Yang v Chen no.5 HC Auckland CIV-2007-404-1751

[2011] NZHC 1492

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2007-404-1751

BETWEEN  LIMIN YANG AND LIU (JASMINE) YANG

Plaintiffs

ANDPAUL (YU PO) CHEN Defendant

CIV 2008-404-4287

AND BETWEEN            DACHA INTERNATIONAL LIMITED First Plaintiff

ANDROTORUA INTERNATIONAL VILLAS LIMITED

Second Plaintiff

ANDTOP INTERNATIONAL LIMITED Third Plaintiff

ANDPAUL (YU PO) CHEN First Defendant

ANDHEARD PARK LIMITED Second Defendant

ANDCHOON KHIAW CHIN Third Defendant

Hearing:         8 and 13 April 2011

Counsel:         P J McPherson and G J Luen for plaintiffs

R B Hucker and D L Lang Siu for defendants

Judgment:      3 October 2011

JUDGMENT NO.5 of ALLAN J

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 11 am on Monday 3 October 2011

YANG V CHEN HC AK CIV-2007-404-1751 3 October 2011

Solicitors:

Hesketh Henry, Auckland Patrick McPherson [email protected]

Paul Chen [email protected]

Queen City Law, Auckland [email protected] [email protected]

R B Hucker [email protected]

Introduction

[1]      This  judgment  is  concerned  with  two  separate  applications  made  by  the plaintiffs against Mr Chen in these related proceedings.   In the first application, Limin Yang and Jasmine Yang seek an order declaring Mr Chen to be in contempt of the terms of a Mareva (freezing) order made in April 2007 and the imposition of appropriate sanctions.  In the second application, the plaintiffs in the later proceeding seek an order for security for costs against Mr Chen in respect of his counterclaim.

Procedural history

[2]      This  complex  litigation  went  to  trial  in  2010.    In  my  judgment  No.2, delivered on 5 October 2010, I set out the factual background and the issues in the case in some detail.  It is unnecessary to repeat now what I said then.  But a brief explanation is required in order to place the present applications in their proper context.

[3]      In 2003, Mr and Mrs Chen established a personal and business relationship with Ms Yang, and her husband Mr Liu.  Because Mr Liu was based predominantly in China, it fell to Ms Yang, who lived in New Zealand, to liaise with the Chens (but particularly  Mr Chen)  in  the  course  of  carrying  forward  certain  joint  business activities.  Mr Chen became a director of certain companies in which Ms Yang (and for a time Jasmine) were shareholders.   Regrettably a dispute arose between the Chens on the one hand, and Ms Yang and Mr Liu on the other.

[4]      The Chens considered that in the course of various joint projects entered into by Mr Lui and Mr Chen, the latter had become beneficially entitled to certain shares and  assets  hitherto  owned  by  Ms Yang,  or  companies  in  which  she  was  the shareholder.   Thereafter, Mr Chen dealt with certain assets on the basis that they were effectively owned by him.

[5]      All of this was extensively canvassed during a long trial which commenced on 26 April 2010 and concluded on 18 June 2010.   In my judgment of 5 October

2010, I upheld the claim of Limin and Jasmine Yang, finding that, notwithstanding Mr Chen’s claim to be entitled to act as he did, the shares and assets concerned remained the beneficial property of the plaintiffs.  I held also that Mr Chen had never been a beneficial owner of the shares, and that he held them in trust for the plaintiffs.

[6]      At a relatively early stage of the litigation, the plaintiffs’ solicitors obtained by consent a Mareva order, restraining Mr Chen from dealing with the assets of certain companies, pending further order of the Court.

[7]      In   reliance   on   information   subsequently   obtained,   both   during   the interlocutory stages of the proceedings and at trial, Ms Yang now contends that Mr Chen dealt with certain Rotorua properties in breach of the Mareva injunction and that he is accordingly in contempt of court.  Ms Yang seeks a declaration to that effect on the footing that an appropriate penalty be determined following a further hearing.  There are similar allegations about the circumstances in which a mortgage over an Auckland building owned by Top International Ltd (Top International) was discharged, and separately, as to the adequacy of Mr Chen’s disclosure of certain bank accounts. That is the first of the present applications.

[8]      The second application (security for costs) is quite unrelated to the first.  To place it in proper context, it is necessary to outline a little of the recent procedural history.

[9]      In my judgment No.2, I held that Limin and Yasmine Yang were unable to rely on derivative proceedings already commenced by them because they were not shareholders   of   the   companies   concerned.      But   I   gave   directions   for   the reconstitution  of  the  derivative  proceedings  in  order  that  they might  be  carried forward by the proposed corporate plaintiffs, now under the control of Ms Yang.  In the later proceeding, Top International makes a claim in respect of certain properties formerly owned by it, but admittedly sold by direction of Mr Chen.  The latter has filed a statement of defence in which he claims a set off.  He contends that neither he, nor his interests, were paid for the properties when they were earlier transferred by him or his interests to Top International, and that he is entitled to claim the value

of those properties by way of set-off.  Top International asserts that Mr Chen and his interests were paid.

[10]     In addition to the claimed set off, Mr Chen has filed a counterclaim, seeking to  recover  the  same  sum  as  that  which  is  claimed  by  way  of  set  off.    Top International  now  seeks  an  order  for  security  for  costs  in  respect  of  that counterclaim.

The contempt application

Rotorua transactions

[11]     During the course of their business activities, the parties acquired certain properties, including a hotel in Rotorua.  These assets were placed in the name of Rotorua International Villas Ltd (Rotorua International), the second plaintiff in the later proceeding.   In May 2006, Mr Chen became the sole shareholder of Rotorua International in circumstances described in my judgment No.2.

[12]     In August  2006,  Mr Chen  instructed his  solicitors  to  transfer title to  the Rotorua International assets to Kiwi Villas Ltd, a company controlled by him.  That transaction did not proceed.

[13]     In January 2007, Mr Chen lodged a caveat over the properties owned by Rotorua International.  The caveat document was signed by Ms Chen as Mr Chen’s attorney.

[14]     Then,   in   early   February   2007,   Mr Chen   proposed   that   the   Rotorua International properties be transferred to CCK Investments Ltd.  Mr Chen’s mother in law was to be the sole director and shareholder of this company.  But Mr Chen’s plans changed.   On 12 February 2007, he advised the ANZ Bank that the assets would be transferred into the personal name of his mother in law.  Later that same day, Ms Chen advised the ANZ Bank that Rotorua International had agreed to sell the properties it owned to Mr Chen’s mother in law, Choon Khiaw Chin.  The sale

price was to be $1.5 million and the bank was advised that the transaction was to be undertaken as a matter of urgency.

[15]     Mr Chen’s mother in law was elderly, she had no significant assets and no experience in managing hotel properties.  Various ANZ file notes, upon which the plaintiffs rely, record the fact that the sale was to be at an under value and that the Chens  would  continue  to  manage  the  hotel  after  the  sale.   A valuation  of  the properties and of the Kiwi Hotel business as at May 2005, puts the total value of the properties at $3.2 million.   The sale price to Mr Chen’s mother in law was $1.5 million.  She made no financial contribution to the purchase price.  The borrowings necessary to purchase the properties were guaranteed by the Chens.  In effect, what occurred is that the existing debt secured against Rotorua International was simply transferred to Mr Chen’s mother in law.   She had no ability to service the loans herself.   I am satisfied the bank would not have permitted this transaction to take place, were it not for the guarantees of Mr and Mrs Chen.

[16]     During the earlier trial Mr and Mrs Chen both gave evidence.   They were asked certain questions about the circumstances of this transaction.  Neither was able to explain the reasons for it.  Nor was there any discernible commercial advantage to Rotorua International.   Mr Chen described the transaction as a “restructuring” and said it was his wife’s idea.  For her part, she thought the transaction was planned by her husband.

[17]     In my judgment No.4, given on 10 March 2011, I confirmed orders made on

17 February 2011 (in judgment No.3) vesting title to the properties concerned in Rotorua International.  During the course of argument preceding judgment No.4, Mr Hucker for Mr Chen indicated that his client did not now claim to have either a beneficial or a proprietary interest in the properties.   Neither, at any stage, did Mr Chen’s mother in law.   I am satisfied that the sale to her was orchestrated by Mr Chen, either alone or in conjunction with his wife.  The properties were placed in the name of his mother in law for the purpose of concealing their true ownership from outside scrutiny.  As between her and the Chens, she held the properties on a constructive trust for them.  It is common ground that she would do whatever they asked her to do in respect of the properties concerned.

[18]     In my view it is an irresistible inference that the sale to Mr Chen’s mother in law eventually took place as a matter of urgency because the Chens had been put on notice that the plaintiffs were taking steps to freeze the assets of the companies.  On

17 January 2007, the plaintiffs’ solicitors had written to Mr Chen in order to put him on notice of the plaintiffs’ intention to take steps to recover the assets, including the Rotorua International assets, and seeking an undertaking that there would be no further dealings with those assets.

[19]     Accordingly, through February and March 2007 when the sale to Mr Chen’s mother in law of the Rotorua International assets was devised and implemented, Mr Chen was on notice of the plaintiffs’ intentions.

[20]     On 29 March 2007, the plaintiffs’ solicitors, Hesketh Henry, wrote to Burton

& Co, acting for the defendants, advising that the plaintiffs proposed to seek a Mareva injunction against Mr Chen.  There was correspondence between solicitors from that date to 3 April 2007 when Hesketh Henry provided to Burton & Co copies of the plaintiffs’ application for a Mareva order and supporting affidavits.   The application came before Stevens J on the morning of 4 April 2007.  Mr Chen was represented by counsel, Mr Bigio, who had instructions from his client to consent to the  orders  sought  by  the  plaintiffs.    Stevens  J  accordingly  made  the  following consent orders requiring Mr Chen to:

a.Refrain  from  dealing  in  or  with  the  assets  of  Top  International Limited  (TIL),  Rotorua  International Villas  Limited  (RIVL),  and Dacha  International  Limited  (DIL),  except  that  funds  may  be received by those companies and accounts of its ordinary creditors, including employees and any mortgagee, shall be paid from those funds as they fall due and provided further that bank statements be provided at not less than 7 day intervals.

b.Refrain from dealing in or with shares held in his name, in TIL, RIVL and DIL and those companies listed in paragraph 84(c) in the affidavit of Limin Yang sworn at 3 April 2007;

c.Refrain from dealing in or with any real property held in his name, whether jointly or otherwise, in New Zealand;

d.By  13 April  2007,  disclose  to  the  plaintiffs,  details  of  all  bank accounts held in his name, (whether alone or jointly), and the entities set out in (b) above, together with the balances in each of those accounts as at the date of this order and to verify the information provided by affidavit by 20 April 2007.

[21]     Many of the steps to implement the sale to Mr Chen’s mother in law were taken between 29 March 2007 (the date of Hesketh Henry’s formal notice of an intention to apply for a Mareva order) and 4 April 2007 (the date of the Mareva order itself).  On 30 March 2007, Mr Chen deposited funds with his solicitors in order to facilitate the transaction.  On the same day, those solicitors advised the ANZ Bank in writing that the transaction was to settle that day.  The solicitors later that day repaid the mortgage to the bank.  There was also correspondence between the solicitors for Rotorua International and Mr Chen’s mother in law.   Mr Chen signed a transfer. Although the copy produced to the Court is undated, a file note made by Mr Chen’s solicitor suggests it was dated 19 March 2007.   The solicitor also indicates that Ms Chen confirmed on 4 April 2007 that a caveat lodged by Mr Chen in January

2007 was to be withdrawn.

[22]     The transfer to Mr Chen’s mother in law was registered on 5 April 2007, the day after the making of the consent Mareva order.  Following settlement, the Chens remained responsible for management of the hotel.  Mr Chen subsequently filed an affidavit, sworn on 30 April 2007.  In it, he indicated that the Rotorua International assets had been sold to “repay the mortgage”, but that is a manifestly inadequate explanation.  He did not then disclose that the purchaser was his mother in law, nor that he was guaranteeing the borrowings, nor that he and his wife were continuing to run the hotel.

[23]     In November 2007, the Kiwi Hotel was sold for $2 million (some $500,000 more than had been stipulated as the value for all the properties combined in the sale to Mr Chen’s mother in law).  The three residential properties remained in her name. The net proceeds of sale of the hotel were $493,077.41.  At trial, Ms Chen accepted that that figure, together with a substantial sum raised on mortgage over the three remaining Rotorua International residential properties, was applied by the Chens for their own benefit.

[24]     Mr McPherson argues that the evidence shows that Mr Chen received a direct pecuniary benefit  of  close  to  $800,000  from  assets  which  belonged  to  Rotorua International, and that his family as a whole received pecuniary benefits of more than

$1 million.  For present purposes it is unnecessary to make findings as to that, but I

am satisfied that, as both Mr and Mrs Chen frankly conceded at trial, very significant benefits were obtained by them from the Rotorua International assets.

Alleged acts of contempt (Rotorua International)

[25]     Mr McPherson argues, that in breach of the Mareva order, Mr Chen dealt in or with the assets of Rotorua International as follows:

(a)       Permitting the sale transaction to proceed on 30 March 2007 when he was on notice that the Mareva application was pending;

(b)Failing to take any steps to prevent the transfer from being registered after consenting to the Mareva orders on 4 April 2007;

(c)       Facilitating withdrawal of the caveat on 4 April 2007; (d)      Dealing with and obtaining a pecuniary benefit from:

(i)       The sale proceeds of the Kiwi Hotel;

(ii)      The proceeds of a mortgage against the remaining Rotorua

International properties.

[26]     Mr McPherson submits that the Court might properly consider each of these steps in isolation or simply regard them as part of a continuing course of conduct.

Legal principles

[27]     Refusal or neglect to do an act required by an order of the Court within the time specified in a judgment or order, or to abstain from doing a specified act, may amount to a civil contempt.  Intention is not an element of civil contempt, although an absence of intention will be reflected in the ultimate punishment.1   Nevertheless,

where the innocent party seeks the imposition of a sanction such as a fine, the Court

1 Duff v Communicado Ltd [1996] 2 NZLR 89 (HC).

will generally look for a degree of wilfulness or reckless disobedience of the Court order.2

[28]     The law of contempt is founded on public policy considerations:  in Attorney- General v Times Newspapers Ltd, Lord Diplock said:3

The due administration of justice requires first that all citizens should have unhindered access to the constitutionally established courts of criminal or civil jurisdiction for the determination of disputes as to their legal rights and liabilities; secondly, that they should be able to rely upon obtaining in the courts the arbitrament of a tribunal which is free from bias against any party and whose decision will be based upon those facts only that have been proved in evidence adduced before it in accordance with the procedure adopted  in  courts  of  law;  and  thirdly  that,  once  the  dispute  has  been submitted to a court of law, they should be able to rely upon there being no usurpation by any other person of the function of that court to decide it according to law. Conduct which is calculated to prejudice any of these three requirements  or  to  undermine  the  public  confidence  that  they  will  be observed is contempt of court.

[29]     It  seems  that  the  burden  of  proof  resting  upon  an  applicant  may  vary according  to  the  need  for  a  remedial,  or  alternatively a  punitive,  response.    In Country Colours Ltd v Resene Paints Ltd, Anderson J said:4

In my view the appropriate principle is that indicated in Jendell (supra) and Bramblevale (supra), namely that the standard of proof required may vary from  the  ordinary  civil  standard  of  the  balance  of  probabilities  to  the ordinary criminal standard of proof beyond reasonable doubt, depending on all the circumstances of the case which include the indications for a remedial response or for a punitive response. This requires a consideration whether the respondent has acted in breach of an order for injunction by inadvertence or carelessness, or whether the respondent has wilfully breached the order. The nature of the sanction or sanctions to be considered will affect the standard  of  proof  required.  Thus,  in  Jendell  (supra)  where  no  case  of criminal contempt had been made out to the requisite standard of proof and therefore no punitive sanctions were appropriate, nevertheless costs were awarded to the applicant.

[30]     That analysis was adopted by Randerson J in Douglas Pharmaceuticals.5

[31]     For  the  purposes  of  the  present  application,  I  proceed  on  the  basis  that

Mr Chen’s alleged contempt must be established beyond reasonable doubt.

2 Douglas Pharmaceuticals Ltd v Nutripharm New Zealand Ltd HC Auckland CP515/97, 19 March

1998 at 9.

3 Attorney-General v Times Newspapers Ltd [1974] AC 273 at 309.
4 Country Colours Ltd v Resene Paints Ltd (1992) 6 PRNZ 506 (HC).

5 At 10.

[32]     A person with notice of an order must of course observe the terms of the order, but he or she has an additional responsibility.  When he or she can foresee the possibility that a servant or agent might act contrary to the terms of an injunction, he or she has an obligation to take all reasonable steps to prevent them from doing so.6

This is because an injunction is intended to prevent the relevant acts and the party concerned is bound not only not to do those acts either personally or through others acting on his behalf, but also to take all reasonable steps to ensure that those acts will not be done by others.   If those acts would be done on his behalf by reason of previous instructions or authority given by the defendant, then he must take all

reasonable steps to ensure that they do not occur.7

Discussion

[33]     It is common ground that nothing done or omitted by a party prior to the grant of an injunction can of itself provide the basis for a contempt of court application.  But that is not to say that events prior to the making of the order may not assist the Court in determining the state of mind at a later time of a party subject to the terms of an injunction.  I accept that Mr Chen believed at the time of the grant of the Mareva injunction that he was beneficially entitled to the shares in each of the plaintiff companies, and that he was entitled to exercise his rights in respect of those shares.   But it will not avail a party who disobeys an order of the court, simply because he believes that the claim underpinning the order lacks substance.

[34]     Mr Hucker points out that the orders were not mandatory in character (other than order d. which deals with disclosure issues).  Mr Chen was simply obliged to refrain from dealing in or with the assets of certain companies.

[35]     He  submits  that  there  has  been  no  dealing  in  the  assets  of  Rotorua International on or after 4 April 2007.  Settlement occurred on 30 March 2007, some days prior to the order.

[36]     In summary, the argument is:

6 Worldwide Fund for Nature v THQ/JAKKS Pacific LLC (World Wrestling Federation Intervening)

[2004] FSR 10 at 161.

7 Steven Gee QC Commercial Injunctions (5th ed, Sweet and Maxwell), London, 2004 at 548.

(a)      The purchaser (Mr Chen’s mother in law), was entitled to possession of the property as from 30 March 2007;

(b)Thereafter she had an equitable title in the property capable of being perfected by registration;

(c)      Registration  is  a  process  undertaken  by  the  purchaser  who,  in attending to registration procedures, was simply enforcing her own rights to perfect her title to the property.  Accordingly, the registration process was outside the power, possession and control of Mr Chen after settlement had occurred;

(d)It follows that Mr Chen had no contractual right to cancel the contract and insist on return of the title, following the making of the order.

[37]     Mr Hucker’s analysis is perfectly sound so far as it goes, but it assumes that this was an arm’s length transaction between Rotorua International (that is Mr Chen) on the one hand, and Mr Chen’s mother in law on the other.  But it was not an arm’s length transaction at all.  It is clear that the purchaser was nominated by Mr Chen to act as a bare trustee for him (and possibly Ms Chen), and to hold the property at his direction.  When the hotel was ultimately sold, the proceeds of sale were claimed by Mr and Mrs Chen, and not by the vendor.   In those circumstances Mr Hucker’s analysis is really beside the point.

[38]     Mr Chen’s mother in law would have taken any step required of her by her son in law.  It was within Mr Chen’s power to bring the sale transaction to an end at any time.  In particular, having consented to the Mareva injunction he was bound, in my view, to take such steps as he could to bring to a halt any transaction aimed at depriving Rotorua International of its assets.   That would include refraining from providing a withdrawal of the caveat on 4 April 2007.   It would certainly have included a direction to his mother in law, through his solicitors, to refrain from registration of the transfer from Rotorua International.  He knew of the terms of the court order at the latest on the morning of 4 April 2007, and had time to ensure that registration of the transfer was not effected on the following day.

[39]     The detail of the Rotorua International sale to Mr Chen’s mother in law was not disclosed to the plaintiffs for many months after the making of the Mareva order. Indeed, the fact that the purchaser was his mother in law was not disclosed until the plaintiffs were preparing for trial.  In my view, Mr Chen was obliged to ensure that the registration of the transfer did not proceed, and to reverse registration once it occurred.  Despite Mr Hucker’s submissions to the contrary, I am satisfied that no legal consequences would have been suffered by Mr and Mrs Chen, had Mr Chen complied with the terms of the Mareva order, because his mother in law had in reality no interest whatsoever in the Rotorua properties, save as a bare trustee who was required to act at Mr Chen’s direction, and would have done so.

[40]     I am satisfied also that the registration of the transfer amounted to a “dealing” within the terms of the order.   It follows that Mr Chen’s failure to take action to prevent registration amounted to a contempt of court.

[41]     From that finding it follows that Mr Chen was also in contempt when he procured the sale by his mother in law of the Kiwi Hotel, in or about November

2007.  Although the property was by then no longer in the name of Rotorua International, it ought earlier to have been preserved for the benefit of the company by the prevention of the registration of the transfer into the name of Mr Chen’s mother in law.

[42]     Had he taken that step, legal title (at least) would have remained in the name of Rotorua International.  The subsequent sale would therefore have been a “dealing” for the purposes of the order in the assets of the company.  It is no answer to say that the subsequent sale was effected by Mr Chen’s mother in law to a third party.  That was simply window dressing.  The practical reality is that it was a sale by Mr Chen (and  possibly  his  wife)  to  a  third  party.    That  much  is  demonstrated  by  the application of the net proceeds of sale, which were all expended for the benefit of Mr and Mrs Chen.  That sale would never have occurred if registration of the transfer to Mr Chen’s mother in law had been prevented in the first place.

[43]     In my opinion the sale of the Kiwi Hotel represented a further breach of the

Mareva order, in that it amounted to a dealing with an asset which would have been

an asset of Rotorua International but for Mr Chen’s prior breach.  Accordingly, that sale, of itself, amounted to a contempt.

[44]     For completeness I should add that, to the extent that aspects of the two sale transactions were directed or organised by Ms Chen, I am satisfied that she was acting as agent for her husband, who remained under a duty to prevent the taking of any step which might amount to a breach of the order.  That obligation included the duty to ensure that Ms Chen as his agent took no step that might amount to a “dealing” with an asset of the company.

Top International transaction

[45]     The principal asset of Top International was a major commercial building situated at 48 Greys Avenue, Central Auckland.  Early in 2007 it was agreed between the parties that this property should be sold to Montgomery Developments Ltd for

$10.8 million.  In order to facilitate the repayment of a mortgage to Westpac Bank, the parties obtained a consent order, made by Winkelmann J on 16 May 2007, varying the terms of the existing Mareva order. The variation relevantly provided:

1.That Order 1.a. made by the Court on 4 April 2007 is varied to allow the sale of 48 Greys Avenue by Top International Limited to Montgomery Developments Limited to settle on the following terms:

a.        Burton  &  Co,  solicitors  of  Auckland  will  act  for  Top

International in relation to the settlement of the sale;

b.That the net proceeds of sale (allowing for the discharge of the Westpac mortgage, agents’ commissions, solicitors’ fees and normal adjustments for rates, rentals and maintenance) shall be paid into the trust account of Burton & Co to be held pending further order of the Court.

[46]     The plaintiffs agreed to the variation of the order to facilitate the repayment of a mortgage of $7 million to Westpac.   There was correspondence between the solicitors as to the precise amount to be repaid to Westpac.  The plaintiffs’ solicitors, Hesketh Henry, were concerned to ensure that the amount paid to Westpac was the minimum necessary to secure the release of the first mortgage.  In response to their inquiries, Mr Chen’s lawyers at the time, Lee Salmon Long, advised the plaintiffs’ solicitors that the amount required to repay the mortgage was of the order of $7.3

million.    Hesketh  Henry  understood  this  sum  to  represent  the  amount  actually secured by the mortgage.

[47]     But the figure of $7.3 million included in addition:

(a)       $54,522.68,  being  the  amount  due  on  Top  International’s  current

account;

(b)      $16,000.98,  being  the  balance  outstanding  on  Top  International’s

Choices Home Loan Account;

(c)      $200,000 owing on the Heard Park Ltd account, being a $200,000 bond in relation to the Chen family car.  Heard Park Ltd is a company owned and controlled by the Chens.

[48]     The case for the plaintiffs is that, on the evidence, Westpac would have given a discharge of the mortgage without payment of any of the three foregoing sums. The choice to effect repayment of the additional sums at the time of discharge was that of the Chens who, in respect of the $200,000 payment, effectively enriched themselves at the expense of Top International.   Accordingly, the plaintiffs claim, there has been a breach of the Mareva order in that the amount paid to Westpac exceeded that necessary to obtain a discharge.

[49]     At the hearing of the present application there was a great deal of argument as to the true position surrounding Westpac’s requirements.  There is some evidence to suggest that the Chens were given a choice by Westpac, and that they could have secured a discharge for less than was actually paid.

[50]     Mr Hucker argued that the answer lay in the extent to which there was cross securitisation in respect of the first mortgage, and accordingly he sought time to obtain further information from the bank and from certain solicitors.   Thereafter, various memoranda and affidavits were filed, but none of the additional material conclusively determined the issue.

[51]     The plaintiffs and their solicitors understood the Westpac mortgage to secure a $7 million term loan obtained by Top International in order to finance what was known between the parties as the second barley deal.   During the course of correspondence between the solicitors acting for the plaintiffs on the one hand and the Chens on the other, there was no mention of the possibility that the mortgage secured  other  liabilities  than  that.   At  the  time  the  plaintiffs  had  no  access  to company documents and no means of verifying the position otherwise than through the Chens and their solicitors.

[52]     Accordingly, the plaintiffs agreed to the repayment of the $7 million term loan and other standard deductions from the proceeds of sale of the Greys Avenue property.   The plaintiffs did not consent to the deduction of any other sums, not referable to the liability of Top International on its term loan to Westpac.

[53]     Mr McPherson submits that notwithstanding the terms of the variation of the freezing order, a sum of $200,000 was retained by solicitors acting on the direction of the Chens, and was placed on term deposit in the name of Heard Park Ltd.  That was because the bank required a replacement security for a bond given by the bank in respect of a Rolls Royce motor car owned by Heard Park Ltd, or the Chens, and currently in Australia.  Prior to settlement, that bond had formed part of the mortgage security over  the  Greys Avenue  property.   At  the  time  of  settlement,  the  bank required that the sum of $200,000 be placed by Heard Park Ltd on a term deposit, as security for the continuing bond.

[54]     Mr McPherson argues that the application of that sum at that time was not authorised by the freezing order as varied.  I agree.  Mr Chen must have known there was no basis upon which he could justify what was, in effect, the application of Top International’s  money by way of term  deposit  in the name of  Heard  Park  Ltd. Without that term deposit the bank would not have maintained the bond.

[55]     I accept Mr McPherson’s submission that Mr Chen must have authorised that aspect of the transaction, or alternatively, that he was obliged in his capacity as director of Top International to ensure that its funds were not paid away in that

fashion.  I consider that he was in contempt when permitting the authorisation of Top

International’s funds in that fashion.

[56]     The   plaintiff’s   case   a   for   contempt   finding   is   even   stronger   when consideration is given to events at the time of maturity of the term deposit.   The period covered by the bank bond ended on 30 November 2007.  At that point, the bank no longer required security, and Heard Park Ltd gained access to the term deposit that supported the bond.

[57]     On  21  November  2007,  the  term  deposit  was  broken,  and  the  sum  of

$203,088.44 was paid to the cheque account of Heard Park Ltd.

[58]     In summary, the amount of the term deposit represented the funds of Top International.  Mr Chen was not entitled to permit or authorise the application of Top International’s funds to discharge an obligation of Heard Park Ltd at the time of the settlement of the sale of the Greys Avenue property.  It was for Heard Park Ltd to organise  alternative security to enable the bank bond to continue.   There is no suggestion that the bank required that the sum of $200,000 be paid in order to facilitate  the  discharge  of  the  mortgage.    The  bank  would  have  accepted  any sufficient alternative security for the bond proffered by the Chens or Heard Park Ltd.

[59]     Throughout 2007, the sum held on term deposit was therefore beneficially owned by Top International.  When the term deposit matured, Mr Chen was under an obligation to account for that sum to Top International.  He failed to do so.  Instead, the funds were applied for the benefit of Mr Chen and/or Heard Park Ltd.  Mr Chen was not free to deal with the funds as he chose.  Rather he was bound by the terms of the freezing order which required any sale proceeds (beyond those authorised by the variation)  to  be  held  by  Burton  &  Co  pending  further  order  of  the  court. Accordingly, upon maturity of the term deposit, Mr Chen was obliged to pay the amount of the deposit to Burton & Co, but he did not do so.

[60]     I accept Mr McPherson’s submission that the ultimate application of the term deposit proceeds, by or on behalf of Mr Chen, amounted to a separate contempt on Mr Chen’s part.

[61]     Mr McPherson pursued the argument with respect to the other components of the $7.3 million figure with less vigour.  I am not satisfied that the plaintiffs have established  to  the  requisite  standard  that  Mr Chen  was  in  contempt  of  court  in respect of the application of these lesser sums.

Deficient discovery

[62]     The original Mareva order required Mr Chen to disclose to the plaintiffs by

13 April 2007, details of all bank accounts held in his name, and/or in the name of certain other companies, including Heard Park Ltd, together with the balances in each of those accounts as at the date of the order.

[63]     Mr Chen  disclosed  the  existence  of  some  18  bank  accounts  by letter  of

13 April 2007 and an affidavit of 19 April 2007.  Since the date of the order, a further

10 bank accounts have been identified by the plaintiffs that were not disclosed by

Mr Chen at the time of the order.

[64]     The defendants’ evidence on the present applications is given almost entirely by Ms Chen, who in some instances has purported to give inadmissible evidence concerning Mr Chen’s state of mind and intentions at various times.

[65]     Mr Chen himself remains in China, where he has been for more than a year. He has provided an affidavit running to just three paragraphs in which he purports to confirm everything said by Ms Chen in her affidavit.  It has to be said that evidence adduced in that way is unsatisfactory, but understandable to a degree in the light of Mr Chen’s present predicament.  The Court is given to understand that he is unable to leave China at present.

[66]     Nevertheless, it raises a difficulty on this aspect of the application.  Ms Chen says on behalf of her husband that he was orally advised by his solicitors that he was only required to supply details of bank accounts that were operative as at 4 April

2007.  Accounts that were not operative or had a nil balance were accordingly not disclosed.  Further, Mr Chen did not disclose Australian bank accounts because his legal advice was to the effect that the order did not reach such accounts.

[67]     The fact that a party may have acted on legal advice does not prevent a finding of contempt, although that would be a circumstance going to penalty.  But I am satisfied, quite apart from the issue of legal advice, that Mr Chen has failed to comply  with  the  terms  of  the  discovery  order.    Mr McPherson  refers  to  three accounts which were in existence on 4 April 2007, but which were not disclosed in Mr Chen’s discovery affidavit of 19 April 2007. They were:

(a)      ANZ bank account 010190 0193674 91 in the name of Rotorua International Villas Ltd.  On 5 April 2007, the day after the order was made,  a  sum  of  $1,555,116.77  was  withdrawn  from  that  account, which was closed on that day;

(b)On 29 May 2007 the sum of $16,004.98 was deposited in the Westpac bank account of Top International, 030104 070 8396 91.  That bank account, closed on 13 May 2007, was not disclosed by Mr Chen;

(c)       A further Top International account at Westpac, namely 030104 070

8118  93  was  the  subject  of  deposits  and  withdrawals  on  29  and

30 May 2007.  Included was a deposit of $77,203.42 on 30 May 2007. That bank account, in existence on 4 April 2007, was not disclosed by Mr Chen.

[68]     Two  of  these  bank  accounts  were  subsequently  disclosed  in  Mr Chen’s affidavit of documents, filed in 2009, but I accept Mr McPherson’s submission that that does not cure Mr Chen’s contempt.

[69]     Mr Hucker submits that, to the extent that there has been a breach of the discovery orders, the remedy is simply to require Mr Chen to file a supplementary affidavit.  He also submits that there has been a waiver on the part of the plaintiffs, by reason of their failure to take timely steps to pursue their contempt application

once Mr Chen’s defaults became known to them.8    Further, he argues the filing of

subsequent affidavits by Mr Chen has in effect purged any contempt which the Court might find to exist.

[70]     In my opinion, those are all matters which Mr Hucker is entitled to advance when the question of penalty comes to be considered, although in my view there are difficulties with each of his propositions.

[71]     For present purposes, it is sufficient to find, as I do, that Mr Chen was in contempt in not disclosing the three accounts identified by Mr McPherson and set out above.

Security for costs

[72]     Top International, as counterclaim defendant, seeks an order for security for costs against Mr Chen in respect of his counterclaim.  Rule 5.45 of the High Court Rules provides that the Court may make an order for security for costs where a plaintiff is resident out of New Zealand, or where there is reason to believe that a plaintiff  will  be  unable  to  pay  the  costs  of  the  defendant  if  the  plaintiff  is unsuccessful in the proceeding. A plaintiff includes a counterclaim defendant.

[73]     The proper judicial approach to an application for security for costs was discussed  by  the  Court  of Appeal  in  AS  McLachlan  Ltd  v  Mel  Network  Ltd.9

Whether or not to order security, and if so the quantum, is discretionary.  They are matters for the Judge to determine if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing principles from the facts of previous cases.

[74]     An order having the effect of preventing a plaintiff from pursuing a claim should be made only after careful consideration and in a case in which the claim has little chance of success.  But the interests of defendants must also be weighed.  They ought to be protected against being drawn into unjustified litigation.

[75]     There is no doubt the threshold test is met in this case.  Mr Chen has been in China for more than a year and cannot therefore be said to be resident in New Zealand.  The question is whether it is just in all the circumstances to make an order directing that he give security for costs on his counterclaim.

[76]     I am satisfied that it would not be proper to do so.   That is because the counterclaim is, in effect, a defence to the plaintiffs’ claim.   It supports the defendants’ claim to a set off, in which Mr Chen argues that he has not been paid by Top International for assets transferred to it and subsequently on-sold.

[77]     In Onop Properties Ltd v Fallon Properties Ltd,10  Barker J held that it is “quite inappropriate to order security for costs against a counterclaimant who is in effect using his counterclaim as a defence to the plaintiff’s claim.  To hold otherwise would be to require a defendant to give security for costs which is something not contemplated by the rules”.11

[78]     Mr Chen cannot be required to give security for costs in respect of his claim to a set off.  Neither in my view, in all the circumstances of this case, ought he be required to do so in respect of his counterclaim.  The plaintiffs will be put to no extra cost at all by reason of the existence of the counterclaim, because they will be required to meet Mr Chen’s argument for a set off irrespective of whether there is a counterclaim.

[79]     Accordingly, the plaintiffs’ application for security for costs against Mr Chen is dismissed.

Summary

[80]     I find Mr Chen to have been in contempt of court in respect of the following matters:

(a)       Failing to take any or any sufficient steps to prevent the transfer to his mother in law of the Rotorua properties owned by the second plaintiff,

following the making of the consent freezing order on 4 April 2007;

10 Onop Properties Ltd v Fallon Properties Ltd (1988) 1 PRNZ 261 (HC).

11 At 262.

(b)Subsequently procuring the sale of the Kiwi Hotel and applying the net proceeds of sale for his own benefit, contrary to the terms of the freezing order of 4 April 2007;

(c)      Authorising,  or  failing  to  prevent,  the  application  of  part  of  the proceeds of the sale of the Greys Avenue property owned by Top International in favour of Heard Park Ltd;

(d)Failing to ensure that Heard Park Ltd accounted to Top International for the amount of the term deposit set up with Westpac, utilising part of the proceeds of sale of the Greys Avenue property;

(e) Failing to comply with the terms of the freezing order of 4 April 2007 by omitting to disclose particulars of the bank accounts referred to at [67] above;

[81]     The plaintiffs’ application for an order for security for costs against Mr Chen in respect of his counterclaim is dismissed.

[82]     Prior to the delivery of this judgment, the court was advised that Mr Hucker no longer has instructions from Mr Chen, and he was accordingly granted leave to withdraw.

[83]     Mr McPherson has advised the court that the plaintiffs are unlikely to seek to pursue the substantive proceeding, given Mr Chen’s current personal and financial situation.  It will be for the plaintiffs to determine whether they wish, in consequence of this judgment, to proceed to a penalty hearing.   If they do then counsel for the plaintiffs is to seek an appropriate fixture.

Costs

[84]     The plaintiffs are entitled to costs.   Counsel for the plaintiffs may, at his discretion, file a memorandum, or alternatively, seek to have the matter of costs dealt with at any penalty hearing.

C J Allan J