I was satisfied that Yi Lu knew the plaintiffs were seeking freezing orders to stop Waihopai’s assets being dissipated and took steps to remove all the funds recently received from Waihopai to his wife’s bank account. Against the background of everything else I had learned during the hearings on 24 and 26 February 2021 I considered the relevant tests for granting a freezing and ancillary orders over Yang Qi’s bank account were met and that it was appropriate that the funds should be frozen in her bank account. Accordingly, I made the necessary orders.

Follow up directions

• [61] The plaintiffs should file and serve a written without notice application for freezing and ancillary orders on Yang Qi together with affidavits in support.

• [62] The orders remain in force to 5 pm 8 March 2021 when the trial of the Chen claim is set down to commence. Whether the trial goes ahead that day or the time is spent hearing opposing argument on whether the orders I have made should continue is a matter for the Judge allocated to hear the matter on 8 March 2021.

• [63] Since making the orders Auckland is now subject to a level 3 lockdown. Counsel for the parties should liaise and be in contact with the case officer or her substitute this week to inform the Registry of any developments relevant to the trial fixture.

• [64] In the orders I reserved leave for the parties to return to Court should the need to do so arise.

Duffy J