Fuati v Peng

[2020] NZHC 672

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-000848

[2020] NZHC 672

UNDER

Part 2 of the High Court Rules

BETWEEN

MUSABAYOUFU FUATI

First Plaintiff

AND

JUN KIN

Second Plaintiff

AND

YUCHEN PENG

First Defendant

AND

ZOURU JIN

Second Defendant

Hearing:	4 February 2020
Appearances:	N Scampion for Plaintiffs D Zhang for Defendants
Judgment:	1 April 2020

JUDGMENT OF WALKER J

This judgment was delivered by me on 1 April 2020 at 4.00 pm Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

FUATI v PENG [2020] NZHC 672 [1 April 2020]

Introduction

[1]    The plaintiffs, Mr Fuati and Mr Jin, claim that the first respondent, Ms Peng, borrowed RMB 4.2 million (approximately NZD 850,000) from them with an obligation to repay on or before 4 April 2018, together with interest. The claim asserts that, except for the sum of NZ$156,942.54, the balance borrowed remains outstanding. The plaintiffs obtained without notice freezing and ancillary disclosure orders in May 2018. The result of those orders was that the bank accounts of Ms Peng and Wanda International Limited (WIL), a company of which Ms Peng is the sole director and shareholder, were frozen.1

[2]    The defendants sought to vary the freezing order. On 17 August 2018, Courtney J varied the ancillary orders, dismissed the application for an order requiring Ms Peng to answer interrogatories but held that the freezing orders should remain in place until further order of the Court.2 This was on the basis that the plaintiffs were able to show that they have a good arguable case on their substantive claim and there was a real risk of dissipation or disposal of the assets.

[3]    There have been significant other interlocutories fought throughout this heavily contested proceeding. By way of example, on 23 October 2018 the plaintiffs obtained a without notice freezing order against the second defendant on the basis of alleged transfers between Ms Peng and the second defendant. That order was discharged by Toogood J on 1 August 2019.3 Ms Peng asserts that the discharge provided a means for Ms Peng to take more vigorous steps to defend her position.

[4]    Ms Peng not only denies that the alleged debt is owing to the plaintiffs but has filed a counterclaim. The gist of Ms Peng’s defence is that she asserts that she and the plaintiffs were together conducting a currency exchange business. In the course of that business, she deposes that the flow of funds from her to the plaintiffs exceeded any transfers of funds to her.

1      WIL was de-registered on 4 April 2018.

2      Fuati & Anor v Peng & Anor [2018] NZHC 2134.

3      Fuati & Anor v Peng & Anor [2019] NZHC 1859.

[5]    The plaintiffs in turn deny they were operating a currency exchange business. They acknowledge that Ms Peng paid significant sums of money to them but assert that those payments were unconnected with the money they had loaned to her. Rather they were repayments of funds they had made available to her from time to time to assist in her foreign exchange business.

[6]    It is impossible in the context of an interlocutory to take any view on the merits; neither is it this Court’s role. What is clear is that the versions of events pleaded by the plaintiffs and the defendants differ markedly.

[7]    A six-day hearing commencing 11 November 2019 was adjourned at the plaintiffs’ behest (ultimately by consent) because a key witness was unavailable. Two- and-a-half months before the trial was set to commence, the first defendant made an omnibus application for leave to apply for:

(a)Particular or further and better discovery against the plaintiffs;

(b)Non-party discovery against the ASB and ANZ Banks in respect of two account holders, Danzen Quncuo and Abudula Alapati who are alleged to be associates of the plaintiffs;

(c)An order for substituted service of an application for discovery against Wei Wang; and

(d)An “unless order” to compel compliance with any order made for non- party discovery by Mr Wang. That application was framed in terms of seeking an order preventing Mr Wang from giving evidence in the substantive proceeding for and on behalf of the plaintiffs in the event of non-compliance with any non-party discovery order.

[8]    Once the substantive hearing was vacated, the first defendant obtained a hearing date for resolution, at least in part, of those applications. Directions were made for the determination of procedural issues including as to substituted service on

Ms Quncuo and Mr Alapati, being the account holders of accounts allegedly utilised as third-party accounts in the currency exchange operation.

[9]    In addition, the plaintiffs then filed an application, dated 3 September 2019, seeking that “the defendants comply with the standard discovery order made on     22 November 2018”. That application identified six categories of documents which the plaintiffs assert had not been discovered but which are relevant and within the defendants’ control. No supporting affidavit was filed.

[10]   The Court made directions for exchange of submissions in respect of both sets of applications. The plaintiffs did not comply with those directions. The defendants filed submissions in support of the first defendants’ application on 21 January 2020.

Preliminary matters

[11]   Mr Scampion, for the plaintiffs, was unable to satisfactorily explain the plaintiffs’ failure to file submissions in support of its own application or in opposition to the defendants’ application. He submitted that the plaintiffs are a small business, facing a downturn in view of the current crisis in China. He proposed a course which would see this hearing adjourned to enable the parties to confer and agree on provision of further and better discovery.

[12]   Mr Zhang, for the first defendant, vigorously opposed that proposal. Instead, he urged the Court to dismiss the plaintiffs’ application for discovery on the basis that it was not supported by affidavit evidence, whereas the first defendant had deposed that the documents sought by the plaintiffs did not exist. He submitted that, ignoring the timetabling directions made by the Court, adjournment was not an option and contact should have been made with both him and the Court in advance of the hearing.

[13]    Mr Zhang also submitted that the plaintiffs ought not to have standing to oppose the application for substituted service anyway since these were matters to be resolved between the defendants and the non-parties, rather than the plaintiffs. This is notwithstanding that the application for substituted service proposed service on the plaintiffs’ counsel. At  the  hearing  Mr Zhang  orally  amended  that  application  for

substituted service to substitute the plaintiffs personally, rather than the plaintiffs’ solicitors or counsel.

[14]   To add to the procedural morass, it transpired that Mr Scampion had not received the defendants’ submissions. It was only when he saw the defendants’ memorandum dated 31 January 2020 that he appreciated that the defendants had complied with the directions timetable and were pursuing the application. As it transpired, those submissions had not made it through the firewall of the IT system of Mr Scampion’s chambers, nor the plaintiffs’ solicitors. In response to my query as to why he had not communicated with Mr Zhang when the submissions were not received on time, Mr Scampion had no ready answer.

[15]   Taking all these factors into account, I determined that it was not appropriate to defer this hearing. I declined to hear the plaintiffs’ application, deeming it abandoned in view of the non-compliance. I was not prepared to dismiss the application which may or may not have merit. The plaintiffs are entitled to resurrect that application at a later point in time if there are grounds to do so although, in the face of the defendants’ affidavit evidence that the documents do not exist, there would need to be cogent evidence to support looking behind those statements.

[16]   I adjourned the hearing until 11.45 am to permit Mr Scampion time to review the defendants’ submissions and for counsel to discuss any common ground. At the reconvened hearing, Mr Scampion sought to answer the application for substituted service on Mr Wang by providing email contact details for Mr Wang who resides off- shore.

[17]   The first defendant’s application relates to further discovery, substituted service and discovery against non-parties. The hearing before this Court dealt with a subset of those applications, namely the applications for further discovery and substituted service.

[18]   At the outset, the plaintiffs indicated they no longer opposed leave to bring the application. This is a pragmatic and realistic stance given that a new trial is scheduled to commence in October 2020.

[19]   By a Minute dated 7 November 2018 the parties were directed to provide standard discovery by 1 February 2019. The plaintiffs discovered 14 documents as part of standard discovery. The defendants submit this is palpably inadequate. The defendants discovered nearly 200 documents.

Further and better or particular discovery

[20]   It is convenient to deal first with the application for an order for further and better or particular discovery. The documents sought by the defendants fall into the following categories:

As against Mr Fuati – the first defendant

(a)Documents relating to the acquisition of funds transferred to Mr Wang to be held on trust for Mr Fuati;

(b)Documents relating to the transfer of funds Mr Wang allegedly held on trust for Mr Fuati;

(c)Bank statements of all  his accounts for the period 1 April 2017 to    21 August 2019;4 and

(d)Correspondence  between  Mr Fuati  and  Ms Peng  for  the  period     1 February 2017 to 4 April 2018.

As against Jun Jin – the second plaintiff

(e)Documents relating to the acquisition of funds transferred to Mr Wang to be held on trust for Jun Jin;

(f)Documents relating to the transfer of funds that Mr Wang held on trust for Jun Jin;

4      Mr Zhang in his oral submissions clarified that this is both New Zealand and Chinese bank accounts.

(g)Bank statements of all  his accounts for the period  1 April 2017 to   21 August 2019;

(h)Transactional records for Jun Jin’s Alipay and WeChat wallet for the period 1 April 2017 to 21 August 2019; and

(i)Correspondence between Ms Peng and Jun Jin for the period 1 February 2017 to 1 May 2018.

[21]   Essentially the grounds are that the plaintiffs have not discovered any financial records such as bank statements, which are required in order to assess the defendants’ assertions that all parties were working together in a currency exchange business. The first defendant pleads that the money which the plaintiffs transferred to her, allegedly by Mr Wang, does not belong to the plaintiffs but belonged to clients of the currency exchange business and transactions between them were made in the operation of the business. Therefore, a central issue is said to be whether the funds passed to Ms Peng as alleged loans belonged to the plaintiffs at all. True or effective ownership of the funds can only be ascertained by tracing the financial records showing acquisition of funds in China and subsequent transfer to Mr Wang.

[22]   The plaintiffs’ transactional records, including transactions to and from their accounts and correspondence evidencing communications with the first defendant relating to the business are material to ascertain the truth or otherwise of the assertion that the parties were involved in a currency exchange business and any flow of funds between them was in furtherance of the business. This is clearly a central issue which is denied by the plaintiffs.

[23]   Similarly, the  electronic  correspondence  and  communications  between  Ms Peng and the plaintiffs shed light on the nature of their relationship and dealings. Ms Peng discovered some of these WeChat messages from  her  personal  mobile. Ms Peng maintains that she does not have access to all such records as her “work” mobile phone was returned to the plaintiffs. The plaintiffs deny this.

[24]   The nub of the discovery application is whether the documents sought are relevant, whether there are sufficient grounds for believing that the documents sought exist and whether an order for discovery is proportionate.5 After weighing and balancing all these matters, the Court should stand back and assess whether the order for particular discovery is appropriate.

[25]   The pleadings are paramount in any assessment of relevance. Pleadings define the scope of the issues between the parties and determine the ambit of relevance. In the circumstances of this case, however, there is considerable evidence already filed because of the applications for freezing orders and subsequent applications to vary the freezing orders against the defendants. This means that the Court is assisted in determining the issues between the parties not just by the pleadings but by reference to the evidence filed, so far as that relates to the substantive contest between them. Having said that, it is still critical that the pleadings are adequately particularised. It may well be that amended pleadings will be required to properly define the issues.

[26]   Mr Scampion is critical of the lack of specificity of the defendants’ pleading and submits that resorting to the evidence filed in support of an opposition to the freezing orders is an inadequate basis for orders for discovery. He says that the defendants’ application casts the net too widely; the defendants should replead their case first since the discovery application puts the cart before the horse and over- reaches. At a more granular level, he submits that the time period for which financial records are sought, not just from the plaintiffs but also from third parties, cannot be justified after May 2018 when Ms Peng left and the proceeding was brought. Material subsequent to that must be irrelevant to the pleaded case.

[27]    Mr Zhang’s riposte is that while he accepts there is a level of generality in the pleaded case, brought about by information asymmetry, there is enough in the circumstances and the evidence before the Court to establish relevance. In this respect, Mr Zhang relies on Assa Abloy Limited v Allegion Limited.6

5      Assa Abloy Limited v Allegion Limited [2015] NZHC 2760 at [9]–[14].

6      Assa Abloy Limited v Allegion Limited [2015] NZHC 2760.

[28]   As to the time period for the bank statements, Mr Zhang submits that it is necessary for statements beyond May 2018 to be discovered to show the continuation of the plaintiffs’ currency exchange business rather than a business solely conducted by Ms Peng. While I accept this in the abstract, in my view, the issue of proportionality comes into play at this point. I am not persuaded that the date range needs to extend much beyond the date on which Ms Peng left.

[29]   A separate class of documents sought by the defendants is said to relate to whether the alleged loan funds belonged to the plaintiffs. They seek documents relating to the plaintiffs’ acquisition of funds in China and subsequent transfer to Wei Wang. Mr Zhang submits that this class of documents is material as if the money did not belong to the plaintiffs, it cannot have been the subject of loan to Ms Peng.

[30]   In my view, this is a very broad proposition. There is merit to Mr Scampion’s submission that the defendants are overreaching by seeking to find evidence of the source of the plaintiffs’ funds before funds were transferred to Wang Wei in 2014 or 2015. This is not an appropriate forum to try the case to decide the ultimate relevance of this material. At this stage, it appears to me the category is both too broad and incapable of clear temporal definition. As Mr Scampion submits, what would define the beginning of the relevant period to ascertain the source of funds? It appears from some affidavit evidence that the source of funds would have to be traced back to before 2015 or even 2014. Based on the material before me, and particularly the pleadings, I consider that it can be no more than marginally relevant, if at all, and to make an order would be disproportionate.

[31]Rule 8.19 of the High Court rules provides:

8.19Order for particular discovery against party after proceeding commenced

If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered

1 or more documents or a group of documents that should have been discovered, the Judge may order that party—

(a)to file an affidavit stating—

(i)whether the documents are or have been in the party’s control; and

(ii)if they have been but are no longer in the party’s control, the party’s best knowledge and belief as to when the documents ceased to be in the party’s control and who now has control of them; and

(b)to serve the affidavit on the other party or parties; and

(c)if the documents are in the person’s control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.

[32]   It is clear from the terms of this rule that the Court is entitled to rely on evidence or from the nature or circumstances of the case to satisfy itself that there are grounds for believing a party has not discovered one or more documents or a group of documents. I am satisfied in this case that such grounds exist.

[33]   I am also satisfied that the class of documents identified below should have been discovered once the counter-claim was filed by the defendants. As to relevance, while I accept that the current pleadings are drawn at a level of generality, I also accept that this is most likely due to the information asymmetry between the parties. It is palpably clear that one of the central disputed issues is the nature of the relationship between the parties and whether the plaintiffs were operating a currency exchange business in conjunction with Ms Peng. It is typical for such businesses to use third party accounts for transactions in view of the de-risking policy of major New Zealand banks. The use of these accounts can indicate the existence of a currency exchange business.

[34]   I accept that the grounds for the application for further and better discovery/particular discovery are made out. I make the following orders:

(a)The plaintiffs are to file affidavits within 28 days stating whether the following documents or classes of documents are or have been in their control:

(i)Correspondence (including electronic messaging by WeChat or otherwise) with Ms Peng for the period 1 February 2017 to 4 April 2018;

(ii)Bank statements of all bank accounts held by the plaintiffs jointly or individually, or held in the names of third parties Danzen Quncuo or Abudula Alapati (third party accounts) where the plaintiffs, or any of them have access to or control such  third-party  accounts  in  the  period  1April   2017  to   21 August 2018;

(iii)Transactional records for Jun Jin’s Alipay and WeChat wallet for the period 1 April 2017 to 21 August 2018.

(b)if they have been but are no longer in their control, their best knowledge and belief as to when the documents ceased to be in their control and who now has control of them; and

(i)to serve the affidavits on the defendants; and

(ii)to make those documents in their control available for inspection, in accordance with rule 8.27, to the defendants.

[35]    In the current situation in New Zealand (Covid-19 Alert level 4) there needs to be some flexibility built into timetable orders and in respect of the manner of compliance.

[36]    I have already extended time for compliance in these orders beyond what would be normal to reflect the extraordinary situation in New Zealand. In the event that the plaintiffs are unable to comply with these orders within 28 days, they should notify the defendants in the first place with an explanation. If an extension of the timetable is unable to be resolved between the parties, the plaintiffs should notify the case manager by email to seek an enlargement.

[37]   The affidavit required by these rules may, in the first instance should Alert Level 4 continue, be unsworn. If so, it should include the following statements by the deponents:

(a)confirming the truth and accuracy of the affidavit; and

(b)making the affidavit in the knowledge that it is to be used in Court proceedings; and

(c)confirming awareness that it is an offence to make an affidavit that they know to be false or intended to mislead.

[38]    I also urge the parties to provide informal discovery of documents within the terms of the order in the event of delays to formal compliance.

Application for substituted service - Wei Wang, Abudula Alapati and Danzen Quncuo

[39]   The application before the Court dated 22 August 2019 seeks an order for substituted service on Wei Wang, a non-party against whom a discovery order is sought. Wei Wang lives in China. The plaintiffs intended that he travel to New Zealand last year to give evidence for the plaintiffs at trial. When he was not able to travel for medical reasons, the trial was vacated by consent of the parties. He is said to be a key witness for the plaintiffs with a close association.

[40]   Before me, Mr Zhang seeks to expand that application to include orders for substituted service in respect of Mr Alapati and Ms Quncuo, customers of the ASB and ANZ banks respectively. Considerations of substituted service for the non-party applications against the banks were triggered by this Court when the matter came before it on the Duty Judge list. I directed service on the two account holders before the applications against the ASB and ANZ could be substantively determined.7 This explains why they were not included in the original application for substituted service. Nonetheless, Mr Scampion takes this point, albeit faintly.

7      For the sake of completeness, neither the ASB nor ANZ take any position on the application for non-party discovery.

[41]    I am prepared to determine the orally amended application for two reasons. First, the defendants’ memorandum dated 4 September 2019 expressly refers to the need for a half-day interlocutory hearing to deal with “substituted service orders on non-parties”. The Minute of Wylie J dated 5 September 2019 makes directions which reference this. Secondly, Mr Scampion advises that the only contest in respect of the non-party applications is the futility of an order for substituted service on the plaintiffs as they maintain they do not have up  to  date  contact  details  for  Mr Alapati  or  Ms Quncuo, despite the previous association.

[42]   By way of context, during the relevant period, Ms Peng transferred money to a bank account in the name of Ms Quncuo which the plaintiffs allege was repayment of the loan to Ms Peng. The plaintiffs plead in their Reply to Statement of Defence and Defence to Counterclaim dated 29 July 2019 that Ms Quncuo is a friend of the first plaintiff. Ms Peng asserts that  funds  were  transferred  from  her  account  to Ms Quncuo’s account as part of the currency exchange business. Mr Zhang submits that bank statements for these accounts would verify Ms Peng’s version of events, presumably as they would show a volume and pattern of transaction characteristic of money remittance through third party accounts.

[43]   Similarly, the plaintiffs themselves allege that Mr Fuati transferred money to Ms Peng through accounts in the name of Mr Alapati. Ms Peng contends that this account was another third-party account used by the plaintiffs.

[44]   If this is correct, then it follows that the plaintiffs, or either of them, actually control or have access to these bank accounts themselves and, if so, would have an ongoing obligation to disclose the statements since the documents would also be within their control.

[45]   The application in respect of Wei Wang sought an order for service originally on plaintiffs’ counsel and then on the plaintiffs’ solicitors.8 At the hearing, Mr Zhang shifted again and suggested that an order for service on the plaintiffs rather than their legal advisors may be sufficient. I consider there is little or no difference between these

8      Initially the application was for substituted service on plaintiffs’ counsel but Mr Zhang acknowledged that this was not appropriate.

two positions since the address for service of the plaintiffs is their solicitors in any event. Mr Scampion proposed a further alternative after taking instructions which is to provide to Mr Zhang the most recent known email address for Wei Wang.

[46]   As  for  an  order  in  respect  of  Danzen  Quncuo  and  Abudula  Alapati,  Mr Scampion acknowledged the defendants’ quandary since they have no means of knowing how to find these individuals or even whether they reside in New Zealand. This makes it practically burdensome for the defendants. It is clear, however, and as I apprehend it, not disputed, that the plaintiffs had contact details for them at some stage.

[47]   Orders for substituted served may be granted where reasonable efforts have been made to serve a document and either the document has come to the knowledge of the person to be served or it cannot be promptly served.9

[48]Rule 6.8 of the High Court Rules reads:

6.8      Substituted service

(1)If reasonable efforts have been made to serve a document by a method permitted or required under these rules, and either the document has come to the knowledge of the person to be served or it cannot be promptly served, the court may—

(a)direct—

(i)that instead of service, specified steps be taken that are likely to bring the document to the notice of the person to be served; and

(ii)that the document be treated as served on the happening of a specified event, or on the expiry of a specified time:

(b)when steps have been taken for the purpose of bringing, or which have a tendency to bring, the document to the notice of the person on whom it is required to be served, direct that the document be treated as served on that person on a specified date:

(c)subject to any conditions that the court thinks just to impose, dispense with service of a document on a person and give to the party by whom the document is required to be served leave to proceed as if the document had been served.

9      High Court Rules 2016, r 6.8.

(2)If a direction is given under subclause (1)(a) in respect of a document, the document must be treated as having been served at the place—

(a)at which the document is likely to have come to the notice of the person to be served; or

(b)where that person was or is likely to have been on the happening of the event or the expiry of the time specified under subclause (1)(a)(ii).

[49]   I am satisfied on the evidence that orders for substituted service are warranted and the grounds made out. I therefore make the following orders:

(a)Directing the plaintiffs to provide to the defendants’ solicitors the most recent electronic contact details for Wei Wang within 5 working days;

(b)Service of the application for non-party discovery on Wei Wang is deemed effective by:

(i)emailing or otherwise electronically communicating the application for non-party discovery and supporting affidavit to Wei Wang in reliance on the electronic contact details provided by the plaintiffs; and

(ii)re-serving the application for non-party discovery and supporting affidavit on the plaintiffs’ solicitor, Lucy Chu at Lucy Chu Lawyers.

[50]   The application for substituted service in respect of non-party discovery against the ANZ and ASB, directed by this Court to be served on Danzen Quncuo and Abudula Alapati, presents a more difficult practical problem for the defendants. Nonetheless, I am satisfied that the plaintiffs’ own pleading provides a workable solution.

[51]   In addition to the orders made at [49] I make the following directions and orders:

(a)I direct the ANZ and ASB to forward the application for non-party discovery of bank statements of accounts held by Danzen Quncuo and Abdula Alapati and supporting affidavit to their respective customers by electronic means and to confirm they have done so by memorandum to the Court within 28 days;

(b)I direct the plaintiffs to forward the application for non-party discovery of bank statements of accounts held by Danzen Quncuo and Abdula Alapati and supporting affidavits to Ms Quncuo and Mr Alapati to their last known electronic address and to confirm by memorandum to the Court that they have done so within 28 days;

(c)Service of the applications is deemed effective once:

(i)The Court receives confirmation from the ANZ and ASB as to

(a)   above and from the plaintiffs as to (b) above.

Costs

[52]   The defendants have largely succeeded in their applications. They are entitled to costs on a 2B basis. Costs are to include steps taken in respect of the plaintiffs’ applications which I have deemed abandoned. While Mr Scampion urged me to reserve costs on the plaintiffs’ application in case it should be resurrected, it is more appropriate to deal with costs now. If the application is resurrected in future, the impact of costs paid at this time can be factored into any future application for costs.

[53]   If the parties are unable to agree on the quantum of costs on a 2B basis, sequential memoranda are to be filed within 21 days, of no more than 3 pages in length. In that event, I will deal with the question of costs on the papers if necessary.

………………………………………

Walker