Gracewood International Limited v Zhan
[2023] NZHC 3111
•3 November 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-416
[2023] NZHC 3111
BETWEEN GRACEWOOD INTERNATIONAL LIMITED
ApplicantAND
XIANGMING ZHAN
First Respondent
HONGJUN YANG
Second Respondent
Hearing: 15 May 2023 Appearances:
M A Corlett KC and Y Lee for Applicant
D M Salmon KC and S J Humphrey for First Respondent
Judgment:
3 November 2023
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 3 November 2023 at 3.15 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date: ...................................
Solicitors: Gilbert Walker, Auckland
Lee Salmon Long, Auckland
Counsel:M A Corlett KC, Auckland D M Salmon KC, Auckland
GRACEWOOD INTERNATIONAL LTD v ZHAN [2023] NZHC 3111 [3 November 2023]
Introduction
[1] On 27 February 2023, I granted an on notice originating application by the applicant (“Gracewood”) for freezing and ancillary orders against the first respondent (“Mr Zhan”).1 I dismissed the application insofar as it was against the second respondent, Ms Yang, who is Mr Zhan’s former wife.
[2] The freezing orders against Mr Zhan prohibit him from dealing with or disposing of assets in which he is interested, wherever they may be, up to a value of US$32 million. The ancillary orders require Mr Zhan to give discovery of information concerning those assets, including their whereabouts and value.
[3] This judgment determines an application by Mr Zhan dated 20 March 2023 to discharge the orders in their entirety, alternatively to vary several of them. The application is made pursuant to High Court Rules 2016, rr 32.6 and 32.8. Rule 32.6 makes provision for the form and terms of a freezing order. Rule 32.8 permits the respondent to apply to the Court to discharge or vary the order(s).
[4] In the absence of special circumstances, r 32.6(4) requires an applicant for a freezing order to file an undertaking to pay such damages to the respondent as the respondent may sustain as a result of the orders. Mr Zhan now seeks to discharge the freezing and ancillary orders on grounds relating to Gracewood’s undertaking.
[5] If I decline to discharge the orders, Mr Zhan seeks a discharge of [7] of the freezing orders and a variation of two of the ancillary orders, on grounds which I discuss below.
[6]Gracewood opposes the application, also on grounds discussed below.
Background
[7] The background to Gracewood’s originating application is set out in my judgment of 27 February 2023. The following is sufficient to put the matters discussed below in context.
1 Gracewood International Ltd v Zhan [2023] NZHC 307.
[8] At all material times, Gracewood, a company incorporated in Hong Kong, operated as a wholesale distributor of petroleum and petroleum products. Gracewood has commenced proceedings against Mr Zhan in Hong Kong, seeking to recover a substantial sum from him, in the order of US$32 million. The sum is claimed pursuant to a personal guarantee which Mr Zhan is alleged to have given in May 2002, as security for sums owed to Gracewood by Guangdong Province HuaGuang Light Industrial Co (“HuaGuang”), a company in which Mr Zhan was interested.
[9] Mr Zhan is alleged to have left China shortly after giving the guarantee, and thereafter to have relocated to New Zealand.
[10] In June 2021, Gracewood discovered that Mr Zhan was living in New Zealand, and in March 2022 it made the originating application which culminated in the orders that are the subject of this application.
[11] Gracewood’s proceedings in Hong Kong face the complication that Mr Zhan was adjudged bankrupt by the High Court of Hong Kong in 2005 (“bankruptcy order”). Mr Zhan was discharged from bankruptcy in 2009. The effect of the order and of Mr Zhan’s subsequent discharge on Gracewood’s proceedings is unclear but, in any event, Gracewood is seeking to have the bankruptcy order annulled on the ground the Court did not have jurisdiction to make the order. Mr Zhan is opposing Gracewood’s endeavours in this regard.
Application to discharge
[12] An application pursuant to r 32.8 is to be determined in accordance with r 7.49, which in turn permits a party affected by an interlocutory order to apply to the Court to vary or rescind that order.
[13] Such an application will only be the proper course in particular circumstances, including if there was not full argument when the application was heard; if there was full argument, there has been a material change in circumstances; or the interests of justice require the order to be revisited.
[14] An application for review is not a means to relitigate an issue the Court has already determined. An appeal is the appropriate course if the affected party considers the Court has erred in its decision.2
[15] Mr Salmon KC, counsel for Mr Zhan, contends that the substance of Gracewood’s undertaking as to damages is in doubt, and was not the subject of full argument at the hearing in August 2022, the emphasis being on “full”.
[16] Moreover, Mr Salmon submits that additional evidence regarding Gracewood’s financial circumstances has come to light since and constitutes a material change in circumstances. More generally, he submits the interests of justice require the orders to be revisited.
[17] In response, Mr Corlett KC, counsel for Gracewood, submits that Mr Zhan is seeking to relitigate an issue that has already been determined by the Court. Gracewood’s application was on notice; there was an opportunity for full argument on all issues including the sufficiency of the undertaking; and there has been no material change in circumstances.3 Mr Corlett also submits that it is not in the interests of justice to discharge or vary the orders as Mr Zhan seeks. If that is in prospect, Mr Corlett submits I should order Gracewood to provide security for the undertaking pursuant to r 32.6(5).
[18]I turn now to the evidence regarding Gracewood’s undertaking.
Chronology
[19] In an affidavit filed in support of Gracewood’s originating application, Mr Kai Wa Wong, Gracewood’s managing director, set out the background to Gracewood’s claim against Mr Zhan in Hong Kong. This included Gracewood’s trading history with the debtor company; the concerns which developed over its late payment for various shipments; the additional security Gracewood obtained from the debtor company and its parent; the circumstances in which Mr Zhan gave the personal
Crequer v Chief Executive of the Ministry of Social Development [2014] NZCA 284 at [19];
Dotcom v Attorney-General [2017] NZHC 1621; and Harper v Love [2022] NZHC 2256 at [18].
3 Howard v Accident Compensation Corporation [2013] NZHC 1004 at [4].
guarantee on which Gracewood relies; and then Gracewood’s discovery that Mr Zhan had left China and its efforts to locate him.
[20] As to Gracewood’s undertaking as to damages, Mr Wong said that Gracewood’s financial position was sound and that it was able to meet any damages which might be ordered against it. Mr Wong attached Gracewood’s then most recent financial statements, which were for the year ended 31 March 2020 and which Mr Wong said recorded cash on hand of approximately NZ$3.8 million.
[21] Mr Zhan (and Ms Yang of course) filed evidence in reply. Then, in late-July 2022, Mr Zhan filed a further affidavit annexing a copy of a judgment obtained by United Overseas Bank Ltd (“UOB”) of Singapore against Gracewood, “GNT” which is a Gracewood subsidiary, and Mr Wong in the High Court of Hong Kong in October 2021 (“UOB judgment”).
[22] It appears from the judgment that UOB had advanced a substantial sum to Gracewood of up to US$40 million, under various loan facilities. UOB had made demand for repayment of US$20 million of the funds so advanced, and then commenced proceedings when the demand was not met. It also appears from the judgment that UOB was seeking to enforce securities that it held, including mortgages of three properties owned by Gracewood and GNT.
[23] The Court found the defendants, including Gracewood, liable to the bank for US$24.8 million plus interest. It also ordered indemnity costs, these being UOB’s contractual entitlement. The Court also ordered the defendants to give vacant possession of the mortgaged properties in the absence of payment of the sum due within 30 days.
[24] In response to this evidence, Mr Wong of Gracewood filed an affidavit, in early-August 2022, in which he said that Gracewood had largely settled matters with UOB and that overall it remained in a good financial position. Mr Wong also referred to Gracewood’s provision of security for Mr Zhan and Ms Yang’s (New Zealand) costs in amounts that they had proposed, this security comprising (NZ) $65,000 for Mr Zhan and $100,000 for Ms Yang.
[25] That was the state of the evidence on this issue at the time of the August 2022 hearing.
[26] As between Gracewood and Mr Zhan, much of that hearing was devoted to whether Gracewood had a reasonably arguable case in its proceedings against Mr Zhan in Hong Kong. Both parties had adduced evidence from experts on Hong Kong law as to the effect of the bankruptcy order and the discharge, and the prospects of annulment. That said, Gracewood’s undertaking was addressed. Mr Salmon submitted that the impact of the freezing orders on Mr Zhan would be significant and that there were reasonable grounds for the Court to be concerned that Gracewood might not be able to honour its undertaking, given the UOB judgment.
[27]I addressed the matter in [56] and [57] of my judgment, as follows:4
[56] There is one other point I should mention, which goes to criticism of Gracewood’s level of disclosure and the comfort that can be taken from its undertaking in damages. In his first affidavit, Mr Wong referred to Gracewood’s financial position as of 31 March 2020 (so some two years before it made this application), stating that as at that date it had cash on hand of approximately NZ$3.8 million. Then, in an affidavit sworn shortly before the hearing, Mr Zhan drew to the Court’s attention a judgment entered against Gracewood in the High Court of Hong Kong in October 2021, requiring Gracewood to pay damages of US$49.2 million, plus interest and costs. In response, Mr Wong stated that Gracewood had “largely settled” the sum due under the judgment; that the remaining sum was in the process of being resolved; and that Gracewood remained in a good financial position. In addition, Gracewood has provided security in sums the respondents requested for costs and damages on this application.
[57] There is no doubt that Mr Wong’s first affidavit ought to have been more forthcoming than a reference to Gracewood’s financial position as at 31 March 2020. Regardless, given the most recent information, I am willing to proceed on the basis that Gracewood has the resources to meet any damages that it might be ordered to pay in respect of loss caused by the orders it seeks.
[28] Accordingly, the implications of the UOB judgment and the undertaking as to damages were both addressed at the August 2022 hearing and in my judgment.
[29] This brings me to the more recent evidence filed on the issue, in support of this present application.
4 My reference to US$49.2 million in [56] was a mistake. The principal sum due is a little less than US$24.8 million.
[30] This evidence is that, in March 2022, UOB did re-enter two of the mortgaged properties; had sold one at least by mortgagee sale by the time of Mr Wong’s August 2022 affidavit; and had sold all three by January 2023. Moreover, it sold them for sums which Mr Salmon estimates still leaves a substantial shortfall on the principal due to UOB, estimated to be in the region of US$10 million, leaving aside interest and costs.
[31] Mr Wong’s son, Mr Chi Yui Wong, responded to this evidence, stating that Gracewood was and remains in a position to honour its undertaking as to damages. First, as to the absence of financial statements beyond the year ended 31 March 2020, Mr Wong Jnr states that Gracewood wrote off the debt it contends that HuaGuang/Mr Zhan owes between 2018 and 2020. However, when Gracewood located Mr Zhan, the Hong Kong Inland Revenue Department permitted Gracewood to defer filing returns for 2021 and 2022 as there was some prospect of recovery. Gracewood is seeking a similar concession from the Department in respect of the current year.
[32] Mr Wong Jnr then refers to the security for costs already provided that is referred to above, plus additional security provided in the sum of HK$550,000 for Mr Zhan’s costs on an aspect of the Hong Kong proceedings. That sum is the equivalent of NZD110,000. Gracewood has settled with Ms Yang in respect of her costs ($20,000), with $80,000 of the original $100,000 remaining in trust in New Zealand.
[33] Turning to the position with UOB, Mr Wong Jnr states in his affidavit that following the UOB judgment, Gracewood and UOB maintained amicable communications; that in June 2022 the parties agreed that the sum due to UOB should be “realised and satisfied through a handover and resale of three of Gracewood’s properties that had been mortgaged to the UOB”; and that the properties had been sold between late-June 2022 and January 2023. Whether Mr Wong Jnr means fully or partially satisfied is unclear, but I assume he means the latter.
[34] Mr Wong Jnr also says that Gracewood did not address UOB’s claim or matters relating to the mortgagee sales in its evidence before the hearing in August 2022, as it
did not consider they related to Gracewood’s ability to meet its obligations under the undertaking.
Discussion
[35] As I said in my judgment in February 2023, Gracewood ought to have been considerably more forthcoming in its evidence prior to the August 2022 hearing. At the very least, it should have disclosed the fact of the UOB judgment; the steps UOB was taking to realise its security; and the implications for the financial statements that Gracewood had put before the Court as evidencing its sound financial position. The suggestion above, that they were not considered relevant, is not convincing.
[36] Despite that, however, I am not persuaded that the evidence now adduced alters matters particularly from the situation in August 2022. The likelihood of a prompt entry into possession by the bank is evident from the orders made in the UOB judgment, and it is a short step from a mortgagee entering into possession to a sale of the property concerned. In short, what has occurred could be readily anticipated from the judgment itself.
[37] Mr Salmon was sceptical of Mr Wong Jnr’s evidence that UOB and Gracewood remained on “amicable” terms, given the mortgagee sales. For myself, I am not so sceptical. It appears from the judgment that UOB and Gracewood have had a banking relationship since 2005 and that there were considerable negotiations before the bank commenced proceedings. But, in any event, the critical issue is whether the undertaking is sound and sufficient for the purposes of this proceeding.
[38] Because of that, I discussed with counsel the likelihood and quantum of possible loss to Mr Zhan.5
[39] Mr Salmon acknowledged that he could not identify any immediate prospect of loss to Mr Zhan and, for the following reasons, I am unable to conceive of one, or one which could not be avoided or protected against if required.
5 Sanson v Energy Products Ltd HC Auckland CIV-2009-404-5464, 4 December 2009 at [40].
[40] Mr Zhan’s evidence has been to the effect that he lives a modest life in New Zealand without regular involvement in substantial financial transactions such as, for instance, the property developments Ms Yang undertakes.
[41] As to his assets, in his affidavit of March 2023, Mr Zhan disclosed bank accounts both here and in China, and shareholdings in Chinese companies.
[42] The balances of Mr Zhan’s New Zealand accounts are trivial. Mr Zhan has not provided the balances of the bank accounts in China, his evidence being that he is unable to obtain those balances from outside the country.
[43] Of his shareholdings in Chinese companies, only two are said to be trading. There is no suggestion that any transaction in respect of any of Mr Zhan’s shareholdings is imminent.
[44] However, if that changes, appropriate steps can be taken to put the issue before the Court in the absence of an agreed resolution. The risk of any substantial loss can then be considered and, if necessary, protected against.
[45]There are two further matters I mention.
[46]There is provision for the ordering of security in r 32.6(5), which provides:
32.6 Form and further terms of freezing order
(5)If the applicant has, or may later have, insufficient assets within New Zealand to discharge the obligation created by an undertaking as to damages, the court may require the applicant to provide security for that obligation in a form and in an amount fixed by a Judge or, if the Judge so directs, the Registrar.
[47]This too remains an option if there is a real risk of loss to Mr Zhan.
[48] Lastly, insofar as concerns the interests of justice, no doubt Gracewood would say that, to the extent it is presently constrained financially, that is in large part caused by the substantial debt owed to it by HuaGuang, as to which there is no dispute. I note
that the Court of Appeal took a similar matter into account in Auckland Steel Fixers Ltd (in liq) v Watson.6
Conclusion
[49] I accept Mr Salmon’s submission that Gracewood’s lack of candour on its financial affairs has been unsatisfactory. However, I am not persuaded to rescind the freezing and ancillary orders in their entirety. The information which has become available since the August 2022 hearing does not add materially to that which was then known, or which could have been anticipated. Moreover, I am not satisfied that any substantial loss is likely to flow to Mr Zhan but, if that becomes likely, steps can be taken to address the position at the time.
Application to vary
[50] I turn now to Mr Zhan’s alternative application which is first to seek a discharge of freezing order [7] and then to vary or delete ancillary orders [3](b)(v) and [3](f).
[51] Much was made at the hearing of this application as to the circumstances in which the orders that Gracewood proposed, and which I ultimately made, had been notified to Mr Zhan and his legal advisers prior to the hearing. Those draft orders were notified to Mr Zhan and counsel but it does not seem to have been appreciated that they differed in a material respect from the form prescribed in the High Court Rules, being form G 38.
[52] I do not propose to get into the rights and wrongs of what was or was not done at the hearing in relation to the orders, but rather to deal with the matter on the merits.
Order [7]
[53]Form G 38 includes a provision which reflects r 32.6(3), which provides:
32.6 Form and further terms of freezing order
(3)The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—
6 Auckland Steel Fixers Ltd (in liq) v Watson [2015] NZCA 274.
(a)paying ordinary living expenses; or
(b)paying legal expenses related to the freezing order; or
(c)disposing of assets, or making payments, in the ordinary course of the respondent’s business, including business expenses incurred in good faith.
[54] Order [6] of Gracewood’s orders is in identical terms to the above, but its effect is confined by [7], which is not part of the prescribed form:
6.This freezing order does not prohibit you from dealing with the assets covered by the order for the purpose of—
a.paying ordinary living expenses; or
b.paying legal expenses related to the freezing order; or
c.disposing of assets, or making payments, in the ordinary course of your business, including business expenses incurred in good faith.
7.Before dealing with any asset for any of the purposes referred to in B [sic] above, the respondents shall (absent agreement between the parties) apply to the High Court by memorandum served on counsel for the applicant seeking approval of the Court to use or deal with particular assets for one or more of the described purposes.
[55] After the hearing, an issue arose as to the expenses referred to in [6](a) and (b), and in that context attention was focused on what was meant by the reference to “B” in [7]. As it turned out, that was a typographical error.
[56] In any event, agreement was reached as to how those expenses would be dealt with but the issue which now arises is the effect of [7] as regards the funding of Mr Zhan’s legal representation in the Hong Kong proceedings. Hence Mr Zhan’s application to discharge [7].
[57] I am not persuaded that [7] now serves any useful purpose insofar as it concerns the type of expense referred to in [6](a), or in [6](b) if the reference to “legal expenses related to the freezing order” means legal expenses payable to legal advisers in New Zealand and incurred in respect of the freezing orders.
[58] However, I accept that order [7] serves a purpose in relation to dealings with or the disposal of assets which have a material effect on Mr Zhan’s financial position. Equally, however, it is necessary to allow for Mr Zhan’s legal expenses in the
Hong Kong proceedings, without his having to obtain Gracewood’s prior agreement or the leave of the Court at every stage.
[59] At the hearing of this application, Mr Corlett considered it likely counsel would be able to agree a suitable arrangement between themselves. Given this, I would ask counsel to document an amended order [7]. If they are unable to agree, I shall determine the matter. My order is likely to free Mr Zhan’s hands up to a maximum level for the purpose of funding his legal representation in Hong Kong. Over and above that, Mr Zhan would need to seek Gracewood’s agreement or the leave of the Court.
Ancillary orders [3](b)(v) and [3](f)
[60] Ancillary order [3](b)(v) requires Mr Zhan to state the value of each of his current assets and liabilities. This is causing difficulty insofar as concerns Mr Zhan’s shareholdings in various Chinese companies. Mr Salmon submits that it should be sufficient simply to disclose the asset and that Mr Zhan cannot be expected to obtain a valuation to meet the terms of the order.
[61] Mr Corlett advises that, if a valuation is not available, it will be sufficient for Mr Zhan to say what he believes to be the value of each shareholding. Mr Corlett submits that Mr Zhan must know the approximate net asset position of the various companies in which he is a shareholder. This in turn will give him some indication of the value of his shareholding.
[62] Ancillary order [3](f) requires Mr Zhan to provide a comprehensive list of, and supporting evidence of, the following:
f.For each of the bank account(s) in Mr Zhan’s name and/or to which he previously held or currently holds sole or joint control (including accounts held personally, by companies of which he is/was a director (including shadow director) and any trusts of which he is a trustee or beneficiary):
i.Details of the bank name, name of the account and bank account number.
ii.Confirming the current balance of each account.
iii.Providing bank statements for the last three years for any accounts currently open.
iv.Providing bank statements for the last three years of any accounts that have been closed.
[63] Mr Salmon submits that this order is oppressive, and in fact requires Mr Zhan to “do the impossible”. He seeks that this order be confined to bank accounts in Mr Zhan’s name only, or in which he personally is a joint holder.
[64]Mr Corlett opposes any variation of this order.
[65] I do not propose to discharge the order in [3](b)(v) but it is to be varied to reflect a requirement that, in the absence of a valuation, Mr Zhan use his best efforts to state the current value.
[66] As to ancillary order [3](f), I accept that this may include numerous accounts. Again, I do not propose to discharge the order but rather it is to be varied so that Mr Zhan is to use his best efforts to supply the information addressed by the order.
Result
[67] I dismiss the application to rescind the freezing and ancillary orders made in this proceeding.
[68] Counsel are to seek to agree revised terms for Freezing Order [7] and Ancillary Orders [3](b)(v) and [3](f) and submit them to the Court.
[69]I reserve leave to apply.
Costs
[70]The parties may make submissions on costs in the absence of agreement.
Peters J
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