Gong v Zhang
[2019] NZHC 574
•26 March 2019
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV-2018-454-61
[2019] NZHC 574
UNDER the Property Law Act 2007 IN THE MATTER
of application under Part 6 Subpart of the Act
BETWEEN
YAOMING GONG
Plaintiff
AND
SHIJUN ZHANG
First Defendant
SHIJUN ZHANG AND JIAN HUA HOU (AS TRUSTEES), TRUST NAME UNKNOWN
Second Defendants
Hearing: 14 February 2019
(Further submissions and evidence filed 21 February 2019 and 26 March 2019)
Appearances:
S F Clark for Plaintiff
Judgment:
26 March 2019
JUDGMENT OF CLARK J
Introduction
[1] On 8 May 2018 the plaintiff, Dr Gong, obtained summary judgment against the first defendant for the sum of $604,985.29 plus future interest (the judgment debt).
[2] The first defendant has not paid the judgment debt. The plaintiff has filed this proceeding under the Property Law Act 2007 (the Act). His case is that as a consequence of the first defendant’s disposition of property which was subject to a
GONG v ZHANG [2019] NZHC 574 [26 March 2019]
freezing order, the first defendant is unable to pay the judgment debt. The plaintiff seeks either:
(a)an order requiring the second defendants to pay the judgment debt to the first defendant; or
(b)an order vesting in the first defendant the property at 25D Riverglade Drive, Hamilton, Certificate of Title SA67D/214 (the Property).
[3]The claim proceeded by way of a formal proof hearing.
Background
[4] The plaintiff and first defendant have been in litigation since 2014 when Dr Gong commenced two proceedings against Mr Zhang.
[5] It is not necessary for the purpose of determining the claim before me that I traverse the history to the disputes. It is touched upon in a High Court judgment dealing with interrogatories and discovery disputes1 and in the judgment of the High Court delivered 15 April 2016 declining the first defendant’s application to set aside or vary freezing and ancillary orders made on 27 November 2015.2
[6] There is also a decision of the High Court in a third proceeding granting Dr Gong’s application for an interim freezing order over the Property, along with an ancillary order requiring Mr Zhang to file and serve a list of assets. That judgment was delivered on 1 March 2018.3
[7]For the purpose of the present claim the following are the key pleaded facts:
(a)On 22 December 2014, in the course of the two proceedings to which I refer at [4] above, the first defendant disposed of his major asset, the Property, to a trust. The Property was transferred to Shijun Zhang and
1 Gong v Zhang [2014] NZHC 2838.
2 Gong v Zhang [2016] NZHC 705 at [64].
3 Gong v Zhang [2018] NZHC 297.
Jian Hua Hou presumed to be the trustees of the trust to which the transfer was made.
(b)The plaintiff became aware of the transfer and, on 5 June 2015, placed the first defendant on notice that the transfer was considered a disposition of property that prejudiced the plaintiff as a creditor.
(c)The plaintiff and first defendant entered into a Deed of Settlement dated 18 May 2016. Under the Deed the first defendant was required to pay to the plaintiff the sum of $708,795.15 over an agreed period.
(d)The first defendant defaulted on his obligation.
(e)The first defendant, by way of affidavit affirmed 13 April 2018, deposed to his only asset in New Zealand and China being a black Jaguar, registration FWR923, and that he was not then earning an income.
(f)The plaintiff obtained summary judgment in respect of the outstanding debt on 8 May 2018 in the sum of $604,985.29 plus future interest. This is the judgment debt to which I have referred at [1]–[2] above.
(g)The first defendant has not paid the judgment debt.
(h)The plaintiff commenced a bankruptcy process against the first defendant who was adjudicated bankrupt on 5 October 2018.
(i)As a consequence of the first defendant’s disposition of the Property, the first defendant is not able to pay the judgment debt.
[8] In terms of his pleaded cause of action, the plaintiff says the first defendant disposed of a major asset to the second defendants with intent to prejudice the plaintiff, by way of gift, or without receiving reasonably equivalent value in exchange. The first defendant became insolvent as a result of making the disposition or should have reasonably believed the disposition would incur debt beyond his ability to pay.
[9] The plaintiff pleads he is prejudiced by the disposition of property in that the first defendant:
(a)defaulted on the Deed of Settlement;
(b)has not paid the judgment debt; and
(c)has no assets to make payment.
[10] Accordingly, the plaintiff seeks either of the two orders which I have set out above at [2].
A claim to restore property for plaintiff’s benefit
[11] The claim is made under subpart 6 of the Act. In broad terms, the purpose of the subpart is to enable a court to order that property acquired or received under a prejudicial disposition made by a debtor be restored for the benefit of creditors.4
[12] For a claim under subpart 6 to succeed, the following statutory prerequisites must be satisfied:
(i)There must be a disposition within the meaning of s 345(2).
(ii)The disposition must have been made after 31 December 2007.5
(iii)The disposition was made with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.6
(iv)The person who made the disposition (the debtor):7
(a)was insolvent at the time, or became insolvent as a result, of the disposition; or
4 Property Law Act 2007, s 344.
5 Section 346(1).
6 Section 346(1)(b).
7 Section 346(2).
(b)was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
(v)The plaintiff is a creditor of the party making the disposition.8
(vi)The application, together with a notice communicating the effect of ss 348 and 349, has been served on the person in whose favour the disposition of property was made and any other person from whom property or compensation is sought through the application.9
(vii)The person who acquired the property did not do so in good faith, for valuable consideration and without knowledge of the fact that it had been subject of a disposition to which subpart 6 applies.10
[13] I now consider whether each of the statutory preconditions for a successful claim under subpart 6 is met.
A “disposition” within the meaning of s 345(2)?
[14] For the purposes of subpart 6, unless the context otherwise requires, the meaning of “disposition” includes “a conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity”.11
[15] The original transfer of the Property to Jian Hua Hou and Shijun Zhang was on 8 April 2011. The Computer Freehold Register records a transfer of the Property on 22 December 2014 to Jian Hua Hou and Shijun Zhang. This second transfer was thought to be into a trust but that was not proved from the register itself. However, an
8 Section 347(1)(a).
9 Section 347(3).
10 Section 349.
11 Section 345(2)(a).
affidavit of Mr Zhang affirmed 4 February 2016 puts the point beyond doubt. Mr Zhang deposed to having, with his wife, transferred the Property into a trust on 22 December 2014.
[16] Accordingly, the plaintiff has established the Property was transferred in terms of the definition of disposition in s 345(2)(a) of the Act.
Disposition made after 31 December 2007?
[17] Subpart 6 applies only to dispositions of property made after 31 December 2007.12
[18] The disposition having been made on 22 December 2014, this statutory requirement is met.
Disposition under 346(1)(b)?
[19] In his written synopsis, counsel for the plaintiff, Mr Clark, submitted the first defendant intended to prejudice the plaintiff by the transfer of the Property to the trust. In oral argument, Mr Clark placed greater emphasis on the disposition being by way of gift.13 I accept the only realistic inference to be drawn from the evidence is that the disposition of the property was by way of gift to the trust.
(a)Mr Zhang’s evidence is that the Property was transferred to a trust.
(b)There is no evidence of a loan back. When the first defendant was asked to disclose his assets he did so but disclosed no loan back which he would have been required to disclose as an asset. Mr Zhang swore a further affidavit in April 2018 in which he deposed to:
… not presently earning any income. The only asset I have in New Zealand is a Black Jaguar FWR923. I have no other assets in New Zealand or China.
12 Property Law Act, s 346(1).
13 Section 346(1)(b).
[20] The first defendant’s own sworn evidence of his assets, in combination with his affidavit evidence as to his transfer of the Property into a trust, strongly suggests the transfer was by way of gift. Accordingly, I find the disposition is one to which subpart 6 applies.
Does s 346(2) apply?
[21]Section 346(2) applies only to a debtor who —
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
…
(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
[22] Dr Gong’s position is that the first defendant became insolvent as a result of the disposition of the Property because, as at the date of disposition on 22 December 2014, he owed creditors some $5 million and had declared assets worth $40,000, along with two cars and household furniture.14
[23] It is not necessary for the Court to determine whether the first defendant was insolvent or became insolvent as a result of making the disposition because I have relied on the third limb of s 346(2) in reaching my conclusion that s 346(2) applies to the first defendant.
[24] Citing the decision of the Supreme Court in Regal Castings Ltd v Lightbody, Mr Clark submitted, issues of insolvency aside, s 346(2) applied to the first defendant because it can be shown he intended to incur, or believed, or reasonably should have believed he would incur debts beyond his ability to pay.15
[25] One of the issues for determination in Regal Castings was the nature of the proof required to demonstrate “intent to defraud” in s 60(1) of the Property Law Act
14 A letter on behalf of the Official Assignee on 7 January 2019 addressed to counsel for Dr Gong refers to the fact that Mr Zhang was advanced RMB 20 million (approximately NZD 4 million) in 2008. In April 2017 The New Future Family Trust apparently agreed to provide a guarantee for the principle sum plus interest owing under the loan using the Property as security.
15 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.
1952. Blanchard J observed the expression has been regarded as shorthand for “intent to hinder, delay or defeat a creditor in the exercise of any right of recourse of the creditor in respect of property of the debtor” and that is how the concept is now expressed in s 345(1)(a) of the Act.16 At to what constitutes intent, Blanchard J said:17
Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss.
[26] Even if it was not his actual wish to cause Dr Gong loss, the first defendant must have known that by his alienation of the property, he exposed Dr Gong to a “significantly enhanced risk” of not being able to recover the debt which the first defendant owed to him. In his disposition of the Property to the trust by way of gift, the first defendant risked Dr Gong’s rights to recovery of the sum owed. The disposition is a classic example of the simple case described in Regal Castings as “one in which an insolvent debtor has gifted a substantial asset to … trustees of a family trust, thereby subtracting from an already insufficient quantum of assets”.18 The consequence for Dr Gong is so obvious it is really beyond doubt the first defendant “must be taken to have intended it”.19
[27] In summary, I conclude that, at the time he disposed of the Property, the first defendant would have been aware the disposition exposed Dr Gong to a significantly enhanced risk of not recovering the judgment debt owing to him. Dr Gong first commenced proceedings against the first defendant in 2014. The freezing order made on 27 November 2015 was extended on 11 December 2015 and again, on 18 December 2015.20 The disposition occurred on 22 December 2014. At this time the first defendant also owed his sister-in-law, Aihua Hou, approximately $4,000,000. I have no doubt that, given the circumstances in which the first defendant disposed of his last substantial realisable asset capable of meeting his debt to Dr Gong, at the very
16 At [52].
17 At [54].
18 At [55].
19 By analogy with [55].
20 Gong v Zhang, above n 2, at [12]–[15].
least he reasonably should have believed that in his disposition of the Property he would incur debts beyond his ability to pay. Accordingly, s 346(2) applies.
Does the application meet the requirements of s 347?
[28]Section 347 provides:
347 Application for order under section 348
(1)Only the following may apply for an order under section 348:
(a)a creditor who claims to be prejudiced by a disposition of property to which this subpart applies (whether the disposition was made before or after the debtor became indebted to the creditor):
(b)the liquidator, if the debtor is a company in liquidation or an overseas company being liquidated under section 342 of the Companies Act 1993.
(2)The application must specify the disposition claimed to be prejudicial, and the property or compensation sought through the application.
(3)The application, together with a notice communicating the effect of sections 348 and 349, must be served on—
(a)the person in whose favour the disposition of property was made; and
(b)any other person from whom property or compensation is sought through the application
[29] Section 347(1)(a) is satisfied. The plaintiff is a creditor who claims to be prejudiced by the disposition of property to which subpart 6 applies.
[30] Summary judgment for the plaintiff was given on 8 May 2018 and the following orders were made:
(a)Judgment in the sum of $539,695.15;
(b)Interest pursuant to clause 7 of the Deed up to 8 May 2018 calculated at $19,327.00;
(c)Interest on the missed payment commencing from 20 December 2016 to 8 May 2018 calculated at $20,547.59;
(d)Future interest pursuant to HCR 11.47 and the Interest on Money Claims Act 2016;
(e)Legal costs on a Solicitor client basis pursuant to clause 13 of the Deed calculated at $25,415.55;
(f)The freezing orders made by her Honour Justice Cull on 1 March 2018 and 17 April 2018 are continued until further order of the Court, or until this judgment is fully satisfied.
[31]As required by s 347(2), the statement of claim:
(a)specifies the disposition,21 pleads the prejudicial consequence for the plaintiff of the first defendant’s disposition (that the first defendant is unable to pay the judgment debt);22 and
(b)specifies the nature of the property or compensation sought, namely, the return of the property to the first defendant allowing for all creditors to recover or alternatively that the second defendants pay the judgment sum to the first defendant.
[32] Finally, in terms of s 347(3), an affidavit for substituted service filed on 20 August 2018 confirms the defendants were served in accordance with the direction for substituted service given 10 August 2018.
[33] The notice communicating the effect of ss 348 and 349 was served on 19 and 20 October 2018. Although that evidence was not initially before the Court at the time of the hearing, it was provided subsequently.
Section 348 order?
[34] Section 348 enables the court to set aside dispositions of property if satisfied the applicant for the order has been prejudiced by a disposition to which subpart 6 applies.23
[35] The plaintiff is owed more than $600,000. The first defendant is bankrupt. That much is clear from a letter dated 7 January 2019 on behalf of the Official Assignee to the plaintiff’s solicitors. The letter discloses an advance of some
21 Statement of claim dated 6 July 2018 at [4].
22 At [12].
23 Section 348(1)(b).
RMB 20 million by the first defendant’s sister-in-law to the first defendant in 2008. The letter states:
It appears that in April 2017 the New Future Family Trust agreed to provide a guarantee for the principal sum plus interest owing under the loan. The property at 25D Riverglade Drive was used as security. More information has been sought.
[36] It may be inferred from the Official Assignee’s letter, and the first defendant’s disclosure of assets, that he has very little in the way of property to satisfy his debts.
[37] A court must not make an order under s 348 against a person who acquired property in respect of which it could otherwise make the order if the person proves the property was acquired for valuable consideration, in good faith and without knowledge of the fact the property was subject to a disposition to which subpart 6 applies.24
[38] As Mr Clark submitted, this threshold has not been, and cannot be, met. In light of my finding at [19] that the disposition of property was by way of gift, it follows the second defendants did not acquire the Property for valuable consideration and s 349 does not therefore operate as a bar to the making of an order under s 348. It is therefore not necessary to consider whether the second defendants received the Property in good faith and without knowledge of the fact the Property was subject to a disposition to which subpart 6 applies.
[39] Dr Gong seeks either an order vesting the property in the first defendant (in this case the Official Assignee) or, alternatively, an order requiring the first defendant to pay reasonable compensation.
[40] Dr Gong prefers the vesting option. An order for reasonable compensation offers slim prospects for recovery of the debt amount. The first defendant owes approximately $4 million to Aihua Hou. If the Official Assignee were to take steps to liquidate the trust and distribute the first defendant’s remaining assets on a pro-rata basis, it is unlikely there would be sufficient funds to compensate Dr Gong by an order for reasonable compensation unless the Official Assignee proves the loan to Aihua Hou is not legitimate or that the second mortgage to Aihua Hou is voidable.
24 Section 349.
[41] Mr Clark submitted Dr Gong will have a better chance of recovery if the property is vested in the first defendant. The property is valued at $2.06 million. Two mortgages are registered over the property to BNZ and Aihua Hou respectively. It follows that upon the vesting order, the Official Assignee will liquidate and distribute the assets first to BNZ as the priority mortgage holder, and second to Aihua Hou. The remaining sum will be available to satisfy Dr Gong’s judgment debt.
[42] I am satisfied it is appropriate in the circumstances to make an order pursuant to s 348 vesting the property in the first defendant.
Result
[43]The plaintiff’s claim succeeds.
[44] An order is made vesting in the first defendant the property at 25D Riverglade Drive, Hamilton, Certificate of Title SA67D/214, Legal Description Lot 1 Deposited Plan South Auckland 85290.
[45] The plaintiff is entitled to costs which I award on a solicitor client basis in accordance with the Deed of Settlement between the parties, paragraph [13] of which provides:
If any amount is not paid in accordance with this Deed Mr Zhang is liable to Dr Gong for the legal costs of recovery on a solicitor client basis.
Karen Clark J
Solicitors:
Cooper Rapley Lawyers, Palmerston North for Plaintiff
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