Qingdao Zoono Biotech Company Limited v Zoono Limited
[2020] NZHC 1282
•10 June 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000253
[2020] NZHC 1282
BETWEEN QINGDAO ZOONO BIOTECH COMPANY LIMITED
Plaintiff/First Counterclaim DefendantsAND
ZOONO LIMITED
First Defendant
PAUL RUSSELL HYSLOP
Second DefendantZOONO GROUP LIMITED
Counterclaim PlaintiffLINGCHEN QI
Second Counterclaim Defendant
Hearing: 25 May 2020 Appearances:
M Lenihan for Plaintiff/Counterclaim Defendants
D T Street and M W Denton for First and Second Defendants and Counterclaim Plaintiff
Judgment:
10 June 2020
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 10 June 2020 at 3.00 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar Date………………………
QINGDAO ZOONO BIOTECH CO LTD v ZOONO LTD [2020] NZHC 1282 [10 June 2020]
Introduction
[1] The plaintiff, Qingdao, is a company incorporated in the Shandong province, part of the Peoples’ Republic of China. It is a special purpose vehicle (SPV), established for the purposes of distributing within China antimicrobial products supplied by the first defendant, Zoono Ltd (Zoono).
[2] Qingdao now sues Zoono for breach of contract. Qingdao contends that, pursuant to an agreement (said to have settled disputes between the parties), Zoono is obliged to pay it $390,000 in relation to sales of Zoono’s product in China. Zoono has counterclaimed against both Qingdao and Mr Lingchen Qi (Qingdao’s director). Zoono claims that it has suffered significant losses, arising from its cancellation of the various agreements. Zoono says that Mr Qi and his partners failed to source the capital they had represented and agreed was necessary for the establishment of Qingdao.
[3]In the present interlocutory proceedings, two applications have been made:
(a)An application by Zoono, pursuant to r 5.45 of the High Court Rules 2016 (regarding overseas plaintiffs), that Qingdao provide security for costs in the sum of $40,000; and
(b)A cross-application by Qingdao against the counterclaim plaintiff, Zoono Group Ltd (ZGL), pursuant to r 5.45(1)(a)(iii) to provide security for costs in the sum of $20,000 (on the grounds that ZGL is a subsidiary of a corporation incorporated outside of New Zealand, namely, in Australia).
Factual background
[4] The Zoono Group (which includes the first defendant) operates across Australia and New Zealand which collectively specialises in the development, manufacture and global distribution of antimicrobial solutions. The Zoono Group has three companies:
(a)The first defendant, Zoono Limited, registered in New Zealand;
(b)ZGL, the counterclaim plaintiff, registered in New Zealand; and
(c)Zoono Group Limited, registered in Australia (Zoono Australia).
[5]Mr Paul Hyslop is the global managing director and CEO of ZGL.
[6] The first defendant, Zoono, is a wholly owned subsidiary of ZGL, and ZGL is a wholly owned subsidiary of Zoono Australia.
[7] Zoono Australia is listed on the ASX and Mr Hyslop owns 41 per cent of its shares.
[8] In 2013, Zoono wished to expand its antimicrobial production business into China. It elected to work with Mr Qi (the counterclaim defendant), Di W, and Xuejian Zhan (the Partners). Zoono says it chose to work with the Partners based on claims Mr Qi had made about his extensive and well-funded contacts who were willing to invest into the distribution of Zoono products in China, and also the promise of shares in the distribution company.
[9] On 29 May 2013, ZGL and the Partners entered into a partnership agreement (the Partnership Agreement). The Partnership Agreement established Qingdao as the distributing company of Zoono products in China. On the same day, Zoono signed a distribution agreement with Qingdao (the Distribution Agreement).
[10] In June 2014, Zoono cancelled both the Partnership Agreement and the Distribution Agreement.
[11] Following the cancellations, a dispute arose between Zoono and Qingdao about Zoono products that Qingdao still retained. In order to settle this dispute, Mr Hyslop met with Mr Qi in July 2014 to discuss terms. Those agreed terms are then said to have formed the basis of an agreement that was signed on 26 August 2014 between Zoono Medical Limited (another relevant entity) and Qingdao (the Agency Agreement).
[12] The terms of the Agency Agreement are in dispute. Qingdao says the Agency Agreement was in full and final settlement of all legal disputes arising from the cancellation of the Distribution and Partnership Agreements, and that pursuant to the settlement, Zoono agreed to pay Qingdao US$400,000 within 18 months of the date of that agreement.
[13] Zoono says that under the Agency Agreement, it would pay Qingdao a commission totalling 10 per cent of all sales to Zoono’s new Chinese distributor from 26 August 2014 to 26 February 2016. The commission was capped at US$400,000.
[14] Zoono Medical Ltd was removed from the Companies Register on 29 January 2016.
[15] In these proceedings, Qingdao seeks judgment against Zoono in the sum of US$390,000 for an alleged breach of contract, namely, for breaching the Agency Agreement. Zoono paid an initial sum of $10,000 in April 2016 but no further payments have been made. Qingdao has also brought a deceit claim against Mr Hyslop for statements he made during the settlement negotiations in July 2014.
[16] Zoono and ZGL have also brought a counterclaim against Qingdao for alleged breaches of the Agency, Distribution and Partnership Agreements, and misrepresentations that Qingdao is said to have made. There is also a counterclaim against Mr Qi personally for alleged misrepresentations that induced ZGL into entering the Partnership Agreement, as well as Zoono’s new Chinese distributor into breaching its contract with Zoono.
Relevant legal principles
[17] The relevant legal principles are well established. An application for security for costs must both:1
(a)Satisfy the threshold test that either:
1 High Court Rules 2016, r 5.45(1) and (2).
(i)the plaintiff is a corporation incorporated outside New Zealand; or
(ii)there is reason to believe that the plaintiff will be unable to pay the defendants’ costs if the plaintiff is unsuccessful; and
(b)Persuade the court that it is just in all the circumstances to exercise its discretion to order security.
[18] When assessing the impecuniosity of the plaintiff, the Court will consider credible evidence of surrounding circumstances, from which it may reasonably infer that the plaintiff cannot pay costs.2 But an applicant does not have to prove inability to pay in the normal civil sense. In the absence of direct evidence, it can be sufficient to adduce evidence of surrounding circumstances from which an inference of inability to pay can reasonably be drawn.3
[19] The meaning of “satisfied” in r 5.45(1) does not imply any onus or standard of proof but, rather, merely indicates that the Court has come to a decision on the evidence before it.4 If the threshold is met, whether to grant security and the quantum (if so), are discretionary matters. What is required is a broad overall assessment, having regard to the situation of the parties and the nature of the proceeding.5
[20] If a prima facie case can be established that the plaintiff’s claim is unmeritorious, that will be a factor in favour of ordering security. The less apparently meritorious, the more likely security is to be ordered.6
[21] On ordering provision of security, the Court will generally stay the proceeding until the security is given.7
2 Concord Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 (SC) at 519.
3 Totara Investments v Abooth Ltd HC Auckland CIV-2007-404-990, 4 March 2009 at [28].
4 Wishart v Murray [2016] NZHC 3132 at [7].
5 Hamilton v Papakura District Council (1997) 11 PRNZ 333 (HC) at 335.
6 Highgate On Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [22](c).
7 High Court Rules 2016, r 5.45(3)(b).
[22] In relation to the plaintiff’s application for security against ZGL (the counterclaim plaintiff, r 5.45(1)(a)(iii) is engaged. The threshold test under that rule is that the plaintiff, including a counterclaim plaintiff, is a subsidiary (within the meaning of s 5 of the Companies Act 1993) of a corporation incorporated outside New Zealand. That is met here.
Analysis and decision
Application by defendant for security for costs
[23] Qingdao accepts that the threshold in r 5.45(1)(a)(ii) has been met. The critical issue to determine is, as a matter of discretion, the quantum of the security. Qingdao has placed $20,000 in its solicitor’s trust account. Zoono seeks security on a staggered basis, in the sum of $40,000.
[24] Zoono has calculated its 2B scale costs at $59,152.50. That is based on an estimated five-day trial which will include the hearing of Zoono’s counterclaim.
[25] Qingdao contends that both applications for security should be resolved on the basis that both parties pay the same amount in security, namely, $20,000. That is because at least half of the hearing time (the basis for the estimate of $59,152.50) will be taken up with the counterclaim.
[26] It is necessary to address the factors that are relevant to my exercise of discretion.
[27] I accept the submission of Mr Street, for Zoono, that in the event the defendant is successful it is not likely to recover any more than the amount put up by Qingdao for security. There is significant evidence which demonstrates that Qingdao will not be able to meet the estimated scale costs. It appears that Qingdao has no assets in New Zealand other than the $20,000 currently held in its solicitor’s trust account. Qingdao is of course a SPV and there are real issues about its ability to pay any costs award arising from failing to sell sufficient Zoono products in China. and from the Partners’ failure to provide adequate investment into Qingdao.
[28] It also appears that there is no bilateral treaty between China and New Zealand in relation to the enforcement of a New Zealand court judgment,8 and in all likelihood attempts to enforce a costs order in these circumstances would be futile.
[29] I do not see how I can place any real weight on Mr Lenihan’s submission that Zoono’s actions at issue in these proceedings have caused Qingdao’s impecunious state.9 There is no real evidence establishing a causal link and, as already noted, Qingdao is merely a SPV, and the promised investment by Mr Qi and the Partners never materialised.
[30] In relation to quantum, there is some merit to Mr Lenihan’s submission that a greater allowance than a 32 per cent discount (i.e. from $59,152.50 to $40,000) needs to be made for Zoono’s counterclaims. While the defence is linked to the counterclaim and the contextual factual background relevant to both, without the counterclaim I accept that the same amount of hearing time would not be required.
[31] As to the merits of Qingdao’s claim, they are difficult to assess in these circumstances where the Agency Agreement (being the central document in dispute) was not drafted by solicitors and is to be interpreted in a cross-cultural context. Mr Lenihan fairly acknowledged that the clause that Qingdao relies upon as the contractual basis for the payment of $390,000 is somewhat awkward. As discussed below, in relation to the security for costs application on the counterclaim, the correspondence between the parties leading up to the Agency Agreement and subsequent to it do cast considerable doubt on whether the Agency Agreement was actually cancelled by Zoono – and to a large extent, Zoono’s counterclaims depend upon the Agency Agreement having validly been cancelled. However, whatever weaknesses there are with the counterclaim does not mean that the substantive claim by Qingdao should be assessed in the same way.
[32] As best as I can assess, the plaintiff’s claim has some prospect of success, but it would be wrong to characterise that prospect as strong.
8 Shanghai Neuhof Trade Company Ltd v Zespri International Ltd [2019] NZHC 617 at [39].
9 See Highgate on Broadway Ltd v Devine [2012] NZAR 1017 at [23].
[33] As a final factor going to discretion, I acknowledge that the imposition of security is not an automatic consequence of a plaintiff’s impecuniosity and that access to justice is an important principle. Having said that, Qingdao, while claiming that
$40,000 security would be excessive, has not claimed that security in that sum would deprive it completely of access to justice. It appears that Qingdao does have access to some funds.
[34] In balancing all of these relevant factors, I conclude that Qingdao should pay security for costs in the sum of $35,000, on the staggered basis proposed by Zoono in its written submissions.
Cross-application by plaintiff for security for costs in relation to counterclaim
[35] Because Zoono Australia owns all the shares in ZGL and Zoono, it is not in dispute that s 5(1)(a)(iii) of the Companies Act 1993 is engaged and thus ZGL and Zoono meet the definition of a subsidiary of an overseas corporation. As such, the threshold in r 5.45(1)(a)(iii) is also met here. Again, the critical issue is one of exercise of discretion.
[36] I accept security for costs may be ordered on a counterclaim, which is an independent cross-claim,10 and as Mr Lenihan submitted, that the requirements of r 5.45(1)(a) are not subject to a reasonable belief of insolvency. Relevant considerations include:
(a)The difficulty and expense involved in a party enforcing a judgment for costs in the place of the other party’s residence; and
(b)Whether the party against whom security is sought has substantial property which will be available for costs, not being property which could immediately be dissipated so as to avoid an order for costs.
[37] In a case such as this where there is an application by defendants and a cross- application by a plaintiff in relation to a counterclaim, it is not simply a question of
10 See McGechan on Procedure (online ed, Thomson Reuters) at [5.45.13].
treating the parties on an equal basis as if their respective circumstances were the same or equivalent. It is important to focus on the rationale for the rule including ability to pay and difficulty and expenses in enforcing a costs judgment outside of New Zealand.
[38] In the circumstances of this case, I do not see that Qingdao or Mr Qi (as the counterclaim defendants) would have any difficulty in enforcing a judgment for costs award against Zoono in the event that they were successful in defending the counterclaim. For the reasons submitted by Mr Street, there is a real likelihood that such an award could be enforced in New Zealand without much difficulty.
[39] As at March 2020, ZGL had, in BNZ accounts in New Zealand, over $1.5M cash in its business bank accounts and over $2.5M cash in term deposits. ZGL also has further assets in New Zealand, as it owns 100 per cent of the shares in Zoono. Furthermore, it appears that ZGL’s financial position has significantly improved following the outbreak of COVID-19. Prior to any awareness of COVID-19, ZGL’s average sales were around $20,000 per month. However, by February 2020, Zoono’s online sales were averaging between $30,000 and $50,000 per day. On 28 February 2020, Zoono Group announced that their sanitiser products were 99.9 per cent effective against the latest COVID-19 strain, and that announcement caused sales of Zoono products to increase to $100,000 per day.
[40] While I accept that in principle the cash deposits of ZGL could be moved out of New Zealand relatively easily, that ignores, as Mr Street submitted, the practical reality that the Zoono Group operates from New Zealand and has a strong presence and ties to the New Zealand jurisdiction. The Zoono Group started in New Zealand in 2009 and its head office is located in Botany, Auckland. Mr Hyslop, the CEO of the group, lives in Auckland and is a major shareholder in Zoono Australia. The Zoono Group manufactures the products in New Zealand and has its intellectual property registered here.
[41] I accept the submission of Mr Street that it is most unlikely that the Zoono Group would re-structure its entire operations to avoid a $60,000 costs award.
[42] As to the merits of the counterclaim, I have already noted above that, for the reasons advanced by Mr Lenihan (with reliance upon email correspondence both preceding and dating the Agency Agreement) that the counterclaim might well have some significant weaknesses. Having said that, I acknowledge that the parties to the Agency Agreement were not the same as those involved in the Partnership Agreement. The explanation put forward by Zoono for the email correspondence subsequent to the Agency Agreement (which suggests that the Agency Agreement was still on foot) arose out of Zoono’s concern that it needed to maintain good relations with Mr Qi and Qingdao because of trademark issues in China. While accepting there are some weaknesses with the counterclaim, it is far from clear that they are fundamental, and there do appear to be legitimate issues for trial.
[43] Not only is there no real likelihood that Qingdao would fail in enforcing a costs award in New Zealand, the provisions of the Trans-Tasman Proceedings Act 2010 would allow Qingdao to enforce any such award in Australia with relative ease. Under that Act, Qingdao could register a costs decision of this Court in Australia and enforce it, as if it were an Australian judgment.11
[44] In all the circumstances, I conclude that ZGL, as the counterclaim plaintiff, should not be required to provide security for costs.
Result
[45] The application by the first defendant, Zoono Ltd, for security for costs is granted.
[46] Pursuant to r 5.45, I order the plaintiff, Qingdao Zoono Biotech Company Limited, to pay into court the sum of $35,000 in the following stages:
(a)First, Qingdao shall pay $8,750 immediately following the sealing of orders in favour of security for costs;
11 Trans-Tasman Proceedings Act 2010 (Cth), s 68(1) and s 74(1).
(b)Second, Qingdao shall pay $8,750 upon service of its briefs of evidence;
(c)Third, Qingdao shall pay $8,750 within five working days of receipt of the defendants’ briefs of evidence; and
(d)Fourth, Qingdao shall pay $8,750 ten working days before the commencement of the trial.
[47] The proceedings are to be stayed unless the plaintiff provides the security in accordance with the orders made here.
[48] The application for security for costs by the plaintiff and counterclaim defendants, Qingdao Zoono Biotech Limited, and Mr Lingchen Qi, is dismissed.
[49] As to costs in relation to the two present applications for security for costs, I am of the preliminary view, that having succeeded in the main, the defendants are entitled to costs on a 2B basis. If the parties cannot agree on costs, then memoranda (no longer than three pages) are to be served within 14 days.
Associate Judge P J Andrew
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