Time Rich Asia Investment Ltd v Zhou

[2024] NZHC 125

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-2441

[2024] NZHC 125

BETWEEN

TIME RICH ASIA INVESTMENT LTD

Plaintiff

AND

XIN ZHOU

First Defendant

LEI WANG
Second Defendant (Discontinued)

EPSOM CENTRAL APARTMENTS LP
Third Defendant

SKY STONE INVESTMENT GROUP LTD

Fourth Defendant

Hearing:	1 February 2024
Appearances:	M N Rathod for Plaintiff
Judgment:	8 February 2024

JUDGMENT OF O’GORMAN J

[Formal proof hearing]

This judgment was delivered by me on 8 February 2024 at 3 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Tompkins Wake, Auckland

G P Blanchard KC, Barrister, Auckland

TIME RICH ASIA INVESTMENT LTD v ZHOU [2024] NZHC 125 [8 February 2024]

[1]    This is an application for judgment sought by the plaintiff, Time Rich Asia Investment Ltd (Time Rich). The plaintiff is a company incorporated in Hong Kong. The claim relates to a loan made by the plaintiff to the third defendant, a limited liability partnership called Epsom Central Apartments LP (ECALP). The fourth defendant, Sky Stone Investment Group Ltd (SSIG), is a general partner of the third defendant, was a party to the loan agreement, and its shares were part of the security provided. Both entities were in the Sky Stone Group, which was in the business of property development in New Zealand. The first defendant, Mr Zhou, was a director and shareholder of SSIG. He acted as an agent for both the third and fourth defendants.

[2]    The loan was granted on 14 May 2019 for a term of one year at an interest rate of 12 per cent per annum, for the principal amount of HKD 24,625,166.78 (approximately NZD 4,750,000). The loan was secured by 24.9 per cent of the partnership interest in ECALP and 24.92 per cent of the share capital of SSIG. ECALP defaulted under the Time Rich loan.

[3]    Time Rich seeks judgment against ECALP, SSIG and Mr Zhou for misleading conduct and misrepresentations made about the loan, the structure and business of the Sky Stone Group and the likelihood of Time Rich being repaid. The pleaded causes of action are for pre-contractual misrepresentation under s 35 of the Contract and Commercial Law Act 2017 (CCLA) and for breaches of the Fair Trading Act 1986 (FTA). Time Rich has not pleaded a contractual claim seeking repayment of the loan (or damages for breach of that obligation) because cl 8.3 of the loan agreement provides that recourse for default is limited to enforcement against the securities (the partnership and share interests), which have no value.

[4]    The second defendant was Mr Wang, the CEO of the Bank of China New Zealand (BCNZ). Mr Wang  facilitated  the  business  introduction  between  Mr Cheung and Mr Zhou and was the initial source of information for Mr Cheung about that investment opportunity. Time Rich settled with Mr Wang and discontinued the claim against him on 10 February 2022.

[5]    The hearing against the remaining defendants proceeded by formal proof. The first, third and fourth defendants took steps in the proceeding, including filing a statement of defence on 12 May 2021 and participating in the discovery phase. However, their defence was struck out after they failed to comply with an unless order made on 30 June 2023. None of the defendants appeared or sought to participate in the proof hearing.1

Facts

[6]    Mr Cheung and Mr Kwai are the two directors of Time Rich. Both are also shareholders of Time Rich. Mr Kwai is based in Hong Kong and Mr Cheung is based in Hong Kong and China. Both have poor English.

[7]    In June 2018, Mr Cheung visited New Zealand and was introduced to Mr Zhou to discuss the possibility of potential investment in Sky Stone Group’s development projects in New Zealand. Mr Zhou took Mr Cheung to view three development projects in Auckland (the Epsom Project, the Sunnynook Project and the Remuera Project), but Mr Cheung was not interested in investing at that time.

[8]    The issue was revisited in May 2019, when Mr Wang of BCNZ told Mr Cheung that Sky Stone Group needed funding to meet a debt about to fall due, and that funding was sought to  repay  that loan related to the Epsom Project.  Mr Wang  provided   Mr Cheung with a report for the Epsom Project indicating that 28 units had been sold, all pre-sale requirements met, and only nine apartment units and one retail shop remained available for sale.

[9]    Mr Wang provided  a  draft  loan  agreement  to  Mr  Cheung  on  or  around 7 or 8 May 2020, with an explanation that security over the Epsom Project company and Sky Stone Group could not exceed 25 per cent because of overseas investment laws in New Zealand.

1      Administrators  and  receivers  were  appointed  to  the  property  of  the  third  defendant  on   28 November 2022. They did not seek to take any steps on behalf of the third defendant to defend this proceeding.

[10]   On 14 May 2019, Mr Zhou met with Mr Kwai in Hong Kong. At this meeting, a number of representations were made about the financial stability of the Sky Stone Group and the value of the Epsom Project. On the strength of those representations, Mr Kwai transferred the loan sum to the account nominated by Mr Zhou, which he understood to be a company related to the earlier lender. Mr Kwai then signed the loan agreement after the transfer was made.

[11]   In February 2020, Mr Cheung came to New Zealand and enquired about the Epsom Project, given that it had been due for completion in October 2019. Mr Zhou advised Mr Cheung that construction had been suspended due to engineering problems, but that money to repay Time Rich could be sourced from selling the Remuera Project for around $15 million.

[12]   On 14 May 2020, the Time Rich loan fell due for repayment, together with interest. Repayment was not made, and instead Mr Zhou signed another “acknowledgement of debt” which recorded Mr Zhou as the shareholder and director of the “Epsom Project company”.

[13]   In early June 2020, Mr Cheung learned that the Remuera Project had been sold for approximately $15 million but this had not led to any repayment of the Time Rich loan. Mr Cheung attempted to contact Mr Zhou to discuss this but received no response.

[14]   In July 2020, Mr Cheung discovered that there were in fact no overseas investment restrictions in respect of the Epsom Project.

[15]   During September 2020, Mr Xu (who was the finance manager at Sky Stone Consulting Ltd) contacted Mr Cheung with whistle-blower concerns about abnormal activities, related party transfers and the dissipation of funds. Through that finance manager, Mr Cheung discovered that a range of misrepresentations had been made to Time Rich. This discovery ultimately led to commencement of this proceeding.

Legal principles

Contract and Commercial Law Act

[16]   The CCLA provides, broadly, that liability in contract exists where there is any misrepresentation, whether innocent or fraudulent, made by one contracting party to another contracting party, which induces the latter to enter the contract.2

[17]   The traditional view is that an actionable representation must refer to a matter of fact, either an existing fact or a past event. A representation as to some future event may amount to a representation of present fact if it implies that there is a current factual basis for the view expressed as to the future.3 For example, a representation as to the future profitability of a business may carry an implied representation that the current state of the business provides a proper foundation for the prospects stated.4

[18]   In some circumstances, the maintaining of silence or the failure to raise a matter may amount to a misrepresentation under the contractual remedies provisions of the CCLA or to misleading conduct under the FTA. The maintaining of silence may make other statements that have been made misleading or incorrect in all the circumstances.5 Silence or reticence in itself does not constitute a misrepresentation unless there are circumstances creating a duty to speak, and it may accordingly be relevant to establish whether the defendant became aware that the plaintiff had been misled by what the defendant had said, particularly on issues of fundamental importance.

[19]   A statement as to the legal position may be one of fact or of mixed law and fact, and thus actionable as a misrepresentation if inaccurate.6 It is also now recognised that a statement about the law may amount to a misrepresentation unless,

2      Contract and Commercial Law Act 2017, s 35(1)(a) (formerly Contractual Remedies Act 1979,  s 6(1)(a)); and Stephen Todd and Matthew Barber Laws of New Zealand Contract (online ed) at [180].

3      Stephen Todd and Matthew Barber Laws of New Zealand Contract (online ed) at [181].

4      Ware v Johnson [1984] 2 NZLR 518 (HC); New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 (HC); and Bird v Bicknell [1987] 2 NZLR 542 (HC).

5      Francis Cooke Laws of New Zealand Misrepresentation and Fraud (online ed) at [15].

6      Fonterra Co-operative Group Ltd v McIntyre and Williamson Partnership [2016] NZCA 538 at [173].

in the circumstances, it would reasonably have appeared that the statement was put forward as nothing more than an opinion on which it would not be reasonable to rely.7

[20]   A misrepresentation will only give a basis for a remedy under the CCLA if the representation was made by or on behalf of another party to the contract.8 Accordingly, liability can arise from representations by an agent within that person’s actual or apparent authority.

[21]   A party seeking to establish misrepresentation must establish that the misrepresentation induced that party to enter the contract.9 Among other things, this requires proof that the representor intended to induce the representee to contract, or that the representor's conduct was such that an ordinary person in the shoes of the representee would be induced to enter the contract.10

[22]   The CCLA provides for three distinct types of remedy for misrepresentation: damages, cancellation, and relief orders.11 Where the remedy sought is damages, the representee is entitled to damages “as if the representation were a term of the contract that has been breached”.12

Limited recourse loans

[23]   Limited recourse loans were considered in Totara Investments Ltd v Crismac Ltd.13 In that case, the lender advanced $480,000 to the borrower on terms that required repayment of $1,400,000 on the expiry date. The loan was secured by a mortgage over shares as security. Clause 5 provided for events of default, including non-payment on the due date, breach by the borrower of other obligations and the enforceability or enforcement of any present or future security or charge over or in respect of any of the assets of the borrower (or its holding company or subsidiary), whereupon the lender might at its discretion demand immediate repayment. The loan agreement also contained cl 11.1, under which the lender acknowledged that the

7      Sky Network Television Ltd v My Box NZ Ltd [2018] NZHC 2768, [2019] 2 NZLR 411 at [107].

8      Stephen Todd and Matthew Barber Laws of New Zealand Contract (online ed) at [189].

9 At [191].

10     Savill v NZI Finance Ltd [1990] 3 NZLR 135 (CA) at 145.

11     Contract and Commercial Law Act, ss 33-59.

12     Section 35(1).

13     Totara Investments Ltd v Crismac Ltd [2010] 3 NZLR 285 (SC).

agreement and the liability of the borrower was limited to the value of the security provided (a “limited recourse” clause). Both the  Court  of  Appeal  and  the  Supreme Court held that cl 11.1 was an overriding provision, given (among other things) the term “limitation of recourse” and the emphatic words “Notwithstanding any other term or provision of this Agreement”.14 In circumstances where the assets over which the mortgages were originally granted were apparently worthless, cl 11.1 precluded the lender from purporting to exercise a power said to exist under the mortgages enabling the lender to obtain further security.

Fair Trading Act

[24]   In Red Eagle Corporation Ltd v Ellis, the Supreme Court said that in a relatively simple case where there is no doubt about what was said or its meaning and the loss arose from the same event, liability can be established by a two stage inquiry:15

(a)First, whether the conduct was misleading and deceptive for the purposes of s 9 of the FTA. This question is to be considered in context, including the characteristics of the person affected (for example, an unsophisticated consumer as opposed to a sophisticated businessperson). The question can be framed conveniently as whether a reasonable person in the plaintiff’s position would likely have been misled or deceived by the representation.

(b)Once a breach of s 9 has been proved, the inquiry moves to the requirements of s 43 — whether the loss or damage was sustained “by” the conduct of the defendant. This question engages a “common law practical or common-sense concept of causation”. It requires proof that the claimant was actually misled or deceived by the defendant’s conduct and then whether that conduct was the or an effective cause of the loss. It is possible for one of the effective causes of loss to be the claimant’s own conduct in failing to take reasonable care to look after

14 At [26].

15     Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [27]–[31], applied in

Shabor Ltd v Graham [2021] NZCA 448; [2021] NZCCLR 26 at [26].

their own interests, in which case the court can exercise its discretion as to whether the full amount of the loss should be recoverable.

[25]   The general rule under s 5C of the FTA is that any provision purporting to override the Act’s obligations is unenforceable.16 However, clauses of that type can nevertheless affect liability in terms of causation.17

A disclaimer or exclusion clause will affect liability for misleading or deceptive conduct only if it deprives the conduct of that quality or breaks the causal connection between conduct and loss. Whether it has that effect in a given case is a question of evidence and not a question of law.

[26]   The fundamental purpose of a remedy of compensatory damages is to put the person whose rights have been found to have been violated in the same position, so far as money can do so, as if those rights had been observed.18 Under the FTA, the injured party is entitled to reparation for all the actual damage flowing directly from the false and misleading statement.19 In general, expectation losses are not available because this would be to seek to enforce the wrong complained of, rather than assess the position if the misrepresentation had not been made.20

Application to facts

[27]   The plaintiff has pleaded a range of alleged misrepresentations. However, not all of those are relevant for the pleaded causes of action against the first, third and fourth defendants.

[28]   The initial information about the investment opportunity came from Mr Wang. There is no evidence that Mr Wang was acting as agent for the first, third and fourth defendants. While he was a mutual contact and business intermediary, there is no assertion that he had any actual or apparent authority to make representations about

16 There is a narrow exception in s 5D permitting parties in trade to contract out in writing in certain circumstances (not applicable on these facts).

17 David v TFAC Ltd [2009] NZCA 44, [2009] 3 NZLR 239 at [63], quoting Kewside Pty Ltd v Warman International Ltd (1990) ATPR (Digest) 46-059 (FCA) at 53,222; Shabor Ltd v  Graham [2021] NZCA 448; [2021] NZCCLR 26 at [40].

18 Joblin Insurance Brokers Ltd v M E Joblin Insurances Ltd [2001] 1 NZLR 753 (HC) at [15].
19 At [20].

20 Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA) at 26.

the investment opportunity on behalf of the remaining defendants. Similarly, the report provided on 7 May 2019 was prepared by BCNZ, so I have no basis for finding the defendants liable for the content of that document under the two pleaded causes of actions.

[29]   I accept that this forms part of the background material that may be relevant for assessing the significance of discussions that did take place directly between    Mr Kwai and Mr Zhou.

[30]   The plaintiff has also pleaded a number of alleged misrepresentations that took place after the loan funds were advanced. I do not focus on those allegations either, because of the need to establish causation and damage. There is no pleading that any separate identifiable damage was sustained during the term of the loan as a result of post-advance representations (e.g., deferring enforcement steps based on reassurances during which time assets were dissipated). In this case, the plaintiff takes the position that the funds would not have been advanced at all, but for the misrepresentations. As a matter of timing, this must relate to representations before the funds were advanced. Under the CCLA, only pre-contractual representations are actionable.

[31]   Accordingly, the claim under both causes of action relies on identifying misrepresentations made by Mr Zhou in the meeting that occurred on 14 May 2019, prior to the funds being transferred. This is addressed in the affidavit of Mr Kwai, which has been translated into English. This says that Mr Zhou gave Mr Kwai a rundown of his company Sky Stone Group, a large-scale retail development group company with three projects currently underway, all in superb locations where the properties would be well-sought after once completed. The loan was merely to relieve some “financial stress” on the Group. Mr Zhou represented that the Epsom Project, being a residential apartment building in the city centre of Auckland, was worth several tens of millions of dollars and that a loan from BCNZ was also secured against the Epsom Project with an approved credit line of $19 million. He represented that the security over shares in the project could not exceed 25 per cent because of overseas investment restrictions.

[32]   Mr Kwai explains his understanding that the draft loan agreement provided via Mr Wang of BCNZ had already been reviewed by lawyers acting for BCNZ and there was no problem with it, so there was no need for Time Rich to engage their own lawyer to review the contract terms (all in English). Believing that the loan was recommended and effectively guaranteed by BCNZ, Time Rich took the view that further due diligence steps were not required.

[33]   In the absence of the defendants choosing to address these allegations, the plaintiff has satisfied me on the balance of probabilities that there were material misrepresentations made at that 14 May 2019 meeting about the structure under which the Epsom Project was undertaken, the legal nature of the borrower (being a partner rather than a company as represented) and the financial position of the borrower and the company over which further security was granted (including representations that the borrower owned all three projects and that profits from any of them could be used to repay the loan).

[34]   I am also satisfied that Mr Zhou was aware that the representations made by and about BCNZ’s involvement in the Sky Stone Group and the Epsom Project gave a false understanding of the current state of the business and the need to review the terms of the loan. To the extent that the representations were about prospects of the Epsom Project completing successfully and the loan being repaid, there was no proper foundation for the assertions that were made in the 14 May 2019 meeting. To the contrary, the Epsom Project was already in trouble, which is why Mr Zhou had transferred $3.1 million of funds from the Sunnynook Project to ECALP to fill the gap likely to be created by investors cancelling their agreements. On an undefended basis, I accept the evidence of the plaintiff witnesses that Time Rich would not have proceeded with the loan if these misrepresentations had not been made.

[35]   In terms of whether these representations induced Time Rich to enter into the contract, it would be unusual for a domestic loan of this size to be made without the lender obtaining legal advice on the loan terms. However, the plaintiff’s evidence has addressed why that did not occur in this case, in part reflecting language issues and different cultural approaches, but also Mr Zhou taking advantage of the role that BCNZ played as an intermediary. I accept the plaintiff’s evidence that they were not aware of the limited recourse provision in cl 8.3, and that this would have been obvious to Mr Zhou on 14 May 2019 and was clearly an issue of fundamental importance to any lender.  I find that Mr Zhou intended to induce Time Rich to make the loan on  14 May 2019, knowing that they were being misled about their risks, the limited recourse terms and their prospects of repayment.

[36]   In making those findings, I do not place any particular significance on the misrepresentations about whether overseas investment restrictions prevented any security exceeding 25 per cent (other than for its more generic relevance on credibility issues).   That  representation  led  to  the  lender  accepting  securities  capped  at   25 per cent, but I do consider that this aspect induced the lender to advance the money (it was discouraging rather than inducing in nature). Even if the lender had not been misled about OIO restrictions, any higher level of security would have been worthless anyway.

[37]   The difficulty that the plaintiff faces under the CCLA cause of action is that the remedy of damages under s 35 is “as if the representation were a term of the contract that has been breached”. In this case, an expectation of higher profitability and likelihood of repayment is of no value if treated as a term of the contract, given the effect of cl 8.3 limiting any remedies for breach to the security that was granted.

[38]Clause 8.3 of the loan agreement provided as follows:

Limited Recourse: The Lender agrees that, if an Event of Default occurs, the Lender’s recourse is limited only to exercising its rights in respect of the Collateral Shares and Collateral Units under the Declaration of Trust and the Security Interest granted under clause 8.1. For the avoidance of doubt:

(a)subject to the Trustee’s obligations under the Declaration of Trust and the Security Interest granted under clause 8.1, neither the Borrower, the Trustee nor Sky Stone shall have any liability to the Lender in connection with any Event of Default; and

(b)neither Sky Stone nor the Trustee guarantee or will be deemed to guarantee the repayment of the Loan or any interest thereon by the Borrower.

[39]   As was held in Totara Investments Ltd v Crismac Ltd,21 I consider that this clause is problematic in terms of obtaining suitable relief within the framework of the CCLA cause of action.

[40]   However, those restrictions do not apply to the FTA cause of action. The defendants were clearly acting “in trade” when the representations were made, with statements by Mr Zhou also made on behalf of the third and fourth defendants. The loan agreement does not contain any other clauses that would impact on causation issues. For example, the loan does not contain any “entire agreement” clause.

[41]   Consistent with the usual position for a FTA claim, the plaintiff is claiming reliance damages rather than expectation losses. The relief sought is repayment of the principal amount of HKD 24,625,166.78, along with interest pursuant to ss 9 and 10 of the Interest on Money Claims Act 2016. This is on the basis that the loan would not have occurred, but for the misrepresentations. There is no claim for interest at the contractual rate of 12 per cent.

Result

[42]   For the above reasons, I find that the plaintiff has established an entitlement to relief under the third cause of action for breach of s 9 of the FTA. I order:

(a)damages in the sum of HKD 24,625,166.78 under s 43(3)(f) of the FTA;

(b)interest pursuant to ss 9 and 10 of the Interest on Money Claims Act 2016 on the above sum for the period from 14 May 2019 until the judgment debt (including all interest payable under the Act) is paid in full; and

21     Totara Investments Ltd v Crismac Ltd, above n 13.

(c)costs  and  disbursements  calculated  on  a  2B  basis  in  the  sum  of

$32,066.50 (as set out in sch 3 to the written submissions for formal proof hearing).

O’Gorman J