Wang v Guangzhou Dongjiang Petroleum Science & Technology Development Company Limited
[2024] NZCA 284
•2 July 2024 at 10.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA436/2023 [2024] NZCA 284 |
| BETWEEN | JIANPING WANG |
| AND | GUANGZHOU DONGJIANG PETROLEUM SCIENCE & TECHNOLOGY DEVELOPMENT COMPANY LIMITED |
| AND | YONGNAN KANG |
| Hearing: | 14 May 2024 |
Court: | Thomas, Fitzgerald and Osborne JJ |
Counsel: | D M Salmon KC, M K Ropati and G D Simms for Appellants |
Judgment: | 2 July 2024 at 10.30 am |
JUDGMENT OF THE COURT
A The appeal is allowed.
BAn order is made rescinding the charging order dated 14 November 2022 to the extent it applies to the estate, right, title or interest of Yongnan Kang in One Pure International Group Ltd.
CThe first respondent must pay the appellants costs for a standard appeal on a band A basis with usual disbursements. We certify for second counsel.
DThe costs order made in the High Court is set aside.
____________________________________________________________________
REASONS OF THE COURT
(Given by Osborne J)
The second respondent, Yongnan Kang, owns 25 per cent of the shares (the Kang shares) in the second appellant, One Pure International Group Ltd (One Pure). The first appellant, Jianping Wang, owns the remaining 75 per cent.
In November 2020, the first respondent, Guangzhou Dongjiang Petroleum Science & Technology Development Co Ltd (GDP), obtained an interim charging order in the High Court over Mr Kang’s interest in a number of New Zealand companies including One Pure (the charging order). Mr Wang (as discussed below at [11]) also has an interim charging order over the Kang shares, made by the High Court in November 2022.
The appellants applied for an order rescinding the (GDP) charging order on the basis they were prejudiced by that order. Peters J dismissed the application (the Judgment).[1] She subsequently ordered costs in favour of the first respondent.[2]
[1]Wang v Guangzhou Dongjiang Petroleum Science & Technology Development Co Ltd [2023] NZHC 1087 [Judgment under appeal].
[2]Wang v Guangzhou Dongjiang Petroleum Science & Technology Development Co Ltd [2023] NZHC 1598 at [5].
The appellants were granted leave to appeal,[3] and now appeal. They again seek rescission of the charging order.
[3]Wang v Guangzhou Dongjiang Petroleum Science & Technology Development Co Ltd [2023] NZHC 1739.
GDP opposes the appeal. Mr Kang did not enter an appearance in the High Court and has not entered an appearance on this appeal.[4]
The parties
[4]Judgment under appeal, above n 1, records Mr Strauss as appearing for both respondents. The record in the High Court in fact shows Mr Strauss appeared for the first respondent only.
Mr Kang has had a number of company interests in the People’s Republic of China (the PRC). Until 2018, his interests included the entire shareholding in One Pure.
In November 2018, Mr Kang sold 75 per cent of the shares in One Pure to Mr Wang for approximately $33.6 million. Mr Kang retained 25 per cent of the shares in One Pure (the Kang shares). Mr Kang and Mr Wang entered into a shareholders agreement at the same time (the shareholders agreement).
Previously, in March 2017, Mr Kang had entered into a loan agreement with the first respondent, GDP, governed by the laws of the PRC. Following a dispute between Mr Kang and GDP under the loan agreement, GDP obtained judgment in a PRC court for RMB 7,657,156.16 (approximately $1,700,000) in May 2019 (the PRC judgment).
In November 2020, the High Court awarded GDP judgment (on the PRC judgment) for the same sum, together with interest and costs.[5] GDP then proceeded to obtain the charging order that is the subject of this appeal.
[5]Guangzhou Dongjiang Petroleum Science & Technology Development Co Ltdv Kang [2020] NZHC 3068. Appeal dismissed in Kang v Guangzhou Dongjiang Petroleum Science & Technology Development Co Ltd [2022] NZCA 281.
In the meantime, Mr Wang had come to suspect the financial position of One Pure had been misrepresented by Mr Kang when Mr Wang was negotiating to purchase 75 per cent of Mr Kang’s shareholding in One Pure. Following an arbitration under the shareholders agreement, by interim award in 2022, Mr Kang was ordered to pay Mr Wang damages in the sum of $22,350,000 for misrepresentation and misleading conduct. The damages represented the difference in value between the purchase price of approximately $33,600,000 and $11,250,000 being the actual value of the shares Mr Wang purchased as at the date of transfer. The arbitrator found Mr Kang had also breached warranties under the shareholders agreement. In September 2022, the arbitral awards were sealed as judgments of the High Court.
Mr Wang subsequently in November 2022 obtained his own interim charging orders over personal property held by Mr Kang. He has also registered a security interest over the Kang shares on the Personal Property Securities Register. The Register does not record GDP as having a security interest registered over the Kang shares.
Notices under the shareholders agreement
The shareholders agreement provided for the transfer of shares in One Pure in the event of breach by a party. Clause 12.1 relevantly reads as follows:[6]
[6]The shareholders agreement is expressed in both English and Chinese. We reproduce only the English text.
12.1. In the event of:
…
12.1.3.Either party failing to observe or perform any of that party’s obligations under this Agreement and such failure not being rectified within 20 working days of written notice by the other party requiring such failure to be remedied.
…
the following provisions will apply:
…
I.The other party (in this clause called “the Non defaulting Party”) may at its option by notice in writing to the first mentioned party (in this clause called “the Defaulting Party”) within 3 months after, in the case of subclauses 12.1.1 or 12.1.2., the happening of the relevant event, and in the case of subclause 12.1.3. the expiry of the notice given under that subclause, as the case may be, require the Defaulting Party to give a transfer notice in respect of all its Shares in the Company in accordance with the Constitution in which event the Defaulting Party must, within 10 working days of receipt of the notice, give a transfer notice accordingly;
…
II.If the Non-defaulting Party does not wish to exercise its right under sub clause (I). of this clause or does not for any reason purchase the Shares of the Defaulting Party pursuant to any transfer notice given in accordance therewith, the Non-defaulting Party may at its option by notice in writing to the Defaulting Party given within the 3 month period referred to in sub clause (I). of this clause or within 3 months after it is finally determined that the Shares of the Defaulting Party will not be purchased by the Non-defaulting Party, as the case may be, require that the Company be liquidated.
…
Clause 12.2 of the shareholders agreement grants the non-defaulting party power of attorney to sign any transfer notice required in these terms:
12.2. If the Defaulting Party fails or refuses to sign any transfer notice or liquidation resolution pursuant to clause 12.1, the Non defaulting Party is entitled to act as the attorney or agent of the Defaulting Party for the purpose of signing any such transfer notice or passing any such resolution, as the case may be, and each party hereby irrevocably appoints the other as its attorney for such purpose.
In July 2022, Mr Wang gave Mr Kang notice under cl 12.1.3, requiring Mr Kang to remedy the breaches. Mr Kang did not do so.
In October 2022, Mr Wang gave Mr Kang notice under cl 12.1.3, requiring Mr Kang to provide a transfer notice in respect of Mr Kang shares. Mr Kang did not provide a transfer notice.
Mr Wang deposed that but for the existence of GDP’s charging order, he would have signed a transfer notice pursuant to his power of attorney.
No party has been able to engage with Mr Kang for some time. The appellants have had no contact with him since June 2022. Mr Kang is not participating in or contributing to the operation of One Pure in any way.
Effects of the charging order on the appellants
We have noted, above at [10], the arbitration award of $22,350,000 representing the extent by which Mr Wang paid too much for the One Pure shares he had purchased from Mr Kang (as a result of Mr Kang’s misrepresentations).
Mr Wang gave detailed affidavit evidence as to the detrimental impact of the current situation on One Pure. He exhibited One Pure’s financial statements. He described the impact as being on the funding, management, and operations of the business of One Pure.
Mr Wang’s evidence was supported by an affidavit of a co-director, Michael Geng, who gave detail as to One Pure’s operational difficulties, supported in each aspect by exhibited correspondence.
Mr Wang has been unable to register a transfer of Mr Kang’s shares to himself. Mr Kang therefore remains the registered owner of his shares despite the process envisaged by cl 12.1.3 of the shareholders agreement and not participating in any way in the business of One Pure.
Mr Wang identifies that, as shown by the financial statements, One Pure has incurred annual losses in the three years to 2022 of between $3,000,000 and $4,000,000. The company is funded by Bank of China lending of $5,700,000 and personal advances from Mr Wang of approximately $6,000,000.
One Pure has 21 employees. Mr Wang views the company as having “significant potential” but deposes he cannot continue to fund the company indefinitely while the issues with Mr Kang’s shares remain outstanding.
Mr Wang exhibited the minutes of a One Pure board meeting held in September 2022 in which the Board identified and discussed the impact of the non-transfer of the Kang shares. In particular:
(a)the Bank of China requires One Pure to transfer its bank accounts from the Christchurch branch to the Auckland branch, a process One Pure cannot complete without a signature from Mr Kang to open a new account in Auckland;
(b)One Pure’s accountants, Deloitte, have informed One Pure they require information and a signature from Mr Kang to renew their engagement as the company’s accountants; and
(c)One Pure staff have been asking questions and raising concerns about the situation of Mr Kang which Mr Geng deposes is damaging to company morale.
Transfer notices under the shareholders agreement
The “transfer notice”, as referred to in cl 12.1.3.I of the shareholders agreement is to be given “in accordance with the Constitution”.
Under the definition provision of cl 1.1, “Constitution” means the constitution of One Pure if one exists from time to time. The reference to “the Constitution” is implicitly a reference to a document of the nature identified in s 29 of the Companies Act 1993. It is common ground that One Pure has never had such a constitution.
Pre-emption rights in relation to One Pure shares
The shareholders agreement gives each of the shareholders a pre-emptive right to acquire the others’ shares in the event of an intended disposal:
10.1. The Shareholders shall not, unless expressly permitted by this Agreement, sell or otherwise dispose of the legal or beneficial ownership of any of their Shares at any time during the term of this Agreement without first offering such shares to the other on the terms that are the same as or better than those on which the Shares would be offered or disposed to another party.
The charging order regime
Orders under rr 17.53–17.55
The charging order was made under rr 17.53 and 17.54 of the High Court Rules 2016 (the Rules). Under r 17.55 any person served with an interim charging order may not (except in circumstances that do not apply here) transfer the property the subject of the charging order.
An interim charging order does not create any right in property or priority but simply acts as a stop order.[7]
[7]Lawton v Redemptech Holdings Pte Ltd [2022] NZHC 21 at [26] citing Re Ben Green Advertising Co Ltd, ex parte E F Jones Ltd [1932] NZLR 1511; and Brdjanovic v Ellis Hardie Syminton Ltd [1974] 2 NZLR 542 (SC) at 543.
Unlike a mortgage or similar security interest over property, a charging order is not a method of direct enforcement or recovery — rather, the entitled party, upon having an interim order made final, needs to take further steps to complete enforcement under pt 17 of the Rules.
Relief under r 17.44
Rule 17.44 provides for the relief of persons prejudicially affected by charging orders:
17.44 Application for relief by persons prejudicially affected
(1)At any time, a person alleging that he or she is prejudicially affected by a charging order may apply to the court for relief.
(2) The court may—
(a) vary or rescind the order; or
(b)cancel the registration or modify the effect of registration of any order affecting land.
(3)The powers of the court under this rule are in addition to its powers under rule 7.49.
The expression “charging order”, the subject of subpt 5 of pt 17 of the Rules, refers to the various forms of charging order identified in subpt 5. That includes pre‑judgment charging orders,[8] and post‑judgment charging orders,[9] which in turn includes orders in relation to land interests which are final when issued and orders in relation to other types of property (as here) which are interim when issued.[10] GDP’s charging order may accordingly be the subject of an application for rescission under r 17.44(1).
[8]High Court Rules 2016, r 17.41.
[9]Rule 17.42.
[10]Rule 17.47.
The appellants have standing under r 17.44(1) because they have alleged they are prejudicially affected by the charging order. The rule in its terms requires alleged prejudice. This Court has nevertheless observed the rule as a whole appears to imply some prejudice must be established.[11] A situation is unlikely to arise in which the Court, in relation to an application relying on alleged prejudice, would vary or rescind a charging order unless some material degree of prejudice is established.
[11]Motor Vehicle Dealers Institute Inc v UDC Finance (1991) Ltd [1994] 1 NZLR 659 (CA) at 665. The heading to r 17.44 may be referred to in ascertaining the meaning of the provision: Legislation Act 2019, s 10(4).
In any event, there is an onus on the applicant for relief under r 17.44 to establish relief should appropriately be granted.[12]
The Judgment
[12]Isolare Investments Ltd v Fetherston (2006) 1 NZTR 16-013 (HC) at [11].
The Judge recorded the parties’ competing positions.[13]
[13]Judgment under appeal, above n 1, at [6]–[8].
The appellants asserted prejudice because:
(a)Mr Wang is entitled to have the Kang shares transferred to him;
(b)Mr Kang has no beneficial interest in the Kang shares; and
(c)the charging order is preventing the proper management and performance of One Pure.
GDP asserted:
(a)Mr Kang continues to have a beneficial interest in the Kang shares; and
(b)the charging order should not be discharged unless Mr Wang pays into Court the amount of the PRC judgment or the “fair market value” of the Kang shares.
At the outset of the Judgment, the Judge recorded she was satisfied Mr Kang continued to hold the beneficial interest in the Kang shares and was accordingly declining the application for discharge.[14] Her reasons were then set out following a description of the background.
[14]At [9].
The Judge focused on the effect of the shareholders agreement. She referred to the appellants’ primary argument — that, because Mr Wang had taken steps to require a transfer of the Kang shares, in equity the Kang shares had been transferred to him. The Judge then identified the appellants’ alternative argument that, at the very least, the Kang shareholding was subject to Mr Wang’s rights under the shareholders agreements.[15]
[15]At [27].
The Judge found the beneficial interest in the Kang shares had not passed to Mr Wang because:
(a)for cl 12.1.3.I to be effective, in the absence of a constitution, it would be necessary to imply a term to make provision for the content of a transfer notice;[16]
(b)contrary to the submissions for the appellants, any implied term would require Mr Wang to provide consideration for the share transfer, as indicated by the right of the non-defaulting party under cl 12.1.3.II to not “purchase” the shares;[17]
(c)any provision requiring a transfer of shares for no consideration might well (aside from the scheme under cl 12.1.3) constitute a penalty and be struck out accordingly:[18] any transfer notice would, at the very least have to nominate a price for the Kang shares;[19]
(d)Mr Wang’s rights under cls 10 and 12 do not include a right of transfer of the Kang shares without payment for the same;[20]
(e)the non-defaulting party may decide not to purchase the shares and may require One Pure to be liquidated;[21] and
(f)the process therefore would not inevitably result in Mr Wang becoming bound to purchase the Kang shares.[22]
[16]At [29].
[17]At [30].
[18]At [33].
[19]At [32].
[20]At [30]–[33] and [35].
[21]At [31]–[32].
[22]At [32].
The Judge considered the price-fixing mechanism in cl 10.1 (for pre-emptive purchase) might be an appropriate price-fixing mechanism under cl 12.1.3.I.[23]
[23]At [35].
The Judge accepted the appellants’ alternative submission (not disputed by GDP), namely that the Kang shares are subject to Mr Wang’s rights under the shareholders agreement.[24] She noted GDP was not opposed to Mr Wang acquiring the Kang shares provided Mr Wang first paid into court the amount of the PRC judgment debt or the fair market value of the Kang shares.[25]
[24]At [34].
[25]At [8].
The Judge then turned to consider whether the charging order was causing the appellants prejudice by preventing the proper management of One Pure.
The Judge referred to the appellants’ evidence of important matters in respect of One Pure’s affairs being in abeyance. But she accepted the submission for GDP that such prejudice derives from Mr Kang’s absence and not from the charging order. The Judge commented it would be resolved if Mr Wang or a third party purchased the Kang shares.[26]
[26]At [37].
The Judge also considered a submission for the appellants that GDP would not be prejudiced through the Kang shares being excluded from the charging order. She observed that the Kang shares are one of Mr Kang’s assets and GDP is entitled to charge the shares as any other asset.[27]
Prejudice
[27]At [38].
We focus first on whether, in terms of the threshold requirement in r 17.44, One Pure and Mr Wang were persons “prejudicially affected” by the charging order.
The evidence of Mr Wang and Mr Geng clearly established One Pure and Mr Wang have been prejudicially affected through Mr Wang not having become the owner of the Kang shares. The evidence as to the impact upon One Pure’s relationship with its banker and its accounting firm is sufficient to establish prejudice. We further accept, as Mr Salmon KC for the appellants submitted, that the evidence establishes the continued viability of the business and the ongoing employment of its staff are being put at risk through the unresolved shareholding issue. Consequently, so too is Mr Wang’s investment.
For GDP, Mr Strauss submitted the Judge correctly concluded the issues raised by the appellants as to prejudice flow not from the charging order but from Mr Kang’s absence and failure to engage with the parties.
We do not accept that characterisation. The appellants had no assurance Mr Kang, if he had made himself available and engaged to some extent with the parties, would have given the transfer notice or otherwise sold his shares to Mr Wang. The detailed provisions of the shareholders agreement in relation to defaulting parties, under cl 12.1.3.I, represent a contractual commitment that the non‑defaulting party will be able to acquire the other’s shares with or without the co-operation of the defaulting party. In other words, cl 12.1.3.I provides for the very situation of non‑cooperation that confronted and still confronts Mr Wang. The non-defaulting party’s ultimate mechanism of acquisition is by acting as attorney or agent of the defaulting party under cl 12.2.
Mr Wang has been precluded from exercising his contractual rights under cl 12.2 by the operation of the charging order. But for the charging order, Mr Wang could have followed through the share transfer process unilaterally. Mr Kang’s absence is immaterial. For this reason we respectfully disagree with the Judge — it was the charging order rather than Mr Kang’s absence that was and remains the effective cause of One Pure and Mr Wang being prejudicially affected.
Enforceability of Mr Wang’s rights
A beneficial interest in the Kang shares
The Judge found the beneficial interest in the Kang shares had not, by reason of Mr Wang’s cl 12.1.3 notice, passed to Mr Wang.
In the appellants’ written submissions, an authority referred to for the proposition that the beneficial interest had passed from Mr Kang to Mr Wang was the High Court’s judgment in Thomson v Surch.[28] The appellants particularly rely on Eaton J’s finding that the plaintiffs there had acquired the beneficial interest in another shareholder’s shares. The case bears similarity to the present in that the plaintiffs’ right of acquisition arose, in the event of the other party’s default, under the transfer notice provisions of a shareholders agreement. The similarity of the two cases ends at that point — as is clear from the judgment in Thomson v Surch, the process described under the shareholders agreement in that case was in fact fully completed, leading to the Judge’s conclusion that the plaintiffs now had beneficial ownership of the shares.[29] We incline to the view that beneficial ownership in the Kang shares has not passed to Mr Wang, because Mr Wang is not, merely by requiring Mr Kang to provide a transfer notice under cl 12.1.3, committed to acquiring the Kang shares.
[28]Thomson v Surch [2022] NZHC 820 at [22]. See also Re Jonesex parte New Zealand Bloodstock Finance & Leasing Ltd [2023] NZHC 2111.
[29]Thomson v Surch, above n 28, at [13]–[14] and [22].
For the reasons we now come to, however, Mr Wang’s rights need not be determined by reference to whether, through the limited process that has occurred to date, he has acquired a beneficial interest in the Kang shares.
The rights and obligations attaching to the Kang shares
As summarised above at [40(a)–(c)], the Judge identified the need, in the absence of a constitution, for a term or terms to be implied to make cl 12.1.3.I of the shareholders agreement effective. In response to the appellants’ counsel submitting Mr Wang was entitled under cl 12.1.3.I to acquire the Kang shares without payment for those shares, the Judge found an implied term would require Mr Wang to provide consideration for any transfer.[30]
Appellants’ submission
[30]Judgment under appeal, above n 1, at [30].
For the appellants, Mr Salmon submitted the Judge’s approach to the implication of terms into cl 12.1.3.I erroneously led to the conclusion that Mr Wang would have to make a payment if he was to take a transfer of the Kang shares under cl 12.1.3.I. For the appellants, it was submitted an implied term as to a requirement of payment was unavailable for two reasons:
(a)a requirement of payment or a requirement that there be a valuation and an agreed price would be inconsistent with the terms of cls 12.1.3.I and 12.2. Such a term would also ignore the non-defaulting shareholder’s rights to proceed unilaterally under cl 12.2. The Judge’s reference to cl 12.1.3.II contemplating a “purchase” missed the point that cl 12.1.3.II applies only if the non-defaulting party has not exercised its rights under sub-cl I or does not for any reason purchase the shares; and
(b)were there to be an implied requirement for consideration for the transfer, Mr Wang would have the right to set off part of the debt of $22,350,000 arising from Mr Kang’s misrepresentations in relation to the shares. A cash payment could not be required by Mr Wang (or his successors).
Mr Salmon submitted the Judge had incorrectly focused on whether cl 12.1 might be viewed as a penalty clause and struck out, a submission which had not been made for the respondents in the High Court. Mr Salmon described any suggestion in relation to a penalty as an issue that would arise only between Mr Wang and Mr Kang.
Mr Salmon submitted the “real test” in relation to Mr Wang’s rights in relation to the Kang shares is to ask what would eventuate were the Court not to rescind the charging order and were Mr Kang to be adjudicated bankrupt (as one or other of his creditors would likely achieve). In the course of any realisation of Mr Kang’s assets, the Official Assignee (or any other successor in title) would be required by Mr Wang to follow the transfer notice procedure. Mr Wang’s right to a transfer cannot be undone. There would be no funds payable to GDP on account of the share transfer.
Mr Salmon identified what he submits are the three possible scenarios by which Mr Wang might complete the acquisition of the Kang shares if the charging order is rescinded. He submitted an analysis of these scenarios indicates there will be no financial harm to either respondent should the charging order be rescinded. The scenarios are:
(a)Scenario 1: in which Mr Wang issues a transfer notice without a stated purchase price;
(b)Scenario 2: in which Mr Wang identifies a purchase price, Mr Kang does not participate with any response, and Mr Wang acquires the Kang shares at Mr Wang’s figure by setting off the necessary portion of his judgment sum to cover the purchase price; and
(c)Scenario 3: in which Mr Kang does participate in a process, a fair price is determined, and Mr Wang completes the acquisition by setting off the necessary portion of his judgment sum to cover the purchase price.
Mr Salmon observed there is no prospect of loss for the respondents under Scenario 3. He submits, in relation to the earlier scenarios, GDP would have a fully effective means of achieving what it here asserts should be the required purchase price, namely through bankrupting Mr Kang on the basis of the PRC judgment and then having his Official Assignee in bankruptcy enforce what GDP suggests are Mr Kang’s entitlements by recovering any shortfall figure from Mr Wang.
Respondent’s submission
For GDP, Mr Strauss submitted the dismissal of the appellants’ application was correct for the reasons identified in the Judgment.
Mr Strauss submitted that Mr Kang remained the legal and beneficial owner of the Kang shares. He submitted on that basis it was unnecessary to consider arguments as to what rights Mr Wang may have acquired and how those rights may have been acquired — the initial charging order was validly made.
Mr Strauss identified the appellants must therefore establish they have been prejudicially affected by the charging order and submitted, as identified at [48] above, they have not been so prejudiced.
Mr Strauss submitted the value of the Kang shares would need to be determined as part of an execution process following appointment of a receiver under subpt 4 of pt 7 of the Rules to realise the shares. In his oral submissions, Mr Strauss emphasised GDP’s dispute is not whether Mr Wang has a right to the shares — GDP’s sole concern is the Court should not at this point rescind the charging order. GDP, in Mr Strauss’ submission, may appropriately take steps to have the present issue resolved through appointing a receiver to step into Mr Kang’s shoes for that process.
Discussion
The right Mr Wang seeks to exercise under cl 12 of the shareholders agreement is the right to acquire Mr Kang’s shares in the event Mr Kang breaches his obligations under the shareholders agreement. That is the very situation that has arisen.
The share transfer mechanisms under cl 12.1.3.I are self-evidently provisions intended to ensure, as between two shareholders, the non-defaulting party has an effective means of promptly exiting the defaulting party from ownership and governance and of having the company’s operations continue with minimised impact from the period of breach.
The primary focus in the determination of relief under r 17.44 is upon the prejudice the appellants assert they are suffering. In this case, the prejudice is not merely alleged but demonstrably exists at a high level. The charging order cuts across Mr Wang’s entitlement to acquire the shares. By contrast, GDP has no similar entitlement, contractual or otherwise, to the Kang shares. At best, GDP may share proportionately in any sums received to Mr Kang’s credit as a result of Mr Wang (or a third party) acquiring the Kang shares. Any assignee of Mr Kang’s estate will be able to enforce any such entitlement of Mr Kang in the interests of Mr Kang’s creditors, including both One Pure and GDP.
On our assessment of the justice of the case, these circumstances are sufficient to justify the rescission of the charging order. We do not consider it necessary for the purposes of the determination required under r 17.44 to determine whether, properly construed, cl 12.1.3.I requires consideration for the transfer of the shares. As Mr Salmon observed, the correct construction of cl 12.1.3.I was not, in the context of the rescission application before the High Court, the subject of any pleading of the nature that would have occurred had the construction issue been raised in a civil proceeding between Mr Wang and Mr Kang. Nor was evidence directed to the issue. In these circumstances it would be inappropriate for this Court to seek to determine precisely the proper construction of cl 12.1.3.I. It is unnecessary because, as suggested by Mr Salmon, a consideration of his three “scenarios” allows determination of the appeal by reference to the suggested harm arising on each scenario.
One or other of Mr Salmon’s three scenarios will arise at the point after Mr Wang issues a transfer notice as Mr Kang’s attorney, when Mr Wang decides to acquire the Kang shares. For the time being, Mr Wang cannot even exercise his contractual right to issue that transfer notice because of the terms of the charging order.
What GDP seeks to achieve by having the charging order remain in place is to prevent Mr Wang acquiring the Kang shares unless Mr Wang does so based on GDP’s terms that Mr Wang should provide cash (to be held in security by the High Court) for the purchase at a fair market value.
It is conceivable, if the proper construction of cl 12.1.3.I comes to be determined by a court, that the court would conclude that the clause requires consideration for the transfer of the Kang shares. In that event, Mr Wang’s assertion of an entitlement to set off a portion of the judgment debt appears cogent. If the right of set off applies, then any cash Mr Wang is forced to provide as security to acquire the Kang shares (on the basis of a fair market value) will be unavailable to Mr Wang until the ultimate determination of any litigation, only to then be released to him if and when his entitlement to set off his judgment debt has been upheld.
We accept Mr Salmon’s analysis of his three scenarios. Apart from Mr Wang, the only person who has beneficial or contractual rights in relation to the Kang shares is Mr Kang. GDP’s entitlement to obtain the charging order arises from its standing as an (unsecured) judgment creditor — that standing does not cut across Mr Wang’s contractual rights or Mr Kang’s contractual obligations and liabilities in relation to the shares.
In the event Mr Wang decides to take a transfer of the Kang shares, the relevant right remaining for Mr Kang, given his breaches of the shareholders agreement, is to receive his entitlement upon transfer. At this point, that entitlement is still enforceable at the suit of Mr Kang himself should he come forward. Alternatively, and in the likely event of his bankruptcy, his entitlements will be enforceable at the suit of the Official Assignee in his bankruptcy. If Mr Wang, acting on his power of attorney, has acquired the Kang shares without proper consideration, the deficit will be recoverable by the Official Assignee for the benefit of Mr Kang’s creditors according to their ranking. In the case of unsecured creditors, such as Mr Wang and GDP, their entitlements will be pro rata, with GDP entitled to less than 10 per cent of Mr Wang’s entitlement.
Mr Wang’s contractual entitlement to take a transfer unilaterally is reinforced by Mr Kang giving Mr Wang his power of attorney in relation to a transfer procedure. If Mr Wang, in acting as Mr Kang’s attorney, is later found to have not met a contractual entitlement to consideration, he can be held accountable for that.
There is a demonstrated high level of prejudice occasioned to Mr Wang and One Pure through Mr Wang not being able to exercise his contractual right to acquire the Kang shares. There is a lack of demonstrated prejudice to GDP as a party having no direct rights in relation to the shares.
We conclude the appellants’ application for rescission of the charging order should have been granted. The Judgment, with its focus on considering the likely nature of implied terms, did not identify the lack of prejudice to GDP’s standing and rights regardless of how cl 12.1.3.I is ultimately construed.
Outcome
The appeal is allowed.
An order is made rescinding the charging order dated 14 November 2022 to the extent it applies to the estate, right, title or interest of Yongnan Kang in One Pure International Group Ltd.
The first respondent must pay the appellant costs for a standard appeal on a band A basis with usual disbursements. We certify for second counsel.
The costs order made in the High Court is set aside.
Solicitors:
Wynn Williams, Auckland for Appellants
JC Legal, Auckland for First Respondent
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