Zespri Group Limited v Gao

[2020] NZHC 681

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-463-00094

[2020] NZHC 681

BETWEEN

ZESPRI GROUP LIMITED

Plaintiff

AND

HAOYU GAO

First Defendant

SMILING FACE LIMITED
Second Defendant

XIA XUE

Third Defendant

Hearing:	5 March 2020
Counsel:	L A O’Gorman and L C Sizer for plaintiff/respondent E St John and S Moore for defendants/applicants
Judgment:	3 April 2020

JUDGMENT OF KATZ J

[Stay application]

This judgment was delivered me on 3 April 2020 at 11.00 am pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar Date:

Solicitors:           Buddle Findlay, Auckland

Yu Lawyers, Auckland

Counsel:            E St John, Barrister, Auckland

S Moore, Barrister, Auckland

ZESPRI GROUP LIMITED v GAO & ORS [2020] NZHC 681

Introduction

[1] Zespri Group Limited (“Zespri”) controls all kiwifruit exports from New Zealand to countries other than Australia, on behalf of New Zealand growers.1 Following an extensive research programme, Zespri developed the G3 and G9 varieties of gold kiwifruit. The G3 variety (also known as “SunGold”) is particularly valuable, as it is a high-quality gold variety that is resistant to the kiwifruit vine disease Psa. Zespri holds the exclusive rights to commercialise G3 and G9 under the Plant Variety Rights Act 1987 (“PVR Act”).

[2] In a judgment delivered on 10 February 2020, I found that Mr Gao and his associated company, Smiling Face Limited, had breached Zespri’s exclusive rights under the PVR Act in relation to G3 and G9.2 I also found that Mr Gao and his wife, Ms Xue, had breached their G3 licence agreement with Zespri. I awarded significant damages to Zespri.

[3]    The defendants/applicants have appealed the judgment. Pending resolution of their appeal, they seek a partial stay of execution.

[4]    The applicants’ assets were “frozen” by this Court in September 2017.  On  19 December 2017 the freezing order was varied to enable Mr Gao and Ms Xue to sell their kiwifruit orchard in Whakatane. The net proceeds of that sale were added to the frozen funds held in trust. In January 2020, the freezing order was again varied, this time to enable Mr Gao and Ms Xue to purchase a home in Hamilton (“the Hamilton property”) for just under $1 million. The Hamilton property is subject to the freezing order. In addition, a charging order has been registered against it. The balance of frozen funds remaining in trust after the property purchase was approximately

$650,000.

[5]    The applicants now seek to stay execution of the judgment against the Hamilton property and also $75,000 of the frozen funds. The applicants wish to use

1      Pursuant to the Kiwifruit Industry Restructuring Act 1999.

2      Zespri Group Ltd v Gao [2020] NZHC 109.

that $75,000 to fund their appeal. They seek a variation to the freezing order to enable them to do that.

Legal principles

[6]    The starting point is that a successful party is entitled to the fruits of its judgment. An appeal does not operate as a stay of enforcement of the judgment appealed.3 The onus is on the applicant for a stay of execution to show why the usual consequence of enforcement should not follow.4

[7]    The Court appealed from may, however, grant a stay of execution in appropriate circumstances.5 The factors to be taken into account in the exercise of the Court’s discretion include:6

(a)whether the appeal may be rendered nugatory by the lack of a stay;

(b)the bona fides of the appellant as to the prosecution of the appeal;

(c)whether the successful party will be injuriously affected by the stay;

(d)the effect on third parties;

(e)the novelty and importance of questions involved;

(f)the public interest in the proceeding;

(g)the overall balance of convenience; and

(h)the apparent strength of the appeal.

3      Court of Appeal (Civil) Rules 2005, r 12(1); Brook Valley Community Group Inc v Brook Waimarama Sanctuary Trust [2017] NZCA 377 at [10].

2     Brook Valley Community Group Inc v Brook Waimarama Sanctuary Trust [2017] NZCA 377 at [10].

4      Brook Valley Community Group Inc v Brook Waimarama Sanctuary Trust  [2017] NZCA 377 at [10].

5      Court of Appeal (Civil) Rules 2005, r 12(3).

6      Brook Valley Community Group Inc v Brook Waimarama Sanctuary Trust  [2017] NZCA 377 at [10].

[8]    The Court must weigh the relevant factors in balancing, on the one hand, the right of a successful litigant to have the fruits of judgment and, on the other hand, the need to preserve the position in case the appeal is successful.7 At the end of the day, the test for a stay of execution is one of the justice of the given case.8

[9]    In the case of a money judgment, a judgment creditor who gives appropriate security or assurance as to repayment if the judgment debtor’s appeal is allowed, should in principle be allowed the judgment sum.9 A stay of enforcement of a monetary judgment should generally only be granted if there is no appropriate assurance of any contingent repayment by the judgment creditor.10

Should a stay of execution be granted?

[10]   Although it is routine for freezing orders to provide for the payment of the reasonable legal costs of defending a substantive proceeding, counsel were unable to refer me to any case where a freezing order had been varied post-judgment to allow a judgment debtor access to frozen funds to finance an appeal. This likely reflects that the situation post-judgment differs markedly from that which prevails pre-judgment. Post-judgment there has been a substantive determination of rights, usually following a fully contested hearing. As a consequence, the policy of the law is strongly in favour of the enforcement of judgments in circumstances where the judgment creditor is in a position to repay the judgment debtor if the appeal succeeds.

[11]   Both parties claimed that the English Court of Appeal decision of Emmott v Michael Wilson & Partners Ltd supported their position.11 That case did not, however, directly consider the present issue. Nor is it sufficiently analogous, in my view, to be of material assistance. I therefore approach the issue on a “first principles” basis, with

7      Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 (CA) at 87 as cited in Dymocks Franchise Systems (NSW) Ply Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 (HC) at [8].

8      Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 (HC) at [8].

9      ASB Bank Ltd v Lin [2014] NZHC 106, [2014] NZAR 327 at [14]; McLeod v New Zealand Pine Company Ltd (1892) 11 NZLR 493 (SC) at 495.

10     ASB Bank Ltd v Lin [2014] NZHC 106, [2014] NZAR at [11], [14] and [17]; McLeod v New Zealand Pine Company Ltd (1892) 11 NZLR 493 (SC) at 495.

11     Emmott v Michael Wilson & Partners Ltd [2019] EWCA Civ 219, [2019] 4 WLR 53 at [44].

reference to the specific factors set out at [7] above, and any other relevant matters referred to by counsel.

Will the appeal be rendered nugatory if a stay is not granted?

[12]   Mr St John acknowledged that the appeal will not be rendered nugatory if a stay is not granted, although he submitted that it will make it significantly more difficult (or impossible) for the applicants to fund the appeal.

[13]   The fact that the appeal will not be rendered nugatory is a factor that weighs against granting a stay of execution. I acknowledge, however, Mr St John’s concern that the present situation could change if Zespri were to bankrupt Mr Gao and Ms Xue, or liquidate Smiling Face. No such applications have yet been made, however. I accept Ms O’Gorman’s submission that if there is merit to the applicants’ submission that bankruptcy or insolvency would render their appeal nugatory (which Zespri denies), then the proper course would be to address that issue in the context of any application for adjudication or winding up.12

Bona fides/apparent strength of the appeal/novelty and importance

[14]   The applicants are obviously bona fide in their wish to pursue an appeal. Further, they clearly have arguable grounds of appeal.

[15] The judgment addresses complex and difficult issues relating to the extraterritorial application of the PVR Act that have not previously been considered in New Zealand, or internationally. The issues are far from straightforward. Unfortunately, they were not addressed by either party in their closing submissions. During the course of writing the judgment, however, the significance of the extraterritoriality issues quickly became apparent. As a result, I issued a lengthy Minute on 22 May 2019 (after I had completed my analysis of the evidence) setting out my preliminary thoughts on the extraterritoriality issues that arose. I sought further

12 See Mainzeal Property and Construction Ltd v Yan  [2019] NZHC 3145 at [26]. As discussed there, the clawback time runs from when the bankruptcy application is served on the debtor: Insolvency Act 2006, s 193.

submissions from the parties on  those issues.    As is apparent from my Minute, my preliminary views tended to favour the applicants, rather than Zespri.

[16]   Due to the complexity of the issues raised, Zespri subsequently sought an extension to the timetable for filing submissions (which was granted). The further submissions filed were comprehensive and were accompanied by comprehensive bundles of  relevant  authorities.  The  final  legal  submissions  were  received  on  10 July 2019.13 Ultimately, having considered counsel’s further submissions and the authorities provided, I determined he extraterritoriality issues largely in Zespri’s favour. I acknowledge, however, that it is quite possible that the Court of Appeal could take a different view.

[17]   Similarly, the assessment of damages was a challenging exercise, requiring the application of the “user principle” to a novel factual situation. Again, the Court of Appeal may take a different approach to the assessment of damages, if my liability findings are upheld.

[18]    The merits of the appeal must therefore objectively be considered reasonable. The applicants’ bona fides, the apparent strength of the appeal, and the novelty and importance of the issues raised, are all factors that weigh in favour of a partial stay.

Will the successful party (Zespri) be injuriously affected by a stay?

[19]   Zespri submitted that staying execution on the judgment would cause prejudice to it because:

(a)It would delay the commencement of the specified and restricted periods under the antecedent transaction regimes in insolvency.

(b)It would enable the debtors (rather than Zespri as judgment creditor) to benefit financially from ongoing use of the Hamilton property during the time period that any appeal is being pursued.

13 Unfortunately, delivery of the judgment was then delayed until February 2020 as a result (amongst other things) of my presiding over a 10 week Judge-alone trial in the second half of 2019, followed by four weeks spent writing my Reasons for Verdicts.

(c)It would deprive Zespri of the time value of money during the period between the likely date of execution (in the absence of a stay) and determination of the appeal.

(d)Releasing $75,000 to the applicants from the frozen funds would dissipate existing assets and diminish Zespri’s recoveries on the judgment debt by a corresponding amount.

[20]   I accept that there is force in each of these submissions, and that a stay on the terms sought (including the release of $75,000 to Zespri) would injuriously affect Zespri. Zespri would, in effect, be funding the defendant’s appeal, in circumstances where (if the appeal fails) it would be permanently deprived of the “dissipated” funds. Further, Zespri would be deprived of any interest it might otherwise be able to earn from the proceeds of sale of the Hamilton property. This would occur in circumstances where there is already a very substantial shortfall between the applicants’ apparent assets and the judgment debt. This is therefore a factor that weighs against granting a stay.

Relevance of possible difficulties in funding the appeal

[21]   Mr St John submitted that a further factor the Court should take into account, in the overall interests of justice, is that if the defendants are not able to access the frozen funds to finance the appeal it is unlikely to proceed.

[22]   Zespri challenged that claim, submitting that it is far from clear that the applicants would be financially precluded from pursuing their appeal without access to the frozen funds. In particular, Ms O’Gorman submitted that:

(a)Mr Gao and Ms Xue are entitled to appear in person;

(b)they have disclosed income and other assets (and may have more offshore, given the veracity and non-disclosure  issues  concerning  Mr Gao referred to in the judgment);14

14     Zespri Group Ltd v Gao [2020] NZHC 109 at [43], [108] and [113].

(c)they could seek financial assistance from other sources (such as family), as they have done previously, based on the evidence at trial; and

(d)they could seek legal representation on a reduced fee, pro bono or contingency basis.

[23]   Ms O’Gorman further submitted that the justice system proceeds on the basis that legal aid, rather than judgment creditor adversaries, should fund access to justice where there is an appropriate need.15 I accept that that proposition is the appropriate starting point. Nevertheless, in an appropriate case the overall interests of justice could favour a stay (and, in this case, the release of frozen funds) even where appellants are not eligible for civil legal aid due to their level of income.

[24]   It is incumbent on the applicants to establish that, without access to the frozen funds, they could not fund adequate legal representation for an appeal. (I accept that it is unrealistic, given the complexity of the issues, to expect the applicants to represent themselves on appeal).

[25]   Ms Xue has sworn an affidavit in support of the stay application, to which she has annexed a “statement of means of liable party” setting out her income for the    52 weeks prior to 26 February 2020. Mr Gao has not provided a similar statement. Mr Xue says in her own statement, however, that Mr Gao received wages of approximately $40,000 for the year to February 2020.

[26]   Ms Xue’s statement discloses total income for the couple of $115,859.37. Expenses of $88,447.00 are listed for the same period. This includes, however,

$27,000 in rent, which Ms Xue acknowledges is no longer required now that they have purchased a home, mortgage free. In addition, I note that expenses of $8,930.00 are listed for “entertainment” and $2,000 for “fares” (which is not further explained). There is also a payment of $1,932.00 for “GST return for partnership”, which I presume is a one-off payment.

15     ASB Bank Ltd v Lin [2014] NZHC 106, [2014] NZAR 327 at [16].

[27]   It therefore appears that the applicants’ income is likely to exceed their reasonable expenses, by a fairly significant margin. Of particular note, since February 2020 they are no longer liable to pay rent of $27,000 per annum, freeing up that money for other purposes.

[28]   I have not overlooked that Ms Xue claims to have debts of $46,814.41 due in the next six months, comprising credit card debts and debts payable to Nicky Edward and Zhengang Xue. No supporting documentation is provided. Given my previous adverse credibility findings in relation to Ms Xue, discharging the onus of proving that the applicants are unable to finance an appeal without recourse to the frozen funds requires at least some verification of the information set out in the statement of means. In particular, I give relatively little weight to the debts allegedly owing to Zhengang Xue and Nicky Edward, given the absence of supporting evidence from those creditors confirming the details of those debts and the timeframe for repayment.

[29]   I also acknowledge the force in Ms O’Gorman’s submission that providing security for costs of the appeal out of the frozen funds would, in practical terms, provide no real security to Zespri at all. The relevant funds would be sourced from an account that Zespri is already entitled to enforce the judgment against.

[30]   In conclusion, although I accept that the inability to fund an appeal could potentially be a relevant consideration in the stay context, the applicants have failed to satisfy me that they will be unable to fund an appeal without recourse to the frozen funds. It may be difficult to fund an appeal to a “Rolls Royce” standard, but the applicants appear to currently have sufficient income to fund an adequate appeal, possibly over a period of time. I note in this context that the extraterritoriality issues that are likely to be the primary focus of the appeal have already been extensively traversed in this Court. In response to a specific request from the Court, both parties researched the relevant issues thoroughly and filed comprehensive supplementary written submissions on the topic.

Conclusion on whether a partial stay of execution should be granted

[31]   As I have noted above, the starting point is that a successful party is entitled to the fruits of its judgment. A stay of enforcement of a monetary judgment will generally

only be granted if there is no appropriate assurance of any contingent repayment by the judgment creditor. Here, there is no issue that Zespri is in a position to repay the applicants if the appeal is allowed.

[32]   The appeal will not be rendered nugatory if a stay is not granted. Further, I have not been persuaded that it will be impossible for the applicants to finance an appeal unless $75,000 of the frozen funds are released to them. I have also found that Zespri would be injuriously affected by a stay. These are all factors that weigh against granting a stay.

[33]   On the other hand, the appeal raises difficult and novel legal issues and must be assessed, objectively, as having a reasonable prospect of success. Although the Hamilton property has only recently been acquired, it is now the applicants’ family home. Any sale of the property would be irreversible. While the proceeds of any sale could be refunded, the home itself could not be “returned” to the applicants. Further, conducting any sale of the property in these unprecedented times (the country is currently grappling with the worldwide COVID-19 pandemic) is fraught with uncertainty and could result in a significant loss of equity for the plaintiffs.

[34]   Taking all of these matters into account it is my view that the overall interests of justice favour granting a stay of enforcement in respect of the Hamilton property, despite the fact that this will cause some prejudice to Zespri. The interests of justice do not require, however, a stay of execution in respect of $75,000 of the funds currently subject to the freezing order, or a variation of the freezing order to enable the applicants to access those funds. Zespri is entitled to seek to execute the judgment against the frozen funds.

Result

[35]   I order that execution of the judgment be stayed pending the appeal of the judgment, to the extent that no further steps are to be taken to enforce the judgment against the applicants’ property in Hamilton prior to the appeal being heard and determined. The stay application (and application to vary the freezing orders) is otherwise dismissed.

[36]   Leave is reserved to Zespri to seek a review and/or variation of this order in the event that the applicants do not prosecute their appeal with due diligence (taking into account the current unprecedented circumstances, arising out of the worldwide COVID-19 pandemic).

[37]   If costs issues cannot be resolved between counsel, then leave is reserved to file memoranda on costs.  Any memorandum on  behalf of Zespri is to be filed by  17 April  2020.   Any memorandum  on behalf of the applicants  is  to be filed by     1 May 2020. A costs decision will then be made on the papers.

Katz J