Tian v Xu

[2023] NZHC 2443

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-735

[2023] NZHC 2443

BETWEEN

YANG TIAN

Plaintiff/Respondent

AND

CHEN XU

First Defendant/First Applicant

KNOX X TRUSTEE LIMITED

Second Defendant/Second Applicant

Hearing:	30 August 2023
Counsel:	C Huang for Plaintiff K Sun for Defendants
Judgment:	30 August 2023
Reasons:	4 September 2023

REASONS FOR JUDGMENT OF LANG J

[application for discharge of freezing orders]

This judgment was delivered by Justice Lang On 4 September 2023 at 11.00 am

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

Date:…………………………

Solicitors/counsel:

Great Wall Lawyers, Auckland Capstone Law Ltd, Auckland

TIAN v XU [2023] NZHC 2443 [4 September 2023]

[1]    In this proceeding the plaintiff, Mr Tian, applies for summary judgment to enforce judgments he has obtained in China against the respondent, Mr Xu. Mr Xu is a New Zealand resident but has been living in China since 2019. He was served with the proceeding by way of substituted service but has now instructed counsel in    New Zealand to oppose the application for summary judgment. The application will be heard on 13 November 2023.

[2]    On 26 May 2023, Mr Tian obtained freezing orders over Mr Xu’s assets on a without notice basis.1 These included his bank accounts and the shares that he owns in the second applicant, Knox X Trustee Ltd (Knox X Trustee). That company owns a residential property (the property) that was to be sold on 31 August 2023. The property was also subject to the freezing order. In the event that the property was sold to a third party in an “arms length” transaction, the sum of $592,227.65 from the net sale proceeds was to be subject to a freezing order.

[3]    Mr Xu and Knox X Trustee applied for an order discharging the freezing order to the extent that it affected the sale proceeds. This was opposed by Mr Tian. At the end of the hearing on 30 August 2023 I dismissed the application and now give my reasons for doing so.

Background

The loans

[4]    Between 2015 and 2019, Mr Tian  loaned the sum of RMB 15,097,100 to   Mr Xu. In addition, he loaned the sum of RMB 650,000 to Mr Xu’s business associate, Mr Zhang. Mr Xu personally guaranteed this loan. At that stage he and Mr Tian were close friends and Mr Tian did not require Mr Xu to pay interest on the loan.

[5]    Mr Xu and Mr Tian signed a “loan details” agreement on 7 January 2020. This document contained an acknowledgement by Mr Xu that he had received loans from Mr Tian totalling RMB 15,747,100. The loan by Mr Zhang has never been repaid. The loan outstanding by Mr Xu has been repaid in part through the sale of a property owned by Mr Xu in China. The Lubei District People’s Court of Tangshan City in the

1      Tian v Xu [2023] NZHC 1261.

People’s Republic of China’s Hebei Province (the Lubei Court) directed that this was to be sold to partially repay the debt owing by Mr Xu to Mr Tian. Mr Tian says that the sum outstanding by Mr Xu to Mr Tian for both loans as at 18 May 2023 amounted to RMB 1,716,589.34 together with accrued interest at the rate of 3.85 per cent per annum from 2 September 2021 to the date of repayment.

The property

[6]    Mr Tian says Mr Xu told him in early 2016 that he was intending to purchase a property in Hobsonville as a residence for himself and his wife. It subsequently transpired that the property was purchased in the name of Knox X Trustee. Mr Xu is the sole shareholder of that company and was also originally the sole director. Mr Xu’s wife, Ms Meng, is now the sole director.

[7]    Mr Xu and Ms Meng have provided affidavits in support of the application to discharge the freezing orders. They say they established a trust on 24 April 2015 for the benefit of their son, Knox Xu. Under the trust deed, the settlors of the trust are Mr Tian and Ms Meng. The corporate trustee is Knox X Trustee, of which Mr Xu was originally the sole director. On 24 July 2023 Ms Meng replaced Mr Tian as sole director. Ms Meng and Mr Tian have the joint power under the trust deed to appoint alternative trustees.   The discretionary beneficiaries under the trust are Mr Tian,   Ms Meng and their son. The final beneficiary is their son. Mr Xu and Ms Meng say that they established the trust up for the sole purpose of protecting their son and had no intention of using it as a means by which to render Mr Tian judgment proof.

[8]    Mr Xu entered into an agreement to purchase the property on 24 February 2016 for the sum of $1.69 million. He subsequently nominated Knox X Trustee as the purchaser. The amount required to settle the purchase on 2 May 2016 was

$1,691,930.15. This was paid by means of a loan in the sum of $1.33 million that Knox X Trustee obtained from the ANZ Bank together with an irrevocable gift in the sum of $360,311.14 from Ms Meng and Mr Xu.

[9]    From May 2016 until 1 November 2022 Knox X Trustee made loan repayments to the bank using funds provided to it by Mr Xu and Ms Meng. These amounted to approximately $6,000 per month. Mr Xu and Ms Meng says these payments, which

totalled approximately $480,000, were also irrevocable gifts to the trust. They say they did not make the gifts to the trust with the intention of rendering Mr Xu judgment proof.   They point out that there was no risk of any proceedings against him in   May 2016 when they began making these gifts.

Freezing Orders

[10]   It is common ground that to obtain and sustain a freezing order an applicant must establish a good arguable case against the respondent.2 The applicant must also show there is a risk the respondent will dissipate its assets if such orders are not made.3 In addition, it is necessary to show that an asset exists to which a freezing order could attach.4 Finally, the Court will consider where the balance of convenience lies.5

[11]   Knox X Trustee is a joint applicant with Mr Xu in the present application but it is not a party to the present proceeding. However, r 32.4 of the High Court Rules 2016 permits the Court to make a freezing order against a person who is not a party to a proceeding in which substantive relief is not sought against that person.

[12]   Rule 32.5(4) and (5) prescribe the circumstances in which the Court may make a freezing order against a prospective judgment debtor and a third party:

32.5Order against judgment debtor or prospective judgment debtor  or third party

…

(4)The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—

(a)the judgment debtor, prospective judgment debtor, or another person might abscond; or

(b)the assets of the judgment debtor, prospective judgment debtor, or another person might be—

2      High Court Rules 2016, r 32.5(1)(b).

3      Rule 32.5(4).

4      Rule 32.2(2).

5      Murren v Schaeffer [2018] NZCA 318, (2018) 24 PRNZ 285 at [17].

(i)removed from New Zealand or from a place inside or outside New Zealand; or

(ii)disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).

(5)The court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a third party) if the court is satisfied, having regard to all the circumstances, that—

(a)there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—

(i)the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or

(ii)the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or

(b)a process in the court is or may ultimately be available to the applicant, as a result of a judgment or prospective judgment, under which the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.

[13]   Mr Tian relies on both r 32.5(4)(b) and (5)(b). Once he has obtained summary judgment against Mr Xu he intends to commence a proceeding against Knox X Trustee under Sub-part 6 of Part 6 of the Property Law Act 2007 (the PLA). He therefore contends that Knox X Trustee is a prospective judgment debtor in terms of r 32.5(4)(b). Alternatively, Mr Tian relies on r 32.5(5)(b), which permits the Court to make a freezing order where the applicant may be able to avail itself of a court process under which, as a result of a judgment or prospective judgment, Knox X Trustee may be required to disgorge assets.

The test

[14]   There is some divergence in the authorities as to the test to be applied in relation to an application for a freezing order against a potential judgment debtor or third party. In some cases the courts have required the applicant for a freezing order in the present context to establish that there is a real case to be investigated. In Primary

Services New Zealand Ltd v Colombo Projects Ltd,6 a case involving an application under r 5.32(5), Osborne J observed:

[17]      I respectfully adopt, as helpfully informing the Court’s approach, the observation of Hargrave J in Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd. His Honour recorded a submission on behalf of the defendant and the non-parties that, in order to establish that a relevant process “may” ultimately be available, the plaintiffs must establish “a compelling cause of action” for relief as a result of a court process being instigated. The submission was that a mere possibility that some process may ultimately lead to relief of the relevant kind is not sufficient for the purposes of the rule. His Honour held:

I do not accept this submission. Although I accept that a merely theoretical possibility will not fall within the rule, I do not think that a plaintiff need establish a “compelling cause of action”. It will be enough if a plaintiff can satisfy the Court that, in all the circumstances of the case, there is a real case to be investigated under the process or processes relied upon as potentially yielding a means of satisfaction of the judgment from the assets of the non-parties.

[18]      In Robmatjus, the plaintiff as its intended recovery process was invoking a provision under the Property Law Act 1958 (Vic) in relation to voluntary conveyances to defraud creditors. Hargrave J found that there was a real case to be investigated under the relevant provision and that the process involved was one which was or might ultimately be available to the plaintiff in order to set aside the relevant transaction. Having made that finding, Hargrave J observed that it was unnecessary to reach a firm conclusion into other processes relied upon by the plaintiffs in argument, including recovery by a liquidator of the defendant company under the Corporations Act 2001 (Cth).. His Honour nevertheless observed that it seemed to him that the possibility of such claims being pursued by a liquidator of the defendant was a real one and that one or more of those processes may well be available to a liquidator of the defendant (assuming that the plaintiff succeeded in obtaining judgment in the proceeding).

(Emphasis added)

[15]   In other cases, the Courts have applied a test of whether the applicant has established a good arguable case against the third party or prospective judgment debtor.7 In the present case, it does not matter which test is applied because the result is the same. However, I proceed on the basis that Mr Tian is required to establish a good arguable case for retention of the freezing order because this aligns with the approach taken when an applicant seeks a freezing order against a party to the proceeding.

6      Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 101.

7      Official Assignee v 22 O’Shannesey Ltd [2022] NZHC 2930 at [61].

The proposed claims against Knox X Trustee

[16]   Mr Tian will invoke ss 346, 347 and 348 of the PLA in advancing his claims against Knox X Trustee. They provide as follows:

346Dispositions to which this subpart applies

(1)This subpart applies only to  dispositions  of  property  made  after 31 December 2007—

(a)by a debtor to whom subsection (2) applies; and

(b)        with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.

(2)This subsection applies only to a debtor who—

(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or

(b)was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or

(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.

347Application for order under section 348

(1)Only the following may apply for an order under section 348:

(a)a creditor who claims to be prejudiced by a disposition of property to which this subpart applies (whether the disposition was made before or after the debtor became indebted to the creditor):

(b)the liquidator, if the debtor is a company in liquidation or an overseas company being liquidated under section 342 of the Companies Act 1993.

(2)The application must specify the disposition claimed to be prejudicial, and the property or compensation sought through the application.

(3)The application, together with a notice  communicating  the effect  of sections 348 and 349, must be served on—

(a)the person in whose favour the disposition of property was made; and

(b)any other person from whom property or compensation is sought through the application.

348Court may set aside certain dispositions of property

(1)A court may make an order under this section—

(a)on an application for the purpose (made and served in accordance with section 347); and

(b)if satisfied that the applicant for the order has been prejudiced by a disposition of property to which this subpart applies.

(2)The order must do 1, but not both, of the following:

(a)vest the property that is the subject of the disposition in the person (for any applicable purpose) specified in section 350:

(b)require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.

(3)If the order does what is specified in subsection (2)(a), it may also require a person who acquired or received property through the disposition to physically restore some or all of that property that is tangible personal property to 1 or more persons specified in the order.

(4)Person who acquired or  received  property  through  the  disposition means a person who acquired or received property—

(a)under the disposition; or

(b)through a person who acquired or received property under the disposition.

(5)The order must not have effect so as to increase the value of a security held by a creditor over the debtor’s property.

(6)Subsection (5) overrides subsection (2) and section 350.

(7)This section is subject to section 349.

[17]   Mr Tian will contend s 347(1)(a) gives him standing to seek orders under s 348 because he is a creditor who was prejudiced by the gifts Mr Xu made to Knox X Trustee. He will seek an order under s 348(2)(b) of the Act requiring Knox X Trustee

to pay compensation for those gifts. Mr Tian will argue that such orders are available under s 346(2)(a) because Mr Xu made the gifts at a time when he was either insolvent or, alternatively, he became insolvent by making the gifts. Mr Tian will also argue that, in obtaining further loans from Mr Tian after purchasing the property, Mr Xu should reasonably have believed he was incurring debts that were beyond his ability to repay.8

[18]   Mr Tian also says that, once he obtains summary judgment against Mr Xu, he will seek an order adjudicating Mr Xu bankrupt. The Official Assignee will then be able to exercise powers under the Insolvency Act 2006 to set aside the gifts Mr Xu has made to Knox X Trustee.

Analysis

[19]   Mr Sun submitted on Mr Xu’s behalf that any claim by Mr Tian that Mr Xu made the gifts with intent to prejudice creditors did not stand scrutiny because Knox X Trustee purchased the property well before Mr Tian began pursuing Mr Xu for the outstanding debt. However, a disposition made with intent to prejudice creditors is but one of the available limbs under s 346(1)(b). The subsection also applies to dispositions by way of gift and dispositions made without receiving reasonably equivalent value in return. Those types of disposition do not require any intent to prejudice creditors.

[20]   In the present case both Mr Xu and Ms Meng acknowledge that the payments that they made to Knox X Trustee were by way of irrevocable gift. The payments would also amount to dispositions that Mr Xu and Ms Meng made without receiving reasonably equivalent value in return.  These two limbs are therefore available to   Mr Tian in the present context.

Mr Xu made the gifts when he was insolvent or the gifts caused him to become insolvent

[21]   Mr Sun points out that by 2021 Mr Xu had repaid a substantial portion of the funds that he borrowed from Mr Tian. Mr Xu borrowed a total of RMB 15,747,100

8      Property Law Act 2007, s 346(2)(c).

between 2015 and 2019. By 26 April 2021 he had repaid the sum of RMB 12,859,859. This reduced the sum outstanding to RMB 2,887,240.

[22]   Mr Sun also points out that the loans did not have a fixed repayment date. He therefore submits that the Court cannot find that Mr Xu was insolvent at any time before 2021 because Mr Tian did not  call  for repayment of  the loans  until then.  Mr Tian did not file proceedings in the Lubei Court until 27 July 2021.

[23]   This submission needs to be viewed in the context of Mr Xu’s current position and his circumstances between 2016 and 2021. Mr Xu has filed an affidavit in which he says he has effectively no savings.9 His only present asset is his share in a motor vehicle registered in Ms Meng’s name. This has a value of approximately $30,000 but has a loan secured against it in the sum of approximately $15,000. Mr Xu is therefore now unquestionably insolvent if the judgments entered against him in China are taken into account.

The gift made to enable Knox X Trustee to complete the purchase of the property

[24]   At the time Mr Xu and Ms Meng made the gift to enable Knox X Trustee to purchase the property Mr Xu still owed Mr Tian  the sum of RMB 680,000.  As at  23 May 2023 this was the equivalent of approximately NZD 159,145.10 In the affidavits they have filed in support of the present application Mr Xu and Ms Meng do not explain how they funded the sum that they gifted to Knox X Trustee. Ms Meng says only that it comprised their relationship property and that they each owned one-half of the amount that they gifted. This means Mr Xu gifted the sum of approximately NZD 180,155 to Knox X Trustee to enable it to purchase the property.

[25]   It is possible that Mr Xu used some of the funds he had already borrowed from Mr Tian for this purpose. He had borrowed the sum of RMB 600,00 (NZD 138,622) in December 2015 and a further RMB 80,000 (NZD 18,482) on 20 April 2016. Regardless of their source, however, the important point is that the funds Mr Xu gifted to Knox X Trustee on or about 2 May 2016 would otherwise have been available to

9      He says he has a joint interest in a bank account in New Zealand that has a credit balance of two cents.

10     In an affirmation dated 25 May 2023 in support of his without notice application for freezing orders Mr Tian says the Bank of China exchange rate at that time was RMB 438.18 to NZD 100.

repay the sum he owed to Mr Tian at that time. Further, the sum that Mr Xu gifted to the trust would have been sufficient to enable him to repay the amount owing to    Mr Tian in full. He was therefore arguably solvent up until that point.

[26]   Mr Xu has not explained what other sources of income and capital were available to him between 2016 and 2021. Mr Tian says that between 2014 and 2020 Mr Xu and Mr Zhang operated a property development business through a company called Golden Ocean Investment Ltd (Golden Ocean). Mr Xu owned 80 per cent of the shares in that company. Golden Ocean sold its last property in October 2019 and the shareholders placed the company in voluntary liquidation on 15 December 2020.

[27]   A report issued by the liquidators on 5 July 2023 advises that the company’s only asset was a motor vehicle and this realised sufficient funds to repay the debt owing on it but no more. Further, the company failed to account to the Commissioner of Inland Revenue for GST when it sold its assets and currently owes the sum of

$2.975 million by way of unpaid tax. It also has unsecured creditors who have filed claims totalling $356,676. It therefore seems inherently unlikely that Golden Ocean was ever in a position to provide Mr Xu with funds to meet the debt owing to Mr Tian.

[28]   In the absence of any evidence suggesting that Mr Xu had access to other sources of income or capital on 2 May 2016 it is likely that by structuring the sum paid to Knox X Trustee as an irrevocable gift Mr Xu rendered himself unable to pay the debt owing to Mr Tian at that time. In other words, the gift rendered Mr Xu insolvent. This means Mr  Tian  has  a  good  arguable  case  against  Knox  X  Trustee  under  s 346(2)(a) of the PLA.

The gifts made to enable Knox X Trustee to make payments under the mortgage

[29]   Mr Xu and Ms Meng have not explained how they funded the gifts they subsequently made to Knox X Trustee to enable it to meet its commitments to the bank under the mortgage. They say only that they made the payments from their joint account or from Ms Meng’s account. However, the payments were obviously significant because they continued for approximately six and a half years and enabled Knox X Trustee to repay the bank the sum of approximately $480,000.

[30]   Ms Meng appears to have worked during this period but she does not assert she provided all the funds that made up these gifts. It therefore seems that Mr Xu was also able to make contributions from other sources of income or capital that he has not yet disclosed. If Mr Xu had not used these funds to make the gifts to Knox X Trustee he could have used them to repay the debt he owed to Mr Tian. For the reasons already given it is likely that Mr Tian contributed to the gifts at a time when he was insolvent. Mr Tian has therefore established a good arguable case for a claim against Knox X Trustee in relation to Mr Xu’s share of these payments under s 346(2)(a) of the PLA.

The loans that Mr Xu obtained subsequently from Mr Tian

[31]   After  2016  Mr  Xu  obtained  further  loans  from  Mr   Tian   totalling  RMB 14,067,100. For the reasons already given it is likely he incurred this indebtedness at a time when he was already insolvent. However, Mr Xu was able to repay all but RMB 1,716,589 by the time Mr Tian issued the present proceeding on 17 April 2023.  In part he was able to do this because, as previously noted, the   Lubei Court directed the sale of a property that Mr Xu owned in China and the sale proceeds were utilised to repay some of the debt owing to Mr Tian. However, the fact that Mr Xu was able to repay so much of the debt by April 2023 leaves me in a position where I am unable to say, even to an arguable basis, that Mr Xu should reasonably have believed when he obtained these loans that he would not be able to repay them. Mr Tian has therefore not established a good arguable case for  a  claim  against Knox X Trustee under s 346(2)(c) of the PLA.

Conclusion

[32]   I am satisfied Mr Tian has established a good arguable case for claims against Knox X Trustee under s 346(2)(a) of the PLA. Subject to the matters discussed below, jurisdiction exists to retain the freezing order under both r 32.5(4) and (5) of the High Court Rules.

Risk of dissipation of sale proceeds if the freezing order is not maintained

[33]   The difference between r 32.5(4) and (5) in this context is that an applicant seeking a freezing order under r 32.5(4)(b) must show there is a risk that the respondent will remove from New Zealand or otherwise dispose of assets if the order

is not made. It is uncertain whether this is a requirement of r 32.5(5)(b).11 In any case, as Mr Xu relies on both these provisions I consider the risk of dissipation of the sale proceeds.

[34]   The fact that Mr Xu has been living in China means it is virtually inevitable that he has access to bank accounts in that country. This is demonstrated by the fact that he has been able to contribute to the mortgage payments made by Knox X Trustee following his return to China in 2019. It is therefore highly likely he would also be able to transfer funds between New Zealand and China.

[35]   Mr Sun argues that Mr Tian’s position would actually be improved if the sale proceeds were remitted to China because of Mr Tian’s influence in that country and the demonstrated willingness of the courts in China to assist him to execute the judgments he has obtained against Mr Xu. However, before Mr Tian could enlist the aid of the courts in China he would need to know that funds had been transferred from New Zealand to China. He would also need to know where the funds had gone. There is no reason to believe Mr Xu would be forthcoming with information regarding these issues. I therefore consider Mr Sun’s submission to be amount to speculation on his part.

[36]   Mr Xu and Ms Meng say they need access to the sale proceeds so they can purchase an alternative property as a home for Ms Meng and their son. However,  Ms Meng would not be bound to use the funds for that purpose if the freezing order was lifted at this stage. Should that occur I consider there is considerable risk that  Mr Xu and Ms Meng would arrange for the net proceeds of sale of the property to be transferred from New Zealand to China. Mr Xu is now aware of the claims Mr Tian proposes to make against Knox X Trustee once he has obtained summary judgment against Mr Xu. He has a very real incentive to ensure the sale proceeds are placed beyond Mr Tian’s reach.

[37]   For these reasons I consider there is a significant risk that the net sale proceeds will be dissipated and placed beyond Mr Tian’s reach if the freezing order is lifted at this stage.

11     The Official Assignee v 22 O’Shannessey Ltd [2022] NZHC 2930 at [71]-[76].

Balance of convenience

[38]   Mr Xu says the balance of convenience favours the immediate discharge of the freezing order so that Knox X Trustee can purchase another property as a residence for Ms Meng and their son. He says that if this does not occur Ms Meng will be forced to rent a property. Mr Tian disputes the ability of Knox X Trustee to purchase a replacement property in New Zealand. He says that the provisions of the Overseas Investment Act 2005 (OIA) will preclude this from occurring.

[39]   I am not able to comment on Mr Tian’s arguments relating to the ability of Knox X Trustee to purchase an alternative property. However, the risk of dissipation of the sale proceeds means that the balance of convenience firmly favours the retention of the freezing orders at this stage.

Result

[40]   For these reasons I dismissed the application by Mr Xu and Knox X Trustee for discharge of the freezing order over the sale proceeds.

Leave reserved

[41]   Knox X Trustee has leave to apply on five days notice for an order permitting it to utilise the sale proceeds for the purchase of a replacement property on the basis that any such property would also be subject to a freezing order. Any such application would obviously need to be supported by evidence confirming that the OIA will not prevent Knox X Trustee from purchasing the property.

Costs

[42]   Mr Tian is the successful party in the present application. He is accordingly entitled to costs on a category 2B basis together with disbursements as fixed by the Registrar.

Lang J