Li v The Advancing Holdings Limited - [2020] NZHC 1479

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2019-409-000690

[2020] NZHC 1479

UNDER the Companies Act 1993

IN THE MATTER

of an application to bring a derivative action and to set aside a statutory demand

BETWEEN

MIN LI

First Applicant

AND

2PM LIMITED

Second Applicant

AND

THE ADVANCING HOLDINGS LIMITED

Respondent

Hearing: Determined on the papers

Counsel:

G J Ryan for Applicants

R G Smedley for Respondent

Judgment:

29 June 2020

COSTS JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 29 June 2020 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

MIN LI v 2PM LIMITED [2020] NZHC 1479 [29 June 2020]

Introduction

[1] The protagonists in this proceeding are Chinese but choose to go by English first-names and for that reason I refer to them in that manner.

[2] The first applicant (Michelle) applied to bring a derivative action to set aside a statutory demand served upon the second applicant (2PM) by the respondent (TAH). Before the application was heard, 2PM was put into liquidation by special resolution of its shareholders. Michelle has discontinued this proceeding but TAH seeks costs in reliance upon High Court Rule 15.23. Michelle argues costs should lie where they fall.

Background

[3] Michelle and Cheng-Hsin Shou (Alley) are the directors and shareholders of 2PM. 2PM operated a restaurant business. Michelle’s husband, Xu Yan (Kevin), and Alley’s husband, Shaobo Liu (Patrick), were business partners in TAH, which is a developer.

[4] In July 2019, Kevin resigned as a director of TAH due to concerns about his use of company money. BDO was instructed to investigate and report on the financial affairs of TAH as well as other companies. BDO issued a report which identified transactions of concern. Relevantly, BDO considered TAH had loaned $570,000 to 2PM of which $280,000 had been repaid by Kevin and Patrick and $13,000 by 2PM leaving a balance owing of $277,000.

[5] Anthony Harper wrote to Kevin on behalf of TAH on 9 October 2019 asking him to comment on BDO’s findings; the implication was that Kevin had misappropriated TAH money.

[6] Anthony Harper wrote to 2PM on 7 November 2019 demanding payment of the $277,000. TAH then issued a statutory demand to 2PM on 22 November 2019. Michelle wished to apply to set aside the statutory demand.

[7] On 29 November 2019, Michelle’s solicitors, White Fox & Jones, wrote to Alley asking for her consent to them applying to set aside the statutory demand on behalf of 2PM.

[8] On the same date, White Fox & Jones wrote to Anthony Harper advising the statutory demand was disputed and should be withdrawn. Enclosed with the letter were 2PM’s 2018 financial statements. There was no liability to TAH recorded in the financial statements. White Fox & Jones observed that as TAH and 2PM shared accountants (McCoy & Co) it was expected that TAH’s financial statements would reflect the same. The stated…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2020] NZHC 1479
Decision Date: 29 June 2020

CaseChat Overview and Summary

The High Court of New Zealand was presented with a case involving Michelle Li and Cheng-Hsin Shou, directors and shareholders of 2PM Limited, against The Advancing Holdings Limited (TAH). Michelle sought to bring a derivative action to set aside a statutory demand issued by TAH against 2PM. Prior to the hearing, 2PM was liquidated by shareholder resolution. Michelle sought to discontinue the proceedings, arguing that costs should lie where they fell, while TAH sought costs pursuant to High Court Rule 15.23.

The central legal issue was whether Rule 15.23, which presumes that a discontinuing party must pay costs to the defendant, should apply in this case. Michelle contended that it was just and equitable not to apply the presumption, given the circumstances of the case, including the substantial dispute over the existence of the debt claimed in the statutory demand and TAH's persistence in pursuing the demand despite this dispute. TAH argued that the merits of the case were irrelevant and that the presumption should apply.

The court considered the change of circumstances that rendered the proceeding redundant due to the liquidation of 2PM. While the court typically refrains from speculating on the merits of the case before hearing, in this instance, the court found that the evidence presented allowed for an assessment of the merits. The court was satisfied that Michelle had demonstrated a substantial dispute over the debt claimed in the statutory demand, and that TAH should not have persisted with its demand once served with Michelle's application. Given these findings, the court concluded that it was just and equitable not to apply the presumption in Rule 15.23, and that costs should lie where they fell.

In conclusion, the court ruled that the costs of the proceeding should lie where they fell, declining TAH's request for costs. This decision highlights the importance of considering the specific circumstances of each case when applying the presumption under Rule 15.23, and the potential for the merits of the case to influence the costs outcome in certain situations.

Orders