Aivita Healthy New Zealand Limited v Unipharm Healthy Manufacturing Co Limited
[2021] NZHC 1401
•15 June 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-333
[2021] NZHC 1401
UNDER the Companies Act 1993, section 174 BETWEEN
AIVITA HEALTHY NEW ZEALAND LIMITED
Plaintiff
AND
UNIPHARM HEALTHY MANUFACTURING CO LIMITED
Defendant
CIV-2021-404-477 BETWEEN
UNIPHARM HEALTHY MANUFACTURING CO LIMITED
First PlaintiffANC NZ LIMITED
Second PlaintiffQING FENG CHEN
Third Plaintiff
AND
AIVITA HEALTHY NEW ZEALAND LIMITED
Defendant
Hearing: 31 May 2021 Appearances:
T J Rainey and Lydia Tawse for Aivita Healthy New Zealand Ltd Chen Jiang for Unipharm Healthy Manufacturing Ltd, ANC NZ Ltd and Qing Feng Chen.
Judgment:
15 June 2021
Reissued:
16 June 2021
AIVITA HEALTHY NEW ZEALAND LIMITED v UNIPHARM HEALTHY MANUFACTURING CO LIMITED [2021] NZHC 1401 [15 June 2021]
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was reissued by me on 16 June 2021 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
[1] Discord in Unipharm Healthy Manufacturing Co Ltd has led to these proceedings. Aivita Healthy New Zealand Ltd, a shareholder, is seeking relief under s 174 of the Companies Act 1993. In the other proceeding, Unipharm and the other two shareholders seek declarations that certain share transfers were valid and sue Aivita for misuse of confidential information. Many discord cases are resolved by one side buying out the other. A purchase price is negotiated after each side has obtained expert valuation advice. Counsel agreed that was a likely outcome in this case.
[2] In the meantime, interlocutory applications need attention. In Aivita’s proceeding:
(a)Unipharm has applied for particulars;
(b)Aivita has applied for discovery against Unipharm;
(c)Unipharm has applied for discovery against Aivita;
(d)Aivita has applied for Unipharm to answer interrogatories; and
(e)Unipharm has applied to strike out parts of Aivita’s prayer for relief.
In its proceeding, Unipharm has applied for the two proceedings to be consolidated.
[3] By the hearing, some of these matters had been resolved. Aivita had given Unipharm the particulars it sought. Aivita’s discovery application had narrowed. Unipharm no longer sought orders on its discovery application. Unipharm no longer pursued its strike-out application. The matters left for decision are:
(a)the remaining part of Aivita’s application for discovery against Unipharm;
(b)Unipharm’s application for consolidation; and
(c)Aivita’s interrogatories application.
[4] On Aivita’s discovery application I give directions to safeguard confidentiality of documents. The proceedings are not consolidated but are to be heard together for two weeks beginning 18 July 2022. I reduce the interrogatories Unipharm is to answer.
Background
[5] This comes mainly from Unipharm’s case. Aivita does not accept it all, but as Unipharm provided fuller information, it is convenient to use that information, so long as it is kept in mind that Aivita disagrees with the way that Unipharm has characterised events and transactions.
[6] Unipharm Healthy Manufacturing Co Ltd was incorporated on 20 September 2016 and began business in early 2017 manufacturing health supplements for the New Zealand and Chinese markets. It was established as a joint venture of three men, Chinan Xie (Charlie), Qingfeng Chen (Kevin) and Haibing Du (Wilson). Charlie made an initial capital investment of $1,112,000 in Unipharm. Kevin invested
$240,000. Wilson invested $240,000, but that was through Aivita.
[7] Pengli Teng, Charlie’s de facto partner, is an accountant in public practice and has prepared the company’s financial statements. Yibo Weng is Pengli’s son. He was initially appointed a director of the company but did not take any active part in the management or decision-making of the company. He held shares, representing Charlie’s investment in the company. Charlie says that Yibo held the shares on trust for him.
[8] Charlie had been a director of Tong Ren Tang (New Zealand branch), a traditional Chinese medicine supplier. Kevin worked for a pharmaceutical company,
GMP Pharmaceuticals Ltd, on the production side. Wilson also worked for GMP Pharmaceuticals Ltd as its Asian sales and marketing manager. Unipharm bought an existing pharmaceutical manufacturing business from Evergreen Life Ltd for $2.2m. As well as the capital contributions from the three men, the ASB lent $1 million,
$600,000 of which went to the purchase price.
[9] On Unipharm’s incorporation, there were 1,600,000 shares: 960,000 shares held by Yibo Weng, 320,000 shares by Kevin, and 320,000 shares held by Aivita Healthy Ltd. Wilson’s wife, Yinghua Xu (Wendy), was Aivita’s sole director and shareholder.
[10] At the outset, the Companies Office records showed Unipharm’s directors as Yibo Weng, Kevin and Wendy. Unipharm, however, says Charlie, Pengli, Kevin and Wilson made the management decisions. Before the company began trading, a WeChat messaging group was established called “The Preparation Group” involving Kevin, Charlie, Pengli and Wilson. After the company started trading, Wilson started a new WeChat messaging group called “Unipharm Directors Group” in which Kevin, Charlie, Pengli and Wilson took part. Unipharm says that Wilson attended board meetings and signed board resolutions as a director. Wendy, on the other hand, although nominally a director, did not take any active part in management. Likewise, Yibo Weng, although a director in name, did not attend meetings whereas Charlie did as a director.
[11] The shareholders, Yibo, Kevin and Aivita, made a written shareholders’ agreement on 3 June 2017. Some provisions of the shareholders’ agreement are in issue. In 2018, the company’s solicitors prepared a constitution. There is no record of the constitution having been formally adopted. It is not registered in the Companies Office. Nevertheless, the shareholders’ agreement refers to the constitution and there is therefore a question whether the constitution has been incorporated into the shareholders’ agreement.
[12] The shareholders’ agreement contains provisions typically found in such agreement, including not competing against the company and preserving confidentiality and intellectual property. Clause 2.9 of the shareholders’ agreement
needs to be noted. The shares allocated to Kevin and to Aivita do not reflect their capital contributions to the company. Under cl 2.9, they acknowledge that they each held 80,000 shares on behalf of Yibo. The clause provides that Kevin and Aivita will be fully entitled to the additional 80,000 if performance targets are met for the next three years. If those targets are not met, they each undertake to transfer their 80,000 shares held to Yibo. Whether the performance targets were met was to be decided at the end of three years – that is, after 31 March 2020.
[13] Unipharm did not do well in its first year. For the year ending 31 March 2018, it made a very substantial loss. Unipharm, Charlie and Kevin blame Wilson for this, saying that he did not obtain enough orders as sales and marketing manager. He had also taken over production, but he mis-managed that. Unsurprisingly, in a case involving company discord, Wilson rejects those allegations. By July 2017, the company needed more funds. The shareholders agreed to lend the company $500,000: Aivita $75,000, Kevin $75,000 and Yibo (on behalf of Charlie) $350,000. Charlie left Tong Ren Tang and became involved in the day-to-day management of Unipharm. Aivita says that this was contrary to the shareholders’ agreement which provided that Yibo was not to be involved in the daily operations of the company.
[14] By October 2017, the ASB demanded repayment of part of its loan. Wilson proposed that the business be sold to minimise losses. Kevin and Pengli agreed, but later changed their minds. Aivita says that Unipharm’s board authorised Wilson to market the business for sale.
[15] In November 2017, Yibo transferred his 960,000 shares to ANC NZ Ltd. That company had been incorporated on 16 February 2007. Charlie is its sole shareholder and director. Aivita says that the transfer of the shares from Yibo to ANC NZ Ltd was in breach of the pre-emption provisions of the constitution and the shareholders agreement, whereas Unipharm and ANC NZ Ltd say that the transfer was valid.
[16] There is a dispute whether Wilson disclosed confidential information about Unipharm to third parties. The shareholders’ agreement required shareholders to keep information about the company confidential. Unipharm says that Wilson was bound
by that as the person behind Aivita. He also signed a separate confidentiality undertaking in December 2017.
[17] Wilson’s relationship with the others in the company deteriorated. In December 2017 he stepped down as sales and marketing manager. In December 2017, the 80,000 shares held by Aivita and Kevin respectively were transferred to ANC NZ Ltd. The stated reason was an alleged failure to achieve the performance target. Aivita says that these transfers were in breach of the shareholders’ agreement. On the other hand, Unipharm seeks a declaration that the transfers were valid.
[18] Unipharm’s trading losses continued. Charlie lent the company $400,000 through ANC NZ Ltd. The loan was to be convertible to shares.
[19] In February 2018 Unipharm also borrowed $300,000 from Full Joy Foods Pty Ltd, an Australian company. The man behind Full Joy Foods is a friend of Charlie. This loan was also convertible to shares. These injections of funds from Charlie and Full Joy Foods allowed Unipharm to pay the ASB. Aivita complains that the conversion of these loans into share capital diluted its shareholding. Unipharm says there was a resolution approving this at a shareholders’ meeting on 3 March 2019. Charlie and Kevin outvoted Aivita. They also approved the issue of 75,000 ordinary shares to Kevin by way of repaying his loan of $75,000. Charlie says that there 775,000 more shares were issued, 75,000 to Kevin, the other 700,000 to ANC NZ Ltd. Charlie says that he held 300,000 of those shares on trust for Full Joy Foods.
[20] By 2019, Charlie and Kevin had found out that Wilson had set up another company, Universal Pharmaceuticals Ltd, which competes against Unipharm. Wilson incorporated Universal Pharmaceuticals Ltd in April 2018. Unipharm alleges that Wilson and Universal Pharmaceuticals Ltd solicited Unipharm’s customers. Universal Pharmaceuticals Ltd bought equipment which Unipharm intended to buy. Universal Pharmaceuticals Ltd enticed Unipharm employees to work for it. Unipharm also alleges that Wilson copied confidential information including formulas and intellectual property held in Unipharm’s computer systems.
[21]On 14 March 2019, Wendy was removed as a director of Unipharm.
[22]In May 2019 Aivita began this proceeding.
[23] In June 2019 Kun Xiu (Sabrina), an accountant in public practice, bought Wendy’s shares in Aivita and is now Aivita’s sole director. Unipharm, Charlie and Kevin say that this transfer of control of Aivita contravenes share pre-emption provisions in the shareholders’ agreement. They did not know about her before. She is said to be friendly with Yi Wu (Easter) who runs Mega Dairy Ltd, one of Unipharm’s competitors. She has established a company, Naturies Laboratories Ltd, which has the same registered office as Mega Dairy Ltd. Sabrina is an accountant for both Easter and Mega Dairy. Since Sabrina took over Aivita, Mega Dairy and Easter have published social media posts attacking Unipharm. It says that these posts refer to confidential information about its financial performance.
[24] Unipharm now has two directors, Charlie and Kevin. Its current shareholders are ANC NZ Ltd, under Charlie’s control, holding 1,820,000 shares, Kevin with 315,000 shares and Aivita, under Sabrina’s control, with 240,000 shares.
[25] Paragraph 16 of Aivita’s current statement of claim pleads how Unipharm’s affairs have been conducted in a manner which is unfairly discriminatory and unfairly prejudicial to it as shareholder. Aivita says that Charlie has always represented the interests of Yibo as shareholder and director. Charlie required Aivita to contribute
$75,000 to Unipharm. Contrary to the shareholders’ agreement Charlie involved himself in the daily operations of Unipharm. Yibo’s transfer of the shares to ANC NZ Ltd breached the share pre-emption provisions in the constitution and the shareholders’ agreement. Yibo resigned as director, but his replacement, Charlie, was appointed as a director in his place without any notice to other shareholders or the approval of other directors. Contrary to the shareholders’ agreement, Charlie directed Unipharm to terminate Wilson’s employment with Unipharm, Wilson’s authority to sell the business and Wendy’s access to the online bank accounts for Unipharm, and prevented Wilson and Wendy from having access to any information about Unipharm, thereby preventing Wendy from acting as director. Kevin’s 80,000 shares and Aivita’s 80,000 held by Aivita were not transferred to Yibo but to ANC NZ Ltd. No notice of this was given to shareholders or directors. The transfer was not approved by shareholders or directors and is contrary to cl 2.9 of the shareholders’ agreement. Since December
2017 Wendy, as a director of Unipharm, has been effectively shut out of all management decisions. Contrary to the shareholders’ agreement, Unipharm did not approve an annual budget or an annual business plan with unanimous approval of all directors in 2018 and 2019. Contrary to the shareholders’ agreement, Unipharm did not have at least four board meetings in 2018 and 2019. Unipharm appointed Charlie as its general manager, but that was contrary to the shareholders’ agreement which required a unanimous resolution of directors. A board resolution of January 2019 authorising Charlie to negotiate the loan from Full Joy Foods Ltd was defective because no written notice of the meeting was given to Wendy. The resolution did not have the unanimous approval of all directors. The resolution did not authorise Charlie to enter into an agreement giving Full Joy the option to take shares in Unipharm. Transactions at a board meeting on 3 March 2019 were invalid (including approval of the issue of shares to Full Joy). The resolutions did not have the unanimous approval of all shareholders and directors, as required by the shareholders’ agreement. The issue of the additional 775,000 shares was invalid. The removal of Wendy as director was invalid. Aivita has been deprived of its right to exercise its pre-emptive rights on the transfer of shares and has been excluded from participation in the management of the company. Its shareholding has been diluted. The affairs of the company have been run for the benefit of the majority shareholders and to the detriment of Aivita.
[26] In the statement of claim in their proceeding, Unipharm, ANC NZ Ltd and Kevin seek declarations that the transfer of the 960,000 shares from Yibo to Charlie was valid, the transfer of 80,000 from Aivita to ANC NZ Ltd was valid, and that in any event ANC NZ Ltd is entitled to retain those shares because the performance targets were not realised. They also seek a declaration that the transfer of the shares in Aivita from Wendy to Sabrina was invalid. They sue Aivita for breach of the confidentiality provisions in the shareholders’ agreement and for breach of confidence in equity.
Aivita’s discovery application
[27] Aivita’s application sought discovery of 25 categories of documents. Unipharm’s response satisfied most of Aivita’s concerns, but one issue remains. Aivita seeks disclosure of Unipharm’s financial statements of 2019 and 2020, Unipharm’s
bank statements, its cashbook, ledger and other accounting records. Unipharm accepts that those documents are relevant and should be disclosed, but it says that those documents are confidential and Sabrina should not see them. It does not object to Aivita’s lawyers and share valuer seeing those records, so long as they give appropriate confidentiality undertakings.1
[28] Unipharm objects to Sabrina having that information, because of her association with Easter and his company, its competitor. It says that there is reason to believe that confidential information of Unipharm has been passed on to Easter. There is a significant risk that if Sabrina were to receive the information in the financial records, she would use it other than for this proceeding.
[29] Appreciating the point, Aivita says that while Sabrina may not receive the accounting records directly, its share valuer will use the information in Unipharm’s financial records to prepare valuations and will include it in their report. For Aivita to run its case effectively and to explore settlement Sabrina must be shown the valuer’s report. She should receive the report, even if she will not see the accounting records on which the valuer will prepare their report. She will also give a written undertaking to use the information only for the proceeding.
[30] In response, Unipharm proposed that before the report is shown to Sabrina, it should be allowed to vet the report for sensitive information.
[31] That is not realistic. The share valuer’s report will be privileged, having been prepared for litigation or for settlement.2 Aivita cannot and should not be compelled to disclose it. The report may go through several versions. It would not be right for Unipharm to have a look at its development unless and until Aivita is ready to disclose it.
1 The bundle of documents included an undertaking acceptable to Unipharm.
2 Evidence Act 2006, ss 56 and 57(2).
[32] I accept Aivita’s submission that Sabrina must be able to receive the valuer’s report so that its professional advisers can advise her properly and she can give them informed instructions. The text Disclosure states:3
In modern times however, it is rare that the claimant himself (or, where the claimant is a corporate body, a named officer) is excluded from knowledge, because decisions whether to continue or abandon the action, for example, should be made by the claimant, and not by his advisers.
[33] Unipharm’s interest in keeping the information confidential can be protected against unauthorised disclosure by Sabrina by:
(a)allowing her to read reports by the share valuer, even though those reports may contain information confidential to Unipharm, but not allowing her to receive those reports in any tangible or electronic form, or to keep for herself any physical or electronic records of those reports;
(b)modifying the proposed undertakings by the lawyers and the share valuers to allow them to show the report(s) to Sabrina, but barring them from giving her any copy of the report(s) in tangible or electronic form or allowing her to receive any copy of the report in tangible or electronic form; and
(c)Sabrina undertaking to keep the information in the reports confidential, not to disclose it to anyone else, and to use the information only for the proceeding.
I am confident that the lawyers will be able to draw up appropriate undertakings to cover this. Leave is reserved to apply for directions if any difficulties arise.
The consolidation application
[34] Unipharm sought consolidation of the two proceedings. Aivita opposed, saying that its claim should be heard first. The matter was not, however, fully argued.
3 Paul Matthews and Hodge M Malek Disclosure (5th ed, Sweet and Maxwell, London, 2017) at 15.28.
Whether or not there was consolidation, the earliest hearing date was 18 July 2022. There is time available then for one case to be heard by itself or for two to be heard together. Even without consolidation, neither proceeding would be heard any earlier. With that information, Aivita no longer opposed.
[35] The proceedings are not consolidated, but they are to be heard together. Evidence in one proceeding will be evidence in the other.
Interrogatories
[36]The objects of interrogatories are to:4
(a)obtain admissions;
(b)reveal weaknesses in the other party’s case;
(c)obtain information as to material facts which the applicant needs to prove in support of its case;
(d)ascertain details of aspects of the other party’s case so as to reduce surprise when statements of evidence are served or at trial;
(e)obtain clarification of the other party’s case and limit the other party’s ability to depart from its case as clarified; and
(f)narrow the issues between the parties and thus reduce the expense and length of trial, including the expense in earlier stages of litigation such as disclosure of documents and statements of witnesses.
[37] The parties agreed on the basic principles for interrogatories but parted on how they applied.5
[38] Aivita’s notice for Unipharm to answer interrogatories is directed at particular sub-paragraphs of Unipharm’s statement of defence, especially paragraph 16.
[39] Pengli gave sworn answers on behalf of Unipharm. Unipharm did not apply under r 8.36 of the High Court Rules 2016 for orders that it not be required to answer the interrogatories. While answering some interrogatories, it objected to others.
4 Disclosure, above n 3, at 20.06; Ash v Singh [2019] NZHC 2790 at [179], and Wright v Attorney- General [2021] NZHC 18 at [11].
5 See McGechan on Procedure (online ed, Thomson Reuters) at [HR8.34.01–.013, 8.38.03, 8.39.01–.07, 8.40.01–.08]; High Court Rules 2016; Todd Pohokura Ltd v Shell Exploration NZ Ltd [2009] NZCA 561 at [16].
[40] Aivita’s interrogatories seek factual information to establish Unipharm’s position on aspects of its defence, including the validity of transactions. Aivita has not asked for comments or opinions. The merits of each side’s position have been left for trial.
[41] Aivita has applied under r 8.38 of the High Court Rules for an order directing Unipharm to answer some, but not all of the the interrogatories in its original notice under r 8.34. Rule 8.38 says:
8.38Order to answer
(1)A Judge may, at any stage of any proceeding, order any party to file and serve on any other party (whether the interrogating party or not) a statement prepared in accordance with rule 8.39 in answer to interrogatories specified or referred to in the order.
(2)The interrogatories must relate to matters in question in the proceeding.
(3)The order may require the statement to be verified by affidavit.
(4)The Judge must not make an order under subclause (1) unless satisfied that the order is necessary at the time when it is made.
[42]Rule 8.39 says:
8.39Contents of statement
(1)A statement in answer to interrogatories must, unless a Judge otherwise orders, comply with this rule.
(2)A statement in answer to interrogatories must deal with each interrogatory specifically, either—
(a)by answering the substance of the interrogatory without evasion; or
(b)by objecting to answer the interrogatory on 1 or more of the grounds mentioned in rule 8.40(1) and briefly stating the facts on which the objection is based.
(3)The statement must set out above or opposite to each answer or objection the interrogatory to which it relates.
[43]The grounds of objection in r 8.40 are:
(a)that the interrogatory does not relate to a matter in question between the parties involved in the interrogatories:
(b)that the interrogatory is vexatious or oppressive:
(c)that the information sought is privileged:
(d)that the sole object of the interrogatory is to ascertain the names of witnesses.
[44] For some of her answers Pengli has said, “I cannot recall”. That is not acceptable, when she is answering as a director of Unipharm. Megarry V-C set out the position in Stanfield Properties Ltd v National Westminster Bank plc:6
A director or liquidator who answers that he does not know is not answering the question; for the question is what the company knows, not merely what the director or liquidator knows. The person answering the interrogatories is accordingly bound to make all reasonable enquiries which are likely to reveal, or may reveal, what is known to the company. In order to show that this has been done, it is obviously desirable that the answers should include some statements which shows that the person swearing the answers has applied his mind to this duty and has attempted to discharge it. This, however, is all that I think is required.
Pengli’s answers do not show that she has made any enquiries to find out the answers, when she does not personally know.
[45] Unipharm complained that taken together the interrogatories are oppressive. For each interrogated sub-paragraph in the statement of defence, there are sub- questions. Unipharm complains that altogether there are over 230 interrogatories and that is unreasonable and oppressive. An oppressiveness objection is often an invitation to reject the interrogatories in their entirety.7 Notwithstanding that general objection, Unipharm dealt with the questions for each of the interrogated sub-paragraphs. The winnowing of interrogatories following submissions has resulted in a manageable group of questions to be answered.
[46] Orders under r 8.38 are made only if they are necessary. In Wright v Attorney- General, I said that the necessity requirement is not a stringent one.8 The party wishing to interrogate must show that there is a good reason for the interrogatories. Relevant factors are the scope of the proceeding, the matters in issue, whether the
6 Stanfield Properties Ltd v National Westminster Bank plc [1983] 1 WLR 568 at 571.
7 See, for example, Shore v Thomas [1949] NZLR 690 (SC) where answers were sought to over 150 interrogatories.
8 Wright v Attorney-General [2021] NZHC 18 at [19].
matters have been adequately addressed in the pleadings and whether the interrogating party should be held to alternative means of proving its case.
[47] Unipharm objected to many interrogatories, because it said that it had already given Aivita the information. That goes to necessity under r 8.38. Unipharm argued that Aivita’s proceeding under s 174 of the Companies Act is under Part 18 of the High Court Rules, where evidence is given by affidavit. Both sides have already exchanged affidavit evidence on the substantive issues. On Unipharm’s side, Charlie, Kevin and Pengli have sworn affidavits. As well, Unipharm has made discovery. There is accordingly considerable information in disclosed documents and sworn testimony. In response, Aivita objected that that was not a satisfactory response. Aivita should not have to comb through Unipharm’s evidence and documents to find the answers. But, for this case, Unipharm provided a schedule setting out all the references to evidence and documents, which it says gives Aivita the information it is after. I have used that schedule to see whether interrogatories have already been answered.
[48] Mr Rainey no longer sought answers to interrogatories on these parts of the statement of defence:
(a)paragraph 4(c)(iii);
(b)paragraph 4(d)(iv);
(c)paragraph 5(i);
(d)paragraph 5(l); and
(e)paragraph 16(o)(v).
[49] For some paragraphs of the statement of defence, Aivita has asked a standard set of 14 questions about share transfers, share issues and allocations. It is not necessary to set them out in full. They ask about consideration, when it was paid, to whom and by whom, how price was fixed, whether shares were first offered to existing shareholders and, if so, details, and so on. Given Unipharm’s position on the transactions, not every question needs to be answered.
Paragraph 5(d)(i) – meeting in August 2017
The questions are directed at a pleading about a meeting in August 2017 “In relation to transfer of 320,000 shares from Aivita to Yibo Weng.” Aivita asks its 14 questions about the transfer. Mr Jiang explained that while the matter was discussed at the shareholders’ meeting, there was no such transfer. With that, Mr Rainey said that Unipharm could answer that the transfer did not happen. If so, no other answers were required.
Paragraph 16(e)(iv) and (v) – transfer of Yibo’s shares to ANC NZ Ltd
[50] Paragraph 16(e)(iv) and (v) of Aivita’s amended statement of claim pleads that the directors did not offer Yibo’s shares to other shareholders before transferring them and that the transfer of his shares to ANC NZ Ltd is outside cl 5.6 of the constitution. In its statement of defence, Unipharm has pleaded that the transaction was a family transaction in accordance with cl 5.6 of the constitution, which states:
5.6Any share held by trustees under any such trust as aforesaid may be transferred to any beneficiary of such trust.
The transfer was approved at a meeting on 20 November 2017 attended by Charlie, Kevin, Pengli and Wilson, but Wilson refused to consent to the transfer.
[51] Unipharm says that it does not need to answer Aivita’s 14 questions. Charlie’s affidavit of 8 August 2019 refers to the meeting of 20 November 2017, says that Yibo was holding his shares on trust for him and that the transfer of shares from Yibo to ANC NZ Ltd was merely a formality. Unipharm says that in light of that it is clear that there was no consideration for the transfer. There is no point in answering the other questions, which presuppose that there was some consideration.
[52] Most of the time a transfer from a trustee to a beneficiary is made without consideration, but that is only general. Aivita is entitled to know whether there was any consideration in this case. Unipharm has not expressly said that there was no consideration and it would not be safe to assume so. If the answer is “No”, as I understand it will be, the other questions do not need to be answered. If the answer is “Yes”, the other questions should be answered.
Paragraph 16(i) – transfer of Aivita’s and Kevin’s shares to ANC NZ Ltd in December 2017
[53] Paragraph 16(i) of the amended statement of claim is about the transfers of the five per cent shareholdings each held by Aivita and Kevin to ANC NZ Ltd pleaded as breaching cl 2.9 of the shareholders’ agreement.
[54] Unipharm’s statement of defence admits the transfers to ANC NZ Ltd but says that Wilson/Aivita and Kevin agreed to the transfers. Unipharm had not met the performance targets in cl 2.9. Besides, as control of Aivita changed on 24 June 2019, Charlie was entitled to the unconditional transfer of the Aivita shareholding. The transfer to ANC NZ Ltd is also said to be in accordance with cl 5.6 of the constitution.
[55] In the hearing Mr Rainey no longer sought answers to all the 14 questions. Instead, Unipharm should say whether there was any consideration for these transfers, and if not, the basis for the transfers.
[56] Unipharm objected that the questions were not necessary. It referred to evidence, but the evidence does not say expressly whether there was no consideration. Again, it may not be safe to make assumptions. It needs to be kept in mind that Aivita is not under Sabrina’s control, and she does not necessarily know as much as Wilson did. Unipharm should answer whether there was any consideration for these transfers. If there was not, it does not need to say any more, as its pleading explains its basis for the transfer. If there was consideration, it should answer the 14 questions.
Paragraph 16(u) and (v) – issue of 775,000 shares in March 2019
[57] Paragraph 16(u) and (v) of the amended statement of claim plead that on 6 March 2019 Unipharm issued an additional 775,000 shares, but that did not have the unanimous approval of all directors as required under cl 2.5 of the shareholders’ agreement. 700,000 were allocated to ANC NZ Ltd and 75,000 to Kevin. In the statement of defence Unipharm has pleaded that the shares were issued by the unanimous approval of all directors on 14 March 2019 after Wendy had ceased to be director of Unipharm. ANC NZ Ltd holds the 700,000 shares on trust, 300,000 for Joy Foods and 400,000 for Charlie.
[58] Again, Aivita has asked its 14 questions. In response Unipharm has answered the first question as to consideration. That answer is adequate. Taken with the documents Unipharm has discovered, it does not need to answer anymore under this head.
Paragraphs 5(g), 5(k) and 16(a)(i), 16(c)(i) and 16(e)(i) – Yibo’s trusteeship
[59] These parts of the statement of defence refer to Yibo holding shares on trust for Charlie. Aivita asks the same questions about the trusteeship:
(a)By what method or process did Yibo agree to hold the shares in Unipharm on trust for Charlie and/or ANC NZ Ltd?
(b)When did Yibo agree to hold the shares in Unipharm on trust for Charlie and/or ANC NZ Ltd?
(c)Was the agreement between Yibo and Charlie that Yibo would hold shares on trust for Charlie and/or ANC NZ Ltd in writing? If ‘Yes’, what document records that agreement?
[60] In response to each of these questions, Unipharm says that it has given extensive evidence about it. It refers to paragraphs 35–37 of Charlie’s affidavit of 8 August 2019 and to documents it has discovered. It also objects that the questions ask for evidence, not facts.
[61] Unipharm’s evidence and documents refer only generally to Yibo holding shares on trust for Charlie. They do not say how the trust was set up. Aivita’s questions are directed at that. Someone alleging that assets were held on trust must be able to say how they came to be held on trust. The trusteeship is relevant as Charlie and Unipharm rely on it to say that Yibo’s share transfers were not caught by the pre- emption provisions of the shareholders’ agreement and the constitution. In the hearing, I wondered whether a resulting trust had arisen from Charlie having put up the funds for the shares which were put in Yibo’s name. But that is beside the point.
Charlie seems to be saying that there was an express trust. The information sought is more than evidence. The questions should be answered.
Paragraphs 5(g)(iii), 16(a)(ii), 16(c)(ii) and 16(e)(ii) – Wilson’s knowledge of the trusteeship
[62] These paragraphs of the statement of defence all plead that Wilson knew and consented to Yibo holding the shares on trust for Charlie, including by a message from Charlie on the WeChat “Preparation Group” on 17 November 2016. Aivita asks these questions:
(a)When was Aivita given notice that Yibo was holding the shares on trust for Charlie?
(b)By what means was Aivita given notice that Yibo was holding the shares on trust for Charlie?
(c)Was the notice to Aivita that Yibo was holding the shares on trust for Charlie in writing? If ‘Yes’ what document records that notice?
(d)When did Aivita consent to Yibo holding the shares on trust for Charlie?
(e)Who gave consent on behalf of Aivita to Yibo holding the shares on trust for Charlie?
(f)Was the consent on behalf of Aivita in writing? If ‘Yes’, what documents record that consent?
[63] Interrogatories are about facts, not evidence.9 Wilson and Aivita’s knowledge of Yibo’s trusteeship is on the evidence side of the line. The trust may be valid, whether they knew about it or not. On the other hand, their ignorance of the trust might be evidence against proving the trust. Imagine evidence by Wilson that no-one told him that Yibo was holding his shares on trust for Charlie and he would expect to have been told of it. But requiring Unipharm to say how Charlie came to know about
9 Wright v Attorney-General [2021] NZHC 18 at [12].
the trust goes beyond the facts in issue and gets into the detail of evidence. These questions do not need to be answered.
Paragraph 10 – shareholders’ agreement
[64] Paragraph 10 of the amended statement of claim pleads that the initial shareholders entered into a written shareholders’ agreement through which they intended to regulate their respective rights in the management of Unipharm. In its statement of defence, Unipharm says that Yibo, Kevin and Aivita signed the shareholders’ agreement but otherwise denies paragraph 10. It says that Yibo entered into the shareholders’ agreement on behalf of Charlie. As I understand it, Yibo is said to have been Charlie’s agent, when making the shareholders’ agreement.
[65]Aivita’s questions are:
(a)By what process did Charlie become a party to Unipharm’s shareholders’ agreement?
(b)On what dates did Charlie become a party to Unipharm’s shareholders’ agreement?
(c)Did Charlie record his agreement to be a party to Unipharm shareholders’ agreement. If ‘Yes’, what documents record that agreement?
[66] The questions expose an issue. Can Yibo be both a trustee and Charlie’s agent? So far, Unipharm’s case has been that Yibo held his shares on trust for Charlie. Conceptually trusteeship and agency are distinct. An agent is appointed by the principal and acts only within the authority given by the principal. A trustee is appointed by a settlor, not the beneficiary, and acts within the terms of the trust, not the instructions of the beneficiary. For example, in Baker v Archer-Shee, Lord Sumner said:10
10 Baker v Archer-Shee [1927] AC 844 (HL) at 850.
The trustee has the full legal property in the whole of the trust fund and the beneficiary has not. Apart from special provisions in particular settlements, which do not affect the general principle, the trustee is not the agent of the beneficiary, who can neither appoint nor dismiss him. She cannot require him to change or forbid him to change the particular investments of the fund. There is no liability on the beneficiary for the trustee’s acts on the principle of respondeat superior11 and, unless the trust deed otherwise provides, the trustee must act without remuneration to himself and cannot in any case sue the beneficiary on any implied promise to pay. It is the trustee alone who can give a discharge for interest, rent or dividends to the parties who have to pay them in respect of the invested trust estate, nor need they know the beneficiary in the matter. All that the latter can do is claim the assistance of a Court of equity to enforce the trust and to compel the trustee to discharge it. This right is quite as good and often is better than any legal right, but it is not in any case one, which for all purposes makes the trust fund “belong” to the beneficiary or makes the income of it accrue to him eo instanti12 and directly as it leaves the hand of the party who pays it.
(Emphasis added)
A beneficiary of a trust does not ordinarily become personally bound by a contract entered into by a trustee. Of course in particular cases the two roles may be combined, as when a lawyer, their client’s agent, holds the client’s funds in their trust account.
[67] These considerations show that Unipharm should clarify how Yibo was both Charlie’s agent and a trustee. To a certain extent the questions overlap with a request for particulars, but that does not count against them. The questions are factual and are about more than evidence. They should be answered.
Paragraph 11 – the constitution
[68] Paragraph 11 of the statement of claim refers to the constitution and in particular says that all shareholders agreed to the draft constitution but it was never formally adopted by the company. In response, Unipharm pleads:
It admits that the shareholders’ agreement refers to the constitution. Save as is expressly admitted, it denies paragraph 11 of the amended statement of claim and says further that the constitution was drafted by Unipharm’s solicitors, Dawsons.
[69]Aivita’s questions are:
11 Let the superior answer.
12 At that very instant.
(a)Was notice given to the shareholders to adopt the constitution? If so, details are sought.
(b)By what method or process was it agreed by the shareholders that the constitution would be or had been adopted – for example, by special resolution?
(c)Which shareholders adopted the constitution?
(d)Is the shareholders’ agreement to adopt the constitution recorded in writing? If ‘Yes’, what document records that agreement?
[70]In answer Pengli has said “I cannot recall”. As explained, that is not adequate.
[71] Having read the evidence, I am not clear that the parties are apart on the effect of the constitution. Both sides seem to accept that there was a shareholders’ agreement and a constitution had been drawn up, but it was not registered in the Companies Office. There is a problem, however, with Unipharm’s pleading. It has denied Aivita’s pleading that the constitution was never formally adopted. If a party denies an allegation that something did not happen, it means that it did occur, and it must state what it was and give details.13 Otherwise the denial is evasive.
[72] Aivita’s questions are directed at providing information the Unipharm should have given, because of its denial that the constitution had not been adopted. I doubt, however, that Unipharm really means that the constitution was adopted. Clarity is required. It should answer these questions:
(a)Did the shareholders by special resolution adopt the constitution drawn up by Dawsons?
(b)If so, when did the shareholders adopt the constitution?
13 Ash v Singh [2019] NZHC 2790 at [20].
(c)Did Unipharm give notice of the adoption of the constitution to the Registrar of Companies?
(d)If so, when?
[73] Unipharm will not be required to answer those questions if it amends its statement of defence and admits that the shareholders did not formally adopt the constitution and did not give notice of it to the Registrar of Companies.
Paragraphs 16(a)(iii) and 16(c)(iii) – Charlie’s directorship
[74] Aivita pleads that from incorporation Charlie represented the interests of Yibo Weng as shareholder and director of Unipharm as his agent. The statement of defence denies that. It pleads that Charlie was the beneficial owner of the shares held by Yibo and under the joint venture agreement Charlie exercised the powers, duties and responsibilities of a director in relation to Unipharm in place of Yibo. The interrogatories are about Charlie’s directorship. In relation to the agreement that Charlie would exercise the powers of the director in place of Yibo, Aivita asks:
(a)The date of the agreement;
(b)The parties to the agreement;
(c)In what capacity the parties agreed; and
(d)Whether the agreement was in writing and if so, which documents record it?
[75] Charlie’s evidence is that at the outset, although not formally a director, he did act as a director. His evidence is consistent with his coming under s 126(1)(a) of the Companies Act, being a person occupying the position of director of the company, by whatever name called.
[76] Aivita’s questions probe a narrower issue, whether there was any specific agreement that Charlie could act as director in place of Yibo. That leaves aside any
legal questions as to the validity of such an arrangement. If Unipharm says that Charlie became a director, even a de facto director, by agreement, it should say what that agreement was. Unipharm’s response in the schedule for the hearing makes generalised references to evidence and pleadings but does not answer the specifics of the questions. They should be answered.
Paragraph 16(e)(v) and 16(f)(i) – Wilson’s attendance at the meeting on 20 November 2017
[77] Paragraph 16(e) and(f) of the amended statement of claim refer to the transfer of Yibo’s shares to ANC NZ Ltd. In its statement of defence, Unipharm has pleaded that a shareholders’ meeting was held on 20 November 2017 regarding the transfer of shares by Yibo to ANC NZ Ltd. Charlie, Wilson, Kevin and Pengli attended. Wilson has deposed that he never received notice of the shareholders’ and directors’ meeting on 20 November 2017 and did not attend. On the other hand, Charlie has deposed that Wilson was notified and did attend but refused to sign any documents. Charlie has given copies of resolutions passed on 20 November 2017, signed by Kevin and Charlie but not by Wilson.
[78] Aivita’s questions are about when notice was given to Wilson of the meeting, whether the notice was given in writing or orally, who gave the notice, what resolutions were set out in the notice, and what resolutions were considered at the meeting. The last question, as to what resolutions were considered, has been answered in Charlie’s evidence and the exhibits to his affidavit.
[79] There are two aspects. First, Aivita’s questions ask Unipharm to assume a hypothetical, that Wilson did not attend and accordingly it should say how it notified him of the meeting. But interrogatories about hypotheticals are not permitted.14 A party cannot be asked to assume facts it denies. Second, in this context information about a notice to a shareholder calling a meeting is a matter of evidence, not fact. These questions do not need to be answered.
14 Westpac Banking Corp v Hart (1987) 1 PRNZ 719 (HC); Wright v Attorney-General [2021] NZHC 18 at [12].
Paragraph 16(j)(ii) – Wendy’s exclusion from management
[80] The statement of claim pleads that since December 2017, despite being a director of Unipharm, Wendy was effectively shut out of all management decisions. In response, Unipharm denies that and says it was agreed that Wendy would not exercise or perform powers, duties and responsibilities as a director in relation to Unipharm. Instead Wilson was director in her place. Aivita’s questions are about the agreement:
(a)Was the agreement in writing or oral?
(b)When was it made?
(c)Who were the parties?
(d)What documents record that agreement?
[81] Unipharm refers to its statement of defence at paragraph 5(a)–(f) where it has pleaded the facts to show that Wilson acted as director, although not formally appointed as such. It also refers to its evidence on these matters. Its answers are adequate. It cannot be expected to answer as to particular arrangements made between Wendy and Wilson. It can only answer what it knows of how each of them acted as directors. It has done that. More cannot be required.
Outcome
[82] The proceedings are not consolidated, but they are to be heard together. Evidence in one proceeding will be evidence in the other.
[83] The Registrar is to allocate a fixture for both proceedings for two weeks beginning 18 July 2022.
[84] The Registrar is to allocate a case management conference after 1 August 2021 for further directions.
[85] As for further steps, the parties anticipate that the share valuers will report in about mid-July. The parties will likely exchange valuations then, even if on a without prejudice basis. The valuers are likely to value shares at two dates: June 2019, when Sabrina bought all the shares in Aivita, and current value. The second date may require Unipharm to update its discovery, including showing its accounts for the year ending 31 March 2021.
[86] Subject to later case management directions, I suggest that Aivita give its evidence first in support of its claims in its proceeding, Unipharm will give its evidence in defence of Aivita’s claim, and its evidence in support of its proceeding, and Aivita will give evidence in defence of Unipharm’s claims against it. It may be appropriate for the parties to split hearing fees 50/50.
[87] On Aivita’s discovery application, I direct that Unipharm’s interest in the confidentiality of its information can be protected against unauthorised disclosure and misuse as follows:
(a)Sabrina may read reports by the share valuer, even though those reports may contain information confidential to Unipharm, but she shall not receive those reports in any tangible or electronic form, or keep any physical or electronic copies of those reports;
(b)Sabrina shall undertake to keep the information in the reports confidential, not to disclose it to anyone else, and to use the information only for the proceeding; and
(c)The proposed undertakings by the lawyers and the share valuers are to be modified to allow them to show valuation reports to Sabrina, but not to give her any copy of the reports in tangible or electronic form or to allow her to receive any copy of the report in tangible or electronic form.
[88] Unipharm does not need to answer the interrogatories to these paragraphs in its statement of defence: 4(c)(iii), 4(d)(iv), 5(g)(iii), 5(i), 5(l), 16(a)(ii), 16(c)(ii), 16(e)(ii), 16(e)(v), 16(f)(i), 16(j)(ii), 16(o)(v); 16(u); and 16(v).
[89]Unipharm shall answer these interrogatories to its statement of defence:
(a)Paragraph 5(d)(i) – meeting in August 2017
Unipharm is to answer whether there was a transfer of 320,000 at or arsing out of the meeting in August 2017. If the answer is “no”, it need not answer the other questions. If the answer is “yes”, it shall answer them.
(b)Paragraph 16(e)(iv) and (v) – transfer of Yibo’s shares to ANC in November 2017
Unipharm is to answer whether there was consideration for the transfer. If the answer is “No”, the other questions do not need to be answered. If the answer is “Yes”, it shall answer the other questions.
(c)Paragraph 16(i) – transfers of Aivita’s and Kevin’s shares to ANC NZ Ltd in December 2017
Unipharm shall answer whether there was any consideration for these transfers. If the answer is “No”, the other questions do not need to be answered. If the answer is “Yes”, it shall answer the other questions.
(d)Paragraphs 5(g), 5(k), 16(a)(i), 16(c)(i) and 16(e)(i) – Yibo’s trusteeship Unipharm shall answer these interrogatories.
(e)Paragraph 10 – shareholders’ agreement Unipharm shall answer these questions.
(f)Paragraph 11 – constitution
Unipharm shall answer the questions set out at [72], unless it amends its statement of defence to admit that the shareholders did not formally adopt the constitution and did not give notice of it to the Registrar of Companies.
(g)Paragraphs 16(a)(iii) and 16(c)(iii) – Charlie’s directorship Unipharm shall answer these questions.
[90] A director of Unipharm shall answer the interrogatories on behalf of the company. Unipharm shall file and serve sworn answers to the interrogatories by 9 July 2021.
[91]I do not make any other orders on the applications in paragraph [2] above.
[92] Counsel are to confer on costs. If they cannot agree and one side seeks costs, it is to file and serve a memorandum. The other side is file and serve a response within a further week.
[93]Leave is reserved to apply for further directions.
…………………………………….
Associate Judge R M Bell
Solicitors:
Stainton Chellew (Bruce Stainton), Auckland, for Aivita Healthy New Zealand Ltd Glaister Ennor (Chen Jiang), Auckland, for Unipharm
Copy for:
Greg Blanchard QC, Auckland, for Unipharm Healthy Manufacturing Co Limited T J Rainey, Auckland, for Aivita Healthy New Zealand Limited
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