Hearing:	13 March 2014
Court:	Harrison, White and Venning JJ
Counsel:	G J Judd QC for Appellant N R Campbell QC for First Respondent P R Cogswell for Second Respondent
Judgment:	17 April 2014 at 11 am

JUDGMENT OF THE COURT

AThe appeal is dismissed.
BThe appellant is to pay the first and second respondents costs for a standard appeal on a Band A basis and usual disbursements.

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REASONS OF THE COURT

(Given by Venning J)

Introduction

Yao Wei He appeals against a judgment of Associate Judge Doogue declining to grant him leave to bring proceedings in the name of NZ Products International Limited (NZPIL) against Zhixiong Chen (Mr Chen Snr) and Youngzhou Chen (Mr Chen Jnr).[1]

Background

[1]Chen v He [2013] NZHC 2033.

NZPIL was incorporated on 18 June 2010. Mr He and Mr Chen Jnr are its de jure directors. Mr He and his wife hold 50 per cent of the shares in NZPIL. The balance 50 per cent of the shares are held by the Chen interests through a trustee company and Mr Chen Jnr and his wife.
Prior to the incorporation of NZPIL Mr He carried on a business which involved the purchase of New Zealand made dairy and health supplements in retail stores in New Zealand and the export of them for sale into Hong Kong and China through Mr He’s contacts in those markets.
Mr He and Mr Chen Snr were known to each other. Mr He says that Mr Chen Snr suggested that they establish a commercial joint venture (CJV) to exploit the opportunity identified by Mr He. Mr Chen Snr proposed that he provide finance to increase the scale of the operation. Mr He says that Mr Chen Snr suggested that his son, Mr Chen Jnr, be a director and the Chen interests would hold 50 per cent of the shares in the joint venture company. Mr He agreed. NZPIL was incorporated to give effect to that agreement.
Mr He says that Mr Chen Snr then advanced sums totalling $300,000 to him for the purposes of the CJV. Mr Chen Snr does not agree. He says that the $300,000 advanced to Mr He was a personal loan, which Mr He is liable for.
Mr He says Mr Chen Snr also convinced him to take a minority shareholding in another company, Hong Kong Dairy International Limited (HKDIL), on the basis that company would be used to expand the business to include sales of New Zealand seafood and wine through Mr Chen’s Snr’s contacts in Hong Kong. HKDIL was incorporated in Hong Kong. Mr He says that from February 2011 onwards, Mr Chen Snr required all NZPIL’s exports to be sold to HKDIL for distribution.
Mr He alleges that Mr Chen Snr has breached the terms of the CJV in a number of ways. Of…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading He v Chen

Details

AGLC: He v Chen [2014] NZCA 153
Case: [2014] NZCA 153
Decision Date: 17 April 2014 at 11 am

CaseChat Overview and Summary

Yao Wei He appeals against a judgment of Associate Judge Doogue, who declined to grant him leave to bring proceedings in the name of NZ Products International Limited (NZPIL) against Zhixiong Chen (Mr Chen Snr) and Youngzhou Chen (Mr Chen Jnr). The appeal concerns the validity of a proposed derivative action by NZPIL against the Chens for breach of fiduciary duty. The Court of Appeal found that the appeal should be dismissed, and the Court retains its discretion to decide whether to grant leave to pursue the derivative action, even if the company has an arguable claim against the directors.

The Court considered the threshold requirement of s 165(3)(a) of the Companies Act 1993, which must be met before the court's discretion to give leave to bring a derivative action may be exercised. The Court found that the threshold requirement was met, as the deadlock in management between the parties rendered it impractical for the company to decide whether to bring proceedings. The Court also found that Mr Chen Snr was a director of NZPIL under s 126(1)(b) of the Act.

The Court then assessed the main issue, whether leave should have been granted for the proposed derivative action as Mr He argued. The Court found that there was an arguable claim against Mr Chen Snr for breach of the fiduciary duty he owed NZPIL. However, the Court also found that the proposed claim was confused and did not support leave being granted, as the relief sought was either more appropriately pursued by Mr He personally or the relief had no legal basis. The Court noted that the company was no longer trading and subject to an application for liquidation.

In the context of this appeal, it was unnecessary for the Court to discuss the nature and extent of its discretion except to confirm its broad terms. A major factor in this case was that the company was no longer trading. The Court considered that, given the complete falling out between the parties and the current impasse in the company, the appropriate way for the claims to be advanced was through the liquidation process. The liquidator could carry out the accounting exercise to determine what amounts, if any, the parties may owe the company for moneys wrongfully withdrawn from it. The Court concluded that it should not exercise its discretion and grant leave to Mr He to pursue a derivative action in this case, and the liquidation application should be allowed to proceed.

Orders