Jia v Yang
[2025] NZCA 231
•13 June 2025 at 11 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA330/2024 |
| BETWEEN | XINHONG (VICTOR) JIA |
| AND | YULING YANG |
| SEN GAO Second Respondent |
| Hearing: | 24 March 2025 |
Court: | Woolford, Muir and Isac JJ |
Counsel: | R J Hollyman KC, B J Norling and C M C Browne for Appellant |
Judgment: | 13 June 2025 at 11 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay one set of costs to the first and second respondents for a standard appeal on a band A basis and usual disbursements.
REASONS OF THE COURT
(Given by Muir J)
Introduction
Xinhong (Victor) Jia appeals the judgment of Associate Judge Brittain dated 30 April 2024 granting an application by the respondents, Ms Yang and Mr Gao, for summary judgment in respect of a claim to repayment of a $3,000,000 loan plus interest and costs.[1]
[1]Yang v Jia [2024] NZHC 992 [judgment under appeal].
In the High Court, Mr Jia accepted that the loan was never intended to be or to become a gift (although he claimed that the obligation was that of his family trust of which he was a trustee, and not of him personally).[2] However, he now argues that the arrangement was in the nature of a “limited recourse” loan which is not repayable unless or until a shareholder dividend (which he says includes any distribution to shareholders under s 313 of the Companies Act 1993 (the Act)) is paid in the liquidation of two companies associated with the parties.
[2]At [1] and [59].
The appeal raises two key issues:
(a)Whether, on the proper construction of the loan agreement, the relevant loan became repayable on liquidation of the related companies, Winter Forest Holdings Ltd (WFHL) and Browns Bay Seaview Ltd (BBSL) (collectively, the Companies)?
(b)If not, whether a term is appropriately implied in the relevant contract requiring repayment upon liquidation?
Judge Brittain found the loan to be repayable as a matter of construction, but, in the alternative, that the criteria for implication of a term to like effect were established.[3] Both findings are challenged on appeal.
Background
[3]At [79]–[81].
In 2014, Mr Jia incorporated BBSL to undertake a six‑storey residential development on Auckland’s North Shore (the development).
Mr Jia, Ms Yang and Mr Gao became friends in 2015. About three years later Mr Gao began investing in the development. The investments were made on his behalf by Ms Yang who was legal owner of the funds acting on Mr Gao’s behalf as beneficial owner. By May 2019 the respondents had invested approximately $14,000,000 in the development.
Early the same year, Mr Jia approached Mr Gao seeking a loan to repay a debt of approximately $1,500,000 owed by him to another member of the Chinese community, non‑payment of which threatened his standing within that community. Mr Gao indicated a willingness to assist. The Judge found that the resulting arrangements stood “outside of” and were “unrelated to” their broader business relationship.[4]
[4]At [1] and [23].
Initially, the vehicle by which assistance was to be given was transfer to Mr Jia of an unencumbered property owned by Ms Yang and Mr Gao,[5] with payment of the $3,000,000 purchase price deferred until Mr Jia received a dividend from the development. The intention was to make available an asset against which Mr Jia could borrow money to clear his debt. The original arrangement was therefore for a sale and purchase to Mr Jia fully funded by unsecured vendor finance from Ms Yang and Mr Gao.
[5]Ms Yang was the sole registered proprietor of the property but held an interest in it (unidentified as to extent) on behalf of Mr Gao.
On 8 May 2019, Ms Yang as vendor and Mr Jia as purchaser entered the relevant agreement for sale and purchase (SPA). The express terms included:
(a)a purchase price of $3,000,000 with no deposit payable;
(b)a settlement date of 21 May 2019;
(c)at cl 20, a deferred purchase price payment provision in terms:
The settlement funds will not be payable until at such time that the Victor Project by Brownsbay Seaview Ltd has been completed and the shareholder dividends are payable and paid to the shareholders.
The transaction did not however proceed as documented. Instead:
(a)On 19 June 2019, Mr Jia borrowed $1,450,000 from BBSL and made this available to his family trust.
(b)On what was ultimately the settlement date, 25 June 2019:
(i)Ms Yang transferred the relevant property to Mr Jia’s trust.
(ii)The trust borrowed $1,500,000 from Westpac, secured against the property.
(iii)The trust used the borrowings from BBSL and Westpac to pay $3,000,065.84 (being the purchase price and rates apportionment) to Ms Yang.
(c)On 26 June 2019, Ms Yang advanced $3,000,000 to Mr Jia.
What was formerly a deferred payment obligation at this point became an unsecured loan which Mr Jia applied to repayment of the advance from BBSL and the debt owed by him within the Chinese community.
In February 2020 the investment structure for the development was varied. WFHL was incorporated as a holding company for 100 per cent of the shares in BBSL, with the shares in WFHL in turn issued to Mr Jia (49 per cent, voting) and Ms Yang (51 per cent, non‑voting). The substantial loans which each of Mr Jia, Ms Yang and Mr Gao had made to BBSL were then restructured as shareholder loans to WFHL with a corresponding loan by WFHL to BBSL. The loan agreement between Ms Yang and WFHL recorded that as at 24 March 2020 the total sum advanced by her was approximately $15,500,000. There is no reference in the document to the earlier $3,000,000 advanced to Mr Jia by Ms Yang. This is understandable, given that it did not involve WFHL.
On the same date that the shareholder loans to WFHL were documented, Mr Jia and Ms Yang entered into a written shareholders’ agreement containing the following relevant provisions:
1.1In this Agreement unless the context otherwise requires:
…
“Completion” means the date on which the Code of Compliance Certificate and Certificate of Title pursuant to the Unit Title Plan in respect of the Development are issued or at such other date as the Board [may] determine from time to time.
…
2.1The parties agree and confirm that with effect from the Effective Date, the Group shall be governed by and conducted in accordance with the terms of this Agreement and will continue until:
…
(b)an order is made, or a resolution is passed, to appoint a liquidator to the company;
except for provisions which are intended to survive termination.
…
10.1 Subject to clause 10.2, the Shareholders wish to record that it is their intention that the Group will distribute any Income (as at the relevant date) of the Group in two (2) tranches:
(a)first, on the date Completion is achieved; then
(b)on the Taxation Date;
subject to the retention of funds which are in the Board’s opinion sufficient to discharge BBSL’s obligations pursuant to any maintenance period or defective works liability under the sale and purchase agreement(s) in respect of the Residential Units and/or the Retail Units.
In September 2020 a real estate agent acting for Ms Yang and Mr Gao sent a draft agreement to Mr Jia relating to the $3,000,000 loan. It recited Mr Jia as the borrower, Ms Yang as the lender, the date of borrowing and the amount borrowed, and then contained the following provisions (translated from Mandarin):
Agreement for sale and Purchase of Real Estate, Vendor Yuling Yang, Purchaser: Xinhong Jia Date 8th May of 2019, Address: 30 Oban Road, Browns Bay, Lot 113 DP 10786, CT NA49A/203, Price: $3,000,000) :
Yang Yuling lent 3 million New Zealand dollars to Jia Xinhong for two years. After one year's loan, on September 24, 2019, through friendly negotiation between both parties, the loan terms were clearly improved on the basis of the original oral agreement between the two parties as follows (See attachment Agreement for sale and Purchase of Real Estate, Vendor Yuling Yang, Purchaser: Xinhong Jia Date 8th May of 2019, Address: 30 Oban Road, Browns Bay, Lot 113 DP 10786, CT NA49A/203, Price: $3,000,000):
Interest‑free loan period: From May 21, 2019, until the completion of the The Victor apartment project of Browns Bay Seaview Limited (5485918), and the date when the shareholders are paid and the dividends are divided.
Repayment method: The borrower and the lender are also shareholders of WINTER FOREST HOLDINGS LIMITED (7860779), which is the holding company of Browns Bay Seaview Limited (5485918). When the company pays and splits dividends to shareholders, the borrower shall receive directly the loan is deducted from the amount and paid to the lender.
After the lender receives the total loan amount, this agreement will be automatically terminated.
The draft agreement was not signed. However, Mr Jia confirmed by email that it was “fair and reasonable, and reflect[ed] the original we agreed on”.
By 2022 relations between the parties were becoming strained. The development was under financial stress with significant liabilities to secured lender China Construction Bank Corp (CCB). There were difficulties in refinancing the project (attributed by Mr Jia to an absence of cooperation on the part of Ms Yang and Mr Gao).
On 8 September 2022 the respondents commenced proceedings in relation to the $3,000,000 loan, seeking summary judgment in respect of an alleged oral term that the loan was repayable on demand. That application was dismissed by Associate Judge Lester on 28 March 2023.[6] His Honour observed that the proposition that Mr Jia agreed to an advance that could be called up at any time was contrary to the rationale of the transaction which linked repayment to dividends from the BBSL project and, in turn, lacked “commercial common sense”.[7]
[6]Yang v Jia [2023] NZHC 639.
[7]At [25].
No appeal was brought from that decision. All parties now proceed on the basis that repayment of the loan is governed by the provisions of the SPA (most relevantly cl 20) or any other term appropriately implied by law.
By September 2023 problems with the development had escalated. CCB required its facilities to be refinanced and Ms Yang and Mr Gao would not agree to the proposed terms of the refinancing including the provision of personal guarantees. In September 2023 CCB commenced a mortgagee sale process. Shortly afterwards, Ms Yang and Mr Gao applied to put WFHL into liquidation on the basis that it was insolvent and that it was just and equitable to do so. On 30 October 2023 Mr Jia responded by placing both companies into liquidation.
Ms Yang and Mr Gao then amended their statement of claim and sought leave to bring a second summary judgment application. They pleaded that the $3,000,000 loan was repayable on the liquidation of BBSL and/or WFHL as a result of either an express or implied term of the SPA.
CCB’s secured lending in respect of the development, totalling in excess of $21,000,000, has been repaid from the proceeds of sale. The liquidators of BBSL have, in turn, brought proceedings against it alleging sale at an undervalue.
It is not in dispute that, for the purposes of cl 20 of the SPA, the development is “completed”. The sole issue is whether, by construction or implication, the personal loan to Mr Jia became repayable to Ms Yang and Mr Gao upon liquidation of the Companies.
Decision on appeal
Judge Brittain held that the factual matrix against which cl 20 in the SPA was to be interpreted was not in dispute and that Mr Jia was unable to point to any additional facts relevant to inception of the loan and which might emerge at trial which would justify deferring interpretation of the clause to that point.[8] He noted Mr Jia’s acceptance that the $3,000,000 advance was never intended to be or become a gift and the concession of Mr Jia’s counsel, Mr Norling, that “the requirement in cl 20 that the shareholder dividends are ‘paid’ only applies if a shareholder dividend is payable”.[9]
[8]Judgment under appeal, above n 1, at [53].
[9]At [59].
The Judge considered that cl 20 recognised a qualifying event for repayment with two interrelated components:
(a)the completion of construction of the building and sale of the apartments and commercial units; and
(b)payment of profit, if any, to the shareholders.[10]
[10]At [65].
He addressed Mr Jia’s argument that the meaning of “shareholder dividends” in cl 20 was broad and included distributions in a liquidation made under s 313 of the Act or dividends following termination of a liquidation under s 250 of the Act.[11]
[11]At [72].
He noted “force” in Ms Yang and Mr Gao’s response that liquidation of the Companies was unlikely to produce a distribution to Mr Jia, concluding that “at best” he might receive partial repayment of his shareholder loan to WFHL.[12] The Judge did not, however, consider it necessary to make any finding in that respect on the summary judgment application.
[12]At [52].
The Judge’s essential reasoning and conclusions are contained in the following paragraphs:
[73] The Court is required to ascertain the objective intention of the parties for repayment of the loan, assessed at the date of the contract. There is no evidence that the parties turned their minds to any distinction between distributions to shareholders in the form of dividends under s 53 of the Act and distributions to shareholders in a liquidation under s 313 of the Act. That is not surprising given that the parties anticipated that the project would be profitable.
…
[78] I do not accept that a reasonable person in the shoes of the parties in May 2019 would have understood the qualifying event for repayment of the loan to include completion of a liquidation of the development company and a liquidator’s pursuit of claims for unliquidated damages against a mortgagee of the development company or directors of the company.
[79] I consider that a reasonable person having all the background knowledge which was reasonably available to the parties in May 2019 would understand the qualifying event in cl 20, conveyed by the words used, to be completion of construction of the project and the payment of any shareholder dividends payable to Ms Yang and Mr Gao by a development company controlled by its board of directors.
[80] It is common ground that construction of the project was completed. On the liquidation of [BBSL] and [WFHL], the qualifying event in cl 20 was satisfied because dividends were no longer payable as a matter of law.
[81] If I am wrong on the interpretation of the words used in cl 20, then I find that the criteria for implication of a term are established. Clause 20, read against the relevant background, must be understood to mean that liquidation of the development company would require repayment of the loan.
The appellant’s case
Mr Jia submits that, as a matter of construction, and on a purely textual analysis, there is nothing to indicate that liquidation would trigger repayment and that the Judge departed significantly from the language used by effectively deleting the phrase “and the shareholder dividends are payable and paid to the shareholders” from cl 20. He says that the Judge did this by conflating the concepts of dividends being payable and of them being paid, submitting that conceptually they are two different things with “payable” describing the ability of a company to satisfy the solvency test and make a distribution and “paid” meaning the actual receipt of the distribution after satisfaction of the payable pre‑condition. He says that in construing the trigger as “payment of profit, if any, to the shareholders” the Judge allowed for the notion of a “payable” dividend of zero.[13] By contrast, where “paid” is regarded as a necessary condition of loan repayment, which Mr Jia says is what the express term states, there must be a distribution to the shareholders greater than zero otherwise nothing has been “paid”.
[13]At [65(b)] (emphasis added).
Mr Jia further submits that on the Judge’s approach there is no possible circumstance after the completion of the development where the loan does not become payable, effectively rendering the payable and paid conditions irrelevant.
Turning then to the factual matrix within which the words were used, Mr Jia takes issue with the Judge’s conclusion that no reasonable person would conclude that the repayment obligation would be deferred until completion of the liquidation process.[14] He said that this rationale is incorrect, or at least has no place in a summary judgment context, because the court cannot exclude the prospect that the loan was a “limited recourse loan”, only repayable from dividends (or perhaps more widely “distributions”) from the development and then only to the extent such dividends or distributions permitted.
[14]At [78].
Mr Hollyman KC, for Mr Jia, postulates various commercial reasons for why cl 20 should be interpreted in this way, suggesting that a repayment obligation on liquidation would deprive Mr Jia of the opportunity of injecting funds at the moment of the company’s greatest jeopardy and therefore of potentially saving it. Counsel also suggests that the whole SPA transaction should be considered in light of Mr Jia’s previous desire to withdraw funds from the development to pay his unrelated personal debt, and as such is an example of parties to a joint venture property development restructuring their debt obligations. Neither of these scenarios however were developed in the evidence.
Mr Jia also references post‑contractual conduct as relevant to identification of the parties’ assumed intentions. He says that subsequent to provision of the personal loan, Mr Jia and Ms Yang entered into the shareholders’ agreement and BBSL loan agreement and that these committed Ms Yang on a “more or less … indemnity” basis to cover any shortfall in the development regardless of its profitability. He says that this underscores Ms Yang and Mr Gao’s “complete faith” in the development. He submits that interpreting cl 20 as creating a limited recourse obligation is consistent with that level of confidence. He contrasts the absence of any reference to insolvency in cl 20 to identification of the fact that in the loan agreement between Ms Yang and BBSL, the loan is recognised as repayable on an “insolvency event”. Counsel invites the Court to draw the inference that the absence of any reference to an insolvency event in cl 20 (or in the draft loan agreement which was subsequently prepared but not executed) demonstrates that the parties had not contracted for this eventuality.
In respect of whether a term is appropriately implied that the debt be repayable on liquidation, Mr Jia suggests that the Judge failed to engage adequately with the test for an implied term and inappropriately “piggyback[ed]” on his construction analysis. He says that no implied term was necessary for business efficacy because this was a limited recourse loan and that it would be contrary to the express terms of the contract by providing an alternative realisation trigger which fundamentally rebalances the contractual allocation of risk.
He says that the suggested implication fails to meet the threshold of “strict” necessity and that the proper construction of cl 20 allows for any distribution by a liquidator to shareholders under s 313 of the Act to be considered a dividend, with the result that repayment is suspended pending any such distribution. He says that there is the prospect of such a distribution because CCB’s sale price of $23,500,000 plus GST was between approximately $16 and $23 million less than valuation. He submits that because of the inadequacy of CCB’s marketing campaign and tender process the prospects of liquidator recovery against it are high and relies on the liquidator’s opinion that “a distribution will be made. The question [is] as to how much and when it will be paid.”
Approach on appeal
An appeal against the grant of summary judgment proceeds by way of rehearing.[15] An appellate court should enter judgment in accordance with its own opinion, including on matters of fact and degree requiring a value judgment.[16]
[15]Court of Appeal (Civil) Rules 2005, r 47; and McKay v Sandman [2018] NZCA 103, [2018] NZAR 707 at [31].
[16]Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].
Accordingly, the appeal must be evaluated through the standard summary judgment lens whereby Ms Yang and Mr Gao were required to satisfy the Court that Mr Jia had no arguable defence to their claim, meaning that there was no real question to be tried.[17] The appellant must nevertheless establish error in the judgment under appeal.[18]
[17]High Court Rules 2016, r 12.2.
[18]Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [30].
Stating the obvious, it will not generally be possible to determine disputed issues of fact on a summary judgment application.[19] That caveat does not feature prominently in our assessment. There is no dispute that the loan was made independently of funding provided by Ms Yang and Mr Gao for the development and that, as Mr Jia himself says in one of his affidavits, “[Mr Gao] did [him] a big favour so that I could repay the Personal Loan.”
Scope of the appeal
[19]Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 4.
Counsel’s suggestion that arrangements for transfer of the property and the associated loan were only necessary because Ms Yang and Mr Gao opposed any attempt by Mr Jia to withdraw funds from the development to repay his debt does not, in our view, elevate the personal loan to a restructure of the joint venture property development obligations. The reality was that, absent consent, Mr Jia could never have withdrawn money from the development without being in potential breach of his statutory duties. He had a personal debt that needed to be repaid and he was the beneficiary of the respondents’ generosity in providing an unsecured and interest free (absent default) facility with which to do so. Mr Jia acknowledges that it was not a gift. The sole issue is whether, as a matter of construction or implication, the loan was repayable on liquidation of the development at which point a dividend (at least within the terms contemplated in ss 52 and 53 of the Act) was no longer possible. We agree with the Judge that the answer to this question does not turn on any disputed issue of fact.
The relevant law on construction and implication
In respect of the construction of cl 20 we adopt the standard objective approach of ascertaining:[20]
… the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
[20]Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912, as quoted in Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [41].
What the clause conveys to a reasonable person will most obviously be derived from the language used which remains the primary window to contractual intentions.[21]
[21]Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [17]; Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]; and Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [46].
Courts will however look to the factual matrix in which the agreement occurred, even if the words of the contract seem clear at first sight.[22] The context of an agreement will usually operate as a cross‑check, but the plain meaning of a contractual term must be regarded as provisional and is susceptible to being altered by context.[23] Pre‑contractual negotiations and post‑contractual conduct, each shedding an objective light on meaning, may be relevant and admissible.[24]
[22]Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [4] per Blanchard J, [22] per Tipping J and [64] per McGrath J.
[23]At [24] per Tipping J.
[24]At [31] per Tipping J.
In respect of the test for implication, we adopt the analysis of the Supreme Court in Bathurst Resources Ltd:[25]
[25]Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20 (footnotes omitted).
[116] To conclude, the principal points that govern the implication of terms are as follows:
(a)The legal test for the implication of a term is a standard of strict necessity, a high hurdle to overcome.
(b)The starting point is the words of the contract. If a contract does not provide for an eventuality, the usual inference is that no contractual provision was made for it.
(c)While the task of implication only begins when the court finds that the text of the contract does not provide for the eventuality, the implication of a term is nevertheless part of the construction of the written contract as a whole. An unexpressed term can only be implied if the court finds that the term would spell out what the contract, read against the relevant background, must be understood to mean.
(d)As with the task of interpreting a contract, the inquiry for the court when considering the implication of a term is an objective inquiry — it is the understanding of the notional reasonable person with all of the background knowledge reasonably available to the parties at the time of contract that is the focus of this assessment. The court is tasked with the role of constructing the understanding of that reasonable person.
(e)Thus, the implication of a term does not depend upon proof of the parties' actual intentions, nor does it require the court to speculate on how the actual parties would have wanted the contract to regulate the eventuality if confronted with it prior to contracting.
(f)The BP Refinery conditions are a useful tool to test whether the proposed implied term is strictly necessary to spell out what the contract, read against the relevant background, must be understood to mean. Whilst conditions (4) and (5) must always be met before a term will be implied, conditions (1)–(3) can be viewed as analytical tools which overlap and are not cumulative. The business efficacy and the “so obvious that ‘it goes without saying”’ conditions are both ways, useful in their own right, of testing whether the implication of a term is strictly necessary to give effect to what the contract, objectively interpreted by the court, must be understood to mean.
[117] We see this approach to the implication of terms as aligning with the objective theory of contractual interpretation. It promotes the primacy of the words of the contract, while also seeking to reach a complete understanding of what the contract, read against the relevant background, must be understood to mean. By excluding speculation as to how the actual parties would have wanted the contract to regulate an unforeseen eventuality, this approach treats as irrelevant (and unreliable) evidence of subjective intent, given with the benefit of hindsight. It thereby promotes the efficient and just conduct of proceedings.
This approach appears significantly informed by that of Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd.[26] In the result, the “implication of terms does not involve adding to the terms of the contract; it simply draws out a meaning already implicit in it”.[27]
[26]Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.
[27]Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (7th ed, LexisNexis, Wellington, 2022) at [6.4.4(d)].
In adopting the strict necessity test, the Supreme Court in Bathurst cited Lord Steyn in Equitable Life Assurance Society v Hyman who, on the facts before him, concluded:[28]
In my judgment an implication precluding the use of the directors’ discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.
[28]Equitable Life Assurance Society v Hyman [2002] 1 AC 408 at 459, as cited in Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [116].
This assists in identifying what the term which is sought to be implied must be strictly necessary for. Self‑evidently, strict necessity cannot, on the Supreme Court’s approach, simply be equated with the old BP Refinery business efficacy test.[29] That much is clear from the sixth point in its analysis.[30] Rather it attaches to the broader construction‑based test. Provided an objective lens is maintained, we do not see a significant material difference in saying the proposed term is strictly necessary to “give effect to the reasonable expectations of the parties” or to “constructing the understanding of [the] reasonable person”.[31]
[29]BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 (PC) at 283.
[30]Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [116(f)]
[31]Equitable Life Assurance Society v Hyman, above n 28, at 459; and Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [116(d)].
Again, self‑evidently, the BP Refinery conditions which identify implication as necessary to give business efficacy to the contract and require that the proposed term be “so obvious that it goes without saying” must now be considered subordinate to the overarching inquiry in terms of what the contract must be understood to mean and thus what is strictly necessary to give effect to that meaning.[32] The authors of Burrows, Finn and Todd on the Law of Contract in New Zealand postulate that the approach now required “provides more flexibility and nuance than the BP Refinery criteria” and that although a term “can be applied[[33]] only on the basis of strict necessity, there will be some instances where a term will be implied under the Bathurst Resources approach that would not have been on a strict BP Refinery approach”.[34] They suggest this may not be of concern since “the latter approach set a standard that if fully applied was likely too high”.[35]
[32]BP Refinery (Westernport) Pty Ltd v Shire of Hastings, above n 29, at 283. Noting that conditions four and five in BP Refinery (the implied term must be capable of clear expression and must not be contrary to an express term in the contract) must “always be met”: see Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [116(f)].
[33]We think the authors may mean “implied”.
[34]Todd and Barber, above n 27, at [6.4.4(d)].
[35]At [6.4.4(d)].
David McLauchlan suggests that as a result of these developments the overall conceptual footing for implication is now “sounder”.[36] This may not make the test any easier to apply — exemplified by Bathurst where, although the Court was unanimous in the test to be applied, it was divided three to two on whether the test was met.[37] However, as he further observes, while the Belize and Bathurst approach “may not lead to greater certainty of outcome … at least it has the potential to lead to greater transparency in judicial reasoning”.[38]
Analysis
Construction
[36]At [6.4.4(d)], citing David McLauchlan “Construction and implication: in defence of Belize Telecom” [2014] LMCLQ 203 at 240.
[37]Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [201] per Winkelmann and Ellen France JJ and [263] per Glazebrook, O’Regan and Williams JJ.
[38]McLauchlan, above n 36, at 240.
In this Court, Ms Yang and Mr Gao did not press their High Court argument based on a construction of cl 20, acknowledging, for reasons we will shortly return to, that the case stood or fell on whether a term is appropriately implied in the contract making the loan repayable on the liquidation of BBSL.
Paradoxically, therefore, it was the appellant who primarily addressed us on the subject of construction. We consider the reasons for that tolerably clear. By driving a construction of cl 20 which includes within the definition of “dividends” any liquidator distribution to shareholders, Mr Jia seeks to avoid the consequences of what is, ostensibly, a significant lacuna in the parties’ contract — namely, what happens if a shareholder dividend becomes impossible as a result of insolvency or liquidation of the company. This was a totally unanticipated event at the time the loan was made and not addressed in cl 20.[39] The existence of such a lacuna must be considered a significant factor in any implication of an additional term. So, if, on its proper construction, no such lacuna exists and cl 20 can be interpreted as the appellant suggests, that must be considered relevant to whether the implication for which Ms Yang and Mr Gao contends is appropriate.
[39]We are not, in that context, persuaded by Mr Jia’s argument that we should infer, by reference to explicit recognition of the consequences of an insolvency event in the WFHL/Yang loan agreement, that absence of such reference in the SPA was effectively deliberate. The two cannot be compared, the loan agreement being several months later than the SPA and having all of the indicia of being prepared by a lawyer (with all the “belts and braces” typically associated with professional advice) unlike cl 20, the relevant words of which were drafted by Mr Jia.
However, we do not consider that, on its proper construction and having regard to the factual matrix in which the agreement occurred, the cl 20 reference to “shareholder dividends” includes liquidator distributions under s 313 of the Act.
A dividend is undoubtedly a form of distribution but that does not mean to say that when the word “dividend” is used in a contract it necessarily includes any sum which, after payment of all claims on the company, a liquidator “must distribute”.[40]
[40]Either in accordance with the company’s constitution or, in the absence thereof, of s 313(4) of the Companies Act 1993.
A dividend is defined in s 53 of the Act as a distribution other than a distribution to which ss 59 (acquisition of a company’s own shares) and 76 (financial assistance to a person for the purposes requiring shares) applies. Payment of a dividend requires satisfaction of the solvency precondition identified in s 52(1). Directors who vote in favour of a distribution by way of dividend must sign a certificate stating that, in their opinion, the company will, immediately after the distribution, satisfy the solvency test and the grounds for that opinion.[41] On liquidation the board loses its power under s 52(1) to authorise a distribution by the company.[42] In any event, the solvency test as defined at s 4 of the Act will, in the typical case, be incapable of satisfaction at that point.
[41]Section 52(2).
[42]Section 248(1)(b).
The s 53 definition of a dividend as being a form of distribution other than that to which ss 59 or 76 applies, does not in our view mean that, where elsewhere in the Act, there is reference to a liquidator obligation to “distribute” any surplus, this makes such a distribution a “dividend”.
Section 53 occurs within pt 6 of the Act under the cross‑heading “Distributions to shareholders”. This cross‑heading introduces ss 52–57. Section 313 occurs in pt 16 “Liquidations”, under the cross‑heading “Creditors’ claims”. We consider that, within the context of the Act, the “dividend” referenced in s 53, to which the definition of “dividend” in s 2(1) refers, is the type of distribution contemplated in ss 52–57. That is, a distribution made with board authorisation and predicated on solvency.
This accords with the relevant meaning of “dividend” identified in the Oxford English Dictionary, viz a “sum payable … as a profit of a joint‑stock company”.[43]
[43]Oxford English Dictionary (online ed, Oxford University Press) definition of “dividend”. Noting also that a secondary definition is “sum divided among the creditors of an insolvent estate”. We accept the notional reasonable person would also recognise this meaning but do not consider any final payment to shareholders after satisfaction of creditor claims to be in the same category.
The factual matrix surrounding the SPA supports that construction. As at 2019 all parties anticipated a successful outcome for the development, with repayment of the shareholder advances and a significant profit payable pro rata. No one turned their mind to the consequences of insolvency because it was simply never contemplated. The word “dividend” was, in our view, intended to recognise what would flow from the successful conclusion of the project. It was a dividend of the type authorised by s 52 and assumed solvency. This is reinforced by the second of the two preconditions “payable and paid”. It is also consistent with the terms of the unsigned but acknowledged draft agreement of September 2020. With the liquidation of BBSL, payment of such a dividend became impossible as a matter of law.
Were Mr Jia’s construction adopted, it would require, in the case of liquidation, for Mr Yang and Mr Gao to await the final conclusion of the liquidation process before any entitlement to recovery. Potentially, as in this case, that could result in extended delays as liquidator claims against third parties (or possibly directors) were finalised. In the context of an unsecured non‑interest bearing $3,000,000 loan made as a favour between friends, that would appear an objectively unlikely interpretation.
Mr Jia’s construction would also suggest the result that if, on account of creditor claims (including shareholder advances), there was no s 313 distribution to shareholders, there would then be a nil recovery on the loan (making it at that point a non‑recourse facility). But within the relevant factual matrix — extension of a “big favour” to facilitate repayment by Mr Jia of a personal loan — we consider such an interpretation unlikely to resonate with the notional reasonable person. It would, as Ms Yang and Mr Gao submit, truly be a case then of “no good deed [going] unpunished”.
Like the Judge, we consider the prospects of a s 313 shareholder distribution in the WFHL liquidation to be negligible. We agree with the respondents that the liquidator’s affidavit “muddies the waters” by conflating claims by the parties to recovery of shareholder advances, with entitlements to a potential distribution as shareholders. The quantum of shareholder advances is such that we cannot realistically envisage any s 313(4) distribution. The interpretation for which Mr Jia contends therefore envisages stark consequences. And, in our view, consequences never objectively contemplated.
But as Ms Yang and Mr Gao now fairly recognise, that does not mean that as a matter of interpretation, the loan became repayable at the point of liquidation. To the contrary, the second of the identified qualifying events could never at that stage be satisfied because a dividend within the terms of ss 52–57 was no longer capable of being “payable” or “paid”. Unlike the Judge, we do not regard it as an available construction that the qualifying event is satisfied simply because, as a matter of law, satisfaction is impossible. As Mr Jia says, that would effectively delete the second of the preconditions from the clause.
However, such conclusions at once expose the significant lacuna we have previously identified.
Implication
This is a challenging case in terms of application of the new orthodoxy around implication of contractual terms. Courts are now enjoined to ask whether the term contended for is “part of the construction of the written contract as a whole”.[44] But here, the contract of loan which substituted for the original deferred payment obligation, was oral. It had impressed on it cl 20 from the SPA. However, there is nothing else in the SPA which assists in a construction‑based analysis.
[44]Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 20, at [116(c)].
The position can, in that respect, be contrasted with Bathurst where, in the context of a comprehensive commercial contract for royalty and performance payments, the question was whether a term should be implied that if Bathurst ceased to mine at a level which equated to that triggering performance payment obligations (while at the same time refusing to make a USD 40 million payment which had become due) it was in breach of the agreement.[45]
[45]Noting again the three to two division between the Justices of the Supreme Court in this respect.
Here the ability to test the implication against construction of the written contract as a whole is minimal. As a result, the focus is more particularly on establishing, among the fragments of written contract to hand, how the notional reasonable person, with all the background knowledge reasonably available to the parties, would have responded to the unforeseen eventuality of insolvency/liquidation and consequent legal (and practical) inability to declare the dividend from which repayment was anticipated.
We consider the following to be the critical contextual factors:
(a)The loan was for a very significant sum — $3,000,000.
(b)It was between parties not only involved in a separate business relationship, but, at that stage, bound by friendship.
(c)It was “a big favour” designed to preserve Mr Jia’s “standing” within the Chinese community in Auckland.
(d)It was never intended to be a gift.[46]
(e)It was intended to be repaid from dividends which, from the point Mr Jia resolved to liquidate the Companies, could never be declared.
(f)It was non‑interest bearing and unsecured.
[46]As acknowledged by Mr Jia in his 27 October 2022 affidavit where he said “I accept that my family trust owes Jenny the funds”.
In our view the suggested implication, which would add words to the effect “or dividends are no longer payable as a result of liquidation” to the end of cl 20, is essential to give effect to the reasonable expectations of the parties, objectively determined. The proposed term is not unreasonable or inequitable — to the contrary, it seems to us entirely reasonable that the unexpected eventuality of a liquidation should crystalise a repayment obligation. The alternative would be to leave a benevolent creditor to face a complete loss arising from their debtor’s decision to liquidate BBSL or, on Mr Jia’s interpretation, an at best greatly deferred and partial recovery and no ongoing interest entitlement.[47] We do not consider that any of that makes commercial sense within the context of the acknowledged favour extended by Ms Yang and Mr Gao. From that it is a small step to our conclusion that an implied term is essential to give effect to the parties’ objective expectations.
[47]Noting again our assessment that a s 313 distribution to Mr Jia is most unlikely.
Nor is the suggested term contrary to any express term, and in particular, cl 20. Rather it simply addresses the lacuna we have identified — what happens if, as a matter of law, a dividend is no longer payable. This is a classic case of the Court being required to construct the understanding of the notional reasonable person in the circumstances of an eventuality which was unaddressed.
We come back to what, in the context we have identified, the contract must be understood by such a notional reasonable person to mean. Inquiry into whether the proposed term is necessary to give business efficacy to the contract or whether the term goes without saying are, as the Supreme Court has observed, simply analytical tools in establishing that meaning. But they are powerful tools nonetheless. Implication is necessary to give business efficacy to this contract because, absent the term proposed, an unsecured and substantial loan, never expected to remain outstanding beyond successful conclusion of an unrelated property development, otherwise becomes a gift on liquidation — a result which no reasonable person would anticipate and which the parties themselves did not. For the same reason we consider that the implication contended for effectively goes without saying.
As a result, we are unpersuaded that we should depart from the result reached in the High Court.
Result
The appeal is dismissed.
The appellant must pay one set of costs to the first and second respondents for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Norling Law Ltd, Auckland for Appellant
Claymore Partners Ltd, Auckland for Respondents
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