He v Chen
[2019] NZHC 2390
•23 September 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2014-404-003369
[2019] NZHC 2390
BETWEEN YAO WEI HE
Plaintiff
AND
ZHIXIONG CHEN
Defendant
Hearing: 14 February 2019 Appearances:
Plaintiff in Person
N Campbell QC and M Jiang for the Defendant
Judgment:
23 September 2019
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 23 September 2019 at 11.30 am pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
Solicitors:
Glaistor Ennor, Auckland N Campbell QC, Auckland
HE v CHEN [2019] NZHC 2390 [23 September 2019]
Introduction
[1] Mr He and Mr Chen have been entangled in a long-running dispute since 2012 arising out of the collapse of an export business venture that was engaged in selling products produced and/or packaged in New Zealand into Hong Kong and mainland China.
[2] The current proceeding was brought by Mr He on 23 December 2014. Following various delays, Mr He filed a long and convoluted amended statement of claim on 14 March 2017. On 19 November 2018 Mr Chen applied for summary judgment or an order striking out the amended statement of claim. On 12 February 2019 Mr He filed a second amended statement of claim in response to Mr Chen’s application. It is substantially similar to the first amended statement of claim. It was filed with the Court on 12 February 2019 and reportedly provided to Mr Chen on 8 February 2019.
[3] At issue presently is whether grounds for strike-out or summary judgment in relation to the second amended statement of claim have been made out.
Background and prior litigation
[4] Mr He’s allegations against Mr Chen have their origins in the setting up and demise of the export business venture. To implement the venture, they incorporated a company called New Zealand Products International Ltd (NZ Products) in 2010. The company was put into liquidation by the Court on 22 May 2014 when the Official Assignee was appointed as liquidator.
[5] It appears both individuals were actively involved in the operation of the now defunct venture along with Mr Chen’s son (Mr Chen Jnr). Not long before the company was put into liquidation, the Court of Appeal dealt with an application by Mr He to bring a derivate action in the company’s name under s 165 of the Companies Act 1993 against the Chens.1 It is helpful to repeat the Court’s summary of the
1 He v Chen [2014] NZCA 153.
background to that litigation; and to reference some of its findings and observations about the grounds on which the Chens opposed the application. In relation to the background the Court set out the following:
Background
[2] 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.
[3] 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.
[4] 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.
[5] 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.
[6] 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.
[7] Mr He alleges that Mr Chen Snr has breached the terms of the CJV in a number of ways. Of particular relevance for present purposes is Mr He’s allegation that, while he was in Hong Kong between 19 December 2011 and 26 February 2012, he discovered that Mr Chen Snr had been operating a business in competition to NZPIL. Mr He says that, unknown to him, Mr Chen Snr had been operating the same business as NZPIL and HKDIL and storing the product at two of HKDIL’s three warehouses in Hong Kong.
[8] Further, when Mr He accessed NZPIL’s bank accounts on 6 February 2012 the accounts disclosed that the Chens had transferred almost all of NZPIL’s receipts to themselves, including a GST refund of in excess of
$370,000 on 13 January 2012. Mr He says on learning that he transferred
$80,000 out of an account of NZPIL’s to his own personal account.
[9] Mr He also says that Mr Chen Snr incorporated a further Hong Kong company, New Zealand Milk Powder Limited (NZMPL) at about this time (in
January 2012). He also refers to a further company incorporated by Mr Chen Snr in New Zealand, Dairy New Zealand International Ltd, although no specific allegations are made concerning that entity.
[10] Unsurprisingly, the relationship between the parties has broken down entirely. Mr Chen Snr issued proceedings on 14 September 2012 against Mr He for the recovery of the $300,000. Mr He threatened to take proceedings against Mr Chen Snr in October 2012, but ultimately brought the application for leave to bring a derivative action in the name of NZPIL against both Mr Chen Snr and Mr Chen Jnr.
[11] NZPIL is no longer trading. Mr Chen Jnr has applied for it to be placed in liquidation. Mr He opposes its liquidation.
[6] As the Court of Appeal observed, the breakdown in the parties’ relationship spawned litigation; principally by Mr Chen for the recovery of the $300,000 advance, and by Mr He for leave to bring a derivative action. I refer to the litigation in a little more detail – referring first to the leave application – as it forms the backdrop to the current proceeding.
Companies Act derivative action
[7] When, in 2012, Mr Chen commenced his debt recovery proceedings against Mr He relating to the $300,000 advance, Mr He sought leave to bring the derivative action in the company’s name as the basis for a counter-claim against Mr Chen. This Court refused to grant the leave he sought.2 He appealed unsuccessfully to the Court of Appeal.3
[8]The Court of Appeal found that:
(a)Mr Chen was a director of NZ Products for the purposes of s 126(1)(b).4 He had led discussions with Mr He; required that his son be appointed as a director on a ‘quid pro quo’ basis; and actively controlled funding in a way that effectively meant he “controlled the direction of the company.”5
2 He v Chen [2013] NZHC 2033.
3 He v Chen, above n 1.
4 At [28].
5 At [26]–[28].
(b)There was “sufficient evidence to support an arguable claim against Mr Chen for breach of the fiduciary duty he owed [NZ Products].”6 This could be by using connections he made or was made aware of through his involvement with NZ Products, arguably at the expense of NZ Products, or simply because he availed himself of publicly available opportunities while director of a company itself exploiting similar opportunities.7 Either way, this was arguably a breach of the doctrine of corporate opportunity, which prevents directors independently pursuing opportunities that would connect with the company’s business without the company’s consent.8
(c)Nonetheless Mr He’s application for relief was confused, conflating personal rights of Mr He with claims on behalf of NZ Products that were insufficiently proven or likely to be economically viable to pass the “reasonably prudent business person” standard required for the Court to allow him to commence a derivative claim.9
(d)The appropriate way for identified company claims to be advanced was through the liquidation process. The liquidators could carry out the accounting exercise to determine what amounts, if any, the parties might owe the company for monies wrongfully withdrawn from it.10 Further, the liquidators could bring a claim for breach of fiduciary duty against Mr Chen on behalf of the company if they thought it worthwhile.11
(e)It would be inappropriate to grant leave as a means of avoiding NZ Products’ liquidation, which otherwise appeared warranted.12
6 At [38].
7 At [38]–[39].
8 At [35].
9 At [58].
10 At [61].
11 At [62].
12 At [63].
[9] Despite dismissing Mr He’s appeal, the Court of Appeal did make certain findings of fact which appear to work in his favour – including the express finding that “Mr Chen Snr was a director of [NZ Products] under s 126(1)(b) of the [Companies]
Act.”13
[10] The Court also made various observations (based on submissions for Mr Chen himself) that might be taken as recognition of the possibility that Mr He may have an arguable personal claim against Mr Chen. It noted that Mr Chen sought to support the High Court judgment refusing leave, submitting amongst his grounds that:14
(b)the relief sought in the proposed derivative action is either:
(i)relief that the appellant seeks personally;
(ii) based on the CJV between the appellant and Mr Chen Snr to which the company was not a party; or
(iii) relief that has no legal basis or which this Court has no jurisdiction to grant; and
(emphasis added)
[11] The Court also noted that Mr Chen in his opposition to the application, described the relief sought as being more appropriate to a personal cause of action against Mr Chen than a derivative action in the name of the company against him.15 The Court described the first cause of action in Mr He’s leave application as “a personal claim by Mr He against Messrs Chen for breach of fiduciary duty owed by them as joint venturers under the commercial joint venture”.16 Amongst the reasons it gave for denying Mr He leave, the Court considered:17
… to the extent the relief sought… is apparently based on the CJV, NZPIL was not a party to the CJV. It is not at all clear how it is said NZPIL could enforce any rights which appear to be personal to Mr He.
(emphasis added)
13 At [26]–[28].
14 Recorded in the judgment at [17].
15 At [43].
16 At [33].
17 At [46].
[12] The statement of claim in this proceeding suffers from a lack of clarity, as did the proposed claim that was put before the Court of Appeal in support of the leave application. But it obviously seeks to give voice to the acknowledgement by Mr Chen before the Court of Appeal that Mr He’s claim was really appropriately founded on a personal claim against Mr Chen on the basis of a commercial joint venture between for which they set up NZ Products as the joint venture vehicle.
Mr Chen’s debt proceeding against Mr He
[13] The debt proceeding was eventually heard in the High Court in 2015. Mr Chen successfully claimed that Mr He was indebted to him personally for
$300,000.18
[14] Mr He’s defence that he was not personally liable to Mr Chen for the sum claimed, and that the advance was in fact made on a trust-related basis to the joint venture vehicle (NZ Products) with the debt subsequently being rolled over as a shareholder’s advance to NZ Products was rejected by Moore J.19 Various parts of Mr He’s brief of evidence outlaying his version of events had been struck out in a prior hearing after being challenged by Mr Chen, on the basis that the various pleaded evidence was relevant to a potential breach of fiduciary duty claim (which had not been pleaded) but not the personal debt claim.20 Given Mr He had not actually raised a set-off or counterclaim the evidence was not pertinent to the actual pleaded claims or defences at trial and was struck out.
[15]Justice Moore’s decision was upheld on appeal.21
[16] It is noteworthy that within the context of the personal debt claim, Moore J noted that it was “obvious” “Mr Chen was neither a director or shareholder of NZ Products, nor did he have authority to operate any of the company’s bank accounts”.22 His Honour commented “the mere fact Mr Chen was advancing funds
18 Chen v He [2015] NZHC 1593 [the debt proceeding].
19 At [74].
20 Chen v He [2014] NZHC 2699.
21 He v Chen [2016] NZCA 340.
22 The debt proceeding, above n 18, at [61].
and being repaid when [NZ Products] was in a position to do so does not necessarily mean that Mr Chen was controlling the joint venture.”23
[17] The proceeding, and the findings in the proceeding, did not however refer directly to the earlier application for leave to bring a derivative action. Nor did the Court of Appeal make reference to the earlier findings regarding Mr Chen being a de facto director of NZ Products.
[18] Not content with the Court of Appeal’s decision, in the current claim Mr He again raises the issue of the advance, but coupled with an allegation of fraud.
Progress of the current proceeding
[19] There have been significant delays in the present proceeding. Reasons for delay include various adjournments to do with Mr He replacing his counsel. Following the Official Assignee’s advice that she would not join NZ Products in Mr He’s action against Mr Chen, Mr He indicated he was waiting for the Official Assignee to state the grounds for her decision on declinature, after which he would file a writ of mandamus requiring the Official Assignee as liquidator to “fulfil its statutory duty”.
[20] Mr He also significantly amended his original statement of claim to touch on further areas of law. Following these delays, on 15 March 2017 counsel for Mr Chen filed a memorandum seeking adjournment in response to the amended claim in order to consider the question of security for costs and the possibility of a strike-out application. Mr He consented to the adjournment.
[21] On 20 March 2017 Mr Chen served a bankruptcy notice on Mr He based on the judgment in the debt proceeding. Mr He brought applications to set aside the bankruptcy notice and for a freezing order against Mr Chen’s assets, both of which were struck out.24
23 At [61].
24 He v Chen [2017] NZHC 1933.
Striking off NZ Products from Companies Register
[22] Following the Official Assignee’s decision to decline to join Mr He’s action and bring claims against Mr Chen, NZ Products was struck off the Companies Register.
Other complaints
[23] Mr He also indicated in memoranda his intention to pursue a complaint with the Serious Fraud Office regarding Mr Chen and NZ Products. The Serious Fraud Office seems not to have pursued or investigated that complaint.
[24] Mr He pleads that he reported to the IRD that Mr Chen’s misappropriation of NZ Products funds resulted in taxes being evaded. He says that IRD did nothing in response and alleges they were paid off. Mr He has made similar allegations regarding the Official Assignee and his first lawyer.
The latest statement of claim and the current application
[25] Before I address Mr He’s latest statement of claim in detail, I pause to note that the second pleaded cause of action – repeated in the latest statement of claim – is no longer in issue. Mr He advised at the hearing that he would not be pursuing the point and wished to discontinue it. In the circumstances, it is appropriate to strike out the second cause of action, and I do so accordingly.
[26] The body of the latest statement of claim (including the now struck out second cause of action) spans 53 pages and 184 paragraphs, excluding appendices. The first 24 pages (91 paragraphs) consist of a substantial and rambling narrative laying out the alleged facts giving rise to the first cause of action.
[27]The gist of this narrative is as follows:
(a)From late 2009 Mr He ran a business exporting goods packaged in New Zealand to Hong Kong and China.
(b)In 2010 he met with Mr Chen, who proposed a joint venture, building upon this export business, primarily as a means of getting Mr Chen Jnr involved in running a business.
(c)The two formed an oral agreement for a joint venture which was to entail the incorporation of a new company in which Mr He and Mr Chen would hold equal shares. Mr Chen Jnr was to be nominated as a director and to participate in the business on behalf of his father.
(d)The joint venture would absorb Mr He’s export operation (including stock held in China) as his shareholder’s advance.
[28] Mr He also recounts in his narrative that the $300,000 loan he received from Mr Chen was really an advance towards the joint venture. As I have indicated, this is despite the Court of Appeal having deemed that sum a personal loan.25 Mr He pleads this judgment was the result of fraud by Mr Chen and his associates, in an attempt to get around the Court’s ruling.
[29] Mr He’s narrative continues with details of the development of the company then formed, NZ Products. He pleads that NZ Products’ accounts and finances were managed by appointees of Mr Chen. He explains that Mr Chen proposed the formation of a further company in Hong Kong to distribute New Zealand seafood and wine (among other products). He alleges this was proposed as a 50:50 joint venture, but that he was eventually only granted a 30 per cent shareholding, and that he was not made a director of the eventual company, Hong Kong Dairy International Ltd (Hong Kong Dairy).
[30] Mr He goes on to allege that Mr Chen effectively transferred business from NZ Products to Hong Kong Dairy in order to dilute Mr He’s share of profits, as well as to compete against Mr He by appropriating trade secrets and business connections from Mr He’s original export business. He further alleges that Mr Chen effectively collaborated with associates and relatives involved in businesses in China to import goods from NZ Products and then fabricate damage to those goods as grounds to deny
25 He v Chen, above n 1.
payment to the companies and so deprive Mr He of his share of proceeds. He further alleges misappropriation of NZ Products funds by Mr Chen (or those acting on his behalf). Another substantive factual allegation is to do with Mr Chen secretly operating a parallel export business of New Zealand milk and other products to Hong Kong in competition with NZ Products and Hong Kong Dairy, using Hong Kong Dairy’s warehouses in Hong Kong for the purpose.
First cause of action
[31] Mr He’s first cause of action is actually six alternative causes of action, framed under one heading. The first listed cause of action is for breach of contract under the Contractual Remedies Act 1979 and Contractual Mistakes Act 1977 (as the events occurred prior to 2017, when the more recent act was passed). In essence it alleges that Mr Chen was Mr He’s contractual partner in the commercial joint venture, as well as a deemed director of NZ Products (citing the Court of Appeal’s finding)26 and that over the course of the venture Mr Chen used his influence over the other personnel to take control of Mr He’s business affairs and close him out of the business. This includes stealing the original export business and Mr He’s trade secrets.
[32] Mr He alleges that Mr Chen’s cessation of funding, his contribution (seemingly through his network of influence) to the liquidation of NZ Products and the winding up of Hong Kong Dairy, and his competing in business constitute breaches of the essential terms of the (unwritten) contract as well as an implied fiduciary duty to both him personally and to the joint venture. Mr He also alleges breach of a duty of confidence in relation to his business practices, trade secrets, and share of the joint venture profits.
[33] The pleading also includes a claim of fraudulent misrepresentation, comprising various promises Mr He alleges were made and then broken by Mr Chen regarding the future of the businesses.
[34] The pleading then re-frames essentially the same argument as a unilateral mistake allegation, stating that Mr Chen took advantage of his mistakenly placed trust.
26 He v Chen, above n 1, at [28].
[35] Mr He provides a wide-ranging list of losses he has suffered because of Mr Chen’s conduct – including misappropriation of finances, the loss of the business and subsequent legal fees.
[36] Mr He currently appears to seek remedies or compensation under the Contractual Mistakes Act 1977, exemplary or punitive damages, a judgment and declaratory orders to various effects (including declarations of findings of fact to substantiate his narrative), damages for half the net profit of all the joint venture’s commercial transactions (through NZ Products and Hong Kong Dairy) and access to all business and banking records.
[37] In the alternative, Mr He seeks damages as compensation for the total funds he alleges were misappropriated, the loss of his share of business, the losses suffered due to Mr Chen going into competition with him in secret, exemplary or punitive damages, expenses he incurred pertinent to all proceedings (including remuneration for the solicitor who has assisted him but is not acting as counsel), unspecified orders and variations, and costs on an indemnity basis.
Five alternative causes of action.
[38] The first alternative cause of action is headed “Torts of Deceit by Deception and Conspiracy”. It reframes the claim as tortious deception and conspiracy which caused Mr He’s total losses. The submissions for Mr He understand these as three causes of action for deceit, tortious interference, and inducement of breach of contract. Mr He’s statement of claim also alleges fraud in the form of fabricated financial statements being presented as evidence, and the fraudulent obtaining of Court orders against Mr He and NZ Products. Mr He does not substantiate these fraud allegations. The same remedies are sought for each alternative cause of action as for the first cause of action.
[39] The second alternative cause of action regards torts of conversion (theft of trade secrets) and breach of confidence (relating to trade secrets). It essentially repeats the allegations regarding Mr He’s business practices, contacts, and trade secrets being expropriated by Mr Chen and used to compete against Mr He.
[40] The third alternative cause of action is breach of fiduciary duty. Mr He pleads that he and Mr Chen owed one another fiduciary duties in respect of a commercial joint venture together, to act in the best interests of the joint venture and not cause it loss or damage. He particularises various breaches by Mr Chen, including his various alleged misrepresentations and conspiracy with others, various misappropriations of funds, the establishment of competing export companies and his profiting from those companies.
[41] Mr He’s fourth alternative cause of action is under the Companies Act 1993, regarding Mr Chen being a deemed director of NZ Products under s 126. Mr He alleges various duties were owed and breached in this framework. Though unwieldy, this pleading contains legible references to various sections of the Companies Act and the factual breaches Mr He alleges.
[42] Mr He’s fifth alternative cause of action is for equitable fraud and unjust enrichment. It reiterates pleadings around Mr He’s limited experience and implicit trust in Mr Chen, and Mr Chen’s alleged wrongdoing. The statement of claim does not lay out particulars or authorities for the actual legal content of these submissions.
Second cause of action (previously the third)
[43] Given that the original second cause of action has now been struck out, Mr He’s third cause of action becomes his second cause of action. It is titled “Claim for Commission, pursuant to oral agreement and performance by me and for refund of Investment Funds for breach of trust”. It really comprises two claims relating to alleged arrangements between Mr He and Mr Chen dating back to 2007.
[44] The pleading outlines two claims growing out of discussions occurring in Murrays Bay regarding Mr He’s Hong Kong bank account. The first is a claim for commission relating to Mr Chen’s alleged of use of that bank account from September to December 2007. Specifically, Mr He claims entitlement to a promised commission of 10 per cent of funds put through his own bank account by Mr Chen in relation to land sales (which subsequently appeared to be for the purpose of facilitating under-the-table payments enabling Mr Chen to avoid taxation).
[45] The second claim involves an oral agreement wherein Mr Chen agreed to handle investments for Mr He, but did not invest his money and instead redirected it towards his own family members.
[46] Mr He seeks judgment for the value of a 10 per cent share of the land commission sales, a repayment for his investment monies ($120,0000) and damages for the lost capital gain or appreciation he would have accrued had Mr Chen properly invested the monies. He also seeks interest, exemplary or punitive damages and costs on an indemnity basis.
[47] Counsel for Mr Chen seeks summary judgment on this cause of action or an order dismissing it. Alternatively, counsel requests Mr He submit a further amended statement of claim containing clear pleadings and proper particulars of the plaintiff’s allegations. Finally, counsel seeks costs and disbursements relevant to the amended statement of claim and this application.
The approach on strike-out
[48] Rule 15.1 of the High Court Rules 2016 provides for the Court to strike out all or part of a pleading if it:
(a)discloses no reasonably arguable cause of action or case appropriate to the nature of the pleading;
(b)is likely to cause prejudice or delay;
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
[49] Pleadings which are unnecessarily prolix, contain purely evidential or irrelevant material, or are unintelligible have been held likely to cause prejudice or delay for the purposes of 15.1(b).27
27 See Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679 at [89].
[50] Rule 5.26 requires that a statement of claim show the general nature of the claim to the relief sought, and give sufficient particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances to inform the Court and the party or parties against whom relief is sought of the plaintiff’s cause of action. This should not include setting out evidence beyond the basic particulars of the grounds.28
[51] Plaintiffs are not required to set out the principles of law on the basis of which they are entitled to relief – as long as their absence does not arise to the level of inconvenience or obscurity.29 If pleadings are so non-specific as to law to cause prejudice to the defendant the Court may consider that grounds for rejecting a pleading.
[52] Although the primary focus of Mr Chen’s argument is on the grounds at r 15.1(b)–(d), it is important to recall the well-established principle emphasised by the Court of Appeal in Attorney-General v Prince that the strike-out jurisdiction “is to be exercised sparingly, and only in a clear case”.30 The Court also said “the causes of action must be so untenable that the Court is certain that they cannot succeed”.31 I bear this high standard in mind.
The statement of claim
[53] Mr He’s pleadings are currently highly prolix, include evidentiary and seemingly-irrelevant material and are difficult to follow and understand. In many places they do not just convey relevant factual claims, but also provide affidavit-type explanations of how Mr He came to know large amounts of information, without pointing to which pieces are actually relevant. The actual claims would be relayed more concisely if restricted to the essential facts going to the alleged breaches, rather than a comprehensive narrative of every interaction between parties, which may appropriately be provided through evidence at the actual hearing. While not required to provide full legal explanations, the pleadings do not clearly lay out the essential
28 Andrew Beck and others McGechan on Procedure (looseleaf ed, Thomson Reuters) at HR5.26.04.
29 At HR5.26.05
30 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.
31 At 267.
elements or bases for the duties alleged, nor authorities regarding the various breaches or misconduct. Further, it is not always clear how the sought relief relates to the various elements of each cause of action.
[54]On these bases I am inclined to require re-pleading.
Fraud allegations against various parties
[55] I must also expressly address the allegations of fraud that Mr He makes. Fraud or dishonesty allegations are not to be made lightly – even by self-represented litigants.32 Rule 5.17(2) requires that an allegation regarding a person’s state of mind must give particulars of the facts relied on in alleging that state of mind. This includes an intention to act fraudulently. Fraud allegations should be pleaded separately (rather than simply bundled into other pleadings) with care, providing particulars of the facts relied upon.33 Those particulars must have a credible factual basis. Fraud allegations provide an exception to the finality of the Court’s ruling – but to prevent abuse for this exception fraud allegations are subject to pre-trial scrutiny, requiring at least a prima facie case be made out, fully and precisely pleaded and particularised or sufficiently cogent to go to trial.34
[56] Mr He’s current statement of claim contains assertions that various neutral parties who he says failed to meaningfully assist him or who found against his favour have been paid off by Mr Chen. This includes his former counsel, the Official Assignee and the IRD. Let me be clear: it is inappropriate for Mr He to make these accusations unless he can make out a prima facie case in precise pleadings. There is nothing to indicate he will be able to provide an evidentiary foundation for these claims. He also appears to accuse the accountants who compiled NZ Products’ financial statements of preparing fraudulent documents. He particularises these allegations but should be careful to ensure they are more than speculation if he wishes to make them before the Court. He also explicitly alleges fraud against Mr Chen in his first and fifth alternatives to his first cause of action.
32 Nottingham v Auckland District Court [2017] NZHC 777 at [11] per Gilbert J.
33 See McGechan on Procedure, above n 28, at 5.26.08(1).
34 Commissioner of Inland Revenue v Redcliff Forestry Venture Ltd [2012] NZSC 94, [2013] 1 NZLR 804 at [32]–[33].
[57] If Mr He cannot point to an evidentiary basis for claims of fraud he should not claim that parties have defrauded him. To be clear, this does not mean that he cannot make pleadings which naturally suggest Mr Chen himself has behaved dishonestly; but he cannot make baseless allegations of fraud against the various parties involved without providing clear and substantive particulars.
Inordinate delay
[58] Counsel for Mr Chen also submits that the entire claim should be struck out on the basis of inordinate delay under r 15.2. Dismissal or stay may be warranted if the plaintiff fails to prosecute all or part of the proceedings to trial and judgment. This requires, inter alia, inordinate and inexcusable delay causing serious prejudice to the defendant.35 I do not consider this made out in the present circumstances. But I caution – the opportunity to get his pleadings in order is fast running out.
Abuse of process
[59] Counsel for Mr Chen alleges Mr He is attempting to re-litigate the facts already determined in the debt proceeding. Mr Chen does plead facts regarding the $300,000 advanced to the alleged joint venture, which was held in the Court of Appeal to be a personal loan, separate from any joint venture.36 Relitigating matters which have already been determined is an abuse of process.37
[60] The majority of Mr He’s claim is not an attempt to re-litigate prior matters. However, the personal debt issue has clearly been resolved by the Court. Mr He’s account of it has been rejected by the courts. If his pleadings are to discuss the loan Mr He must either accept it was made personally to him or substantiate his allegation that the Court’s judgment was obtained by fraud. I will make orders accordingly.
35 As summarised in Lovie v Medical Assurance Society NZ Ltd [1992] 2 NZLR 244 (HC).
36 He v Chen, above n 21.
37 McGechan on Procedure, above n 28, at HR15.1.05(2).
Whether the causes of action should be struck out
[61] Rule 15.1(1)(a) allows strike-out of all or part of a pleading if it discloses no reasonably arguable cause of action.
First cause of action and alternatives
[62] Counsel for Mr Chen submits that the alleged losses were caused by Mr Chen Jnr, who is not the defendant, and were suffered by NZ Products rather than Mr He personally. Misappropriated funds also came from NZ Products rather than Mr He. Further, Mr He brings allegations regarding people other than Mr Chen but has not made them defendants. Counsel submits that NZ Products was the proper plaintiff for the majority of claims under the first action, and Mr He was denied leave to take derivative action.38 The proper course was for Mr He to challenge the liquidator’s decision not to pursue Mr Chen.
[63] Further, counsel for Mr Chen criticises the prayer for relief as meaningless or seeking remedies the Court is unable to provide, particularly the various declarations sought, the order that Mr Chen release his business and accounting records, and reimbursement for out-of-pocket payments to the solicitor who assisted Mr He but is not his registered solicitor on this file. Further, damages for misrepresentation inducing contract are limited to treating the misrepresentation as a term which was breached, but damages for deceit itself are not available.39
[64] At present I do not consider these sufficient grounds to strike out the claim. I am not prepared to say that there is no kernel of a potentially viable cause of action contained within the narrative that Mr He relays. I am influenced by the fact that counsel for Mr Chen clearly relied on the possibility that there was a claim to be brought against Mr Chen by Mr He personally when opposing the application to bring a derivative action on behalf of the company.40 I consider that possibility still exists for present purposes. Mr He’s pleadings require reshaping and focus, but I cannot be
38 He v Chen, above n 1.
39 Counsel points to the Contract and Commercial Law Act 2017 s 35. Though this legislation came into effect after the events in question it carries over an equivalent rule at s 6 of the Contractual Remedies Act 1977.
40 See He v Chen, above n 1, at [43].
satisfied that his basic case – that Mr Chen owed him duties in contract or equity relating to their initial agreement and breached those duties as they related to their common business – cannot succeed.
[65] Determining whether those duties existed or were broken requires the assessment of evidence. I am inclined to give Mr He the opportunity to reformulate his pleading, accommodating or responding to the criticisms as appropriate. That will better allow the Court to consider the defence’s substantive criticisms.
Second cause of action
[66] The second cause of action contains two claims relating to business arrangements around accounts in Hong Kong. First, the claim relating to a 10 per cent commission from land sales, and second, the claim relating to Mr Chen’s use of Mr He’s investment funds.
[67] Counsel for Mr Chen submits the claim relating to land sale commission should be struck out on the basis that it is out of time – the events it refers to occurred in 2007, nine years before Mr He brought the claim.41
[68] Counsel for Mr Chen also submits that the claims relate to matters which largely took place in Hong Kong. Counsel contend Hong Kong is the forum conveniens for the dispute, rather than New Zealand.
[69] At present I do not consider it useful to try and evaluate these issues without first giving Mr He the opportunity to make more coherent pleadings. An affirmative limitation defence was not pleaded in the application for strike-out or summary judgment. It was simply raised in the eventual submissions. If the defence is going to rely on limitation, it should be pleaded as an affirmative defence. Mr He did not respond to it, but may be able to mount an argument relating to late knowledge or similar.
41 Limitation Act 2010, s 11.
[70] I also am not decisively swayed by the forum conveniens argument. Mr He’s submissions reference at least one discussion occurring in Murrays Beach. While the parties also travelled to Hong Kong to make arrangements there appears to be at least a grain of an argument available that the relevant agreement was formed in New Zealand.
[71] Mr He should consider these potential defences when re-drafting his pleadings, but I do not consider them grounds for strike-out at the current stage. This may change if counsel for Mr Chen pleads them as an affirmative defence and Mr He is unable to provide a response.
Requirements for pleadings
[72] In the hope that Mr He will find them a useful guideline when re-drafting his pleadings, I will summarise the requirements for pleadings in a statement of claim set out by the Court of Appeal in Commissioner of Inland Revenue v Chesterfields Preschools Ltd:42
(a)A statement of claim must be accurate, clear and intelligible.
(b)There must be sufficient factual particulars to allow Mr Chen to be fully informed of the case against him.
(c)The statement of claim should set out all of the elements of each cause of action – what duty exists and how it was breached.
(d)While providing particulars of those elements – meaning enough detail to understand them – the statement of claim should not stray into setting out all of the evidence Mr He will rely on in the eventual trial. That evidence will belong in other documents.
(e)Separate causes of action must be separately stated.
42 Commissioner of Inland Revenue v Chesterfields Preschools Ltd, above n 27, at [84].
(f)The relief sought must be clearly pleaded in respect of each cause of action.
[73] Mr He’s statement of claim should be made to comply with the above requirements. It should also be reduced in size, focussing on providing essential particulars (the relevant facts he believes he can prove in order for his claim to succeed) rather than the story of how he came to possess each piece of information. He should also clarify the relevance of information he provides and remove information which is not relevant to his actual claims.
Conclusion
[74] Mr He’s pleadings are unacceptably prolix, and at points are evidential in nature, as well as failing to clarify the relevance of particular pieces of information. Despite that, I am not persuaded that there is no prospect for viable claims to arise from the scenario he relates. I do not think it is worth looking at the more substantive critiques raised by the defence as to whether his claims can succeed until after he has had the opportunity to rewrite them in a clearer and more concise form.
Summary judgment
[75] Rule 12.2(2) allows for summary judgment against a plaintiff where the Court is satisfied that none of the causes of action in the statement of claim can succeed. Given the first cause of action and its alternatives have not been struck out I am not required to consider granting summary judgment on the second cause of action.
Orders
[76] I order that Mr He should be given a final opportunity to re-plead before the Court should decide definitely whether or not to strike out his claim. His statement of claim should be re-drafted in accordance with the comments at [70]–[71].
[77] Mr He’s pleadings as to the $300,000 loan must be re-written either to accept the version of events found to have occurred at the Court of Appeal (that it was a
personal loan, even if put towards the joint venture) or provide meaningful evidence as to why the Court’s verdict was incorrect due to fraud.
[78] This judgment will be issued on an interim basis, with leave given to revisit the issues of fraud, the limitation period and forum conveniens if they remain in issue.
[79] Mr He would be well advised to revert to obtaining legal advice. Whether or not he does so is a matter for him. But to give him a reasonable opportunity to do so, and to re-plead – with or without legal input – I allow him until 22 November 2019 to file an amended statement of claim that coherently and succinctly sets out the essential elements of each cause of action that he wishes to rely on. If he fails to do so, he can anticipate that his claim will be struck out.
[80] In the circumstances, Mr Chen has leave to seek further orders if the orders I have made are not strictly complied with. A memorandum may be filed and served on 5 working days’ notice for that purpose.
[81]At this stage I reserve the question of costs.
Associate Judge Sargisson