Huang v Zhang

[2024] NZHC 1327

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2019-419-237

[2024] NZHC 1327

BETWEEN

WEIHONG HUANG

Plaintiff

AND

YOUFENG ZHANG

Defendant

Hearing:	On the papers
Counsel:	P V Cornegé for Plaintiff
Judgment:	24 May 2024

JUDGMENT OF MOORE J

This judgment was delivered by me on Friday, 24 May 2024 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar / Deputy Registrar Date:

Solicitors:           Nolan & Lu, Lawyers, Hamilton Counsel:  Phillip V Cornegé

HUANG v ZHANG [2024] NZHC 1327 [24 May 2024]

Introduction

[1]    Mr Huang seeks judgment for breach of  contract.  He pleads that he  and   Mr Zhang, the defendant, each agreed to invest in a retail liquor business for which they incorporated a company called Z&H Venture Limited (“Z&H”). In breach of that agreement, he says Mr Zhang failed to invest as required and that he instead borrowed funds in Z&H’s name. He says that this caused their retail liquor business to be sold by Z&H at a loss.

[2]    Mr Huang received nothing from Z&H’s sale of the retail liquor business. He pleads that because of Mr Zhang’s breach, he lost $219,639. He therefore seeks judgment for that sum, together with interest and costs.

[3]    While Mr Zhang filed a statement of defence to Mr Huang’s first statement of claim, he has not since filed a statement of defence to Mr Huang’s amended pleadings. The matter accordingly proceeds by way of formal proof.

[4]    For various scheduling reasons, a fixture has regrettably eluded this matter. Registry subsequently inquired of counsel for Mr Huang if they were content for the matter to be dealt with on the papers, subject to the Court’s approval. They were. Having reviewed the matter, I consider that it is suitable for determination on the papers.

Background

[5]    As with many a tale of a business fall-out, the origin of this dispute is that  Mr Huang and Mr Zhang  were  friends.  Mr  Huang  was  a  marketing  manager; Mr Zhang ran a liquor store in Hamilton.

[6]    In or about December 2015, the parties began discussions about the prospect of jointly investing in a retail liquor business on the corner of Peachgrove Road and Clyde Street in Hamilton. The idea appealed to Mr Huang as Mr Zhang had told him that revenues from his own liquor store were “good” and because Mr Zhang had experience in the industry.

[7]    In March 2016, Mr Zhang carried out negotiations with Aushi Ventures Limited (“AVL”), the vendor of the retail liquor business Z&H would come to purchase. As this happened, Mr Huang says that he and Mr Zhang reached a verbal agreement of their own (“the Agreement”). Mr Huang says that the Agreement between him and Mr Zhang was that:

(a)they and their wives would each own 50 per cent of Z&H’s shares but that Mr Zhang would be Z&H’s sole director;

(b)they would each invest $400,000 into Z&H to pay for the purchase price of the retail liquor business; and

(c)they would each receive an equal share of the proceeds of the sale of their retail liquor business when it was sold.

[8]    Z&H was incorporated on 14 March 2016. The shareholding was as Mr Huang says was agreed between him and Mr Zhang. Mr Zhang was the company’s sole director.

[9]    On 1 April 2016, Z&H executed an agreement with AVL for the sale and purchase of the retail liquor business. Then, on 27 April 2016, Mr Huang and his wife transferred $400,000 into Mr Zhang’s nominated bank account at Mr Zhang’s request. Z&H subsequently settled its purchase of the liquor store from AVL on 9 May 2016. The retail liquor business was purchased for $722,568.65.

[10]   In the event, the business venture was relatively short lived. On 22 June 2018, Z&H sold the retail liquor business to another company. The total purchase price listed on the sale and purchase agreement was for $600,000.

[11]   Mr Huang says that he only learned of Z&H’s sale of the retail liquor business when Mr Zhang informed him that the business was sold in mid-June 2018. He says that Mr Zhang and his wife then returned to China shortly after the sale.

[12]   Z&H’s statement of account with its solicitors, George Guo Lawyers, shows that a total of $550,906.81 was received from the sale of the business. The statement

of account shows that $303,201.16 was then paid to “Westpac Bank”. Accounting for this payment and other payments to, among others, DB Breweries and for Z&H’s legal costs, the statement of account shows that surplus funds of $154,856.74 were then paid to Z&H. Mr Huang was never paid any money from the sale proceeds of the business.

[13]   Mr Huang commenced the present proceedings around 6 September 2019. It was during these proceedings that Z&H was liquidated. The Official Assignee was appointed liquidator.

[14]   In March 2021, the Official Assignee instructed Mr Parsons of Indepth Forensic Limited to investigate Z&H’s affairs. The Assignee instructed Mr Parsons to consider allegations by Mr Huang that, among other things, Mr Zhang had traded the company recklessly and had misappropriated funds.

[15]As a result of his investigation, Mr Parsons established and or found that:

(a)On 4 May 2016, the directors and shareholders of Z&H executed a resolution for Z&H to obtain banking accommodation with Westpac Bank “to assist in the purchase of the … business”.

(b)On 9 May 2016, Z&H’s purchase of the retail liquor business was settled “with Westpac loan advances of $30,000 and $320,000 (a total of $350,000) being deposited into the trust account of George Guo Lawyer Limited [in an account in the name of Mr Zhang and Ms Wang, Mr Zhang’s wife]”. Funds of $329,144.37 were then received from  Mr Zhang and Ms Wang and a total amount of $389,144.37 was then advanced by Mr Zhang and Ms Wang to effect settlement on behalf of Z&H.

(c)It appeared that the $400,000 provided by Mr Huang was likely “used by Mr Zhang and Ms Wang to pay the $329,144.37 [from Westpac], and effectively reimburse themselves for the $50,000 deposit paid previously”.

[16]Mr Parsons further concluded that:

(a)there was no evidence that Mr Zhang or Ms Wang ever contributed anything towards the purchase price of the retail liquor business themselves; and

(b)the proceeds of Z&H’s sale of its retail liquor business were likely used to settle the company’s secured debts, such as the Westpac loan.

[17]   Mr Parsons has subsequently sworn an affidavit in support of Mr Huang’s claim for breach of contract and calculated damages (as to which I shall return later). In a letter dated 1 November 2022 appended to this affidavit, he concludes that:

(a)the retail liquor business was purchased by Z&H for $722,568.65;

(b)the total amount required to settle the purchase was $727,153.37, taking into account “lease costs and cash in till”; and

(c)on the basis  that  a  further  journaled  amount  of  inventory  from  Mr Zhang’s own liquor store of $80,000 was fair value, the total value of the business was $807,153.

Approach on formal proof

[18]   The approach on a formal proof is well-established. When seeking judgment by way of formal proof under r 15.9 of the High Court Rules 2016, the plaintiff must file affidavit evidence establishing to the Judge’s satisfaction each cause of action and sufficient information to enable the Judge to calculate and fix any damages claimed.1

[19]   The requirement for the plaintiff’s cause of action to be established to a Judge’s “satisfaction” simply means that the Judge makes up their mind,2 which typically does not mean being  satisfied  to any particular standard.3    However, as  Duffy J noted in

1      High Court Rules 2016, r 15.9.

2      Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [15.9.07].

3      Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [96].

Ferreira v Stockinger, the fact that r 15.9 makes provision for a Judge to hear from witnesses whose evidence has not otherwise been challenged4 suggests that a Judge is required to satisfy themselves as if the proceeding had gone to trial.5

[20]   While r 15.9 speaks of a “formal proof hearing”, this does not preclude a formal proof being determined on the papers.6 The learned authors of Sim’s Court Practice explain that if the evidence has been properly and fully assembled and there are no outstanding questions, a Judge may be prepared to deal with the hearing on the papers.7 As the objective of the High Court Rules is to secure the just, speedy and inexpensive determination of any proceeding,8 it follows that the term “hearing” in r 15.9 must, of necessity, include hearings on the papers.

[21]   I consider it in the interests of justice to proceed on the papers here. The present proceeding is supported by comprehensive affidavits from Mr Huang and  Mr Parsons for which I can decide if I am satisfied Mr Huang’s cause of action is made out. I also consider that I have sufficient information to calculate and fix any damages, should I consider that appropriate. An on-the-papers determination is also warranted here given the difficulty in finding a fixture and the time that has since elapsed since Mr Huang’s proceedings were commenced.

Is Mr Zhang liable for breach of contract?

[22]   Mr Huang says Mr Zhang’s failure to invest $400,000 into Z&H was a breach of contract. He says this breach caused Z&H to sell the retail liquor business at a loss, and that he consequently suffered a loss of $219,639 (as calculated by Mr Parsons).

4      High Court Rules 2016, r 15.9(5).

5      Ferreira v Stockinger [2015] NZHC 2916 at [35].

6      Indeed, I have found at least two decisions where such an approach has been taken: see Wedding v Askew [2019] NZHC 3147 and Official Assignee v Rajput [2022] NZHC 3446.

7      Matthew Casey and others Sim’s Court Practice (online ed, LexisNexis) at [HCR15.9.4].

8      High Court Rules 2016, r 1.2.

[23]As such, the three matters I must determine on this formal proof are:

(a)whether the parties had a verbal contract providing that they would each invest $400,000 into Z&H or to otherwise enable Z&H to purchase the retail liquor business;

(b)whether Mr Zhang breached this verbal contract; and

(c)what, but for Mr Zhang’s breach, Mr Huang lost.

Was there a verbal contract between the parties?

[24]   I am satisfied that Mr Huang and Mr Zhang had a verbal contract that each would invest $400,000 to enable Z&H’s purchase of the retail liquor business, and to otherwise share Z&H’s profits and to split the proceeds of any sale of the business equally between them (and or between them and their wives).

[25]   While the parties were friends, I consider it implausible that Mr Huang would have contributed $400,000 to this business venture with Mr Zhang if all Mr Zhang was providing for his half of the company was his industry knowledge. The fact that Mr Huang transferred $400,000 to Mr Zhang directly further supports this conclusion. It is unrealistic that these funds would have been transferred to Mr Zhang directly when Z&H had already been incorporated if Mr Zhang was not also under an obligation to commit funding towards the acquisition of the retail liquor business. Put another way,  it is difficult to see why Mr Huang would have made the transfer to  Mr Zhang had Mr Zhang not also been under an obligation to commit $400,000 towards the purchase himself.

[26]   Furthermore, the purchase price that Z&H paid AVL for the retail liquor business ($722,568.65) and the amount Mr Parsons says the business would have been valued at the time of that purchase ($807,153) fits logically with the idea that each party would contribute $400,000 to purchase it.

[27]   Although the parties were friends and so in that sense were not at arm’s length from each other, I do not consider this to militate against a finding that they intended

any agreement between them to be legally binding. The transaction was plainly commercial in nature, and it stands to reason that each was entering into it for their own self-interest. The fact that they were friends is not incompatible with these findings. I therefore consider that the agreement entered between them to each commit

$400,000 towards the purchase of the retail liquor business (and otherwise as shareholders) was one they intended to be legally binding.

Did Mr Zhang breach this verbal contract?

[28]   The answer to this question is plainly yes. Mr Parsons’ investigation concluded that there was “no evidence” Mr Zhang ever contributed to the purchase of the retail liquor business. Given my  finding  that there  was  a  contract  between  him  and  Mr Huang to each commit $400,000 towards the purchase of the retail liquor business, whether by direct investment into Z&H or by some other means, I am therefore satisfied that Mr Zhang breached this contract.

What was Mr Huang’s loss as a consequence?

[29]   Mr Parsons’ conclusion is that  the  loss  Mr  Huang  suffered  because  of  Mr Zhang’s failure to invest the $400,000 he was contractually obliged to was “the

$400,000 [Mr Huang] advanced less his equal share of loss ($180,361), resulting in a net loss of his funds of $219,639” as at 11 June 2018, when the retail liquor business was sold for $600,000. In his letter to Mr Huang’s solicitors, Mr Parsons explains this further by stating:

2.On 24 April 2016 Mr Huang advances funds $400,000.00 from his bank account … to Mr Zhang and Ms Wang …

3.The shareholder Mr Huang claims that the transaction was meant to be equal contribution to the purchase of this business. There is no evidence of any contribution by Mr Zhang and Ms Wang. If Mr Zhang and Ms Wang had contributed $400,000 this amount combined with the advance of $400,000 from Mr Huang would have (apart from approximately $7,153) settled the purchase consideration.

4.The effect of not requiring the Bank Loan facilities would have been a reduction in the Interest Costs $57,521 over the 2017 to 2019 period.

5.As I have previously indicated there is significant doubts over the accounting of the trading operations of the business over the 2017 to 2019 period.

6.On the basis there was an equal contribution of funds what would have been loss to the parties assuming the business traded as it did and all additional borrowing was required to operate the business (including Spiers Finance ($42,371) and Li Mingling Loan Repayment ($20,600).

(a)Amount to discharge Westpac Financing Statement $303,201.

(b)Amount of Interest incurred $57,521.

(c)Total $360,722 loss in funds.

7.Therefore the loss to Mr Huang would have been $400,000 (advanced) less his equal share of loss in funds ($360,722 divided by two= $180,361), resulting in net loss of his funds of $219,639 as at 11 June 2018.

[30]   As I apprehend Mr Parsons’ conclusions, the key point here is that Mr Huang had to shoulder half the burden of what was required to discharge a loan to Westpac ($303,201) when Z&H sold the liquor business at a loss and interest ($57,521). That burden comes to $180,361. Therefore, he says Mr Huang’s loss is properly represented as what was left remaining after that burden of $180,361 was shouldered from his $400,000 investment. That amount is $219,639.

[31]   While that conclusion presupposes that the loan to Westpac and the interest figure of $57,521 were both legitimately incurred (and that they would have been incurred had Mr Zhang performed as he was required), I am content to quantify damages in this way. Mr Parsons is a chartered accountant who has provided evidence as an expert witness in criminal and civil proceedings in relation to accounting, among other areas. He was engaged by the Official Assignee for the purposes of investigating Z&H’s accounts. As his report to the Official Assignee makes clear, the financial records of Z&H are seriously deficient in many respects and it is difficult to make sense of what the company’s true financial position ever was. The critical point here is that I am satisfied there has been some real damage done to Mr Huang who invested in a business and has now lost that entire investment. In such circumstances, the Court will do the best that it can to arrive at a figure based upon the available evidence.9 The evidence provides a figure of $219,639.

9      Walsh v Kerr [1989] 1 NZLR 490 (CA) at 494.

Result

[32]   I order that Youfeng Zhang is liable for damages in the amount of $219,639 together with interest calculated from 22 June 2018 and 2B costs and disbursements as fixed by the Registrar.

Moore J