Francis v William Gong Lawyers Ltd

[2024] NZHC 3365

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2024-404-002212

[2024] NZHC 3365

UNDER

Sections 261 and 266 of The Companies Act 1993 and Part 19 of the High Court Rules 2016

IN THE MATTER

of GLZJ Limited (in liquidation)

BETWEEN

BENJAMIN BRIAN FRANCIS and GARRY CECIL WHIMP

Applicants

AND

WILLIAM GONG LAWYERS LTD

First Respondent

BINBO GE
Second Respondent

Continued

Hearing:

22 October 2024

Appearances:

K Mills for Applicants

M J W Lenihan for Respondents

Judgment:

13 November 2024

JUDGMENT OF WHATA J

This judgment was delivered by me on 13 November 2024,

pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date: ………………………….

Solicitors/Counsel:

Tompkins | Wake, Auckland

Michael Lenihan Barrister, Auckland

FRANCIS v WILLIAM GONG LAWYERS LTD [2024] NZHC 3365 [13 November 2024]

UNDER

Continued

CIV-2024-404-002420

Sections 284(1) and 250 of The Companies Act 1993 and Part 19 of the High Court Rules 2016

IN THE MATTER

of GLZJ Limited (in liquidation)

BETWEEN

BINBO GE

Applicant

AND

BENJAMIN BRIAN FRANCIS and GARRY CECIL WHIMP

Respondents

[1]I have before me the following applications:

(a)By Mr Ge:

(i)to commence proceedings by way of originating application pursuant to pt 19 of the High Court Rules 2016 and s 284 of the Companies Act 1993 (the Act) (the leave application); and

(ii)to terminate the liquidation pursuant to s 250 of the Act

(b)By the liquidators for orders to produce specified information pursuant to ss 261 and 266 of the Act.

[2]        Following the hearing of this matter, I resolved to grant leave to Mr Ge to commence the proceedings by way of originating procedure, but adjourned consideration of the substantive application so that Little Hen Ltd (LHL) and its director Mr Cong Liu could be given the opportunity to join the proceedings as any substantive ruling on the applicable loan agreement directly affected their rights and interests. These are my reasons.

Background

[3]        The liquidators were appointed at the request of LHL pursuant to a term loan agreement (TLA) for non-payment of monies they say were due and owing under that agreement. Under the TLA, LHL was the lender and GLZJ Ltd was the borrower for vendor finance of $2.6m in respect of the sale of Onehunga properties. The properties were transferred to GLZJ who then on sold the properties to Luxe Capital Group LP. LHL was not happy with this and registered a caveat over the properties. GLZJ then applied to have the caveat removed. Negotiations for the resolution of this application then followed, captured in a series of emails that Mr Ge says culminates in an agreement to vary the TLA.

[4]        Those negotiations are helpfully set out in an agreed chronology that I reproduce as an appendix to this judgment.

[5]        The parties disagree as to whether there was any final agreement to amend the TLA. On the liquidators’ case there was no final agreement, and so the existing TLA remained binding. On Mr Ge’s case, a final agreement was reached, the effect of which was to reduce the vendor finance to $800,000 and the term for repayment was extended to 10 years.

[6]         On 24 June 2024, LHL issued a default notice to GLZJ and then a statutory demand on 3 July 2024. Messrs Francis and Whimp were appointed liquidators on  17 July 2024. The liquidators then applied for orders seeking the production of specified information from the respondents. That was met with the application by the respondents for leave to commence proceedings pursuant to pt 19 of the High Court Rules and s 284 of the Act. They claim in short that the obligations under the TLA had been settled by agreement, payment under it was not due and owing, and it therefore followed that the appointment by LHL of the liquidators was invalid.

Threshold issues

[7]        Both counsel agreed that the first key issue for determination is whether there is a proper basis for leave (by way of originating application) to commence Mr Ge’s proceedings. The threshold for leave under s 284 is as follows:1

(a)whether the applicant’s claim has a credible factual basis; and

(b)whether there is a reasonable likelihood that if the claim is established the Court will disturb the act or decision in question.

[8]        In this case, it must also be asked whether the originating application procedure is appropriate.

[9]        If leave is granted, I was also invited to determine the substantive issue, namely, whether the TLA was amended and if so, whether the liquidators were invalidly appointed.

1Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 (HC) at [21] affirmed on appeal in Trinity Foundation (Services No 1) Ltd v Downey (2006) 3 NZCCLR 401 (CA) at [31].

A credible claim

Key arguments

[10]      The position for the liquidators can be stated simply. While an agreement in principle was reached between LHL and GLZJ, that agreement was always “subject to contract” as set out in Mr Ho’s email of 13 July 2023. Much emphasis was also placed on the fact that as agreed between the parties, the final form of the contract had to be in the form of a deed and as such, could only be enforceable on the final execution of such a deed. There being no final execution, no final agreement was reached and the TLA remained in force and enforceable.

[11]      Mr Lenihan contends however, that the 13 July 2023 email clearly showed that an agreement had been reached to resolve the caveat proceedings and to discharge the obligations of GLZJ under the TLA. Particular emphasis was placed on the fact that the parties confirmed in the email correspondence that an agreement had been reached, and that the parties had acted in reliance on that agreement. In the case of LHL, the withdrawal of its caveat, and in  the case of Mr Ge, the execution of a guarantee.  The only step outstanding was the final execution of the deeds by LHL. It is therefore unarguable that there was a final agreement, and the formal signing of the deeds was unnecessary for the purposes of the discharge of the TLA. Significantly, the agreement extended the time for payment out from two years to ten years so that no debt was due and owing by GLZJ to the LHL interests at the time of the issuance of the notice of default.

Assessment

[12]      I am satisfied that Mr Ge has a strong arguable case that, based on the email exchanges between the parties, an agreement was reached to the effect of discharging the obligations under the TLA and replacing them with alternative obligations as ultimately recorded in the deeds. To my mind, the emails on their face support a strong inference of agreement having been reached. The parties’ subsequent conduct, including the withdrawal of the caveat, reinforces this conclusion. In this regard, I rely on the observations of the Court of Appeal in Croser v Focus Genetics Ltd Partnership (2548500) to the effect that a contract or agreement maybe concluded

even though formal steps have not yet been taken in the form of execution of final contracts.2 The following passage is particularly relevant in this context:

[81] However, this factor needed to be viewed in the context of the upcoming trial and the desire of both parties to achieve a settlement before that trial and thereby avoid the costs and risks associated with the trial. This context provided a strong incentive for both parties to compromise their positions. That incentive would dissipate if the parties were free to walk away from their agreed compromise after the fixture was vacated if the terms of a formal document were not agreed upon. This is quite different from a negotiation over a land purchase or a commercial arrangement which does not have that litigation context.

[13]      Overall, therefore, having regard to the chronology of exchanges set out in the appendix, it must be at least arguable that the TLA, relied upon for the purposes of the commencement of liquidation, had been discharged and replaced with the obligations set out in those deeds.

Reasonable chance the Court would disturb the liquidators’ appointment

[14]      It must follow that if Mr Ge is correct, and the TLA was discharged and the terms of the loan varied such that the remaining debt did not become payable for ten years, the liquidators’ appointment was invalid — there being no proper basis for it.

Originating application procedure

[15]      Given the foregoing, it is inevitable that leave should be granted to the GLZJ interests to commence proceedings. I am also satisfied that the background facts are not really contentious with no obvious issues of credibility arising. It is in short, a classic contract formation case from which the objective intentions may be derived from the available documentation. On that basis, I am satisfied that the pt 19 originating procedure is appropriate.

Determination of the substantive issue

[16]      I am conscious, however, that the LHL interests were not represented in this proceeding, and they are, in end, the most affected by the resolution of the substantive contract formation issues. Plainly, it would be unfair to proceed without them. I am

2      Croser v Focus Genetics Ltd Partnership (2548500) [2020] NZCA 367.

not therefore prepared to move to substantive resolution without affording them an opportunity to be heard.

Orders and Directions

[17]      Leave is granted to the GLZJ interests to commence proceedings pursuant to s 284 of the Act.

[18]      I also grant leave to the LHL interests to join the proceedings. They are to advise the parties and the Court 10 working days within receipt of this judgment of their intention to be joined.

[19]      I will also remain seized of this matter given my background involvement.     I will issue a separate minute regarding case management and will convene a telephone conference for the purposes of further timetabling orders once I have received notice of the LHL interests’ intention to join, or alternatively, at the expiry of the period they must advise of such intention.

Costs

[20]      The GLZJ interests seek indemnity costs on the basis, in short, that the liquidators should have been aware and were advised of the problems of their appointment. They should have taken a neutral stance on the present application accordingly. Reference is made  to  the  approach  taken  by  the  liquidator  in  Zhang v Kamal, where the liquidator stepped to one side while the parties litigated the merits of his appointment.3

[21]      Ms Phillips submits that costs should be reserved pending the hearing of the substantive application. She notes amongst other things that the liquidators were only advised once they had commenced their own application of the background matters raised by the GLZJ interests. The liquidators clearly had an otherwise proper basis for accepting appointment given the TLA.

3      Zhang v Kamal [2017] NZHC 1943.

[22]      I reserve the issue of costs to the substantive hearing. While the position of the GLZJ is strongly arguable, it cannot be suggested that the liquidators accepted appointment on an improper basis or that their application requesting further information was itself improper.

Whata J

Appendix

CHRONOLOGY

Date

Event

31.07.2020

GLZJ Ltd incorporated.

GLZJ Ltd and LHL – vendor finance term loan agreement

03.2022

Sale and purchase agreement between LHL and GLZJ Ltd for sale of Onehunga properties, with vendor finance of $2.6m.

09.09.2022

Term loan agreement between LHL as lender and GLZJ as borrower for $2.6m vendor finance

General security agreement between LHL as secured party and GLZJ as creditor.

12.09.2022

Onehunga properties transferred to LHL.

12.09.2022

LHL transferred Onehunga properties to GLZJ Ltd.

12.09.2022

Swan Investment NZ Ltd registered mortgage over Onehunga properties.

13.09.2022

LHL’s security interest under GSA registered on PPSR.

Sale to Luxe and Caveat Proceeding

27.06.2023

GLZJ Ltd entered into agreement to sell Onehunga properties to Luxe Capital Group

LLP.

06.07.2023

LHL registered caveat over titles to Onehunga properties.

07.07.2023

WGLL sends LHL’s solicitor Joseph Chen a letter regarding removal of the caveat.

07.07.2023,

5.02pm

After WGLL’s letter is sent, Chimbusco International Ltd’s (Chimbusco) solicitor Joseph

Chen lodged caveat over titles to Onehunga properties.

07.07.2023

Luxe agreed to defer settlement until 12 July 2023

12.07.2023

GLZJ filed urgent application to have LHL’s caveat removed.

13 July 2023 Email Exchange

12.07.2023

Alden Ho (LHL) emails WGLL an agreement for sale and purchase that Mr Ho asserted was the basis of LHL’s caveat.

13.07.2023

Parties’ lawyers Michael Lenihan (Mr Ge/GLZJ Ltd), Alden Ho (LHL), and Xinan Zhang (Chimbusco) negotiated by email.

3.07.2023,

10:44AM

Email Alden Ho to Michael Lenihan:

13.07.2023,

1:15PM

Email Michael Lenihan to Alden Ho (points 1, 5 and 6  related  to  the TLA,  and the remainder to the caveats/caveat application):

13.07.2023,

2:31PM

Email Alden Ho to Michael Lenihan [text in black only]:

13.07.2023,

3:00PM

Email Xinan Zhang to Michael Lenihan [adding in the red text to the 2:31pm email]:

3.07.2023,

Email Michael Lenihan to Alden Ho, Xinan Zhang:

4:16PM

13.07.2023,

4:54PM

Email Xinan Zhang to Michael Lenihan:

13.07.2023,

4:56PM

Email Michael Lenihan to Alden Ho, Xinan Zhang

13.07.2023

Parties’ lawyers signed joint memorandum of counsel advising Court that “settlement in principle has been reached”, and seeking adjournment to allow time for caveats to

be removed.

Drafting of settlement, TLA amendment and guarantee documents

17.07.2023

Mr Ho wrote to Mr Lenihan

18.07.2023

LHL’s caveat withdrawn.

18.07.2023

The parties’ lawyers filed a further consent memorandum advising “The matter has

now settled”, and attaching a notice of discontinuance

21.07.2023

Sale of property to Luxe was settled.

18–

31.07.2023

Lawyers William Gong, Michael Lenihan and Alden Ho continue to negotiate settlement deed and amendment to TLA between LHL and GLZJ, and the guarantee to be provided by Mr Ge, as set out in further detail below.

18.07.2023,

2:16PM

Email from William Gong to Alden Ho:

18.07.2023,

4:26PM

Email from Alden Ho to William Gong:

19.07.2023,

10:58AM

Email from Michael Lenihan to Alden Ho:

19.07.2023,

12:39PM

Email from Alden Ho to Michael Lenihan:

24.07.2023,

4:49PM

Email from Michael Lenihan to Alden Ho:

28.07.2023,

1:12PM

Email from Michael Lenihan to Alden Ho:

31.07.2023

Execution copies of the draft documents were distributed.

31.07.2023

Email Alden Ho to Michael Lenihan:

02.08.2023

Mr Lenihan emailed to Mr Ho copies of the settlement  documents, executed  by his clients on 1 August 2023.

05.09.2023

Mr Gong (WGLL) emailed requesting Mr Ho send the documents through or advise progress on his end.

18.10.2023

Mr Ho advised Mr Gong that he had no instructions.

29.10.2023

GLZJ Xero journal entries related to Luxe sale.

Events leading to appointment of administrators, GLZJ’s liquidation, and s261 Notices

24.06.2024

LHL issued a default notice to GLZJ.

03.07.2024

LHL issued statutory demand to GLZJ.

17.07.2024

Ben Francis and Garry Whimp appointed administrators of GLZJ Ltd by LHL pursuant

to s 239K of the Companies Act 1993 (Act)

17.07.2024

Administrators requested records from respondents pursuant to s261 of the Act.

17.07.2024

Mr Ge advised Ben Francis he disputed the Liquidators’ appointment as administrators.

23.07.2024,

11:25AM:

Mr Ge emailed Ben Francis and advised:

23.07.2024,

11:38AM

Ben Francis emailed Mr Ge, requesting documents, and advising indemnity costs would be sought on any application:

23.07.2024,

5:08PM

Mr Ge emailed Ben Francis and advised:

The two emails attached are:

1.   Messrs Lenihan, Ho, and Zhang’s email exchange from 17 to 5:18pm 31 July 2023 [Francis affidavit, BBF:082‐BBF:096 [201.0090‐201.0104];

2.   Messrs Lenihan, Ho, and Zhang’s email exchange from 17 to 5:04pm 31 July 2023 [Gong affidavit, exhibit page 148 [202.0560]], attaching:

‐    “Draft Deed of Settlement Final” [Gong affidavit, exhibit page 149

[202.0561]];

‐  “Deed of amendment of TLA – clean FINAL” [Gong affidavit, exhibit page 170

[202.0582]].

5.07.2024

William Gong emailed Ben Francis, advising:

Mr Gong’s email attached a screenshot of the statutory demand (a copy of

which is at BBF:120)

30.07.2024

Ben Francis emailed Binbo Ge, stating:

31.07.2024

Administrators’ solicitors requested records from respondents pursuant to s261 of the

Act.

05.08.2024

Email WGLL to Tompkins Wake. The attachments were:

1.   Letter of demand (the statutory demand);

2.   Admin authority (the administrators’ appointment document);

3.   Mr Gong’s 25 July 2024 email to Mr Francis;

4.   Messrs Lenihan, Ho, and Zhang’s email exchange from 17 to 31 July 2024;

5.   Messrs Lenihan, Ho, and Zhang’s email exchange from 17 to 31 July 2024, up to Mr Lenihan’s email sent at 5:04pm, attaching:

‐   “Draft Deed of Settlement Final”;

‐   “Deed of amendment of TLA – clean FINAL”.

21.08.2024

Watershed meeting of GLZJ Ltd (in administration) – creditors appointed administrators as liquidators.

21.08.2024

Liquidators’ solicitors requested records from respondents pursuant to  s261  of the

Act, advising indemnity costs would be sought if a Court application was required.

28.08.2024

Letter from WGLL to Tompkins Wake, setting out the respondents position, and enclosing:

1.   The 13 July 2023 Email Exchange;

2.   The 13 July consent memorandum;

3.   Mr Ho’s 18 July email confirmation the Caveats had been removed;

4.   The 18 July consent memorandum;

5.   Deed of guarantee signed by Mr Ge.

03.09.2024

Liquidators filed s266 Application.

27.09.2024

Mr Ge, director of GLZJ, filed Validity application,  sections 284(1)(g)  and s250 of the Act, and opposition to s266 Application.