Hunan Hengyu Investment Guarantee Corporation Limited v BCH Investments Limited
[2020] NZHC 650
•25 March 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000018
[2020] NZHC 650
UNDER Part 19 of the High Court Rules and the Land Transfer Act 2017 IN THE MATTER OF
An originating application for orders that caveat not lapse
BETWEEN
HUNAN HENGYU INVESTMENT GUARANTEE CORPORATION LIMITED
Applicant
AND
BCH INVESTMENTS LIMITED
Respondent
Hearing: 17 March 2020 Appearances:
D Hickson for Applicant
A Barker QC and J Barrow for Respondent
Judgment:
25 March 2020
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 25 March 2020 at 3.00 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar Date………………………..
Solicitors:
PCW Law Ltd, Auckland
HUNAN HENGYU INVESTMENT GUARANTEE CORP LTD v BCH INVESTMENTS LTD [2020] NZHC 650 [25 March 2020]
Introduction
[1] The applicant, Hunan Hengyu (a limited company), seeks orders pursuant to s 143 of the Land Transfer Act 2017 (LTA) preventing the lapse of its caveat over the respondent’s 28 properties at a subdivision in Gill Road, Albany (the Gill Road properties).
[2] The Hunan Hengyu application arises out of the business dealings between two Chinese families – the Zhou family (represented by Hunan Hengyu) and the Tang family (represented by the respondent, BCH). The two families had a number of investments together in China and New Zealand, including what is known as the Albany Rose development (i.e. the Rose Garden Apartment complex near the Westfield mall in Albany).
[3] The company developing the Albany Rose development is now known as NZ Rose Garden Development Ltd (RDL).
[4] Hunan Hengyu says that it advanced funds to RDL through Mr Junwei Tang for the purpose of the Albany Rose development. That was originally a joint development between the families, until Mr Zhou withdrew. When that happened, Hunan Hengyu says that RDL returned the advances that had been made to Mr Tang who was then required to pass them on to Hunan Hengyu.
[5] Hunan Hengyu alleges that instead of returning the funds, Mr Tang advanced them into a separate company, namely, BCH. Those funds were then used, it is alleged, to develop the Gill Road properties owned by BCH.
[6] Hunan Hengyu contends for a beneficial interest in the Gill Road properties on the basis of a constructive trust that has arisen from the actions of Mr Tang.
[7] BCH says there is no basis for the claim. It says it never received the funds that Hunan Hengyu alleges it was paid and that no money from Hunan Hengyu was used in the purchase or development of the Gill road properties. Furthermore, even if Hunan Hengyu was able to establish an evidential basis for its claim, BCH says this
would only support a claim in debt and does not support any proprietary claim essential to maintaining the caveat.
Background facts
[8] BCH purchased the Gill Road properties (the subject of the caveat), in April 2013. The purchase price was NZ$9.2m. Mr Tang says there was an ANZ loan for NZ$4.625m and that the balance of the purchase price came from BCH’s shareholders (each contributing an equal amount).
[9] Hunan Hengyu says that between September 2013 and December 2013, it advanced approximately NZ$5.89m to Mr Junwei Tang for him to on-lend those funds to RDL, to then be used in the Albany Rose development.
[10] In January 2014, Hunan Hengyu decided to withdraw from its investment. Hunan Hengyu alleges that RDL then repaid the investment to Mr Tang, who was then meant to pay the funds back to Hunan Hengyu. It is said that RDL made repayments to Mr Tang totalling NZ$5,601,000.
[11] Of that amount repaid, Hunan Hengyu says that NZ$500,000 was deposited into Mr Zhou’s account and the rest, NZ$5,101,000, was deposited into the account of Mr Tang’s father, Mr Wenbing Tang. However, Mr Zhou says that he never actually received the NZ$500,000 because the account that money was paid into was an account which Mr Junwei Tang had access to and control over.
[12] It is Hunan Hengyu’s case, and the basis for its caveat, that the NZ$5.6m which it lent to Mr Junwei Tang (which he has allegedly failed to repay to Hunan Hengyu despite having received the money back from RDL) is being used to fund the development of BCH’s Gill Road properties.
[13] There have been previous disputes and litigation between the Zhou and Tang families in relation to their general business affairs. This has included a development at Ormiston Road which had Green Land Investment Ltd (Green Land) as its development company (the Green Land development). The relevance of those other developments (also disputed by Hunan Hengyu) is explained below.
[14] The first proceeding was when Hunan Hengyu registered a caveat over land belonging to Green Land. Green Land applied for its removal, however, before any substantive documents were filed, the proceedings were settled. The terms of the settlement essentially ensured that the sale proceeds in that development would be held on trust, pending the resolution of the dispute between Green Land’s shareholders. That agreement was signed in May 2016.
[15] In August 2016, Mr Zhou applied to wind up Green Land on the just and equitable ground under s 241(4)(d) of the Companies Act 1993. BCH says that at issue in those proceedings was the way that Green Land had allegedly dealt with loans it received from Hunan Hengyu. Those loans included advances totalling NZ$5.89m, which BCH says are the basis of Hunan Hengyu’s application in these proceedings.
[16] The liquidation proceedings then led to a settlement agreement between the shareholders and Green Land. The terms of that settlement (the second settlement) were as follows:
The settlement agreement represents that all the co-operation projects and interpersonal debt and credit relationships between the Tang family and the Zhou family in China and New Zealand have been totally cleared. Among them, Hunan Hengyu Guarantee Investment Co Ltd, Hengyu private investment and Hunan concrete mixing station will have the share of the Tang family unconditionally transferred to Bingyan Zou, and all the court cases of Bingyan Zhou or under the name will be unconditionally withdrawn. The three parties agree that the current court case about the Green Land dispute will undergo withdrawal by the lawyer within five working days from the date of this agreement. Meanwhile, neither the Tang family nor the Zhou family will individually pursue responsibilities of any party, now or in the future … From now on it will be totally cleared.
[17] Hunan Hengyu says that BCH’s funding arrangements for the development of the Gill Road properties (the subject of the caveat) are unclear, but included a loan facility of NZ$20m from ASAP Finance between April 2015 and June 2019, and another from OneLend of NZ$11.75m from June 2019 (to repay lending from ASAP Finance).
Relevant legal principles
[18] A caveator, in response to the caveat lapsing procedure under the LTA, may apply for an order that the caveat not lapse.1
[19] I adopt the following principles in relation to Hunan Hengyu’s application to sustain a caveat over the properties at issue:2
(a)The burden of establishing that the applicant has a reasonably arguable case for the interest claimed is upon the caveator;3
(b)The caveator must show an entitlement to, or beneficial interest in, the estate referred to in the caveat by virtue of an unregistered agreement or an instrument or transmission, or of any trust expressed or implied;4
(c)The summary procedure involved in an application of this nature is wholly unsuitable for the determination of disputed questions of fact5
– an order for removal of the caveat will not be made unless it is clear that the caveat cannot be maintained either because there was no valid ground for lodging it or that such valid ground as then existed no longer does so;6
(d)When an applicant has discharged the burden upon the applicant, there remains a discretion as to whether to remove the caveat, which will be exercised cautiously;7
(e)The Court has jurisdiction to impose conditions when making orders.
Analysis and decision
[20] The critical issue for determination is whether Hunan Hengyu has discharged the burden of establishing that it has a reasonably arguable case for a beneficial interest in the land. That turns, in this case, on a close assessment of the evidential and legal basis for the claimed beneficial interest, namely a constructive trust arising from the misappropriation of funds.
1 Land Transfer Act 2017, s 143.
2 Cube Building Solutions Ltd v Kingloch Holdings Ltd HC Christchurch CIV 2009-409-935, 15 October 2010 at [13] (citations omitted) (footnotes added).
3 New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA) at 43; and Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36 at [30] citing National Bank of New Zealand v Radisich HC Hamilton CIV 2003-419-928, 25 August 2003 at [6].
4 Land Transfer Act 2017, s 138.
5 New Zealand Limousin Cattle Breeders Society Inc v Robertson, above n 3, at 43.
6 Sims v Lowe [1988] 1 NZLR 656 (CA) at 659–660.
7 Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA); and Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA).
[21] Hunan Hengyu’s critical contentions are that RDL paid the NZ$5.89m loan funds to Mr Tang who then diverted them, contrary to Mr Zhou’s instructions, to BCH. In these circumstances, Hunan Hengyu contends that Mr Tang was its agent and that he held the funds, when returned to him by RDL, as a fiduciary. In acting contrary to Mr Zhou’s instructions and diverting the funds to BCH, Mr Tang is said to have acted in breach of his fiduciary obligations and BCH (being a Tang family company) knew that Mr Tang had no authority to act as he did.
The evidential basis for the claim
[22] It is clear that, as the applicant, Hunan Hengyu must discharge the onus of establishing a reasonably arguable case. A mere assertion of a certain state of affairs is not sufficient and some positive evidence is required. As Bell AJ held in Virtual Spectator Ltd v Rothlander:8
To establish a reasonably arguable case there must be evidence tending to prove the facts relied on. Assertion, whether in pleadings or affidavit, is not enough. The evidence need not be extensive as that given in a hearing on the substantive merits. It may be circumstantial. But if there is no evidence to prove the facts contended for, the caveator will not have made out a reasonably arguable case for those facts.
Furthermore, it is not enough for an applicant to make a general assertion, and then seek to prove its claim through the lack of any response.
[23] In Trustees Executors v Steve G Ltd, it was held that until the caveator makes out an arguable case, the registered proprietor is not required to answer. Furthermore, no inference can arise against a registered proprietor for not giving evidence in response to an unproved allegation.9
[24] Hunan Hengyu submits that the following evidence compromises “strong circumstantial” proof that the NZ$5.6m loan funds have been used to help fund the development of the Gill Road properties:
(a)The NZ$5.6m loan has not been repaid by Mr Tang;
8 Virtual Spectator Ltd v Rothlander [2016] NZHC 499 at [9].
9 Trustees Executors Ltd v Steve G [2013] NZHC 16 at [98]. See also Re Lord Cable [1976] 388 All ER 417 at 431.
(b)there is a complete absence of evidence from BCH as to where the BCH shareholders got the money to fund their 50 per cent share of the costs of the Gill Road development; and
(c)Mr Zhou’s personal knowledge of the financial circumstances of BCH shareholders, which indicates that they could not possibly have funded their share of the development expenses without recourse to funds from some other source.
[25] I reject that submission. The fundamental problem for Hunan Hengyu is that the evidential basis for its claims is tenuous. There is a great deal of uncertainty about key aspects of Hunan Hengyu’s claim, including how much BCH borrowed for the Gill Road property development, where the funds came from, and why the Zhou family is still in dispute with the Tang family over these funds where the evidence (though disputed) suggests that the matter has been settled pursuant to the second settlement agreement. On the evidence before me, the financial arrangements of BCH may well be “murky”, as Mr Hickson submitted. However, it is not enough for Hunan Hengyu to raise some suspicion based on the amounts of the funds being similar (i.e. the additional loan of NZ$5.5m Mr Tang says was taken out for re-financing). Rather, Hunan Hengyu must discharge the onus of establishing a reasonably arguable case.
[26] I accept that Hunan Hengyu has established a reasonably arguable case that the funds at issue were paid by RDL to Mr Tang. The documentation provided is proof. However, Hunan Hengyu has not established a proper evidential basis for its claim that the funds were then diverted to BCH. It is the cumulative effect of the uncertainties and unanswered factual issues that leads me to the conclusion that the evidence Hunan Hengyu relies upon does not establish a reasonably arguable case. There is insufficient evidence to prove the facts relied upon. The weakness of the evidence is apparent from the following:
(a)The evidence does tend to establish that BCH must have borrowed substantial funds for the development of the Gill Road property. However, there is clear uncertainty as to the nature of the funding arrangements, including how much exactly the shareholders of BCH
contributed. In any event, Hunan Hengyu places great reliance on Mr Zhou’s assertion that the loan funds must have been used by BCH because he does not know where else it could have got the money from, and the Tang family could not have otherwise afforded it. While Mr Zhou may know the shareholders of BCH personally and their financial circumstances, the parties have been in dispute for a long time and his assertions are not supported by any documentation or concrete facts.
(b)Mr Zhou says that, of the NZ$5.6m funds repaid by RDL to Mr Tang, some NZ$500,000 was deposited into his account but he never actually received those funds because the account was one which Mr Tang had access to and control over. However, no explanation is provided as to why Mr Tang has control of Mr Zhou’s account.
(c)Mr Tang accepts that he received the funds at issue from Hunan Hengyu but says he did not receive them personally. He says the money was paid into an account of Green Land. I do not accept that I can safely conclude that such evidence is obfuscatory and irrelevant, as Mr Hickson submitted. To the extent that there is evidence before me, it does tend to establish that the previous litigation between the Zhou and Tang families is relevant and that the funds now in dispute were also at issue in the August 2016 proceedings and intended to be part of the second settlement.10
The statement of claim in the liquidation proceedings (where Mr Zhou was represented by senior counsel) expressly refers to and sets out the detail of the loan in dispute in these proceedings (i.e. the same loan is at issue here).11 The settlement that was ultimately reached expressly referred to Hunan Hengyu. It is also apparent that the parties clearly intended that the dispute over these funds as between the Tang and Zhou families would end. Mr Hickson’s submission that the reference
10 See terms recorded above at [16].
11 At paragraph 22 of the statement of claim dated 30 August 2016.
in the statement of claim to the same loan funds in dispute here was a mistake simply raises more questions. It does not provide any satisfactory answer. It may also, strictly speaking, be correct that Hunan Hengyu was not a party to that second settlement. However, it is apparent from the documentation before me that the disputes between the Tang and Zhou families were to come to an end, and that settlement was reached at a time when the loan funds at dispute here were clearly an issue between the parties.
[27] I now turn to address the legal basis for the caveat. The question becomes: Has Hunan Hengyu established a reasonably arguable basis for a beneficial interest in the land?
The legal basis for the claim
[28] It is well settled that a person who advances money to another to purchase or improve land does not have a caveatable interest:12
An unsecured creditor has only personal rights against a debtor and therefore has no right to lodge a caveat against title to the debtor’s land. This is so even if the unsecured creditor has lent money to the debtor for the express purpose of buying the land or paying off mortgages on the land or if the unsecured creditor has provided goods and services that have been used to improve the land.
[29] It is also well settled that an institutional constructive trust may give rise to an interest in land sufficient to lodge and sustain a caveat but a remedial constructive trust does not. Because a remedial constructive trust does not exist until it is created by order of a court, a caveat cannot be lodged in respect of it prior to the date of such an order.13
[30] The distinction between an institutional constructive trust and a remedial constructive trust is discussed by Tipping J in Fortex Group Ltd v MacIntosh:14
12 Campbell on Caveats 3rd ed, 2019 at [10.101(a)].
13 Three Chicks Ltd v NZ Building & Projects Ltd (2001) 12 NZCPR 799.
14 Fortex Group Ltd v MacIntosh [1998] 3 NZLR 171 and adopted by Matthews AJ in Three Chicks Ltd v NZ Building & Projects, above, at [19].
For present purposes, these three types of trusts can be described as follows. An express trust is one which is deliberately established and which the trust deed deliberately accepts. An institutional constructive trust is one which arises by operation of the principles of equity and whose existence the court simply recognises in a declaratory way. A remedial constructive trust is one which is imposed by the court as a remedy in circumstances where, before the order of the court, no trust of any kind existed.
The difference between the two types of constructive trust, institutional and remedial, is that an institutional constructive trust arises upon the happening of the events which bring it into being. Its existence is not dependent on any order of the court. Such order simply recognises that it came into being at the earlier time and provides for its implementation in whatever way is appropriate. A remedial constructive trust depends for its very existence on the order of the court; such order being creative rather than simply confirmatory.
[31] Bell AJ in Trustees Executors Ltd v Steve G, held that when funds have been misappropriated, the owner may be able to trace them because ownership never changed.15 However, when the owner has voluntarily changed ownership, the owner can no longer claim continued ownership unless he or she can show that the transferred assets have been re-vested as an under recision.16 Even though the contract under which the funds were transferred may be set aside because the agreement was tainted from misrepresentation, mistake, duress or some other vitiating factor, the transferred title remains effective unless or until the contract is rescinded.
[32] Bell AJ further held, in reliance on Collings v Lee,17 that the rationale for the principle, as it applies to a transfer of property, is that even where the transfer is obtained by fraudulent misrepresentation, the transferor nevertheless intends that the whole legal and beneficial ownership in the property shall pass to the transferee.
[33] I also note that under a standard loan contract, the lender transfers ownership of the funds advanced to the borrower, who may use them and their proceeds as he or she wishes. The borrower is required to repay an equivalent sum (plus interest if applicable) but he or she does not hold the funds on trust for the lender.
[34] Even if I am wrong to conclude that the evidential basis for Hunan Hengyu’s claim is insufficient, I note that the funds at issue were the subject of a voluntary loan
15 Trustees Executors Ltd v Steve G, above n 9.
16 At [39].
17 Collings v Lee [2001] 2 All ER 332 (EWCA) 337.
and it is difficult to see how Hunan Hengyu can claim continued ownership or have any other valid basis for saying that Mr Tang held the funds on trust. The principles articulated by the Supreme Court in Paper Reclaim Ltd v Aotearoa International,18 a case relied upon by Mr Hickson, do not assist Hunan Hengyu. As the Supreme Court noted, a relationship is not fiduciary in nature merely because the parties may be depending upon one another to perform the contract in its terms.
[35] I acknowledge that institutional constructive trusts (which may support a caveat) can arise, for example, where the proceeds of a fraud are used to acquire a registerable interest in land, or where there has been a non-consensual transfer of an interest in land from a vendor to a purchaser, as a result of a fraud perpetrated on the vendor by the purchaser.19 However, I find there is no reasonably arguable case that an institutional constructive trust arises on these facts. As Mr Barker submitted, if (as appears to be the case) Hunan Hengyu was alleging fraud through the misappropriation of funds, then a commensurate degree of proof is required.20 The evidential basis of Hunan Hengyu’s claim here falls well short of that standard. There are simply too many unexplained factors, including the apparent intention of the second settlement agreement that all disputes over the funds at issue in this proceeding have been settled, to conclude that the necessary threshold has been established for an institutional constructive trust. Even if it could be established that there was a valid claim against Mr Tang for the return of the funds, there is simply too much doubt about whether the funds have been transferred to BCH and applied in the manner Hunan Hengyu contends.
[36] For all these reasons, I conclude that Hunan Hengyu has not established a sufficient evidential and/or legal basis for the caveat. It has not discharged the burden of establishing that it has a reasonably arguable claim for a beneficial interest in the land.
[37]On that basis, the application that the caveat not lapse, must be dismissed.
18 Paper Reclaim Ltd v Aotearoa International [2007] 3 NZLR 169.
19 Campbell on Caveats, above n 12, at [10.009], with reference to Trustees Executors Ltd v Eden Holdings (2010) Ltd [2010] NZCA 626.
20 Schmidt v Pepper NZ (Custodians) Ltd [2012] NZCA 565.
Result
[38] The application by Hunan Hengyu Investment Guarantee Corporation Ltd for an order that Caveat No. 11620565.1 not lapse, is dismissed.
[39] I award costs to the respondent, BCH Investments Ltd, on a 2B basis plus disbursements.
Associate Judge P J Andrew
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