Chen v Chen
[2017] NZHC 242
•21 February 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1733 [2017] NZHC 242
BETWEEN SHAN-HUA CHEN AND WENG YUAN
TSAO Appellants
AND
YEN WEI CHEN AND KUEI HUAN CHEN
Respondents
Hearing: 21 February 2017 Appearances:
No appearance of S Chen
Appellant Tsao in person (Mr H Zhang McKenzie friend) D G Collecutt for the Respondent
Judgment:
21 February 2017
ORAL JUDGMENT OF MUIR J
CHEN v CHEN [2017] NZHC 242 [21 February 2017]
Introduction
[1] This is an appeal from a minute/direction made by District Court Judge Lovell-Smith on 25 July 2016 in which she struck out the plaintiffs’ case for non- compliance with orders of Judge Cunningham dated 16 May 2016.
Background
[2] There is a long and desultory history to the plaintiffs’ claim. It has its genesis in arrangements between former friends in 2009/2010. The respondents, Mr and Mrs Chen, were the owners of retail premises in Howick. They ran a bakery from part of these premises. It was not particularly successful. They discussed with Ms Chen and Mr Tsao the idea of the appellants running a takeaway business from the same premises with the result that the business would operate as a bakery during the day and a takeaway business at night. Arrangements to that effect were ultimately agreed between the parties. A company was incorporated, Alligators Fast Food Ltd (AFFL), of which the appellants and respondents were shareholders and directors.
[3] In a judgment between the parties delivered by this Court on
10 November 2014, Lang J described what followed in the following terms:1
[7] Ms Chen and Mr Tsao were required to pay the sum of $32,500 in order to acquire a one-half share in the venture. They duly paid Mr and Mrs Chen an initial deposit in the sum of $3,000, and then made another payment subsequently in the sum of $29,750.2 Mr and Mrs Chen used that money for their own purposes.
[8] Both parties provided the company with the sum of $2,000 to provide it with initial working capital. The company then began operating the business.
[9] The parties soon fell out, and this led to Ms Chen and Mr Tsao walking away from the business a short time after it opened. Thereafter Mr and Mrs Chen continued to operate the business without their input or assistance. They subsequently sold the business to a third party
1 Chen v Chen [2014] NZHC 2788.
2 This payment included the sum of $250 being their share of the cost of incorporating the company.
[4] In so describing what occurred, Lang J must be taken as having accepted the conclusion reached by Judge Hubble in the District Court that the nature of the arrangement was to value the new business at $65,500 with Mr and Mrs Chen’s capital contribution comprising the bakery business and Ms Chen and Mr Tsao acquiring their interest in the company for cash.3 If that was indeed the nature of the arrangement then the appropriation by Mr and Mrs Chen of the monies paid by Ms Chen and Mr Tsao for their half share in the company was improper. That cash sum should have constituted working capital of the new company.
[5] Mr and Mrs Chen’s position is, however, that even if that were the case their counterclaims against AFFL for unpaid rental while it continued to operate the business exceed any claim against them.
[6] Judge Hubble found that there was a contract between the parties which Mr and Mrs Chen breached by failing to pay over to the company the sums of money they received.
[7] In the High Court, Lang J held that such finding was not one available on the pleadings before the District Court. Those pleadings in their most recently amended form sought remedies under s 174(2)(b) of the Companies Act 1993. His Honour accordingly allowed the appeal from Judge Hubble’s decision and remitted the matter to be reheard in the District Court. In so doing he pointed out that the most likely claims arising out of the facts as stated were claims by AFFL against Mr and Mrs Chen. He pointed out that the appropriate mechanism for Ms Chen and Mr Tsao to bring such claims was via provisions of the Companies Act 1993, which were only capable of enforcement in the High Court and not the District Court.
[8] On remission to the District Court Ms Chen and Mr Tsao filed a document intituled “Amended Notice of Statement” but which was in substance an amended statement of claim. This was dated 31 July 2015. The amended pleading identified AFFL as the first plaintiff and Ms Chen and Mr Tsao as respectively second and third plaintiffs. The difficulties with that pleading were legion and obvious. Ms
Chen and Mr Tsao had no authority whether by virtue of a director’s resolution or
3 Chen v Chen DC Manukau CIV-2010-092-5263, 23 May 2013.
otherwise to bring proceedings in the name of AFFL. Moreover that company had in the interim been struck off. In addition, the pleadings date had already closed so that an application for leave was necessary.
[9] All of these issues were pointed out by counsel for Mr and Mrs Chen in a memorandum dated 17 September 2015.
[10] Ultimately the matter came before Judge Blackie on 23 February 2016.4 He pointed out that since the matter had been remitted to the District Court the “goal posts appear to have changed” in that the plaintiffs now sought to add AFFL as a party. He pointed out that they had in fact filed amended pleadings with that company as first plaintiff. He recorded the defendant’s advice that AFFL no longer existed having been struck off the Companies Register some time ago. He said that Mr and Mrs Chen were anxious that the proceedings, now in their sixth year, be disposed of and recorded counsel’s submission that it was difficult to proceed with the claim until the proceedings were finally settled. He then made the observation
that “[c]ertainly as they are presently constituted they are somewhat confusing”.5
[11] I agree that that was a correct description of the amended claim dated 31 July
2015. It was a composite of company and personal claims, various threads of which were never appropriately separated and identified and which could not realistically have been adjudicated on in that form.
[12] Judge Blackie then said:
[8] I am prepared to give the plaintiffs a final opportunity to have their pleadings presented in an orderly fashion so that they may be properly answered by the defendants before the matter is set down for trial, and hopefully ultimate disposal.
[13] He adjourned the proceedings to 23 March 2016 at 10.00 am during which time he said:
[9] ... the plaintiffs are to finally settle their pleadings, including if that is an appropriate step, the reinstatement of Alligators Fast Food Ltd as a registered company so it can partake in the case.
4 Chen v Chen [2016] NZDC 2801.
[14] On 23 March 2016 Judge Recordon directed that Ms Chen and Mr Tsao were to:
(a) provide evidence of reinstatement of AFFL;
(b) apply for leave to join AFFL as a defendant and serve that application;
and
(c) apply for leave to file an amended statement of claim.
[15] He allocated a further case management hearing on 16 May 2016 at
10.00 am.
[16] On 16 May Judge P A Cunningham gave extensive directions. She recorded Judge Blackie’s “final opportunity” and the orders made by Judge Recordon. She noted that AFFL had been restored to the Register but that the second and third orders made by Judge Recordon had not been complied with. She said that she had endeavoured to explain to the plaintiffs through their English speaking McKenzie friend that they needed to make an application for leave to join AFFL and to file an affidavit in support to which they would need to attach a proposed amended statement of claim.
[17] She then recorded Mr Collecutt’s submission on behalf of Mr and Mrs Chen that unless orders should be made in that respect.6 She said that she “intended to make” such orders,7 and later that she “agreed there should be unless orders”.8 She then directed that:
[17] By 28 June 2016 the plaintiffs are to file and serve a formal application to amend their pleadings and to join Alligators Fast Food Ltd as a party to the proceedings. That application is to be supported by an affidavit which includes the proposed draft amended statement of claim which particularises the causes of action relied on.
6 At [10].
7 At [12].
[18] Although Her Honour did not at that point in her judgment revisit the unless order, I agree with Mr Collecutt that a fair reading of paragraphs [10], [12], [15] and [17] of the judgment is that the District Court was making such an order in respect of its requirement for a formal application, affidavit and draft statement of claim.
[19] Her Honour also directed that Ms Chen and Mr Tsao were to pay $1500 costs to Mr and Mrs Chen by 28 June 2016. In the way in which the judgment is constructed, and in particular Her Honour’s statement of the effect of an unless order in para [10], I do not believe I can safely conclude that such an order applied to that aspect of the judgment. I do not rely on it.
[20] Her Honour also addressed again the difficulties associated with Ms Chen and Mr Tsao purporting to bring claims in the name of the company. She referred to Mr Collecutt’s submission that there had been no agreement of the shareholders as to how the company was to conduct its affairs or agreement to bring such a claim. She
counselled Ms Chen and Mr Tsao to seek legal advice.9
[21] The documents required by Judge Cunningham’s orders were not filed by 28
June 2016. A memorandum was filed by Mr Chen and Mr Tsao on that day but such memorandum did not include or annex an application to join AFFL or an affidavit with proposed draft amended pleading.
[22] The following day Ms Chen and Mr Tsao filed a further memorandum in which they said, among other things:
2. The plaintiffs applied for leave to the Court to join Alligators Fast Food Ltd as an additional plaintiff on 8 June 2016. [this was by way of memorandum not application.]
9 It is obvious to me, as it has been to a number of Judges who have considered this case previously that, for a claim to be advanced in the name of AFFL the appropriate course (in the absence of a directors’ resolution authorising such proceedings) was for Ms Chen and Mr Tsao as shareholders in that company to seek the leave of this Court under s 165 of the Companies Act to bring a derivative claim in the name of the company. It is possible also that Ms Chen and Mr Tsao had claims under s 174 of the Companies Act on the grounds of alleged oppressive behaviour on the part of their fellow shareholders. The pleading before Judge Hubble was to that effect, albeit improperly brought in the District Court. The orders potentially available under s 174 include orders requiring any person to pay compensation to any other person. However, both derivative proceedings under s 165 and oppression proceedings under s 174 are proceedings necessarily brought in this Court by virtue of the definition of “Court” in s 2 of the Companies Act.
3. The plaintiffs believe the supporting affidavit and proposed draft amended statement of claim cannot be submitted until apply for leave is granted (sic).
4. Judge Harrison deferred the application to join Alligators Fast Food
Ltd to the conference on 5 July 2016.
5. Hence the supporting affidavit and proposed amended statement of claim were not submitted. The plaintiffs inquired to the Court with regards to the submission of the two documents on 22 June and had no response from the Court.
[23] Ms Chen and Mr Tsao elected not to comply with Judge Cunningham’s direction believing that the application to add AFFL should be disposed of prior to them being required to prepare a draft statement of claim. That was an incorrect assumption. The very purpose of the draft was to ensure that the Court had before it all relevant material required to adjudicate on the application for leave to add AFFL
as a plaintiff. A coherent pleading was a necessary prerequisite for any such order.10
But Ms Chen and Mr Tsao thought they knew better and that they could defer preparing such a document.
[24] They now suggest that the document filed on 31 July 2015 met that requirement. However, not only was that pleading deficient, as I have already indicated, but there had been subsequent directions of the Court relating to a requirement to replead.
[25] Neither did Ms Chen and Mr Tsao pay the award of costs made by Judge Cunningham. They sought an order of the Court waiving such costs, which was declined on 1 July 2016 by Judge Harrison.
[26] Judge Cunningham had adjourned the proceeding to 5 July 2016 at 10.00 am. On that day the matter came before Judge Lovell-Smith on the papers. She stated there had been non-compliance with the orders of Judge Cunningham and accordingly struck the proceeding out. Whether it was necessary to do so is moot. I
agree with Mr Collecutt that, an unless order having been made by Judge
10 The problem would have still remained that, absent an order under s 165 of the Companies Act, only available in the High Court, any such claim would have been one in my view improperly brought.
Cunningham, the proceedings were, as a function of that order, properly considered struck out as at 29 June 2016.11
Appellant’s submissions
[27] The appellants have filed submissions totalling 18 pages plus extensive schedules. In part these submissions are, I am obliged to say, unintelligible to me. There are challenges, among other things, to the status of Mr Collecutt to represent Mr and Mrs Chen but I do not consider such challenge can be made in the context of the specific decision appealed from. Any such challenge was appropriately brought and adjudicated on in the District Court. The only matter properly before me is whether the claim was appropriately struck out on 5 July 2016 for non-compliance with the unless orders.
[28] In this respect, the appellants appear to rely on the fact that they had filed a pleading in the company's name. But as I have said, that does not meet the objections identified by both Judges Blackie and Cunningham, and which resulted in the unless orders. Ms Chen and Mr Tsao were placed firmly on notice that, absent a formal application and supporting affidavit annexing a new draft pleading, their proceeding would be struck out.
Respondent’s submissions
[29] Mr Collecutt emphasises that the appellants were warned on multiple occasions both by counsel and the Court they needed urgently to put their house in order. He says that, if anything, the Court was unduly generous given that on
23 February 2016 Judge Blackie expressed the Court’s requirements in terms of a “final opportunity”, but, nevertheless, on 16 May Judge Cunningham gave Ms Chen and Mr Tsao a further, approximately, six weeks to produce a coherent pleading.
[30] He says that in substance this appeal is an appeal from Judge Cunningham’s
directions but that because such an appeal was never pursued, Ms Chen and Mr Tsao
11 Judge Lovell-Smith may have been acting out of an abundance of caution given that in her description of the unless order, Judge Cunningham had said (at [10]) that in the event of non- compliance the proceedings “should be struck out”.
were bound by her directions and, having failed to comply with them, their proceedings were appropriately struck out.
Discussion
[31] As Paterson J observed in Ko v Ko:12
[18] An “unless order” is an order of last resort. Case management principles should not in ordinary circumstances override the justice of the situation but in a situation where a judicial officer has felt compelled to make an “unless order”, unless it can be established that there were no grounds for making such an order or that reasons beyond the party’s control caused non-compliance, the order should be upheld….
[32] I consider that this was an obvious case in which to make an unless order. The proceedings had, at the time of the order, been running for in excess of six years. The plaintiffs had been counselled on a number of occasions that any proceeding by the company needed necessarily to be brought in the High Court. Despite this, the matter had continued to languish in the District Court with unsatisfactory pleadings and inappropriate attention to its rules, in particular the requirement for a formal application for leave to amend, supported appropriately.
[33] Any appeal from the decision of Judge Cunningham imposing unless orders is, in my view therefore, unlikely to have succeeded.
[34] For completeness Mr Collecutt notes that this Court has, despite the absence of an appeal, an inherent jurisdiction to review decisions of the District Court including procedural, pre-trial and substantive determinations. He points out that such jurisdiction is exercised sparingly. In my view, there is no basis upon which such jurisdiction could be invoked in this case. It was, in my view, well open to the District Court to impose an unless order.
[35] I have already indicated that because that order was not complied with, the proceedings were, in my view, properly considered struck out as at 29 June 2016,
and the subsequent decision of Judge Lovell-Smith doing so was probably otiose.
12 Ko v Ko (2000) 12 PRNZ 362.
Her decision, however, took the matter beyond doubt and was clearly justified on the basis of the non-compliance she identified and the Court’s previous unless orders.
[36] Ms Chen and Mr Tsao, although unrepresented and therefore entitled to some latitude and understanding, could not take it upon themselves to redefine the time or order in which documents were to be provided to the Court. They are in that sense the authors of their own misfortune.
[37] However, I emphasise that, in my view, the causes of action most likely to have resulted in an adjudication in either their favour or that of AFFL were always causes of action which could only be prosecuted in this Court, via applications under ss 165 or 174 of the Companies Act. In terms of the overall justice of the case, the District Court’s decision to strike out the proceedings should be seen in that context.
Result
[38] I dismiss the appeal. I allow costs to the respondents on a 2B basis. I order that the amount paid into court as security for costs on this appeal be paid to the respondents’ solicitors (Shean Singh, Barristers and Solicitors).
[39] I make one final observation. I encourage the parties to enter into responsible discussions concerning potential claims by AFFL. The prospect that this Court should be required to consider either a s 165 or s 174 application in circumstances where the sum of money involved is under $30,000 is not a welcome one given the potential complexities of both applications. To the extent that there may be an
underlying injustice it should be resolved by more efficient means.
Muir J
4