Du v M5 Holdings Limited

[2017] NZHC 409

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-2124 [2017] NZHC 409

UNDER

the Companies Act 1993, Contractual

Remedies Act 1979, Contractual Mistakes Act 1977, the common law of torts and equity

IN THE MATTER

of claims and remedies and relief

BETWEEN

JIANYING DU

Plaintiff

AND

M5 HOLDINGS LIMITED First Defendant (discontinued) DAVID COTTER

Second Defendant (discontinued) YUE YANG

Third Defendant (discontinued) FENG SHI

Fourth Defendant

Hearing:	9 March 2017
Counsel:	D Zhang for plaintiff
Judgment:	9 March 2017

ORALJUDGMENT OF KATZ J [Formal proof]

Solicitors:               Amicus Law, Auckland

DU v M5 HOLDINGS LIMITED  [2017] NZHC 409 [9 March 2017]

[1]        The plaintiff, Ms Jianying Du, is a businesswoman residing in China.  She issued proceedings against four defendants in respect of an investment she made, or intended  to  make,  in  the  first  defendant,  M5  Holdings  Limited.    M5  Holdings Limited is in the business of manufacturing honey.   The claims against the first, second and third defendants have now been discontinued.   Ms Du proceeds today against the fourth defendant, Mr Feng Shi, by way of formal proof.   The fourth defendant has taken no steps in the proceeding.

[2]        In 2014 Ms Du decided to invest in a New Zealand business.  She entered into  an  agreement  with Mr Shi  pursuant  to  which he would  transfer  to  her his

22.5 per cent shareholding in M5 Holdings Ltd for $270,000.   The parties entered into a share transfer agreement (“Agreement”) in respect of those shares. That agreement includes a number of representations, covenants and warranties on the part of Mr Shi as transferor, including:

a)       that he had all rights, powers and authorities to enter into and perform all duties and responsibilities under the agreement;

b)that he legally and actually owned the shares and was capable in right and action to transfer the shares, having secured all necessary approvals;

c)       that he had disclosed the contents of the transfer of shares to all shareholders of M5 Holdings Ltd and those shareholders had waived their priority rights to purchase;

d)that the shares and benefits and interests thereunder had not been pledged, charged, or otherwise encumbered or were subject to any potential liability to a third party;

e)       that the shares were not subject to restrictions for transfer posed by any agreements, judgments or orders; and

f)        that any party in breach would indemnify the non-breaching party for all costs, losses and expenses incurred by the non-breaching party as a result of the breach.

[3]        On 27 June 2014 Ms Du paid the full amount of the share purchase price, in the sum of RMB 1,470,000.00, being the currency exchange equivalent of NZD

270,000 as at the date of transfer.   Although she was initially added to the share register by Mr Shi, she was removed shortly thereafter due to failings by Mr Shi to comply with the necessary requirements for transferring his shares.  In particular, it is apparent from the evidence of Ms Du and also Mr Yang, a company director of M5 Holdings Ltd, that:

a)       Mr Shi had totally failed to follow the pre-emptive rights procedure set out in the Constitution of M5 Holdings Ltd.

b)Mr Shi owed a debt to M5 Holdings Ltd of approximately $32,000 which had not been satisfied prior to the transfer. Mr Yang’s evidence is that he would have required that this debt be repaid prior to approving any share transfer.

c)       Mr Shi had instructed the company’s accountant to amend the share register after he had already resigned as a director, and without the authority or knowledge of the Board.  When Mr Yang found out what had occurred he directed that the transfer be reversed, which it was.

[4]       It is clear on the evidence before the Court that, at a minimum, the representations, covenants and warranties referred to at  2(a), (b), (c) and (e) above were not true.   At the time Mr Shi entered into the agreement:

a)       he did not have all the rights, powers and authorities to perform his obligations under the agreement;

b)        he had not secured all necessary approvals to transfer the shares;

c)       he had  not  disclosed the contents  of the transfer of shares  to  all shareholders of M5 Holdings Ltd and secured a waiver from them of their priority rights to purchase; and

d)        the  shares  were  subject  to  restrictions  on  their  transfer,  despite

Mr Shi’s warranty and representation to the contrary.

[5]        As a result, Mr Shi was not able to legally transfer his shareholding to Ms Du, thereby breaching the agreement.  Ms Du has paid the full contract price for transfer of the shares,  but Mr Shi has not  fulfilled his part of the bargain  and transferred the shares to her.  He has breached his contractual obligations to Ms Du and she is entitled to the return of the purchase price for the shares, together with costs and interest, as a result.

[6]        I note that the plaintiff has also pleaded a number of alternative causes of action against Mr Shi including claims under the Contractual Remedies Act 1979, Contractual Mistakes Act 1977, and a claim in unjust enrichment.  In my view, this is a straightforward breach of contract claim.   Given that I have found that a breach of contract occurred it is not necessary to traverse the alternative causes of action in any detail.  I note, however, that the merits of this case are squarely with Ms Du, on the evidence before the Court.  Had it been necessary to traverse the intricacies of the alternative causes of action, in my view it is likely that at least one of them would have been established.

[7]        I order that Mr Shi:

a)       pay Ms Du damages in the sum of RMB 1,470,000.00, together with interest at the rate of five per cent per annum from 27 June 2014 to the date of judgment, pursuant to s 87 of the Judicature Act 1908 (together, “the judgment sum”);

b)pay interest on the judgment sum at the rate of five per cent per annum from the date of judgment until the date of payment, pursuant to r 11.27 of the High Court Rules;

c)       reimburse Ms Du for all costs, losses and expenses incurred by her as a result of his breaches of the Agreement on an indemnity basis, pursuant to cl 4.8 of the Agreement.   Leave is reserved to file a memorandum as to quantum (“costs sum”).

d)pay interest on the costs sum from the date that costs are quantified to the date of payment, at the rate of five per cent.

Katz J