Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd
[2013] NZHC 1297
•5 June 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-6336 [2013] NZHC 1297
UNDER the Land Transfer Act 1952
IN THE MATTER OF Caveat No.9155346.1
BETWEEN PAUGRA HOLDINGS LIMITED (IN LIQUIDATION)
Applicant
ANDHARVESTFIELD HOLDINGS LIMITED Respondent
Hearing: 25 March and 28 March 2013
Appearances: N H Malarao (with K H Kuang on 25 March only) for
Applicant
D G Collecutt for Respondent
Judgment: 5 June 2013
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 5 June 2013 at 1:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland, for Applicant
Simpson Dowsett Mackie, Mt Roskill, Auckland, for Respondent
PAUGRA HOLDINGS LIMITED (IN LIQUIDATION) v HARVESTFIELD HOLDINGS LIMITED [2013] NZHC 1297 [5 June 2013]
[1] In this caveat case the liquidators of Paugra Holdings Ltd (in liquidation) allege that Harvestfield Holdings Ltd and its director, Junjie Tao, dishonestly failed to pay Paugra Holdings Ltd $6,792,106.40 on the purchase of a property at 33-37
Seymour Road, Henderson, Auckland.
[2] On 22 June 2007 Paugra had entered into an agreement to buy the property at
33-37 Seymour Road from Kiwi on Queen Ltd for $5,600,000 plus GST. On 20
November 2008 Paugra Holdings Ltd entered into an agreement to on-sell the Seymour Road property to Harvestfield for $10,500,000 plus GST. On 15 July 2009 the sale by Kiwi on Queen to Paugra and the on-sale to Harvestfield both settled. Harvestfield’s lawyers paid Paugra’s lawyers only $5,019,957.54. Paugra used
$5,012,957.54 of that to settle the purchase from Kiwi on Queen Ltd. Paugra, in turn, transferred the property to Harvestfield. Harvestfield maintains that the balance of the purchase price was paid to Paugra in China, but the liquidators contest that. They say that Paugra never received the funds.
[3] The loser in this is the Commissioner of Inland Revenue. Harvestfield claimed GST of $1,312,500 on the purchase which the Inland Revenue paid. Paugra has not paid the Inland Revenue the GST payable on its sale to Harvestfield. Paugra has also not paid income tax on the profit from the re-sale of the property. On the Commissioner’s application, Paugra was ordered to be put into liquidation. The Commissioner has claimed in the liquidation for $3,835,367.87 for unpaid GST and income tax. Save for the steps they have taken in this application, the liquidators have not found any assets to meet the claim. The liquidators made demand of Harvestfield for the alleged outstanding purchase price of $6,792,106.40, but Harvestfield refused to pay.
[4] The liquidators also say that Paugra Holdings Ltd has a caveatable interest in the Seymour Road property. They have lodged caveat 9155346.1 which says:
The caveator claims a beneficial interest in the land contained in the above certificate of title as cestui que trust of which the registered proprietor, Harvestfield Holdings Ltd, is trustee, on the following basis:
(a) The property was sold by the caveator to the registered proprietor with settlement on 15 July 2009;
(b) The agreement provided for a purchase price of $11,812,500 including GST but the registered proprietor only paid the caveator the sum of $5,019,957.54 on settlement;
(c) With full knowledge of a wrongful intervention in the caveator’s affairs by the registered proprietor’s shareholder and director, the registered proprietor took advantage of the disability of the caveator brought about by that wrongful intervention and procured a transfer of the property to itself on payment of the sums set out in (b) above;
(d) The registered proprietor, Harvestfield Holdings Ltd, therefore holds the property on trust for the caveator, as to part, on the basis of a constructive trust.
[5] In short, Paugra claims a constructive trust in the Seymour Road property by reason of Harvestfield’s fraudulent intervention in Paugra. It says that those actions allow it to claim a caveatable interest.
[6] Paugra has applied under s 145A to sustain the caveat. The liquidators say that Junjie Tao is the author of the fraudulent scheme under which Harvestfield was able to acquire the Seymour Road property without paying the full purchase price. They characterise him as the puppet-master who controlled others so as to bring about the fraudulent acquisition of the Seymour Road property.
[7] In opposition, Harvestfield says that it did pay the outstanding purchase price to Paugra’s director, Weiyu Wang, in China, and that it is Weiyu Wang who has failed to arrange for Paugra to pay the outstanding taxes to the Inland Revenue. Harvestfield denies that Paugra has established any fraud. Further, it also says that even if the allegations of fraud can be made out, they do not give Paugra a caveatable interest. In particular, it relies on s 67 of the Property Law Act 2007.
[8] The case involves two main questions:
(a) Has Paugra Holdings Ltd proved its allegations of fraud to the required standard?
(b)Do those allegations of fraud, if proved, give rise to a caveatable interest?
[9] In this decision I find that Paugra has shown a prima facie case for its claims of fraud, but those facts do not give rise to a caveatable interest, primarily because s
67 of the Property Law Act stands in the way of the interest that Paugra claims. The effect of that section is that an unpaid vendor cannot claim a charge over the property sold, unless the parties have provided for it by agreement. The fact that Paugra has also alleged and proved fraud does not change the position.
Entities and people involved
[10] Those involved are:
(a) Kiwi on Queen Ltd, the original owner of the property at 33-37
Seymour Road, Henderson.
(b)Paugra Holdings Ltd bought the Seymour Road property from Kiwi on Queen Ltd and on-sold it to Harvestfield Holdings Ltd. It was ordered to be into liquidation on 27 July 2012.
(c) Henry David Levin and Vivien Judith Madsen-Rees – liquidators of
Paugra Holdings Ltd.
(d) Harvestfield Holdings Ltd – the ultimate purchaser of the Seymour
Road property, the current registered proprietor.
(e) Tao Design and Construction Ltd – a New Zealand company of which Junjie Tao was a 90 per cent shareholder and sole director. His wife holds the remaining shares.
(f) Trustees of the Mercury Trust, the Hvar Trust and the McCracken Trading Trust – the original shareholders of Paugra Holdings Ltd. On that company’s incorporation, a lawyer initially held all the 1000 shares but transferred them to the trustees of these trusts.
(g) Junjie Tao/Sam Tao – is the alleged puppet-master. A businessman.
Other Chinese people are alleged to have acted as his behest. He is the man behind Harvestfield Holdings Ltd and allegedly also the man behind the transactions attacked by the liquidators. He has a home in Auckland and was in Auckland at relevant times, but is now in China.
(h) Qin Lu/Bruce Lu – an intermediate shareholder of Paugra Holdings
Ltd, lives in Auckland, an associate of Junjie Tao.
(i)Weiyu Wang – a resident of Zhengzhou, Henan Province, China. He has never entered New Zealand. He was the ultimate shareholder and director of Paugra Holdings Ltd. The liquidators query whether Weiyu Wang actually had anything to do with the transactions in this case.
(j)Ying Qing Qiu – a builder. Held a power of attorney for Weiyu Wang and for Paugra Holdings Ltd. He lives in Auckland. Another alleged puppet.
(k)Guangbin Yan/Laurie Yan – a plumber. A resident of Auckland. At various times was a shareholder and director of Harvestfield Holdings Ltd but only at the behest of Junjie Tao. Another alleged puppet.
(l) Mimi You – wife of Junjie Tao. Lives in Auckland.
(m)Jinying Zhu – mother of Junjie Tao. Lives in China but various documents filed in the Companies Office give her addresses in Auckland at the home of Guangbin Yan and at the home of Mimi You and Junjie Tao.
(n)Jinyan Tao – sister of Junjie Tao, lives in China, is alleged to have taken part in arranging the payment by Harvestfield to Paugra.
(o)Xianyu Wang – a lady in China, alleged to have been involved in part of the payment in China of the purchase price by Harvestfield to Paugra.
Legal practices
[11] The evidence refers to the following legal practices:
(a) DAC Legal – acted for Kiwi on Queen Ltd on the sale to Paugra.
(b)Foy and Halse – acted for Paugra up to 17 December 2008 on the purchase from Kiwi on Queen and for the original shareholders on the sale of their shares to Qin Lu.
(c) Lui Lawyers – acted for Qin Lu on the purchase of the shares in
Paugra from the original shareholders.
(d)Forest Harrison – acted for Paugra Holdings Ltd and Weiyu Wang from 17 December 2008 to the settlement of the sales of Seymour Road in July 2009.
(e) Yu Lawyers – acted for Harvestfield on the purchase of Seymour
Road.
[12] While the liquidators allege misconduct by Junjie Tao and Harvestfield Holdings Ltd, there are no allegations of improper or unprofessional conduct on the part of any of the law practices and I make no such finding.
The property at Seymour Road
[13] Under the agreement of 22 June 2007, Kiwi on Queen Ltd sold the Seymour Road property to Paugra for $5,600,000 plus GST. Paugra re-sold the property to Harvestfield for $10,500,000 plus GST under an agreement of 20 November 2008. At the time of the sale by Kiwi on Queen Ltd, the property was bare land. In November 2008 Waitakere City Council granted land use and subdivision consents
which would allow extensive development on the site. A valuation by a registered valuer provides a market value for the property as at December 2008 of $11,500,000 inclusive of GST.
Share transfers in outline
[14] The transactions to be considered are not only the sale and on-sale of Seymour Road, but also changes in the shareholding of Paugra. At the outset, after Paugra had entered into the agreement to buy the Seymour Road property from Kiwi on Queen Ltd, the original shareholders, the trustees of the Mercury Trust, the Hvar Trust and the McCracken Trading Trust, sold their shares to Qin Lu. Qin Lu, in turn, transferred the shares to Weiyu Wang. Qin Lu did not put in any of his own funds to buy the shares from the original shareholders. Junjie Tao and others associated with him put in the funds. At the same time, Paugra extended the time to settle the purchase from Kiwi on Queen Ltd, and later negotiated variations under which the time for settlement was further extended. The extension and the variations required Paugra to make payments to Kiwi on Queen Ltd. Junjie Tao and people associated with him funded Qin Lu’s acquisition of the shares and also funded the bulk of the payments Paugra was required to make to Kiwi on Queen Ltd under the extension and variations. Qin Lu transferred his shares in Paugra to Weiyu Wang, apparently without consideration. Weiyu Wang is elusive.
[15] The liquidators’ case for fraud by Harvestfield is circumstantial but relies on
a number of features:
(a) Junjie Tao’s funding of Qin Lu’s acquisition of the shares in Paugra;
(b) Junjie Tao’s financing of the extensions and variations to Paugra’s
agreement with Kiwi on Queen;
(c) The absence of any financial contribution by Qin Lu to the purchase of the shares;
(d) Junjie Tao’s collaboration with Qin Lu in acquiring the shares in
Paugra;
(e) Qin Lu’s transfer of the Paugra shares to Weiyu Wang without
receiving any consideration;
(f) The elusiveness of Weiyu Wang;
(g) The unusual absence of communications between Paugra and
Harvestfield as to the on-sale;
(h) The unusual means used by Harvestfield to settle the purchase from
Paugra;
(i) The absence of any persuasive evidence of payment.
[16] The liquidators’ case also relies on certain matters of detail which do not gel
if the transactions were genuine.
[17] To put these matters into context, it is necessary to traverse an amount of detail. That these details are available is the result of extensive investigations by officers of the Inland Revenue Department.
Paugra’s purchase of the Seymour Road property
[18] Under Kiwi on Queen Ltd’s agreement, there was a deposit of $1,200,000 to
be paid as follows:
(a) $250,000 on the agreement becoming unconditional;
(b) A further $950,000 payable three working days before the vendor’s
GST date, but not before 25 July 2007;
[19] The agreement was conditional on Paugra being satisfied with the property after due diligence, with the condition to be satisfied by 1 July 2007.
[20] The possession date was 31 May 2008 but Paugra could extend the possession date up to 30 November 2008 by giving written notice to Kiwi on Queen. In that event, Paugra had to pay Kiwi on Queen an additional $1,369.80 per day from 31 May 2008 up to the date of settlement.
[21] The agreement became conditional on 2 July 2007. The initial deposit of
$250,000 was paid. The source of the payment was a company associated with one of the original shareholders.
[22] In August 2007 Paugra paid the second part of the deposit, $950,000.
$700,000 of that was provided from the same company associated with one of Paugra’s original shareholders. Paugra repaid the $700,000 when it received a GST refund on the purchase of the property for the GST period ending 31 July 2007. The rest of the deposit payment was funded by an undocumented oral loan by Junjie Tao for $275,000. From that loan Paugra had a surplus of $25,000, which was paid into its bank account. This is the first evidence of Junjie Tao becoming involved with Paugra and with Seymour Road. It comes before the first documentary evidence of Qin Lu taking an interest in the property.
[23] In May 2008, Foy and Halse wrote to DAC Legal on Paugra’s behalf, giving notice extending the time for settlement of the purchase to 30 November 2008. That required Paugra to make additional payments of interest. These payments followed:
(a) July 2008: $89,574.87 (b) August 2008: $41,095.08 (c) September 2008: $100,646.851
(d) October 2008: $41,095.802
(e) November 2008: $42,465.663
1 The July, August and September payments all came from Mimi You.
2This payment came from the joint account of Qin Lu and Wei Zhang. Mr Lu funded that by a payment of $10,693 from Mimi You and by a payment of $30,402.74 from “Capital Group”, said to be repayment of a loan.
Investigations have shown that funds traced to Mimi You’s bank account are the source of most of these payments, but some have been traced back only as far as Qin Lu.
[24] As to the timing of these payments, it is to be noted that Qin Lu finalised a purchase of shares in Paugra on 22 August 2008 and is recorded as having been appointed a director and having received 25 per cent of the company’s shares on 8
October 2008.
[25] Paugra did not complete the purchase from Kiwi on Queen in November
2008. In December 2008, Kiwi on Queen and Paugra agreed to extend the time for settlement to 30 January 2009 in exchange for a payment of $200,000. At the time of this agreement, Weiyu Wang had become sole shareholder of Paugra and its sole director. New lawyers, Forest Harrison, now acted for Paugra. The $200,000 to be paid for extending the term for settlement was contributed by Tao Design and Construction Ltd on 17 December 2008.
[26] Paugra did not complete the purchase under the agreed variation on
30 January 2009. Instead, Kiwi on Queen and Paugra negotiated a further extension to 31 July 2009. Under this new variation to the agreement for sale and purchase, the $200,000 paid under the first variation was to be treated as interest payable by Paugra for late settlement. Paugra also agreed to pay Kiwi on Queen a further
$262,500 by 30 January 2009, being an advance interest payment on the unpaid portion of the purchase price for the next six months. That unpaid portion of the purchase price was recorded as being $5,100,000 – that is, the $6,300,000 less the deposit of $1,200,000. The $262,500 paid to Kiwi on Queen has been traced back to a cheque for $317,000 drawn by Mimi You on 28 January 2009 which was cashed into Qin Lu’s bank account. On 30 January 2009 Qin Lu drew a cheque for
$262,500 in favour of DAC Legal. As already noted, Paugra eventually completed the purchase from Kiwi on Queen on 15 July 2009, paying $5,012,957.54 being
funds it received from Harvestfield on its on-sale.
3 $29,658.65 came from Paugra’s own funds and $12,807.01 came from Mr Lu.
[27] From 17 December 2008 until 21 July 2009, Weiyu Wang was the sole director and shareholder of Paugra, but there is no evidence that he contributed any funds towards Paugra’s purchase of the property.
Transfer of shares in Paugra
[28] Qin Lu had taken an interest in buying Seymour Road in February 2008. The liquidators have shown correspondence between Lui Lawyers, acting for Qin Lu, and Foy and Halse, acting for the original shareholders, setting out proposals and counter-proposals.
[29] In August 2008 Qin Lu entered into an agreement with the original shareholders of Paugra to buy their shares for $1,200,000. The agreement included these terms:
(a) Settlement of the sale of the shares was to be on the same day as settlement of Paugra’s purchase of the Seymour Road property from Kiwi on Queen, that is, in November 2008. The shares would be transferred only on payment of the purchase price on settlement.
(b)Within 5 working days of the agreement, Qin Lu was to pay $50,000 as part-payment, and thereafter $50,000 each month until the settlement date. These payments were to be made into a solicitor’s trust account and the funds would be released to the trust account of Foy and Halse to pay for the development costs of the property and running costs of the company.
(c) On the first payment of $50,000, Qin Lu would receive 25 per cent of the shares in Paugra.
(d)Within 5 working days of the agreement, the original shareholders would provide Qin Lu with documents for the resignation of the original director, Mr Clough, and the appointment of another in his stead, at Qin Lu’s option.
[30] The change of directors took place on October 2008. Qin Lu became a
25 per cent shareholder at the same time.
[31] In November 2008 there were two meetings at the offices of Foy and Halse between Qin Lu and some of the original shareholders of Paugra. At the first meeting Qin Lu advised the others that he had a buyer for his shares in Paugra, but that would be conditional on the remaining 75 per cent of the shares being transferred to him. He offered security against properties in Hamilton.
[32] At the second meeting, Junjie Tao also attended. At this meeting it was agreed that the remaining 75 per cent of shares in Paugra would be transferred to Qin Lu and as security for the payment a mortgage would be taken over three properties in Hamilton owned by Tao Design and Construction Ltd. A mortgage was granted securing the sum of $925,000. While Qin Lu had agreed to pay $1,200,000 for the shares, the additional $275,000 was covered by Mr Tao’s undocumented loan to Paugra to assist with the purchase of the Seymour Road property. In other words, the undocumented loan of $275,000 was taken into account against Qin Lu’s liability to the shareholders for the purchase of the shares.
[33] Once the mortgage to the original shareholders of Paugra was registered, the remaining 75 per cent of shares in Paugra were transferred to Qin Lu.
[34] On the purchase of the shares in Paugra, Qin Lu was represented by Lui Lawyers. Once Qin Lu owned all of the shares, he instructed Foy and Hulse to act for him and to continue acting for Paugra.
[35] Soon afterwards, Qin Lu transferred his shares in Paugra to Weiyu Wang. Forest Harrison were instructed to act for Weiyu Wang. In November 2008, while Qin Lu was still only a 25 per cent shareholder of Paugra, Foy and Hulse wrote to Forest Harrison with an agreement for the sale and purchase of all the shares in Paugra for a purchase price of $1,300,000.
[36] On 2 December 2008 Forest Harrison replied, enclosing an amended version of the agreement for sale and purchase of the shares. Importantly, the amendment was this provision:
The vendor acknowledges that the sum of $1,300,000 has been paid by the purchaser to the vendor by way of a deposit.
[37] The parties to the agreement are Qin Lu and Weiyu Wang. Qin Lu has signed the agreement with his signature witnessed by a lawyer in Forest Harrison. Ying Qing Qiu signed the agreement for Weiyu Wang in the exercise of a power of attorney dated 11 November 2008. The same lawyer in Forest Harrison witnessed that signature. On 3 December 2008 Qin Lu resigned as director of Paugra, and Weiyu Wang was appointed in his place. Through Weiyu Wang, Paugra appointed Ying Qing Qiu as its power of attorney. Qin Lu’s transfer of 100 per cent of the shares in Paugra to Weiyu Wang was registered on 12 December 2008.
[38] What I have set out so far is based on documents that officers of the Inland Revenue Department have obtained during their investigations. So far, no documents have come to light to show that Weiyu Wang actually paid Qin Lu
$1,300,000 for his shares in Paugra. Instead, there is an explanation by Qin Lu. He was interviewed by Inland Revenue officers on 19 June 2012. A transcript of the interview has been provided. Qin Lu was not giving sworn evidence. His answers to questions were given through an interpreter. He qualified many of his answers by saying that he had to rely on memory and had not had the opportunity to check records.
[39] He has also given an affidavit in this proceeding. It is in English and includes the following:
(a) He had a long business relationship with Junjie Tao in China and New Zealand during which they helped each other out by lending money to each other from time to time and transferring money to each other in New Zealand and overseas to save on currency exchange costs. The way they did business was not based on documented transactions but was founded on trust built up over a long period of time.
(b)Qin Lu would prefer to do business with someone he trusted rather than with a documented transaction with somebody he did not know.
(c) He found out about the Seymour Road project in 2007 and saw its potential. He was aware that Junjie Tao had also been approached about the property. Although both he and Junjie Tao were interested, neither had the funds to become involved as investors.
(d)Qin Lu thought he could be a “middle man” by finding a potential buyer in China. He found a potential purchaser in Shanghai. While negotiations proceeded well, that buyer pulled out.
(e) Qin Lu had to make payments. Junjie Tao owed him a lot of money and accordingly he asked Junjie Tao to make payments for the Seymour Road project.
(f) When the potential purchaser from Shanghai pulled out, he was required to settle the purchase of the property. He owed significant sums to creditors in China for matters unrelated to the Seymour Road project. He suggested to his creditors that he would repay his debt by transferring the project to the creditor. He says that the creditor then introduced him to Weiyu Wang as a potential purchaser.
(g)He had had no previous dealings with Weiyu Wang before this and did not know him. Weiyu Wang lives in Henan, far away from Sichuan where he came from.
(h)It was agreed that he would transfer his shares in Paugra to Weiyu Wang to settle his debt to the creditor. Qin Lu also arranged for a lawyer to represent Weiyu Wang and arranged a power of attorney for him.
(i)After Weiyu Wang bought the shares in Paugra, Junjie Tao also expressed an interest in buying the land. At that, Qin Lu suggested to Junjie Tao that he deal with Weiyu Wang. He had no involvement in the negotiations between Weiyu Wang and Junjie Tao.
[40] Qin Lu has provided no documents to support these statements. He has not identified his creditor in China. His affidavit does not state how much he owed the creditor in China. There is nothing to record the discharge of his indebtedness to the creditor in China. He has also not stated how much Junjie Tao owed him, when loans were made and how they were repaid.
Harvestfield Holdings Ltd
[41] Harvestfield Holdings Ltd was incorporated on 18 November 2008. There are 1,000 shares. On incorporation Junjie Tao was sole director and shareholder. In July 2009 there were changes to the shareholding and directorship. The significance of these events happening in July is that Harvestfield completed the purchase of the Seymour Road property on 15 July 2009.
[42] On 6 July 2009, Guangbin Yan/Laurie Yan was appointed co-director. Junjie Tao transferred all his shares to Guangbin Yan. On 7 July 2009 Guangbin Yan transferred 1 per cent of the shares back to Junjie Tao. On 9 July 2009 Guangbin Yan transferred the remaining 99 per cent of the shares to Junjie Tao and resigned as director. Junjie Tao was therefore sole shareholder and director at the time of settlement of the Seymour Road purchase.
[43] On 20 July 2009, Junjie Tao transferred 99 per cent of the shares in
Harvestfield Holdings Ltd to Guangbin Yan who was also reappointed director.
[44] On 1 September 2011, Guangbin Yan transferred 44 per cent of the shares in Harvestfield Holdings Ltd to Jinying Zhu, Junjie Tao’s mother who lives in China. She was appointed director on 19 April 2012. Junjie Tao resigned as director.
[45] On 26 April 2012 Guangbin Yan resigned as director, and on 1 May 2012
Junjie Tao transferred the 1 per cent of shares he held to his mother.
[46] Both Junjie Tao and Guangbin Yan say that Guangbin Yan held his shares in
Harvestfield on trust for Junjie Tao and never had a beneficial interest himself.
Harvestfield’s purchase of Seymour Road
[47] The agreement by Paugra to sell Seymour Road to Harvestfield is dated
20 November 2008. At 20 November 2008, Qin Lu was a 25 per cent shareholder of Paugra – the remaining 75 per cent of shares had not been transferred to him. He had not entered into his agreement to sell the shares to Weiyu Wang. Notwithstanding that, the signature of the vendor in Paugra’s agreement to sell to Harvestfield is similar to Weiyu Wang’s signature in his power of attorney in his deed of November 2008 appointing Ying Qing Qiu as his attorney. Junjie Tao has signed the agreement for sale and purchase on behalf of Harvestfield. There is no evidence as to the circumstances in which the agreement came to be signed. As Weiyu Wang lives in Zhengzhou, but Junjie Tao hails from Wuxi, some distance away, and was based in Auckland, it would have been helpful to have some information as to how they came to sign the agreement. In saying that, of course I acknowledge that the Inland Revenue and the liquidators could not be expected to know.
[48] Under the agreement, the purchase price is $10,500,000 plus GST, with a deposit of $300,000 to be paid on execution. The settlement date is 28 November
2008. The agreement is conditional on finance, with the finance date 5 working days from the date of the agreement. The agreement is also subject to due diligence with the clause to be satisfied within 5 working days of the agreement.
[49] The agreement uses the standard ADLS form. Apart from the deposit, the purchase price is payable on settlement. There is no provision for Paugra to leave money in or for Harvestfield to give security for any unpaid part of the purchase price.
[50] Forest Harrison are shown as lawyers for Paugra. The lawyers for
Harvestfield are not identified.
[51] While the agreement provided for settlement on 28 November 2008, it did not happen until 15 July 2009. Unlike the transaction between Kiwi on Queen Ltd and Paugra, there is no record of communications between Paugra and Harvestfield about this agreement, about payment of the deposit or about deferral of the settlement date. Instead, it appears that Forest Harrison only became aware of the deal on 9 July 2009 when Yu Lawyers wrote to them about the proposal for settlement. Forest Harrison only obtained a copy of the agreement when Yu Lawyers sent it to them.
[52] While the agreement provided for payment of a deposit of $300,000, there is no record of it being paid and the agreement was completed on the basis that the deposit had not been paid.
[53] On 12 July 2009 Forest Harrison received a telephone call from a person named or believed to be Weiyu Wang. His instructions were that they were to prepare a draft settlement statement for Harvestfield on the basis that Forest Harrison would only collect from Harvestfield at settlement enough funds to cover their fees and disbursements plus the amount required to settle the purchase from Kiwi on Queen. Paugra would collect the balance of the funds from Harvestfield by way of a deposit overseas.
[54] Forest Harrison prepared a draft settlement statement on 30 July 2009. The purchase price payable was $11,812,500, comprising $10,500,000 plus GST of
$1,312,500. Apart from an adjustment for local authority rates, the purchase price was to be paid by a deposit of $5,479,686.40 (if paid) and a balance to be paid on settlement of $6,332,457.54. The amount required for settlement provided not only for the sum required to settle the purchase from Kiwi on Queen, but also incorporated the GST that would be payable to the Commissioner of Inland Revenue on the sale.
[55] Forest Harrison had another telephone call from Weiyu Wang. Forest Harrison’s note of that conversation records that they intended to collect the GST from the purchase so as to pay it to the Inland Revenue. Forest Harrison explained Paugra’s GST obligations. Weiyu Wang is recorded as advising them that he had an accountant who had been introduced to him. Weiyu Wang would collect the GST as part of the deposit and get his accountant to attend to the payment of GST. He also advised that he would be in New Zealand in August.
[56] The settlement statement Forest Harrison sent to Yu Lawyers increased the amount of the deposit to be paid to $6,792,186.40 and reduced the amount required on settlement to $5,019,957.54. Forest Harrison were clearly acting under instructions not to collect the GST component of the price on settlement.
[57] On 15 July 2009, Forest Harrison received an email message from Weiyu
Wang’s email address. Translated, it said:
The part of overseas settlement has been completed and confirmed. Please settle as soon as possible.
The subject matter was “Confirmation of receipt”.
[58] As already recorded, Forest Harrison received $5,019,957.54 on settlement, as required under their settlement statement. Paugra did not account to the Inland Revenue for the GST of $1,312,500 on the sale.
[59] The email of 15 July 2009 to Forest Harrison from Weiyu Wang was sent from this email address: [email protected].
Enquiries as to the payment of $6,792,186.40
[60] The Inland Revenue has made enquiries to establish whether Harvestfield Holdings Ltd paid Paugra the outstanding $6,792,186.40, the outstanding balance under the sale of Seymour Road.
[61] On 29 July 2009, Harvestfield Holdings Ltd applied for a GST refund. Auckland accountants made the claim on behalf of Harvestfield. The accountant who prepared and filed the GST return provided the Inland Revenue with copies of three documents, which the accountant advised the Inland Revenue he had received from Junjie Tao before he filed the GST return. The three documents, all in Chinese, are said to be receipts. Two of them are dated 14 July 2009. The third is dated 15
July 2009. One is signed by Weiyu Wang. The other two are signed by Xianyu Wang. The first acknowledges receipt of a notice from a bank to the effect that US$3m had been paid into Weiyu Wang’s account, being funds used to buy the land at Seymour Road. The amount of US$3m was treated as equivalent to NZ$4,800,000. The receipt also went on to say that Weiyu Wang had received RMB¥6,768,125 (equivalent to NZ$159,250). A staff member of the accountant has translated the document:
This is to certify that I have received a notice from Bank that the money you sent to my bank account and was used to purchase land in New Zealand (33-
37 Seymour Road Henderson) has been received. The amount is
US$3,000,000, ie NZ$4,800,000. Also, I have received the money order of RMB¥ 676,8125.00, i.e. New Zealand$159,2500.00 with the exchange rate of 1: 4.25. I will notify the relevant person in New Zealand to process the land settlement accordingly.
[62] The second receipt says:
This is to certify that I have received from Industrial and Commercial Bank the money order of RMB¥6768125.00, ie NZ$159,250.00, with the exchange rate of 1: 4.25. Each party has a copy of this certificate.
[63] The third document says:
This is to certify that I have received money of RMB ¥382,500.00 i.e. NZ$90,000 (the exchange rate of 1:4.25) which was used to buy land in New Zealand. Each party has a copy of this certificate.
[64] The first receipt is addressed to Harvestfield Holdings Ltd and Junjie Tao. The other two are not. Neither of the documents refers to Paugra. There is nothing on the face of the documents that suggests that the receipts were given by Paugra.
[65] The Inland Revenue have tried to contact Weiyu Wang. A number of letters were sent to the address given for Weiyu Wang at his address in Zhengzhou, China
but there has been no response. The Inland Revenue has not received any information from Weiyu Wang, and certainly no confirmation from Weiyu Wang that Paugra did receive payment from Harvestfield.
[66] The Inland Revenue have also made enquiries with Junjie Tao about payment.
[67] Junjie Tao was in New Zealand between 27 April 2009 and 3 August 2009, but he has been out of the country since. Junjie Tao advised the Inland Revenue that the receipts given to the accountants were only given to him on his return to China. That explanation does not tie in with Customs records showing that he was still in New Zealand up until 3 August 2009 and with the account given by the accountants that he gave them the receipts before the end of July 2009.
[68] Junjie Tao cannot provide any documents to show payment by Harvestfield to Paugra. Junjie Tao said that he had left all records with Guangbin Yan when he left New Zealand for China. There was, however, a fire at Mr Yan’s house in which these records were destroyed. When the Inland Revenue enquired of Guangbin Yan, he stated that there had been a fire, but he was unable to provide any corroboration of that, such as any communication from the New Zealand Fire Service. He also says that he was not insured for the fire loss.
[69] Junjie Tao says that it is useless trying to get information out of Chinese banks because the transaction happened so long ago. Junjie Tao has advised that part of the payment was by (what he has called) a “bank acceptance bill”. That might also refer to the “money order” in the second receipt. It may also be equivalent to a bank cheque in New Zealand. Even so, he has not been able to provide any documentation to show that funds were provided to the Industrial and Commercial Bank for the issue of such a bank cheque.
[70] Junjie Tao has also given an explanation that the bank cheque and the cash of RMB¥380,000 were paid to Paugra by someone coming to his house in China to collect the payment. When the Inland Revenue made enquiries as to the finance company he used to remit funds, Junjie Tao was unable to do more than advise that
the company was based in Hong Kong. However, in response to further enquiries, he said that the finance company was in fact “black-market traders, who are standing in front of the banks in Hong Kong”. He used the “black-market traders” because they offered lower commission and his sister therefore used them to remit the US dollar payment. When the Inland Revenue made further enquiries, he said that the black-market traders were in fact based in China. The Inland Revenue has spoken to Junjie Tao’s sister, who advised the Inland Revenue that the funds belonged to the family and that there was a transferrable note, some cash, and US dollars conducted through many transactions involving black-market traders. The sister advised that Xianyu Wang came to her office and that she personally had not met Xianyu Wang – her personal assistant had instead.
Junjie Tao’s affidavit
[71] On the question of payment, Mr Tao does not add significantly to the information he gave to the officers of the Inland Revenue. He asserts that Weiyu Wang is responsible for Paugra not paying the GST. He accepts that the off-shore payment of part of the purchase price was carried out in such a way that there was not a lot of secondary evidence available. However, he asserts that Harvestfield did obtain receipts for the payments. He says that he has tried in recent months to obtain secondary evidence for the payments, but has not been able to because of the delay in the matter being raised by the Inland Revenue – for example, he says that a copy of the negotiable bill could have been obtained earlier. He also says that Harvestfield’s records were lost in the fire at Guangbin Yan’s home. He asserts that Weiyu Wang does exist, and was involved in the transaction. He claims that he has also tried to locate Weiyu Wang.
Paugra’s change of registered office
[72] On Weiyu Wang, there is a further matter of interest.
[73] After the settlement of the sale of Seymour Road in July 2009, Paugra changed its registered office. On 10 August 2009 it was changed to 108 Dominion Road, Mt. Eden, Auckland. On 16 December 2009 it was changed to 2 Moniver
Place, Howick, Auckland. The occupants of 2 Moniver Place, Howick, Auckland, have lived at that property for six years and have no connection with Weiyu Wang.
[74] Both these communications to the company’s office took place after Junjie Tao had left New Zealand on 3 August 2009. They came from Weiyu Wang’s email address: [email protected] Both emails have been traced to the Bigworld Internet cafe in Central Auckland. Weiyu Wang could not have sent the emails, because Customs records show that he was not in the country.
Ying Qing Qiu
[75] The Inland Revenue interviewed Ying Qing Qiu. He held the power of attorney from Paugra and also from Weiyu Wang. He did not know Weiyu Wang. He did not know where he lived, or how to contact him. He had had no dealings or communications with Weiyu Wang. He agreed to be attorney only because Qin Lu asked him to. They already knew each other through working on building jobs. Ying Qing Qiu also acknowledged that he knew Junjie Tao.
Guangbin Yan
[76] Guangbin Yan was interviewed twice by Inland Revenue officers. In the first interview he told the officers that he had also invested in Harvestfield Holdings Ltd, with funds advanced by relatives. That accounted for his holding 440 shares. He was unable to provide the Inland Revenue with any information as to Harvestfield’s purchase of the Seymour Road property, the identity of the vendor or how Junjie Tao financed the purchase. In the second interview he said that he had been lying in the first. He said that although he held 440 shares, he had not made any investment in the company. He knew that Qin Lu and Junjie Tao were friends, but he did not know Weiyu Wang and could not provide any information as to the purchase of the Seymour Road property. He was helping Junjie Tao look after the property and he hoped that after it sold Junjie Tao might pay him something for his efforts.
[77] Harvestfield objected that the liquidators have relied on hearsay and double hearsay evidence. That objection goes to weight, not to admissibility. Applications under s 145A of the Land Transfer Act are summary proceedings, in which an applicant must get his or her case under way within a short time. Sections 18 and 20 of the Evidence Act 2006 and rules 7.29, 7.30, 9.76 and 19.10 may allow statements of belief and hearsay statements to be given.4 To the extent that the documents relied on by the liquidators comprise business records under s 16(1) of the Evidence Act, I admit them under s 19(1)(c) to avoid undue expense and delay in requiring those who compiled those records to give evidence. Following R v Kereopa,5 Pakai v
Police6 and Burrell Demolition v Wellington City Council,7 I hold that the Inland
Revenue’s records of interviews of Guangbin Yan, Ying Qing Qiu and Qin Lu are business records. To the extent that the liquidators’ hearsay evidence does not consist of business records, I admit it under s 18(1)(b)(ii) to avoid undue expense and delay in requiring those who made the statements to give evidence. I am also satisfied that the circumstances relating to the information obtained by the liquidators, being the results of extensive investigations by the Inland Revenue Department, give reasonable assurance that the statements are reliable.
Findings on fraud
[78] Paugra has the onus of establishing the fraud it alleges. Because it is alleging fraud, it is required to show a prima facie case rather than an arguable case.8
[79] Certain features of the case can be addressed.
4 For an elaboration of this, see Trustees Executors Ltd v Eden Holdings (2010) Ltd HC Wanganui CIV 2010-483-101, 12 August 2010, at [21]-[32]. That part of the judgment was not disturbed on appeal: Trustees Executors Ltd v Eden Holdings (2010) Ltd [2010] NZCA 626.
5 R v Kereopa HC Tauranga CRI-2007-087-411, 11 February 2008.
6 Pakai v Police HC Invercargill CRI-2008-425-37, 13 March 2009.
7 Burrell Demolition v Wellington City Council HC Wellington CIV 2006-485-1274, 12 March
2008.
8 Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15], Trustees Executors
Ltd v Steve G Ltd [2013] NZHC 16 at [63]-[66].
[80] Weiyu Wang is a key person in the case. Harvestfield says that he is the villain of the piece. It entered into an arm’s length transaction with Paugra and paid it, but Weiyu Wang, Paugra’s director, kept the proceeds of sale and failed to pay the company’s GST and income tax.
[81] The liquidators have put in evidence an extract from an expired passport for Weiyu Wang, obtained from Immigration New Zealand. That at least establishes that there is someone with that name. Beyond that, there is a cloud of uncertainty:
(a) No-one knew him or had had any dealings with him before the transactions in this case. That is relevant to assertions that for Chinese it is better to do business with people with whom a relationship of trust has been established over time than to enter into arm’s length transactions based on documents with strangers. Qin Lu is vague about how he came into contact with Weiyu Wang, saying only that he was introduced by an unidentified creditor. Throughout Qin Lu was in New Zealand and Weiyu Wang was in China.
(b)Although Qin Lu entered into a formal agreement with Weiyu Wang for the sale of his shares in Paugra for a substantial sum, $1,300,000, it is uncertain what, if anything, Weiyu Wang paid for the shares. There is only an acknowledgement that the debt has been paid, without any further information as to how or when. There is no evidence that Weiyu Wang actually put any funds of his own into the purchase of the shares in Paugra or into the purchase of Seymour Road.
(c) Qin Lu arranged for Ying Qing Qiu to act for Weiyu Wang under a power of attorney. Ying Qing Qiu did not know Weiyu Wang and did not have any direct contact with him at any time. Qin Lu arranged for Forest Harrison to act for Weiyu Wang and paid an advance for the
legal fees. Forest Harrison had not acted for Weiyu Wang before and had only email and telephone contact with him.
(d) Weiyu Wang signed the agreement to sell Seymour Road on 20
November 2008 before he had become Paugra’s shareholder under the
agreement of 3 December 2008.
(e) Although Weiyu Wang was sole director and shareholder of Paugra, Qin Lu was the one who instructed Forest Harrison on the extension and variations to the agreement with Kiwi on Queen. Forest Harrison sent their account of January 2009 for Paugra to Qin Lu.
(f) The Tao interests, not Weiyu Wang, funded Paugra’s added expenses
on the extension and variations of the agreement with Kiwi on Queen.
(g) Weiyu Wang’s instructions to Forest Harrison on completing the sale
to Harvestfield were unorthodox.
(h)The Inland Revenue’s attempts to contact Weiyu Wang at his address in China have been unsuccessful. Junjie Tao also says that his attempts to contact him have also been unsuccessful.
(i) Weiyu Wang has not given evidence which could support Junjie Tao’s
account of how Harvestfield paid Paugra.
(j)After the sale was completed, someone in New Zealand impersonated Weiyu Wang to change Paugra’s registered office to an address with no connection with the company.
[82] At most Weiyu Wang is a shadowy elusive figure. The liquidators have established that there is good reason to doubt whether he had any significant role in the transactions.
The unusual aspects of the sale by Paugra to Harvestfield
[83] Harvestfield has it that this was an arm’s length commercial transaction between strangers. The difficulties with that are:
(a) The deposit of $300,000 was relatively low, less than 3% of the purchase price, and was not paid on signing as required by the agreement. There is no evidence of Paugra following up the non- payment of the deposit.
(b)Although the agreement was made in November 2008 and named Forest Harrison as Paugra’s lawyers on the sale, Forest Harrison were not told about the sale until just before the settlement in July 2009 and then only by the lawyers for Harvestfield.
(c) The settlement date under the agreement was 28 November 2008. It did not settle until July 2009. On Paugra’s purchase from Kiwi on Queen the deferral of completion was marked by correspondence between the parties’ lawyers. Here there was none. Junjie Tao says that he did not want to go ahead with the purchase until he had confirmed the value of the land and arranged funding. He was seemingly able to put the date back without involving the vendor or its lawyers in that decision.
(d)While Paugra under Weiyu Wang’s shareholding and directorship was the purchaser from Kiwi on Queen, the Tao interests provided the mortgage to secure payment of $925,000 by Qin Lu to the original Paugra shareholders and met Paugra’s costs on the extension and variations to the agreement with Kiwi on Queen: the payment of
$200,000 in December 2008 and the payment of $262,500 in January
2009.
(e) The instructions Forest Harrison received to complete the sale were unorthodox. That includes not only the instruction to transfer title
even though Forest Harrison was to receive payment of only part of the purchase price, but also overriding the advice to require payment of enough to meet any GST liability.
(f) The questionable form of payment of the balance of the purchase price. That aspect is a separate subject in its own right.
Reliance on informal Chinese business culture
[84] Qin Lu and Junjie Tao explain gaps in their case by reference to informal Chinese business culture. The explanation goes that it is customary for Chinese to establish a relationship over time and build up trust and confidence. That provides the basis for doing business. With that it does not become necessary to attend to tiresome formalities such as documenting transactions. Once a transaction is completed, it is not necessary to keep records.
[85] So Qin Lu alleges that Weiyu Wang became involved because he owed money to creditors in China and his acknowledgement that Weiyu Wang had paid
$1,300,000 for the shares in Paugra was enough to discharge his indebtedness to his Chinese creditors. He expects that explanation to be accepted without providing any details identifying his creditors, the amounts of his debts or his records of the debts. Similarly the payment by the Tao interests for his purchase of the shares in Paugra and for meeting Paugra’s costs on the extension and variation of the purchase from Kiwi on Queen is said to be Junjie Tao’s repayment of debts he owed Qin Lu. Again Qin Lu and Junjie Tao do not see the need to bother the court with details or to disclose records.
[86] That reliance on alleged Chinese business practice needs to be put into context. This is a New Zealand case. It involves transactions governed by New Zealand law. The subject matter is land in New Zealand. The parties to the transactions include companies with places of business and registered offices in New Zealand and established under the Companies Act. The individuals are residents of New Zealand (apart from Weiyu Wang). The transactions have given rise to liabilities under New Zealand tax legislation. Those who do business in
New Zealand are expected to do so according to the applicable laws of New Zealand. Complying with these laws has led to commonly accepted ways of doing business, which includes documenting transactions and keeping proper business records. When business people enter into transactions without following those commonly accepted practices, it is open to inquire whether they intend to comply with New Zealand’s laws. When the sums involved are significant, as they are in this case, there is more reason to inquire. When the result of those irregular transactions is the non-payment of substantial amounts of New Zealand taxes, as they are in this case, there is all the more reason to inquire. Where the inquiry is whether there is a prima facie case of fraud, failure to follow accepted business practices may be part of the evidence relevant to establishing dishonesty. If Junjie Tao and Qin Lu do not want to bother with following accepted New Zealand business practice in significant transactions where New Zealand law applies, they risk having adverse inferences drawn against them.
[87] Junjie Tao and Qin Lu are New Zealand residents and had lived in New Zealand for some years. They both describe themselves as businessmen. Junjie Tao is said not to have a good command of English. Even so, the evidence shows that they have an appreciation of how to go about transactions under New Zealand law. Independent lawyers were instructed so that no law practice acted on both sides of a transaction. The powers of attorney given by Paugra and Weiyu Wang to Ying Qing Qiu were in standard form in English. Qin Lu’s agreement to sell the shares in Paugra to Weiyu Wang is a formal document prepared by lawyers. While lawyers were involved, the purchase of the shares in Paugra from the original shareholders and the extension and variations to the agreement with Kiwi on Queen (neither of them straightforward matters), show that they must have had a good understanding of those transactions. In the light of their knowledge of how business is done in New Zealand, inferences can be drawn against them when they have not followed usual New Zealand practice. Reliance on Chinese practice is not necessarily an adequate answer.
[88] The Tao interests funded Qin Lu’s purchase of the shares in Paugra and most of the purchase price for Seymour Road.9 Junjie Tao had been interested in Seymour Road from as early as August 2007 when he had lent funds to Paugra to pay part of the second deposit. The explanation for assisting Qin Lu, that he was repaying a debt, carries little weight in the absence of any records of that indebtedness. It is more consistent with Junjie Tao pursuing the acquisition of the property right from the outset.
Payment of the missing $6,792,186.40
[89] It was a departure from normal conveyancing practice to instruct Forest Harrison to transfer title when Forest Harrison did not receive all the outstanding purchase price on settlement. The normal safeguard of not transferring title until payment of the full price is assured was dispensed with. Even stranger is the instruction not to require payment on settlement to cover Paugra’s GST liability.
[90] Junjie Tao’s accounts of paying Weiyu Wang are wanting. His accounts vary
– payments are made through a bank, then through blackmarket traders, who move from Hong Kong to mainland China. His claim that he received the receipts when he went back to China does not tally with his giving them to his accountant before the date he left New Zealand. He has not produced any documentary evidence of having paid the funds. His explanation that he is unable to do so is implausible.
[91] As counsel for the liquidators submitted, the loss of records in an undocumented house fire is a “The dog ate my homework” story.
[92] To establish a prima facie case the liquidators have done enough to show that
Harvestfield did not pay the missing $6,792,186.40.
9 The original shareholders paid $950,000, of which they got back $700,000 under the GST
refund. Qin Lu put in some of his own money to the costs of extending the settlement date.
[93] When these matters are taken together, the liquidators have established a prima facie case that:
(a) Junjie Tao was interested in buying Seymour Road from as early as August 2007, when he lent money to Paugra under its original shareholding.
(b)He actively assisted Qin Lu in the acquisition of the Paugra shares and in financing the extension and variation to the agreement with Kiwi on Queen. That investment was not in repayment of indebtedness to Qin Lu.
(c) Throughout Qin Lu was working in Junjie Tao’s interests. When he
was shareholder of Paugra, he held the shares on behalf of Junjie Tao.
(d) There was no consideration for the transfer of the Paugra shares to
Weiyu Wang.
(e) Weiyu Wang was a token director of Paugra. He acted at Junjie Tao’s behest. Qin Lu chose his New Zealand attorney, Ying Qing Qiu, who had no contact with him. Qin Lu chose his New Zealand lawyers and continued to instruct them after Weiyu Wang became director and sole shareholder. Just as Qin Lu held the Paugra shares for Junjie Tao, so did Weiyu Wang.
(f) Whoever gave Forest Harrison instructions on the settlement of the sale to Harvestfield was acting at the behest of Junjie Tao.
(g)Harvestfield did not pay Paugra the missing $6,792,186.40. It is still outstanding.
(h) At all times Harvestfield was under the control of Junjie Tao.
[94] On those findings, the question arises why Junjie Tao did not arrange the purchase of Seymour Road differently. A more straightforward way to buy the property would be to buy the shares in Paugra himself. Settlement with Kiwi on Queen could still have been put back to July 2009, as happened here. On settlement he could have paid the required purchase price under the agreement with Kiwi on Queen. It seems strange to interpose Weiyu Wang as director and shareholder of Paugra and the on-sale to a fresh entity, Harvestfield. The straightforward course could have been carried out quite lawfully.
[95] The answer is revealing. It is for tax advantages. Paugra had already claimed GST on the purchase from Kiwi on Queen. By installing a fresh purchaser, Junjie Tao could arrange for a fresh claim for a GST refund, and this time reflecting the higher price. It made sense for Paugra to resell at a higher price to Harvestfield so as to reduce the amount of any gain on resale on which Harvestfield would be taxed. That strategy would work if Paugra were left as an empty shell, unable to meet its tax liabilities.
[96] On that basis I find that the liquidators have a prima facie case that the way Harvestfield acquired the Seymour Road property was part of a dishonest scheme by Junjie Tao, which included installing a token director and shareholder in Paugra to allow the sale to Harvestfield to go ahead without payment of the full price.
The claimed caveatable interest
[97] Formally the liquidators claim an institutional constructive trust for Paugra based on fraud attributable to Harvestfield. In going for the institutional form of the trust they accept that they must make out an interest in the property that arose as a matter of law, and is not dependent on the court creating the trust, as in a remedial constructive trust. Similarly it is not enough that Paugra might have a personal claim against Harvestfield for the unpaid purchase price. Instead it must show a property interest within s 137(1) of the Land Transfer Act 1952.
[98] Certain matters can be cleared away.
[99] The liquidators accept that there was a real sale by Paugra to Harvestfield. While they say that it was part of a fraudulent scheme by Junjie Tao, they do not say that the sale was a nullity or a sham. Paugra did transfer title to Harvestfield for valuable consideration. The liquidators would otherwise be in difficulty with the Commissioner who has also treated the sale as genuine and claimed in the liquidation on that basis. For Harvestfield it was faintly suggested that the transaction could be reconstituted at a lower consideration, but I know no basis for doing so.
[100] The liquidators do not say that the sale should be set aside and the parties returned to their original positions. Setting aside the sale would require refunding the money paid by Harvestfield. The liquidators do not have the funds for that. Besides, they affirmed the sale in their letter of demand of 14 August 2012. It is accordingly not necessary to consider whether setting aside is available for abuse of
corporate power.10 Instead the liquidators say that the transfer of title should stand,
but that Paugra can still claim an interest in the property it transferred.
[101] While Paugra is in liquidation, the liquidators do not rely on any special provisions of insolvency law. Instead they say that the caveatable interest arises under general principles of property law and the law of constructive trusts.
[102] Now to see what the liquidators are claiming.
[103] The liquidators do not say that all of the property at Seymour Road is subject to the constructive trust. The caveat says “as to part”. The “part” is $6,792,186.40 worth. Counsel for the liquidators said that the caveat is to cover only the unpaid purchase price. If only $1m of the purchase price were unpaid, the part would be
$1m worth. While a constructive trust is claimed, it really operates as a charge for the amount of the unpaid purchase price. In other words the caveat is intended to protect a charge founded in equity, independently of the intentions of the parties, to
cover the unpaid purchase price.
10 The New South Wales Court of Appeal’s decision in Kinsela v Russell Kinsela Pty Ltd (1986)
4 NSWLR 722 gives guidance on how such a claim might be made.
[104] This is the point to consider whether New Zealand law recognises such an equitable charge. The law is very clear. It does not. It was abolished in 1842. Section 43 of the Conveyancing Ordinance 5 Vict. No 10 said:
No vendor of any land shall have any equitable lien thereon by reason of the non-payment of the purchase money or any part of the purchase money for the same.
28 See also Daraydan Holdings Ltd v Solland International Ltd [2005] 4 All ER 73. Reid was not followed in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] 4 All ER 335.
29 Fletcher Steel Ltd v Nahal Contractors Ltd HC Auckland CIV 2006-404-498, 24 May 2007.
30 Smith v Hugh Watt Society [2004] 1 NZLR 537.
31 T E Group of Companies Ltd (in liq) v Lin HC Auckland CIV-2003-404-6777, 10 March 2004.
32 Trustees Executors Ltd v Eden Holdings (2010) Ltd [2010] NZCA 626.
trust for the lender. The lender did not wish to set aside the loans and it could not –
no remedies allowed revesting. The Court of Appeal rejected that. It said:
[17] We do not see why the equitable remedy sought by Trustees Executors against Mr Mayer, Champion and Eden in response to the fraud that it says was perpetrated by Mr Mayer should become unavailable to it because one element of the fraudulent scheme was the entry into a loan contract with Champion. Under that agreement, Trustees Executors unwittingly loaned money on a false understanding of the risk it was taking on and unaware that this was providing Mr Mayer with the ability to skim off funds for his own or associates' benefit. The effect of the Judge's decision is to confine Trustees Executors to the exercise of contractual and statutory rights against only the party with which it has a contract (Champion) and to avail itself of those rights it must rescind the loan agreement with Champion, even though it does not choose to do so. However, in the absence of argument from Eden on this issue, we confine ourselves to these comments and leave the matter for full argument in the substantive proceeding.
...
[32] We find, therefore, that Trustees Executors has established that it is reasonably arguable that Mr Mayer/Champion obtained money by fraud from Trustees Executors and used those funds to purchase the Mt Eden property. The prerequisites for the creation of an institutional constructive trust, as identified by Eden in the High Court, are satisfied.
[132] The Court of Appeal held that it was not necessary to consider whether and how the loan agreement could be unwound so as to give Trustees Executors Ltd a beneficial interest in the funds it had lent to Champion Apartments Ltd. Paragraph [33] of its judgment suggests that it equated obtaining money by fraud with stealing money, so that the distinction between consensual and non-consensual transfers made in other cases did not apply. The Court’s findings are provisional: at [17] it left the issue for full argument in the substantive hearing.
[133] The judgment cannot be read as ruling that in all cases of consensual transfers obtained by fraud there is an institutional constructive trust over the transferred assets. If the Court had intended to make such a wide finding, it would have addressed statutory provisions, such as the Contractual Remedies Act 1979, and case law. If the Court had intended to depart from the approach taken in Australia and England and to that taken by Glazebrook J in Commonwealth Reserves I, LC v
Chodar,33 it would have set out its reasons more fully. The focus of the Court’s decision was allegations that the fraudster had skimmed off part of the loan proceeds for his own benefit. The case is better considered as turning on its own facts. In Trustees Executors Ltd v Steve G Ltd,34 I followed it because the facts could not be distinguished. The facts here are quite different. I am not required to follow Eden Holdings (2010) Ltd here.
[134] The authorities cited by the liquidators do not require me to find a caveatable interest on the basis of an institutional constructive trust.
The Land Transfer Act 1952
[135] If I had found that Paugra had an interest by way of a constructive trust in the Seymour Road property, the indefeasibility provisions of the Land Transfer Act would not have stood in the way of its caveat. Paugra would be able to rely on two exceptions to the indefeasibility provisions: fraud and the in personam exception. The findings as to fraud above also apply here. There is no conflict with title and accordingly an in personam claim is available.35
Result
[136] While the liquidators have made out a prima facie case of fraud on the part of Harvestfield and Junjie Tao, s 67 of the Property Law Act bars the interest they are claiming in their caveat. While it has an unsecured claim against Harvestfield for the outstanding amount of the purchase price, Paugra does not have a caveatable interest in the Seymour Road property.
[137] The liquidators indicated that Paugra would consider an appeal if the caveat was not upheld. Accordingly I defer the time for the caveat to lapse to allow time for an appeal to be lodged. Any extension of the caveat beyond the lapse date will
require an application under r 12(3) of the Court of Appeal (Civil) Rules.
33 Commonwealth Reserves I, LC v Chodar [2001] 2 NZLR 374 (HC).
34 Trustees Executors Ltd v Steve G Ltd [2013] NZHC16.
35 CN and NA Davies Ltd v Laughton [1997] 3 NZLR 705 (CA) at 711.
[138] I make these orders:
(a) I dismiss the application that caveat 9155346.1 not lapse;
(b)Caveat 9155346.1 will lapse on 26 June 2013, unless Paugra Holdings Ltd sooner obtains an order under r 12(3) of the Court of Appeal (Civil) Rules extending the caveat pending any appeal from this decision;
(c) Paugra Holdings Ltd shall pay costs to Harvestfield Holdings Ltd on this application on a category 2 basis. If the parties cannot agree costs, memoranda may be filed and I shall decide costs on the papers.
...........................................
Associate Judge R M Bell
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