David Lawrence Mills and Fionna; Eileen Mills as Trustees of the Mills Family Trust; Judgment Creditors; And; Weiqiang Feng also known as Brian Feng; Judgment Debtor

[2024] NZHC 3067

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-212

[2024] NZHC 3067

BETWEEN

DAVID LAWRENCE MILLS and FIONNA

EILEEN MILLS as Trustees of THE MILLS FAMILY TRUST
Judgment Creditors

AND

WEIQIANG FENG also known as BRIAN FENG

Judgment Debtor

Hearing:	14 October 2024
Counsel:	K Wendt for the Judgment Creditors T J P Bowler for the Judgment Debtor
Judgment:	21 October 2024

JUDGMENT OF ASSOCIATE JUDGE BRITTAIN

This judgment was delivered by me on 21October 2024 at 11 am Pursuant to r 11.5 of the High Court Rules.

…………………..

Registrar/Deputy Registrar

Solicitors/Counsel:

Powle & Hodson, Auckland

Richmond Chambers, Auckland Neilson Lawyers, Auckland

MILLS v FENG [2024] NZHC 3067 [21 October 2024]

Introduction

[1]                  The judgment creditors, David and Fionna Mills (Mr and Mrs Mills), are the trustees of the Mills Family Trust (the Trust). The Trust sold a property to the judgment debtor, Weiqiang (Brian) Feng (Mr Feng). Mr Feng nominated Kai (Tony) Wang (Mr Wang) to complete the purchase. Neither Mr Wang nor Mr Feng settled the purchase.

[2]                  Mr and Mrs Mills resold the property and obtained summary judgment against Mr Feng and Mr Wang, jointly and severally, for the loss on the resale and other damages. Judgment was entered for $756,597.31 (the judgment).1 The judgment has not been paid.

[3]                  Mr Wang was adjudicated bankrupt on 6 September 2024. Mr and Mrs Mills now seek an order adjudicating Mr Feng bankrupt. Mr Feng opposes the application.

[4]                  Underlying Mr Feng’s opposition is his inability to accept that he is liable for the judgment. He maintained that Mr Wang should pay. He asserted that he has cross-claims against the Trust, which have been struck out. Mr Feng has sought leave from the Court of Appeal to appeal that decision, and he argues that he should not be adjudicated bankrupt while he maintains an appeal. Further, Mr Feng says that he is solvent and he can provide security for the judgment.

Legal principles

[5]Section 36 of the Insolvency Act 2006 (the Act) provides:

36       Court may adjudicate debtor bankrupt

The court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in section 13.

[6]                  Section 13 requires that the debtor owes the creditor a debt for a certain amount of $1,000 or more, payable immediately or at a date in the future that is certain, and that the debtor has committed an act of bankruptcy within a period of three months before the filing of the application for an order for adjudication.

1      Mills v Feng [2022] NZHC 3278.

[7]                  Mr and Mrs Mills have met the jurisdictional requirements of ss 13 and 36 of the Act.

[8]                  Section 37 of the Act confers a discretion on the Court to decline to make an order for adjudication:

37       Court may refuse adjudication

The court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a)the applicant creditor has not established the requirements set out in section 13; or

(b)the debtor is able to pay his or her debts; or

(c)it is just and equitable that the court does not make an order of adjudication; or

(d)for any other reason an order of adjudication should not be made.

[9]                  The following general principles, extracted from the case law, are relevant to the Court’s discretion to refuse adjudication:

(a)The onus is on the debtor to show why an adjudication order should not be made.2

(b)It is not common practice to engage in an analysis of the correctness or otherwise of the underlying judgment. However, the Court can exercise its discretion to refuse to adjudicate a debtor bankrupt if there is good reason to doubt the liability established by the underlying judgment.3

(c)In exercising its discretion, the Court may consider, inter alia, the following factors:

(i)the views of all affected parties, including the petitioner, other creditors and the debtor;4

2      McHardy v Wilkins & Davies Marinas Ltd (in rec) CA54/93, 7 April 1993 at 3.

3      Nightingale v James [2018] NZHC 965 at [5]–[22]; Keung v Official Assignee [2020] NZHC 32 at [51].

4      Re Sturdee [1985] 2 NZLR 627 (HC) at 635.

(ii)the wider public interest, including whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public”;5

(iii)the circumstances in which the debt was incurred and whether those circumstances suggest that the creditor is acting unreasonably in pursing adjudication;6

(iv)whether the debtor is able to pay their debts over a reasonable period of time;7

(v)whether adjudication would be pointless in the sense that the creditors are unlikely to receive payment;8 and

(vi)whether adjudication would render the debtor unable to support him or herself.9

(d)Where a creditor is able to obtain payment by execution against the assets of the debtor, an order for adjudication is often not appropriate.10

(e)In exercising its discretion, the Court should also remain cognisant of the broader purposes of bankruptcy which include:11

(i)allowing for administration of the debtor’s estate in the interests of creditors;

(ii)holding the debtor accountable for his or her debts;

(iii)punishing or stigmatising the debtor for misconduct;

5      Re Nisbett, ex parte Vala [1934] GLR 553 (SC) at 556.

6      Re Epirosa, ex parte Diners Club (NZ) Ltd HC Wellington B498/91, 6 March 1992 at 6.

7      Body Corporate 68792 v Memelink [2018] NZCA 509, [2019] NZAR 127 at [15].

8      Re Fidow [1989] 2 NZLR 431 (HC) at 444.

9      Re Epirosa, above n 6, at 7.

10     Lawson v Perkins [2009] NZFLR 330 (HC) at [20].

11     Sheppard v Blanchett [2012] NZHC 789, (2012) 3 NZTR 22-014 at [35]–[43].

(iv)protecting the community from a debtor who runs up credit without being able to honour it; and

(v)allowing the debtor to eventually take up commercial activity once freed from his or her liabilities after the discharge of their bankruptcy.

(f)Ultimately, the Court must balance the various considerations relevant to an application when concluding whether the debtor has succeeded in showing that the order sought should not be made.12

The issues

[10]              The issue is whether Mr Feng has established grounds which justify this Court exercising its discretion to decline to adjudicate him bankrupt. In particular:

(a)Does Mr Feng have a viable challenge to the judgment?

(b)Does Mr Feng’s financial position justify an exercise of the discretion in his favour?

The history of the litigation

[11]              Mr Feng was represented by counsel  at  the  summary  judgment  hearing. Mr Feng did not oppose the judgment entered  by Lang J  on 7  December 2022.13  Mr Feng then applied for a stay of execution of the judgment. That application was declined by Campbell J on 22 May 2023.14

[12]              On 19 April 2023, Mr Feng filed a separate proceeding against the real estate agent, Mr Wang and Mr and Mrs Mills, raising various allegations related to his purchase transaction and the resale (Mr Feng’s proceeding). Mr and Mrs Mills applied to strike out the pleadings against them.

12     McHardy v Wilkins & Davies Marinas Ltd (in rec), above n 2, at 4.

13     Mills v Feng, above n 1.

14     Mills v Feng [2023] NZHC 1199.

[13]              On 2 May 2023, Mr and Mrs Mills served a bankruptcy notice on Mr Feng based on the judgment. Mr Feng applied to set the bankruptcy notice aside.

[14]              On 26 September 2023, Associate Judge Taylor granted Mr and Mrs Mills’ application and struck out the claims against them in Mr Feng’s proceeding and declined Mr Feng’s application to set aside the bankruptcy notice.15 Associate Judge Taylor held:16

[30]      I am of the view that Mr Feng’s claim against the Mills Trust should be struck out as none of the arguments he has put forward, in my view, are tenable. The reasons for this are as follows:

(a)The fact that the Mills  Trust  may  have  been  aware  that Mr Wang was the actual purchaser, not Mr Feng, does not alter Mr Feng’s liability under the sale and purchase agreement having signed it as purchaser. This is confirmed in the judgment of Campbell J. Further, financial arrangements between Mr Feng and Mr Wang are irrelevant to Mr Wang and Mr Feng’s joint and several liabilities under the sale and purchase agreement.

(b)The fact no valuation of the property was provided, and that Mr Feng did not view the property before signing the sale and purchase agreement are irrelevant to his liability under the agreement. The Mills Trust, as vendor, had no legal obligation to ensure any due diligence was conducted  by  Mr Feng and this was his sole responsibility.

(c)The fact that Mr Feng did not consent to the Mills Trust’s re- sale of the property and no valuation of the property was obtained before re-sale is not a ground for a claim against the Mills Trust. Having reviewed the evidence of Mr Mills and Mr Gibson as to the steps taken on re-sale of the property, I can see no tenable argument by Mr Feng that the Mills Trust failed to mitigate its loss in respect of the re-sale.

(d)As to breach of the Fair Trading Act, I accept the Mills Trust was not “in trade” in respect of the sale of the property, and therefore the Act has no application to it.

(e)As to the claim of negligence by the Mills Trust, I find there was no duty of care owed by the Mills Trust to Mr Feng to ensure that any conditions which may have been required for the protection of the purchaser relating to OIO or finance were inserted into the agreement. It is clearly Mr Feng’s obligation to identify any conditions which may have been required to be inserted in the sale and purchase agreement for the protection of the purchaser.

15     Feng v Mills [2023] NZHC 2674.

16 At [30].

[15]              Associate Judge Taylor declined to set aside the bankruptcy notice for the same reasons.17

[16]              Mr Feng was entitled to appeal to the Court of Appeal against Associate Judge Taylor’s decisions as of right. However, Mr Feng mistakenly applied for leave to appeal the decision declining to set aside the bankruptcy notice. That application was otiose.

[17]              Eventually, on 8 May 2024, Mr Feng filed an appeal of Associate Judge Taylor’s decisions. By then, the appeal was out of time and it was rejected by the Court of Appeal. Mr Feng has now applied to the Court of Appeal for leave to file his appeal out of time. The application for leave is pending.

[18]              Mr Feng also applied for a stay of enforcement of Associate Judge Taylor’s decision declining to set aside the bankruptcy notice. That application was declined by Associate Judge Taylor on 22 August 2024.18

Does Mr Feng have a viable challenge to the judgment?

[19]              Counsel for Mr Feng, Mr Bowler, submitted that Mr Feng’s claims against the Trust in Mr Feng’s proceeding amount to a cross-claim and a challenge to liability under the judgment. Mr Feng will be able to pursue those claims if the Court of Appeal grants leave for Mr Feng to appeal the decision of Associate Judge Taylor striking those claims out, and an appeal is successful. Mr Bowler argued that Mr Feng should not be adjudicated bankrupt in the interim because that will prevent him from pursuing his claims.

[20]              I am not satisfied that this is an appropriate case to exercise the discretion in Mr Feng’s favour based on his application for leave to appeal, for the following reasons:

(a)Mr Feng’s cross-claims against the Trust could have been advanced in opposition to the entry of the judgment. They were not.

17 At [33].

18     Mills v Feng [2024] NZHC 2354.

(b)In a minute dated 31 October 2023 in this proceeding, Associate Judge Taylor noted that Mr Feng did not require leave to appeal his decision to strike out the cross-claims.19 Mr Feng has offered no explanation for his delay of six months before he filed his appeal.

(c)Mr Bowler did not advance any challenge to the reasons of Associate Judge Taylor that led him to strike the claims out, cited in [14] above. The reasons are sound.

(d)If the cross-claims do have merit, the Official Assignee can pursue them.

[21]              Mr Feng has not established a good reason to doubt the liability established by the judgment.

Does Mr Feng’s financial position justify an exercise of the discretion in his favour?

Mr Feng’s financial position in early 2023

[22]              Mr Feng provided a statement of financial position to Mr and Mrs Mills dated 16 January 2023, using the standard form prescribed in the High Court Rules 2016 (the statement of financial position). The statement of financial position was provided to Mr and Mrs Mills’ solicitors by the solicitor then acting for Mr Feng.

[23]              Mr Feng affirmed an affidavit dated 15 February 2023 in support of his application for a stay of execution of the judgment (the affidavit). The affidavit verified the information provided in the statement of financial position.

[24]              Mr Feng did not disclose any property interests in China. The only substantial assets disclosed in the statement of financial position were a half interest in four properties in New Zealand, the other half interest owned by Mr Feng’s wife. Mr Feng stated that the combined value of those properties was approximately $8,590,000, and that they were subject to mortgages with a combined balance of $8,808,602.

19     Feng v Mills HC Auckland CIV-2023-404-212, 31 October 2023 (Minute of Associate Judge Taylor) at [4].

[25]              Mr Feng stated that the properties were producing rental income of approximately $200,000, declaring his half share of the income to be approximately

$100,000.     Mr Feng stated that his half share of the mortgage payments was approximately $178,000.

[26]              In the affidavit he stated that the amount secured against the properties had been reduced to approximately $7.8 million, and the shortfall in meeting mortgage payments would be met by his salary, his wife’s salary, and borrowing from family members and friends. Mr Feng described himself as a project manager, earning approximately $66,000 in the year ended 7 February 2023.

[27]              Mr Feng declared his ownership of shares  in  Newhope  Group  Development Ltd (Newhope), which he described as a company that had bought and sold properties but no longer traded. He said it is a shell company.

[28]              Mr Feng acknowledged that his financial position was weak, blaming the downturn in the property market. He averred that he did not have sufficient assets to meet the judgment.

Developments since early February 2023

[29]              Three of the disclosed properties have been transferred to Helio Investment and Holdings Ltd (Helio). Mr Feng’s wife is a director of Helio. There is no evidence of the transactions between Mr Feng, his wife and Helio. The  fourth  property is  199 Portland Road, Remuera, Auckland (Portland Road), which remains in the joint ownership of Mr Feng and his wife. Mr and Mrs Mills have a charging order over Portland Road.

[30]              Mr Feng filed an unaffirmed affidavit dated 13 December 2023 stating that he was returning to China to sell a property that he owns, previously undisclosed, which would produce NZD 1,495,000. Settlement was said to be due on 25 April 2024.

[31]              I granted leave to Mr Feng to file an affidavit affirmed on the morning of the hearing, 14 October 2024. The updating evidence in respect of Mr Feng’s financial

position is sparse. Mr Feng has not updated the Court on the sale of his property in China.

[32]              Mr Feng says that he has “an interest in a development being carried out in Geordie Street”. Mr Feng gives no details of the nature of his interest or its value. He says that a director of the company undertaking the development has “provided an indemnity and guarantee to me in relation to the monies owed to me by Mr Wang.” He says that the director has agreed to pay him when titles to the developed properties issue in January 2025, and that this will be enough to allow him to pay the judgment. Mr Feng does not produce any supporting documents.

[33]              On the basis of this evidence, Mr Bowler submitted that I should not adjudicate Mr Feng bankrupt because he is able to pay his debts over a reasonable period of time.

[34]              In the interim, Mr Feng says that he and his wife are prepared to offer the Trust security over Portland Road, by way of an agreement to mortgage supporting a caveat. Mr Feng has produced a printout from an Auckland Council website to indicate that Portland Road has a capital value of $2,675,000 for rating. Mr Feng has produced a printout from the registered first mortgagee which states that the amount due to the mortgagee on 14 August 2024 was $1,438,510.

[35]              Mr Feng says: “The value of the property is $2.65 million and borrowing is only $1.43 million.” There is no independent evidence of the market value of the property. Mr Feng does not categorically state that there are no other debts secured against the property. Mr Feng has produced no evidence from his wife confirming that she is prepared to charge her interest in the property to secure his debt.

[36]              Mr Bowler submitted that the evidence establishes that Mr Feng is solvent, and if security for the judgment is not granted then the Trust can pursue an enforcement process in respect of Portland Road.

[37]              Even if I adopt a view of the available evidence that is the most favourable for Mr Feng, the equity in Portland Road is at most approximately $1,200,000. Mr Feng’s half-share would be approximately $600,000, which is approximately $200,000 less than the amount due on the judgment and subsequent costs orders.

[38]              An enforcement process could not realise any more than $600,000, and would likely realise significantly less, given the current state of the property market, the potential for other debts to be secured against the property and the effect on value if there is a forced sale of a half share in a jointly owned property. I do not accept that an enforcement process is likely to satisfy the judgment.

Decision and orders

[39]              I am satisfied that this is an appropriate case to adjudicate Mr Feng bankrupt, for the following reasons:

(a)Mr Feng entered into an unconditional agreement to purchase a property from the Trust for $2.6 million in circumstances where he was reliant on finding a solvent sub-purchaser to assume his obligations. That was commercially reckless. There is a public interest in an order adjudicating Mr Feng bankrupt.

(b)Mr Feng has failed to fully disclose his financial position, including supporting documents.

(c)Mr Feng belatedly disclosed that he owns property in China. There is no explanation of what has become of the property in China, or the proceeds of sale if it has been sold.

(d)The value of the property in China and the New Zealand shares in Newhope is unknown and can be investigated by the Official Assignee.

(e)It is not possible to ascertain whether Mr Feng has any realisable equity in Portland Road. The Official assignee can investigate.

(f)There is no reasonable prospect of an enforcement process satisfying the judgment.

(g)After the judgment, Mr Feng and his wife transferred registered ownership of real estate to Helio. The Official Assignee will be able to investigate those transactions.

(h)The limited financial  information  that  is  available  suggests  that  Mr Feng is insolvent.

(i)Mr Feng has provided insufficient evidence of any contractual right he may have to receive funds from a third party, to then apply to payment of the judgment.

(j)Mr Feng’s offer to secure the judgment was made at the last minute and is not supported by adequate evidence to establish that the full judgment can be secured.

(k)Mr Feng’s pending appeal in the Court of Appeal does not operate as a stay of enforcement of the judgment.

[40]              Accordingly, the judgment debtor is adjudicated bankrupt. The order is timed at 11 am.

[41]              My preliminary view is that the judgment debtor should pay the judgment creditor’s costs on a 2B basis. If counsel cannot agree on costs, then:

(a)the judgment creditors may file and serve written submissions on costs, of no more than five pages, by 4 November 2024;

(b)the judgment debtor may file and serve written submissions on costs, of no more than five pages, by 11 November 2024;

(c)I will then determine costs on the papers.

Associate Judge Brittain