Fang v Liang
[2017] NZHC 1909
•11 August 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-002883 [2017] NZHC 1909
BETWEEN YU FANG AND XIUMEI LAN
Plaintiffs
AND
FENMING LIANG First Defendant
U. FOND LIMITED Second Defendant
Hearing: 9 August 2017 Appearances:
E St John for Plaintiffs
C Jiang for First Defendant
J Skinner for Second DefendantJudgment:
11 August 2017
JUDGMENT OF WOOLFORD J
This judgment was delivered by me on Friday, 11 August 2017 at 3:00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Date:
Solicitors/Counsel:
E St John, Auckland
Yu Lawyers, Auckland
FANG & ANOR v LIANG & ANOR [2017] NZHC 1909 [11 August 2017]
Introduction
[1] In April 2014, the plaintiffs and the first defendant agreed to form a company, U. Fond Ltd (the second defendant), with equal shareholding for the purposes of real estate development. They also agreed to contribute capital to the company in equal shares. Pursuant to the agreement, the company bought a property at 27 Colwill Road, Massey (the property) on 30 June 2014, using the plaintiffs’ capital contributions, for the purposes of subdivision. The agreement was later documented in a written “Co-operation Agreement” dated 30 September 2014.
[2] The subdivision works started in May 2016. In September 2016 a dispute arose between the plaintiffs and the first defendant as to the failure of the first defendant to allocate two thirds of the shares in the company to the plaintiffs and his failure to contribute any of his own money to the development of the property. Proceedings were filed in this Court on 8 November 2016. These proceedings have been set down for a five day trial beginning 18 September 2017.
[3] On 11 July 2017, the plaintiffs filed an interlocutory application for an interim injunction against the first defendant. They sought orders that until further order of the Court the first defendant be restrained from:
(a) dealing with the property described as identifier NA38A/346 at 27
Colwill Road, Massey, including but not limited to:
(i) increasing any borrowings against the property; (ii) granting any charge against the property;
(iii) selling the property;
(iv) carrying out any physical works on the property.
(b) contracting with any third party on behalf of the second defendant;
(c) withdrawing any funds from account(s) in the name of the second defendant (other than to pay accounts already incurred); and
(d)selling, mortgaging or otherwise disposing of any shares in the second defendant.
[4] The application for an interim injunction was first called on 18 July 2017. Counsel for both the first and second defendants indicated that the application was to be opposed and wished to have the opportunity to file both notices of opposition and affidavits in opposition. I accordingly adjourned the application to a date to be fixed by the Registry. The date fixed by the Registry was 9 August 2017. Because of the limited nature of the opposition to the application for an interim injunction, counsel for the first defendant was willing to consent to certain interim orders on behalf of his client. I therefore directed that until further agreement of the parties or further order of the Court, the first defendant was not to deal with the property described as identifier N38A/346 at 27 Colwill Road, Massey, by:
(a) increasing any borrowings against the property;
(b) granting any further charges against the property; or
(c) selling the property.
[5] Furthermore, I also directed that until further agreement of the parties or further order of the Court, the first defendant was not to sell, mortgage or otherwise dispose of any shares in the second defendant.
[6] The plaintiffs now seek an order that the first defendant stop the development of the property until these proceedings are resolved.
Factual background
[7] The Co-operation Agreement dated 30 September 2014 provided that the three named parties would each contribute $1.1 million and hold one-third of the
shares in the company. Dividends would be distributed in proportion to the parties’
capital contributions.
[8] The first defendant has, however, only allocated two shares in the company to the plaintiffs and retained eight shares for himself. He is also the sole director. He says he did this because of the financial and other disadvantages of operating a company with 25 per cent or more of its shareholding owned by foreign residents. He acknowledges, however, that the plaintiffs do hold a two-thirds interest in the development.
[9] The first defendant also acknowledges that the plaintiffs have contributed in total the sum of $1,444,917.72 to the development. The plaintiffs complain that the first defendant has, however, not matched the plaintiffs’ contribution as required in the Co-operation Agreement. In response, the first defendant says the plaintiffs were aware that he would raise his capital contribution by way of a mortgage over the property in respect of which he would pay the interest out of his own pocket. This is, however, hotly disputed by the plaintiffs.
[10] Subdivision works started in May 2016 and have continued until today because the first defendant remains the sole director of the company and is able to direct its activities. The plaintiffs do, however, have serious concerns about the management of the company by the first defendant. In particular they complain about a loan of $440,000 to the first defendant’s brother to fund the purchase of a neighbouring property and the payment of the first defendant’s credit card debts totalling $58,000. The first defendant acknowledges these transactions but says all company funds have been repaid.
[11] The plaintiffs also complain that the first defendant has used his control of the company to advantage his brother’s interest in the neighbouring property by giving consent to enable more intensive development of the neighbouring property and allowing the neighbouring property’s wastewater system to utilise the property’s infrastructure at no cost. The first defendant responds by saying that the owners of the neighbouring property had earlier given consent to enable more intensive development of the property and so his consent was merely a quid pro quo. Both
properties were advantaged by the mutual consents. He also produced evidence that the neighbouring property’s wastewater system does not utilise the property’s infrastructure.
[12] The plaintiffs also have concerns about some expenditure on the property such as the payment of $25,000 to clear the property in May 2016 prior to the start of the subdivision works. They say an arborist should have cost no more than $10,000. In response, the first defendant has produced Google Earth photographs of the property prior to its clearance and noted that the invoice for $25,000 was in any event approved by one of the plaintiffs prior to the dispute arising in September
2016.
[13] The subdivision started in May 2016 and according to the first defendant will be completed next month. All that is required is:
(a) the backfilling of trenches dug for services and the removal of excess soil;
(b) road works including shared driveways; and
(c) surveying work for s 224C certification.
[14] The first defendant advises that an application for s 224C certification can be lodged by the end of September 2017 with titles to be issued shortly thereafter. The result will be eight new lots being one 800m2 lot comprising the existing house and seven lots of around 350m2 each.
Interlocutory application for interim injunction
[15] There are three stages for the consideration of an interlocutory application for an interim injunction:1
(a) the applicant must establish that there is a serious question to be tried, or put another way, that the claim is not frivolous or vexatious;
1 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90; (2013) 13 TCLR 531 at [12].
(b)next, the balance of convenience must be considered, which requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order; and
(c) finally, an assessment of the overall justice of the position is required as a check.
Serious question to be tried
[16] Counsel for the first defendant accepts there is a serious question to be tried, being the meaning and effect of the agreement entered into by the plaintiffs and the first defendant, documented in the Co-operation Agreement dated 30 September
2014.
[17] Counsel for the plaintiffs goes further and submits that the plaintiffs have an absolute right to stop the development through their 66.6 per cent shareholding. The only reason they need the Court’s assistance is because the first defendant has unlawfully hijacked their shareholding. Counsel for the plaintiffs therefore submits that the Court should not even proceed to consider the balance of convenience or the overall justice. The injunction should be granted immediately.
[18] The interlocutory application for an interim injunction does not, however, seek an order increasing the plaintiffs’ shareholding to two-thirds as specified in the Co-operation Agreement. That is a remedy sought in the statement of claim which is for trial on 18 September 2017. The application for an interim injunction seeks an order restraining the first defendant from dealing with the property, in particular by carrying out any physical works on the property. I am therefore of the view that the strength of the plaintiffs’ claim to a two-thirds shareholding is not a matter that automatically means an interim injunction should be granted. Rather, it is a matter that I can take into account when I am considering the overall justice of the position.
Balance of convenience
[19] The question of balance of convenience concerns the adequacy of damages as compensation for any loss suffered by between the time of application and the time
of the trial.2 Counsel for the plaintiffs notes the first defendant’s advice that he is now funding the development with his own money. Counsel submits that to do so the first defendant must be agreeing on behalf of the company to borrow funds. The plaintiffs are therefore left in a position where they have no control over the company borrowing money on terms of which they have no knowledge, and which will be spent at the first defendant’s sole discretion. Counsel says that the plaintiffs want the development stopped before any further costs are incurred.
[20] I am of the view, however, that the plaintiffs have not provided any evidence that completion of the subdivision will cause irreparable harm to them. The interim orders I have already made prohibit the first defendant from increasing the borrowings against the property, granting any further charges against the property or selling the property. They preserve the status quo by protecting the value of the company. Counsel for the first defendant advised the Court from the bar that the subdivision will be completed by the end of next month for a little over $200,000, which sum is being contributed by the first defendant. Borrowing against the property will not be increased nor will any further charges be granted.
[21] The $200,000 contribution must therefore increase the value of the property. It is a matter for trial as to whether the $200,000 contribution is to be treated as a capital contribution in terms of the Co-operation Agreement or an unsecured loan to the company. In the unlikely event that the contribution of $200,000 will cause the plaintiffs harm in some way then I am of the view that damages would be an adequate remedy. Irreparable harm will not be caused by the completion of the subdivision. That is after all what the Co-operation Agreement intended.
[22] Further, I am of the view that the late filing of the interlocutory application for an interim injunction two months before a scheduled five day substantive hearing in September 2017 must count against the plaintiffs. The plaintiffs’ dispute with the first defendant arose in September 2016, about four months after subdivision works started. Substantive proceedings were filed in November 2016, yet the interlocutory
application for an interim injunction to stop the development of the property was not
2 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 408.
filed for another eight months, only two months before the subdivision was due to be completed.
[23] I also accept that there will be substantial costs involved if the development of the property is stopped now and then re-commenced sometime in the future. Engineering approvals for the proposed shared driveways and for a public fire hydrant lapse on 23 November 2017 and 31 January 2018 respectively and a fresh application would have to be made if the approved works were not completed by the expiry date of the approvals. I also accept that there would be a substantial cost in cancelling the contracts for the shared driveways and the subsequent re-letting of those contracts. Furthermore, the plaintiffs do not have any experience in property development and would have to engage a professional at some cost to manage the completion of the subdivision if that is what they chose to do. I am therefore of the view that the balance of convenience favours the first defendant. It may not have if the interlocutory application for an interim injunction had been filed at the same time as the substantive proceedings.
Overall justice
[24] As noted earlier the Co-operation Agreement provided that the parties were to have an equal shareholding in the company. If the first defendant had complied with the agreement, then the plaintiffs as the majority shareholders would have been able to remove the first defendant as sole director and stop the development of the property. However, counsel for the first defendant submits that he would then be able, as a minority shareholder, to make an application to the Court under s 174 of the Companies Act 1993 for an order requiring the company to complete the subdivision or to pay compensation to him for work undertaken by him on the company’s behalf on the basis that the decision of the plaintiffs to stop the development of the property was unfairly prejudicial to him.
[25] Also under this heading, I have regard to the fact that when the dispute first arose in September 2016, the plaintiffs accessed the company’s bank account and withdrew company funds totalling $460,000 which they have retained to this day. In the substantive proceedings, the first defendant counterclaims for losses incurred in
sourcing other funds to complete the subdivision. I am therefore of the view that consideration of the overall justice of the situation does not change the position reached on the balance of convenience.
Conclusion
[26] The interlocutory application for an interim injunction to restrain the first defendant from carrying out any physical works on the property is dismissed on the basis that the balance of convenience favours completion of the subdivision when the application was only filed when the subdivision was nearly complete. The overall justice does not change this assessment. The plaintiffs are sufficiently protected by the interim orders already made which maintain and protect their
interest in the property.
Woolford J
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