Huang v Chen
[2022] NZHC 1888
•4 August 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-100 CIV-2021-404-304
[2022] NZHC 1888
BETWEEN HONGZHAO HUANG
First Plaintiff
JIEYU LU
Second PlaintiffMATAKANA WINES LIMITED
Third PlaintiffAND
CHRIS CHEN
First Defendant
continued: …/2
Hearing: 18 May 2022 to 3 June 2022 Appearances:
M D O’Brien QC, M D Pascariu and M J Grayson for the Plaintiffs
SRG Judd for the Defendants
Judgment:
4 August 2022
JUDGMENT OF GORDON J
This judgment was delivered by me on 4 August 2022 at 2 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel: Solicitors:
M D O’Brien QC, Barrister, Auckland William Gong Lawyers, Auckland M D Pascariu, Anderson Creagh Lai, Auckland
M J Grayson, Anderson Creagh Lai, Auckland SRG Judd, Barrister, Auckland
HUANG v CHEN [2022] NZHC 1888 [4 August 2022]
…/2
WAIHOPAI VALLEY VINEYARD LIMITED
Second Defendant
YI LU
Third DefendantDON CHEN
Fourth DefendantJINPING HUANG
Fifth Defendant
QI YANG
Sixth DefendantADELAIDE EDUCATION GROUP PTY LIMITED
Seventh DefendantTABLE OF CONTENTS
Introduction [1]
The parties [21]
Factual background [30]
Matakana Villa Lots [31]
Waihopai [37]
Chateau Kiwi [41]
Willow Flat [43]
Long-term business visa application – Ms Lu and Mr Huang [45]
Acquisition of Matakana Estate [47]
The JV agreement [57]
Amended INZ application – Ms Lu and Mr Huang [61]
Integration Scheme [65]
Further advances for Waihopai [81]
Memorandum of corporate trusteeship [84]
End of relationship [86]
Continued operation of Matakana Estate and Matakana Zhongshan [92]
Retrospective OIO consent [93]
First proceeding against Mr Chen [97]
Sale of Waihopai and distribution of proceeds of sale [99]
Proceedings against Waihopai and freezing orders [104]
Credibility issues [108]
Mr Huang [110]
Ms Lu [113]
Mr Chen [116]
Yi Lu [119]
Order of consideration of issues [122]
Status of Mr Huang’s payments to Mr Chen/Waihopai [123]
Partnership [140]
Relevant law [144]
Relevant documents [150]
Cultural context [169]
Conduct of parties [176]
First affirmative defence: estoppel [204]
Misrepresentation [215]
Relevant law [219]
Were the representations made as pleaded? [224] First pleaded misrepresentation: equity in Waihopai [224]
Second pleaded misrepresentation: willingness [238]
Was Mr Chen’s representation of Waihopai’s value and his share of it
misleading and deceptive? [245]
Was Mr Huang misled or deceived? [252]
Was Mr Chen’s conduct an effective cause of Mr Huang’s loss? [254]
JV Agreement – 19 April 2012 [259]
Principles of contract interpretation under Chinese law [271]
The claims [284]
Applicable law [287]
Third cause of action: breach of the JV agreement [292]
Second cause of action: breach of fiduciary duty [296]
First cause of action: constructive trust based on the law of property [305]
Laches [311]
Equitable damages [319]
Counterclaims [325]
First counterclaim (against Mr Huang and Ms Lu): Matakana Zhongshan
shares [328]
Second counterclaim (against Ms Lu): shares in Matakana Wines [332]
Third counterclaim (against Matakana Wines): failure to repay advances [336]
Fourth counterclaim (against Matakana Wines): failure to pay rent and
outgoings [344]
Matakana claims (first to third causes of action): relief in favour of
plaintiffs [348]
Matakana claims (third counterclaim): relief in favour of Mr Chen [349]
Waihopai claims [350]
Fourth cause of action (against Mr Chen) and fifth cause of action (against Waihopai): claims for debt [350]
Sixth cause of action (all defendants): money had and received [356]
Seventh cause of action (against Mr Chen, Don Chen, Jackie Huang and
AEG): dispositions made with the intent to prejudice Mr Chen’s creditors [361]
Eighth cause of action (against all defendants): dispositions made with
intent to prejudice Waihopai’s creditors [361]
Ninth cause of action (all defendants): unjust enrichment [385] Affirmative defence and counterclaim [388] Second affirmative defence (Mr Chen): debt owed [388]
Fifth counterclaim (against Ms Lu): failure to repay advance [392] Waihopai claims (fourth to ninth causes of action): relief [395] Fourth and fifth causes action [395]
Sixth cause of action [397]
Seventh cause of action [399]
Eighth cause of action [402]
Ninth cause of action [405]
Result – summary [406]
Relief [412]
Costs [414]
Introduction
[1] This proceeding arises following a falling out between two couples who were once friends and who were involved in business dealings with each other. The exact nature of their business relationship is in issue.
[2] Three of the four, namely the first plaintiff, Hongzhao (Alex) Huang, his (now) wife, the second plaintiff, Jieyu (Chrissy) Lu and the first defendant, Xiaolin (Chris) Chen, together purchased the land (Matakana land) and business of the Matakana Estate Ltd winery (together Matakana Estate) in 2011/2012. Mr Chen’s wife, the fifth defendant, Jinping (Jackie) Huang1 was not involved in this purchase.
[3] It is common ground that Mr Huang paid the entire purchase price but a Joint Venture Agreement, signed and dated 19 April 2012, (JV agreement) provided that Mr Chen would repay to Mr Huang his share of the purchase price and the dates for payment are specified. Interest on the loan was provided for. The JV agreement also specified the share that each of the three would have in Matakana Estate. The share of each of the individuals was a reflection of the financial contribution each would make.2 There was an initial version of the JV agreement signed and dated 21 October 2011, but the parties agree that it was superseded by the agreement of 19 April 2012. The JV agreement was signed in the People’s Republic of China (China) and is expressed to be subject to the laws of China.
[4] At the time of the purchase of Matakana Estate, Mr Huang and Ms Lu did not have permanent residency in New Zealand. Mr Chen was, and continues to be, a New Zealand citizen. Pending consent from the Overseas Investment Office (OIO) the JV agreement provided that the Matakana land would be purchased in Mr Chen’s name. Mr Chen had incorporated Matakana Wines Ltd (Matakana Wines) which was used to complete the purchase of the Matakana Estate business. Mr Chen was the sole director and shareholder of Matakana Wines. The Matakana land remains in
1 Jackie Huang is not related to the first plaintiff Alex Huang. I will refer to Alex Huang as Mr Huang and Jackie Huang by her first name and surname rather than as Ms Huang. That is to avoid any confusion between references to Mr Huang and Ms Huang. No disrespect is intended by referring to Ms Huang as Jackie Huang.
2 Mr Huang: 55%; Mr Chen: 35%; and Ms Lu: 10%.
Mr Chen’s name but all the shares in Matakana Wines are now held by Kiwi Club Ltd (Kiwi Club), a company owned by Ms Lu.
[5] At the time of the purchase of Matakana Estate Mr Chen had an interest in a vineyard in the South Island. On 15 August 2006 he incorporated Waihopai Valley Vineyard Ltd (Waihopai) with the third defendant, Yi Lu,3 and Waihopai purchased what was bare land at the time in Marlborough from interests associated with the Vegar family. Mr Chen and Yi Lu were the two directors. Mr Chen held 40 per cent of the shares in Waihopai, his brother, the fourth defendant, Don Chen, held 20 per cent and Yi Lu held 40 per cent.
[6] Mr Chen says in February 2013 he and Mr Huang began discussions about Mr Huang buying an interest in Waihopai. There followed a series of documents drafted by Mr Huang which are headed (in the English translation of the documents in the common bundle) “Matakana Estate Integration Scheme” (Integration Scheme). The documents on their face purport to show an integration of the interests of Mr Huang, Ms Lu and Mr Chen in Matakana Estate and of Mr Chen’s (asserted) 60 per cent interest in Waihopai. Jackie Huang was also included.
[7] On 25 June 20134 Mr Huang advanced $1.2 million to Mr Chen’s solicitor’s trust account to be advanced to Waihopai. Mr Huang and Ms Lu later made further advances to Mr Chen and/or Waihopai totalling (it is said) $1,176,261. None of those advances, including the $1.2 million, have been repaid.
[8] In this proceeding Mr Huang says all of those advances to Mr Chen/Waihopai were loans made to assist Mr Chen and/or Waihopai at a time when Waihopai was in financial difficulty. In fact, at the time of the first advance of $1.2 million Waihopai was in receivership. It then came out of receivership in July 2013.
[9] Mr Chen disputes the claim by Mr Huang and Ms Lu that the advances were loans. He says that Mr Huang advanced the money as capital contributions for an interest in Waihopai and they were made pursuant to the Integration Scheme.
3 Mr Lu is not related to Ms Lu. To avoid any confusion with Ms Lu I will refer to him as Yi Lu, rather than Mr Lu. No disrespect is intended by the use of his first name.
4 The date of receipt into Mr Chen’s solicitor’s trust account.
[10] Mr Huang and Ms Lu say that the Integration Scheme was never finalised and the terms were never agreed. It was simply a proposal.
[11] Despite the nine causes of action, two affirmative defences and six counterclaims, the core elements of the dispute are reasonably straightforward. There are two fundamental claims made by the plaintiffs. The first concerns the legal title to the Matakana land and the overall ownership of Matakana Estate. The second concerns what Mr Huang and Ms Lu call the “Waihopai loans”. I will use the neutral term, the “Waihopai advances”.
[12] As to the former (the Matakana claim) Mr Huang and Ms Lu say that Mr Chen has acted in breach of contractual and equitable obligations of fidelity and good faith by refusing to pay his share of the purchase price for Matakana Estate or transfer the legal title of the Matakana land to them. Mr Huang and Ms Lu say that Mr Chen holds the title to the Matakana land on a constructive trust for them. They also claim damages for the delay in the development of Matakana Estate which they say has been caused by Mr Chen’s actions, and the loss that this has caused.
[13] As to the second (the Waihopai claim) the plaintiffs say they are entitled to repayment of the Waihopai advances together with interest. They also plead breaches of s 348(4) of the Property Law Act 2007 (PLA) in respect of the distribution of the sale proceeds of Waihopai’s assets following the sale of Waihopai by Mr Chen and Yi Lu in February 2021. The cause of action under the PLA against Mr Chen seeks orders against Mr Chen, Don Chen, Jackie Huang and the seventh defendant Adelaide Education Group Pty Ltd (AEG), on the basis they each received part of the sale proceeds. The cause of action against Waihopai under the PLA seeks orders against all of the defendants on the same basis.
[14] Mr Chen’s position is that the Integration Scheme (and in particular the version of 26 June 2013) superseded the JV agreement and now governs the relationship and overall shares of the parties in the assets of the two businesses. In a related argument, Mr Chen says that he and Jackie Huang together with Mr Huang and Ms Lu were in partnership. The partnership argument principally relies on the Integration Scheme documentation.
[15] As a consequence, Mr Chen says he is not required to pay Mr Huang the amounts set out in the JV agreement as his share for Matakana Estate. Rather, as noted above, he says the parties’ respective contributions and accordingly their shares in the assets of the two entities are governed by the Integration Scheme/partnership. Mr Chen accepts that he holds the Matakana land on a constructive trust. But he says he holds it on a constructive trust not just for Mr Huang and Ms Lu, but also for himself.
[16] Mr Chen also accepts he needs to account to Mr Huang and Ms Lu for the proceeds of sale of Waihopai. At the time Waihopai was sold he did not tell Mr Huang and Ms Lu of the sale and they did not receive any of the proceeds of sale. Those proceeds were distributed to Mr Chen, Yi Lu and Don Chen, who all then further distributed the proceeds they received. The quid pro quo Mr Chen says is that Mr Huang and Ms Lu must account for their share in Matakana Estate’s assets.
[17] Further to Mr Chen’s position that the assets of the two entities need to be divided in accordance with the Integration Scheme/partnership, he seeks an order that the partnership be dissolved (if it has not already been dissolved) and he says that the dissolution should be subject to an accounting to determine the parties’ respective rights to the assets in the two entities.
[18] Mr Chen’s counterclaim that a partnership existed and seeking an accounting of what he says are the partnership assets was contained in an amended statement of defence filed on 6 April 2022. The plaintiffs do not oppose the amendment that pleads the existence of a partnership (without conceding that a partnership in fact existed) but oppose the amendment to the relief sought by way of an accounting of assets.
[19] In any event the plaintiffs’ position is that the parties’ interests in Matakana Estate and Waihopai were never integrated. They say the governing document in relation to the Matakana claim is the JV agreement. In relation to Waihopai they say that the money advanced was by way of loans and was not pursuant to an integration scheme or partnership and was not for an interest in Waihopai.
[20] In summary then, the primary issue is whether the business relationship between the principal parties is governed by the 26 June 2013 Integration Scheme document or the JV agreement of 19 April 2012.
The parties
[21] Mr Huang is a businessman who lives in China. At all relevant times he would travel from China to New Zealand for meetings, stay a few days and then return to China. Mr Huang typically spent less than one month a year in New Zealand. He obtained residency in January 2015 based on his marriage to Ms Lu who obtained New Zealand residency at the same time based on the Entrepreneur category. Mr Huang is, and always has been, an overseas person as defined in the Overseas Investment Act 2005 (OIA). He remains an overseas person even though he has obtained residency because he is not ordinarily resident in New Zealand.
[22] Mr Huang does not speak English. He gave evidence with the assistance of a Cantonese-speaking interpreter. He and Mr Chen, who does speak English, conversed orally in Mandarin in their dealings. Documents exchanged between them were in the Chinese language.5
[23] Ms Lu, who was not then married to Mr Huang, came to New Zealand in 2004 to study English when she was about 22 or 23 years old. Mr Chen’s wife, Jackie Huang, operated a business helping Chinese students in New Zealand. Jackie Huang arranged accommodation and schooling for Ms Lu. They became friends. Jackie Huang introduced Ms Lu to her husband Mr Chen. Ms Lu speaks reasonable English but used the interpreter from time to time when she gave evidence.
[24] Mr Chen first came to New Zealand in 1996. After a period away from New Zealand he returned in 1999. Mr Chen has been a New Zealand citizen since 2001 and he lives in this country. Mr Chen’s wife, Jackie Huang, has also been a New Zealand citizen since December 2001. Since about 2006 Mr Chen and
5 The characters for Mandarin and Cantonese are the same. I will therefore use the term Chinese language.
Jackie Huang have worked in the New Zealand wine industry including promoting New Zealand wines in China. They both have wine industry qualifications.
[25] Mr Chen and Jackie Huang’s first language is Mandarin. But they can speak, read and write in English. Mr Chen is more proficient in English than Jackie Huang. Mr Chen used the interpreter only occasionally when giving evidence, Jackie Huang more so.
[26] Mr Chen met Yi Lu through Yi Lu’s sister, who was Mr Chen and Jackie Huang’s neighbour. As noted above, Yi Lu became a director of and a 40 per cent shareholder in Waihopai. He lives in New Zealand. Yi Lu’s first language is Mandarin. He speaks some English although not proficiently. He used the interpreter from time to time when he gave evidence.
[27] Don Chen is Mr Chen’s brother. He was a 20 per cent shareholder in Waihopai and lives in Australia. Don Chen was not a witness.
[28] The sixth defendant, Qi Yang, is Yi Lu’s wife. She lives with Yi Lu in Auckland. She was not a witness.
[29] The seventh defendant, AEG, is an incorporated company which carries on an education business and has its registered office in Australia. It has three current directors, one of whom is Don Chen. It also has three current shareholders, again one being Don Chen.
Factual background
[30] In 2006 Mr Huang came to Auckland for business. By that stage he and Ms Lu were in a relationship. Ms Lu acted as his interpreter while he was here. She introduced Mr Huang to Mr Chen.
Matakana Villa Lots
[31] At about that time Mr Chen was interested in buying a property in Matakana, north of Auckland. He had been introduced to the land by Paul Vegar, a real estate
agent. Mr Chen says that Mr Vegar explained that the land was owned by his family company. It adjoined land owned by the Vegar family’s Matakana Estate winery at 568 Matakana Road. Mr Chen says he discussed this with Yi Lu.
[32] The land for sale at Matakana was, at that stage, bare land and was in seven lots numbered 8 to 14. Mr Chen says Mr Vegar’s proposal was that his companies would plant grapes on the properties except for an area reserved to build a house on each lot. The Vegars would maintain the vines and use the grapes in their winery and the purchasers of the lots would pay a small amount to the Vegars for maintenance. The neighbouring properties (Lots 4–7) would continue to be owned by the Vegars. The Matakana Estate winery itself was on Lot 4.
[33] Mr Chen’s evidence was that at the time he had no experience in property investment or in the wine industry but was attracted to the idea of living on a property in Matakana surrounded by grapes. Mr Chen discussed this idea with Mr Huang and Ms Lu while Mr Huang was in New Zealand and they went to see the properties together.
[34] The upshot was that in late 2006 Mr Chen’s wife, Jackie Huang, purchased Lot 8 and his brother, Don Chen, purchased Lot 14. Yi Lu’s wife purchased Lot 9 and Yi Lu’s brother-in-law purchased Lot 13. Mr Huang purchased Lots 11 and 12, and Ms Lu purchased Lot 10. Ms Lu’s evidence was that Mr Chen and Yi Lu borrowed from Mr Huang to fund their purchases. There was evidence of at least some repayments by Mr Chen.
[35] Additionally, Mr Huang, Ms Lu, Mr Chen and Yi Lu entered into a written agreement signed and dated 15 March 2007 relating to all seven lots. It appears from that agreement that the parties intended to work together to develop the seven lots and in particular to build a lodge. They commissioned an architect to prepare concept plans but otherwise the 15 March 2007 agreement was not advanced.
[36] The ownership of those lots has not changed. The parties referred to them as either the “vineyard” lots or the “villa” lots. I will use the latter term.
Waihopai
[37] Mr Chen said at about the time he was introduced by Mr Vegar to the villa lots, Mr Vegar and his brother Peter talked to him and Yi Lu about investing in a new vineyard development in Marlborough on land owned by a company associated with the Vegar family. Mr Huang and Ms Lu were not involved in the acquisition that followed.
[38] Mr Chen says that the Vegars’ proposal was that he and Yi Lu would buy the land and the Vegars would provide services to develop the then bare land as a vineyard and to manage and maintain the vineyard including by arranging to sell the grapes. The Vegars’ initial proposal was for a property in Waihopai Valley. That was replaced by another offer by the Vegars for a different piece of land nearby under essentially the same arrangement. The replacement property was known as Kintyre, a name that appears on a number of the documents. The company name Waihopai reflected the land in the original proposal made by the Vegars.
[39] On 11 October 2006 Waihopai purchased the Kintyre property from the Vines Development Company Ltd, one of the Vegars’ companies, for $5.2 million. Waihopai then entered into two contracts: a Vineyard Management Agreement with the Vines Development Company Ltd and a Grape Supply Agreement with Goldridge Estate Ltd. The latter was a company also owned by the Vegars. Both contracts were later assigned to another Vegar family company, Savvy Vineyards 3550 Ltd (Savvy).
[40] Waihopai was planted with grapes in 2007 and 2008 and it began supplying grapes to Savvy, some of which were sold by Savvy to the Vegars’ Matakana Estate winery.
Chateau Kiwi
[41] Also in 2006, Mr Chen and others started a business called Chateau Kiwi which exported New Zealand wine to China. Wine was purchased from a number of New Zealand wineries, including the Vegars’ Matakana Estate winery, and sold at a number of Chateau Kiwi outlets in cities and towns in China.
[42] Chateau Kiwi Headquarters, the name used for the franchisor, franchised the brand to 15 to 20 franchisees in China. From 2009 Ms Lu was a franchisee in her home town of Zhongshan, China.
Willow Flat
[43] The friendship between the two couples (Mr Huang and Ms Lu, and Mr Chen and Jackie Huang) continued. In 2009, Mr Huang and Ms Lu visited Marlborough with Mr Chen and looked at another piece of bare land owned by a Vegar family company at Willow Flat. It was 21.60 hectares in area. The Vegars were selling the land on the same basis as they had sold the land to Waihopai in 2006, including the vineyard development, vineyard management and grape supply agreements. Ms Lu was very keen to invest in a vineyard. Mr Chen referred her to his then lawyer, Brad Botting, who gave her advice on the sale and purchase agreement and the three other agreements. Ms Lu waived privilege in that correspondence. The advice was comprehensive and raised a number of issues and risks with proceeding with the transaction, including the risk of losing the deposit. Mr Botting explained that the land was subject to the OIA as Ms Lu was not “ordinarily resident in New Zealand” and it was rural land of an area greater than 5 hectares. The advice included an explanation of the OIA requirements and explained that compliance with the OIA was a different and additional matter to obtaining residency. Having a residence permit did not necessarily make Ms Lu ordinarily resident in New Zealand.
[44] Notwithstanding Mr Botting’s advice, Ms Lu signed the agreement for sale and purchase and paid the deposit of $114,500, not to the Vegars’ solicitor, nor to the vendor company, but to another company owned by the Vegars. Ms Lu incorporated Kiwi Club for this venture. She was the sole director with 100 per cent shareholding. It appears from Ms Lu’s evidence that her concern at the time was to obtain residency and she hoped that the purchase of Willow Flat would fast track her residency application through the immigration consultant she was using at the time. However, her residency application did not succeed, the company to which Ms Lu paid the deposit went into liquidation, and Ms Lu lost the deposit. Mr Botting continued to advise her, attempting to recover the deposit over the following two years up to July 2011, but was not successful.
Long-term business visa application – Ms Lu and Mr Huang
[45] After the failed immigration application, Ms Lu and Mr Huang engaged a new immigration consultant. In May 2011 they applied to Immigration New Zealand (INZ) for a long-term business visa. Ms Lu was the principal applicant. The application was based on a business plan under which Ms Lu intended to set up a business in New Zealand to export wine to China. She relied on her experience as a franchisee of Chateau Kiwi in Zhongshan, China and ownership of the villa lots in Matakana.
[46] Separately, Ms Lu said in her evidence that from October 2011 to 2015 she ran another business which sold wine – including New Zealand wine – in Zhongshan, China, called Halfmoon Bay Club. She says she closed this business in around 2015.
Acquisition of Matakana Estate
[47] In or around 2011 Mr Chen became aware that the corporate owners of Matakana Estate were in liquidation and receivership and that the winery and land (Lots 4–7) were for sale. Mr Chen says this created a potential problem for the owners of the villa lots because the Vegar companies had set up the development on the villa lots and continued to manage those properties. He says the receivership was also a potential problem for Waihopai because some of the grapes Waihopai produced were supplied to Matakana Estate indirectly through Savvy.
[48] Mr Chen says he could not afford to purchase the Matakana land and winery business himself, so he discussed the issue with Mr Huang and Ms Lu in September 2011.
[49]The Matakana land and winery business were being sold in three parts:
(a)Three lots were being sold together as a package (Lots 5, 6 and 7). Those lots were used for growing grapes;
(b)Another lot was being sold separately (Lot 4). This lot (the winery lot) contained the main winery buildings used for the Matakana Estate business; and
(c)The Matakana winery business itself was being sold together with the stock.
[50] Mr Huang agreed to provide all of the funding to buy the Matakana land and winery business. The plan was that Mr Huang, Ms Lu and Mr Chen would own and operate the business together. It was agreed Mr Huang would lend Mr Chen his contribution towards the purchase and Mr Chen would repay Mr Huang.
[51] Mr Huang and Ms Lu did not have residency at that stage; they lived in China and were accordingly both “overseas persons” not eligible to purchase the Matakana land under the overseas investment rules. It was decided that Mr Chen would buy the land in his own name and the business through his company Matakana Wines; Mr Huang and Ms Lu would acquire 65 per cent of Matakana Estate (55 per cent to Mr Huang and 10 per cent to Ms Lu) once they had approval from the OIO. Mr Chen would have a 35 per cent share for his contribution of $1.47 million loaned to him by Mr Huang which was to be repaid on specified future dates.
[52] On 30 September 2011 Mr Chen entered into an agreement to purchase Lot 4 for $1.2 million and an agreement to purchase the winery business for $950,000. The agreement for the purchase of the winery business was later varied and the purchase price was ultimately $1,400,938.94.
[53] On 21 October 2011 Mr Huang, Ms Lu and Mr Chen entered into and signed a “Joint Venture Contract” which, as noted above, all parties agree was superseded by the later JV agreement.
[54]The 21 October 2011 agreement contemplated a total purchase price of
$3.5 million dollars to be paid by Mr Huang. Mr Chen would later pay $1.4 million and Ms Lu would later pay $350,000. Mr Huang would therefore have a 50 per cent share, Mr Chen would have 40 per cent and Ms Lu would have 10 per cent.
[55] On 26 October 2011 the purchase of Lot 4 settled. Mr Huang paid the full purchase price and Mr Chen acquired the land in his name.
[56] On 2 November 2011, as part of the agreement reached with Mr Huang and Ms Lu, Mr Chen entered into an agreement to purchase Lots 5, 6 and 7 for
$1.25 million. That transaction settled on 27 March 2012. Mr Huang again provided the funds for the purchase. As agreed, Mr Chen acquired the land in his own name and the business assets were acquired by Mr Chen’s company, Matakana Wines.
The JV agreement
[57] After all the transactions had settled Mr Huang prepared an updated and more formal version of the 21 October 2011 agreement with the assistance of his lawyers in China. The agreement was in the Chinese language and was signed in China on 19 April 2012 by Mr Huang, Ms Lu and Mr Chen. This is the document I have referred to as the JV agreement and which forms the basis of the plaintiffs’ Matakana claim.
[58] I will discuss the terms of the JV agreement later in this judgment. For present purposes the following summary suffices:
(a)The cost of acquisition of the Matakana Estate project was agreed at
$4.2 million;
(b)$1.47 million of this was to be treated as a loan from Mr Huang to Mr Chen, repayable in three instalments on particular dates between 2013 and 2015;
(c)Mr Huang was to have a 55 per cent share, Ms Lu 10 per cent and Mr Chen 35 per cent;
(d)Due to the requirement for Mr Huang and Ms Lu to obtain OIO consent, Mr Chen would acquire the assets as nominee of the three parties, but the actual buyers were Mr Huang, Ms Lu and Mr Chen; and
(e)Mr Chen would be appointed CEO of the business.
[59] The parties took possession of the Matakana land and winery business from February 2012 and continued to employ the existing chief winemaker. Mr Chen was employed as the CEO and General Manager of Matakana Wines.
[60] The plaintiffs say there was agreement reached with Mr Chen that he was responsible for obtaining OIO consent for Mr Huang and Ms Lu. In an earlier version of the statement of claim that was pleaded as a separate cause of action. In the final version of the statement of claim there is no longer a separate cause of action, but it is pleaded that this was Mr Chen’s responsibility under the JV agreement. There was also evidence from the plaintiffs that there was a separate oral agreement with Mr Chen to the same effect. Mr Chen disagrees with that. He says that it was the responsibility of Mr Huang and Ms Lu to get OIO consent. He was prepared to assist them if and when they sought his help – but they never asked him to assist.
Amended INZ application – Ms Lu and Mr Huang
[61] In mid-2012 Mr Chen transferred all the shares in Matakana Wines to Ms Lu’s company, Kiwi Club. There is disagreement between Ms Lu and Mr Chen as to who proposed the transfer. Mr Chen says that Ms Lu told him she had engaged a new immigration adviser and that it would assist her immigration application if she could say to INZ that she held all the shares in Matakana Wines. Mr Chen says he arranged the transfer as a favour to help Ms Lu, at her request: they were friends at the time and Mr Huang had funded the purchase of Matakana Estate.
[62] Ms Lu says that Mr Chen proposed the transfer saying it would assist her to meet the visa criteria. For present purposes it is sufficient to say that the transfer was documented on 29 June 2012 and registered with the Companies Office on 10 September 2012.
[63]On 28 June 2012 Ms Lu was appointed a director of Matakana Wines.
[64] On 23 October 2012 Mr Huang and Ms Lu’s immigration adviser wrote to INZ to amend their immigration application to rely on the Entrepreneur Plus category. This category requires the applicant to be a self-employed entrepreneur who owns and operates their own business. The letter and subsequent formal application said that
Ms Lu was the sole owner of Matakana Wines and was responsible for managing the business.
Integration Scheme
[65] In around the middle of 2012 Waihopai started having disputes with Savvy. Mr Chen says the contracts with Savvy were not working well for Waihopai and Savvy withheld payments due to Waihopai. Mr Chen says that Waihopai was under pressure from the bank which ultimately appointed receivers on 4 February 2013.
[66] Mr Chen says in late 2012 and early 2013 he travelled to China and spoke to people whom he thought might be interested in investing in Waihopai. Yi Lu introduced Mr Chen to a Mr Sun and the three of them signed a letter of intent.
[67] Mr Chen says that he was also keen to offer Mr Huang the opportunity to invest in Waihopai. Mr Chen says he thought that Waihopai’s business would fit in well with Matakana Wine’s business and with the overall plan of exporting New Zealand wine to China. Based on the information provided by Mr Chen, Mr Huang prepared a document which Mr Huang’s secretary, Sue Huimin, emailed to Mr Chen on 23 February 2013. The English version is headed “Vineyard Reform Suggestions”. Dr Liao, the Chinese law expert called by the plaintiffs, thought a better translation would be Grape Winery or Grape Garden Reorganise or Restructure Proposal.
[68] At this stage Yi Lu was to be included in the integration arrangement but he subsequently dropped out. Mr Chen says that he gave Mr Huang a copy of a valuation of the Waihopai Vineyard completed in 2010 and also sent Mr Huang a copy of the Letter of Intent with Mr Sun. Mr Huang denies that. The proposed arrangement with Mr Sun did not proceed further.
[69] Mr Chen’s position is that from this point onwards he regarded Mr Huang as committed to investing in Waihopai. He says that he and Yi Lu did not proceed with Mr Sun because Mr Huang wanted to invest instead. Mr Huang’s position is that the various versions of the Integration Scheme, circulated between February and
May 2013,6 were simply draft proposals for integration. None of the Integration Scheme documents was signed. Both versions of the 26 May 2013 document include the following:
The above figures are approximations, accurate figures will need to be confirmed. A new joint venture agreement should be signed in relation to the Matakana Integration Scheme, and local Auckland lawyer(s) should be employed to draft and witness the legal documents.
[70] Mr Huang’s evidence (in his brief of evidence) is that in May 2013 Jackie Huang travelled to China at short notice and told Mr Huang that Mr Chen urgently needed more money or Waihopai would be auctioned by receivers. Mr Huang’s evidence was that Jackie Huang was very upset; she told him that she was suicidal and that she and Mr Chen could be left with nothing. In her written brief of evidence Jackie Huang did not deny she said that, nor was it put to Mr Huang in cross- examination that Jackie Huang had not said that. In those circumstances it was not necessary for Jackie Huang to be cross-examined on the issue. It is therefore open to the Court to take that evidence into account without limiting the weight to be given to the evidence.
[71] Mr Huang says that he was concerned that if the situation with Waihopai had the potential to bankrupt Mr Chen, then the Matakana assets which were still in Mr Chen’s name could be at risk. There was also the issue that Waihopai was supplying grapes used by Matakana Wines for its wine production.
[72] Mr Huang says in those circumstances he advanced $1.2 million to Mr Chen for Waihopai on 24 June 2013 (received into Mr Chen’s solicitor’s trust account in New Zealand on 25 June 2013). Mr Huang’s position is that this advance was by way of a loan so that the bank did not auction Waihopai. Mr Huang acknowledges that the integration discussions continued, but his position is that he had not yet agreed to integration (and never did so).
6 Versions of the document were circulated on 28 February 2013, 2 March 2013, 9 March 2013 and 26 May 2013 (two versions).
[73]The $1.2 million received from Mr Huang on 25 June 2013, combined with
$800,000 from Yi Lu, enabled Waihopai to reduce the debt it owed to the bank by
$2 million. The receivership ended on 3 July 2013.
[74] On 26 June 2013 Mr Huang’s secretary, Ms Huimin, circulated two further versions of the “Matakana Estate Integration Scheme”. The covering email for one of the versions from Ms Huimin said that this “has just been sorted”.
[75] Both versions of the 26 June 2013 document (and the previous versions) valued the capital in Kintyre (ie Waihopai) at $8.45 million. Accordingly, the 60 per cent that was to be integrated with Matakana Estate was valued at $5.061 million. Those figures were provided by Mr Chen. Mr Huang’s position is that he was still waiting for financial details so the figures could be confirmed. He accepts he received financial forecasts but says no financial statements were provided. Both 26 June 2013 versions showed Mr Huang and Ms Lu together as owning 60 per cent of the integrated assets and Mr Chen and Jackie Huang together as owning 40 per cent.7 The document referred to the Board of Directors of the combined business as Mr Huang, Ms Lu, Mr Chen and Jackie Huang.
[76] On 2 August 2013 Mr Huang circulated a further version of the Integration Scheme.
[77] On 11 October 2013 Mr Chen sent Mr Huang legal advice that Waihopai had received about its dispute with Savvy.
[78] On 22 October 2013 Mr Huang’s secretary, Ms Huimin, circulated an English translation of the Integration Scheme. The version attached to Ms Huimin’s email is dated 26 June 2013 but does not seem to match either of the 26 June 2013 versions in evidence. It was said that the translation was made to enable a New Zealand lawyer to draw up a formal agreement under New Zealand law.
[79] Mr Chen forwarded the English translation to his lawyer, Mr Botting, who prepared a draft Heads of Agreement for a limited partnership. As Mr Botting
7 That would have given Mr Huang and Ms Lu a 36% interest in Waihopai (ie 60% of 60%).
recorded in the draft Heads of Agreement, Mr Huang and Ms Lu needed OIO consent before they could legally own the assets.
[80] On 23 January 2014 Mr Chen sent the draft Heads of Agreement prepared by Mr Botting to Mr Huang and Ms Lu. Neither Mr Huang nor Ms Lu responded to the document. The document remains uncompleted and unsigned. Mr Chen’s position is that the four of them proceeded to conduct themselves in accordance with the Integration Scheme.
Further advances for Waihopai
[81] Between 10 December 2013 and 9 February 2017 Mr Huang and Ms Lu made a series of additional advances to Mr Chen and/or Waihopai. Some of that funding was advanced in the context of the dispute between Waihopai and Savvy to fund litigation costs.8
[82] The funds were advanced from various sources including Ms Lu’s personal bank account, Mr Huang/Ms Lu or Matakana Zhongshan Ltd, a company incorporated pursuant to the JV agreement.
[83] The plaintiffs’ position is that the further advances were by way of a loan either to Mr Chen personally or to Mr Chen and Waihopai together. Mr Chen’s position is that the payments were pursuant to the Integration Scheme.
Memorandum of corporate trusteeship
[84] Mr Chen and Yi Lu were becoming concerned about the litigation with Savvy. To protect against the risk of losing any further advances to Waihopai, it was decided that such advances should be made by way of loan through Ms Lu, acting as a third- party lender.
8 The dispute was heard in this Court in June and July 2015. Both parties achieved a measure of success. See Waihopai Valley Vineyard Ltd v Savvy Vineyards 3550 Ltd [2015] NZHC 2089.
[85] To that end a Memorandum of Corporate Trusteeship was drafted in the Chinese language and was signed by Mr Huang, Ms Lu, Mr Chen and Yi Lu in New Zealand in March 2015. I will discuss this document later in this judgment.
End of relationship
[86] Mr Chen says that in late 2016 he had burnout from overwork having regard to his responsibilities for both Matakana Wines and Waihopai and he took time off to recover. Mr Huang and Ms Lu then terminated Mr Chen’s employment. Mr Huang and Ms Lu say that there were other reasons for removing him. Mr Chen disputes this. But in any event Mr Chen ceased to be the CEO and General Manager of Matakana Wines from early 2017 and Ms Lu took over.
[87] In late 2017 and early 2018 Mr Huang and Mr Chen exchanged written proposals to separate their interests. Mr Chen’s position is that the various proposals drafted by Mr Huang were based on the premise that the Integration Scheme applied: namely that Mr Huang and Ms Lu were entitled to 60 per cent of the integrated assets and Mr Chen and Jackie Huang were entitled to 40 per cent.
[88] None of those proposals came to fruition. On 10 March 2018 Mr Chen offered to settle on the basis that he would transfer Matakana Estate to Mr Huang and Ms Lu if they would give up their interest in Waihopai and pay him $180,000. This proposal was not agreed to.
[89] On 16 March 2018 Mr Chen resigned as a director of Matakana Wines giving reasons in a letter to Ms Lu. The plaintiffs via their then solicitors said in a letter that Mr Chen had in fact already been removed as a director on 13 March 2018.
[90] On 11 May 2018 Mr Huang via his then solicitors made demand on Mr Chen to repay the loan under the JV agreement. Mr Chen says that was the first time there was ever a demand to repay that loan. Mr Huang says he had made oral demands of Mr Chen prior to the letter.
[91] The letter also alleged that Mr Chen had breached his legal obligation under the JV agreement to obtain OIO consent for Mr Huang and Ms Lu, and further that he
owed Mr Huang and Ms Lu the Waihopai advances. The letter demanded that he pay
$4,536,651.15 by 21 May 2018.
Continued operation of Matakana Estate and Matakana Zhongshan
[92] Mr Huang and Ms Lu have continued to operate the winery and vineyard at Matakana and Matakana Zhongshan since Ms Lu took over in early 2017. They have not included Mr Chen and Jackie Huang in the operation of those businesses. Mr Huang and Ms Lu purchased further land in Matakana in 2017 (Lot 1) to operate a lodge and they are running the winery and lodge in conjunction as a tourism venture.
Retrospective OIO consent
[93] At the point when Ms Lu took over the operation of Matakana Wines from Mr Chen, she (and Mr Huang) had still not obtained consent from the OIO to own/acquire the Matakana land. They say they had relied on Mr Chen to obtain consent for them, but no steps had been taken by him.
[94] In 2017 while considering a separate property development Mr Huang and Ms Lu engaged their former solicitors for advice on the OIA process. In October 2017 the solicitors advised the OIO of the acquisition of Matakana Estate. The OIO began an investigation into the transaction which lasted two years. Retrospective consent was granted on 16 September 2020. The special conditions of consent were that:
(a)For the period 1 October 2020 to 30 June 2024 Mr Huang and Ms Lu must retain four full-time equivalent jobs on the Matakana land;
(b)By June 2024 they must register an easement that allows for public walking and cycling across the Matakana land;
(c)By 31 December 2025 they must introduce at least $585,000 to New Zealand for completing “Stage 2” and/or the “preferred design” of a proposed development; and
(d)Each year from 1 June 2023 to 30 June 2027 they must generate at least
$200,000 of non-wine export receipts from the Matakana land.
[95] If these conditions are not met Mr Huang and Ms Lu may be required to dispose of the Matakana land.
[96] Mr Huang and Ms Lu’s then solicitors wrote to Mr Chen asking for his consent. Mr Chen’s separate consent was also necessary for a building consent for minor works in relation to the tasting room. On 29 October 2021 Mr Huang and Ms Lu’s solicitors wrote to Mr Chen’s then solicitor seeking consent to the application for a Code Compliance Certificate for the minor building works and again asking Mr Chen to consent to the registration of the necessary easement for the walkway and cycleway. Mr Chen’s solicitor responded two days later refusing to consent to either, without further information. The general tenor of all the correspondence on behalf of Mr Chen was obstructive. Further information was provided by the plaintiffs’ then solicitors a week later, but no response has been received on behalf of Mr Chen to date.
First proceeding against Mr Chen
[97] Mr Chen did not make any payments in response to the 11 May 2018 letter of demand. On 31 January 2019 the plaintiffs consequently issued the first proceeding against Mr Chen only. The claim was for an alleged failure to repay the loan under the JV agreement and the alleged Waihopai loans. In an amended statement of claim the plaintiffs further sought to recover costs associated with Mr Chen’s alleged failure to obtain OIO consent for them and specific performance in relation to Mr Chen’s alleged failure to transfer the Matakana land in breach of the JV agreement.
[98] Mr Chen relevantly pleaded that: advances to Waihopai were shareholder advances in accordance with the alleged Integration Agreement and were not loans; it was not his responsibility to arrange for Mr Huang and Ms Lu to obtain OIO consent; and he was not required to transfer title to the Matakana land.
Sale of Waihopai and distribution of proceeds of sale
[99] The parties attended a mediation on 21 December 2020, but no agreement was reached.
[100] Shortly before the mediation, Waihopai entered into an agreement on 10 December 2020 to sell its land and business. Mr Chen, as a director and shareholder, was aware of the agreement, but Mr Huang and Ms Lu did not know of it. After the sale was completed, either on the same day of the sale or the next business day, Waihopai distributed cash proceeds totalling $7,476,766.27 to Mr Chen, Don Chen and Yi Lu as follows:
(a)$1,138,000.00 to Mr Chen (15.2 per cent of the proceeds);
(b)$3,348,059.76 to Don Chen (44.8 per cent of the proceeds); and
(c)$2,990,706.51 to Yi Lu (40 per cent of the proceeds).
[101]The payments purported to repay loans they had made to Waihopai.
[102] While the payment to Yi Lu is consistent with his stated shareholding, the payments to Mr Chen and Don Chen are not. Mr Chen owned 40 per cent of the shares, but only received 15.2 per cent of the proceeds. Don Chen owned 20 per cent of the shares but received 44.8 per cent of the proceeds. Together they held 60 per cent of the shares and together they received 60 per cent of the net sale proceeds. They received those proceeds as shareholder lenders to repay shareholder advances.
[103] The sale of the Waihopai assets, which settled on 19 February 2021, was disclosed to the plaintiffs on 22 February 2021 in a brief of evidence for Mr Chen prepared for the original hearing date on 8 March 2021 of the proceeding against Mr Chen. By the time the sale was disclosed settlement was complete and the sale proceeds had already been distributed.
Proceedings against Waihopai and freezing orders
[104] On learning of the sale of Waihopai, the plaintiffs immediately brought proceedings against Waihopai and obtained freezing orders against Waihopai’s assets.9
[105] Having been served with notice of the plaintiffs’ application to seek freezing orders, including that Waihopai would be required to file a memorandum explaining what had happened to the sale proceeds, Mr Chen, Don Chen and Yi Lu each made payments or further transfers of the sale proceeds:
(a)Mr Chen discharged a loan secured against his home;
(b)Don Chen made various payments including to his daughter, another family member, and the seventh defendant AEG, being a company over which he has control over the disposition of assets; and
(c)Yi Lu transferred the sale proceeds to his wife, Qi Yang.
[106] On 25 February 2021 Waihopai disclosed the payment of the sale proceeds to Mr Chen, Don Chen and Yi Lu against whom the plaintiffs then also obtained freezing orders. The plaintiffs also obtained a freezing order against Qi Yang who had received funds from her husband Yi Lu. By this time a significant portion of the sale proceeds had already been transferred out of reach of the plaintiffs.
[107] The two separate proceedings were consolidated and amended statements of claim and defence were filed.
Credibility issues
[108] In Deng v Zheng10 the Supreme Court made a number of observations about cultural considerations, saying that cases in which one or more of the parties have a cultural background which differs from that of the Judge should be approached by the Judge with caution.11 The Supreme Court cautioned that the usual rules of thumb a
9 Huang v Waihopai Valley Vineyard Ltd [2021] NZHC 348.
10 Deng v Zheng [2022] NZSC 76.
11 At [78](a) and (b).
Judge might use for assessing credibility may have no or limited utility. For instance, assessing credibility and plausibility on the basis of judicial assumption as to normal practice will be unsafe, if that practice is specific to a culture that is not shared by the parties.12 However, the Court also said that most of the usual ways that Judges assess credibility remain available.13
[109] It has to be said that there are credibility issues for all three main witnesses: Mr Huang, Ms Lu and Mr Chen. I make the following comments with all of the above in mind.
Mr Huang
[110] On a number of occasions Mr Huang denied what was plainly written in documents which either he had prepared, or which were sent on his behalf.
[111] Mr Huang also said he was not aware of the proposal and agreement reached by Mr Chen and Yi Lu with Mr Sun, although he (that is Mr Huang) had referred to Mr Sun in his 23 February 2013 document “Vineyard Reform suggestions”.
[112] Mr Huang was also complicit in the application made by Ms Lu in 2012 to INZ under the Entrepreneurship category. I refer to that application below in relation to Ms Lu.
Ms Lu
[113] When she was first called to give evidence, Ms Lu denied that Mr Botting represented her in relation to the intended Willow Flat purchase. She said he refused to act. When Ms Lu was later recalled she acknowledged Mr Botting did act for her and gave her advice.14
12 At [78](c).
13 At [78](d).
14 After I had made a direction on an application on behalf of the defendants that a Notice to Produce issue to Ms Lu and Mr Botting in relation to that transaction, it was apparent Mr Botting had acted for her and indeed had provided her with timely assistance throughout the relevant period and had provided comprehensive legal advice (as noted in [43] above Ms Lu waived privilege in that correspondence).
[114] There is also Ms Lu’s conduct in relation to the shares in Matakana Wines which were transferred to her company, Kiwi Club. It cannot be argued that the transfer was done for any purpose other than to advance her application to INZ on the basis that she was self-employed and the sole owner of Matakana Wines. That was not true. Mr O’Brien QC for the plaintiffs submits that, at that stage, because Mr Chen had not paid the first instalment of the loan as he was obliged to do under the JV agreement, Mr Huang was in fact the 100 per cent owner and that a husband and wife may decide how they deal with their interests between them. In other words, it was not inaccurate for Ms Lu to advance her application to INZ on the basis that she was the 100 per cent owner of Matakana Wines. However, Ms Lu’s evidence was that she married Mr Huang about two months after she got her permanent residency, (which was, of course, after she made her application to INZ in 2012).
[115] A further issue is that when they advanced their application to the OIO for retrospective consent in relation to Matakana, both Mr Huang and Ms Lu took the position that it was Mr Chen’s responsibility to obtain OIO consent for them and that he had failed to do so. However, when Ms Lu was recalled to give evidence she changed her position on that issue and said that Mr Chen was going to “help”. That is consistent with Mr Chen’s position. He said he had always been willing to help but he was never asked to make the application or help with it. Additionally, in relation to the OIA process Ms Lu said she relied on what Mr Chen told her about the OIA process and that “he said it was not a big deal and the process was not difficult or long”. I consider Ms Lu understated her knowledge of the OIA process in light of her failed Willow Flat purchase referred to above.
Mr Chen
[116] Mr Chen does not get a clean bill of health either. While it was Ms Lu who was not truthful to INZ, Mr Chen took all the necessary steps to transfer the shares to Ms Lu’s company to enable her to make her application to INZ.
[117] There is also Mr Chen’s conduct in failing to disclose to Mr Huang and Ms Lu that Waihopai had been sold and the way in which he was involved first in distributing the proceeds from the sale of Waihopai and then, at a time when he was on notice that
freezing orders had been applied for, making further payments from the sale proceeds. Mr Judd, for the defendants, referred to that conduct as “foolish”.15 In my view it goes well beyond that. I discuss this issue in the context of the seventh and eighth causes of action.
[118] Despite his assertion that he held 36 per cent of the Waihopai shares in trust for Mr Huang and Ms Lu, Mr Chen did not consult with them or advise them in advance of the sale of Waihopai’s assets, or afterwards. Nor did he pay them any money from the proceeds of sale.
Yi Lu
[119] Turning to Yi Lu, although his evidence was somewhat peripheral as he was not going to be part of the Integration Scheme (after an initial first draft when he was included), I mention him at this point because I am not satisfied he was completely truthful in his evidence. On the same day he received the proceeds of sale of Waihopai’s assets he transferred the funds to his wife. Because of the (self-imposed) limitation on his bank account, limiting individual transfers to the sum of $50,000, he needed to make around 55 electronic transfers. He made all of those transfers in one evening.
[120] When asked about these transfers, Yi Lu said that he did so because he was about to travel overseas to visit his father who was very ill, and he followed his past practice of transferring all his money to his wife in case he suffered some sort of accident while away. However, at that stage Yi Lu confirmed he had made no travel bookings to see his father. In my view his explanation was not credible.
[121] Consequently, I exercise a degree of caution in accepting the word of any of the above witnesses on important issues unless there is either documentary support or support from other witnesses.
15 Mr Judd was not acting for Mr Chen at the time.
Order of consideration of issues
[122] I will deal with the Waihopai advances and alleged agreement as to integration before considering the JV agreement, although the latter was first in time. I do so because if I find in favour of the defendants on the integration issue, then anything owing by Mr Chen under the JV agreement will, on the defendants’ case, be subsumed into the Integration Scheme.
Status of Mr Huang’s payments to Mr Chen/Waihopai
[123] What was the status of Mr Huang’s advance of $1.2 million on 24/25 June 2013 and the later advances said to total $1,176,261?
[124] Mr Chen says they were payments of capital for an interest in Waihopai. Mr Huang says they were loans. Although this issue is bound up with whether the Integration Scheme had been agreed, it can be considered separately.
[125] Mr Chen says that by at least 26 June 2013, the Integration Scheme had been agreed. For reasons discussed below, I do not accept that was the case. But, leaving aside the issue as to an agreement over integration of assets in Matakana Estate and Waihopai, I first consider whether the payments made by Mr Huang were by way of loan or a capital investment in Waihopai.
[126] As already referred to, Mr Huang said that in May 2013 Jackie Huang travelled to China at short notice and told Mr Huang that Mr Chen urgently needed more money or Waihopai would be auctioned by receivers.
[127] In any event, Mr Huang was aware from Mr Chen that Waihopai was in the hands of receivers before he advanced the $1.2 million. Mr Huang said that if the issue with Waihopai had the potential to bankrupt Mr Chen, then the Matakana land could be at risk as it was still in Mr Chen’s name. Further, Matakana and Waihopai had a joint interest in grape supply: Waihopai was supplying grapes used by Matakana Wines for its wine production. Mr Huang’s expressed concerns can be reasonably understood.
[128] Against that background Mr Huang said he agreed to advance the $1.2 million Mr Chen needed for Waihopai by way of loan. The money advanced by Mr Huang was applied, together with $800,000 advanced by Yi Lu, to bring Waihopai out of receivership. This formally occurred on 3 July 2013.
[129] It is important to note that the first advance of $1.2 million occurred at a time when discussions between Mr Huang and Mr Chen about integration were underway. However, on its own, the advance of $1.2 million does not necessarily mean that an agreement had been reached over integration. I also record that the plaintiffs accept that if the Integration Scheme came to fruition/was agreed, then the $1.2 million (and later advances) would form part of the integration. Otherwise, the plaintiffs say they would remain as a loan.
[130] The defendants’ position is somewhat contradictory. On the one hand they say that the Waihopai advances were a capital investment in Waihopai. If that was so, Mr Huang and Ms Lu would receive nothing from the sale of Waihopai which was insolvent at the time of sale. The way Mr Chen treated Mr Huang and Ms Lu at the time of the sale is consistent with this position as they received nothing. On the other hand, the defendants say/acknowledge that Mr Huang and Ms Lu should receive a payment of (approximately) $2.4 million; this is inconsistent with their position that the payments were a capital investment.
[131] In any event and leaving the integration issue aside just for the moment, the evidence is that the Waihopai advances were by way of loan:
(a)The advances made by Mr Chen and Yi Lu to Waihopai were by way of loan (except for the $100 share capital);
(b)The investment by another person, Lucy Wang, was by way of loan, or at least it became so, although it was not transparently identifiable in Waihopai’s accounts;
(c)An indirect advance of a Mr Jiang (a personal friend of Yi Lu in China) via Yi Lu, paid out of sale proceeds of Waihopai in the sum of $705,030
was by way of loan, and similarly all the other advances from Mr Lu’s family and friends;
(d)The $2 million paid out on 28 June 2013 to bring Waihopai out of receivership recorded in the Waihopai Board of Directors’ Resolution and Deed of Acknowledgement of Debt, both dated 28 June 2013 and signed by Mr Chen and Yi Lu, was said to be by way of loan;
(e)It would be inconsistent to treat Mr Huang’s portion ($1.2 million) of the $2 million recorded in the 28 June 2013 document differently from the portion contributed by Yi Lu ($800,000);
(f)The $2 million advance (including the $1.2 million advance from Mr Huang) was recorded in Waihopai’s accounts from 2014 onwards as a loan; and
(g)The later advances from Mr Huang and Ms Lu were recorded in the accounts from 2014 as loans until they were subsumed into the shareholder (Chen/Lu) loans in 2018.
[132] Mr Judd, relying in part on Zheng v Deng,16 submits that the internal accounting is not necessarily conclusive. In particular, Mr Judd relies on comments by the Court of Appeal that the unorthodox nature of the internal accounts (in that case) did not tell against the existence of a partnership and that a partnership can exist even though any accounts that are kept are idiosyncratic and difficult to understand.
[133] At the time of the hearing, the decision of the Supreme Court on appeal from the Court of Appeal judgment in Zheng v Deng was awaited. That decision has now been given.17 On the facts the Supreme Court was satisfied that the internal accounts were authentic; that is, they recorded on a running basis the state of affairs between Mr Zheng and Mr Deng and reflected the nature of their relationship.18
16 Zheng v Deng [2020] NZCA 614 at [101].
17 Deng v Zheng, above n 10.
18 At [60].
[134] I am similarly satisfied in this case. The accounts are evidence of what was intended. The evidence shows that the Waihopai shareholders were advancing funds to the company by way of loan. There is no reason for the advances by Mr Huang and Ms Lu to be treated differently.
[135] There is also the letter written on Mr Chen’s behalf to the OIO. When the OIO was considering Mr Huang and Ms Lu’s retrospective application, it made contact with and interviewed Mr Chen. In a letter to the OIO, Allan Lear, who was Mr Chen’s barrister at the time, referred to the receivership of Waihopai in early 2013 and the bank’s position that if new shareholder funds were introduced in order to reduce the bank’s lending facility by $2 million, the bank would agree to take Waihopai out of receivership. The letter, dated 5 April 2018, states:
Chris and the other shareholders could only raise $800,000 and went to other friends and acquaintances to raise the balance. Chris advises that he secured loans for the balance from acquaintances in China but then thought that he should perhaps inform Alex and Chrissy given their connection with Matakana and that his vineyard supplied some grapes to Matakana. On hearing the proposed arrangement, Alex said he would help them out and provide the balance of the funds to bail the company out of Receivership. Alex advanced $1.2m to Chris and with the other funding provided by the shareholders, Waihopai Valley Vineyard came out of Receivership.
[136]In relation to the later advances the letter states:
Additional money was required to fund the litigation [with Savvy] that went to a full hearing. The shareholders of the company, along with Alex, contributed funds, at least some of which were loaned to the Company via Chrissy …
[137] This letter supports the proposition that Mr Huang’s advances were not capital payments.
[138] For all the above reasons I accept the Waihopai advances were loans to Mr Chen and/or Waihopai. They were not capital payments for an interest in Waihopai.
[139] However, whether Mr Huang and Ms Lu made the loans as shareholders in Waihopai requires consideration of whether they were in partnership with Mr Chen
and Jackie Huang. That in turn requires a consideration of the Integration Scheme and whether there was agreement on its terms.
Partnership
[140] The defendants allege in a counterclaim, by way of a late amendment to their statement of defence, that there was a partnership agreement between Mr Huang and Ms Lu on the one hand and Mr Chen and Jackie Huang on the other. The defendants’ position is that while they rely on the Integration Scheme (they say Integration Agreement) their position on the existence of a partnership does not depend on that agreement.
[141] The plaintiffs initially opposed the defendants’ late application to amend the statement of defence to allege the existence of a partnership. However, without conceding the existence of a partnership, the plaintiffs then withdrew that opposition. The plaintiffs say: (i) the parties considered but never agreed on the terms of an Integration Scheme; nor did they ever otherwise agree to combine their interests into a partnership; and (ii) if there was agreement (which is denied) such agreement was procured by Mr Chen’s false and deceiving representation as to the value of his equity in Waihopai.
[142] The plaintiffs do oppose the application to amend the counterclaim in terms of the relief sought by the defendants if the Court finds there was a partnership. In short, the plaintiffs say that delays that will occur in the provision of further information necessary for an accounting to be done will prejudice the plaintiffs.
[143] Notwithstanding the opposition to the relief sought, if the Court finds a partnership exists, an accounting will need to be undertaken. The Court does not have all the necessary information to make orders and, in any event, the Court may grant relief even though that relief has not been specifically claimed.19 I therefore grant the defendants’ application to amend the counterclaim in terms as sought. However, given the decision I reach in relation to the existence of a partnership, the issue regarding taking of accounts is somewhat academic.
19 High Court Rules 2016, rr 5.31(2) and 16.2.
Relevant law
[144] There is no reference in any of the Integration Scheme documents regarding which country’s law is to apply. However, the draft Heads of Agreement prepared by Mr Botting provides that the law of New Zealand is to apply. It was agreed between the parties that New Zealand law applies on the partnership issues. There was little, if any, disagreement as to the relevant principles that govern the existence of a partnership. Both counsel referred to the Court of Appeal decision in Zheng v Deng.20 The Supreme Court decision in Deng v Zheng21 leaves those general principles unchanged.
[145] The issue of whether the parties had entered into a partnership is a mixed question of fact and law. The starting point is s 4 of the Partnership Act 1908 which provides:
4 Definition of partnership
(1) Partnership is the relation which subsists between persons carrying on a business in common with a view to profit.
(2) But the relation between members of any company or association registered as a company under the Companies Act 1993 or any other Act of the Parliament of New Zealand for the time being in force and relating to the registration of joint-stock, trading, or mining companies, or formed or incorporated by or in pursuance of any other Act of the Parliament of New Zealand or letters patent, or Royal Charter, is not a partnership within the meaning of this Act.
[146] Some of the factors that may be relevant to determining whether or not a partnership exists are set out in section 5:
5 Rules for determining existence of partnership
In determining whether a partnership does or does not exist regard shall be had to the following rules:
(a) joint tenancy, tenancy in common, joint property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof:
(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived:
20 Zheng v Deng, above n 16, at [90]–[94].
21 Deng v Zheng, above n 10.
(c) the receipt by a person of a share of the profits of a business is prima facie evidence that he or she is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make him or her a partner in the business; and, in particular,—
(i)the receipt by a person of a debt or other liquidated amount, by instalments or otherwise, out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such:
(ii)a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such:
(iii)a person being the widow, widower, surviving civil union partner, surviving de facto partner, or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such:
(iv)the advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business, or liable as such:
provided that the contract is in writing, and signed by or on behalf of all the parties thereto:
(v)a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business is not, by reason only of such receipt, a partner in the business or liable as such.
[147] The analysis in any particular case is highly fact specific. The Court of Appeal noted that the following warning remains apposite:22
Very little assistance can be obtained from the numerous cases reported in which the question of partnership or no partnership has been decided. In all such cases the particular facts – what were in effect the respective contracts – were intimately connected with the questions of law.
[148] The Court of Appeal said: “The question ‘is a legal question to be determined by the Court on the basis of what the parties said and did’”.23
[149] The Court of Appeal also stressed that it is important to bear in mind the infinite variation in partnership structures and avoid the assumption that a partnership must have certain characteristics or incidents other than those actually required by s 4(1) of
22 Zheng v Deng, above n 16, at [92] citing Aldridge v Paterson (1914) 33 NZLR 997 (SC) at 1006.
23 Zheng v Deng, above n 16, at [93] quoting from Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA) at [51].
the Partnership Act. The Court cited a passage from the learned authors of Lindley & Banks on Partnership:24
There is … a danger that what are, in truth, normal incidents or characteristics of partnership are wrongly perceived as pre-requisites to the existence of that relationship, thus distorting the application of [the United Kingdom equivalent of s 4(1) of the Partnership Act].
Relevant documents
[150] Mr O’Brien accepts that although what was discussed between Mr Huang and Mr Chen was not something called a partnership agreement (it translates as Integration Scheme, Proposal or Plan),25 if the parties came to an agreement on the scheme then there was a partnership agreement. That must be right. Mr O’Brien also submits that whether there is an integration agreement, either written or oral, whether express or implied, that again could be seen as falling within the umbrella of a partnership. The issue turns on whether there was an agreement.
[151] Mr Chen’s evidence was that from the time he received Mr Huang’s first document on 23 February 2013 he regarded Mr Huang as committed to investing in Waihopai. Mr Chen says he and Yi Lu did not proceed with Mr Sun because Mr Huang wanted to invest instead. In my view it cannot be said that Mr Huang was committed as at this date based on what is plain from the document. The 20 per cent proposal is couched in the following way:26 “If Mr Huang buys 20 per cent shares from [Mr] Chen
…”.
[152] Mr Chen places weight on a WeChat message sent by Mr Huang to him on 23 February 2013. The English translation of the message reads: “I’m in the company, I can tell you”. However, Mr Huang’s explanation was that the Chinese message correctly translated should read: “I’m in the company, can communicate via phone”. Mr Huang’s position was that he was not agreeing that he was now part of Waihopai; he was simply explaining he was at work but could give Mr Chen a phone call. That is a reasonable explanation in the context of documents that follow, particularly the
24 Zheng v Deng, above n 16, at [94] quoting Roderick I’Anson Banks Lindley & Banks on Partnership (20th ed, Sweet & Maxwell, London, 2017) at [2–15], (emphasis in original).
25 There was evidence that the Chinese language version could equally be translated to ‘proposal’ or ‘plan’.
26 (Emphasis added).
May 2013 version of the Integration Scheme discussed below, which indicate they had not yet reached agreement.
[153] As already detailed above at [67] – [80], between February and June 2013 there were a number of documents drafted by Mr Huang for an Integration Scheme.
[154] Under cross-examination Mr Chen seemed to suggest that the parties had reached agreement on integration in May 2013. But it is clear from the documents that the parties had not reached agreement as at that date. As already noted, both versions of the 26 May 2013 Integration Scheme state that:
The above figures [provided by Mr Chen in relation to Waihopai] are approximations, accurate figures will need to be confirmed. A new joint venture agreement should be signed in relation to the Matakana Integration Scheme, and local Auckland lawyer(s) should be employed to draft and witness the legal documents.
[155] There is also the fact that drafts continued after May 2013. Further, and importantly, the values for the Waihopai Vineyard set out in the drafts were provided by Mr Chen. They needed to be verified.
[156] Moving to the 26 June 2013 versions, one of them referred to eight annexures, only one of which was in evidence. No email with the annexures was produced in discovery. In any event there is evidence, which I will come to, which indicates that Mr Huang wanted a formal agreement (as referred to in the 26 May 2013 document).
[157] Although in his evidence Mr Chen relied on the 26 May 2013 version, the position for the defendants in closing submissions was that the 26 June 2013 document formed the agreement. Mr Judd refers to the covering email from Mr Huang’s secretary which says: “Attached is the Matakana Estate Integration Scheme which has just been sorted”.
[158]The defendants also rely on the payment by Mr Huang on 24/25 June 2013 of
$1.2 million. Mr Judd notes that the payment was then described by Mr Huang in one of the 26 June 2013 documents as: “The NZD1.2m first advanced payment from Alex Huang to acquire Kintyre Estate …”. Mr Judd suggests that this implies that Mr Huang owned shares in Waihopai at this time. However, I read “to acquire Kintyre
Estate” as simply a reference to taking back Waihopai from the receivers. That is consistent with the evidence that the $1.2 million advanced by Mr Huang was used to take Waihopai out of receivership.
[159] The $1.2 million advance was made at a time of need and under a degree of time pressure. It was advanced to an associate who had become a friend, at a time when integration discussions were underway. Almost certainly, the parties hoped those discussions would reach a conclusion. But the mere payment of $1.2 million does not mean that they did.
[160] The defendants also refer to a WeChat message from Mr Chen to the others in the group of four, namely Mr Huang, Ms Lu, Mr Chen and Jackie Huang (WeChat group), on 1 July 2013 saying: “Kintyre Vineyard has been officially taken back on 28 June. Matakana also officially owns Kintyre Vineyard, from now on it will be promoted as the Matakana Marlborough Vineyard”. That message on its own might tend to suggest there had been agreement as to integration. But it needs to be seen in the wider context.
[161] On 2 August 2013 Ms Huimin sent an email to Mr Huang, Ms Lu, Mr Chen and Jackie Huang attaching one of the 26 June 2013 Integration Scheme documents. The covering email in the English version says:
Please see attached the newly organised “Matakana Estate Integration Scheme” first draft and its attachment(s), please check you have received it! If you have questions about the attachment(s) you can inquire with the corresponding contact person, mr Huang will arrive at Auckland on 9th August to discuss this integration scheme with othe (sic) shareholders. Thank you!
[162] The use of the expression “first draft” would indicate that there was not yet agreement on the scheme. The reference to other shareholders, on the other hand, could tend to indicate that the interests in the two businesses had been integrated. However, it could equally be a reference to the individuals as Matakana shareholders or to intending shareholders. In any event, the covering email suggests there was further discussion yet to occur.
[163] On 11 October 2013 Mr Chen forwarded to Ms Huimin legal advice received by Waihopai in relation to the dispute with the Vegars’ company Savvy. Mr Judd
submits Mr Chen would only do so if Mr Huang was a shareholder in Waihopai. However, it could equally be the case that the advice was forwarded because Mr Chen needed more money for Waihopai which he wished to borrow from Mr Huang. That was Mr Huang’s evidence. Having regard to credibility issues raised earlier in relation to Mr Huang I do not necessarily take his evidence at face value, but it does provide an explanation for Mr Chen sending the advice. Equally, sending the advice is consistent with disclosure of matters in anticipation of reaching a concluded integration agreement.
[164] On 22 October 2013 Ms Huimin sent an email to Mr Huang, Ms Lu, Mr Chen and Jackie Huang attaching the “Matakana Estate Integration Scheme which has just been translated … Wishing success in business!” The attachment was the more detailed version of the 26 June 2013 document which contained the opening words:
On the basis of the JOINT VENTURE CONTRACT (see Annex 1 for details), in order to give light to each party’s special advantage, Chris Chen, Alex Huang and Chrissy Lu decide to reintegrate Matakana Estate. Concrete operations as follows.
[165] Despite the use of the words “decide to reintegrate Matakana Estate” it would appear that the parties had not yet reached agreement on the terms. I say that because on 23 October 2013 Mr Chen emailed his lawyer, Mr Botting, from China, saying that he would be back at the end of the month and that “I like to ask you to draft an agreement for the shareholders of matakana wines”. Then on 5 November 2013 Mr Chen forwarded the email from Ms Huimin of 22 October 2013 (refer [164] above) and the attached document to Mr Botting. Mr Chen agreed under cross-examination that at that point Mr Huang’s intention and his own intention was to get a document drafted up under New Zealand law by a New Zealand lawyer for them to consider.
[166] On 23 January 2014 Mr Botting sent Mr Chen an email attaching what he refers to as a “revised” Heads of Agreement. That would indicate there was an earlier draft although no such draft was put before the Court. I set out the email in full:
Hi Chris
Thanks for your time this afternoon.
[322] Equitable damages for losses arising out of breach of contract are only available where the particular loss was reasonably foreseeable. The traditional test in contract derives from Hadley v Baxendale,66 which held that the type of damages suffered must be that which would “ordinarily” arise or was stipulated at the time of the contract. The basic premise behind the principle of foreseeability is that what can be recovered is limited by a judicial determination of what is reasonable.67
[323] In my view, Mr Chen ought to have foreseen that Mr Huang and Ms Lu would wish to start the implementation of the conditions and develop the Matakana land at the earliest opportunity, so as to ensure compliance with the special conditions of the OIO consent. Additionally, Mr Chen was put on notice in a letter from the plaintiffs’ solicitor dated 26 August 2021 that by his conduct he had delayed the implementation of the conditions and that damages would be sought. Mr Chen took no steps to facilitate the implementation of the conditions following receipt of that letter.
[324] The plaintiffs are entitled to damages from the delay as the loss set out in Mr Hanlon’s evidence was reasonably foreseeable. Increased construction and property development costs are an ordinary and expected consequence of significant delay. In this case, the increase in costs arose in the ordinary way and should have been foreseen by Mr Chen.
66 Hadley v Baxendale (1854) 9 Exch 341, (1854) 156 ER 145.
67 Andrew Butler, above n 57, at [32.5.2].
Counterclaims
[325] It is next necessary to consider the counterclaims and any effect they may have on the orders sought by the plaintiffs.
[326] Of the six counterclaims, Mr Chen pleads four in relation to the plaintiffs’ Matakana claims, and Mr Chen and Jackie Huang together plead the partnership counterclaim which I have already addressed. I have found there was no partnership agreement. That counterclaim therefore fails. The sixth counterclaim is pleaded by Waihopai against Ms Lu. I will consider that counterclaim after considering the plaintiffs’ Waihopai claims.
[327]I now address the four Matakana counterclaims.
First counterclaim (against Mr Huang and Ms Lu): Matakana Zhongshan shares
[328] Mr Chen claims that Mr Huang and Ms Lu breached the JV agreement by failing to provide him with any interest in Matakana Zhongshan.68
[329] As the plaintiffs acknowledge, the JV agreement provides that a wholly owned subsidiary of Matakana Wines was to be set up in China with an investment of
$200,000. That sum was provided by Mr Huang. The plaintiffs further accept that Mr Chen was entitled to a share in Matakana Zhongshan, subject to performing his obligations under the JV agreement. One of those obligations was to repay Mr Huang the sum specified in the JV agreement together with interest.
[330]The plaintiffs defend the counterclaim on two bases:
(a)The JV agreement provides that Mr Chen would acquire a 35 per cent interest in Matakana Wines rather than Matakana Zhongshan; and
68 In this counterclaim Mr Chen also alleges a breach of the integration “agreement” by failing to provide an interest to him in Matakana Zhongshan. It is not necessary to consider that part of the counterclaim as I have found that the Integration Scheme had not reached the stage of “agreement”.
(b)Mr Chen’s right to require a 35 per cent interest is subject to a condition precedent that he pays the money due under the JV agreement together with interest.
[331] The plaintiffs are correct on the first point and I have accepted Dr Liao’s evidence in relation to the second point. There is no answer to the plaintiffs’ defence to the first counterclaim which fails.
Second counterclaim (against Ms Lu): shares in Matakana Wines
[332] When Matakana Wines was incorporated, Mr Chen was the sole shareholder. In September 2012, he transferred 100 per cent of the shares to Kiwi Club, a company wholly owned by Ms Lu. Mr Chen says this was to assist Ms Lu in her immigration application. I have found that to be the case. Mr Chen pleads it was an implied term of the agreement with Ms Lu that she would procure the transfer of 40 per cent of the shares in Matakana Wines to Mr Chen upon approval of her immigration application and/or the granting of OIO consent, both of which have now occurred. The 40 per cent interest is sought under the alleged Integration Agreement. In the alternative, Mr Chen says if the Court finds the JV agreement was still in force, then he claims 35 per cent of the shares in Matakana Wines.
[333] Ms Lu denies the counterclaim and pleads that the transfer was in consideration of the money advanced by Mr Huang and herself in accordance with the JV agreement. I do not accept that was the reason for the transfer of the shares having found that the transfer was for the purpose of assisting Ms Lu in her immigration application.
[334] However, while Mr Chen is in breach of the JV agreement he does not have a 35 per cent entitlement in the shares of Matakana Wines (or the Matakana land).
[335]The second counterclaim fails.
Third counterclaim (against Matakana Wines): failure to repay advances
[336] In his third counterclaim against Matakana Wines, Mr Chen alleges a failure to repay advances he made between 8 May 2015 and 29 March 2016 totalling, he says,
$540,000. Mr Chen seeks to recover that sum, plus interest.
[337] Further, Mr Chen claims interest on earlier advances he made to Matakana Wines which were repaid.
[338] The plaintiffs refer the Court to the Matakana Wines financial statements which show the amount of $530,784 as the amount owing (rather than $540,000). Ms Fu gave evidence as to the quantum of the debt by reference to Matakana Wine’s ledger. I found Ms Fu to be a reliable witness who gave balanced evidence, notwithstanding she was called as a witness for the plaintiffs. Although Mr Chen challenges the quantum, he did not substantiate his claim by reference to Matakana Wine’s ledgers. He simply asserted in his brief of evidence that he made the advances in the amount pleaded in his counterclaim.
[339] There is no reason not to accept Ms Fu’s evidence. The amount owed by Matakana Wines to Mr Chen is $530,784.
[340] Turning to the matter of interest on that sum and the interest on the earlier advances which were repaid, the counterclaim pleads that it was the agreed practice of Mr Huang, Ms Lu and Mr Chen to charge interest on any amounts advanced by themselves or third parties to Matakana Wines from the date of advance until the date of repayment at a rate of between 12 per cent and 18 per cent per annum. That is denied by the plaintiffs. At the hearing, Mr Chen said in evidence:69
In all these years, the money that we borrowed from other parties or friends, all these loans, their interests were above 10%. For example, when Alex advanced money into Matakana, he also charged the company 18% of the interest per year.
He also asserted that:70
69 In the context of acknowledging that he owed Mr Huang and Ms Lu a share of the proceeds of the sale of Waihopai.
70 In the context of pleading his claim for an interest in Matakana Zhongshan.
Mr Huang recorded a loan of 850,000 to Matakana Zhongshan with interest of 18% per year. That is recorded in the [...] meeting. And Ms Lu’s father, at the same time, he make a loan of 1.5 million [...] at the interest rate of 12% per year. So at the same time, they didn’t pay the company, but at the same time, they make a loan to the company with such a high interest. So, my style is difference with them. So based on that, I think, like, even the money of 850,000 RMB, that’s equivalent of about 150,000 New Zealand dollar, to his own company and here's their charge, there's two charge 18% interest per year.
[341] The above is evidence of what Mr Huang charged as interest in relation to Matakana Wines and Matakana Zhongshan, as well as Mr Huang’s father-in-law in relation to (it seems) Matakana Zhongshan. But the evidence does not go so far as establishing there was an agreed practice to charge interest at the interest rate alleged.
[342] I have considered whether Mr Chen might be able to claim interest under the Interest on Money Claims Act 2016. However, the difficulty for Mr Chen is that this was not pleaded, as required by that Act.71
[343]Mr Chen succeeds in part on this counterclaim to the extent of a claim of
$530,784 owed to him by Matakana Wines. He fails on his claim for interest on the basis of a lack of evidence regarding alleged agreed practice and because there is no pleading in relation to the Interest on Money Claims Act.
Fourth counterclaim (against Matakana Wines): failure to pay rent and outgoings
[344] This counterclaim relies on Mr Chen being the registered proprietor of the Matakana land. By a written Deed of Lease in 2012, Matakana Wines agreed to lease from Mr Chen the land and buildings on Lot 4 at a specified rental and pay 100 per cent of the outgoings. Mr Chen pleads that Matakana Wines has been in occupation of the premises since 27 March 2012 and has failed to pay rent or outgoings to him since at least January 2015, in breach of the lease. Mr Chen seeks to recover
$454,999.74 in unpaid rental up to July 2021 and further (unspecified) rental from July 202172 and $86,339 in unpaid outgoings (Auckland Council rates).
71 Interest on Money Claims Act 2016, s 25.
72 It appears Mr Chen would calculate any further rental on a monthly rate of $5,833.33.
[345] Mr Chen’s position is that if the Court were to find there was no agreement on the Integration Scheme and the plaintiffs are entitled to enforce the JV agreement, then Mr Chen seeks payment from Matakana Wines under the strict terms of the lease.
[346] That is not a tenable position to adopt. Because Mr Chen has failed to repay the amount he owes to Mr Huang under the JV agreement, he was at all relevant times holding the Matakana land on a bare trust for Mr Huang and Ms Lu. Matakana Wines has therefore been in occupation of the land with the permission of Mr Chen as bare trustee for Mr Huang and Ms Lu alone. As far as the claim for rates, there was no evidential basis for this part of the counterclaim.
[347]The fourth counterclaim fails.
Matakana claims (first to third causes of action): relief in favour of plaintiffs
[348]I grant the following relief on the first, second and third causes of action:
(a)A declaration that Mr Chen holds the Matakana land on a constructive trust for Mr Huang and Ms Lu (first cause of action);
(b)An order requiring Mr Chen to transfer the title to the Matakana land, unencumbered, to Mr Huang and Ms Lu (first, second and third causes of action); and
(c)An order for equitable damages against Mr Chen in the sum of
$3 million in favour of the plaintiffs as a consequence of the delay suffered by the plaintiffs in developing the Matakana land (first, second and third causes of action).
Matakana claims (third counterclaim): relief in favour of Mr Chen
[349] I make an order that the third plaintiff, Matakana Wines, pay Mr Chen the sum of $530,784.00.
Waihopai claims
Fourth cause of action (against Mr Chen) and fifth cause of action (against Waihopai): claims for debt
[350] The fourth cause of action is against Mr Chen for his failure to repay the Waihopai advances (which I have found to have been loans). The fifth cause of action is an alternative claim against Waihopai for failure to repay the Waihopai advances.
[351] The defendants’ response is that there is no debt because of the alleged agreement on the Integration Scheme. That argument has failed. In relation to the fifth cause of action they say there would be no debt owed by Waihopai in any event because the relationship was between Mr Chen and Mr Huang.
[352] As I have already found, Mr Huang transferred $1.2 million to Mr Chen’s then solicitors in June 2013. Those funds were used along with $800,000 from Yi Lu to bring Waihopai out of receivership.
[353] Then from December 2013 to February 2017 Mr Huang and Ms Lu made further advances to both Mr Chen and Waihopai. Together the additional advances totalled $1,176,261. Some of those later advances were made directly to Waihopai. Others were to Mr Chen and he advanced them to Waihopai. The pattern indicates they were advanced on a joint and several basis.
[354] As to quantum, Mr Chen (while not accepting that the advances were loans) admitted that the plaintiffs advanced in excess of $2 million in relation to Waihopai but did not accept the exact figure of $2,376,261. This sum was calculated by Ms Fu; Mr Chen has offered no accounting evidence to challenge the calculation.
[355] The plaintiffs succeed on these two causes of action. The advances (which I have found to be loans) were made to Mr Chen and/or Waihopai.
Sixth cause of action (all defendants): money had and received
[356] In the alternative to the above claims for recovery of the Waihopai advances as a debt, the plaintiffs seek to recover the Waihopai advances in equity. They plead
money had and received (and the doctrine of unjust enrichment in the ninth cause of action). The plaintiffs say they understood they made the Waihopai advances as loans repayable on demand to be used to remove Waihopai from receivership and to ensure that Waihopai could continue trading. They say that Mr Chen and Yi Lu then caused Waihopai to sell its assets and dissipated the sale proceeds without repaying the Waihopai advances to the plaintiffs. They say this resulted in the defendants being unjustly enriched at the plaintiffs’ expense in the amount of the Waihopai advances and it would be unconscionable for the defendants to retain the benefit of the Waihopai advances.
[357] The defendants again plead there was no debt because of integration. That is their only defence, which has failed.
[358] The common law action for money had and received is based on the receipt of money by a defendant who has no right to retain it, and the cause of action is complete when the money is received.73 An action for money had and received does not depend on proof of any wrongdoing or impropriety on the part of a recipient and it does not turn on the continued existence or retention of the money received.74
[359] I have accepted that the plaintiffs’ advances to Mr Chen and/or Waihopai were loans. The advances were made to assist in retrieving Waihopai from receivership and enable the company to continue trading. Each of the defendants received money from the proceeds of sale of Waihopai as set out in [382] below.
[360] The claim for money had and received is an appropriate response in the circumstances. The plaintiffs succeed on this cause of action.
73 Nimmo v Westpac Banking Corporation [1993] 3 NZLR 218 (HC) at 238.
74 Worldwide Holidays Ltd v Wang [2019] NZHC 2218 at [71].
Seventh cause of action (against Mr Chen, Don Chen, Jackie Huang and AEG): dispositions made with the intent to prejudice Mr Chen’s creditors
Eighth cause of action (against all defendants): dispositions made with intent to prejudice Waihopai’s creditors
[361] The eighth cause of action is an alternative to the seventh cause of action which is a further alternative to the previous causes of action.
[362] Addressing both causes of action together, the plaintiffs’ say that the payments of the sale proceeds of Waihopai’s assets made to the defendants were “prejudicial dispositions” pursuant to the PLA because:
(a)The plaintiffs were creditors of Mr Chen and/or Waihopai in relation to the Waihopai advances;
(b)The concealed sale of Waihopai’s assets and distribution of the sale proceeds just before the original trial date of the plaintiffs’ claim against Mr Chen bears the hallmark of a transaction undertaken with the intention to render Waihopai and Mr Chen judgment-proof;
(c)Mr Chen became insolvent once payment to his brother Don Chen was made in excess of the amount that would equate to Don Chen’s percentage share in Waihopai; and Mr Chen could no longer repay the Waihopai advances to the plaintiffs and other creditors such as Ms Wang;
(d)Additionally, and alternatively, following the payments of all net proceeds of the sale of Waihopai’s assets to the defendants, Waihopai became insolvent (if it was not already); and
(e)The payments were intended to prejudice and have the effect of causing prejudice to the plaintiffs as creditors.
[363] The defendants’ position is that the plaintiffs are not creditors of either Mr Chen or Waihopai because of the alleged Integration Agreement. That argument has failed.
[364] The plaintiffs rely on subpart 6 of Part 6 of the PLA. The purpose of subpart 6, as set out in s 344 of the PLA, is:
… to enable a court to order that property acquired or received under or through certain prejudicial dispositions made by a debtor (or its value) be restored for the benefit of creditors …
[365]“Property” is defined to include the “proceeds of any property”.75
[366] “Proceeds” in relation to any property means the “proceeds of the sale of the property”.76
[367]The definition of “disposition” is:77
A conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity …
[368]A further relevant definition relates to prejudicial dispositions:78
A disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of a property.
[369]Section 346 relevantly provides:
346 Dispositions to which this subpart applies
(1) This subpart applies only to dispositions of property made after 31 December 2007—
(a)by a debtor to whom subsection (2) applies; and
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2) This subsection applies only to a debtor who—
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
…
75 Section 345(2).
76 Section 345(2).
77 Section 345(2).
78 Section 345(1).
[370] A creditor who claims to be prejudiced by a disposition of property to which subpart 6 applies may make an application to the Court for an order to set aside certain dispositions.79
[371]Section 348 relevantly provides:
348 Court may set aside certain dispositions of property
(1)A court may make an order under this section—
(a) on an application for the purpose (made and served in accordance with section 347); and
(b) if satisfied that the applicant for the order has been prejudiced by a disposition of property to which this subpart applies.
(2)The order must do 1, but not both, of the following:
(a) vest the property that is the subject of the disposition in the person (for any applicable purpose) specified in section 350:
(b) require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.
(3)If the order does what is specified in subsection (2)(a), it may also require a person who acquired or received property through the disposition to physically restore some or all of that property that is tangible personal property to 1 or more persons specified in the order.
(4)Person who acquired or received property through the disposition means a person who acquired or received property—
(a) under the disposition; or
(b) through a person who acquired or received property under the disposition.
…
[372] Under s 348 a court may set aside dispositions of property if it is satisfied that the applicant for the order has been prejudiced by a disposition of property to which subpart 6 applies.80 The order of the court must either (but not both) vest the property that is the subject of a disposition in the person specified in s 350 (with the vesting to be for any applicable purpose) or require a person who acquired or received property
79 Sections 347(1)(a) and 348.
80 Section 348(1)(b).
to pay, in respect of that property, reasonable compensation to the person specified in s 350. The plaintiffs seek the former order.
[373] Under s 350 property may be vested in the debtor, for the purpose only of enabling the carrying out of any execution or similar process against the debtor.81
[374] I have already accepted that the plaintiffs are creditors of Mr Chen and/or Waihopai in respect of the Waihopai advances.
[375] By 22 February 2021 Mr Chen knew that if the plaintiffs succeeded at trial in the proceeding against him (scheduled for hearing in this Court in March 2021) orders would be granted in relation to the Waihopai advances. With this knowledge, on 22 February 2021 Mr Chen paid out $404,000 from the sale proceeds he received to third parties.
[376] On 24 February 2021, Mr Chen and Yi Lu and, I accept through them, Jackie Huang and Yi Lu’s wife, Qi Yang, knew that freezing orders had been applied for and granted against Waihopai. Then:
(a)On 24 February 2021 Yi Lu paid $2.71 million of the Waihopai sale proceeds from his bank account to the bank account of his wife Qi Yang in around 55 individual electronic transfers of $50,000 each and a further transfer of $1,000;
(b)On 25 February 2021 Mr Chen or Jackie Huang caused $299,000 to be paid to a bank to discharge a loan that was secured against their family home.
[377] I accept that Mr Chen became insolvent because he could no longer repay the Waihopai advances. That is because Mr Chen has repeatedly confirmed that he has no ability to repay the advances. In an application made to vary and discharge the freezing orders made in April 2021, Mr Chen, Don Chen and Waihopai put forward a security proposal under which they proposed to advance approximately $2.5 million
81 Section 350(2)(b).
to Waihopai to be held as security for the plaintiffs’ claim. However, Mr Chen’s contribution to the sum was to have been borrowed from other parties including Yi Lu. In the course of the trial Mr Chen professed a willingness to repay this amount but indicated that he has no cash available and that if he is required to pay, he would need to borrow money from friends.
[378] I accept that the payment of part of the sale proceeds to his brother in excess of the amount that would equate to Don Chen’s percentage share in Waihopai was intended to prejudice and had the effect of causing prejudice to the plaintiffs as creditors of Mr Chen. At the time of the payments the plaintiffs were seeking recovery of the Waihopai advances from Mr Chen. Mr Chen and Yi Lu caused Waihopai to pay part of Mr Chen’s share of the sale proceeds to Don Chen. Mr Chen then paid part of the sale proceeds to Jackie Huang and third parties. Moreover, Mr Chen only disclosed the sale of Waihopai to the plaintiffs after the sale proceeds had been dissipated.
[379]In relation to Mr Chen, and for the purposes of s 348(4) of the PLA:
(a)Don Chen is a person who received property through a prejudicial disposition because he received $3,348,059.76 from the sale proceeds;
(b)Jackie Huang received property through a prejudicial disposition, because she received at least $90,000 of the sale proceeds from Mr Chen; and
(c)AEG is a person (entity) which received property through a prejudicial disposition, because it received at least AUD$1 million being part of the sale proceeds paid to Don Chen.
[380] In relation to Waihopai, as a result of the payment of the sale proceeds to Mr Chen, Don Chen and Yi Lu, Waihopai became insolvent because it could no longer repay the Waihopai advances.
[381] I accept the payments made to Mr Chen, Don Chen and Yi Lu following the sale of Waihopai’s assets were intended to prejudice and had the effect of causing prejudice to the plaintiffs as creditors of Waihopai. At the time of those payments the plaintiffs were seeking the recovery of the Waihopai advances in proceedings against Mr Chen. Those claims included orders that, if necessary, Mr Chen procure Waihopai to pay the Waihopai advances to the plaintiffs. Mr Chen and Yi Lu caused Waihopai to pay all of the sale proceeds to themselves and to Don Chen with no payments made to the plaintiffs and again Mr Chen only disclosed the sale of Waihopai to the plaintiffs after the proceeds had been dissipated from the company.
[382] In relation to Waihopai and for the purposes of s 348(4) of the PLA, each of the defendants is a person who received property through a prejudicial disposition, having received the following amount from the sale proceeds:
(a) Mr Chen: $1,023,000.00; (b) Yi Lu: $2,990,706.51; (c) Don Chen: $3,348,059.76;
(d)Jackie Huang: $90,000 (being part of the proceeds received by
Mr Chen);
(e)Qi Yang: $2,751,000 (being part of the proceeds received by
Yi Lu);
(f)AEG: AUD$1,000,000 (being part of the proceeds received
by Don Chen).
[383] For completeness I note that I have considered whether s 345(1)(b) might apply. It provides that a disposition of property is not made with intent to prejudice a creditor if it is made with the intention only of preferring one creditor over another. In this case I accept that Mr Chen concealed the sale of Waihopai’s assets and the distribution of the sale proceeds from the plaintiffs (until disclosed in his brief of evidence for the trial scheduled for March 2021). I accept the plaintiffs’ submission
that in all those circumstances that conduct bears the hallmark of steps taken with the intention to render Waihopai and Mr Chen judgment-proof. Accordingly, s 345(1)(b) does not apply.
[384] For all the above reasons the plaintiffs succeed on the seventh, and in the alternative, the eighth cause of action.
Ninth cause of action (all defendants): unjust enrichment
[385] This is a further alternative cause of action in equity. The defendants again plead the Integration Scheme was agreed. They say under that agreement the plaintiffs will be required to account to Mr Chen and Jackie Huang for a greater amount than the Waihopai advances. Again, that defence cannot succeed on the facts as I have found them.
[386] Unjust enrichment claims seek to reverse otherwise effective transfers because the claimant’s consent was, although objectively manifest, in some way substantively defective or absent. The right to restitution is triggered by the receipt of an enrichment in circumstances that put it within one of the unjust categories: these include mistake, lack of capacity, compulsion and lack of consideration. Liability for unjust enrichment is strict; it does not depend on the commission of the wrong, or the quality of the defendant’s conscience or his conduct.82
[387] I am not certain that the facts as I have found them fit within the above principles. However, having found in favour of the plaintiffs against all defendants on the sixth and eighth causes of action I do not consider it is necessary to decide the ninth cause of action.
Affirmative defence and counterclaim
Second affirmative defence (Mr Chen): debt owed
[388] In relation to the plaintiffs’ Waihopai causes of action, Mr Chen pleads a second affirmative defence that payments he received were partly owed to him.
82 Andrew Butler, above n 57, at [42.2.2].
He says that as of 22 January 2021 Waihopai owed him a debt of $81,537 being the sum of expenses that he had paid on Waihopai’s behalf. Mr Chen further pleads that to the extent that payments were made by Waihopai to him from 22 January 2021, to a total of $81,537, they were in satisfaction of that debt.
[389] Mr Judd did not address this defence in his submissions. That is consistent with his general approach that there was a partnership and that the accounting issues would be addressed following an order from the Court that accounts be taken.
[390] I have reviewed the evidence on this issue. Mr Chen, in his brief of evidence, says that the accounting needs to include various contributions made by the plaintiffs and by himself and Jackie Huang. He then lists various matters he says would need to be addressed as part of the taking of accounts. He says that Waihopai owed him
$81,537 as at 22 January 2021 as pleaded. In the absence of any underlying evidence, I do not accept what is simply a bare assertion.
[391]Mr Chen’s second affirmative defence fails.
Fifth counterclaim (against Ms Lu): failure to repay advance
[392] Waihopai brings the fifth counterclaim against Ms Lu. It pleads: prior to 4 October 2016 Ms Lu advanced $100,000 to Waihopai; then, on or around 4 October 2016, Waihopai paid $120,000 to Ms Lu, being repayment of the $100,000 and a further advance of $20,000. Waihopai claims repayment of the $20,000 as a debt and interest under the Interest on Money Claims Act.
[393] At the hearing the approach on behalf of Waihopai was that the claim should be dealt with as part of the overall accounting, on the basis that the Court would find there was a partnership and order an accounting be taken. I have found there was no partnership. No evidence to support this counterclaim was adduced by Mr Chen.
[394]The fifth counterclaim fails.
Waihopai claims (fourth to ninth causes of action): relief
Fourth and fifth causes action
[395] I give judgment in the sum of $2,376,261 in favour of the plaintiffs against Mr Chen and in the alternative against Waihopai.
[396] I award interest on the above sum of $2,376,261 from the date on which each of the individual advances making up that sum were advanced (adopting 25 June 2013 as the date for the first $1.2 million and for the balance, the dates for each individual advance as specified in Schedule 2 to Ms Fu’s brief of evidence) calculated under s 12 of the Interest on Money Claims Act 2016.
Sixth cause of action
[397] In the alternative I give judgment in the sum of $2,376,261 in favour of the plaintiffs against all defendants.
[398] I award interest on the above sum of $2,376,261 from the date on which each of the individual advances making up that sum were advanced (adopting 25 June 2013 as the date for the first $1.2 million and for the balance, the dates for each individual advance as specified in Schedule 2 to Ms Fu’s brief of evidence) calculated under s 12 of the Interest on Money Claims Act 2016.
Seventh cause of action
[399] In the further alternative I make an order under s 348 of the Property Law Act 2007 requiring Jackie Huang, Don Chen and AEG each to repay the funds received by them through prejudicial dispositions back to Mr Chen’s account (being $90,000 received by Jackie Huang; $3,348,059.76 received by Don Chen; and AUD$1,000,000 received by AEG: which sum is part of the sum of $3,348,059.76 received by Don Chen).
[400]I make an order requiring Mr Chen to pay the plaintiffs $2,376,261.
[401] I award interest on the above sum of $2,376,261 from the date on which each of the individual advances making up that sum were advanced (adopting 25 June 2013 as the date for the first $1.2 million and for the balance, the dates for each individual advance as specified in Schedule 2 to Ms Fu’s brief of evidence) calculated under s 12 of the Interest on Money Claims Act 2016.
Eighth cause of action
[402] In the further alternative I make an order under s 348 of the Property Law Act 2007 requiring each of the defendants to repay the proceeds of the sale of Waihopai’s assets received by them to Waihopai. The proceeds of sale received by each defendant is as follows:
(a) Mr Chen: $1,023,000.00; (b) Yi Lu: $2,990,706.51; (c) Don Chen: $3,348,059.76;
(d)Jackie Huang: $90,000 (being part of the proceeds received by
Mr Chen);
(e)Qi Yang: $2,751,000 (being part of the proceeds received by
Yi Lu);
(f)AEG: AUD$1,000,000 (being part of the proceeds received
by Don Chen).
[403]I make an order requiring Waihopai to pay the plaintiffs $2,376,261.
[404] I award interest on the above sum of $2,376,261 from the date on which each of the individual advances making up that sum were advanced (adopting 25 June 2013 as the date for the first $1.2 million and for the balance, the dates for each individual advance as specified in Schedule 2 to Ms Fu’s brief of evidence) calculated under s 12 of the Interest on Money Claims Act 2016.
Ninth cause of action83
[405]I make no orders on the ninth cause of action.
Result – summary
[406] The terms of the 26 June 2013 Integration Scheme were not finally agreed between the parties. There was no partnership agreement based on the Integration Scheme or otherwise.
[407] The advance of $1.2 million made by Mr Huang and the subsequent advances totalling $1,176,261 made by Mr Huang and Ms Lu to Mr Chen and/or Waihopai were not payments under the alleged agreement in the Integration Scheme or otherwise in the course of partnership, but were loans.
[408] The business relationship between Mr Huang, Ms Lu and Mr Chen is governed by the Joint Venture Cooperation Agreement signed on 19 April 2012.
[409] Mr Chen is in breach of the 19 April 2012 Joint Venture Cooperation Agreement by failing to make the payments required for his share of Matakana Estate and by failing to transfer title to the Matakana land to Mr Huang and Ms Lu.
[410] The plaintiffs succeed on each of the first to eighth causes of action. It is not necessary to make a decision on the ninth cause of action.
[411] Mr Chen succeeds in part on the third counterclaim. The other five counterclaims fail.
Relief
[412] In relation to the Matakana claims (the first to third causes of action) the relief ordered in favour of the plaintiffs is set out at [348] and in favour of Mr Chen on the third counterclaim at [349] above.
83 Incorrectly called the tenth cause of action in the amended statement of claim dated 28 January 2022.
[413] In relation to the Waihopai claims (the fourth to ninth causes of action) the relief ordered in favour of the plaintiffs is set out at [395] to [404] above.
Costs
[414] I did not hear submissions on costs. Costs are therefore reserved. The plaintiffs as the successful parties are prima facie entitled to costs. If the parties are able to agree costs a joint memorandum is to be filed and served within 25 working days of the date of this judgment. If costs cannot be agreed the plaintiffs are to file and serve their memoranda on costs within five working days of the date for the joint memorandum. The defendants are to file and serve their memorandum within five working days of the date of service of the plaintiffs’ memorandum.
[415] Memoranda are not to exceed five pages, excluding attachments. I will determine costs on the papers.
Gordon J
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