Chen v Auckland Weihao Investment Limited
[2021] NZHC 306
•26 February 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-1760
[2021] NZHC 306
UNDER THE Companies Act 1993 IN THE MATTER
of the liquidation of AUCKLAND WEIHAO INVESTMENT LIMITED
BETWEEN
LIYUN CHEN
Plaintiff
AND
AUCKLAND WEIHAO INVESTMENT LIMITED
Defendant
Hearing: 30 November 2020 Appearances:
Plaintiff in person
JA Wickes for the Defendant
Judgment:
26 February 2021
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 26 February 2021 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Loo & Koo, Auckland
Chen v Auckland Weihao Investment Ltd [2021] NZHC 306 [26 February 2021]
Introduction
[1] The defendant, Auckland Weihao Investments Limited (“AWIL”), applies for an order staying the application to liquidate AWIL and restraining advertising.
[2]The grounds on which the orders are sought are:
(a)no statutory demand has been served on AWIL;
(b)the debt upon which the liquidation proceedings is founded is the subject of a genuine dispute that is already the subject of defended proceedings in CIV-2020-404-1236;
(c)it is an abuse of process to commence winding-up proceedings in respect of a disputed debt; and
(d)there is no evidence of breaches of the Companies Act 1993 or the Anti- Money Laundering and Countering Financing of Terrorism Act 2009 (“AML/CFT”) as alleged in the application for liquidation.
[3] An interim order restraining advertising of the liquidation pending further order of the Court was made on 9 October 2020 to protect AWIL until judgment could be given on this application.
[4] The issue for the Court is whether a stay of the liquidation proceedings should be ordered.
Other proceedings
[5] These liquidation proceedings are the third proceedings issued by Ms Chen in relation to the dispute with AWIL, arising from the agreement by Ms Chen to purchase land from AWIL. The first proceedings related to possible vendor finance by AWIL (“Loan Agreement proceedings”) and the second, an application to sustain a caveat lodged over the property at the centre of the dispute (“First Caveat Proceedings”).
[6] Since these liquidation proceedings were issued, further proceedings in relation to a second caveat (“Second Caveat Proceedings”) and the recovery of costs by AWIL on interlocutory matters in the Loan Agreement Proceedings (“Cost Recovery Proceedings”) have also been issued.
[7] The First and Second Caveat Proceedings have now been determined, with Ms Chen’s applications to sustain the caveats dismissed in both cases. The Loan Agreement Proceedings are still to be determined.
[8] I set out below a chronology of the facts relevant to the question of whether a stay should be granted. The chronology refers to steps taken in the other proceedings where relevant to the question of whether a stay should be granted.
Factual chronology
[9] In mid-October 2019 AWIL agreed to sell land at 285 Murphy’s Road, Flat Bush to Ms Chen for $10.8 million. The parties entered into a sale and purchase agreement and a deposit of $1.08 million was paid by Ms Chen. Settlement was originally to take place on 15 June 2020 but AWIL granted Ms Chen a one-week extension without penalty.
[10] On 22 June 2020, apparently following difficulties with financing as a result of Covid-19 travel restrictions, AWIL agreed to provide short-term vendor finance of
$3 million. This was on condition that a second mortgage would be granted in AWIL’s favour, with the loan to be repaid within three months. Interest of $75,000 was to be capitalised and paid in advance on 24 June 2020 (“Loan Agreement”).
[11] On the morning of 25 June 2020, the defendant’s solicitor gave the necessary details and undertakings for settlement.
[12] In the afternoon of 25 June 2020 Ms Chen’s solicitor forwarded a deed of priority and subordination prepared by the solicitors for the first mortgagee and asked AWIL to sign the deed in its capacity as second mortgagee. The deed specified a priority amount of $30 million for the first mortgage and provided that AWIL could not enforce its security under the second mortgage until the first mortgage was fully
repaid. AWIL refused to accept the terms of the deed. AWIL’s solicitor pointed out that AWIL’s loan was to be repaid within three months, which was shorter than the term of the first mortgage. The first mortgagee would not, however, agree to allow the defendant to enforce its security until after the first mortgage was repaid. Despite further discussions no agreement could be reached between AWIL and Ms Chen.
[13] The next day, on 26 June 2020, Ms Chen registered a caveat against the title of the property on the basis of her interest as purchaser under the sale and purchase agreement.
[14]On 1 July 2020 AWIL served Ms Chen with a settlement notice.
[15] Ms Chen did not comply with the settlement notice issued and on 21 July 2020, AWIL cancelled the sale and purchase agreement without prejudice to its rights.
[16] On the same day, AWIL applied to the Registrar for the caveat over the property to lapse. Ms Chen then applied for an order that the caveat not lapse.
[17] In the meantime, on 17 July 2020, Ms Chen, who is self-represented, filed proceedings alleging that AWIL had wrongfully repudiated the Loan Agreement by failing to provide vendor finance of $3 million and seeking a refund of the 10 per cent deposit paid under the sale and purchase agreement with the interest being paid on the other financing and damages for AWIL’s alleged wrongful repudiation of the loan agreement (“Loan Agreement Proceedings”).
[18] AWIL filed its statement of defence in the Loan Agreement Proceedings on 7 August 2020, confirming that it intended to defend the proceeding.
[19] Ms Chen’s application for the first caveat not to lapse was heard on 24 August 2020.1
1 Chen v Auckland Weihao Investments Limited [2020] NZHC 2450.
[20] On the day following the hearing of the First Caveat Proceedings, Ms Chen sent a letter of demand to the solicitors for AWIL in respect of the penalty interest she says was payable for late settlement under the sale and purchase agreement. Ms Chen alleges that this letter is a statutory demand and that it was properly served on AWIL.
[21] On 18 September 2020, Associate Judge Gardiner issued her decision in the First Caveat Proceedings ordering that the first caveat lapse.
[22] On 19 September 2020, Ms Chen lodged a second caveat on the basis of a different interest than that claimed in the First Caveat Proceedings.
[23] These liquidation proceedings were then filed on 28 September 2020, relying on the failure to comply with the alleged statutory demand in respect of penalty interest for late settlement of the sale and purchase agreement as well as alleged breaches of the Companies and AML/CFT Acts.
[24] Ms Chen’s application to sustain the second caveat was heard on 10 February 2021. Associate Judge Bell gave an oral decision ordering that the second caveat lapse and awarding full solicitor/client costs. In this decision, Associate Judge Bell held that the filing of the Loan Agreement Proceedings arguably amounted to notice of cancellation of both the Loan Agreement and sale and purchase agreement by Ms Chen but that Ms Chen had not shown an arguable case for a right to cancel either agreement.2 Associate Judge Bell went on to hold that whether the filing of the proceedings by Ms Chen was notice of cancellation or not, AWIL was still entitled to cancel the sale and purchase agreement. Ms Chen was not, therefore, entitled to a refund of the deposit paid. Associate Judge Bell concluded:
With the agreement for sale and purchase cancelled, and without a purchaser’s equitable lien to secure repayment of the deposit, there is no remaining basis on which she can claim an interest in the property.
[25]Ms Chen’s application to sustain the second caveat was dismissed on this basis.
2 Chen v Auckland Weihao Investment Limited [2021] NZHC156 at [19] – [23].
Grounds for AWIL’s application to stay
[26] AWIL relies on several grounds in its application to stay these liquidation proceedings.
[27] First, AWIL submits that the alleged statutory demand does not comply with the requirements for a statutory demand set out in s 289 of the Companies Act as:
(a)the demand is not in respect of a debt that is due;
(b)it was not served on AWIL in accordance with the Companies Act;
(c)it does not include the mandatory wording set out in s 289(2)(d) of the Companies Act as it does not require the company to pay the debt or enter into a compromise or otherwise compound with the creditor or give a charge over its property within 15 working days of the date of service or such longer period as the Court may order.
[28] Secondly, AWIL submits that no evidence has been filed by Ms Chen to support the claims:
(a)that AWIL is in breach of s 151 of the Companies Act because Mr Nengyi Chen, the sole director at the time the proceedings were brought, does not live in New Zealand; or
(b)“the company is seriously in breach of AML/CFT 2009 by not fully declared (sic) legitimate source of the funding”3.
Legal framework
Application for stay
[29] The application to stay the liquidation proceedings is made under r 31.11 of the High Court Rules 2016 which provides:
3 Statement of claim in Liquidation Proceedings dated 16 September 2020 at [7].
31.11 Power to stay liquidation proceedings
(1)If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court—
(a)for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to the statement of claim; and
(b)for an order staying any further proceedings in relation to the liquidation.
(2)The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3)The inherent jurisdiction of the court is not limited by this rule.
[30] The principles governing an application for a stay of liquidation proceedings are well settled:4
(a)The Court has an inherent jurisdiction to stay winding-up proceedings where the debt upon which such proceedings are found as the subject of genuine dispute. In those circumstances the plaintiff cannot show it has the status of a creditor or that there has been neglect by the company to pay.
(b)The jurisdiction is an inherent one to prevent abuse or process. There is no inflexible rule.
(c)The governing consideration is whether the proceeding suggests unfairness or undue pressure.
(d)It is a serious matter to stay winding-up proceedings so the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate something more than the balance of convenience considerations which are usually considered on an application for interim injunction. If the defendant company has had an opportunity to file appropriate affidavits, such defendant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds or show that there are clear and persuasive grounds for a stay.
4 Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC) at 385 (under the previous r 700k).
[31] Associate Judge Smith commented in Waikato Motors Limited v Westend Property Developments Ltd 5 that the authorities show that the defendant ordinarily carries a heavy onus for establishing that there is a strong prima facie case for the existence of a genuine dispute on substantial grounds before a stay will be granted.
Power to liquidate
[32] Because Ms Chen is relying on several grounds for seeking liquidation of the defendant company, it is useful to consider the circumstances in which a Court may appoint a liquidator. These are set out in s 241(4) of the Companies Act:
241 Commencement of liquidation
…
(4)The court may appoint a liquidator if it is satisfied that—
(a)the company is unable to pay its debts; or
(b)the company or the board has persistently or seriously failed to comply with this Act; or
(ba) the company, or 1 or more of its directors or shareholders, has intentionally provided the Registrar with inaccurate information; or
(bb)the company, or 1 or more of its directors or shareholders, has in a persistent or serious way failed to comply with duties relating to the company—
(i)under this Act; or
(ii)under the Financial Reporting Act 1993 while in force, except that this subparagraph does not apply after 5 years have elapsed after this subparagraph came into force; or
(c)the company does not comply with section 10; or
(d)it is just and equitable that the company be put into liquidation.
…
[33] From the above, it is clear that, as well as inability to pay its debts, failure to comply with s 10 of the Companies Act (requiring at least one director to live in New Zealand), or a persistent or serious failure to comply with other duties under the Companies Act, also provide a basis for appointing a liquidator.
5 Waikato Motors Ltd v Westend Property Developments Ltd [2019] NZHC 865 at [5].
Inability to pay debts
[34] Section 287 of the Companies Act provides that a company is presumed to be unable to pay its debts if it fails to comply with a statutory demand.
[35]Statutory demands are defined by s 289:
289 Statutory demand
(1)A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.
(2)A statutory demand must –
(a)be in respect of a debt that is due and is not less than the prescribed amount; and
(b)be in writing; and
(c)be served on the company; and
(d)require the company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.
[36] Prior to the filing and service of the liquidation proceeding, the applicant filed the Loan Agreement Proceedings seeking recovery (inter alia) of the deposit paid under the sale and purchase agreement plus the interest paid on financing and other costs associated with the development. A statement of defence has been filed in the Loan Agreement Proceedings denying Ms Chen’s right to recover.
[37] The seeking of the return of the deposit in the Loan Agreement Proceedings is not consistent with the letter of demand for payment of penalty interest for late settlement relied on in this proceeding. Seeking the return of the deposit suggests Ms Chen accepts that the sale and purchase agreement is at an end. As Ms Chen does not have a lawyer representing her, it is not clear that this will remain her position. But whether Ms Chen accepts the sale and purchase agreement has been cancelled or not, the issues in the Loan Agreement Proceedings will still include whether the sale and purchase agreement was validly cancelled and, if so, by whom; Ms Chen or AWIL. If the sale and purchase agreement was validly cancelled, then the amount demanded by Ms Chen in the letter of demand will not be payable.
[38] From the above, there is clearly a dispute between the parties as to whether the alleged debt for penalty interest of $208,000 is owing.
Service
[39] As well as submitting that there is clearly a disputed debt, the defendant submits that a statutory demand in the required form has never been served on the company as required by s 289(2)(c).
[40] The alleged statutory demand was served on the solicitor acting for AWIL in other proceedings and to Ms Chaoyun Chen, at the time the General Manager of AWIL by email.6 Counsel for AWIL submitted that service by these methods did not comply with the Companies Act requirements for service.
[41] Section 387 of the Companies Act provides for service of documents on companies in legal proceedings and s 388 for service of “other documents” on companies. The authorities are not settled as to whether a statutory demand is a document in a legal proceeding or not. Associate Judge Lester concluded in Upright Scaffolding Limited v Pinnies Painters & Plasterers7 that the better view is that a statutory demand is not a document in a “legal proceeding”, preferring the approach adopted in Arzan Developments Ltd v Beresford Apartments Ltd.8
[42] If s 388 rather than s 387 applies, service by email at an address that is used by the company is valid service. Service of the demand by email to the general manager may, therefore, have been sufficient to comply with s 289(2)(c), assuming that the letter of demand otherwise complied with the requirements of s 289.
Section 289(2)(d) requirement
[43] The letter of demand that Ms Chen relies on as the statutory demand does not require the defendant company to pay the debt or enter into a compromise etcetera, within 15 working days, as is required by s 289(2)(d). It instead requires payment
6 Now an appointed director of AWIL since 22 December 2020.
7 Upright Scaffolding Limited v Pinnies Painters & Plasterers [2019] NZHC 1495, [2019] NZAR 1084 at [10].
8 Arzan Developments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 at [21].
within four working days (being Tuesday, 25 August 2020 to Monday, 31 August 2020), with no other options for securing the debt and so forth offered.
[44] In earlier decisions a failure to use the exact wording set out in s 289(2)(d) has not prevented the document being accepted as a statutory demand,9 but options to secure or compound the debt were still given, just not with the exact wording of s 289(2)(d). In a recent decision, Grinberg v Galante,10 where the number of days by which a defendant company was required to pay was increased from 15 to 60 working days, the change was held to be a “deliberate departure” from the statutory demand process, leading to it being set aside.11
[45] The 15 working day period required by s 289 is necessary for the setting aside process in s 290 to work. That process requires a defendant company to apply to set aside a statutory demand within 10 working days of the date of service of the statutory demand. The setting aside process would not be available to a defendant company if a letter of demand with a four working day deadline, as used by Ms Chen here, were accepted as sufficiently complying with s 289.
Conclusion – not a statutory demand
[46] In this case, the multiple irregularities with the form of the alleged statutory demand together with the fact that it relates to a disputed debt, mean that Ms Chen would not be able to rely on the ground that AWIL is unable to pay its debts for failure to comply with a statutory demand.
Alleged Breaches of the Companies and AML/CFT Acts
[47] Ms Chen also relies on alleged failures by AWIL to have a director who lives in New Zealand and serious breaches of the AML/CFT Act 2009 as further grounds for liquidating the company.
9 Cooper Horticulture Limited v Apollo Fruit Limited HC Napier CIV-2006-441-18, 24 March 2006 at [22].
10 Grinberg v Galante [2020] NZHC 800.
11 At 17.
[48] As counsel for the defendant submitted, however, the evidence does not support either of these allegations.
[49] In the Loan Agreement Proceedings brought by Ms Chen, an application for particular discovery was made against the defendant and seven non-parties, including the Chinese Consulate in Auckland. Hinton J dismissed the application as the residency of the director of AWIL and any breaches of the AML/CFT Act were not relevant to the Loan Agreement Proceedings. Hinton J commented, however, that it seemed that through the discovery sought, Ms Chen was hoping to establish that the original director of the defendant company, Mr Nengyi Chen, was not a New Zealand resident.12 Hinton J recorded further that Ms Chen appeared also to be seeking discovery to see if she could establish a breach by AWIL of the AML/CFT Act.13
[50] In contrast to the Loan Agreement Proceedings, whether the director lives in New Zealand and whether there have been serious breaches of the AML/CFT Act may be relevant to liquidation proceedings, as they are included as grounds for liquidation under s 241(4) of the Act. Counsel for AWIL does not submit otherwise but instead argues that there is simply no evidence before the Court supporting either a breach of s 10 or a breach of the AML/CFT Act.14
[51] Section 241(4)(c) provides that a liquidator may be appointed if the company does not comply with s 10 of the Companies Act. Section 10(d) of the Companies Act provides that a company must have one or more directors, of whom at least one must live in New Zealand (or in an enforcement country, but that is not relevant here).
[52] The Companies Register records that AWIL now has two directors, with Ms Chaoyun Chen appointed on 22 December 2020. There is no allegation that Ms Chaoyun Chen does not live in New Zealand. Furthermore, an affidavit was deposed by Ms Chaoyun Chen in Auckland on 12 October 2020 and filed in this proceeding.
12 Chen v Auckland Weihao Investment Limited [2020] NZHC 2564 at [18].
13 At [19].
14 The Court’s power to liquidate a company requires “persistent or serious failure to comply” with the Companies Act. A question remains as to what point a breach of the AML/CFT Act would meet this threshold.
At least since 22 December 2020, therefore, AWIL complies with s 10 of the Companies Act.
[53] The power to appoint a liquidator for breach of s 10 appears only to apply where there is a current breach. In any event, in Re Carr15 it was held section 10 does not require a director to be in New Zealand for 183 days per year (as required by taxation legislation) but instead required the analysis of a number of factors. Covid- 19 travel restrictions may be relevant to such an analysis.
[54] With the claims in respect of breaches of the AML/CFT Act, it is difficult to see how the Act would apply to AWIL. The AML/CFT Act regulates the actions of “reporting entities” as defined in s 5 of the Act. There is no evidence that AWIL would fall within this definition and, therefore, it is difficult to understand how it could be in breach of the AML/CFT Act.
[55] Ms Chen relied on an affidavit dated 19 November 2020 attaching a photograph of a real estate sign on the property. The affidavit stated that:
… the photo of the real estate sign on the property taken as at 18.11.2020 that this matter is Genuine Public Interest for all the potential buyers of both lot 1 and lot 2 of 285 Ormiston rd where this matter must proceed as Genuine Public Interest as the general public should not be the victim of the “highly” suspected the properties are tools of money laundering for respondent company (sic).
[56] The affidavit was filed in support of Ms Chen’s application for leave to appeal Hinton J’s refusal to order particular discovery in the Loan Agreement Proceedings and was purported to be “fresh evidence”, providing further support for the allegations of breach of the AML/CFT Act. The photograph does not provide such evidence and nor is there any other evidence of possible breach.
[57] I record that counsel for AWIL submitted that Ms Chen should not be able to rely on this affidavit given leave was not sought prior to the hearing and there was no opportunity to file evidence in response. I have granted an indulgence in allowing the
15 Re Carr [2016] NZHC 1536, (2016) 11 NZCLC 98-044 at [17].
affidavit to be relied on. In the end, it does not provide evidence in support of Ms Chen’s contention and so there is no prejudice to AWIL.
[58] At the hearing, there was discussion about when the AML/CFT Act came into effect in respect of the relevant transactions. Memoranda were filed on behalf of both parties following the hearing confirming the position. However, in the absence of evidence that the defendant company is a reporting entity, or of any possible breach of the Act, whether the Act applies to different groups of reporting entities is not relevant to this application.
Outcome
[59] It is a serious matter to stay liquidation proceedings but it is clear in this case that it is appropriate for an order for stay to be made. There is no prospect that any of the grounds on which the proceedings have been brought will be able to be established.
[60] Prior to the filing of the liquidation proceedings, the Loan Agreement Proceedings had already been commenced by Ms Chen and those proceedings appear to be inconsistent with the issuing of the letter of demand. The Loan Agreement Proceeding is the appropriate forum for the resolution of the dispute between the parties, not liquidation proceedings.
[61] Furthermore, there is no evidence to support the further bases relied on in seeking to liquidate the company.
[62]The application for a stay is, therefore, granted.
Costs
[63] AWIL has sought indemnity costs in respect of these liquidation proceedings as AWIL submits that it was an abuse of process to file the liquidation proceedings in the first place.
[64] The Court may order indemnity costs if a party has acted “vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing or defending a proceeding or a step in a proceeding”.16
[65] Filing the liquidation proceedings after the Loan Agreement Proceedings had been commenced and a statement of defence filed would ordinarily be considered acting improperly or unnecessarily.
[66] Ms Chen is, however, self-represented. From discussions with Ms Chen at the hearing, it did not appear that she was aware of the inappropriateness of the liquidation proceedings in these circumstances. Furthermore, at the time the liquidation proceedings were filed, AWIL only had one director who appeared to be in China. As a result, I do not award indemnity costs in respect of this application. Instead, I award scale costs on a category 2B basis.
[67] Hinton J in a postscript to her Honour’s first judgment in the Loan Agreement Proceedings recorded that there was “a lot of money at stake in [that] proceeding and a desperate need for the plaintiff to engage counsel experienced in cases of this nature”.17 I repeat that call and record that continued inappropriate or unnecessary steps may attract increased or indemnity costs awards in the future.
[68] If the parties are unable to agree on costs, a memorandum is to be filed by AWIL within 10 working days of this judgment and Ms Chen is to file a memorandum in response within a further 10 working days. Memoranda are limited to 5 pages.
Associate Judge Sussock
16 High Court Rules 2016 at r 14.6(4)(a).
17 Above n 12, at [30].
6
1