Keemati Limited v NE Civil Limited (in liquidation)
[2022] NZHC 195
•16 February 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000967
[2022] NZHC 195
BETWEEN KEEMATI LIMITED
Applicant
AND
MR CIVIL LIMITED (in liquidation) First Respondent
QNZ LIMITED
Second RespondentJIE GAO
Third RespondentTINGSONG QIU
Fourth Respondent
Hearing: 2 February 2022 Appearances:
D Purusram and A Kaur for Applicant
H Thompson for Mr Noyce, liquidator of First Respondent – excused attendance
C Jiang for Second, Third and Fourth Respondents
Judgment:
16 February 2022
JUDGMENT OF VENNING J
This judgment was delivered by me on 16 February 2022 at 4pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:
Solicitors: Victorian Lawyers, Auckland
McMahon Butterworth Thompson, Auckland Tompkins Wake, Auckland
KEEMATI LIMITED v MR CIVIL LIMITED [2022] NZHC 195 [16 February 2022]
Application
[1] In an amended application Keemati Limited (Keemati) seeks the following orders:
(a)joining Tingsong Qiu as a respondent;
(b)directing QNZ Limited (QNZ) to be fined and Mr Qiu to be committed to prison, and/or otherwise dealt with for breach of a freezing order;
(c)directing Inland Revenue to investigate the affairs of QNZ;
(d)granting Keemati leave to continue with the proceedings against MR Civil Limited (MR Civil) (in liquidation);
(e)an injunction preventing and restraining QNZ and any other respondent from passing any resolution to put QNZ into voluntary liquidation and to proceed with the voluntary liquidation only with leave of the Court or consent of Keemati; and
(f)preventing and prohibiting QNZ, Ms Gao, and Mr Qiu, from disposing of, encumbering or taking steps in any way to diminish the value of their assets or properties to the total value of $2 million in addition to the two properties at 33 Rashni Road and 3 Skanda Crescent, Auckland, or, in the alternative, an order that QNZ, Ms Gao, and Mr Qiu collectively pay $2 million into Court as security.
[2] Keemati’s substantive claim against MR Civil, Ms Gao and QNZ is currently scheduled for a 10 day substantive fixture to commence 19 September 2022.
[3] For present purposes I take the summary of the background to Keemati’s claim as recorded in a previous minute:1
1 Keemati Ltd v MR Civil Ltd HC Auckland CIV-2019-404-967, 10 November 2021 (minute of Venning J).
[4] The following summary is taken from Moore J’s earlier summary2 from Associate Judge Paulsen’s judgment on Keemati’s application that certain caveats not lapse,3 the voluminous evidence filed by the parties, the pleadings and the parties’ oral and written submissions.
[5] The third defendant, QNZ, is a property development company. Mr Qiu is QNZ’s sole director and CEO.
[6] The first defendant, MR Civil is a construction contractor. It is a wholly owned subsidiary of QNZ. Mr Qiu is MR Civil’s sole director and CEO.
[7] The second defendant, Ms Gao, is Mr Qiu’s wife. She was formerly a director of MR Civil and QNZ. She is not a party to the present application.
[8] In late 2016 QNZ4 employed Mr Angurala to carry out construction work on its residential subdivision at Flat Bush School Road.
[9] Shortly after this, Mr Angurala was made a director of MR Civil. QNZ engaged MR Civil as the construction contractor to carry out earthworks at Flat Bush School Road. MR Civil also carried out other construction projects which Mr Angurala supervised. These included two large earthwork projects on Matua Road.
[10] In November 2017, 40 per cent of the shares in MR Civil were transferred to Keemati. The circumstances and purposes of this transfer are disputed. Mr Angurala says the shares were gifted. Mr Qiu says they were a loan to enhance Mr Angurala’s credibility with suppliers and contractors.
[11] The relationship between Mr Angurala and Mr Qiu soured. Each attributes the breakdown to the other. In any event, on 3 September 2018, the two men met to discuss the basis on which Mr Angurala would exit MR Civil’s business. Mr Angurala took notes of what he claims was agreed between them. The notes were signed by Mr Qiu. Notwithstanding the notes, it appears to be common ground that they do not reflect everything which was agreed between the parties. In material respects, Mr Qiu does not accept the agreement as claimed by Mr Angurala. It is, however, accepted that it was agreed Keemati would relinquish its shares in MR Civil and Mr Angurala would resign as director. But there is a dispute as to the terms on which the shares would be transferred. Mr Angurala says that certain properties were to be transferred to Keemati in consideration for Keemati shares and upon titles becoming available. Mr Qiu says that QNZ was to pay nothing. The shares were, as they always had been, on loan to Keemati.
[12] The relationship between Mr Qiu and Mr Angurala remains hostile. Mr Angurala claims Mr Qiu made it impossible for Keemati to complete the Matua Road projects. And on 5 May 2019 Mr Angurala wrote to the Matua Road developers telling them he was quitting the projects and, as a consequence, the developer cancelled the contract with MR Civil.
2 Keemati Ltd v QNZ Ltd [2020] NZHC 3496.
3 Keemati Ltd v QNZ Ltd [2020] NZHC 299.
4 At this time QNZ was called Chimbusco International Limited.
[13] There is also a dispute relating to whether the terms of the 3 September 2018 agreement were breached. Keemati claims that MR Civil did not pay the sums due as a result of the 3 September 2018 agreement. MR Civil disagrees. It says it has paid all the sums owing. Keemati sues MR Civil and QNZ in breach of contract. Mr Gao is sued in breach of trust and breach of directors’ duties. To a considerable extent the determination of these proceedings will turn on credibility findings.
[4] In the fourth amended statement of claim dated 23 October 2020 Keemati pleads three causes of action. The first is in contract against MR Civil. It alleges MR Civil breached the terms of the contract entered on 3 September 2018. Keemati seeks damages stated to be “expectation loss” in the amount of $1,571,381.46 together with interest and costs.
[5] In its cause of action against QNZ Keemati claims that, as part of the contract of 3 September 2018, QNZ agreed to transfer two lots of land in Flat Bush (lots 22 and 31 [now 33 Rashni Road and 3 Skanda Crescent]), to Keemati and to construct houses on each of those lots with the construction to be managed by Keemati. Keemati says in breach of that agreement QNZ has failed to transfer the lots and to construct the houses. It seeks an order for specific performance compelling the transfer of the lots and the construction of the houses by QNZ under Keemati’s management or, in the alternative, damages for the non-provision of the lots and houses in an amount to be quantified before trial.
[6] In its final cause of action which is against Ms Gao, Keemati claims that before the contract of 3 September 2018 was entered Ms Gao breached “the trust in partnership and director duties” in a variety of ways. Keemati says that as a result of Ms Gao’s breaches Keemati was unable to complete the purchase and development of properties at 691 Waitakere Road and 25 Ferndale Drive. Keemati seeks damages, again said to be “expectation loss” but in this case in the amount of $10-15 million.
[7]On 14 July 2020 Hinton J made a freezing order in the following terms:
All or any of the assets of [MR Civil] up to the amount of $1,571,381 being the amount of [Keemati’s] claim against [MR Civil] filed on 19 June 2020, shall not be disposed of, dealt with, or diminished in value until further order of this Court.
[8] MR Civil was placed into voluntary liquidation on 5 October 2021. Digby Noyce was appointed liquidator. On 12 October 2021 Mr Noyce finalised his first report for creditors.
[9] On 8 November 2021 Keemati filed an interlocutory application seeking a number of urgent orders including an order to join Mr Noyce and restrain him from taking further steps in the liquidation. After hearing from counsel on a Pickwick basis the Court dismissed the application to join Mr Noyce and dismissed the related application to stay the liquidation of MR Civil. The Court also dismissed an application for an order that QNZ not be placed into voluntary liquidation.
[10] The Court adjourned the application for the remaining orders for hearing on 2 February 2022. Keemati then filed the amended application.
Evidential issues
[11] The parties have exchanged affidavits with extensive annexures for the purposes of the application. Mr Angurala’s affidavit in reply on behalf of Keemati ran to some 1,286 pages with annexures. Mr Jiang, counsel for the second, third and fourth respondents, objected to a number of passages of the affidavit on the basis that they were not in reply, were irrelevant, and were submission. There is force in a number of the objections made by Mr Jiang. However, the affidavits of the respondents also suffer from similar objections, albeit to a lesser degree. I do not propose to trawl through the affidavits ruling passages in or out, but I have taken account of the objections and have focused on the admissible evidence and also the relevant accompanying annexures and contemporaneous documents.
Keemati’s application for leave to continue with the proceedings against MR Civil (in liquidation)
[12] The application for leave to continue proceedings against MR Civil has been resolved by agreement. Mr Thompson confirmed Mr Noyce’s position that he can neither accept nor reject Keemati’s claim in the liquidation at this stage. The resolution of the claim would involve findings of credibility which will best be determined at the substantive trial. In the circumstances Mr Noyce agrees, under s 248(1)(c)(i) of the
Companies Act 1993, to Keemati continuing its proceeding against MR Civil. No order is necessary.
[13] Keemati and the liquidator have also agreed to a variation of the freezing order in the following terms so that the order will provide:
All or any of the assets of MR Civil up to an amount of $1,571,381 being the amount of Keemati’s claim against MR Civil filed on 19 June 2020 shall not be disposed of, dealt with or diminished in value until further order of this Court, PROVIDED THAT nothing in this order prevents MR Civil’s liquidator from continuing with the liquidation of MR Civil in accordance with the liquidator’s statutory and other duties, including without limitation, taking possession of and realising assets of the first respondent.
[14] Mr Jiang confirmed the respondents did not oppose that variation. I order accordingly. I record that that variation to the freezing order is made on the basis of the written undertaking of Mr Noyce as liquidator of MR Civil dated 26 January 2022 and filed in these proceedings.
The application to join Mr Qiu as a respondent
[15] Mr Jiang conceded that, as the amended interlocutory application sought freezing and ancillary orders against Mr Qiu, he was automatically a respondent to that application.5 There was therefore no need for leave to be sought to join him as a respondent to that amended application even though he is not a party to the substantive proceeding.
[16] Initially it appeared from Mr Purusram’s submissions that Keemati intended to seek to join Mr Qiu as a fourth defendant as well. However, during the hearing Mr Purusram accepted that the current fourth amended statement of claim does not plead a cause of action against Mr Qiu. He conceded Keemati did not seek to pursue the application to join Mr Qiu as a defendant to the substantive proceeding at this time.
5 High Court Rules 2016, r 32.4.
The application regarding Inland Revenue
[17] Also as discussed with counsel during the course of the proceeding, the Court is not minded to make any order requiring Inland Revenue to investigate the affairs of QNZ and its related entities as sought in the amended application.
[18] If, following a substantive hearing and after witnesses have been cross- examined, the Court is concerned that there may be evidence of tax evasion, then the Court might direct the Registrar to refer a copy of its judgment and any adverse findings to that effect to Inland Revenue for further investigation, but that is as far as the Court is generally prepared to go. It is premature to suggest the Court should make any direction or provide any information to Inland Revenue at this stage based on the very general allegations raised and evidence which has not been tested. I decline to do so.
The application to prevent QNZ being placed into liquidation
[19] In the minute/orders of the Court dated 10 November 2021 the Court dismissed Keemati’s application for an injunction to prevent QNZ being put into liquidation. While accepting there is jurisdiction to make such an order, it is an extreme step6 and the Court considered that it was not warranted in the present case. The situation was quite different from the case of Vero Insurance that Keemati relied on at that time. The Court also considered it relevant that Keemati had lodged caveats against QNZ’s properties and had a form of security.7
[20] Mr Purusram suggested that the order sought in the amended application was different to the order sought in the original application and noted there was, of course, further evidence now before the Court. I do not accept that any of the further material filed on behalf of Keemati takes the merits of this aspect of the application any further. As noted, the Vero case is distinguishable. Further, the other case relied on by Mr Purusram of Munford v MR & LE Munford Ltd can also be distinguished.8 In that
6 Vero Insurance NZ Limited v Fleet Insurance & Risk Management Ltd HC Auckland CIV-2007- 404-1438, 21 May 2007.
7 Those caveats were recently further sustained by order of Associate Judge Sussock: QNZ Ltd v Keemati Ltd [2021] NZHC 3269.
8 Munford v MR & LE Munford Ltd [2018] NZHC 2473.
case the Court did grant an injunction of the nature sought, but the injunction was granted without hearing from the defendant. It was only granted for a strictly limited period of time to enable the defendant to respond. Taken overall, the evidence does not support such an order in the present case.
[21] Further, Mr Purusram’s reliance on the restraining powers contained under s 247 of the Companies Act is misplaced. The orders available under s 247 of the Companies Act are to protect the position of a company involved in other proceedings when an application for liquidation is pending, rather than to prevent the company being placed into liquidation.
[22] In the absence of an appeal from the decision of 10 November 2021 declining to place QNZ into liquidation (and even having regard to the further evidence) the application to restrain its shareholders from placing QNZ into voluntary liquidation must be dismissed.
[23] Mr Purusram sought to avoid the consequences of the earlier adverse finding by suggesting that an order could be made as part of the freezing orders sought against QNZ, Mr Qiu and Ms Gao. For the reasons that follow, that proposal does not assist Keemati on this point either.
Breach of the freezing order
[24] That leaves the orders sought directed at QNZ and Mr Qiu for breach of the freezing order and for the freezing orders (or in the alternative effective mandatory orders for security against a defendant) sought against QNZ, Ms Gao and Mr Qiu.
[25] The relevant statutory provisions are to be found in the High Court Rules and the Contempt of Court Act 2019. Rule 7.48 provides:
7.48 Enforcement of interlocutory order
(1)If a party (the party in default) fails to comply with an interlocutory order or any requirement imposed by or under subpart 1 of Part 7 (case management), a Judge may, subject to any express provision of these rules, make any order that the Judge thinks just.
(2)The Judge may, for example, order—
(a)that any pleading of the party in default be struck out in whole or in part:
(b)that judgment be sealed:
(c) that the proceeding be stayed in whole or in part:
(d)that the party in default be fined, ordered to do community work, or committed to prison under section 16 of the Contempt of Court Act 2019:
(e)if any property in dispute is in the possession or control of the party in default, that the property be sequestered:
(f) that any fund in dispute be paid into court:
(g)the appointment of a receiver of any property or of any fund in dispute.
(3) An interlocutory order may only be enforced by the following (in accordance with subpart 4 of Part 2 of the Contempt of Court Act 2019):
(a) an order imposing a fine or community work:
(b)a warrant committing the person to prison:
(c) a sequestration order.9
[26]Section 16 of the Contempt of Court Act is also applicable:
16 Certain court orders and undertakings may be enforced
(1)This section applies to—
(a)any interim or final order, decision, decree, direction, or judgment of a court (a court order) to do or abstain from doing something, except as provided in section 17:
…
(2)A court may enforce the court order or undertaking against the party, non-party, or other person bound by the order or undertaking by taking action provided for in subsections (3) and (4) on application by—
(a)the party who sought the order or undertaking being enforced; or
(b)a person who benefits from, or has an interest under, the order or undertaking; or
(c)the Solicitor-General, if the Solicitor-General is satisfied that there is a high degree of public interest in enforcing the order or undertaking.
9 See also rr 17.84 and 17.85 which specifically deal with arrest.
(3)The court—
(a)must not proceed further under this section unless it is satisfied that other methods of enforcing the court order or undertaking have been considered and are inappropriate or have been tried unsuccessfully; and
(b)if so satisfied, must make a finding as to whether it is proved beyond reasonable doubt that—
(i)the court order or undertaking being enforced has been made in clear and unambiguous terms and is clearly binding on the person; and
(ii)the person had knowledge or proper notice of the terms of the court order or undertaking being enforced; and
(iii)the person has, without reasonable excuse, knowingly failed to comply with the court order or undertaking being enforced.
(4)On finding beyond reasonable doubt that the requirements of subsection (3)(b)(i) to (iii) are met, the court may—
(a)do any of the following:
(i)issue a warrant committing the person or a director or an officer of the body corporate, as the case may be, to a term of imprisonment not exceeding 6 months:
impose a fine,—
(A)in the case of an individual, not exceeding
$25,000; or
(B)in the case of a body corporate, not exceeding
$100,000:
(iii)order the individual or a director or an officer of the body corporate, as the case may be, to do community work, not exceeding 200 hours, as the court thinks fit:
(b)if the court is the High Court, make a sequestration order in accordance with the rules of court.
…
[27] Mr Purusram identified the following principles from the cases relating to breach of freezing orders:
(a)A sanction may be required to ensure Court orders are obeyed:10
[41] … The Court has broad powers to make such orders as may be required in the interests of justice where its orders are not complied with. Were it otherwise, respect for the rule of law would be seriously undermined. As Lord Neuberger observed in Global Torch Ltd v Apex Global Management Ltd (No 2):
The importance of litigants obeying orders of court is self- evident. Once a court order is disobeyed, the imposition of a sanction is almost always inevitable if court orders are to continue to enjoy the respect which they ought to have.
(b)Non compliance that prejudices a party may lead to the proceeding being dismissed, stayed or a defence struck out.11
(c)Even though not a party to the original freezing order or other order of the Court a party in contempt may still be subject to the processes for enforcement of criminal contempt.12
[28] The Contempt of Court Act came into effect on 26 August 2020. It replaces the common law on contempt of court in New Zealand, but the common law criteria for addressing contempt of court have been incorporated in the Act.13
[29]Mr Jiang did not challenge the principles.
[30] What is in issue is first, whether the facts of this case support a finding that either or both QNZ and Mr Qiu have acted in breach of the freezing order and, if they have, what order, if any, the Court ought to make given the provisions of the Contempt of Court Act and the particular circumstances of that breach and its significance.
[31] Mr Purusram drew the Court’s attention to a number of matters Keemati relied on to support the allegation that QNZ and Mr Qiu had breached the freezing order.
10 Kidd v van Heeren [2019] NZCA 275, citing Global Torch Ltd v Apex Global Management Ltd (No 2) [2014] UKSC 64, [2014] 1 WLR 4495 at [23].
11 Ship “La Bonita” v Parker Engineering Company Ltd CA123/85, 3 July 1986 at 5.
12 Ash Road Investments Ltd v McLean Tower Ltd (2006) 7 NZCPR 783.
13 Contempt of Court Act 2019, s 3(1).
The liquidation of MR Civil
[32] Mr Purusram noted that QNZ, under the directorship of Mr Qiu and as the sole shareholder of MR Civil, had placed MR Civil into voluntary liquidation without having sought to vary the existing freezing order. None of that is in dispute.
[33] However, the terms of the freezing order did not prevent QNZ placing MR Civil into voluntary liquidation. As a starting point, it would normally not be a breach of a freezing order, which has the effect of preserving a company’s assets, for steps to be taken to place the company subject to the freezing order into voluntary liquidation. Those in control of a company have a duty to preserve its assets and not to continue trading if it becomes unable to meet its obligations. A voluntary liquidation can, in some instances, preserve assets for all creditors. In the absence of an express provision preventing it, the voluntary liquidation of MR Civil was not a breach of the freezing order.
The Guo loan/security
[34] It appears that in 2021 a Hai Guo agreed to advance a loan of $3,449,258.90 to MR Civil. Mr Guo registered a PPSR security on 20 May 2021 over all present and after acquired personal property.
[35] The position regarding the loan and related security is unsatisfactory. Like other aspects of the financial dealing of the parties to this case, it is confused. The respondents’ position is that MR Civil ceased trading in December 2019, although QNZ has traded as “MR Civil” since then, whereas Keemati’s position is that MR Civil continued trading and was trading up to the time it was placed into voluntary liquidation on 5 October 2021. If MR Civil was not trading it is difficult to see any basis for the Guo loan. But in any event, it is the respondents’ case that the loan was never actually advanced and that Mr Guo had agreed to withdraw the PPSR.
[36] Following the liquidation of MR Civil Mr Noyce issued a notice under s 294 of the Companies Act to set the charge aside. Mr Guo did not take any steps to respond to the notice so that, by operation of s 294(3) of the Companies Act, the charge is automatically set aside.
[37] Mr Thompson also confirmed that, to tidy matters up, a notice was issued under the Personal Property Securities Act 1999. The notice will expire later this month. If, as is expected, Mr Guo takes no steps to respond to that notice, that will enable registration of a discharge from the PPSR.
[38] The incurring of a further liability (supported by a security over the assets of MR Civil) could potentially have impacted the value of the net assets of MR Civil and thus have been in breach of the freezing order.
[39] However, as Mr Jiang pointed out, if, as was intended to be the case, the security was provided to secure a loan, then MR Civil’s balance sheet would have had an increase in its current assets or working capital of the $3.4 million introduced and an attendant debt obligation of $3.4 million. Accordingly, the position would have been neutral from MR Civil’s overall net asset position.
[40] Standing back and looking at the matter overall, I consider there is force in Mr Jiang’s point that, while the Guo loan (which is unexplained) may not have been in the ordinary course of business, if, as appears to be the case, the security related to a loan advance then it would have been effectively neutral from MR Civil’s point of view. Neither the borrowing nor the security would, of themselves, have reduced the value of MR Civil’s net assets.
[41] In any event, even if that is incorrect, given that the security has been avoided and appears likely to be formally removed from the register, the end result is that, even if the entry into the agreement permitting the registration by Mr Guo of the security could be said to be a breach of the freezing order, it has had no practical effect. The security has now been avoided. There has been no reduction in the value of the assets of MR Civil available to meet Keemati’s claim as a consequence of the Guo “security” transaction.
Other PPSR securities
[42] Mr Purusram referred also to the “burdening of the assets of MR Civil” by reference to other securities recorded in the PPSR. He referred to Mr Angurala’s evidence relating to MR Civil’s loans from Caterpillar Financial New Zealand. The
relevant emails from Caterpillar Financial and the accompanying letters of between 27 January 2021 and 24 February 2021 and verification statements from the PPSR record the repayment of loans and the discharge as at 24 February 2021. Relevantly the PPSR registrations were in November 2017, well before the freezing order was issued. Rather than dissipate the assets, the subsequent repayment of debts would have improved MR Civil’s net asset position.
General emails
[43] Mr Purusram also referred to an exchange of emails between Mr Angurala and Mr Qiu which, in his submission, suggested an intention to prejudice Keemati’s position, the most pertinent of which was an email of 26 July 2021, which recorded:
I going to liquidate MR Civil some time this year, 100 lenders have priority then you.
[44] When read in context with the other exchanges I do not consider the email suggests an intent to defeat Keemati’s claim. While the reference to 100 lenders may be hyperbole it was no more than acknowledging that MR Civil had other creditors as well as Keemati. In context the applicant fails to satisfy the Court that that suggests an intent to defeat the freezing order.
Phoenix Company
[45] Mr Angurala makes the point that, following the liquidation of MR Civil, Mr Qiu has apparently incorporated another company, MR Civil Construction Limited. However, unless that company has received assets of MR Civil without giving value, the incorporation of a subsequent company with a similar name is not relevant to the allegation of the breach of the freezing order.
Diverting the related assets of MR Civil to QNZ
[46] Keemati next says that Mr Qiu has transferred assets out of MR Civil. The respondents deny that, but Mr Jiang submitted that in any event, the liquidator’s report still valued MR Civil’s assets at $1,522,427 as at the date of liquidation. That figure was only $50,000 less than the freezing order sum of $1,571,381.
[47]However, as Mr Purusram pointed out, that figure of $1,522,427 included
$600,000 for goodwill. As MR Civil is in liquidation and is not trading (and has not since December 2019 according to Mr Qiu’s evidence) then the goodwill is likely valueless. On that basis the net assets held as plant and machinery are valued at
$922,420, a shortfall of approximately $650,000 from the amount in the freezing order.
[48] Mr Purusram submitted that the figure agreed upon in the consent freezing order was reached primarily on the basis of the value of the plant and machinery recorded in MR Civil’s assets depreciation schedule at the time. That appears to be the case. A contemporaneous email of the respondents’ then solicitor, Mr Holden, sent shortly prior to the consent orders being made recorded:
As you know, the Judge would like the freezing orders to identify particular machines. I’ve highlighted in the depreciation schedule the machines MR Civil is prepared to make subject to the orders. As you know, the actual market value of these machines is probably higher, and we could get into a debate about whether a few of these machines could be removed from the list. But time doesn’t really allow that. Having discussed the matter with the client, MR Civil is prepared to just use the depreciated value here. By my calculation this adds up to $1,856,512.29. Taking into account the loans recorded in the schedule dated 31 December 2019 of $269,306.74, there is equity in the machines to the value of at least $1,587,205.55. That’s more than the full value of your client’s claim. And as I have mentioned the loans have since reduced so the real equity figure will be higher.
[49] While Mr Angurala referred to assets in the depreciation schedule being subject to security interests, borrowing against the machinery appears to have been taken into account at the time. It appears that the parties proposed the draft consent order which was confirmed by the Court on the basis that the $1,571,381 referred to in the freezing order was supported by assets represented by plant and machinery. However, that was not made an express condition.
[50] On the face of the liquidator’s report, the freezing order has not been complied with. MR Civil’s assets have been reduced from the value of $1,571,381 referred to in the order. As at the date of liquidation the plant and machinery figure was $922,420.
[51] A matter of particular concern is the way MR Civil and Mr Qiu have dealt with the tangible assets of MR Civil.
[52] In his evidence Mr Angurala referred to particular transactions involving MTS Energy Limited (MTS). MTS is another company controlled by Mr Qiu. Mr Purusram submitted that Mr Qiu had facilitated the transfer of physical plant and machinery assets from MR Civil to MTS.
[53] In reliance on Mr Qiu’s evidence, Mr Jiang sought to explain the transactions involving the transfer of physical assets of MR Civil. He submitted that $1,225,799 (plus GST) of the plant and machinery assets referred to in the updated 31 August 2021 depreciation schedule had been originally purchased by MTS. Sometime after their purchase, MTS had transferred the plant and machinery to QNZ which in turn had then transferred them to MR Civil. During the course of those transfers no money had changed hands. The consideration for the transfers was recorded by way of loans owing by MR Civil to QNZ and then by QNZ to MTS. In June and July 2021 MR Civil sold some of the assets back to QNZ to repay some of the loans owing to QNZ. QNZ then in turn sold the assets back to MTS to repay some of the loans which it owed MTS.
[54] As a result, the July 2021 transaction assets of MR Civil have been transferred out of that company. If the assets had not been transferred then MR Civil would have retained the physical assets and QNZ would have been no more than an unsecured creditor of MR Civil. It would have ranked along with other unsecured creditors for the amount of the loan. The timing of the transaction in July 2021 is relevant given the substantial sum of money involved, and the subsequent voluntary liquidation of MR Civil in October 2021.
[55]Mr Qiu accepts that in July 2021 MR Civil sold plant and machinery worth
$1,225,799 (plus GST) back to QNZ in order to repay the loans owing by MR Civil to QNZ. There is no explanation for the timing of the transfer.
[56] The liquidator has sought to set aside that transaction as well. Mr Noyce has issued a notice under s 294 of the Companies Act to set aside the transfer on or about
31 July 2021 of the sale of “certain assets, including motor vehicles and civil engineering equipment” by MR Civil to QNZ, and the related payment of the purchase price of $1,409,669.73 by way of set-off against amounts owing by MR Civil to QNZ.
[57] QNZ has not responded to that notice so that s 294(3) of the Companies Act applies. However, it appears that the assets may have been further transferred by QNZ to MTS. It is not at all clear that QNZ will be able to either return the assets or pay compensation to MR Civil.
[58] To that extent the assets of MR Civil have been reduced. The Court is satisfied that the spirit and intent of the freezing order have not been complied with. MR Civil is in breach of the freezing order. The net assets of MR Civil have reduced below the figure in the order.
[59] The next issues for the Court are establishing the proper remedy, and whether the remedies sought, imprisonment of Mr Qiu and sequestration of QNZ’s assets are available and appropriate.
[60] Mr Purusram suggested that Mr Qiu should be arrested and imprisoned for perhaps two months. He also suggested that there could be a sequestration order to seize other QNZ or his assets.
[61] The suggestion of arrest and imprisonment of Mr Qiu should not have been pursued. That is entirely disproportionate to the term of the freezing order and the present circumstances.
[62] Section 16(3) of the Contempt of Court Act makes it clear that the orders for imprisonment, fine, community work and sequestration are effectively orders of last resort. The Court must be satisfied that other methods of enforcing the Court order or undertaking have both been considered and are inappropriate, or have been tried unsuccessfully. Mr Purusram did not address the issue of why other available orders or relief might be inappropriate.
[63] An obvious and more appropriate order to address the breach of the freezing order by MR Civil would have been an order dismissing MR Civil’s statement of defence (and counterclaim) so that Keemati could enter judgment against it by formal proof. However, Keemati has not sought such an order. No relief is sought against MR Civil for the breach despite the fact the order was made against it. The application,
insofar as it relates to the breach of the freezing order, is only directed at QNZ and Mr Qiu.
[64] Before making an order against either QNZ or Mr Qiu, the Court must be satisfied to the criminal standard beyond reasonable doubt that:
(a)the freezing order was made in clear and unambiguous terms and was clearly binding on QNZ and Mr Qiu; and
(b)QNZ and Mr Qiu had knowledge or proper notice of the terms of the freezing order; and
(c)QNZ and Mr Qiu have, without reasonable excuse, knowingly failed to comply with the freezing order.
[65] The Court can be satisfied beyond reasonable doubt that Mr Qiu and through him QNZ were aware of the freezing order.
[66] However, as noted, the order was directed at the assets of MR Civil. It applied to MR Civil. The freezing order did not say that it applied to any other party. The Court made the order with the consent of the parties. Keemati had input into the terms of the order. The order makes no reference to officers of MR Civil or to third parties being bound by it. The Court is not satisfied the order bound QNZ.
[67] Although strictly unnecessary to go further, there is also a practical issue that arises in relation to QNZ. Any order which had the effect of requiring the retransfer of assets from QNZ to MR Civil or payment to MR Civil would not reinstate the position in relation to the freezing order. If any assets were transferred back to MR Civil they would be held by the liquidator for all creditors. It must be borne in mind that Keemati at present remains no more than a claimant. It may or may not become a creditor in due course, but even if it becomes a creditor in due course by judgment it will be an unsecured creditor.
[68] There are also difficulties for Keemati with the orders it seeks against Mr Qiu. Section 16(4)(a)(i) of the Contempt of Court Act confirms that the Court may make
orders against a director (such as Mr Qiu). However, that provision must be read subject to s 16(2) which confirms the Court may enforce the order (in the ways set out in s 16(4)) against “the party, non-party, or other person bound by the order …”. The enforcement under s 16(4) only applies to a person who is bound by the order.
[69] Mr Qiu is not a party to the proceeding. In terms of the High Court Rules, a party is defined as “a plaintiff or defendant or a person added to the proceeding”. An interlocutory application such as the present, to which Mr Qiu is a respondent, is expressly excluded from the definition of proceeding. Given the relationship between r 7.48 and s 16 of the Contempt of Court Act, the same definitions should apply.
[70] As a result, for Mr Qiu to have been bound by the freezing order he or at least his office (as a director of MR Civil) should have been expressly referred to.
[71] The order could, for instance, have been expressed in terms that “MR Civil and its officers and agents shall not cause the assets up to the amount of $1,571,381 to be disposed of, dealt with or diminished in value, until further order of the Court”. That would have made it clear that the order applied to Mr Qiu as an officer or agent of the company. The order was not in those terms.
[72] The Court cannot be satisfied beyond reasonable doubt that the freezing order clearly bound Mr Qiu.
[73] For those reasons, and as Keemati has not suggested any alternative orders other than sequestration and imprisonment which the Court considers not made out or otherwise inappropriate, the Court is not minded to make any other orders consequent on the breach by MR Civil of the freezing order.
The freezing order sought against QNZ, Mr Qiu and Ms Gao for $2 million
[74] Keemati also seeks a pre-judgment freezing order against QNZ, Mr Qiu and Ms Gao.
[75]The requirements for a freezing order are:
(a)the applicant must establish a good arguable case on its substantive claim;14
(b)the party against which the orders are sought must have assets to which the orders can apply;15 and
(c)the Court must be satisfied there is a danger that a judgment in favour of the plaintiff would be wholly or partially unsatisfied because the defendant might abscond or the assets of the defendant might be removed from New Zealand or might be disposed of, dealt with or diminished in value.16
[76]Ultimately the Court has a discretion whether to make the order or not.
[77] Given the current state of the pleadings there is no claim against Mr Qiu. There is no basis to make any pre-judgment freezing order against him.
[78] In relation to Ms Gao it has to be said the claim as presently pleaded in the present third cause of action is difficult to follow. As pleaded it alleges that there was some form of partnership or fiduciary relationship. However, the principal basis of the claim by Keemati against her appears to be breach of the agreement said to have been made in September 2018. Further, it is unclear how the damages claimed of expectation loss of between $10-15 million could be sustained. The current pleading fails to satisfy the requirement of a good arguable case against Ms Gao.
[79] Further, there is no evidence Ms Gao has been disposing of any assets that she may have.
[80] While the pleading against QNZ does satisfy the requirement of a good arguable case, there is no evidence other than Mr Angurala’s assertions that QNZ is disposing of its assets or selling its assets at under value. Further, on the affidavit
14 High Court Rules 2016, r 32.5(1)(b)
15 Rule 32.2(2).
16 Rule 32.5(4).
evidence, QNZ has no significant assets other than the two properties, which Keemati has already lodged caveats against.
[81] In the alternative, Mr Purusram suggested that the Court should order the respondents to provide security of $2 million. There is no juridical basis to make such an order.
[82]I decline to make freezing orders against QNZ.
Result
[83]Apart from the order varying the term of the freezing order noted at [13] and
[14] above, the Court either has no jurisdiction or declines to make any of the other orders sought. The applications are dismissed or otherwise dealt with as above.
Costs
[84] Although the orders sought by Keemati have not been made, the freezing order has been breached. In the circumstances I propose that costs on this application should be fixed on a 2B basis but their incidence should follow the outcome of the substantive proceeding.
Venning J
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