Flax Design Group Limited v Chow HC Wellington CIV-2011-485-1564

[2011] NZHC 1113

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2011-485-1564

BETWEEN  FLAX DESIGN GROUP LIMITED Plaintiff

ANDKA-MING (MICHAEL) CHOW First Defendant

ANDKA-YU (JOHN) CHOW Second Defendant

ANDPORTFOLIO (NZ) LIMITED Third Defendant

Hearing:         21 September 2011

Counsel:         K P Sullivan for plaintiff

J Toebes for defendants

Judgment:      21 September 2011

RESERVED JUDGMENT OF DOBSON J

[1]      On 12 August 2011, Kós J made interim orders restraining the defendants from dealing with or disposing of the assets of the third defendant (Portfolio), and further restraining the defendants from making payments (subject to defined exceptions) out of Portfolio’s bank accounts.  The orders were made on the basis of the plaintiff’s without notice application.  The same day as the orders were made, the defendants effected a transfer of $137,431.71 to Chow Management Group Limited (CGML) from Portfolio’s bank account.   Electronic records of the timing of the transaction suggest it occurred six minutes before the Judge made his orders, at

3.39pm.

[2]     More recently, on 15 September 2011, the plaintiff has filed a further interlocutory application seeking orders that would effect the repayment of the sum

FLAX DESIGN GROUP LIMITED v CHOW HC WN CIV-2011-485-1564 21 September 2011

transferred from Portfolio to CGML.  On 15 September 2011, I set a timetable for the exchange of papers to enable the prompt argument of this further application and have now heard counsel this afternoon.

[3]      The plaintiff’s claim alleges the existence of certain contractual arrangements for the plaintiff to become a shareholder in Portfolio, and for the plaintiff to provide architectural, project management and property management services to CGML, a company under the control of the first and second defendants (the Chow brothers). The plaintiff pleaded that it has made two payments totalling $88,888 to Portfolio, as part-performance of a contractual commitment to acquire shares in Portfolio.  When Kós J was confronted with the plaintiff’s initial application, he was satisfied that there was a seriously arguable case of breach of contract demonstrated on the papers then before him.

[4]      The essence of the defendants’ opposition to any further orders is that the plaintiff’s  claim  is  confused  and  untenable.    Further,  that  the  payment  out  of

$137,143.71 to CGML minutes before the Judge’s order was entirely lawful and that any claims the plaintiff may have constitute claims as an unsecured creditor of Portfolio in respect of which the plaintiff should not be entitled to the protection of any orders requiring Portfolio to hold funds pending resolution of the dispute.

[5]      Mr Toebes argued that the cleanest way forward, which could protect any legitimate interests of the plaintiff, was to proceed with a liquidation of Portfolio so that an independent liquidator could investigate all the claims.   If appropriate, the liquidator would have powers to pursue repayment of the sum in issue, should it be found not to be a bona fide commercial transaction.

[6]      For the plaintiff, Mr Sullivan sought further orders requiring repayment of the sum transferred to CGML back into Portfolio’s bank account on alternative grounds. Either, first, that the transfer out of the funds was in circumstances anticipating that such  conduct  would  imminently  be  precluded  by  Court  order  and  therefore constituted a form of contempt in that it was a step undertaken to frustrate an order of  this  Court.    Second  and  alternatively,  that  even  if  the  payment  out  did  not constitute a wrongful step procured by Portfolio, then there was no independent

justification  for  the  payment  to  another  entity  under  the  control  of  the  Chow brothers, and that the Court should exercise its jurisdiction to require reinstatement of Portfolio’s bank account, pending resolution of the plaintiff’s claims.

[7]      The Court’s jurisdiction to make orders preserving the position until trial is a wide one that is to be applied to meet the circumstances of individual cases.  Here, there  is  no  evidence  that  the  amount  transferred  from  Portfolio  to  CGML  on

12 August 2011 remains in that bank account.  However, Mr Toebes’ submissions in opposition to the application suggested that the defendants  are “persons of real financial substance”, which would suggest that, if indeed the funds have been transferred out of the account into which they were paid, the Chow brothers have resources to effect reinstatement of the sum in Portfolio’s bank account.   The assurance of financial substance also tends to reduce any concerns that may have arisen about hardship caused to the Chow brothers by further interim orders.  Money frozen in Portfolio’s account is, of course, not accessible to the plaintiff and accordingly there is no risk of dissipation.

[8]      Orders in terms that would be effective to restore the position intended by the Court’s original orders would necessarily be mandatory in their terms.  The Court is inclined to be more cautious in making orders in mandatory rather than prohibitory terms because of their potential to be more intrusive.[1]

[1] See, for example, Laws of New Zealand Injunctions at [226], Equity and Trusts in New Zealand at [25.4.1].

[9]      However, the requirement to consider the circumstances of a particular case make it unnecessary to respect that additional caution as an inflexible rule.   As Fisher J observed in Telecom New Zealand Ltd v Clear Communications Ltd:[2]

[2] Telecom New Zealand Ltd v Clear Communications Ltd (1997) 6 NZBLC 102,235.

I do not think that those tests [the standard tests] are affected by the question whether the proposed injunction is prohibitory or mandatory.  It is just that when the tests are applied, the potential for injustice to a defendant will often be increased by requiring him or her positively to act rather than passively to desist …

And later:

… an interlocutory injunction is normally brought to preserve the status quo pending a final decision, a mandatory interlocutory injunction is likely to be more intrusive and to disturb the status quo.  But each case turns on its own circumstances.

[10]     I note the recent reliance on that approach by Venning J in making mandatory orders in Hillary v Hillary[3]involving the disputed future of watches formerly held by Sir Edmund Hillary.

[3] Hillary v Hillary [2011] NZAR 109.

[11]     The  thrust  of  Mr Toebes’  argument  in  opposition  to  any  further  orders focused on the lack of merit in the plaintiff’s claim as presently pleaded, and the fact that any claims which, on Mr Toebes’ analysis, might potentially be tenable could not constitute claims giving the plaintiff any form of proprietary claim to the content of the bank account of Portfolio.

[12]     However, at its most basic, that argument overlooks the reality that sums amounting to  approximately 65 per cent  of the  payment  out  can  be seen  as  the equivalent of sums contributed by the plaintiff in part payment for an issue of shares that has not occurred.  The plaintiff’s claim has not focused on the capacity in which Portfolio is holding that money, but it is not entirely untenable that, until applied for their intended purpose, Portfolio would have to acknowledge some form of trust obligations in respect of the funds.  Mr Toebes resisted any scope for this notion, and ultimately he may be correct.  However, I am not dissuaded from granting relief on the  basis  that  the  Court  must  recognise  the  plaintiff’s  limited  standing  as  an unsecured creditor of Portfolio.

[13]     The  present  position  is  that  the  plaintiff  has  commenced  proceedings claiming against Portfolio and its two directors, and did so in the relevant belief at the time that Portfolio remained solvent.  Interim relief was sought to preserve that position pending trial, and it was only very shortly before the Court responded to that initial application that initiatives by the defendants effectively removed the practical pre-condition to the claims being worth pursuing.  Disregarding the balance of the plaintiff’s claims, which are effectively for services provided, the payment out can

be seen as depriving the plaintiff of the opportunity to recover the sum representing

the amounts paid to Portfolio on account of acquisition of share capital.   In those circumstances, the appropriate status quo is one in which the plaintiff is pursuing claims against a solvent defendant, and I was not persuaded that the matters urged by Mr Toebes as to the inadequacies in the claim outweighed the plaintiff’s legitimate interest in preservation of that status quo.

[14]     The first ground advanced by Mr Sullivan for the further orders was that the payment out on the day of the initial orders constituted contempt.  Given the view I have taken of the breadth of the Court’s jurisdiction to make interim injunction orders, and the merits in favour of intervening on that ground, it is unnecessary to traverse this alternative.   Certainly, on any conventional analysis requiring actual disobedience of a Court order known to exist, there could be no finding of contempt on the facts disclosed.

[15]     The stance of the defendants is that the plaintiff’s substantive position does not justify any relief, rather than the extent of detriment that would flow from further interim orders as sought.  Accordingly, I addressed with counsel the future of the proceedings to ensure that the interim orders I was minded to make did not remain in place for any longer than is absolutely necessary to protect the plaintiff ’s position. In light of the argument about the nature of the substantive claims, I anticipate that the plaintiff will wish to amend its Statement of Claim.   Once that is done, the defendants ought to have an appropriate opportunity in which the challenge to the tenability of those causes of action can appropriately be argued.

[16]     The Court’s jurisdiction to order injunctions is classically derived from the jurisdiction in equity.   Notwithstanding the fusing of common law and equity, the underlying principles remain important.  The maxim in equity that he who comes to equity must come with clean hands certainly applies to the exercise of discretion involved here. Among Mr Toebes’ criticisms of the plaintiff was that its relevant conduct, including pursuit of these proceedings, is orchestrated by Mr White who is an undischarged bankrupt, arguably employed by a family company contrary to s 149 of the Insolvency Act, and (inferentially at least) responsible for designing a structure   to   provide   indirect   remuneration   to   Mr White   for   his   efforts,   in circumstances that would frustrate his assignee in bankruptcy.

[17]     However, Mr Toebes did not have any evidence to rely on, and therefore acknowledged that he was not able to oppose a further injunction at this time, on the basis of the absence of clean hands on the plaintiff ’s part.

[18]     Mr Sullivan denied that there is any form of impropriety on Mr White’s part. He assured the Court that Mr White’s interest in shares in the plaintiff was known to the assignee in bankruptcy, who had disclaimed any interest in it.   That may not address all concerns of this type, but the point need not be taken any further at this stage.  I will recognise the prospect that it may arise at a later stage.

[19]   Accordingly, after dialogue with counsel, and reflecting some of their suggestions, I indicated I would make orders to the following effect:

(a)      The Chow brothers are to procure forthwith the repayment to the bank account  of Portfolio  the  sum  of $137,143.71.    If that  sum  is  not immediately  available  from  the  payee  of  the  original  transfer (CGML), then the amount is to be procured by the Chow brothers from their other resources.  On compliance with this order, the orders previously made by Kós J on 12 August 2011 are to remain in effect until further order of the Court.

(b)Solicitors for the defendants are to promptly confirm to solicitors for the plaintiff when the payment required in (a) has been effected.  The plaintiff will thereafter have five working days to file and serve any Amended Statement of Claim in the proceedings.   Thereafter,  the defendants  shall  have  10 working  days  to  file  and  serve  any application for defendants’ summary judgment.  If such application is filed, it is to be accorded priority for determination.

(c)      No steps are to be taken to liquidate Portfolio, pending further order of the Court.

(d)      I reserve leave generally to the parties to apply for further directions.

In particular, I reserve leave to the defendants to apply to revisit the

present orders, in the event that they wish to challenge the plaintiff’s entitlement to the interlocutory relief now granted, on the basis of evidence challenging the present situation which assumes the plaintiff has applied with clean hands.

[20]     The plaintiff is entitled to costs.   It has sought solicitor and client costs. However, it has been unnecessary to form a finite view on the justification for criticisms of the defendants that would need to be made out, in order to justify such an order.  In the meantime, I order costs in favour of the plaintiff on a 2B basis.  I reserve the entitlement of the plaintiff to apply at a subsequent stage in the proceedings   for   increased   costs   on   the   present   application   if   a   definitive determination of the nature of the conduct undertaken by the defendants  would arguably justify such further orders.

Dobson J

Solicitors:

Breaden McCardle Chubb, Paraparaumu for plaintiff

JT Law, Wellington for defendants