Li v 110 Formosa (NZ) Ltd
[2017] NZHC 174
•17 February 2017
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2016-404-001650
[2017] NZHC 174
IN THE MATTER OF Section 145A of the Land Transfer Act 1952 BETWEEN
JUN LI
Applicant
AND
110 FORMOSA (NZ) LIMITED
Respondent
Hearing: 3 February 2017 Appearances:
N Campbell QC and D Huang for the Applicant D Bigio QC and H Ford for the Respondent
Judgment:
17 February 2017
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
17.02.17 at 3:30pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date……………
JUN LI v 110 FORMOSA (NZ) LIMITED [2017] NZHC 174 [17 February 2017]
[1] Issues between the parties focus upon a caveat lodged by the applicant (Mr Li) over property owned by the respondent (110 Formosa) on 2 October 2015.
Background
[2] By an agreement dated 23 April 2014 the then mortgagees of that property at Beachlands, Auckland (the property) entered into an agreement with Meng (Eamon) Wang (Mr Wang) and Ding Zhi (Jenny) Huang (Mr Wang’s mother) for the sale and purchase of the property.
[3] On 10 August 2014 the applicant Mr Li met with Mr Wang and Mr Wang’s mother regarding purchasing an interest in the property that they had agreed to purchase with settlement to take place on 29 August 2014. Mr Wang says he informed Mr Li he wished to set up Jenny and Eamon Holdings Limited (JEHL) for the purpose of their partnership, and which would purchase the land.
[4] Later the parties and others met to discuss their purchase arrangement. The purpose was to complete a cooperation agreement. A meeting was arranged on 27 August 2014 for the purpose of signing the cooperation agreement. That signed agreement provided inter alia:
1.Cooperation and ownership ratio
…
2) Breakdown of the 100% ownership of the purchased land:
a)Party A [Mr Wang] holds 44% Party C [Mr Wang’s mother] holds 24% and Party B [Mr Li] holds 32% ownership of the Land (Party B’s first capital contribution is NZD 4.2 million; another NZD 7.96 million will be raised within six months).
b)Party A, Party B and Party C agree and Party A promise that the base price of the 100% ownership is NZD 38 million, which is the original price of the Land. Depending on the amount of capital they raise, Party B and Party C may, in future, acquire Party A’s ownership (e.g. pay NZD 3.8 million for acquiring 10% ownership).
2.Form of cooperation
1) Set up a (shareholding) limited company (“the Company”) to purchase and manage the Land and carry out joint investment and joint management and share risks as well as profits and losses. Party A, Party B and Party C shall purchase the Land at a total price of NZD 38 million.
…
[5] Mr Li agreed to pay $4.8m to acquire 32 per cent of the ownership interest. JEHL was incorporated on 27 August 2014. On 28 August 2014 Mr Li deposited $4m into the Koo and Loo solicitor’s trust account. Loo and Koo were Mr Wang’s lawyers. On 29 August 2014 the parties signed the cooperation agreement and on that date Mr Li paid $200k to Loo and Koo, as did Mr Wang. On 3 September 2014 Mr Li paid
$400k to Loo and Koo, and $200k to Mr Wang.
[6] The property settlement did not proceed on 29 August 2014 as had been agreed. Mr Li says Mr Wang told him not to worry and on 18 September 2014 Mr Li said Mr Wang reported that settlement would happen in a week’s time.
[7] On 26 September 2014 Golden Beachlands Holdings Limited (GBHL) was incorporated with Mr Wang who was one of the directors. The shareholding did not include Mr Li.
[8] On 29 September Mr Li emailed Loo and Koo to discuss his $4.8m contribution. Loo and Koo responded the next day asking Mr Li to see them with Mr Wang.
[9] On 30 September 2014 the mortgagees of the property entered into an agreement with GBHL to purchase the property with the settlement date of 30 September 2015. At that time Mr Wang sent a copy of that agreement (the September 2014 SPA) to Mr Li.
[10] It is now alleged that Loo and Koo used the $4.8m provided by Mr Lee to pay the deposit of $5m made by GBHL on 1 October 2014. Mr Li’s complaints are:
(a)This use was in breach of his instructions that the funds were not to be disbursed without his express agreement.
(b)The mortgagees received this sum in breach of the express terms of trust;
(c)Mr Li was not and is not a party to the September 2014 SPA.
[11] Mr Li said he called Mr Wang and was told his $4.8m had been paid as part of the deposit. Mr Li says Mr Wang told him he would not return the money but would consider giving Mr Li shares in GBHL. Later Mr Wang allocated 13 of the 100 shares in GBHL to Mr Li. Mr Li responded that this was not what Mr Wang had agreed to. Mr Li requested his $4.8m be returned. The money was not returned and Mr Li’s shares in GBHL were subsequently cancelled by Mr Wang.
[12] On 6 November 2014 110 Formosa was incorporated with Mr Wang as one of its directors. On 8 December 2014 110 Formosa was nominated by GBHL as the purchaser under the September 2014 SPA [which as earlier noted was due for settlement on 30 September 2015].
[13] On 2 February 2015 Mr Li registered his caveat over the land. On 29 June 2015 Mr Li filed in this Court his application for an order that his caveat (the first caveat) not lapse. Initially it was served upon the Formosa Country Club Limited (in liquidation), the then registered proprietor. Later on 7 July 2015 Lang J ordered that the mortgagees and 110 Formosa be joined to the proceeding as respondents. Mr Wang filed an affidavit on behalf of 110 Formosa in opposition to Mr Li’s application.
[14] On 18 August 2015 counsel for Mr Li and for 110 Formosa reached an agreement on the basis:
… The settlement agreement is without prejudice and shall have no effect on the rights and interests of [Mr Li] and/or the third respondent [110 Formosa] with respect to the substantive dispute, or on the right of [110 Formosa] to challenge the validity of the caveat after it becomes the registered proprietor of the land.
[15] On 21 August 2015 when Mr Li’s application was called, Fogarty J adjourned the hearing until that afternoon to allow further settlement discussions to take place. The hearing resumed that afternoon when His Honour was advised that the parties could not reach an agreement. By judgment on 17 September 2015, Fogarty J held:
It follows, the caveat cannot be sustained at the present time… It is likely, however, that the applicant [Mr Li] will have a caveatable interest in the land if the settlement proceeds on 30 September and from the moment that the title is transferred to [110 Formosa].
I can see no reason why the parties to this litigation cannot agree now, and do so prudently protecting their respective exposures, to a new caveat by the applicant (Mr Li) being registered against the title immediately after the title is transferred to … the buyer [110 Formosa].
[16] On 1 October 2015 110 Formosa became the registered owner of the property. The next day Mr Li lodged, as contemplated by Fogarty J, a caveat claiming to protect the following interest:
A beneficial interest in the property contained in Certificate of Title 476189 pursuant to an equitable lien or implied, resulting or constructive trust arising between the registered proprietor, 110 Formosa (NZ) Limited, as the trustee and the caveator, Jun Li, as the beneficiary.
[the second caveat]
Application to lapse the second caveat
[17] On 29 June 2016 110 Formosa applied to the Registrar-General of Land to lapse the second caveat. Mr Li responded by filing his application that the caveat not lapse.
[18] Discussions followed when Mr Li made it clear that his intention was to file a proceeding to claim an interest in the property.
[19] The parties then on 25 July 2016 filed a consent memorandum recording their agreement as follows:
(a)Unless the applicant and respondent agree to the contrary, [the second caveat] shall not lapse pending determination of the applicant’s main proceeding;
(b)The applicant is to file the main proceeding in the High Court by Wednesday, 10 August 2016;
(c)This caveat proceeding is adjourned. Costs will be determined on this proceeding once the main proceeding is determined;
(d)Leave is reserved to apply for ancillary orders.
[20] On 26 July 2016 and in response to the 25 July 2016 consent memorandum Lang J made orders, clearly by reference to the parties’ joint memorandum, His Honour having received no other submissions as to the form that those orders should take, those being:
(a)The caveat 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 the Court 10 August 2016. Should it not do so, the caveat will immediately lapse;
(c)Leave is reserved to apply for ancillary orders;
(d)Costs in respect of the present proceeding are reserved and may be fixed once the substantive proceeding has been determined;
(e)Attendances at the hearing today are excused.
[21]Mr Li filed his substantive proceeding on 10 August 2016.
The present applications
[22] On 9 September and 25 October 2016 110 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.
[23] It is 110 Formosa’s current position that the facts as pleaded by Mr Li are prima facie incapable of supporting a direct proprietary interest in the property in Mr Li’s favour.
[24]Counsel have agreed that the issues for determination at this time are:
(a)Whether the Court can consider the validity of the caveat in light of the order made by Lang J on 26 July 2016; and
(b)If so, whether there is an arguable case for sustaining the caveat.
The case for 110 Formosa
First caveat settlement arrangement
[25] Mr Bigio submits the circumstances by which Mr Li’s first caveat was resolved are important. It will be recalled that when the matter was called before Fogarty J on the morning of 21 August 2015 the hearing was adjourned. Earlier on 18 August 2015 counsel for Mr Li and 110 Formosa reached a settlement agreement on the basis:
… The settlement agreement is without prejudice and shall have no effect on the rights and interests of [Mr Li] and/or the third respondent [110 Formosa] with respect to the substantive dispute, or on the right of the third respondent to challenge the validity of the caveat after it becomes the registered proprietor of the land.
[26] It is apparent that when the matter was called before Fogarty J that further settlement discussions between the parties were needed. It was when His Honour was advised the parties could not reach that agreement that the hearing was resumed that afternoon.
[27] It is Mr Bigio’s assessment of Fogarty J’s judgment that before title to a property passed to the prospective purchaser using Mr Li’s funds, any argument that Mr Li might have had regarding a breach of trust could not support a caveatable interest in the land and therefore the caveat had to lapse.
[28] Fogarty J however also noted (by remarks that were necessarily obiter) that if settlement had taken place Mr Li could attempt to demonstrate a caveatable interest in the land based on an argument that:
… it would be unconscionable for the buyer, now the registered proprietor, knowing that it has obtained title by way of a breach of trust, not to either refund the money or, in the alternative, accept that there would be a charge over the land until the money is paid.
[29] Referring to the current caveat and to the joint memorandum of counsel seeking orders that the caveat not lapse pending determination of the applicant’s main proceeding, Mr Bigio notes that the order made did not expressly contain the words “in terms of the joint memorandum…”. Further and regarding the proceeding subsequently filed by Mr Li it is 110 Formosa’s position that having considered Mr Li’s substantive claim in light of well-established principles of company law and equitable tracing, the facts pleaded by Mr Li are prima facie incapable of supporting a direct proprietary interest in the property and therefore Mr Li has failed to “establish the interest protected by the caveat as Lang J’s order required and therefore that condition of Lang J’s order has not been met and the caveat proceeding should proceed in the usual manner”. Thereby, Mr Bigio submits 110 Formosa has provided a proper basis to challenge Mr Li’s application to sustain his caveat at this time and notwithstanding his substantive proceeding has not been determined.
[30] Regarding the challenge of Mr Campbell, counsel for Mr Li, that this present hearing is an abuse of process in the face of an agreement not to take any steps, Mr Bigio responds that the memorandum of the parties resulting in Justice Lang’s orders could not be interpreted as a contract between the parties as it lacked consideration. Further and for that same reason, Mr Bigio submits considerations of estoppel do not arise. Mr Bigio submits the terms of the parties’ memorandum were not relied upon by Lang J who had ordered only that the caveat should not lapse “pending further order of the court” with a condition that Mr Li file substantive proceedings in respect of the property subject to the caveat.
[31] Mr Bigio submits 110 Formosa’s request to consider the validity of the caveat prior to the determination of the substantive proceeding is not an abuse of process because there is no real prejudice or unfairness to Mr Li.
[32] It is 110 Formosa’s position that the High Court has an inherent jurisdiction to set aside or vary its own orders1. Much depends on the nature of the consent order and the circumstances in which it was made2 and whether any prejudice to either party may result3.
[33] Mr Bigio submits the order of Lang J was procedural and interlocutory and was not dispositive of the underlying issue of the validity of the caveat.
[34] Further it is submitted Mr Li is not prejudiced by the determination of the caveat proceeding prior to the determination of the substantive proceeding because if the Court found there was no arguable case for a caveatable interest Mr Li would be entitled to other forms of relief.
Legal principles
[35] The legal principles were summarised by the Court of Appeal in Philpott v Noble Investments Ltd4:
(a)The onus is on the applicants to demonstrate that they hold an interest in the land that is sufficient to support the caveat, but they need not establish that definitively;
(b)It is enough if the applicants put forward a reasonably arguable case to support the interest they claim;
(c)The summary procedures involved in applications of this nature are not suited to the determination of disputed questions of fact. An order for the removal of a caveat will only be made if it is patently clear that the caveat cannot be maintained – either because there is no valid ground for lodging it in the first place, or because such a ground no longer exists;
(d)When an applicant has discharged the burden upon it, the Court retains discretion to remove the caveat which it exercises on a cautious basis. Before it does so the Court must be satisfied that the caveator’s legitimate interest would not be prejudiced by removal.
1 Butcher v Finnigan [2012] NZCA 250.
2 McHugh v O’Brien [1995] PRNZ 681.
3 Kiwirai Consultants Ltd v Holmes [2013] NZHC 2390.
4 [2015] NZCA 342 at [26].
Whether Mr Li can claim a proprietary interest in the property
[36] Mr Li’s statement of claim alleges 110 Formosa was a constructive trustee holding a 32 per cent interest in the property for him; and that Mr Wang among others owed fiduciary duties to him by virtue of their purpose by the cooperation agreement but that they breached those; and that a resulting trust arose from his contributions to the property; and that 110 Formosa, with others deprived Mr Li of his 32 per cent interest in the property.
[37] Mr Bigio submits it is clear from the pleaded facts that Mr Li never intended to have a direct proprietary interest in the property but rather and in accordance with the cooperation agreement, only intended to invest in GEHL or in another limited liability company which would purchase and manage the property.
Considerations
Whether the Court should set aside its order for stay
[38] It is the position on behalf of 110 Formosa that the order made by Lang J on 26 July 2016 that Mr Li’s caveat over the property was to remain pending further order of the Court, does not have the effect of staying the caveat proceedings absolutely pending determination of the substantive proceedings – albeit that the parties had agreed the caveat should remain and should not lapse pending determination of the proceeding filed by Mr Li on 10 August 2016.
[39] Mr Bigio submits that in any event the Court has an inherent jurisdiction to set aside its own orders when it is in the interests of justice to do so.
[40] In that regard the Court has briefly reviewed issues raised by the pleading and has examined the submissions supported by 110 Formosa upon the present application to set aside Mr Li’s caveat. In this case Mr Bigio submits it is apparent from the proceeding that Mr Li filed that he does not disclose a caveatable interest in the property. It is argued that notwithstanding claims that Mr Wang may have misappropriated the $4.8m deposited by Mr Li with Mr Wang’s solicitors that because
those funds were never intended to acquire a personal interest in the property for Mr Li, Mr Li’s claims ought to be pursued elsewhere i.e. against Mr Wang or his solicitors.
[41] These submissions imply the Court may readily rescind an order it made containing, the Court believed, the commitment of the parties because one of those parties believes the other can no longer achieve its purpose of proving the claim the parties agreed should go to trial.
[42] Notwithstanding 110 Formosa agreed not to proceed with the summary challenge to the caveat so long as Mr Li filed his substantive proceeding by 10 August 2016, as he did, 110 Formosa now says, inconsistently with its earlier agreement and the consent orders, that it should not have to seek to vary the consent orders but instead is properly empowered by its belief that Mr Li’s factual allegations contained in his statement of claim do not establish a caveatable interest.
[43] The Court does not agree. In this Court’s view 110 Formosa must fail by its present application to vary the orders made by Lang J, the clear purpose of which was to adopt the then purpose of both parties to permit the caveat to remain until Mr Li’s main proceeding had been heard and determined.
Is Mr Li’s proceeding unable to succeed?
[44] Mr Li paid $4.8m as a contribution towards the purchase of a property in which, he says, he was to have an interest. It is clear from the receipts issued by Loo and Koo that those payments had been received from him on account of the purchase of the property.
[45] Without Mr Li’s authority, his $4.8m was apparently misappropriated, first it having been used as a contribution to purchase that same property by GBHL, a different company than that which Mr Li was informed would effect the purchase, being JEHL. Mr Li confirmed that Mr Wang told him his funds had been used for this purpose – after it having occurred.
[46] GBHL then transferred (by nomination) the benefit of its agreement, including the benefit it had received from Mr Li’s contribution, to 110 Formosa.
[47] JEHL, GBHL and 110 Formosa each knew, through their common director, Mr Wang, that Mr Li’s $4.8m had been misappropriated and that they were receiving the benefit of that misappropriation.
[48] The Court agrees with the submission of Mr Campbell that on conventional trust and tracing principles these facts establish a reasonably arguable case for a trust in Mr Li’s favour over the property now owned by 110 Formosa, and therefore to a caveatable interest in that property.
[49] Prima facie Mr Li is entitled in equity to trace his $4.8m. In this case it is clear he can trace those funds into that property now owned by 110 Formosa and that company, having received Mr Li’s traceable property with the knowledge of the misappropriation (through Mr Wang), arguably holds a share of its property on trust for Mr Li.
[50] Mr Li is entitled in equity to trace those funds by reasons of those funds having been (arguably) paid for his purpose to acquire that property share and if those funds were misappropriated, they may still be considered to be held in trust on his behalf.
[51] This Court’s clear view is that these issues are best left for resolution at trial rather than for consideration upon the competing claims about whether there is sufficient pleading or evidence to support Mr Li’s cause.
[52] The Court does not agree that claims of trust or tracing are precluded from consideration in Mr Li’s cause. As Mr Campbell submits principles of equitable tracing provide a process by which a claimant may identify and recover property that he or she is entitled to in equity, even though it is passed through the hands of different owners and/or changed form. Equity does permit tracing of property from one person to another, and permits tracing a property into substitute assets.
[53] 110 Formosa claims that when the deed of nomination passed Mr Li’s equitable interest to 110 Formosa that, in exchange, they allocated shares to Mr Li and therefore those shares are all that he can trace his equitable interest too.
[54] However, there remains to a claimant the right to elect whether to follow the original asset into the hands of the new owner (other than a bona fida purchase for value and without notice) or to trace the old assets value into the new asset.5
[55] For 110 Formosa it is argued that after Mr Li’s funds were misappropriated. Mr Li received, ultimately, shares in 110 Formosa in exchange for those funds. 110 Formosa contends those shares are Mr Li’s proper recourse to retrieve the funds taken from him. However it is far from clear that 110 Formosa can absolve itself from the consequences of Mr Wang’s actions. Also and according to Foskett it is arguable Mr Li is not prevented from pursuing his claim of an interest in the property for which he says his funds were initially deposited.
[56] For the Court’s present purposes it only has affidavit evidence provided by or on behalf of Mr Li. Claims that Mr Li paid $4.8m for the purpose of purchasing shares in JEHL are supported by submission and by little evidence in opposition. Mr Li claims the money was paid to purchase an interest in a property. Whether that is true or not cannot adequately be determined upon the affidavit evidence available.
[57] The plain fact is that once Mr Li paid $4.8m he was kept in the dark regarding where those funds were or for what purpose they were being utilised.
Summary
[58] Whether Mr Li ever intended to have a direct proprietary interest in the property is a matter for trial. However, if he did not, that would not necessarily preclude any claim of a proprietary interest in that property even if Mr Li never intended to have a direct proprietary interest. That would not prevent him claiming an equitable proprietary interest because his claim depends on his money having been paid for a specific purpose and then being misappropriated. The initial purpose having
5 Foskett v McKeown [2001] 1 AC 102 (HL) at 127 per Lord Millett.
failed, Mr Li’s rights cannot be limited by reference to it. Although he was a lender for a particular purpose it is arguable that when that purpose failed, his rights of access to remedies should not be unduly limited.
[59] As noted by the Court of Appeal in Butcher v Finnigan 6 applications to set aside a consent order need to be viewed with considerable caution and such an order should not be disturbed unless interests of justice require it and then only if a good ground or grounds are established. The Court is not satisfied there is sufficient evidence to make that assessment in this case.
[60] In a prior affidavit sworn in support of a previous application to sustain his caveat, Mr Li made it clear his reasons of a claim of a proprietary interest. By the proceeding he has subsequently filed, when the parties agreed that proceeding should determine claims of a caveatable interest, Mr Li has not changed his position. Nor is there is any evidence of significance suggesting that 110 Formosa’s position is prejudicially affected by any delay that may occur until the proceeding is brought to an end.
[61] Regardless, the Court considers Mr Li has established an arguable basis for his caveat and further that it is arguable he can trace his claim of an interest in the property which was the initial asset for which he provided those funds he claims have been misappropriated.
[62] Further it is arguable that 110 Formosa received those funds with the knowledge of their misappropriation by Mr Wang, as a director of 110 Formosa at the time.
Result
[63] The application to vary the consent orders made by Lang J on 26 July 2016 is dismissed.
6 CA 133/2012.
[64] 110 Formosa shall pay Mr Li’s costs on a scale 2 basis. If these cannot be agreed counsel are to file brief submissions. Those in reply are to be filed within five days. The matter will be determined on the papers in due course.
Associate Judge Christiansen
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