ROTORWAY LTD AND SPORTS & EDUCATION CORPORATION LTD XIANGMING HUO DEXIN INVESTMENT LTD PEGASUS CONFERENCE HOTEL LTD PEGASUS GOLF LTD

[2024] NZHC 2941

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2024-404-1432

[2024] NZHC 2941

UNDER

High Court Rule 7.53

BETWEEN

ROTORWAY LTD

Plaintiff

AND

SPORTS & EDUCATION CORPORATION LTD

First Respondent

XIANGMING HUO
Second Respondent

DEXIN INVESTMENT LTD
Third Respondent

PEGASUS CONFERENCE HOTEL LTD
Fourth Respondent

PEGASUS GOLF LTD

Fifth Respondent

Hearing:	10 September 2024
Appearances:	J W A Johnson, N G Lawrence and J L Butcher for the Plaintiff S W B Foote KC and M G P Martin for the Respondents
Date:	10 October 2024

JUDGMENT OF CAMPBELL J

This judgment was delivered by me on 10 October 2024 at 12.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

ROTORWAY LTD v SPORTS & EDUCATION CORPORATION LTD [2024] NZHC 2941 [10 October 2024]

[1]    Sports & Education Corporation Ltd (SEC) owns, through three subsidiaries (the third to fifth respondents), a property known as Pegasus Resort and Golf Club  in Canterbury, New Zealand (the Resort). On 17 November 2023, SEC and Rotorway Ltd (Rotorway) entered into a Share Subscription Agreement (SSA). The SSA provides for Rotorway to invest approximately $90 million in return for shares in SEC. Rotorway’s investment is intended in large part to fund an upgrade of the Resort and in part to fund a buy-back of the shares of SEC’s largest shareholder, Mr Huo.

[2]    The SSA is conditional on, among other things, Rotorway being satisfied with the results of its due diligence on SEC and its subsidiaries. The SSA provides that SEC cannot dispose of or materially alter its assets whilst the SSA is in effect.

[3]    In May 2024, while Rotorway was still conducting due diligence, Rotorway learnt that SEC was marketing the Resort for sale. In response, Rotorway brought this application for an interim injunction restraining SEC, the subsidiaries and Mr Huo (who is also a director of SEC and the subsidiaries) from taking steps to sell the Resort.

[4]    The respondents say that Rotorway agreed, despite the SSA, to allow the respondents to try to sell the Resort. Rotorway denies this. The respondents accept that this dispute gives rise to a serious question to be tried.

[5]    The  key  issue,  therefore,  on  this  application   is  whether  the   balance   of convenience favours, or lies against, the grant of an interim injunction.

Background to the SSA

[6]    The third, fourth and fifth respondents own the parcels of land that comprise the Resort. They are wholly-owned subsidiaries of SEC. Mr Huo is a director of SEC and the subsidiaries. He holds about 93 per cent of the shares in SEC.

[7]    Rotorway is a Hong Kong company. It is part of the Yellow River Global Capital Ltd (YRGC) group of companies. YRGC is an investment manager company licensed in Hong Kong.

[8]    One of YRGC’s senior managers is Mr Han. Mr Han was Rotorway’s and YRGC’s  point of contact with SEC in relation to the investment in the Resort that   is at the centre of this dispute.

[9]    In January 2023, Mr Han became aware that SEC was seeking investors for an upgrade of the Resort (the upgrade Project). Mr Han was interested in investing on behalf of Rotorway and YRGC.

[10]   Mr Han met several times with Mr Huo to discuss investing in the upgrade Project.   In June 2023,  SEC and YRGC entered  into a non-disclosure agreement   to discuss the opportunity further. In July 2023, SEC provided Mr Han with some documents outlining at a high level the Resort and the upgrade Project. These did not include any detailed financial information about SEC or the upgrade Project.

[11]   On 19 July 2023, SEC and YRGC signed a memorandum of understanding. This included that the parties would endeavour to negotiate a formal agreement.

[12]   On 20 September 2023, Mr Huo provided Mr Han with a market analysis report prepared by RSM Australia. This provided a high-level market analysis and an implied market value of the Resort, if upgraded as planned.

[13]   SEC and Rotorway (and Mr Huo as guarantor of SEC’s obligations) then entered into the SSA on 17 November 2023.

The SSA

[14]   Under the SSA, Rotorway is to invest approximately $90 million over four tranches. In return, SEC is to issue shares to Rotorway. About $60 million of the funds are to be used for the upgrade Project. The balance is to be used to buy back most of Mr Huo’s shares in SEC. This will result in Rotorway holding approximately

90.91 per cent of the shares in SEC.

[15]The SSA has several conditions precedent. The conditions include:

(a)Rotorway being satisfied with the scope and results of its legal, financial, and commercial due diligence on SEC and its subsidiaries (the due diligence condition); and

(b)Consent being provided under the Overseas Investment Act 2005 and the Overseas Investment Regulations 2005 in respect of the share issue on terms acceptable to Rotorway (the OIO condition).

[16]   The SSA obliges SEC to provide information to Rotorway. At least in part, the purpose of this obligation is to enable Rotorway to satisfy these two conditions. The SSA does not specify a date or dates by which the conditions must be satisfied. This means they must be satisfied within a reasonable time.

[17]   Clause 4.4 of the SSA places restraints on SEC’s conduct from the date of the SSA until completion of the fourth tranche of investment. SEC must not, and will procure that its subsidiaries must not, act in a way that could reasonably be expected to have a material adverse change on SEC or the subsidiaries. This includes that none of them will acquire or dispose of any asset except in the ordinary course of business.

The disputes

[18]   Rotorway claims that the respondents have not provided it with the necessary information to allow it to satisfy the due diligence and OIO conditions. It says SEC has failed to do so despite multiple requests from Mr Han to Mr Huo and through the parties’ solicitors. It says this is in breach of the obligations in the SSA that SEC provide information to Rotorway to enable it to satisfy the conditions.

[19]   The respondents say it is Rotorway that has been dilatory and breached the SSA by failing to complete due diligence within a reasonable time. They also say it is inevitable that Rotorway will be unable to obtain OIO approval or funding for the proposed investment.

[20]   On 21 May 2024, Rotorway became aware that SEC had marketed the Resort for sale. Rotorway says that SEC’s listing of the Resort for sale is a breach (actual

or anticipatory) of its obligation in cl 4.4 of the SSA not to dispose of any assets other than in the ordinary course of business.

[21]   The respondents acknowledge that the marketing of the Resort for sale would ordinarily be a breach by SEC of cl 4.4. But they say there was an oral agreement varying the SSA to allow SEC to market the Resort. They say the background to the variation was Mr Huo’s frustration with Rotorway’s lack of progress on due diligence and obtaining OIO approval.   They say this led to a meeting on 26 February 2024   at the Takapuna Golf Club in Auckland, at which Mr Han agreed that SEC could sell the Resort if it could, but promised that Rotorway would complete due diligence quickly so that the SSA remained on foot. The respondents say the logic of the variation was that if Rotorway could fulfil the due diligence and OIO conditions before the Resort was sold to a third party, the SSA could continue, whereas if a purchaser was found, Rotorway could offer its investment in Pegasus to the new owner.

Rotorway’s application for an interim injunction

[22]   Rotorway commenced this proceeding on 14 June 2024. In its substantive claim, it seeks orders that SEC specifically perform its obligations to provide information to Rotorway, and an order that SEC and its subsidiaries remove the Resort from the market and not sell the Resort until the SSA is completed or validly cancelled.

[23]   At the same time, Rotorway applied for urgent interim injunctions restraining the respondents from taking steps to sell the Resort and requiring them to take the Resort off the market. The parties then worked cooperatively to agree a timetable for the hearing of that application. The respondents agreed to take the Resort off the market pending the determination of Rotorway’s interim injunction application.

The law governing applications for an interim injunction

[24]   The court usually adopts a two-stage approach to applications for an interim injunction. The first, threshold, inquiry is whether there is a serious question to be tried.   If that is answered affirmatively, the court addresses whether the balance     of convenience favours the grant or refusal of an interim injunction. These two stages are, however, merely aids to determining where overall justice lies. As to that

overriding question, in Commerce Commission v Viagogo AG the Court of Appeal cited with approval Lord Hoffmann’s observation that:1

The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other.

There is a serious question to be tried

[25]Rotorway says there are two serious questions to be tried:

(a)Has SEC breached its obligations in the SSA to provide information to Rotorway to enable it to satisfy the conditions?

(b)Has SEC breached its obligation in cl 4.4 of the SSA not to dispose  of any assets other than in the ordinary course of business?

[26]   The first is a serious question that can be resolved only at a trial. But it does not support the interim injunction sought by Rotorway. Rotorway is not seeking an interim injunction in relation to SEC’s obligation to provide information to Rotorway.

[27]   The second question does support the interim injunction sought by Rotorway. Rotorway is seeking to enjoin SEC from acting in breach of cl 4.4. Whether SEC has breached cl 4.4 depends on whether, as contended by the respondents, Mr Han and Mr Huo agreed to a binding oral variation of the SSA at their meeting on 26 February 2024. There is a conflict in the evidence on whether any agreement was reached. There is also a difficult legal issue as to the binding nature of any agreement, given that the SSA provides that variations will be effective only if in writing and signed. The respondents acknowledge that these are matters that can be resolved only at a trial. There is, therefore, a serious question to be tried.

[28]   Both sides addressed me on the respective merits of their positions on whether a binding oral variation to cl 4.4 had been agreed. I consider there are good arguments each way. This is not a case where the merits so clearly favour one side as to have an

1      Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 559 at [31], citing National Commercial Bank Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16, [2009] 1 WLR 1405 at [17].

effect on the balance of convenience. For that reason, it is neither necessary nor appropriate for me to engage in a merits analysis.

Balance of convenience

[29]   The balance of convenience requires “consideration of the impact on the parties of the granting of, and the refusal to grant, an order”.2 A primary consideration is whether damages will adequately compensate each party for losses they might sustain from what turns out (at trial) to be the incorrect refusal (in the case of the eventually victorious plaintiff) or grant (in the case of the eventually victorious defendant) of an interim injunction. The adequacy of damages was the focus of the parties’ submissions on the balance of convenience.

[30]   From Rotorway’s perspective, the question is whether damages would adequately compensate it for losses it might sustain if the respondents were to continue to market the Resort between now and trial. If the respondents were to continue to market the Resort, the Resort might be sold before trial (albeit that I accept that a sale would not be a straightforward or quick process). Mr Johnson, counsel for Rotorway, submitted that damages would not be an adequate remedy for Rotorway in that eventuality. He made two broad points.

[31]   First, Mr Johnson drew on the general principle that land is treated as being of unique value in respect of which the remedy of damages is inadequate (so that specific performance is generally available to a purchaser in a contract  for the sale of land).3 I accept that general principle. But it does not apply to the SSA, as it is not a contract for the sale of land. Rotorway is purchasing not land, but shares to be issued by SEC. The Resort consists not only of land (which is owned by the subsidiaries, who are not parties to the SSA) but also of businesses operated on the land. Further, the SSA is a more complex transaction than an ordinary contract for the sale of land. For example, the SSA obliges SEC to use about two-thirds of the funds invested by Rotorway on a development and upgrade of the Resort.

2      NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90.

3      See, for example, Foreman v Hazard [1984] 1 NZLR 586 (CA) at 594.

[32]   Secondly, Mr Johnson  submitted that Rotorway’s loss would be difficult     to quantify. I accept this. Because of the complex nature of the transaction, it would not be a (relatively) simple matter of comparing the market value of the shares in SEC with the contract price. It would be a matter of valuing the loss of a chance to acquire those shares and thereby indirectly acquire and develop the Resort.  This  would be   a difficult exercise. That said, it would be far from an impossible exercise. It is the sort of exercise that this Court is often asked to carry out. Further, there was evidence before me as to SEC’s debt to equity position. I am satisfied SEC would be able to pay any likely award of damages to Rotorway. The difficulty in assessing damages therefore weighs only partly in favour of granting an interim injunction.

[33]   From the respondents’ perspective, the question is whether damages would adequately compensate them for losses they might sustain if they were prevented from marketing and eventually selling the Resort between now and trial. The respondents said they would suffer two potential types of losses. The first is the loss of the opportunity to obtain a better sale price for the Resort now than after trial. The second is that the Resort is currently trading at a significant loss. The delay to trial will mean that those losses accumulate further.

[34]   Mr Johnson submitted that the first loss was speculative. That is true in the sense that the direction of the market is unknown. But as best as the court can determine a fall in the market is just as likely as a rise. A loss is therefore not a matter of mere speculation. Mr Johnson also submitted that both types of losses would likely continue for some time, as the Resort is not readily saleable. I accept that the Resort will take more time to sell than an ordinary parcel of land. But it will take even longer to sell if an interim injunction is granted prohibiting the respondents from marketing it for sale between now and trial. If the proceeding is put on the ordinary track, a trial is likely to be at least two years away. Even if granted priority, a further delay of a year is likely. Over either period the respondents could suffer significant losses.

[35]    Mr Foote KC, counsel for the respondents, acknowledged that the respondents’ potential losses could adequately be compensated in damages. The problem, he submitted, is that there was no realistic prospect that the respondents could recover those damages from Rotorway. He said that Rotorway had not (until the day

of the hearing) provided  a compliant undertaking as to damages.  The undertaking  in any event was of no or insufficient substance: despite the respondents putting the substance of the undertaking in issue, Rotorway had failed to adduce evidence of its financial circumstances and there was no evidence that it had assets in this jurisdiction.

[36]   Rotorway filed an undertaking as to damages when applying for an interim injunction. However, the undertaking was given not by Rotorway but by Mr Han, who said he would abide by any order the Court may make in respect of damages that Rotorway ought to pay. This does not comply with r 7.54 of the High Court Rules 2016, which requires the applicant to provide the undertaking. If the undertaking was given by a person of financial substance, the non-compliance might be overlooked (or even welcomed if the applicant was not of substance). But Mr Han is not a New Zealand resident and there is no suggestion he has assets here. The respondents gave evidence that Mr Han has an unsatisfied judgment of about NZD7.9 million against him in China. Mr Han has not contested this evidence. I am satisfied his undertaking has no substance.

[37]   In apparent recognition of this problem, Rotorway filed an undertaking on the day of the hearing. This was signed by Mr Han as director of Rotorway. He undertook that Rotorway would abide by any order the Court may make that Rotorway ought  to pay damages.

[38]   The respondents raised two issues with Rotorway’s undertaking. First, they said Rotorway had not adduced sufficient financial information about itself, despite the respondents asking for such evidence. Secondly, they said that because Rotorway was a foreign company with no assets in New Zealand, it needed to also either provide an undertaking from someone of substance in the jurisdiction or provide security for its undertaking.

[39]   An undertaking as to damages must have substance.4 Substance in this context can have at least two aspects. One is that the party providing the undertaking is able to meet it. The other is that the undertaking can be readily enforced if called upon.

4      Cowan v Cowan [2021] NZCA 463 at [15].

[40]   As to Rotorway’s financial capacity to meet the undertaking, Mr Huo made an affidavit in opposition to Rotorway’s application on 3 July 2024. In that affidavit he described in some detail (for example, referring to Rotorway’s most recent annual return) his concerns as to Rotorway’s capacity to finance completion of the SSA or meet any damages claim. He also said he was concerned about the ability to recover any damages from Rotorway given that it was an overseas company registered in Hong Kong. The respondents’ notice of opposition likewise clearly put in issue the worth of any undertaking from Rotorway.

[41]   Mr Han’s affidavit in reply engaged only briefly with the matters raised by the respondents.   He said that Rotorway’s annual return meant little as to its ability     to complete the SSA as “Rotorway is a vehicle for YRGC which operates a number of companies as part of the Yellow River investment group”. This tends to suggest that it is YRGC that has substance, but Rotorway is a mere vehicle. Mr Han also said that Rotorway “has all patents and trademark registrations of Rotorway Helicopter Manufacturing Co” (a related company) and referred to a valuation of the trademarks. I come back to that valuation below. But Mr Han did not provide any details on the overall financial position of Rotorway.

[42]   The respondents’ solicitors then wrote to Rotorway’s solicitors asking for evidence of Rotorway’s ability to meet any damages award and also seeking security for costs. Rotorway’s solicitors replied on the security for costs issue but said nothing in response to the request for evidence of Rotorway’s financial position.

[43]   Mr Huo referred to that correspondence in an updating affidavit. Mr Han then made a further affidavit in reply on 6 September 2024, just a few days before the hearing. He said Rotorway had significant value, saying that the “Rotorway trademark, owned by Rotorway Ltd” was valued at USD15–17 million in August 2023.   He also said that, to alleviate any remaining concerns about the substance    of an undertaking, he had contacted an insurance broker to inquire about purchasing “litigation asset preservation liability insurance”.

[44]   The mere fact of an inquiry to purchase insurance does not give any substance to Rotorway. I put it to one side. As to the Rotorway trademark, Mr Han produced

a report by EY Hong Kong. This says that the trademark is owned not by Rotorway but by its American subsidiaries. EY analysed the market value of the trademark. EY did so, however, based on assumptions that it was asked to make. The trademark relates to Rotorway helicopters. The report records that in the financial years 2017 to 2019 there were three to four helicopters sold annually. Yet a key assumption in the report was that sales of Rotorway helicopters would total 111 in the year to 30 June 2024 and that sales would increase at an annualised growth rate of 19 per cent, 15 per cent, 12 per cent, nine per cent and nine per cent over the following five years. This is one of several assumptions which, on the face of the report, bear little resemblance to reality. In the absence of evidence supporting those assumptions, I am not satisfied that the trademark has a significant value.

[45]   Even if I were satisfied that the trademark had a significant value (and that    it was a value held by Rotorway), that would only be part of Rotorway’s financial picture. Remarkably, Rotorway has not provided recent or any financial statements that would provide some evidence of its overall financial position. This would not have been difficult to do. No explanation was given as to why Rotorway had not furnished such statements. I agree with Mr Foote’s submission that Rotorway’s silence on this matter speaks volumes.

[46]   As well as the lack of evidence as to Rotorway’s financial position, there is no evidence it has assets in the jurisdiction. The respondents would therefore face the difficulty of enforcing the undertaking overseas.   Mr Johnson handed me copies     of Hong Kong legislation which he said showed that New Zealand judgments can be reciprocally enforced in Hong Kong.  He acknowledged that this should have been   a point on which expert evidence was provided.  I leave the lack of such  evidence   to one side. Even assuming that a New Zealand judgment could be enforced with relative ease in Hong Kong, that would assist only if there was evidence that Rotorway had assets in Hong Kong. There is no such evidence.

[47]   For these reasons, I conclude that Rotorway’s undertaking has no substance. This means that the balance of convenience weighs very heavily against the grant of an interim injunction.

[48]   Mr Johnson submitted that if I came to  that  conclusion I could  still  grant  an injunction but make it conditional on Rotorway providing appropriate security. He referred me to authorities that a default or inadequacy in providing an undertaking can be remedied by making an interim injunction conditional on an undertaking being given or security being provided.5

[49]   I accept (as did Mr Foote) that the Court has a discretion to allow an applicant to remedy a default by making any grant of an interim injunction conditional. Whether to exercise that discretion will depend on the circumstances of the particular case. Here, the circumstances that are relevant to the exercise of that discretion are that the respondents made it clear to Rotorway on several occasions well in advance of the hearing that they  had  concerns  about the substance of the undertaking  provided.   It would have been a simple matter for Rotorway to engage with those concerns either by providing more financial information or by proposing to provide security for its undertaking. Rotorway having refrained, for a considerable period of time, and without explanation, from doing either of those things, I do not see why the Court should allow further time to Rotorway to do so.

Where does overall justice lie?

[50]   Rotorway may suffer prejudice if the respondents are at liberty to market and then sell the Resort. This prejudice will be difficult, but not impossible, to measure. Any prejudice is likely to be remediable, because the respondents have the means    to compensate Rotorway for it.

[51]   Conversely, I am not satisfied that Rotorway has the means to compensate the respondents for the prejudice they may suffer if they are restrained from marketing and selling the Resort. Their prejudice is not likely to be remediable.

[52]   The course that  seems  likely to cause the least irremediable prejudice  is     to refuse the interim injunction.

5      Pop-A-Shot Inc v Filtration and Pumping (Commercial) Ltd (1989) 3 TCLR 225; and Munhwa Broadcasting Corporation v Young International 2009 Ltd (High Court, Auckland CIV-2010-404- 203, 17 December 2010, Potter J) at [186].

Result

[53]I decline Rotorway’s application for an interim injunction.

[54]   The respondents are entitled to costs. If any costs issue arises, brief memoranda may be filed and served (no more than two pages each). The respondents are to file first, then Rotorway.

Campbell J