Liao v Zheng

[2020] NZHC 920

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-002148

[2020] NZHC 920

BETWEEN

HONGBING LIAO

Plaintiff

AND

CHAO ZHENG (AKA PETER CHAO ZHENG)

Defendant

Hearing:	20 April 2020
Appearances:	R Rao for Plaintiff K Sun for Defendant
Judgment:	6 May 2020

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 6 May 2020 at 3.00 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar

Date……………………..

LIAO v ZHENG [2020] NZHC 920 [6 May 2020]

Introduction

[1]    The plaintiff, Mr Liao, seeks  summary  judgment  against  the  defendant,  Mr Zheng, for recovery of $457,760.06 (plus interest and costs) pursuant to a guarantee under a general security agreement (GSA). Mr Liao claims that he paid the monies by way of a shareholder’s advance (the advance) to Good Value Group Ltd (GVG Ltd), a company formed by the parties in October 2012, as the vehicle through which Mr Liao would become a partner in Mr Zheng’s existing door-to-door sales business.

[2]    Mr Zheng opposes summary judgment on the grounds that the documents signed by the parties were a sham, and that they are thus void and did not reflect the mutual intention of the parties. Mr Zheng alleges dishonest conduct by Mr Liao. He says that Mr Liao claims to have acquired a 50 per cent stake in his business without paying any purchase price to him. Mr Zheng also relies on the defence of non est factum.

[3]    The critical issue I must determine is whether the defences of Mr Zheng are so inherently improbable and/or lacking in credibility that I can  safely conclude  that Mr Liao, as the plaintiff, has demonstrated that Mr Zheng has no defence to the claim.

Factual background

[4]    Mr Zheng was the sole beneficial owner of Good Value Import Ltd, a company incorporated in January 2009. The business owned several trucks outfitted to be mobile retail stores selling consumer goods such as electronics and clothing. Whether the business was profitable is in dispute.

[5]    Mr Zheng says that on or about October 2012 he and Mr Liao verbally agreed that Mr Liao would purchase a 50 per cent stake in the business for the purchase price of $200,000 (the verbal agreement).

[6]    On 30 October 2012, the parties signed a Shareholders’ Agreement and the GSA. The documents were prepared by a solicitor, Mr Kevin Lo.

[7]The recital to the Shareholders’ Agreement reads:

The parties propose:

A.Forming a company, to be known as Good Value Group Ltd (“the company”) for the purposes of carrying out a door-to-door sale and hire purchase business;

B.The parties wish to record their agreement on certain matters relating to their respective shareholdings in the company.

[8]Clause 5.1 reads:

5Shareholder Advances

5.1Each party shall, on the commencement date, contribute to the company in the following manner:

(a)For Harvey (Liao): by way of shareholder advance the sum of

$200,000 secured by general security agreement pursuant to cl 4.1(b), copy attached; and

(b)For Peter (Mr Zheng): by way of transferring all business assets (tangible and intangible assets included) specified in the first schedule under the ownership of Good Value Import Ltd (“assets”) in which Peter is one of the shareholders, which is agreed to be valued at $200,000.

[9]    Clause 5.2 of the Shareholders’ Agreement provided that if GVG Ltd’s revenue generated in the first year of business did not reach $1.5m, then the advance would be repaid immediately to Mr Liao.

[10]The GSA provided as follows:

A.It defined the secured money as all monies at the time of the agreement by the company to Mr Liao or at any time in the future;

B.Provided that the company would pay the secured money to Mr Liao as provided by a secured agreement, and to the extent that there was no such agreement, then upon demand;

C.Provided that events of default included the company failing to pay the secure money when due or the appointment of receivers or a liquidator, and that in the event of default Mr Liao would be entitled to appoint a receiver.

[11]Mr Zheng signed the GSA as a guarantor of GVG Ltd’s obligations to Mr Liao.

[12]   On 31 October 2012, Mr Liao transferred $200,000 to Mr Zheng’s personal bank account. Mr Zheng says this was the purchase price following the verbal agreement earlier that month.

[13]   Between November 2012 and July 2013, both parties say they invested additional funds into GVG Ltd. Mr Liao says that the additional investment by him, totalling $200,000, was in fact a secured loan. Mr Zheng disputes that and claims he matched Mr Liao’s investment “dollar for dollar”.

[14]   On 15 January 2014, Mr Liao’s solicitors wrote to Mr Zheng raising concerns about how Mr Zheng was conducting the business. They alleged that a number of the business practices being employed were “potentially unlawful”, including the uplifting of critical company records and acting contrary to the provisions of the Shareholders’ Agreement by applying some of the initial  shareholder advance  of  $200,000  for Mr Zheng’s own purposes.

[15]   On 29 January 2014, Mr Liao served a notice of demand on GVG Ltd  and Mr Zheng demanding repayment of the advance and his additional investments, which were claimed at that time to be in the amount of $400,000.

[16]   On 6 March 2014, Mr Liao appointed a receiver to GVG Ltd pursuant to the GSA.

[17]   On 17 April 2014, a new company, Better Life Corporation Ltd (Better Life), was incorporated with Mr Liao as its majority shareholder and sole director.

[18]On 13 May 2014, Better Life acquired all of the assets of GVG Ltd for

$130,000 (by way of off-setting the shareholder advances).

[19]   On 7 September 2015, GVG Ltd was placed into liquidation at the instigation of Mr Liao.

[20]   The summary judgment amount Mr Liao seeks, namely $457,760.06, includes a sum of $270,000 for “the outstanding amount of advances”. Mr Liao says that the purchase price of $130,000 Better Life paid to acquire GVG Ltd’s assets was by way of a corresponding reduction to the debt GVG Ltd owed him (and thereby reduced the outstanding amount of the advances from $400,000 to $270,000).

Relevant legal principles

[21]Rule 12.2(1) of the High Court Rules 2016 provides:

The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.

[22]The relevant principles are summarised in Krukziener v Hanover Finance Ltd:1

[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at

341. In the end the court’s assessment of the evidence is a matter of judgment. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA).

[23]   In Gardner v Gardner, Associate Judge Osborne also summarised the relevant considerations in relation to issuing summary judgment. These include:2

(a)Common-sense, flexibility and a sense of justice.

(b)In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to determine and reject spurious defences or plainly contrived factual conflict. It is not required to accept uncritically every

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.

2      Gardner v Gardner [2015] NZHC 2018 at [20].

statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.

(c)In assessing a defence, the Court will look for appropriate particulars and a reasonable level of detailed substantiation. The defendant is under an obligation to lay a proper foundation for the defence in the affidavits filed in support of the notice of opposition.

(d)In weighing these matters, the Court will take a robust approach and enter judgment even where there may be differences in certain factual matters if the lack of a tenable defence is plain on the material before the Court.

(e)The need for judicial caution in summary judgment applications has to be balanced with the appropriateness of a robust and realistic judicial attitude when that is called for by the particular facts of the case.

Analysis and decision

[24]   The parties have completely different versions and interpretations of the transactions in dispute. Mr Zheng’s version is fundamentally inconsistent with the written documentation including, importantly, the shareholders’ agreement and the GSA.

[25]   Mr Zheng claims that the loans/advances at issue are a sham and arise from the dishonest conduct of Mr Liao. This gives rise, so he says, to the following defences:

(a)A right to cancel the shareholders’ agreement and GSA in accordance with s 37 of the Contract and Commercial Law Act 2017 (CCLA) because Mr Zheng was induced to enter the documents by Mr Liao’s misrepresentation.

(b)A right to cancel the documents because Mr Liao, being in trade, engaged in misleading and deceptive conduct contrary to ss 9 and 43 of the Fair Trading Act 1986.

(c)In accordance with ss 24 and 28 of the CCLA, Mr Zheng is entitled to cancel the documents because he was induced to enter them by a mistake known to the plaintiff and which resulted in a substantially unequal exchange of values.

(d)In accordance with the doctrine of non est factum, the documents are void because they are substantially different to the agreements that the parties entered into.

[26]   Central to the defences advanced, which Mr Sun accepted are essentially allegations of fraud, is the claim by Mr Zheng that the agreements reflected in the documents are so commercially bizarre and oppressive that it is inherently unlikely that they reflect the agreement of the parties.

[27]   Mr Sun submitted that the commercially bizarre and oppressive arrangements recorded in the documents is demonstrated by the diagrams and explanation below.

[28]Mr Zheng asserts that he sold a 50 per cent stake in his business to Mr Liao for

$200,000, which was then transferred to Mr Zheng’s personal bank account. The contractual benefit to both parties under this transaction can be demonstrated as follows:

Benefit to Mr Zheng	Benefit to Mr Liao
Receipt of $200,000 as the purchase price	Acquisition of a 50% stake in the business

[29]   However, and by contrast, Mr Liao asserts that he acquired a 50 per cent stake in the business by lending $200,000 to GVG Ltd, which was secured by the assets of the company, and guaranteed by Mr Zheng. The contractual benefit to both parties under this alleged transaction can be demonstrated as follows:

Benefit to Mr Zheng

Benefit to Mr Liao

Nothing, as Mr Zheng gave away 50% ownership in the business for free

Acquisition of a 50% stake in the business

Interest on the loan of $200,000 as well as further advances

Minimal risk on the loan(s) because of security over the company’s assets and guarantee by Mr Zheng.

[30]   Mr Sun then submitted that under the transactions recorded in these documents (upon which Mr Liao relies), Mr Liao was able to acquire a 50 per cent stake in the business from Mr Zheng, whilst retaining the ability to demand repayment of his investment from Mr Zheng. On this basis, and in contrast to ordinary corporate transactions (including a convertible note), Mr Liao was able to become an equity owner whilst retaining all of the rights and protections of a lender. Moreover, Mr Liao was able to effectively acquire a 50 per cent stake in GVG Ltd without paying any purchase price to Mr Zheng.

[31]   It was further contended by Mr Sun that the net effect of the receivership meant that Mr Liao was able to acquire 100 per cent of the assets of the business (including the $200,000 cash injected by Mr Zheng into the company) without paying any purchase price whatsoever.

[32]   I accept that there are good reasons to be sceptical of Mr Zheng’s claims and defences, and that it is necessary to look critically at the evidence. However, the test is not one of mere scepticism but rather, as Mr Rao acknowledged, whether there is a “plainly contrived factual conflict that should not be permitted to muddy the waters of what is claimed to be a straightforward summary judgment application to which there is no reasonably arguable defence”.

[33]   Where, as here, there are allegations of fraud dependent on findings of credibility, the Court must obviously tread carefully. Equally, allegations of fraud or dishonesty are very serious and should not be advanced by counsel unless they have

reasonably credible material to establish a prima facie case.3 Ultimately, however, the burden of establishing a lack of defence rests with the plaintiff.

[34]   Mr Zheng says that Mr Liao exploited his poor English ability and misled him to believe that the documents accurately reflected their purchase agreement. He also says his first company was profitable, and had Mr Zheng simply wanted to borrow money, he would have approached third-party lenders without having to give away a 50 per cent stake in his business for nothing.

[35]   In response, Mr Rao contended that the documents, reflecting a fundamentally different arrangement, make it clear that the business was in financial difficulty and that the agreements are not in any way bizarre or oppressive, as alleged. The parties were not known to each other and it is undisputed that Mr Liao responded to an advertisement on a Chinese community website. Mr Liao naturally required security for his advances. It is apparent from cl 5.5(a) of the shareholders’ agreement the first company was in financial difficulty and that part of the advance was for rescuing its business assets, with a view to transferring them to the GVG Ltd, which the parties had agreed to set up.

[36]   I accept the allegations of fraud are based largely on the alleged bizarre and oppressive nature of the agreements recorded in the documentation. However, I find that I cannot safely conclude that Mr Zheng’s claims of dishonesty and fraud are so implausible or untrustworthy that they cannot succeed. The fundamental problem for Mr Liao is that too many of the critical facts are in dispute and, ultimately, it will be necessary for all of this evidence to be tested at trial. The matters in dispute include:

(a)The question of whether the business was in financial difficulty at the time of the various agreements;

(b)the role of Mr Kevin Lo, the solicitor who drafted the documentation;

(c)the nature and details of the advertisement placed by Mr Zheng on the Chinese community website;

3      Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].

(d)the reasons why the advance was paid by Mr Liao to Mr Zheng’s personal bank account; and

(e)whether, as alleged, Mr Zheng was a relatively experienced businessman who, in a Chinese cultural context, placed significant weight on the strength of Mr Liao’s word and placed no importance on the written contractual documentation – except as an assurance that it accurately reflected their mutual intention.

[37]   In addition to the factual matters in dispute, there is arguably some uncertainty arising on the face of the documents, which should properly be tested at trial. This includes:

(a)The absence of any express clause in the Shareholders’ Agreement stating that the parties are to be 50 per cent shareholders in the company; and

(b)the absence of an express clause in the Shareholders’ Agreement providing that, in the event that GVG Ltd did meet its targets, the shareholder advances would not be repayable.

[38]   I accept that many of the contentions advanced by Mr Rao cast real doubt on Mr Zheng’s claims that he was in fact misled and that he did not understand what the contractual documentation clearly stated.  This includes the fact that the first time  Mr Zheng raised any objection or opposition to Mr Liao’s demands for payment was when he filed his notice of opposition in these proceedings. However, Mr Zheng’s explanation that he sought advice from a solicitor, Mr Wang, who told him that he had no defence to claims based on the contractual documentation, provides some justification for the lack of response over a six-year period.

[39]   I also accept that there is no independent or documentary evidence before the Court confirming Mr Wang’s role and/or advice. However, I cannot safely conclude at this stage that Mr Zheng’s evidence on this point is wholly lacking in credibility.

Whether that explanation is true, and its consequences, are matters which, in my view, can only be resolved at trial.4

[40]   Mr Rao also relied on contradictions in Mr Zheng’s evidence that cast further doubt on its credibility. For example, despite claiming that he matched Mr Liao’s investment “dollar for dollar”, Mr Zheng never made a claim in the company’s liquidation and has provided no explanation for that. Similarly, the claim by Mr Zheng about the net effect of the receivership (allegedly enabling Mr Liao to acquire 100 per cent of the business without paying any purchase price) ignores the fact that the receivers sold the assets through a public tender process. However, none of these matters mean, either  individually  or  cumulatively,  that  I  can  safely  conclude  Mr Zheng’s defences are wholly lacking in credibility.

[41]   The circumstances surrounding the signing of the documentation by Mr Zheng are troubling and provide further support for Mr Rao’s submission that the defences lack substance. However, notwithstanding my reservations, these are still matters which should properly be tested at trial.

[42]   Mr Liao says that Mr Kevin Lo, who drafted the Shareholders’ Agreement and the GSA, was a contact of Mr Zheng (“a good friend”) and that before preparing the documents both Mr Liao and Mr Zheng met with Mr Kevin Lo to explain what they wanted. Mr Liao also contends that they collected the draft shareholders’ agreement from Mr Kevin Lo a day or two before they signed it, because Mr Kevin Lo wanted both of them to take the documents home to read over. Mr Liao further relies on the following two factors:

(a)The GSA also expressly states “as a warning” on the signature page:

“It is recommended that legal advice be obtained before completing and signing this agreement”.

4      Whether the defendant has waived privilege in relation to Mr Wang’s advice may be an issue for discovery and/or evidence at trial.

(b)The company’s office manager witnessed Mr Zheng’s signature (which tends to confirm Mr Liao’s account and contradict Mr Zheng’s account of the signing).

[43]   Mr Zheng’s evidence is that he and Mr Liao signed the documents at the office of Mr Kevin Lo, that the documents were not provided to him before that meeting and that Mr Kevin Lo did not explain the content of the documents to him. He said his English is poor and that he could not read the content of the documents himself. He further says that he had no reason to suspect the documents did not accurately reflect the agreement he had reached with Mr Liao. He says he signed the documents in front of Mr Lo and Mr Liao.

[44]   If Mr Liao’s version of  events  is  correct,  then  it  is  hard  to  accept  that Mr Zheng’s claims have much credibility. However, as I am emphasising, the facts are in dispute and there is, for example, no evidence before the Court from Mr Kevin Lo as to what occurred. His evidence may well prove to be critical, including confirmation as to who he was in fact acting for. If he was a friend of Mr Zheng as alleged, it seems hard to believe that he would have allowed Mr Zheng to sign documents in English without making him aware in careful terms as to the nature of the agreements they contained. Furthermore, if, as Mr Liao alleges, Mr Zheng expressly chose not to obtain legal advice it may well be that he will not be able to establish his defence of non est factum. A defence of non est factum is only available if the signatory has acted with reasonable care.5 Again, however, such matters can only be determined at trial.

[45]   In support of his submission that it is not unusual for experienced Chinese business people to overlook the importance of written contracts in a “Western context”, Mr Sun referred to a recent report published by the Super Diversity Institute for Law, Policy and Business, where the following observation was made about Chinese parties:6

5      Saunders v Anglia Building Society [1970] 3 WLR 1078 (HL) at 1082; see also Golden Garden Ltd v Zhou [2017] NZCA 227.

6      Mai Chen “Culturally and linguistically diverse parties in the courts: a Chinese case study” Super Diversity Institute for Law, Policy and Business (New Zealand, November 2019) at [33].

Chinese parties are less likely to use written contracts or agreements in their business or familial transactions. If contracts are used, then they will often be brief and may not have had any legal input.

[46]   In the context of a summary judgment application it would be wrong for me to make any finding on this issue, except to note that it does provide some support for Mr Zheng’s defence (although the absence of legal input is not a factor here). I would also note that Mr Zheng does not rely solely on the Chinese cultural circumstances – he has laid a wider evidential foundation for his defences in his affidavit.

[47]   For all these reasons, I conclude that the plaintiff, Mr Liao, has not demonstrated that Mr Zheng has no defence to his claims. Accordingly, the application for summary judgment must be dismissed.

Result

[48]   The application by the plaintiff, Mr Liao, for summary judgment, dated 4 October 2019, is dismissed.

[49]Costs are reserved.

[50]I also make the following directions:

(a)The parties are to provide standard discovery with affidavits of documents to be filed and served by 12 June 2020. The listing and exchange protocol in Schedule 9 of Part 2 to the High Court Rules 2016 will apply;

(b)The proceedings will be called in the Chambers List on Friday, 3 July 2020 at 2.15 pm.

Associate Judge P J Andrew