Li v 110 Formosa (NZ) Limited

[2018] NZHC 2529

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2016-404-001650

[2018] NZHC 2529

UNDER

Section 145A of the Land Transfer Act

IN THE MATTER OF

An application that caveat 10209375.1 not lapse

BETWEEN

JUN LI

Applicant

AND

110 FORMOSA (NZ) LIMITED

Respondent

Hearing:	21 September 2018
Appearances:	D Connor/J Heaney for the Applicant D W Grove for the Respondent
Judgment:	27 September 2018

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by me on

27.09.18 at 10:30am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Carson Fox Bradley Ltd, Auckland D Connor Barrister, Auckland

LI v 110 FORMOSA (NZ) LIMITED [2018] NZHC 2529 [27 September 2018]

Introduction

[1]                 The respondent, 110 Formosa (NZ) Limited (Formosa), is the owner of a golf resort valued at approximately $51 million. The resort is said to be in urgent need of capital expenditure for maintenance and a new waste water treatment system.

[2]                 In June 2016 the parties agreed to the making of an order by this Court that a caveat lodged against the property by the applicant, Mr Jun Li, should not lapse pending the filing and determination of substantive proceedings determining Mr Li’s interest in the property.

[3]                 The substantive proceedings were heard before Fitzgerald J in June and July 2018. Judgment remains reserved. In those substantive proceedings Mr Li contends that he contributed funds of $4.8m to purchase the land but these funds were misappropriated and Formosa obtained complete ownership of the land without Mr Li being either an owner or shareholder. The primary cause of action is knowing receipt, and Mr Li seeks equitable and tracing remedies. A central issue in the case is the existence and extent of any proprietary interest held by Mr Li.

[4]                 Formosa now seeks to vary the consent order made on 26 June 2016 by discharging the caveat so as to allow it to obtain secured funding in the sum of $3 million and thereafter allowing the applicant, Mr Li, to re-register the caveat. Formosa says that this is the only way that the necessary finance can be raised to address the outstanding maintenance and works required on the property. It is contended that these matters need to be addressed as a matter of priority, otherwise there is a real risk that the operations of the resort will be shut down.

[5]                 Formosa says that the current title has no registered security, and the substantial net equity, after allowing for a $3 million mortgage, is more than adequate to protect any interest that Mr Li might establish in the property.

[6]                 Mr Li opposes the application. He says that Formosa has failed to provide evidence on critical issues such as the financial performance of Formosa and whether and why alternative sources of finance are not available to it. Formosa, he says, has

not met the threshold of establishing that the removal of the caveat on the terms proposed will not prejudice his interests as caveator.

Relevant legal principles

[7]                 The onus lies on the party challenging a caveat to show why the Court’s residual discretion should be exercised to remove the caveat.1 This is because the residual discretion is exercisable only where the Court is “completely satisfied” that removal will not prejudice the caveator’s interests, so in the absence of evidence on that point the caveat should be sustained. In other words, there is a presumption, once the caveator has established an arguable case, that the caveat is the appropriate means of protecting the caveator’s interests. The onus lies on the party challenging the caveat to show that it provides no practical advantage to the caveator or that the caveator’s interests can reasonably be accommodated in some other way.

[8]                 The Court of Appeal in Butcher v Finnigan held that applications to set aside a consent order need to be viewed with considerable caution.2 Such an order should not be disturbed unless the interest of justice require it and then only if a good ground or grounds are established.

[9]                 The critical issue I must determine is whether Formosa has discharged the onus that removal of the caveat on the terms proposed will not prejudice Mr Li’s interests.

Background

[10]            Mr Li says that he was induced by one Meng Wang to provide the sum of $4.8m to the solicitors Koo and Woo for the specific purpose of a joint venture to purchase the land. The joint venture between Mr Li and Meng Wang and Jenny Huang was recorded in a cooperation agreement dated 29 August 2014. Mr Li says that he bargained for a 32 percent share of the land or capital in the joint venture company.

1      Hinde McMorland and Sim Land Law in New Zealand (online ed, LexisNexis) at [10.020]; see also Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA) at 60.

2      Butcher v Finnigan [2012] NZCA 250.

[11]            The original sale and purchase agreement was cancelled. Mr Li says that this was due to Mr Wang’s failure to give Koo and Loo sufficient funds to complete that purchase. Mr Li alleges that Koo and Loo, acting on the instructions of Mr Wang, then applied Mr Li’s funds of $4.8m by payment to the vendor of the land under a new agreement. The purchaser was Golden Beachlands Holdings Ltd (GBHL), a company incorporated by Mr Wang. Golden Beachlands Holdings Ltd then nominated Formosa to purchase the land and it eventually completed the transaction. Mr Li has or had no interest in either GBHL or Formosa. He says that it was dishonest of Koo and Loo and Mr Wang to apply his funds to the purchase by those companies without his knowledge or instructions.

[12]            The consent order made by Lang J on 26 July 2016 recorded the following agreements between the parties:

(a)Caveat 10209375.1 shall not lapse pending further order of the Court.

(b)That order is conditional upon the applicant seeking to establish the interest protected by the caveat by filing a substantive proceeding in this Court not later than 10 August 2016. Should it not do so, the caveat will immediately lapse.

(c)Leave is reserved to apply for ancillary orders.

[13]Mr Li filed the substantive proceeding on 10 August 2016.

[14]            On 9 September and 25 October 2016 Formosa wrote to Mr Li requesting the removal of the caveat on the basis that the statement of claim did not disclose a caveatable interest in the property. Formosa then made application to this Court to have the caveat discharged on those same grounds. That application was dismissed by Associate Judge Christiansen on 17 February 2017.3 Formosa was ordered to pay costs to Mr Li in the sum of $12,380.00. To-date those costs have not been paid.

3      Li v 110 Formosa (NZ) Ltd [2017] NZHC 174.

[15]            In a memorandum regarding costs dated 21 September 2018, and in response to a question I asked of counsel at the hearing, Formosa has advised that it now agrees to pay the costs of $12,300.00 from the finance facility it seeks to obtain. In addition, Formosa agrees to pay the reasonable conveyancing costs of arranging for the caveat to be removed and reinstated. However, Formosa reserves its rights and remedies in relation to the costs, and particularly in relation to the substantive judgment that is awaited.4

[16]            In March 2018 Formosa’s solicitors wrote to Mr Li requesting the removal of the caveat and raising concerns about the need to raise finance to pay for urgent Works.

[17]            The director of Formosa is Gui Wen (Jenny Wen). She has a 75.25 percent shareholding in the company. It is said that she contributed $30m in cash towards the purchase of the land.

The case for Formosa

[18]            Formosa has filed an affidavit by its General Manager, Mr Graham Chin, sworn 27 August 2018, in support of its application for removal of the caveat.

[19]Formosa says that in the first instance it will likely only draw down the sum of

$1m of the $3m proposed facility. It seeks no more than $3m in total and once funds are expended, Mr Li will be advised as to the amount and where the costs have been applied.

[20]            One of the most urgent matters facing Formosa is the wastewater treatment system, which is said to be outdated and defective. Mr Chin says that three sewerage trucks are required each day at a cost in excess of $7,000 to remove the wastewater. This is solely because the capital expenditure cannot be obtained.

[21]            The failure to undertake these and other works threaten the building warrant of fitness that is required for insurance purposes and for the operation of the facility.

4      The Court has received and read the memorandum of counsel for the applicant dated 26 September 2018 addressing the question of how costs are to be paid.

[22]            The property is a golf resort and summer is the busiest period. The majority of customers who stay at the resort and use the golf course are foreigners. Not only is the failure to be able to undertake the capital works causing excessive expenditure but, if the works are not undertaken, the operations of the property are threatened. Mr Chin says that if the property is closed down the financial affect will be disastrous and in his view unquantifiable.

[23]            Formosa further says that in addition to the registering of the caveat, Mr Li holds further security by way of the current undertaking given by Mr Meng Wang (who holds 19.75 percent of the shares in Formosa) not to dispose of those shares, pending the substantive judgment. Based on the valuation of the land, ($51m), it is said that those shares are worth in excess of $10m.

Analysis and decision

[24]            On its face, the application, which provides for the reregistration of the caveat, has merit and would appear to make good sense. As Fitzgerald J commented in her minute of 31 August 2018,5 it does not seem to be in any party’s interest for the golf club to be unable to attend to urgent and necessary repairs and maintenance.

[25]            The fundamental problem, however, is that Formosa has not produced sufficient evidence to meet the threshold of establishing that removal of the caveat on the terms proposed does not prejudice Mr Li’s interests as caveator. Formosa has failed to produce sufficient evidence on the critical issue of its financial position and performance and financial information relating to its director and principal shareholder, Ms Wen. That includes the relationship between Formosa and Pine Harbour Ltd. In the circumstances, I find that I cannot be “completely satisfied” that to grant the application would sufficiently protect Mr Li’s interests.

[26]            The substantive litigation, which involves serious allegations by Mr Li of dishonesty, has obviously produced considerable mistrust between the parties. An earlier application to remove the caveat was unsuccessful and the costs that Formosa was ordered to pay to Mr Li have not yet been paid. The caveat was originally the

5      Li v Formosa HC Auckland CIV 2016-404-1650, 31 August 2018 (minute).

subject of a consent order and the substantive proceedings have been concluded. The question of the urgent need to carry out maintenance works has been an issue for some time but was not the subject of a formal application to the Court until after the conclusion of the substantive hearing.

[27]            The onus on Formosa to demonstrate why the Court should exercise its discretion in the manner proposed thus arises in circumstances where there is a particular need for full and frank disclosure of the circumstances giving rise to the urgent need to obtain mortgage finance. Formosa has not discharged the onus that it carries and, as noted above, applications to set aside a consent order need to be viewed with considerable caution.

[28]            I find that Mr Li has raised legitimate concerns about whether Formosa is unable or unwilling (it is not clear) to finance the capital works without the proposed mortgage facility. He has also questioned whether Ms Wen, the principal shareholder and director, has taken money out of the business (and how much), whether she has an unregistered mortgage over the property and the exact nature of the relationship between a company she apparently owns and controls, Pine Harbour Ltd, and Formosa. In a letter from counsel for Formosa to counsel for Mr Li dated 6 August 2018, Formosa advised that there is a management contract between Formosa and Pine Harbour Ltd. Some detail of the relationship between the two companies is provided, but again, it is incomplete.

[29]            Mr Li has for some time been seeking information from Formosa about its current financial position. I reject the submission of Mr Grove that his letter to Mr Heaney dated 6 August 2018 provides an adequate answer to the specific question posed by Mr Heaney about Formosa’s current financial position. It is not enough to say that Formosa has always been willing to provide information reasonably requested by Mr Li. Formosa carries the burden of providing adequate evidence about its financial position either to the Court or to Mr Li, and it has not done so.

[30]            To add to the mistrust that already exists between the parties, Formosa has not provided an affidavit from Ms Wen but instead relies on the affidavit of its General Manger Mr Chin, which has inadequate information about the exact financial position

and performance of the company. In the ordinary course an affidavit from the General Manager may have sufficed, but in the current circumstances the absence of any explanation or information from Ms Wen, including on the relationship with her company Pine Harbour Ltd, leaves the Court in a position of too much uncertainty.

[31]            It may be that in the negotiations that preceded the current application Mr Li, and his legal advisors, sought enhanced terms and conditions giving greater protection than that provided for by the caveat. However, that does not absolve Formosa from its obligation, when seeking a formal court order of a discretionary nature, to provide adequate evidence on critical issues.

[32]            For the purposes of this application, Formosa does not contest the proposition that Mr Li has a reasonably arguable case for a beneficial interest in the land. In assessing the question of whether Formosa has met the onus of establishing that discharge of the caveat on the terms proposed adequately protects Mr Li’s interests, I find  I should proceed on the basis that  he has a reasonably arguable claim to a      32 percent share of the land. I acknowledge that that is a live issue before Fitzgerald J but I am in no position to assess whether that claim is a strong or a weak one. I reject Mr Grove’s contention that I should conclude that a claim to interest in land, as opposed to an interest in the shares, is a weak one. The merits of Mr Li’s claims have been tested before Fitzgerald J but all I can conclude is that the claim is reasonably arguable.6 In reaching that conclusion, I acknowledge that the original cooperation agreement of August 2014 provided for Mr Li to have a shareholding in the joint venture company.

[33]            I also consider that if I should grant the application, it might potentially complicate any relief that Fitzgerald J might award to Mr Li giving him a substantial interest in the land (i.e. the 32 percent interest claimed). The failure of Formosa to provide sufficient evidence about its financial position and performance, and the issue of whether it is unable or just simply unwilling to obtain finance from another source,

6      In Li v Formosa Auckland Country Club Ltd (In liq) [2015] NZHC 2253, and Li v 110 Formosa (NZ) Ltd [2017] NZHC 174 this Court addressed the question of whether Mr Li has a caveatable interest in the land. The conclusion that he does was of course the basis of the consent order made by Lang J on 26 July 2016.

leaves me with an incomplete and uncertain understanding of the implications of acceding to Formosa’s application.

[34]            Mr Li accepts that maintenance and capital works need to be carried out urgently but contends that he has been deprived from participating in the decision as to whether or not the business should be continued. In a letter from his counsel, Mr Heaney, dated 6 July 2018 he takes the position that the Formosa business should no longer be propped up and the land should either be sold or the subdivision (the alleged original purpose for the acquisition of the land) should commence. In my view, in order to reasonably accommodate Mr Li’s caveatable interests, both he and the Court should have been provided with more information about the financial position of the company.

[35]            I accept that there may be merit to the contention of Mr Grove that the undertaking given by Mr Wang in the substantive proceeding not to dispose of his shares provides additional and adequate security for Mr Li in the event that the application, on the terms proposed, is granted. However, again, there is simply not enough evidence for me to be “completely satisfied” that Mr Li’s interests are adequately protected. There is no evidence at all before me as to the value of the shares in Formosa and, against the background of the other uncertainties that I have identified, I am not persuaded that Formosa has met the onus that it carries. In the circumstances I am not prepared to accept at face value the contention by Mr Chin that based on the valuation of the property of $51m Mr Wang’s shares are worth in excess of $10m.

[36]            As noted above, the parties were corresponding as early as March this year (and possibly even earlier) on the issue of the urgent need to carry out maintenance and capital works. I have also already noted that although the issue of urgent maintenance and capital works was discussed during the substantive hearing, Formosa did not bring its current application until after the substantive hearing had concluded. I find that there is no adequate evidence before me which truly explains why the need to discharge/vary the caveat was not raised and dealt with during the substantive proceeding. That would logically have been the appropriate time to deal with the matter if the urgency had arisen by that time and the parties had been unable to reach

any agreement. If there is a valid reason for the late making of the application there is an insufficient evidential foundation for it in the materials made available to me. Once again, this all adds to the uncertain and incomplete picture that I have on the circumstances underlying the application.

[37]            I have noted above that Formosa has not yet paid the outstanding costs order of $12,380.00. However, that issue is not of itself decisive. The amount is a modest sum and, in any event, Formosa has now agreed to make payment. Nevertheless, it is of relevance to note that Formosa’s proposal to pay the modest sum is a commitment to pay that amount from the finance facility. In earlier correspondence between the parties Mr Li was also advised that legal costs incurred by Formosa in the substantive litigation would also be paid from the mortgage facility. The Court has not been provided with adequate information about Formosa’s financial position.

[38]            In all the circumstances, I conclude that the grounds for the application have not been made out and in the absence of evidence on critical issues the caveat must be sustained.

Result

[39]            The application by Formosa to discharge the caveat on the terms proposed in the interlocutory application of 22 August 2018 is dismissed.

[40]            In the ordinary course, having succeeded, Mr Li would be entitled to costs, and on a 2B basis. If the parties cannot agree on costs then memoranda are to be filed within 14 days.

Associate Judge P J Andrew