WH v YL
[2021] NZHC 3434
•14 December 2021
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-000600
[2021] NZHC 3434
BETWEEN W H
First Applicant
AND
Applicant Company Second Applicant
AND
Y L
First Respondent
AND
Respondent Company Second Respondent
Hearing: 7 December 2021 Appearances:
S Hunter QC and N L Walker for First and Second Applicants J B M Smith QC and J L W Wass for First Respondent
No appearance for or on behalf of Second Respondent
Judgment:
14 December 2021
JUDGMENT OF GENDALL J
This judgment was delivered by me on 14 December 2021 at 11.30 am Pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
W H v Y L [2021] NZHC 3434 [14 December 2021]
NOTE: This judgment has been anonymised for publication
Introduction
[1]The first respondent (YL) has applied for:
(a)orders discharging freezing and ancillary orders made against him and against the second respondent company without notice by this Court on 3 November 2021 (the freezing order); and
(b)various procedural orders relating to the conduct of the underlying substantive proceeding.
[2] The orders in question were made as a matter of urgency by this Court without notice against both the first respondent, who is a director of the second respondent company, a company incorporated in the British Virgin Islands (BVI) and the second respondent. Joint provisional liquidators had been appointed to the respondent company in the BVI before the freezing orders were made.
[3] The freezing orders made on an interim basis were to run until 3 February 2022 and were limited to the sum of US$151 million, over assets having a value no greater than that figure.
[4] The assets which are the subject of the freezing order are essentially cash, bank accounts, securities and other investments owned by the second respondent. That order restrains both the first respondent and the second respondent from “transferring, moving or otherwise charging, or disposing of or dealing in any manner whatsoever with any of their assets, or assets held jointly with or beneficially for the respondent(s) whether real or personal or held in their name or jointly with any other property, or any such assets in which either respondent may have a beneficial interest wherever located anywhere in the world, save as to the extent the value of assets exceeds US$151 million and including, but not limited to the following (worldwide) assets:
(i)any funds and/or moneys in the possession of the respondent; and
(ii)any other property held by the respondents.
[5] The present application for orders to discharge the freezing orders and ancillary orders is opposed by the first and second applicants (WH and the second applicant company).
[6] Those applicants in this proceeding, WH and the applicant company, have filed a substantive proceeding against YL and the second respondent, seeking amongst other things the return of the USD$151 million. All parties accept this sum was contributed to the second respondent company by WH. Profits, interest and costs on this are also sought relying on pleaded causes of action against the respondents relating to:
(a)undue influence;
(b)breach of fiduciary duty;
(c)knowing receipt; and
(d)the tort of deceit;
Background facts
[7] By way of general background to this matter, WH and YL were married in Nelson, New Zealand in June 2019 having begun a relationship in around late 2016 or early 2017. I understand they are now separated and living apart. As a result of the sale of a successful business WH had co-founded, she received about US$163 million from this sale some time in 2018. She maintains she was required and/or strongly encouraged then by her husband, YL, to invest US$151 million of this in a new company venture involving the second respondent in which YL would be involved.
[8] Prior to the relationship between WH and YL commencing, WH had been married to her first husband and together had a child before they separated in January 2015.
[9] WH in her evidence confirms she had only a poor grasp of English up to early 2019 when she moved to New Zealand. Her first language and preference throughout was always to communicate in Chinese.
[10] YL in contrast has an undergraduate degree from a college in New York, USA, is fluent in English. He founded a translation service provider in 2011 and apparently invested in and advised numerous start-ups. It is said he has significant knowledge and expertise in financial matters.
[11] WH maintains that when she received the US$163 million from her earlier business sale she was pressured by YL into investing the US$151 million she did into the second respondent company. YL had incorporated that company in the BVI on 9 April 2018, five days after WH’s sale of her earlier business interest. Since incorporation YL has been the only director of the second respondent, although he maintains two additional corporate directors were appointed on 13 September 2021 (WH contends these corporate directors are likely to be merely shell companies entirely controlled by YL). Initially YL was the sole shareholder of the second respondent from the date of incorporation until 25 August 2018 when YL’s shareholding was transferred to another company incorporated in BVI, it seems for his beneficial interest only.
[12] WH says that round 22 June 2018 YL provided her with only the signature page of a share purchase agreement (SPA) to effect what was to be her investment through the second applicant in the second respondent company. The SPA provided that the second applicant was to purchase 20 per cent of the share capital (as preferred shares in the second respondent) for a total sum of US$178 million.
[13] WH maintains that to the best of her recollection, it was only the signature page of the SPA that she saw and signed. But in any event she says it would have made no difference when she signed the SPA as it was in English, she could not read it and YL insisted she sign it urgently. In her evidence WH maintains:
I do not recall seeing the full document of the (share purchase agreement). I was rushed into signing by (YL) and pressured to sign. I trusted him completely on financial matters at the time and believed he was acting in my best interests. I had no reason to doubt his intention. I signed the document
without asking to see a full copy, or for a translated version so that I could understand, or a lawyer to assist me. (YL) did not give me time to think about such things. He did not explain the terms of the (share purchase agreement) or what preferred shares meant in any detail.
[14] After the SPA was signed, as part payment of the US$178 million price, WH transferred to the second respondent, using her company the second applicant, two payments. The first was US$140 million in June 2018 and a further second payment of US$11,000 was made in July 2018. WH’s position in her evidence is that:
(a)YL advised and pressured her to sign the SPA;
(b)YL said to her that he was the only person who could genuinely help her and he rushed WH to sign the SPA without giving her time to consider the document or the transactio;
(c)to the best of her recollection YL did not provide her with a full copy of the SPA and only showed her and asked her to sign its signature page;
(d)YL did not give WH an opportunity to read the SPA, a complex document in English which she could not read, or to obtain legal or other advice on the terms or effect of the agreement;
(e)YL did not provide WH with a translated version of the SPA;
(f)YL did not explain the terms or effect of the SPA, including her rights as a shareholder to access information and exit rights;
(g)YL represented to her that she would retain beneficial ownership of all the proceeds (being the US$151 million she was providing and any investment gains), even though she was only taking a 20 per cent shareholding in the second respondent;
(h)YL said the investment structure of the second respondent was very favourable to WH due to her company, the second applicant, being
allotted preference shares which had pre-emptive rights in the event of winding up;
(i)in any event the second respondent’s investment structure was only a temporary arrangement pending the conclusion of WH’s divorce proceedings with her first husband when a more reasonable structure would be adopted; and
(j)YL would manage and invest the US$151 million proceeds and all other moneys invested in the second respondent, he would ensure the security of those moneys and he would not act improperly in any way in managing the moneys.
[15] WH maintains that, but for YL’s influence and misleading representations he made to her, she and her company, the second applicant, would not have invested in the second respondent.
[16]Later it seems on 1 September 2018, the following matters occurred:
(a)YL’s own company surrendered its one ordinary share in the second respondent and was allotted 800 class A ordinary shares;
(b)WH’s company, the second applicant, was allotted 200 series A preferred shares in the second respondent;
(c)the second respondent adopted an amended memorandum and articles of association which provided in Article 2.13 for an automatic and immediate conversion of the second applicant’s series A preferred shares in the event of it, in any way, changing its control into series B ordinary (non-voting) shares.
(d)as to that last aspect, YL says that Article 2.13 was “intended to protect WH’s, the second applicant’s and the second respondent’s interests if some or all of the shares of the second applicant or WH were transferred to her first husband after or as part of her divorce”.
(e)in any event it is accepted that the investment of WH and the second applicant in the second respondent company was documented on the basis of an allotment to her of preference shares with preferential dividend rights and preferential rights on liquidation. However WH maintains she never saw any drafts of the memorandum and articles of association of the second respondent and had no knowledge at the time of the true arrangements.
[17] Another matter initially was raised here by WH. This related to the setting up of a trust in Hong Kong for WH which YL arranged in December 2018. Trust documents were prepared and WH says YL advised her to sign these, again in a hurry without allowing her time to consider the documents which were again in English. WH says as a result she was quite unable to read or understand any of these documents. No translated versions of the documents were provided, nor any explanation given as to the terms.
[18] As part of this, WH says YL arranged for the transfer of one ordinary share in the second applicant company to be made to the new trust, this he said being in her best interests. WH complains now that this transaction might well trigger the conversion provisions of Article 2.13 in the second respondent’s Articles of Association thus, converting her company’s shareholding in the second respondent from series A preferred shares to class B ordinary shares (non-voting). WH maintains this would result in at least an effective 80 per cent dilution of her interests (in terms of dividend and liquidation preference) in the second respondent.
[19] YL disputes this. He contends there was never any conversion. WH however still has issues with all of this.
[20] Further, WH complains that YL has refused to provide any information relating to the second respondent, except for one unsatisfactory investment report, and that he has refused to unwind her substantial investment in the company. She says too her specific requests for a return of her money or any dividends from the company were strongly refuted by YL and she maintains her concerns over a real risk of dissipation of her asset in the second respondent has escalated. This is even more so she says
given that all parties appear to accept the only initial investment of any kind in the second respondent is the US$151 million contributed by WH and her company.
[21] One other matter of some consequence arose for the first time at the hearing before me on 7 December 2021. This followed very late filing of a third affirmation of YL (which appeared to be dated the day before the hearing, 6 December 2021). This affidavit from YL followed a very lengthy previous affidavit he had filed in this proceeding on 29 November 2021 and a further affidavit on 2 December 2021.
[22]In that 6 December 2021 affidavit YL relevantly deposed:
4 … late last Thursday, 2 December, I recalled a memorandum of Charge by UBS over (the second respondent’s) assets, the Charge, which was provided as security for the obligations (E Inc) in connection with a line provided to that company from UBS. I am a director of E Inc and am its beneficial owner.
5 … a copy of the Charge, which is in the standard form produced by UBS, is attached …
6 … unfortunately I inadvertently overlooked the existence of the Charge at the time of preparing my initial evidence and understand that it should be brought to the Court’s attention. As soon as I recalled the Charge, I worked as quickly as possible to gather the information in this affirmation to ensure the Court was presented with a full and complete picture on oath.
… for the reasons explained below, the existence of the Charge does not alter the statements I made … that the second respondent’s business is solvent and remains in excellent health, with assets of more than US$180 million. … However, I appreciate that the existence of the charge and how it came into existence should be explained to the Court; for the reasons described in more detail below, it reflects a mistake on my part and that I never intended to encompass the second respondent’s assets and thought at the time that the arrangement made with UBS was that the security was to be over my shareholding in the second respondent rather than over the second respondent’s assets. Having now recognised that mistake, my intention is to work together with UBS and the JPLs to remove the Charge (or its effect) as soon as possible so that the assets of the business will be free from any security interest.
[23] This 6 December 2021 affidavit of YL was provided to the Court it seems on the morning of the 7 December 2021 hearing. The exhibits attached to YL’s affidavit appear to show the UBS Charge document, providing for an advance YL says of US$54.4 million to his interests through his company E Inc, but charged in particular over all the assets of the second respondent. Clearly this UBS advance was likely to
be utilised for trading by the borrower E Inc, described at page 4 of the Charge document whereby it is stated:
(a)As a third party security provider, you (the second respondent) may become liable for the indebtedness or obligations of the Borrower instead of all together with the Borrower. You may also be exposed to the Borrower’s economic risks of trading in securities, derivatives and/or currencies on a margin basis, which you may not be able to mitigate. The Borrower’s risk appetite may be higher than yours and may not necessarily be reflected in your risk tolerance assessment with the banks … and
(2)… The provisions governing the security include an “all moneys clause” which means that you could be liable to discharge all liabilities and obligations whether present or future, actual or contingent incurred to the bank (being UBS Ag) … by the Borrower in each case whether individually or jointly and whether a security or otherwise. Liability thereunder is unlimited.
(3)… The assets in your account so charged may be realised, disposed of or sold by the bank at such price without notice in order to satisfy the Borrower’s obligations.
[24] This charge to UBS over the assets of the second respondent presents a matter of some concern. It is acknowledged that YL in his 6 December 2021 affidavit suggests first, that the security over the second respondent’s assets initially was given “in error” as he intended UBS to take a charge only over his shareholding in the company and not a charge over the company’s assets but that in any event, secondly, the charge is not likely to be called upon given his claim that his company E Inc, who obtained the loan, has assets to more than cover the US$54.4 million advance from UBS. From what evidence is before me, however, concerns must remain over two matters. First this must relate to the nature of the UBS charge, being an unlimited all obligations charge securing past, present and future advances, and accordingly the possibility remaining of YL borrowing further from UBS and secondly whether or not other securities or assets outside the second respondent may be sufficient to meet any demands that are made. I leave on one side questions over whether YL, as the sole or major director of the second defendant, in any event acted properly and was not in breach of his duties in providing this security to UBS. This is particularly the case given that the assets charged were purely to secure advances made not to the second respondent but entirely personal to him and his interests.
Jurisdiction
[25] Certain jurisdiction issues tentatively arose before me. First, as I have noted, the second respondent company was not represented by nominated counsel at the hearing. Mr Smith appeared as lead counsel for YL but was not appearing for the second respondent.
[26] In his submissions at [95] Mr Smith maintained that these proceedings had not yet been served on the second respondent company in the BVI. Before the Court however is an affidavit of Service of Natasha McGiore (sworn 24 November 2021). She is a former legal secretary in the BVI and deposes to personally serving the second defendant at its registered office in the BVI with documents for the substantive proceeding and the freezing orders applications. This service took place on 8 November 2021 and Ms McGiore deposes that she received a signed Service Letter acknowledging service.
[27] No documentary response of any kind, either to this substantive proceeding or to the freezing order applications, has been filed for the second defendant. Despite this, and acknowledging that the second defendant was now the subject of BVI Court orders appointing joint provisional liquidators as I note above, YL to some extent here purported effectively to oppose the freezing orders both for himself and on behalf of the second respondent. In one sense he did this in his capacity as a director of the second respondent, although his powers in this regard may well have been somewhat circumscribed when the BVI appointed joint provisional liquidators, which they did prior to the without notice freezing orders being issued.
[28] Nevertheless, matters proceeded before me at the hearing on 7 December 2021, effectively with the consent of all counsel, on the basis that jurisdiction did exist to hear and consider YL’s application seeking to fully discharge the without notice freezing and ancillary orders made against both him and the second respondent in this Court earlier.
Freezing order application
[29] What is effectively at issue here is whether permanent orders sought by the first applicant and the second applicant, brought under Pt 32 of the High Court Rules, should be granted.
[30]As McGechan on Procedure at para HR 32.2.03 provides:
Essentially there are three requirements for a freezing order: a good arguable case on the substantive claim; assets to which the order can apply; and a real risk that the respondent will dissipate or dispose of those assets. In endorsing these requirements in Shaw v Narain [1992] 2 NZLR 544 (CA) at [438], the Court of Appeal stressed the importance of presuming the flexibility of the remedy, and the need to consider the overall justice of the case, balancing the need to protect the applicant so as to ensure any judgment is not rendered barren against any prejudice or any hardship to the respondent or a third party.
[31]I turn now to consider each of these three requirements.
[1] Good arguable case
[32] In confirming the first of the three requirements for a freezing order as a good arguable case, the authors of McGechan on Procedure go on to state at HR 32.2.03 under sub-para (1):
(a)A good arguable case is established if the allegations in the proposed claim are capable of tenable argument and are supported by sufficient evidence, bearing in mind the early stage at which the application is likely to be brought …
(b)The applicant does not, however, need to demonstrate that its case is strong enough to entitle it to summary judgment … The good arguable case has been described as a minimum … “threshold” for the exercise of the jurisdiction. It is a circumstances dependent threshold. Thus the applicant’s case must be better than one barely capable of serious argument, but need not have a greater than 50 per cent prospect of success.
(c)A freezing order will not be granted to an applicant who has no cause of action at the time of the application …
(d)Nor will a freezing order be granted on a quia timet basis (that is, where the actions are merely threatened) …
(Citations omitted).
[33] Here the causes of action advanced in their pleadings by WH and the applicant company are essentially:
(a)undue influence;
(b)breach of fudiciary duty;
(c)knowing receipt (as against the second respondent company only); and
(d)the tort of deceit (fraudulent misrepresentation).
[34] In their submissions WH and the second applicant contend the evidence which has been filed in support of the freezing orders application to date establishes a good arguable case on each of those claims. It is their contention that “ample evidence that establishes a plausible foundation” for the case on each cause of action has been met here in terms of the requirement outlined by the Court of Appeal in Dotcom v 20th Century Fox Film Corporation & Ors.1
[35] Dealing in a preliminary way with this question of evidence before the Court, before me Mr Smith for the first respondent, in addition to his argument that YL had been entirely surprised and blindsided by these proceedings when they were issued against him and the second respondent, suggested that despite the enormous volume of evidence which has already been filed in this proceeding to date, any detailed factual analysis of what may have truly happened cannot usefully be undertaken at this interim stage of the Court’s enquiry into these matters. He referred in this respect to the caution expressed by Mander J in his dicta in Miyamoto International New Zealand Limited v Foster Street Properties Limited.2 Properly, Mr Smith noted here, the allegations advanced at this point necessarily are untested by cross-examination and much will depend ultimately upon the context and credibility questions.
[36] Mr Smith notes too that YL hotly disputes a range of the factual contentions which have been advanced here by WH. This is not unexpected given the relatively
1 Dotcom v 20th Century Fox Film Corporation & Ors [2014] NZCA 509 at [18].
2 Miyamoto International New Zealand Limited v Foster Street Properties Limited, [2015] NZHC 3086, at [37].
acrimonious separation of WH and YL and the resulting animosity which has clearly developed between them. Mr Smith, again quite properly, cautioned the drawing of any firm conclusions from this evidence at the present point.
[37] That noted, one issue needs to be emphasised. This is an issue that was not before or included in the 3 November 2021 judgment of Eaton J, granting the without notice application before him for ex parte freezing and ancillary orders.
[38] This is what might be seen as the rather late disclosure by YL in his third affidavit of 6 December 2021 that I note at para [23] above. This of course related to a disclosure of the UBS charge given by the second respondent company, no doubt at the instigation of YL, as I understand its sole director at the time, for substantial advances to be made for his personal interests only. Those advances were made to his company E Inc, and according to YL’s evidence they now stand at US$54.4 million. From his evidence they appear to have been used solely for YL and his company E Inc personally, as the UBS charging document notes, amongst other things to trade in securities, derivatives and/or currencies on a margin basis, which it seems involves some degree of economic risks as UBS warns. None of this it appears was in any way for the benefit of the second respondent.
[39] The UBS charge over the assets of the second respondent company, and its effective guarantee of all UBS advances made to date and in the future to YL and his company E Inc, in my view represents a significant development in this case, and one only disclosed by YL immediately before the hearing of this matter before me.
[40] It is the case that YL in his 6 December 2021 affidavit does suggest the assets of his company E Inc are substantial and would go some way to covering the majority of the UBS advance the second respondent is guaranteeing.
[41] WH and the applicant company however did raise before me significant questions as to the true position of E Inc and its security value to UBS. Certain material is before the Court of a very limited nature which YL suggests does help to substantiate E Inc’s position. I do not accept this however. No independent verification of any significant kind in relation to this is before me. And in any event,
the ability of UBS to proceed under its security given by the second respondent for the current $54.4 million indebtedness, plus interest, costs and holding charges, together with any further advances which might be made by UBS on this unlimited advances security loan, would entangle the second respondent in a major potential dispute and subject its assets to an immediate security claim. The fact that those charged assets of the second respondent would seem to be realisable over relatively short periods of time, given their nature as cash and securities, also as I see it, encourages USB to claim against these in the event of default under its overall loan arrangements with E Inc.
[42] With all these matters noted I now return to this question of a good arguable case and the currently pleaded causes of action by WH and the applicant company.
(a) Undue influence by YL and the second respondent
[43] WH and the first applicant contend here that a presumption of undue influence arises against YL. He was WH’s husband and trusted investment advisor and as such she reposed significant trust and confidence in him. It is self-evident according to the applicants that the transactions here call for significant explanation given that the outcome that has resulted is that WH has paid from her own assets, US$151 million to ultimately own what is only 20 per cent of the shareholding in the second respondent company, albeit these shares it seems are for some purposes seen as preferential shares. That company in which WH invested, all parties accept, has no other assets. WH certainly has no effective control in relation to the matters affecting that company, no ability to insist on dividends being paid and no exit mechanism from the company. From the outset, YL was the sole director of the second respondent company, although he says recently two corporate director have been added as second and third directors. As I note above, WH suspects however these companies are entirely under the control of YL.
[44] As an alternative, the applicants contend that YL exercised actual undue influence here over his wife WH. That undue influence they say caused WH to enter into the SPA on behalf of the applicant company, to approve the transfer of the US$151 million proceeds from that company to the second respondent, and later to enter into
the transactions associated with the establishment of a trust which YL had arranged, including the share transfer to the trust.
[45] On these aspects, according to WH, relevant evidence supporting the claims to undue influence here include the following:
(a)the disparity in and absence of language skills held by WH. Until recently she did not know or understand English and YL who was fluent throughout, left WH highly dependent on him to trust him and to understand the meaning of documents he placed before her for signature;
(b)a disparity in financial literacy that is said to exist between WH and YL;
(c)the significantly detrimental financial structure of the investment arrangements in the second respondent from WH’s perspective which YL orchestrated and the significant benefit to YL from those arrangements;
(d)the circumstances including those in which the various transactions relating to the US$151 million transactions were entered into with WH deposing that she was rushed, significantly pressured, threatened and influenced by YL to make the investment with no independent advice provided or allowed;
(e)the significant representations relating to all these transactions made by YL throughout and WH’s personal vulnerability at the time of the transactions.
[46] WH says in each case the second respondent company was on notice of this undue influence given that it operated at the relevant time only through YL as its agent.3
3 Barclays Bank v O’Brien [1994] 1AC 180 (HL) at [195].
[47] The applicants’ claim here is that they have suffered loss as a result of this undue influence and so in their substantive pleadings they seek recision of the impugned transactions or in the alternative an enquiry as to equitable compensation.
(b) Breach of fiduciary duty by YL and the second respondent
[48] WH and the second applicant in their present statement of claim allege that YL and the second respondent owed and continue to owe fiduciary duties to WH and the applicant company and those fiduciary duties have been breached through the exercise of influence, the various misrepresentations made and by acting contrary to the duties of loyalty, good faith and the further duty not to profit. YL it is suggested has a fiduciary duty here as an agent and financial adviser. His specific fiduciary duties existing here required actions that are absolutely open and fair, and he was both required to avoid undisclosed personal interests and divided loyalties and to disclose all material information relating to various transactions.
[49] WH in particular contends these obligations have been breached in significant ways by both YL and the respondent company and these breaches of fiduciary duty have caused loss to both of the applicants. Again, recision of the impugned transactions or in the alternative an enquiry as to equitable compensation is sought.
[50] Although not at this stage pleaded, the recent disclosure by YL of the charging of the second respondent’s assets in favour of UBS as I see it will also lead to amended pleadings relating to further alleged breaches of duty here against WH and the applicant company.
[51] In my view there is substance in all these allegations which require further investigations.
(c) Knowing receipt by the respondent company
[52] WH and the applicant company further plead that the second respondent received the US$151 million from them as a result of a breach of fiduciary duty and a clear breach of YL’s conflicted obligations at the time as the sole director of the second respondent. They go on to contend the second respondent had actual and/or
constructive knowledge that it received these funds as a result of that breach of duty given that unquestionably it could only act at all times through YL as its director.
[53]Liability for knowing receipt will arise where there is:4
(a)the transfer of property in breach of trust;
(b)the defendant beneficially receives that trust; and
(c)the defendant has the requisite knowledge that the transfer was in breach of trust.
[54] Although there is a significant dispute regarding this claim, for present purposes I am satisfied that, subject to a careful analysis in due course of the relevant evidence, and given too that YL was the sole director of the second respondent company at the relevant period, a reasonable argument follows here that the second respondent knowingly received the US$151 million proceeds in breach of fiduciary duty. Again recision of the impugned transactions or equitable compensation is sought in the applicant’s pleadings.
(d) Tort of deceit by YL and the second respondent
[55] In this pleading, the applicants contend that YL made representations to WH and the applicant company and that in making them, YL and the second respondent (via YL) either knew that they were untrue, or did not believe that they were true, or were reckless as to their truth. On the basis of these representations it is claimed YH entered into the SPA or authorised the transfer of the funds from the second applicant to the second respondent and at YL’s behest the trust for WH was established.
[56] Further, although understandably this is not as yet pleaded, contentions relating to YL’s charging with UBS of the second respondent’s assets for major personal loans made direct to YL’s interests are likely to result in an amended pleading here.
4 Scott v ANZ Bank New Zealand Limited [2020] NZHC 906 at [101].
[57] Issues do arise over suggestions that YL falsely represented to WH that, through the applicant company, her US$151 million investment in the second respondent was only a “temporary” one and that WH would retain “beneficial ownership of all the proceeds” amounted to representations known by WL to be false. What might be suggested as a deceitful representation that all the assets of the second respondent were unencumbered, when YL had without prior disclosure charged these in favour of UBS for significant personal loans, are also likely to fall within this claim by way of amended pleading.
[58] WH and the second applicant continue to contend in this pleading that representations from YL were made so that WH (on her own behalf and on behalf of the second applicant) would enter what needed to be seen as major impugned transactions, that WH and the second applicant relied on them, and as a result they are likely to have suffered a loss.
[59] Overall, Mr Smith before me suggested, in considering this good arguable case requirement, the claims by WH and the applicant company here lack legal merit and that in reality the present situation is merely one of a perfectly ordinary commercial arrangement between YL and WH as husband and wife. I disagree. At this relatively early point in the present proceeding, and particularly bearing in mind the late revelation by YL of his personal arrangements to charge the assets of the second respondent in favour of UBS, (not before Eaton J in making his interim decision), in my view the evidence before this Court, although requiring fuller and proper testing later, does establish a good arguable case against both YL and the second respondent. This first requirement is established.
[2] Assets to which the freezing order can apply
[60] The authorities establish clearly that a freezing order may cover assets outside the jurisdiction. It is not contested before me in any way over whether that there are assets to which the freezing orders sought may apply here, nor that this Court has the necessary jurisdiction to grant those orders.5
5 Commerce Commission v Viagogo AG [2019] NZCA 472 at [7].
[61] I agree with Eaton J in his decision where he accepts this Court has jurisdiction to make a freezing order against the second respondent company in the BVI and not within jurisdiction. I agree too that this Court has power to make a freezing order enforceable in New Zealand against YL, a party resident in New Zealand in respect of overseas assets. Although it does seem at present that WH and the applicant company may not be able to directly identify with particularity the assets to be frozen, the evidence before me clearly permits an inference to be reached that YL and the second respondent do hold and control assets to which the freezing order can apply.
[62]For all these reasons the second requirement is established.
(3) Real risk of dissipation
[63]McGechan on Procedure at para HR 32.2.03 addresses this requirement at para
(3) and states:
(a)The requirement to establish a real risk of dissipation is central to the freezing order jurisdiction. Technically, it abuses the Court’s process to seek a freezing order where there is no real risk … The fact that a respondent is going to dispose of assets does not invoke the freezing order jurisdiction unless there is a real risk that a judgment in favour of the applicant will be partly or wholly unsatisfied if the freezing order is not made …
(b)Mere assertion of belief that the respondent might dissipate its assets, unsupported by solid grounds justifying that belief, is insufficient. However, affirmative proof of likelihood of dissipation or of nefarious intent is not necessary …
(c)The applicant must point to circumstances from which “a prudent, sensible commercial [person] can properly infer a danger of default”, a test which is “not unduly exacting” … [ the Court can infer] risk from the respondent’s partial only disclosure of its financial circumstances and narrow responses to enquiries about specific instances indicating a risk of dissipation.
(d)Meeting ordinary living expenses, legal expenses relating to the freezing order and transactions in the ordinary course of business will not constitute dissipation of the assets: r 32.6(3). It has become accepted practice that a freezing order will set a maximum sum above which respondents may not deal in their assets.
(e)The existence of a reciprocal enforcement of judgments regime is a relevant consideration …
(f)Payment of validly owed and liquidated debts by a respondent cannot be regarded as dissipation of assets grounding a freezing order. A
freezing order will not be granted if its effect will simply be to give the applicant a preference over other creditors of the respondent …
(Citations omitted)
[64] And in r 32.5(4) of the High Court Rules, prior to granting a freezing order or ancillary order the Court must be satisfied there is a danger that a perspective judgment will be wholly or partly unsatisfied because of a range of factors. This is set out in r 32.5(4) as follows:
(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—
(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.
[65] In relation here to the risk if dissipation or diminishment in the value of assets in the second respondent company such that a prospective judgment might be rendered wholly or partly unsatisfied, it has been emphasised on a number of occasions that affirmative proof of the likelihood of disposition or of nefarious intent by a defendant to defeat creditors is not necessary.6
[66] In my view there is no question in this case that ample evidence is before the Court from which a prudent sensible commercial person can properly infer a danger of default on the part of the second respondent in the event the applicants succeed in a prospective judgment against it. Indeed, at this point, the assets of the second respondent have been charged in favour of UBS for a substantial loan of at least some US$54.4 million utilised personally by YL and his own interests, and this remains
6 Bank of New Zealand v Hawkins [1989] 1 PRNZ 451 HC, at [454].
outstanding. Although other assets outside the second respondent may exist to cover some or all of this debt, as I note above the evidence before the Court on this is at best sketchy, and all actions in that regard appear to be under the control of YL.
[67] In his interim judgment at para 14, Eaton J considered this real risk of dissipation requirement and stated:
[14] The nature of the relationship between WH and YL in the evidence of his refusal to make appropriate disclosures of financial information in relation to the respondent company, coupled with the evidence of YL’s assertions of control over the disputed funds, does establish a risk of dissipation.
[68] I agree. I add too that the fact disclosed by YL only in the last few days that the second respondent’s assets are now subject to the UBS charge and that this was unknown to Eaton J at the time of his interim decision, in my view simply reinforces this aspect.
[69] For all these reasons I am of the view this real risk of dissipation requirement has also been satisfied here.
Overall interests of justice
[70] The position of the applicants is that the overall justice here lies in favour of the granting of the freezing and ancillary orders which they seek. Their position too is that there would be little or no real prejudice to YL or the respondent company given particularly the terms of the freezing orders sought. It is noted of course that r 32.6(3) of the High Court Rules indicates that a freezing order cannot prohibit a respondent from dealing with assets covered by the order for the purposes of paying ordinary living expenses, related legal expenses or for making payments in the ordinary course of business including business expenses incurred in good faith.
Alleged failure to provide full and frank disclosure to the Court
[71] Rule 7.23(2)(a) of the High Court Rules provides that a freezing order application without notice requires an applicant to make all “reasonable enquiries” to ensure that all relevant material is disclosed. Here, Mr Smith for YL contends that
WH and the applicant company failed to discharge their obligations under this provision by not advising the Court that:
(a)at no stage had YL alleged or claimed that the alleged conversion of shares in the company either had in fact incurred or at that stage this issue had been raised by WH;
(b)that the second respondent’s register of members in fact showed that the alleged conversion had not taken place and that the second applicant continued as the holder of 200 series A preferred shares. In this respect the position advanced for YL is that the applicants had misled the Court when in their pleadings they stated “to the best of the plaintiff’s knowledge the current shareholders of (the respondent company) are:
(i)YL’s interests — 800 class A ordinary shares and
(ii)the applicant company 200 class B ordinary shares.
This as it later transpired was incorrect as the 200 shares held by the respondent company in fact were series A preferred shares.
[72] In response the position of WH and the applicant company on this misleading point, is that WH and the applicant company did meet their duty of full and frank disclosure as there was no material non-disclosure here and that in any event, even if there may have been (which they deny), the freezing orders sought should be granted on all the material presently before the Court.
[73] On this aspect, WH does acknowledge the statement of claim filed on her behalf included an error in para 11 in that the 200 shares held by the second applicant it seems have turned out now to be 200 series A preference shares rather class B ordinary shares. WH maintains however that the shareholding which she included in the pleading was to the best of her knowledge at that time based on her understanding and advice as to the operation of the particular article in question in the Articles of
Association of the company. She says in effect this was an innocent error which was regretted.
[74] She notes too, that in any event, this Court has the discretion to continue a freezing order or to make a new order on terms as the Court of Appeal has confirmed.7 In this respect the Court of Appeal in Allen confirmed:
No doubt a plaintiff who fails to make appropriate disclosure is at risk of adverse consequences which may, perhaps, extend to the discharge of the order inappropriately obtained (albeit that if the order was otherwise warranted a further order is likely to be made as in the Brinks-Mat case). But, given there is an entitlement to seek review of orders made ex parte and such review proceeds on a de novo basis, the power to discharge an ex parte order on this ground is likely to be exercised only in egregious cases.
[75] It is accepted that there is a need for parties to be candid with the Court, especially in obtaining an ex parte freezing order. In light of what Eaton J found and that I accept was a real difficulty that WH encountered in obtaining information from YL as director and manager of the affairs of the second respondent company. I accept the error in the applicant’s pleading here was not one made with nefarious intent and in any event now should not impact upon the final outcome. That outcome, as will appear shortly, confirms that the freezing and ancillary orders sought here are clearly justified and are to be made.
Proceeding by the applicant’s ex parte was inappropriate
[76] Next, Mr Smith for YL contends there was no urgency or need for the applicants to proceed before Eaton J without notice in circumstances where the BVI appointment of provisional liquidators to the second respondent had already been ordered by the British Virgin Islands Court. This order meant that the provisional liquidators controlled the assets of the second respondent company even before the applicants brought their original application for the present orders. It is the position of YL that had the applicants proceeded on-notice, YL would have been able to confirm matters such that the present application should not have been required.
7 Allen v Commissioner of Inland Revenue (2004) 21 NZTC 18, 718 (CA) at [93].
[77] With respect I disagree. The only asset of the respondent company, being WH’s initial share capital contribution of US$151 million, was introduced by her. She says she was required to make this investment by her advisor and husband, YL, and especially since their acrimonious separation no information about the second respondent or assistance was forthcoming, despite her repeated enquiries of YL. Her investment in the company was clearly substantial. WH says she found herself in the hopeless position of receiving no dividends nor information from the company or YL, nor in any way has she been able to ensure the safety of her investment. That said, I am satisfied urgency was required and there was a real need for the ex parte application to proceed. This is even more the case given the recent revelation by YL of his US54.4 million previously undisclosed personal borrowing from UBS effectively guaranteed by the second respondent and subject to the charge he arranged as a director over the assets of that company. Issues over his duties as a director of the second respondent I leave on one side here.
The freezing order and supplementary orders sought are unnecessary and prejudicial
[78] Lastly, YL’s position is that the orders sought are unnecessary to protect WH and the second applicant as there is no risk of dissipation here. Further, YL maintains, as best as I can tell, that the freezing order made has and continues to have a prejudicial effect on him. This is set out in submissions from Mr Smith in this way. He maintains YL has had to engage lawyers in multiple jurisdictions to take action in response to the orders and the BVI provisional liquidator appointment, and the consequences flowing from those orders. YL says he has needed to negotiate with the provisional liquidators, in his words to minimise risk of loss to the second respondent from their proposed actions. He maintains he has also encountered difficulties in dealing with his bank due to the existence of the orders and all this has affected YL’s health. On all of this, Mr Smith suggests that matters here can be properly addressed by personal undertakings which YL is now prepared to give in place of any freezing order.
[79] So far as this suggestion that YL’s undertakings would be sufficient to meet the situation here, I note first that these can only comprise undertakings from him personally. The second respondent, as I have noted, is not represented before me. Even when the second respondent company was placed into provisional liquidation in
the BVI, at that point YL was only one of the three directors of the company. There is nothing before the Court to indicate that the other two corporate directors knew anything of this proceeding or of any undertakings proposed. Undertakings here would only therefore in any event be from YL and not the second respondent.
[80] Further, the terms of the suggested undertakings as I see it, would throw many obligations on WH and the second applicant on a short 24-hour notice period to return to the Board of the second respondent company to challenge matters which might be proposed. As I see it WH here is a person in a significantly vulnerable position. She was, through her company the second applicant, the sole provider of substantial funds to the second respondent and protection for her interests by way of Court orders rather than personal undertakings in all the circumstances here is appropriately required.
[81] I turn now to the overall issue of whether making the orders sought might have prejudicial effects on YL. On this I clearly reject here that any significant prejudice might arise. As to this aspect, before me Mr Smith maintained that when his client YL and WH met and subsequently married, it was agreed that YL would be sole director of the second respondent and he would manage and run the company. Accordingly Mr Smith contended first that YL was entitled to carry out the activities he had undertaken because of the contractual and legal relations established between he and WH and secondly, that for the second respondent company not to be in a position where it was able to trade was obviously prejudicial. Mr Smith noted that YL clearly had an interest in the company as both a director and shareholder, that this would be prejudiced if the orders sought were made, and in any event the undertakings he was prepared to give could cover the situation.
[82] I do not regard these arguments advanced by Mr Smith as being of significant weight here. The freezing order sought is limited to US$151 million being the original contribution amount from WH. As I have noted above, any profit on this invested amount held by the second respondent is excluded from the freezing order. On this aspect it seems YL contends that at least US$30 million profit has been made by the company and this does form part of its assets.
[83] In the present case I find little real prejudice arising for YL or the second respondent in the meantime if the freezing order sought is granted. On the other hand, I accept the position advanced for WH and the second applicant that ultimately the Court may well find YL has misused the second respondent’s assets by charging these in favour of UBS to support a substantial US$54.4 million loan to his own interests to support what are described as “high risk business activities” and that this potentially prejudices WH and the second applicant to a significant extent. In my view this further assists in supporting the applicant’s arguments for the grant of a freezing order here.
Other orders sought by YL
[84] Two further orders sought by YL in this hearing need to be addressed. The first relates to YL’s request for an extension to 31 January 2022 of the time for filing of a statement of defence or a notice of protest to jurisdiction in response to the applicant’s statement of claim dated 3 November 2021.
[85] The applicant’s position is that an extension for such a long period is not necessary and the deadline here should be simply 23 December 2021.
[86] In saying that, the applicants acknowledge however that, provided the freezing orders sought are to remain in place, which is to be the case, there is little prejudice to them in the respondents’ delaying a substantive response.
[87] That said, I agree that the extension of time for the first respondent to file a statement of defence or notice of protest to jurisdiction to 31 January 2022 is appropriate. An order to this effect is to follow.
[88] The second order YL seeks here on behalf of the second respondent is an order from this Court staying the present proceedings against the second respondent until the High Court of Justice of the Territory of the British Virgin Islands:
(a)discharges orders appointing the joint provisional liquidators over the second respondent; and/or
(b)makes orders confirming that YL as director of the second respondent has authority to conduct the second respondent’s defence of these proceedings.
[89] WH and the second applicant have confirmed they take no issue with the stay sought pending a substantive decision from the British Virgin Islands High Court on this application to discharge the joint provisional liquidators but suggest an amendment to the terms of the stay. They say the stay should be until four weeks after the British Virgin Islands High Court makes a decision on the joint provisional liquidators discharge application and any appeals are exhausted (with the four week period running from the end of the period in which an appeal may be sought). At that point, if on the one hand the joint provisional liquidator order remains in effect, further directions might be needed from this Court on the second respondent’s participation in the present proceeding. If on the other hand, the joint provisional liquidator’s order is not in effect, then the second respondent will be able to participate in these proceedings in the ordinary way.
[90] This order for stay is granted. An appropriate order will follow. It is to include the four-week period condition noted above.
Result
[91] I dismiss the 29 November 2021 application from the first respondent YL to rescind or discharge the freezing and ancillary orders made without notice on 3 November 2021.
[92] Those freezing and ancillary orders sealed by this Court on 3 November 2021 are confirmed (with the exception of para [8] therein which is deleted) and will remain in place pending resolution in this Court of the substantive proceeding between the parties, and in any event until any further order of this Court is made.
[93]Further ancillary orders are now made as follows:
(a)The time for the first respondent YL to file a statement of defence or notice of protest to jurisdiction, in response to the Statement of Claim
dated 3 November 2021 filed by the first applicant WH and the second applicant, is extended to 31 January 2022;
(b)These proceedings CIV-2021-485-600 against the second respondent company are stayed until that date being 4 weeks (calculated specifically as set out in para [89] above) after the High Court of the Territory of the British Virgin Islands:
(i)discharges the orders appointing joint provisional liquidators over the second respondent; and/or
(ii)makes orders confirming that the first respondent YL, as director of the second respondent, has authority to conduct the second respondent’s defence of these proceedings,
and any appeals against such High Court decisions are exhausted.
[94] Leave is reserved for any party to apply to this Court on notice to vary the freezing or ancillary orders made herein if circumstances may change.
[95] As to costs, these are reserved. In the event counsel are unable to resolve this issue of costs between themselves, they may file (sequentially) memoranda as to costs (5 pages maximum) which are to be referred to me and I will decide the issue of costs based upon the memoranda filed and all other material which is before the Court.
Gendall J
Solicitors:
Russell McVeigh, Wellington
Barrister:
S Hunter QC, Auckland
Jack L W Wass Barrister, Wellington J B M Smith, Barrister, Wellington
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