Wenzhou Hongliang Trading Co Limited v MSUT Trustee Limited

[2020] NZHC 1492

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-000453

[2020] NZHC 1492

UNDER

the Property Law Act 2007

IN THE MATTER

of an application for an order under s 348 for orders setting aside certain dispositions of property

BETWEEN

WENZHOU HONGLIANG TRADING CO LIMITED

Plaintiff

AND

MSUT TRUSTEE LIMITED

First Defendant

MSM HOLDINGS NZ LIMITED

Second Defendant

Hearing:	10 June 2020
Appearances:	H Thompson for the Plaintiff P Twist for the Defendants
Judgment:	30 June 2020

JUDGMENT OF MOORE J

This judgment was delivered by me on 30 June 2020 at 11:00 am pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar Date:

WENZHOU HONGLIANG TRADING CO LIMITED v MSUT TRUSTEE LIMITED &  ANOR  [2020]  NZHC 1492 [30 June 2020]

Introduction

[1]                 Wenzhou Hongliang Trading Co Limited (“Wenzhou”) is the beneficiary of a freezing order made by Duffy J on 19 March 2020 against the first defendant, MSUT Trustee Limited (“MSUT”) and the second defendant, MSM Holdings NZ Limited (“MSM”).

[2]                 On 13 May 2020 Lang J granted MSM’s application to vary the freezing order. This was to enable the settlement of a residential section (Lot 3) with immediate effect.

[3]                 As the Judge noted further sales of residential sections are likely.1 It is understood that a further nine sections are expected to be sold. Wenzhou seeks particular information from MSUT to satisfy itself that any future sale is a genuine arm’s length transaction and that the manner in which the proceeds of sale are to be distributed is appropriate.

[4]                 Although Lang J exhorted the parties to reach agreement as to what information should be disclosed, there remain certain classes of information Wenzhou claims are required and which MSUT says are either unnecessary to achieve what is sought and/or are irrelevant to the question of determining the dispute and making orders. A hearing to determine what information MSUT is required to disclose proceeded before me. This judgment deals with that issue.

Why is the application being brought?

[5]                 The freezing order in favour of Wenzhou was granted to preserve the assets of MSM and MSUT pending the outcome of proceedings brought by Wenzhou against the companies under s 348 of the Property Law Act 2007 (“the Act”) to “unwind certain transactions”. Wenzhou alleges that Gerald Williams, the sole director of MSM,2 transferred wealth  from  himself  to  the  companies  to  the  prejudice  of  Mr Williams’ creditors, including Wenzhou, in circumstances which engage the remedies under the Act. The detail of these allegations is set out Wenzhou’s statement of claim dated 13 March 2020.

1 At [3].

2      MSUT is the sole shareholder of MSM.

[6]                 Mr Williams is a judgment debtor and Wenzhou is a preferential creditor of another company of which Mr Williams was a director. For reasons which are unnecessary to canvas for the purposes of this judgment, Wenzhou is highly mistrustful of Mr Williams.

[7]                 MSM is a property development company. Relevantly, it is in the process of marketing and selling new sections in its property development (“the development”) situated at 6 Shire Place, Papamoa. There were 10 sections included in the development. Lot 3, referred to above, has already been sold, leaving a further nine on the market.

[8]                 A freezing order must not prohibit MSM from dealing with the assets covered by the order for the purpose of disposing of assets, or making payments, in the ordinary course of its business.3 While the freezing order does not prevent MSM from selling sections in the development in the ordinary course of its business or from distributing or allocating sale proceeds in the ordinary course of its business, Wenzhou is unwilling to take Mr Williams at his word as to the nature of these transactions or the distribution of funds from any sales. Wenzhou is seeking to recover $575,000. The freezing order relates to funds from the proceeds of sale after the repayment of mortgages and costs. Wenzhou seeks information, supported by source documents, to enable it to be independently satisfied that any sales transactions undertaken by MSM are taking place in the ordinary course of its business.

What information does Wenzhou seek?

[9]                 Mr Thompson, for Wenzhou, in his memorandum of 29 May 2020, advised that the parties had made some progress towards reaching an agreed position but, as at the time of filing the memorandum, there remained four categories of information which, despite Wenzhou’s requests, MSM refused to provide. These were:

(a)copies of all documents submitted to funders or prospective funders of the project from time to time;

3      High Court Rules 2016, r 32.6(3).

(b)details of the arrangements with the vendor/caveator including a copy of the sale and purchase agreement/s and details of repayment arrangements in respect of vendor finance;

(c)copies of management (or similar project) accounts for [MSM] prepared in relation to accounting periods subsequent to 31 March 2017; and

(d)an    explanation    of    the    relationship    between     MSM     and Mr and Mrs Jordan, who own (or owned) the property at 17 Palamino Place, which seems to be part of the same development, including copies of any agreements or documents evidencing an arrangement or understanding between those parties.

[10]              Since filing that memorandum there have been further discussions between the parties and the position has been, to some extent, refined. Thus, in relation to [9](b) above, MSM has agreed to provide details of the arrangements with the vendor/caveator and details of repayment arrangements in respect of vendor finance. MSM does not, however, agree to provide a copy of the sale and purchase agreement because, in MSM’s view, it is irrelevant. The purchase of 6 Shire Place by MSM is irrelevant because the freezing order applies only to future dispositions of the lots and the repayment of mortgagees and lenders. What is still owed to the vendor/caveator will be disclosed.

[11]              Mr Twist, for MSM, submitted that the remainder of the information and documents of the sort described in [9](a), (c) and (d) above are irrelevant to whether any sale of the section by MSM is within the ordinary course of its business or whether the proceeds of sale have been distributed appropriately.

Submissions

Wenzhou

[12]              In oral argument before me, Mr Thompson refined Wenzhou’s position in respect of the remaining three outstanding categories of information Wenzhou seeks.

[13]              In respect of the first category, that is copies of all documents submitted to funders or prospective funders, he submitted this information is necessary because it gives an indication of MSUT’s “view of its own business’ value and its prospects”. In other words, he says Wenzhou needs to understand the business in order to identify which transactions are in the ordinary course of business and which may not be.

[14]              As for the second category of information, that is copies of management or similar project accounts after 31 March 2017, Mr Thompson said he had been advised that the 2017 accounts are the most recent set of financial accounts for the company. However, as Mr Thompson explained, these accounts are of limited value because they pre-date the acquisition of the land which has since been subdivided. He submitted that up-to-date accounts would provide an objective measure of how the company had performed and what its assets and liabilities are. Mr Thompson advised that while MSUT objects to the production of these documents it has not confirmed they do not exist. Mr Thompson submitted that although MSUT has indicated it is prepared to provide copies of loan agreements, these do not assist in informing what amounts are currently outstanding and what has been paid in the past. He says that these accounts will assist in determining whether the properties are being sold for proper value and at arm’s length and that the proceeds are being distributed appropriately.

[15]              The third category relates to sections held in the name of Mr and Mrs Jordan. Mr Thompson advised that in addition to the sections held in the name of MSUT there are also some sections held in the name of a Mr and Mrs Jordan. This necessarily means there was some arrangement between MSUT and the Jordans because MSUT had a caveat over a title held in the name of the Jordans which, when searched, was found to be supported by an agreement for sale and purchase. The agreement has not been settled and what Wenzhou seeks is some understanding of the nature of the relationship between the Jordans and MSUT.

MSUT

[16]              In essence, Mr Twist, for MSUT, submitted that there has been a long history of repeated requests by Wenzhou seeking information which, when provided, has excited further requests. The essence of his submissions was that at some point, a line

must be drawn. He pointed out that MSUT agreed to the freezing order in the belief that all that would be required from that time would be disclosure demonstrating that MSUT was acting in the ordinary course of business. By way of illustration he referred to the transactions involving the Jordans, which he advised occurred some years ago. They are historic transactions and irrelevant to the present issues, with no connection to the issue of whether the sale of future lots are made in the ordinary course of business.

Discussion

[17]              Under r 32.3 of the High Court Rules 2016, I can make an ancillary order eliciting information relating to assets relevant to the freezing order if I consider it just to do so. The jurisdiction to make an ancillary order has the degree of flexibility needed to meet the justice of the individual case.4 The purpose is to ensure the freezing order can be properly policed and is effective.5

[18]              The question before me is: what information must MSM provide to Wenzhou in relation to future sales of sections in the Papamoa development so that Wenzhou is informed of the ‘ordinary course’ of MSM’s business? The first category of information sought by Wenzhou are the copies of documents submitted to funders or prospective funders. MSM does not oppose the making of orders which would require MSM to promptly provide Wenzhou with:

(a)a copy of the sale and purchase agreement, with an explanation of the identity of the purchaser and of how the purchaser was introduced to the property;

(b)the settlement statements including:

(i)the settlement statements sent by MSM to the purchaser;

4      Twentieth Century Fox Film Corporation v Dotcom [2014] NZHC 1789 at [12]; Shaw v Narain

[1992] 2 NZLR 544 at 548.

5      Monasterio v Bujak HC Christchurch CIV-2008-409-1901, 21 August 2009.

(ii)each settlement statement from a mortgagee who is to be paid from sale proceeds;

(iii)any settlement statement, invoice or other supporting voucher for any other statement or proposed payment from net proceeds of sale;

(c)supporting documentation for each mortgage, comprising loan and security agreements, together with any subsequent variations or side letters; and

(d)MSM’s solicitor’s draft statement of application of settlement funds.

[19]              In my view the provision of that material adequately identifies and confirms that the transactions are in the ordinary course of business and that the proceeds of sale have been distributed appropriately. I do not accept that anything further is required of MSM. Representations made to funders or prospective funders are irrelevant and quite unnecessary to give effect to the orders.

[20]              Accordingly, I make orders that MSM provides Wenzhou with the information set out at [18] herein.

[21]              The second category of information requested by Wenzhou is copies of the management or similar project accounts after 31 March 2017. I agree with Mr Twist that copies of management or similar project accounts are not necessary to prove that any sale of a lot within the development is in the ordinary course of business. For that reason I am not prepared to make the orders Wenzhou seeks in this respect.

[22]              The third category seeks an explanation by MSM of the relationship between it and the Jordans on the grounds that the property concerned appears to be part of the development. Also sought are copies of any agreements or documents evidencing an arrangement or understanding between MSM and the Jordans.

[23]              Again, on the information before me it would appear that the Jordan transaction is historic and has no bearing on or relevance to the issues in relation to the remaining sales in the development. For that reason I am not prepared to make the orders sought.

Result

[24] Wenzhou’s application for further information is declined except for the orders set out at [18] above which are now made.

Moore J

Solicitors: