NZ Causeway Bay International Trading Limited v Wang
[2022] NZHC 2411
•20 September 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-000955
[2022] NZHC 2411
BETWEEN NZ CAUSEWAY BAY INTERNATIONAL TRADING LIMTIED
First PlaintiffJIE CAO
Second PlaintiffAND
YI WANG
First Defendant
HONG DA TONG LIMITED
Second Defendant
Hearing: 1 September 2022 Appearances:
C Jiang for the Plaintiffs
Judgment:
20 September 2022
JUDGMENT OF TAHANA J
This judgment was delivered by me on 20 September 2022 at 3.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Shortland Chambers, Auckland Tompkins Wake, Auckland
NZ CAUSEWAY BAY INTERNATIONAL TRADING LIMTIED v WANG [2022] NZHC 2411 [20 September 2022]
Introduction
[1] Mr Cao advanced funds to Ms Wang to establish a health supplements business in Mt Eden, Auckland. NZ Causeway Bay International Trading Ltd (Causeway Bay) was incorporated for this purpose with Mr Cao holding 70 per cent of the shares and Ms Wang 30 per cent. Despite Mr Cao being the sole director, Ms Wang assumed responsibility for the management and operation of the business.
[2] Mr Cao and Causeway Bay (the plaintiffs) allege that Ms Wang used Causeway Bay funds to purchase stock for her own competing businesses, Hong Da Tong Ltd (HDTL) and Fresh Start NZ Ltd (Fresh Start). They also allege that Ms Wang spent Causeway Bay funds for her own purposes and diverted revenue owing to Causeway Bay to herself.
[3] After commencing trading in February 2018, Causeway Bay ceased operating in May 2019. Causeway Bay owes monies to third parties and has negative equity. Mr Cao has not recovered any of his investment.
[4] The plaintiffs seek judgment on a formal proof basis against Ms Wang. The issues to be determined are:
(a)Whether Ms Wang was acting as a de facto director and has breached her duties under ss 131 and 133 of the Companies Act 1993 (the Act) thereby causing loss to Causeway Bay; and
(b)Whether Mr Cao is entitled to relief under s 174 of the Act as a result of Ms Wang’s conduct.
Background
[5] Mr Cao is a Chinese national and having previously visited New Zealand, in 2017, he decided to immigrate with his family. Ms Wang had lived in New Zealand for several years. At the time, she was the store manager at a health supplement store on Dominion Road in Mt Eden. Mr Cao met Ms Wang when shopping at this store.
[6] In late 2017, Ms Wang and Mr Cao agreed to set up a health supplement store. Ms Wang would contribute her industry experience and Mr Cao would provide capital of $100,000. Causeway Bay was incorporated on 25 January 2018 for this purpose.
[7] Unbeknown to Mr Cao, around the same time, on 31 January 2018, Ms Wang also incorporated Fresh Start. She was a 40 percent shareholder in, and a director of, that company.
[8] In February 2018, Causeway Bay leased a shop at 467 Dominion Road, Mount Eden. It began trading the following month. Between January and May 2018, Mr Cao advanced funds ($210,000) and paid for stock ($83,036.99) for Causeway Bay.
[9] Mr Cao did not speak English and was frequently in China. Mr Cao says he delegated his authority as a director to Ms Wang.
[10] Ms Wang and Mr Cao were both signatories on the bank accounts of Causeway Bay. Initially Ms Wang provided bank statements to Mr Cao so he had visibility of the finances of Causeway Bay. This stopped after a couple of months.
[11] Mr Cao deposes that he returned from China in April 2019 and visited the store. He says Ms Wang would not provide information as to the financial position of Causeway Bay. He says when visiting the store he became aware that Ms Wang had another store across the road trading as “Oceania Health Care Product.” This was the business of HDTL. HDTL was incorporated on 25 September 2018.
[12] Mr Cao says he discovered that Ms Wang had displayed her own “Wechat Pay” barcode at Causeway Bay’s store counter. This meant customers of Causeway Bay paid Ms Wang instead of the company. Mr Cao also contacted customers who provided payment confirmations showing that sales revenue owing to Causeway Bay was paid to HDTL.
[13] Mr Cao also deposes that he located signed receipts at the Causeway Bay store which were signed by Ms Wang. The stock was not in the store. When Mr Cao
confronted Ms Wang he says she admitted to using Causeway Bay’s funds to pay for stock for HDTL. Mr Cao reported his concerns to the police.
[14] Causeway Bay stopped trading on 23 April 2019. A final stock take disclosed stock valued at $20,925.66.
[15] From May to July 2019 Mr Cao advanced further funds ($17,000) so Causeway Bay could pay creditors.
Procedural history
[16] On 24 May 2019, the plaintiffs filed these proceedings. They obtained freezing and ancillary orders against Ms Wang and HDTL.
[17] While Ms Wang initially defended the proceeding and filed a statement of defence, her solicitor applied to withdraw in January 2020 when Ms Wang returned to China.
[18] The plaintiffs obtained non-party discovery and sought further discovery from Ms Wang and HDTL. When it became apparent Ms Wang was no longer defending the claim, the plaintiffs sought judgment by way of formal proof.
[19] In support of the formal proof application, the plaintiffs filed an affidavit of Mr Cao and an affidavit from Ms Burson, a chartered accountant. Ms Burson has reviewed the discovered documents, prepared financial statements for Causeway Bay and has sought to determine how the funds of Causeway Bay were spent, as explained below.
Analysis
[20] The plaintiffs abandoned their claim against HDTL given the absence of documentation and financial information.
[21] The remaining causes of actions against Ms Wang are breach of director duties and relief under s 174 of the Act as referred to at [4] above.
Issue one: breach of director duties
Whether Ms Wang was a “de facto” director of Causeway Bay
[22] Ms Wang was employed by Causeway Bay as a “Shop Supervisor.” An undated one-page employment agreement has been provided to the Court. It does not specify Ms Wang’s salary or include a job description, so I am unable to determine the scope of her duties in that capacity.
[23] Ms Wang was not named as a director of Causeway Bay in the Companies Office register. However, Mr Cao deposes that he was away in China for much of the time and delegated his powers and responsibilities as a director to Ms Wang. He says Ms Wang effectively operated and controlled Causeway Bay. Ms Wang had access to the company’s bank accounts, employed staff, procured stock and was responsible for the financial management of Causeway Bay.
[24] The question, therefore, is whether in these circumstances Ms Wang was a “de facto director.”
[25]A “director” is defined in s 126 of the Act, as follows:
126 Meaning of director
(1)In this Act, director, in relation to a company, includes—
(a) a person occupying the position of director of the company by whatever name called; and
(b) for the purposes of sections 131 to 141, 145 to 149, 291A to 293, 298, 299, 301, 318(1)(bb), 383, 385, 385AA, 386A to 386F, and clause 3(4)(b) of Schedule 7,—
…
(iii) a person who exercises or who is entitled to exercise or who controls or who is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; and
(c) for the purposes of sections 131 to 149, 291A to 293, 298, 299, 301, 318(1)(bb), 383, 385, 385AA, 386A to 386F, and clause 3(4)(b) of Schedule 7, a person to whom a power or duty of the board has been directly delegated by the board with that person’s
consent or acquiescence, or who exercises the power or duty with the consent or acquiescence of the board;
…
[26] The circumstances in which a person may be considered a “de facto” director have been considered by this Court Delegat v Norman, as follows:1
[31] … The concept of de facto director is confined to those who willingly or voluntarily take upon themselves the role, either by usurping the office or by continuing to act once their formal role has ceased. It does not extend to a person who does not willingly adopt the role of director.
[32] I accept the submissions of counsel for Mr Norman that in order to establish that a person is a de facto director of a company, it is necessary to plead and prove that he or she undertook functions in relation to the company that could properly be discharged only by a director. There needs to be clear evidence that the person was either the sole person directing the affairs of the company or if there were others who were true directors that he or she was acting on an equal footing with the others in directing the affairs of the company. If it is unclear whether the acts of the person are referable to an assumed directorship or to some other capacity, such as shareholder or consultant, the person must be entitled to the benefit of the doubt.
[27] The manner in which the business was operated is consistent with Mr Cao’s evidence that he spent much of his time in China and left Ms Wang to direct the affairs of Causeway Bay. While Ms Wang was an employee, she was also a shareholder and had access and control over the bank accounts of Causeway Bay. Ms Wang was also responsible for engaging external accountants and managing all of the company’s affairs. I accept that she had full control and the authority that would ordinarily be discharged by a director.
[28] In the above circumstances, Ms Wang was occupying the position of director and exercised control of Causeway Bay. I accept that Ms Wang was a “de facto” director within the meaning of s 126(1)(c) of the Act.
Whether Ms Wang breached her director duties
[29] Section 131(1) of the Act provides that directors must act in good faith and in what the director believes to be the best interests of the company. Section 133 requires directors to exercise their powers for a proper purpose.
1 Delegat v Norman [2012] NZHC 2358.
[30] The question then is whether Ms Wang breached her duties under ss 131 and 133 in circumstances where it is alleged she:
(a)was a shareholder and director in competing businesses, being HDTL and Fresh Start;
(b)used Causeway Bay’s funds to purchase stock for those competing businesses;
(c)used Causeway Bay’s funds to pay personal expenses;
(d)used Causeway Bay’s funds to pay for entertainment related expenses not linked to Causeway Bay;
(e)directed revenue owed to Causeway Bay to be paid to her personally; and
(f)allowed funds to be paid as wages (where those payments do not reconcile with the IRD’s PAYE records and do not match Causeway Bay’s PAYE deductions).
[31] HDTL was incorporated approximately six months after Causeway Bay started trading. Mr Cao has provided a copy of a screenshot of a website which lists the store address for Causeway Bay (467 Dominion Rd) as a New Zealand branch and the store address of HDTL (604 Dominion Road) as the New Zealand head office. Mr Cao was unaware of this website. The listing creates an impression that Causeway Bay and HDTL are part of a related group of companies. This is misleading and creates a conflict of interest on the part of Ms Wang as she held interests in both companies and had not notified Mr Cao of those interests.
[32] Mr Cao says that Ms Wang admitted she had paid for HDTL stock with Causeway Bay funds and this is why stock receipts found at Causeway Bay did not reflect the stock in the store.
[33] Further, Mr Cao deposes that customers of Causeway Bay have provided payment confirmations indicating that customers paid HDTL for stock owned by Causeway Bay.
[34] In the above circumstances, Ms Wang was not acting in good faith in setting up HDTL and then using Causeway Bay’s funds to purchase stock for HDTL and directing customers of Causeway Bay to pay HDTL. This was clearly not in Causeway Bay’s best interests and Ms Wang was not acting for a proper purpose by operating in this way.
[35] Ms Burson has reviewed the bank statements of Causeway Bay to determine how Ms Wang spent the company’s funds. Mr Cao’s evidence is that Ms Wang had control of the bank accounts.
[36] Ms Burson deposes that her review of the bank statements of Causeway Bay disclose that:
(a)$9,462.24 was spent on items, which appear to relate to personal expenses including pharmacy, food and supermarket expenses; and
(b)$36,001.50 was spent on expenses that on the face of the descriptions, do not relate to the business of Causeway Bay.
[37] As a de facto director, Ms Wang was responsible for accounting to Causeway Bay for the expenditure of funds and ensuring that the funds were spent to further the business interests of the company. The above expenditure does not fall within expenses in the ordinary course of business. Given Ms Wang is the only person (other than Mr Cao) who had access to the bank account, I accept she spent the funds as described. This was a breach of Ms Wang’s duties to Causeway Bay as she was acting in her own interests and contrary to the interests of Causeway Bay.
Stock
[38] Ms Burson’s affidavit says that Causeway Bay paid $884,716.63 to suppliers. This amount is included in the financial statements Ms Burson has prepared as total
cost of sales during the period that Causeway Bay operated. Ms Burson says there are no stocktake records other than for $20,925.66.
[39] Ms Burson also says that there are no purchase invoices and delivery documents for $370,770.90 of stock. Ms Burson has provided a spreadsheet of the “stock” included within this amount. This stock appears to have been identified on the basis that there is no invoice or delivery records in contrast to the remaining stock that has been accepted as being received by Causeway Bay.
[40] Ms Burson then says that the amount of $370,770.90 was “possibly” used to purchase stock for HDTL and Fresh Start.
[41] Under r 15.9 of the High Court Rules, I must be satisfied that the affidavit evidence establishes each cause of action. That is, that on the balance of probabilities, the funds were used for stock that was provided to HTDL and/or Fresh Start. I note that Ms Burson considers that this is a “possibility.” I am not therefore satisfied that on the balance of probabilities HTDL and/or Fresh Start received this stock.
[42] Despite the above finding, I am satisfied that the absence of invoices and receipts together with the statement of Ms Wang to Mr Cao indicates that Ms Wang has failed to account for expenditure of $370,770.90. As a de facto director, Ms Wang was responsible for acting for a proper purpose and in the best interests of the company and failing to account for expenditure breaches that duty. Unless and until Ms Wang can account for those funds, I accept that she has breached her obligations as a director.
Sales revenue
[43] Ms Burson says that of Causeway Bay’s point of sales (POS) transactions between March 2018 and April 2019, $111,780.62 was not deposited in its bank account.
[44] Mr Cao has provided “Wechat” payment confirmations which indicate that customers of Causeway Bay were provided with the “Wechat” payment details for Ms Wang and/or HDTL. This indicates that revenue owed to Causeway Bay was directed to both Ms Wang and HDTL.
[45] Ms Wang as a de factor director was responsible for ensuring the store was managed so as to account for all of the sales revenue. In not accounting for these funds and in using the “Wechat” payment details of herself and HDTL in the Causeway Bay store, Ms Wang has not acted in good faith or for a proper purpose. I therefore consider that this was a breach of her director duties under ss 131 and 133 of the Act.
Wages
[46] Mr Burson deposes that there were withdrawals of $7,949.36 which were purportedly for wages but the amount does not reconcile with PAYE and IRD records. The spreadsheet provided in support of these payments shows that the payments appear to be made to employees. Some of those payments refer to “salary” but most of them do not. It is not therefore clear whether these sums were owing to employees of the company and therefore there was a reasonable basis for paying them. I am not satisfied that the payments on their own establish any breach of Ms Wang’s director duties.
Summary of breaches
[47] Ms Wang’s conduct, as described above breaches the director’s duties prescribed by ss 131 and 133 of the Act. Taking Causeway Bay’s stock and funds, having customers pay her or HDTL directly rather than the company and setting up competing companies and transferring funds to those companies is all conduct that is contrary to the company’s best interests. Ms Wang did not use her de facto director powers for proper purposes, rather she used them to enrich herself and companies in which she held an interest.
What losses did Causeway Bay suffer as a result of Ms Wang’s conduct?
[48] As set out above, I am satisfied that Ms Wang has breached her duties. Those breaches have resulted in the following losses to Causeway Bay:
(a)$9,462.24 of its funds are missing due to unauthorised personal expenses;
(b)$36,001.50 of its funds are missing due to unauthorised entertainment expenses;
(c)$111,780.62 of its sales revenue is missing due to the revenue being directed to Ms Wang and/or HDTL; and
(d)Causeway Bay has lost profits from stock valued at $370,770.90 that it purchased but was unable to sell.
[49]Causeway Bay has not quantified the loss of profits arising from the
$370,770.90 of stock it was unable to sell. In these circumstances, the appropriate relief is an account of profits. The other amounts specified in [48] total $157,244.36.
Issue two: relief under s 174 of the Act
[50] Mr Cao seeks relief under s 174 of the Act and alleges that Ms Wang has acted in a manner that is “oppressive, unfairly discriminatory, or unfairly prejudicial” to Mr Cao, as the other shareholder. Mr Cao claims all the funds he has advanced to Causeway Bay less funds he has received, being $308,259.85.
[51] The issue is whether s 174 of the Act provides a legal basis for Mr Cao to claim the relief he seeks, especially in circumstances where Causeway Bay is also seeking compensation from Ms Wang. Given the finding above that Ms Wang is liable to Causeway Bay, Mr Cao’s financial position as a shareholder changes. That is directly relevant to the issue of whether it is appropriate for Mr Cao to recover for losses that have been suffered by Causeway Bay especially where he advanced funds to the company and not Ms Wang.
[52] I turn now to the issue of s 174 of the Act and whether Mr Cao is entitled to claim against Ms Wang in reliance on that provision. Section 174 of the Act relevantly states:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have
been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a) requiring the company or any other person to acquire the shareholder’s shares; or
(b) requiring the company or any other person to pay compensation to a person; or
(c) regulating the future conduct of the company’s affairs; or
(d) altering or adding to the company’s constitution; or
(e) appointing a receiver of the company; or
(f) directing the rectification of the records of the company; or
(g) putting the company into liquidation; or
(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[53] Counsel for Mr Cao sought to rely on cases in support of the proposition that a majority shareholder may rely on s 174 to claim relief from the other shareholder. In Sturgess v Dunphy,2 the Court of Appeal held that although s 174 is usually invoked to protect minority shareholders, it can be invoked by majority shareholders.
[54] Counsel for Mr Cao also referred to a case “Fairview Holding Ltd v Furno Ltd” decided by Lang J. I assume this is a reference to Fairway Holding Ltd v Furno Ltd.3 In that decision, Lang J said:
[22] In this context, the Court has a very broad jurisdiction but exercises its powers cautiously. It gives significant weight to the company’s constitution and to the expectations of the parties involved. Importantly, the Court is
2 Sturgess v Dunphy [2014] NZCA 266.
3 Fairway Holding Ltd v Furno Ltd [2014] NZHC 858.
required to assess the question of fairness in the round and not from the point of view of any particular shareholder.
[55] While the above cases acknowledge that s 174 is potentially available to majority shareholders, that finding needs to be considered in the context of the facts of the cases. In Sturgess v Dunphy the constitution did not empower the shareholders who held 75 per cent of the shares to pass ordinary or special resolutions, so their shareholding did not confer control of the company. The defendant was both Chief Operating Officer and a shareholder and in his capacity as shareholder was able to veto board decisions.
[56] This case is quite different. As a shareholder, Ms Wang had no ability to veto decisions of the company. Mr Cao was entitled to control the company and set the direction as the sole director and majority shareholder. Mr Cao chose to delegate all authority to Ms Wang. He was free to retract that authority. I do not consider that the conduct of Ms Wang arose by reason of her role as a minority shareholder such that it justifies intervention in reliance on s 174 of the Act.
[57] Further, I am not satisfied the plaintiffs have fulfilled their obligation for this cause of action under r 15.9(4) to “file affidavit evidence establishing, to a Judge’s satisfaction, each cause of action relied on.” There is no evidence as to how Ms Wang in her capacity as shareholder acted oppressively such that relief under s 174 would be justified. It would not be just and equitable to now rely on s 174 to compensate Mr Cao for losses that are more appropriately owed to Causeway Bay and not to him in his capacity as a shareholder.
[58] Mr Jiang for Mr Cao further submits that Ms Wang’s failure to defend these proceedings and give evidence supports the inference that her evidence would not have been helpful to her case. He cites Ithaca (Custodians) Ltd v Perry Corporation in support of this submission.4 I do not consider this case supports this argument. The Court of Appeal in Ithaca was discussing inferences the Court may make where a party fails to call a witness,5 rather than the failure to defend the proceeding or provide any evidence at all.
4 Ithaca (Custodians) Ltd v Perry Corporation [2004] 1 NZLR 731 (CA).
5 See [153]–[154].
Result
[59]For the reasons set out above, I find that:
(a)Ms Wang:
(i)was acting as a “de facto” director of Causeway Bay; and
(ii)breached her director duties prescribed by ss 131 and 133 of the Act.
(b)Ms Wang’s breach of her director duties has caused Causeway Bay to suffer losses, as follows:
(i)loss in the amount of $157,244.36; and
(ii)loss of profits from missing stock valued at $370,770.90.
[60] Causeway Bay claims interest under ss 9 and 10 of the Interest on Money Claims Act 2016 (the Interest on Money Act). The amount on which interest is to be awarded was not quantified as at the various days on which the causes of action arose, being the dates on which Ms Wang acted in breach of her director duties and caused loss to Causeway Bay. In these circumstances, I consider that it is appropriate in accordance with s 9(2)(b) of the Interest on Money Act to award interest as from the date that Causeway Bay ceased trading being 23 April 2019.
[61]I make the following orders and directions:
(a)A declaration is made that Ms Wang has acted in breach of her director duties under ss 131 and 133 of the Act.
(b)Orders are made that Ms Wang:
(i)pay $157,244.36 to Causeway Bay;
(ii)account for profits received from the missing stock valued at
$370,770.90;
(iii)pay interest on the judgment sum in accordance with s 10 of the Interest on Money Act for the period from 23 April 2019 to the day on which the judgment debt (as defined in the Interest on Money Act 2016) is paid in full; and
(c)Leave is reserved for Causeway Bay within 15 working days of the date of this judgment to file a memorandum setting out the costs and disbursements claimed by it. I will then deal with the issue of costs on the papers.
Tahana J
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