Dib Constructions Limited v Yuan HC Auckland CIV 2009-404-4551
[2010] NZHC 732
•19 May 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2009-404-004551
UNDER The Land Transfer Act 1952
BETWEEN DIB CONSTRUCTIONS LIMITED Applicant
ANDYIXING YUAN Respondent
Hearing: 17 September 2009
Counsel: M Mitch for applicant
D J Clark for respondent
Judgment: 19 May 2010 at 4:45pm
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 19 May 2010 at 4:45pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Murdoch Price, PO Box 23 620, Auckland 2155 for applicantWilson McKay, PO Box 28 347, Auckland 1541 for respondent
DIB CONSTRUCTIONS LIMITED V YIXING YUAN HC AK CIV 2009-404-004551 19 May 2010
[1] DIB Constructions Limited (DIB) has applied for an order that a caveat lodged over land registered in the name of the respondent Yixing Yuan not lapse. DIB says that it has a caveatable interest in the land because Mr Yuan acquired it in part by use of a debt due to DIB (it was acquired from a company settlement to DIB’s debtor which credited the debt as part payment). It says that this gave rise to a beneficial interest in the land under an implied trust.
[2] Mr Yuan is a director of DIB. He says that the application has been brought without lawful authority (because it required a special resolution of shareholders) but that, in any event, the circumstances under which the debt was credited towards his purchase of the land do not give rise to a caveatable interest. He says that he and a co- director and shareholder Ibrahim Mohammed (to whom I will refer as Mr Ibrahim) agreed to the debt being used in this way (because the debtor was unable to pay the debt), and that there would be an adjustment between them at a later date. He says that it was never intended that DIB would have an interest in the land.
Background
[3] DIB is in business as a plastering and painting company. Its directors and shareholders (Mr Yuan, Mr Ibrahim and one Khaiber Dost) also carried out plastering work for DIB for which they were entitled to be paid.
[4] In early 2008 DIB carried out plastering and painting work for Jireh Commercial Limited (Jireh) on an Auckland hotel development. Mr Yuan and Mr Ibrahim both physically carried out that work. DIB rendered a payment claim to Jireh on or about 29
May 2008 for this work. The claim was for $163,167.63. There is a difference of views as to precisely how this money was to be applied once received by DIB, but it is common ground that the majority of it was due to Mr Yuan and Mr Ibrahim for their work.
[5] Jireh was experiencing financial difficulties. On 1 July 2008 it held a meeting with its creditors and offered them the option of purchasing land and assets owned by a
related company, Tony Tay Group Limited (TTG) with the debt being offset against the purchase price.
[6] Mr Yuan was interested in purchasing one of TTG’s properties for himself. He and Mr Ibrahim discussed using the debt from Jireh. On 16 July 2008 Mr Ibrahim’s solicitors wrote to Mr Yuan setting out Mr Ibrahim’s understanding of the outcome to those discussions. The relevant parts of that letter read:
We understand from our client that you have agreed to accept Jireh Commercials offer to purchase an apartment/land from the company as per that company’s letter to it [sic] creditors dated 1st July, 2008 in an effort to resolve the outstanding debt payable by the company.
We understand that agreement has been reached between yourself and our client that an amount owed to him of $67,000.00 is to be reduced to $55,000.00 from which an amount of $15,000.00 is to paid immediately to our client and the balance of $40,000.00 is to be repaid within one year’s time or earlier on the sale of the apartment/land being purchased from Jireh Construction.
Our client’s instructions are that in the event that payment is not made as earlier provided then the amount to repay will revert to the original debt of $67,000.00 and the amount to repay will increase from $40,000.00 to $52,000.00. On the sale of the apartment/land you will be entitled to the balance of the debt
$96,167.63 and any surplus from the sale is to be paid to Jireh Construction.
We understand that you are prepared to give our client a personal guarantee for the balance of the amount owing to him.
To ensure that our client is fully protected we would require you both to enter into a Deed of Acknowledgment of Debt which will record the following:
1.The debt is $40,000.00 which will be increased to $52,000.00 if not paid within one year or earlier sale of the apartment/land.
2.Security will be an unregistered mortgage supported by the right to register a caveat against any property owned by you. We will also require a list of property/properties owned by you.
3. Term of loan is to be one year or earlier sale of the apartment/land.
4.In the event that the debt is not repaid within one year’s time then interest at our client’s bank’s current interest plus 5% will be payable on the debt owing until full repayment has been made without prejudice to our client’s right to enforce his remedies under the unregistered mortgage.
5.The Deed is to reflect that the remaining Director Khaiber Dost is not a party to this debt.
Please advise whether the above is acceptable as soon as possible.
[7] The following day, 17 July 2009, Mr Yuan entered into an agreement with TTG to purchase a property at 3/141 Colwill Road, Massey (the property) and twenty safe deposit boxes in an ASB Bank vault for 225,000. The agreement provided for a deposit of $163,167.63. This was satisfied by Mr Yuan agreeing on DIB’s behalf to the assignment of Jireh’s debt to TTG and by the debt being set-off against the purchase price. Mr Yuan paid the balance of $61,832.37 and took title to the property.
[8] In the latter part of August 2008 ASB Bank contacted Mr Ibrahim and asked him to contact it about transferring the twenty safe deposit boxes to him. It appears that this is the first that Mr Ibrahim knew of their inclusion in Mr Yuan’s agreement with TTG. His solicitors wrote again to Mr Yuan on 10 September 2008. The relevant parts of that letter read:
We refer to our letter of 16th July 2008 to which we have still not received a response.
We understand from our client meantime, that you have, without consent of our client, come to an arrangement with Tony Tay (Jireh Commercial Limited) whereby a property at 3/141 Colwill Road, Massey has been transferred into your name as settlement of a debt payable by that company. Our client further advises that you have also, without his consent, arranged for 20 ASB safety boxes, with an approximate value of $4800.00 to be transferred into his name. We understand that these boxes also attract an approximate yearly box fee of
$160.00 which obviously our client does not want to be liable for. Our client does not accept these boxes as payment towards the debt owed to him by you.
Please arrange for these boxes to be transferred out of our client’s name forthwith.
We understand from our client that the debt owed to him by you is now
$67,000.00 less 10% as agreed. We reiterate our previous advice that the remaining Director Khaiber Dost is not a party to this debt.
[9] On 19 September 2008 Mr Ibrahim’s solicitors wrote to TTG challenging the transfer of the safe deposit boxes into his name. In that letter they also stated:
We understand that DIB Construction Limited (of whom our client and Mr X Yuan are two of the directors of the company) entered into a contract to perform plastering work on an Auckland City Hotel Project for your company. There is an outstanding debt owing under that contract to DIB Construction Limited of
$163,167-63.
We further understand from our client that his co-director Bert Yuan entered into an agreement with your company whereby this debt was to be resolved by way of a transfer of land owned by Tony Tay Group to Bert Yuan. On the eventual sale of that land, Mr Yuan was to retain the amount of the debt and to deduct payment for his work and to then pay our client an amount to which he
was entitled for his work undertaken by them in terms of the contract. We understand that any surplus sale proceeds were to be paid to your client company. We enclose copy of letter from DIB Construction Limited dated 29th May, 2008 to your client company setting out details of the debt owing, together with copy of your company’s letter of intent dated 1st July, 2008.
[10] DIB lodged a caveat against the property on 15 December 2008 claiming a beneficial interest in the land under a trust.
[11] Mr Yuan applied to the Registrar-General of Land to lapse the caveat in July
2009. This application followed.
Relevant legal principles
[12] The principles which the Court applies when determining an application to sustain a caveat were not in dispute. The general approach was settled by the Court of Appeal in Sims v Lowe.[1]
The caveator seeks to clog or fetter the proprietary interest of another. As a matter of principle it seems right that he must justify the continued existence of his caveat. He will do that if he can show he has a reasonably arguable case for the interest he claims.
[1] Sims v Lowe [1988] 1 NZLR 656 at 660.
[13] The general principles of relevance to the present application (drawn from the statement in Sims v Lowe unless otherwise indicated) are:
a) The caveator must justify the continued existence of the caveat by satisfying the Court that it has a reasonably arguable case for the interest it claims;
b)An order for the removal of a caveat will not be made and a caveat will not be allowed to lapse unless it is patently clear that there was no valid ground for lodging it or that such valid ground no longer exists;
c) The Court has a discretion to remove a caveat, if a caveatable interest exists, if on the facts of the case the caveator can have no reasonable expectation of obtaining benefit from continuance of the caveat: Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd;[2] Stewart v Kaipara Consultants Ltd.[3]
[2] Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.
[3] Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA).
d)The summary nature of a caveat application makes it unsuitable for determining disputed questions of fact.
The competing contentions and issues arising
[14] DIB contends that it has a beneficial interest in the property by reason of the use of the Jireh debt to acquire the property. It says that this was sufficient to give rise to a resulting trust under the third class of case identified in Bateman Television Limited (In Liquidation) v Bateman.[4] Counsel submitted that there was no evidence to suggest that the debt was made available as a loan to Mr Yuan as distinct from giving DIB an interest in the land pending eventual resale. Counsel for DIB submitted in her oral submissions that the letter from Mr Ibrahim’s solicitor to Mr Yuan of 16 July 2008 was merely a proposal as to respective entitlements on distribution, rather than an agreement
between them as directors which could have the effect of extinguishing any interest that DIB would otherwise take in the land. She also argued DIB had established a sufficient basis for its interest, and that the matter was unsuitable for summary determination.
[4] Bateman Television Ltd (in liquidation) v Bateman [1971] NZLR 453 (CA) at 462.
[15] Counsel for DIB also submitted that the court’s residual discretion should be exercised in DIB’s favour. She argued that if the caveat was to lapse there was a risk that third party interests could arise, prejudicing DIB’s interest,[5] and that there was no real prejudice to Mr Yuan (although he claimed that he might wish to sell, there was evidence of any present intention to do so). Finally, counsel submitted that DIB was able to bring this proceeding. Instructions for it were given by the operations manager of DIB at the time, under specific powers authority granted by Mr Ibrahim and Mr Dost.
[5] Holt v Anchorage Management [1987] 1 NZLR 108 (CA) at 109.
[16] Mr Yuan opposed DIB’s application on two grounds. The first was a preliminary matter as to whether DIB had requisite standing to bring the application. This ground was not advanced in the notice of opposition, but was advanced in counsel’s written and oral submissions. Mr Yuan contended that the issue of this proceeding was not within the normal management of DIB (capable of being undertaken by majority) but was a “major transaction” as defined by s 129(2)(c) of the Companies Act 1993 requiring a formal resolution. The reason for contending that this was a major transaction was that the company had negligible assets and the value of the rights or obligations at issue in this proceeding were more than half the value of the company’s assets before the transaction over the Jireh debt. Counsel for Mr Yuan submitted that any rights that Mr Ibrahim had should lie in derivative proceedings under s 165 or a minority shareholder’s claim under s 174 of the Act.
[17] The second principal ground was that DIB does not have a beneficial interest in the property because there is no evidence to support a finding of an implied trust. Counsel submitted that there was no evidence that the arrangement made to apply the Jireh debt towards Mr Yuan’s purchase of the property was intended to give DIB any rights to an interest in the property. He relied on the correspondence between the parties and their solicitors, referred to above, and argued that it was evidence only of an arrangement between Mr Ibrahim and Mr Yuan (that was accepted by DIB), under which Mr Ibrahim had a personal entitlement to receive money from an eventual sale of the property, and not of an intended beneficial interest in the land.
[18] The issues for the court on this application are:
a) Whether DIB has standing to bring this proceeding;
b)Whether DIB has an arguable case for an interest in the property by reason of an implied trust; and
c) If DIB has such a beneficial (and caveatable) interest whether the caveat should be removed in the exercise of the court’s discretion.
DIB’s standing
[19] Counsel for Mr Yuan argued that this proceeding, as distinct from the underlying arrangement to apply the Jireh debt towards Mr Yuan’s purchase of the property, was the major transaction needing a shareholders’ resolution.
[20] I have some doubt as to whether the issue of this proceeding (albeit to recover a major asset of the company) comes within the provisions of s 129. It does not fit easily into the categories of major transactions in s 129(2). Furthermore, I am in no doubt that the directors/shareholders did agree to use the purchase of the property as a mechanism to obtain value for Jireh’s debt to DIB (if Mr Dost did not agree at the time he subsequently ratified the decision by Mr Yuan and Mr Ibrahim).
[21] Even if it is arguable that the proceeding was a major transaction, there is too much uncertainty as to the nature of the underlying transaction (which sets the value of the proceeding) to decide any question of standing separate from the substantive aspect of the dispute. I turn therefore to address the issue over DIB’s claimed interest in the property.
Implied trust: did the parties intend that DIB would have an interest in the land?
[22] There cannot be any dispute that the Jireh debt (an asset of DIB) was used to purchase the property. Counsel for DIB submitted, correctly in my view, that that gives rise to a presumption that the purchaser (Mr Yuan) holds the property on trust for the person providing the money (DIB) to the extent of that contribution (as long as there is nothing to indicate a contrary intention).[6]
[6] Bateman Television Ltd (in liquidation) v Bateman [1971] NZLR 453(CA); Cossey v Bach [1992]
3 NZLR 612 (HC) at 630; Stephen James Thomas v FWT Holdings Ltd (2009) NZCPR 492 (HC).
Counsel for Mr Yuan accepted the general principle as to presumption advanced for DIB but submitted that the presumption has been displaced by evidence of a contrary intention (namely that Mr Yuan was to get the benefit of the Jireh debt, subject
to his liability to account to Mr Ibrahim personally for his share). To the extent that DIB was contending that the trust it was claiming was a constructive trust, he submitted that DIB could not show the necessary clear and unequivocal representation that it would have an interest in the land,[7] an agreement that it would have an interest in the land[8] or some statement or representation by Mr Yuan that DIB was to have an interest in the land by way of security for its money.[9]
[7] Watson v Arted Ltd HC Auckland CIV-2005-404-1895, 19 July 2005.
[8] Laing Property Developers Ltd v Sanders HC Christchurch CIV-2006-409-824, 22 June 2006.
[9] Hannon v Sommervell HC Hamilton M226/97, 12 November 1997.
[23] Counsel for Mr Yuan referred to the three letters written by Mr Ibrahim’s solicitor dated 16 July 2008, 10 September 2008 and 19 September 2008. He argued that it was evident from this correspondence and the parties’ actions generally that DIB was not seeking an interest in the property, and the only interest being advanced was that of Mr Ibrahim.
[24] The key question is whether this correspondence and the parties’ conduct in respect of the transaction are clear evidence of a contrary intention sufficient to displace the presumption of a resulting trust. I doubt whether the same evidence is capable of constituting a representation or agreement by Mr Yuan that DIB would have an interest in the property (whether by way of security or otherwise) so as to meet the criteria identified by counsel for Mr Yuan as necessary for DIB to claim an interest in the land under a constructive trust. However, as counsel for DIB did not advance a case for a constructive trust, I do not need to determine that point. I make no finding as to whether Mr Ibrahim personally may be able to establish the requisite representation or agreement needed for a constructive trust in his favour.
[25] By reason of the legal presumption flowing from the accepted fact that DIB’s asset (the Jireh debt) was applied towards the purchase price, DIB’s claimed beneficial interest depends on whether the evidence demonstrates that DIB intended to confer on Mr Yuan the beneficial interest in the Jireh debt (in other words that it had divested itself of any interest in the Jireh debt).
[26] I am not persuaded that there was an agreement to this effect at the time of purchase. That would have to be effected by a distribution out of the company. There was no formal decision by the directors to this effect. There is a dispute both as to whether there was any agreement, and as to its terms. I cannot determine that dispute on this summary application. In the absence of a finding as to the basis on which the money was to be applied towards the purchase of the property, it is difficult to assess whether DIB retained an interest in the money and thereby acquired a beneficial interest in the land in proportion to its contribution, or whether the money was simply lent to Mr Yuan, or it was intended that the money be treated as having been distributed. This leaves open an arguable case for DIB having a beneficial interest under a resulting trust.
Exercise of discretion
[27] Although I found that DIB has an arguable case for a beneficial interest, I do not regard it as a particularly strong case. Nevertheless, I do not see it as a suitable case for exercise of my residual discretion to discharge the caveat in any event. As I understand the evidence, Mr Yuan may no longer be a director or shareholder of DIB, but in any event there is clearly a falling out between the directors and shareholders. In light of Mr Yuan’s view that this is merely a dispute between himself and Mr Ibrahim, I cannot discount the possibility that the money protected by the caveat would not be returned to DIB for distribution in accordance with the appropriate shareholder entitlement. On the other hand, if Mr Yuan decides to sell the property, he will be able to do so subject to making alternative arrangements to protect the value of the Jireh debt until the parties have resolved their dispute.
Decision
[28] For the reasons I have given I find that DIB has an arguable case for a caveatable interest. I make an order sustaining caveat 8028981.1 pending resolution of DIB Constructions Limited’s claim to a beneficial interest in the property at
3/141 Colwill Road, Massey registered in the name of Mr Yuan.
[29] I make the following orders with a view to determining DIB Constructions
Limited’s beneficial interest:
a) DIB Constructions Limited is to issue a substantive proceeding for determination of its interest in 3/141 Colwill Road, Massey within
20 working days.
b)Mr Yuan is to file and serve any statement of defence to that claim within a further 20 working days.
c) The Registrar is to allocate a first case management conference for that proceeding at the first available date after the expiry of 40 working days from the date of this judgment.
[30] I regard this claim essentially as a dispute between shareholders. The merits are relatively evenly balanced. I consider that costs of this application should be
determined in light of the overall outcome to the dispute. I reserve costs accordingly.
Associate Judge Abbott
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