Xiao v Department of Internal Affairs

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IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA185/2018
[2019] NZCA 326

BETWEEN	XIAOLAN XIAO Appellant
AND	DEPARTMENT OF INTERNAL AFFAIRS Respondent

Hearing:	1 July 2019
Court:	Courtney, Venning and Dunningham JJ
Counsel:	Appellant in person D G Johnstone for Respondent S M Hunter counsel assisting
Judgment:	23 July 2019 at 3.30 pm

JUDGMENT OF THE COURT

The appeal is dismissed.

____________________________________________________________________

REASONS OF THE COURT

(Given by Courtney J)

Introduction

This appeal concerns the application of the default judgment procedure under the High Court Rules 2016 to proceedings in which pecuniary penalties are sought.
In September 2016 the Department of Internal Affairs (DIA) obtained judgment by default against Ping An Finance (Group) New Zealand Ltd (Ping An) and its sole shareholder and director Xiaolan Xiao.[1] The judgment followed a formal proof hearing before Toogood J. The Judge held that Ping An had committed five civil liability acts under the Anti-Money Laundering and Countering Finance and Terrorism Act 2009 (AML/CFT Act) and imposed pecuniary penalties on the company totalling $5.29 million. The Judge also granted injunctive relief, restraining both Ping An and Mr Xiao from carrying out any financial activities that would cause either to be deemed a financial institution as defined by the AML/CFT Act.
[1]Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd [2017] NZHC 2363, [2018] 2 NZLR 552 [Liability judgment].
More than a year after the judgment was entered, Mr Xiao applied to set aside the judgment in relation to both him and Ping An. Ping An, which was by then in liquidation, was not party to the application. Toogood J refused to set aside the judgment.[2] Mr Xiao appeals.[3]
[2]Department of Internal Affairs v Ping An Finance (Group) New Zealand Ltd [2018] NZHC 530 [Set aside judgment].
[3]Mr Xiao appeared in person in support of his appeal. He had filed written submissions which he supplemented orally with the assistance of an interpreter. Mr Hunter appeared as counsel assisting the court. Since Mr Hunter dealt in detail with the central legal issues our references to submissions made by or on behalf of Mr Xiao include those made by Mr Hunter.
Mr Xiao does not challenge the Judge’s finding on liability. His appeal rests primarily on the assertion that he should have been notified of the date of the formal proof hearing and served with the documents relied on to support the claim so that he and Ping An were apprised of the basis on which pecuniary penalties were being sought, and given the opportunity to be heard on that aspect.
Counsel assisting the Court, Mr Hunter argued that:
(a)Rule 15.9, which provides for judgment to be entered by default, does not provide adequate protection of a defendant’s right to natural justice, guaranteed by s 27(1) of the New Zealand Bill of Rights Act 1990 (NZBORA) in cases where pecuniary penalties are sought; and
(b)the judgment should be set aside as having been obtained irregularly because, in fixing the pecuniary penalties, the Judge relied on information that went beyond the pleadings.

Standing

Mr Xiao appeals against the pecuniary penalties imposed on Ping An though he, himself, is subject only to the injunctive relief. Mr Hunter submitted, correctly, that a non-party prejudiced by a judgment entered by default can apply to set aside the judgment.[4] He argued that, although the pecuniary penalties do not affect Mr Xiao, he is nevertheless affected by the judgment because the findings on which the pecuniary penalty orders were made were, in part, based on findings of deliberate misconduct by him which was not pleaded and on which he had no opportunity to comment.
[4]Argyle Estates Ltd v Bowen Group Ltd (2003) 17 PRNZ 57 (HC) at [6]..
In fact, the Judge made very little comment about Mr Xiao personally. The pleaded acts of civil liability, the findings of liability and the determination of the starting points for the pecuniary penalties were based on the conduct of Ping An. Of course, that conduct was effectively that of Mr Xiao, as the sole shareholder and director, as the Judge noted when he commented that “the widespread and wholesale failure of Ping An to meet its obligations must have occurred with the knowledge and support of Mr Xiao as an active director and shareholder fully engaged in the day to day operation of the business”.[5] But Mr Xiao’s status in the company was pleaded and it must have been obvious to him that the allegations of civil liability acts were founded almost entirely on his conduct.
[5]Liability judgment, above n 1, at [120].
It is, however, true that the Judge uplifted the pecuniary penalties he considered otherwise appropriate on the basis of misconduct by Mr Xiao in relation to the DIA investigation. This had not been pleaded and was contained in the affidavit relied on by the DIA at the formal proof stage. We accept that, from a reputational perspective, Mr Xiao could claim to be affected in a way that would permit him to apply to set aside the judgment and appeal the dismissal of that application.

The default judgment

The proceedings against Ping An and Mr Xiao

Ping An carried on a financial services business, which it described as “changing foreign currency”. For most of the relevant time it was a registered financial service provider under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. It was subject to the requirements of the AML/CFT Act, which was enacted for the purposes of detecting, deterring and preventing money laundering and the financing of terrorism through the financial system. These, relevantly, included the obligations of conducting customer due diligence, monitoring accounts and transactions, reporting suspicious activity and maintaining records, including sufficient records to enable transactions to be reconstructed.
The DIA investigated Ping An over a 12 month period. The company had undertaken more than 500 transactions involving the transfer of sums over $50,000. It had been the subject of numerous suspicious transaction reports by other reporting entities in relation to transactions exceeding $31 million in total. Ping An itself had never submitted a suspicious transaction report.
In 2016 the DIA applied to commence proceedings against Ping An and Mr Xiao by way of originating application. The application and an affidavit in support (sworn by a DIA officer, Mr Milnes) were served on Ping An and Mr Xiao.[6] Mr Xiao appeared in person at the hearing of the application. Ping An was not represented. Downs J declined the application on the basis that an originating application was not appropriate given the potential penalties.[7]
[6]The application also related to proceedings that the DIA wished to bring against another, unrelated, registered financial services provider, Qian Duoduo Ltd.
[7]Department of Internal Affairs v Qian Duoduo Ltd [2016] NZHC 2544.
The DIA then commenced proceedings by way of statement of claim. The statement of claim and notice of proceeding were served on Ping An and Mr Xiao on 18 January 2017. They were in the usual form, including the advice that each had 25 working days to file a statement of defence and that if they failed to do so “the plaintiff may at once proceed to judgment on the plaintiff’s claim and judgment may be given in your absence”.
The statement of claim alleged five breaches of obligations imposed on reporting entities under the AML/CFT Act, namely failure to conduct customer due diligence,[8] failure to monitor accounts (including identity checks),[9] failure to keep proper records,[10] and failure to report suspicious transactions.[11] The prayer for relief sought “a pecuniary penalty pursuant to s 90(1) of the Act in such sum as this honourable Court considers just”. The DIA also sought injunctive relief and costs against both defendants.
[8]Anti-Money laundering and Countering Financing of Terrorism Act 2009, s 78(a) [AML/CFT Act].
[9]Sections 78(b) and 78(c).
[10]Section 78(e).
[11]Sections 39A–48C, and 78(da).
Neither Ping An nor Mr Xiao filed a statement of defence. The DIA filed a memorandum dated 3 March 2017 requesting that the proceedings be listed for formal proof under r 15.9 of the High Court Rules. The memorandum was filed by email and copied to Mr Xiao using a gmail address that he had previously used.[12]
[12]In the High Court, and before us, Mr Xiao maintained that he did not receive that email. However, in the application to set aside the default judgment, Toogood J found as a fact that Mr Xiao did receive the email. We have seen nothing that would justify interfering with that finding. However, nothing actually turns on whether Mr Xiao received the email or not.
A formal proof hearing was scheduled for 12 April 2017. That date was not required to be, and was not, notified to Ping An or Mr Xiao.[13] At the hearing the DIA relied on the same affidavit that Mr Milnes had provided in relation to the originating application together with a supplementary affidavit by Mr Milnes.

The default judgment

[13]High Court Rules 2016, r 15.9(2) states that upon a request for judgment by default other than a liquidated demand the proceeding “must be listed for formal proof and no notice is required to be given to the defendant”.

In his decision Toogood J reviewed the legislative framework under which the proceedings were brought, including the availability of maximum penalties for civil liability acts.
In relation to the alleged failure to conduct customer due diligence the Judge held that, by virtue of the amounts, frequency and timing of the transactions relied on by the DIA, Ping An should have realised that the transactions were either complex or unusually large for the purposes of s 22 of the AML/CFT Act, thereby requiring “enhanced” customer due diligence.[14] He concluded that there had been widespread failure by Ping An to conduct customer due diligence as required.[15]
[14]Liability judgment, above n 1, at [35].
[15]At [41].
In relation to the alleged failure to adequately monitor accounts and transactions the Judge found that there were 122 customers with whom Ping An was in a business relationship that required it to undertake account monitoring to identify whether grounds existed for reporting a suspicious transaction. He concluded that the paucity of records made it clear that Ping An never reviewed the account activity, transaction behaviour or customer information for those 122 customers.[16]
[16]At [49].
In relation to the allegation of entering into or continuing a business relationship with a person who had failed to produce or provide satisfactory evidence of identity the Judge held that the 122 customers with whom or with which Ping An had entered into or continued business relationships had failed to produce satisfactory evidence of identity.[17]
[17]At [52].
In relation to the alleged failure to keep records, required by s 49(1),[18] the Judge found that, overall, Ping An had failed to keep appropriate records for 1,588 transactions which totalled $105,413,026.44 and had failed to keep records for the identity and verification of 362 customers and records of the establishment and continuation of 122 business relationships.[19]
[18]At [54], the Judge described this section as a “cornerstone provision”. It requires reporting entities to keep detailed transaction, identity and verification records for customers with whom they have business relationships.
[19]Liability judgment, above n 1, at [59].
In relation to the alleged failure to report suspicious transactions, the Judge considered the requisite mental element in some detail, concluding that it was an objective test.[20] He concluded that 173 transactions undertaken by Ping An during the relevant period were objectively suspicious and required the filing of a suspicious transaction report, which it had not done.[21] He also commented that “Mr Xiao and Ms Xu were directly involved in activities giving rise to suspicion, leading to an inference that they may well have been parties to wilful money laundering”.[22]
[20]At [72].
[21]At [77].
[22]At [117].
In considering the appropriate penalties in respect of each of the proven civil liability acts, the Judge identified the relevant factors to take into account. In addition to the matters set out at s 90(4), the Judge identified three further factors, namely, the degree to which the conduct was initiated or condoned by officers or senior management of the company, whether steps had been taken to ensure compliance with the act including policies and steps to educate officers and employees and whether there had been full and frank disclosure and cooperation with the Department, the Judge regarded Ping An’s breaches as being at the “higher end of non-compliance” with the Act’s requirements, describing its non-compliance as amounting “to a calculated and contemptuous disregard for the AML/CFT requirements”.[23]
[23]At [104] and [106].
The Judge then proceeded to fix pecuniary penalties in respect of each of the civil liability acts. In relation to the failure to conduct customer due diligence, which carried a maximum penalty of $2 million for each civil liability act, the Judge imposed a penalty of $1.3 million, which he considered necessary “to mark the extent of the breach of a fundamentally important AML/CFT requirement and to act as a deterrent”.[24] In relation to the failure to adequately monitor accounts, which the Judge considered overlapped with the failure to report suspicious transactions, and which carried a maximum penalty of $1 million, he took a starting point of $500,000.[25] In relation to entering into or continuing a business relationship with a person who had not produced or provided satisfactory evidence of identity, which overlapped with the customer due diligence obligation and failure to keep records, and carried a maximum penalty of $1 million, the Judge took a starting point of $500,000.[26] In relation to the failure to keep records, which carried a maximum penalty of $2 million, the Judge took a starting point of $1 million to recognise the degree of overlap with other obligations such as the failure to carry out customer due diligence.[27] Finally, in relation to the failure to report suspicious transactions, for which no maximum penalty was specified, the Judge determined that a notional ceiling of $2 million would be appropriate and took a starting point of $1.3 million.[28]
[24]At [113].
[25]At [114].
[26]At [115].
[27]At [116].
[28]At [117].
The Judge then turned to consider aggravating and mitigating factors. It is at this point in the assessment that the Judge explicitly took into account conduct by Mr Xiao. On the issue of full and frank disclosure and cooperation with the DIA in its investigation the Judge observed that “Ping An and Mr Xiao, however, did not simply fail to cooperate; they provided misleading information to the Department …”.[29] The Judge then said:
[124] The attempts by Mr Xiao to mislead the Department in its investigation accentuate Ping An’s non-compliance and further heightens the seriousness of the contraventions. Such efforts to frustrate the AML/CFT supervisors in their enforcement role must be met with a stern rebuke from the Court.
[125] Mr Xiao and Ping An are not charged with misleading the Department as the AML/CFT supervisor, which is a separate offence under s 103 of the Act, but the misleading behaviour warrants an uplift of 15 per cent from the starting point in each category of non-compliance. As indicated below … the efforts to mislead are also relevant to the application for an injunction restraining them from participating in the industry.
[29]At [123].
Finally, in relation to the injunctive relief, the Judge considered that, in light of Ping An’s repeated contraventions of the Act, if an injunction was not granted it was likely to engage in similar financial activity in such a way to contravene the Act. Then, in relation to Mr Xiao, the Judge said:
[135] Mr Xiao has also demonstrated a complete disregard for the Act’s requirements, if not a wilful intention to flout them. His failures as a director and manager of the business led directly to the scale and severity of Ping An’s breaches. Moreover, his misleading behaviour during the course of the Department’s investigation indicates a strong probability that if he is not restrained from engaging in financial activities, Mr Xiao will continue to ignore obligations under the Act to which any other entity in which he is involved, in any capacity, may be subject. …

The application to set aside the default judgment

In October 2017 Mr Xiao filed an application to set aside the default judgment. The application was supported by affidavits filed subsequently, dated 22 November 2017, 14 December 2017 and 15 February 2018. He asserted that there had been a miscarriage of justice because his failure to appear at the formal proof hearing was excusable, that there was a substantial defence and that the DIA’s “methodology and proceeding was cavalier”. He said that he was unaware of the hearing date and not familiar with the procedure. His affidavits did not, however, provide any detail as to what matters he or Ping An would have raised by way of defence or in relation to penalty. Mr Xiao appeared at the hearing of the application and was cross-examined.
Toogood J stated the relevant test by which an application to set aside a default judgment was to be considered, namely whether it is just in all the circumstances to do so; the ultimate issue was whether there was a possible miscarriage of justice if the judgment was allowed to stand.[30] He identified as relevant considerations whether the failure to appear was excusable, whether there was a substantial ground of defence and whether there would be irreparable injury to the party that had obtained the judgment if the judgment was set aside.[31]
[30]Set aside judgment, above n 2, at [7] citing KBR MacKinder Ltd v Fine Art Productions Ltd HC Wellington A372/85, 17 April 1986.
[31]Set aside judgment, above n 2, at [7] citing Russell v Cox [1983] NZLR 654 (CA); and Norwich Winterthur Insurance (NZ) Ltd v Erikson CA370/91, 2 October 1992.
The Judge then reviewed Mr Xiao’s grounds of application and his evidence. He noted that Mr Xiao had read and understood the notice of proceeding which advised him of the consequences of not filing a statement of defence and considered that Mr Xiao did not misunderstand those consequences.[32] He noted that Mr Xiao had communicated with the DIA’s solicitors following receipt of the notice of proceeding and statement of claim asking for advice and information about legal representation, which he was given.[33]
[32]Set aside judgment, above n 2, at [13].
[33]At [14].
The Judge held that Mr Xiao did receive the email of 3 March 2017 which signalled that the DIA had applied to obtain judgment by default.[34] However he did not regard that issue as relevant because the DIA was not obliged to notify Mr Xiao of the request for a formal proof hearing in any event.[35]
[34]At [20].
[35]At [22].
The Judge refused the application solely on the ground that there was no basis on which to find that Mr Xiao had a substantial defence:[36]
Most significantly, Mr Xiao has not provided any evidence or reasoned grounds to support a challenge to the findings in the judgment. He has said only that the Department’s methodology and proceeding was cavalier and that he had a substantial defence.
… Nothing in the material presented by Mr Xiao in support of the application to set this judgment aside goes anywhere near persuading me that judgment by default ought not to have been entered.

Appeal

[36]At [23]–[24].

Mr Xiao’s case on appeal is that pecuniary penalties are properly viewed as akin to a criminal sanction because their potentially draconian effects are punitive in substance. Therefore, natural justice requires greater protection than the civil procedure rules provide. Specifically, defendants ought to be notified of the formal proof hearing date and served with the material relied on to set the pecuniary penalty so they have the opportunity to be heard on penalty. This could be achieved by serving an amended pleading, affidavits and submissions on penalty.
Alternatively, it is said that Ping An and Mr Xiao should have had the benefit of such notification in the particular circumstances of this case; the Judge’s finding of misconduct by Mr Xiao, which resulted in a 15% uplift of the penalty, was based on conduct not signalled in DIA’s pleadings and instead on evidence not provided to Mr Xiao and on counsel’s submissions. Because Mr Xiao did not have the opportunity to be heard on penalty, the judgment should be regarded as irregularly obtained and should be set aside as of right.
Although Mr Xiao had advanced his application to set aside the default judgment on the basis that he should have been advised of the formal proof hearing date, the more sophisticated arguments now being advanced were not put to the Judge.

Are the current procedural rules adequate?

A central aspect of natural justice is the right to be heard. Mr Hunter relied on the statement by Elias J (as she then was) in Ali v Deportation Review Authority:[37]
Fundamental to the principles of natural justice is the requirement that where the circumstances of decision making require that someone affected by it be given an opportunity to be heard, that person must have reasonable opportunity to present his case and reasonable notice of the case he has to meet. The more significant the decision the higher the standards of disclosure and fair treatment.
[37]Ali v Deportation Review Authority [1997] NZAR 208 (HC) at 220. See also Dotcom v The United States of America [2014] NZSC 24, [2014] 1 NZLR 355 at [118].
The question in this case is whether the current rules of procedure governing default judgment provide defendants faced with a claim for pecuniary penalties an adequate opportunity to be heard. Rule 15.9 of the High Court Rules sets out the procedure for obtaining judgment by default by formal proof where the claim is other than a liquidated demand.[38] Proceedings in which pecuniary penalties are sought are not specifically mentioned but it is not in dispute that the High Court Rules apply to such cases. [39]
[38]There are separate High Court Rules for judgment by default in cases of liquidated demand (r 15.7) and demand for the recovery of land or chattels (r 15.8).
[39]In Chief Executive of the Department of Internal Affairs v Mansfield [2013] NZHC 2064 Wylie J considered the issue in relation to pecuniary penalties under the Unsolicited Electronic Messages Act 2007 and held that there was no reason in principle or as a matter of law that pecuniary penalties under that Act could not be imposed by formal proof, a conclusion reinforced by a provision (which the AML/CTF Act does not contain) specifying that the usual rules of court apply.
Rule 15.9 provides that:
(1)This rule applies if, or to the extent that, the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, and the plaintiff seeks judgment by default for other than a liquidated demand.
(2)The proceeding must be listed for formal proof and no notice is required to be given to the defendant.
(3)After a proceeding is listed for a formal proof hearing, no statement of defence may be filed without the leave of a Judge granted on the ground that there will or may be a miscarriage of justice if judgment by default is entered, and on such terms as to time or otherwise as the Judge thinks just.
(4)The plaintiff must, before or at the formal proof hearing, file affidavit evidence establishing, to a Judge’s satisfaction, each cause of action relied on and, if damages are sought, providing sufficient information to enable the Judge to calculate and fix the damages.^[[40]]
(5)If the Judge before or at the formal proof hearing considers that any deponent of an affidavit filed under subclause (4) should attend to give additional evidence, the Judge may direct accordingly and adjourn the hearing for that purpose.
[40]As noted earlier, there is no specific reference in r 15.9 to pecuniary penalties. Although it would be preferable for the rule to do so, the context allows the reference to damages to be treated as encompassing pecuniary penalties.
Rule 15.10 makes provision for judgments obtained by default to be set aside:
Any judgment obtained by default under rule 15.7, 15.8, or 15.9 may be set aside or varied by the courts on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.
In arguing that these rules are insufficient to protect defendants facing pecuniary penalties, Mr Hunter pointed to additional procedural safeguards of the kind provided in the Australian cases Australian Communications and Media Authority v Mobilegate Ltd (No. 4)[41] and Australian Competition and Consumer Commission v Yellow Page Marketing BV (No. 2).[42] Mr Hunter submitted that in both cases the Australian Judges had been careful to analyse the fairness of the procedural steps taken, which included notifying the defendants of the claims against them and the hearing dates.
[41]Australian Communications and Media Authority v Mobilegate Limited (No. 4) (2009) FCA 1225, [2009] 180 FCR 467.
[42]Australian Competition and Consumer Commission v Yellow Page Marketing BV (No. 2) [2011] FCA 352, (2011) 195 FCR 1.
In Mobilegate pecuniary penalties were imposed in respect of contraventions of the Spam Act 2003 by way of a default judgment. Mr Hunter drew our attention to the Judge’s reference to directions previously given requiring the applicant to serve on the respondents written submissions together with affidavits to be relied on in respect of penalty. In Yellow Page Marketing pecuniary penalties were imposed pursuant to the Trade Practices Act 1974 by default. The Judge noted that the respondents had been served with the notices of motion seeking leave to file an amended application.
We note, however, that order 35A of the Federal Court Rules 1979, which applied to both the Yellow Page and Mobilegate cases and provided for default judgment where a defendant was in procedural default, do not include a specific procedure in relation to the setting down of formal proof hearings. We infer that the directions given in each of those cases were ones required by the courts in the particular cases. Such directions could be made in New Zealand under r 1.4(4) if a judge considered it necessary. We therefore do not see these cases as assisting Mr Hunter’s argument that, as a general proposition, greater procedural protections are available in Australia than here.
Nor do we consider that greater procedural protections are necessary in New Zealand. We accept that pecuniary penalties may be punitive in substance. Those imposed under the AML/CFT are imposed primarily for the purposes of deterrence and denunciation. That does not, however, mean that different procedural rules should apply to such claims as opposed to other forms of civil proceedings.
A defendant who fails to take steps to defend a proceeding will have been served with a statement of claim that satisfies the pleading requirements set out in pt 5 sub-pt 4 of the High Court Rules, including identifying the distinct causes of action and facts relied on for it[43] and specifying the relief sought.[44] A defendant served with proceedings brought under the AML/CFT Act is taken to know that pecuniary penalties of up to $1 million and $2 million for each civil liability act could be imposed.
[43]High Court Rules, r 5.17.
[44]Rule 5.31.
The defendant will also have been served with a notice of proceeding stating the consequences of not filing a statement of defence from which the defendant will know that if steps are not taken the plaintiff may obtain judgment by default without further notice to the defendant. At the formal proof hearing, a judge must be satisfied by affidavit evidence of each cause of action relied on and sufficient information must be provided to allow the Judge to calculate and fix damages.[45] If a judge is not satisfied, the deponent can be required to give further evidence. If prejudice does result such that a miscarriage of justice occurs or is likely to occur, the position can be rectified by an application to vary or set aside under s 15.10.[46]
[45]Rule 15.9(4). We note that “damages” is inapt to include pecuniary penalty awards but, by analogy, r 15.9(4) can be taken to apply to such claims. This aspect of r 15.9 could benefit from clarification.
[46]In this case the judgment by default reserved leave to Ping An and Mr Xiao to apply for cancellation or variation of the injunctive relief granted.
Rules 15.9 and 15.10 therefore operate in tandem to provide an effective procedure that caters fairly for the interests of both parties. Plaintiffs are provided with a mechanism for proving claims where a defendant has failed to take any step to defend the claim. Defendants have the protection to being able to apply to set aside or vary the judgment in the event of a miscarriage of justice. We consider that this regime provides adequate protection and do not see any need to require service of evidence and submissions relating to penalty prior to a formal proof hearing. To the contrary, adding a requirement for the service of further documents before a plaintiff can proceed to judgment would simply increase the cost to the plaintiff and cause further delay, especially where service is difficult (for example where a defendant has gone overseas). Moreover, such a requirement would also conflict with r 6.20 which sets out that a party who does not provide an address for service does not have an entitlement to be served with further documents.
Notably, the adequacy of procedural protections in cases in which pecuniary penalties are sought was considered by the Law Commission.[47] Acknowledging that the rules of civil procedure were not designed for cases in which pecuniary penalties were sought, the Law Commission nevertheless did not consider it necessary to recommend changes to the procedural rules to accommodate pecuniary penalty regimes:
[12.14] The Law Commission does not consider that pecuniary penalty proceedings should take place within the criminal jurisdiction of the courts. At present, the alternative that presents itself is the civil jurisdiction, which brings with it the rules of civil evidence and procedure. But those rules of evidence and procedure were not designed with a State imposed penalty in mind. Pecuniary penalties therefore differ from the forms of proceeding for which the rules are most apt.
[12.15] Having said this, where pecuniary penalty cases are concerned, we are not aware of the courts encountering particular difficulties or raising particular objections when applying civil procedural rules. Submitters did not raise any specific concerns in this area, nor has our subsequent consultation. We have no evidence of substantive unfairness having occurred, or of particular concern on the part of those involved in pecuniary penalty proceedings about the way the courts are handling them.
(Footnote omitted).
[47]Law Commission Pecuniary Penalties: Guidance for Legislative Design (NZLC R133, 2014).
The Law Commission also noted the effect of r 1.4(4) (to which we referred earlier) which allows the court either on application or on its own initiative to “give any directions it thinks just”. It concluded:
[12.16] This rule arguably provides judges with sufficient scope to depart from particular High Court Rules where, given the nature of the proceedings, they will lead to unfairness. On balance, then, we propose that the civil rules of evidence and procedure should continue to apply.
We accordingly reject Mr Hunter’s argument that greater procedural protections are required for cases involving pecuniary penalties or that such further protections were required in the particular circumstances of this case.

Was the default judgment obtained irregularly?

Mr Hunter argued that the judgment obtained in this case offended the rule that a plaintiff cannot go beyond its pleading when obtaining formal proof because the level of pecuniary penalty being sought was not indicated in the statement of claim the DIA ought not have been able to proceed to a hearing on penalty. He relied on the decision in Richmond v Heskett Holdings Ltd, a claim for damages under the Fair Trading Act 1986 in which the statement of claim stated that the amount of the loss would be specified when once a valuation was available.[48] Formal proof was obtained on the basis of a valuation but without the valuation being provided to the defendant beforehand. Penlington J noted that a plaintiff seeking judgment by default is entitled to such relief as is claimed in his statement of claim and incidental thereto but could not go beyond his pleadings.[49]
[48]Richmond v Heskett Holdings Ltd (1995) 8 PRNZ 533 (HC) at 535.
[49]At 536.
The statement in Richmond is uncontroversial but the present case is not comparable to Richmond because the DIA was not required to prove what level of penalty should be imposed. The purpose of pleadings is to inform the opposing party and the court of the essential basis for the claim or defence and the necessary elements of it.[50] There are specific requirements in relation to the pleading of the relief sought, including the requirement that where the recovery of a money sum is sought the amount must be stated as precisely as possible[51] and where special damages are sought the amount must be stated.[52] But where a pecuniary penalty is sought under the AML/CFT Act it is for the Judge to set the penalty based on his or her own assessment of the evidence.[53] We agree with the submission made by Mr Johnstone, for the DIA that requiring plaintiff to plead that a certain penalty should be imposed would be inappropriate because it would risk appearing to hamper a judge’s assessment.
[50]Reay v Attorney-General [2016] NZCA 519, [2016] NZAR 1672 at [16].
[51]High Court Rules, r 5.32
[52]Rule 5.33.
[53]AML/CFT Act, s 90.
Nor do we consider that there is any basis for finding that Mr Milnes’ affidavits should have been served prior to the formal proof hearing. The DIA submitted Mr Milnes’ affidavit in support of the application for default judgment. It was entitled to do so. Neither the affidavit evidence, nor the findings based on it could fairly be described as going beyond the case signalled by the pleadings. As we have observed already, a defendant served with a claim for pecuniary penalty under the AML/CFT Act is taken to know the potential exposure.
For these reasons we do not accept that the judgment was irregularly obtained. In any event, even an irregularly obtained judgment will not inevitably be set aside. The approach to judgments irregularly obtained was discussed by this Court in EA v Rennie Cox Lawyers, which concerned a default judgment in respect of legal fees.[54] The judgment had been obtained on the basis of an application to extend time to apply for applying for judgment by default where the underlying proceeding had been deemed discontinued under the District Court Rules as they then stood, without serving the application.[55] Gilbert J, giving the judgment for the Court said:
[20] In summary, where a judgment has been irregularly obtained, there will almost always be a miscarriage of justice such that the judgment should be set aside without considering the merits. However, that is not an inflexible rule that must be applied in every case, regardless of the circumstances. There may be cases where the irregularity in obtaining the judgment was so minor and inconsequential that it could not have caused prejudice and there is no arguable defence. If the court can safely conclude that there is no risk of a miscarriage of justice it might properly decline to set aside the judgment.
[54]EA v Rennie Cox Lawyers [2018] NZCA 33, [2018] 3 NZLR 202.
[55]In addition, the plaintiff had sought judgment without disclosing correspondence showing the debt to be disputed.
Ultimately, this appeal must turn on whether Mr Xiao can show a miscarriage of justice as a result of the judgment being entered. This requires him to demonstrate that, had he been given the opportunity to be heard at the formal proof hearing, the outcome would likely have been different. However, as Mr Hunter acknowledged, Mr Xiao made no attempt to explain what evidence he might have adduced (had leave been given to do so) or what submissions might have been made that could have resulted in a different outcome.
It was not suggested by either Mr Xiao or Mr Hunter that any difference in liability could have been achieved. However, Mr Hunter submitted that it could not confidently be said that the penalty would have been the same, had the defendants been represented at the formal proof hearing. To illustrate and support this submission he pointed to Powell J’s decision in Department of Internal Affairs v Qian Duoduo (QDD) as an example of the difference representation at the penalty stage could result in.[56]
[56]Department of Internal Affairs v Qian Duoduo Ltd [2018] NZHC 1887.
It will be recalled that the DIA’s application for leave to begin proceedings by originating application was brought against both Qian Duoduo Ltd (QDD) and Ping An. In September 2018, more than a year after the default judgment had been entered against Ping An, QDD acknowledged similar breaches of the AML/CTF Act to those committed by Ping An. Powell J imposed penalties totalling $356,000.
The circumstances in which these penalties were imposed were rather different to the present case. In our view QDD is not a helpful comparator. QDD had acknowledged its breaches and the penalty hearing proceeded on the basis of an agreed statement of facts with additional evidence and cross-examination of both DIA staff and the director and sole shareholder of QDD. In QDD the company had sought professional advice as to its obligations and the Judge found that the company had not intended to breach the AML/CTF Act. The Judge also concluded that the nature and extent of QDD’s civil liability acts cumulatively stood at the lower end of the spectrum. It is true that QDD was also found to have misled the DIA during its investigation. However, since that conduct did not affect the nature and extent of the civil liability acts committed by QDD and QDD had co-operated with the DIA in relation to the proceedings themselves the Judge imposed a modest ($25,000) uplift overall. We are therefore not persuaded that representation alone accounted for the difference in outcomes.
Mr Hunter also submitted that a point accepted by Powell J, that lack of compliance with the AML/CFT regime was not used a selling point and QDD’s customers were unaware of it, could equally have been made for Ping An. It is not, however, apparent the extent to which this factor influenced the level of the penalty. In any event, there was no evidence from Mr Xiao to support the assertion that Ping An would have been in a position to make the same submission.
Mr Xiao’s application to set aside the judgment failed because Mr Xiao did not provide any evidence, nor point to any ground on which the claim might have been defended so as to lead to a different outcome. It is reasonable to expect that if such material existed, it would have been advanced in this appeal. However, nothing has been advanced on which we could conclude that, even if Mr Xiao had been present at the formal proof hearing, the outcome would have been any different. As a result, Mr Xiao cannot show either a miscarriage of justice or the risk thereof.

Result

The appeal is dismissed.

Solicitors:
Meredith Connell, Auckland for the Respondent

[2019] NZCA 326

23 July 2019 at 3.30 pm