Zhang v Dong
[2013] NZHC 818
•18 April 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-2223 [2013] NZHC 818
BETWEEN HUA ZHANG Plaintiff
ANDYAN DONG Defendant
Hearing: 25 and 26 March 2013
Counsel: R O Parmenter for the Plaintiff
D A Wood for the Defendant
Judgment: 18 April 2013
JUDGMENT OF WOODHOUSE J
This judgment was delivered by me on 18 April 2013 at 4:00 p.m. pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
……………………………………
Counsel:
Mr R O Parmenter, Barrister, Auckland
Mr D A Wood, Barrister, AucklandInstructing Solicitors:
Winston Wang & Associates (for the plaintiff), Solicitors, Auckland
Ms J Wang (for the defendant), Jenny Wang & Associates, Solicitors, Manukau
ZHANG V DONG HC AK CIV-2012-404-2223 [18 April 2013]
[1] The question in this case is whether a payment of $1 million to the defendant, Mrs Yan Dong, was a part payment by the plaintiff, Mrs Hua Zhang, for shares in the defendant’s company, or whether it was a loan to Mrs Dong by Mrs Zhang and her husband, Mr Tao Li.1 Mrs Zhang and Mr Li say it was a loan and they seek to recover it. Mrs Dong says it was part payment of a total of $1.5 million to be paid by Mrs Zhang for 39.5% of the shares in Mrs Dong’s company. There is a
counterclaim by Mrs Dong for $500,000 that was not paid.
[2] There is a written agreement between Mrs Zhang and Mrs Dong recording the transaction as a sale and purchase of shares. Mrs Dong says that this, another share purchase agreement, and a letter of commitment from Mrs Zhang, record all of the terms of the agreement between the parties. Mrs Zhang and Mr Li say that the full agreement between the parties is contained in an oral agreement which preceded the documents. Mrs Zhang and Mr Li say that the essence of this agreement was a loan by Mrs Zhang to Mrs Dong, to be repaid in two to three years, and with security to be provided in the meantime by transfer of the shares from Mrs Dong to Mrs Zhang.
[3] For Mrs Zhang to succeed in her claim to recover the $1 million, she must establish, on the balance of probabilities, that there was an oral agreement between Mrs Zhang and Mr Li on the one hand, and Mrs Dong on the other, as contended for by Mrs Zhang and Mr Li. If Mrs Zhang succeeds, Mrs Dong cannot succeed on her counterclaim.
[4] If I am satisfied that the terms of the original agreement between the parties are confined to the written agreements for sale and purchase of shares and the letter of commitment, Mrs Zhang cannot succeed on her claim. However, it does not follow that Mrs Dong must then succeed on her counterclaim. There is a further question in relation to the counterclaim as to whether, if it was originally an agreement to purchase 39.5% of the shares, there was a subsequent variation by which the parties agreed, in effect, to reduce the purchase to 26% of the shares at $1
million.
1 For convenience family names have been recorded as the last name.
[5] Mrs Zhang and Mr Li gave evidence of the oral agreement they say was made, and of subsequent dealings with Mrs Dong. Mrs Dong gave evidence to the effect that there was no oral agreement as contended on the other side. She also gave evidence of subsequent dealings with Mrs Zhang and Mr Li, and in particular with Mr Li. There were no other witnesses. The remaining evidence is documentary. This includes the agreements for sale and purchase of shares and the letter of commitment earlier referred to, subsequent email correspondence between Mrs Dong and Mr Li, and some other documents.
[6] The primary issue as to the terms of the agreement is to be determined, in part, by weighing the evidence of Mrs Zhang and Mr Li on the one hand against the evidence of Mrs Dong on the other. Central to this is an assessment of the evidence of what was done at the time the original agreement was made and subsequent conduct, and an assessment of the content of and inferences to be drawn from the subsequent emails between Mr Li and Mrs Dong and some later documents prepared on behalf of Mr Li. This in turn involves consideration as to whether what happened is more consistent with what Mrs Zhang and Mr Li say was agreed, or with what Mrs Dong says was agreed.
Conclusion in summary
[7] I am satisfied that there was an oral agreement as contended by Mrs Zhang and Mr Li. I am therefore satisfied that the $1 million paid to Mrs Dong was a loan. I am further satisfied that, in terms of the agreement, Mrs Zhang is entitled to recover the loan and is therefore entitled to judgment against Mrs Dong.
[8] I have reached this conclusion because, firstly, the evidence as to what actually happened immediately before the agreements were signed, and subsequently, in my judgment points strongly to a conclusion that the parties were not involved in the sale and purchase of shares. For example, nothing was done by Mrs Zhang or by Mr Li, with the latter having most involvement in negotiations, indicative of a share purchase. What actually occurred, and also what did not happen, supports the evidence of Mrs Zhang and Mr Li that it was a loan. There was a transfer of shares to Mrs Zhang to provide security for the loan and also to assist in
an application by Mrs Zhang for a New Zealand visa. Secondly, the subsequent written communications between Mr Li and Mrs Dong support the contentions of Mrs Zhang and Mr Li. In addition, Mrs Zhang and Mr Li were more persuasive as witnesses than Mrs Dong.
The facts
[9] Mrs Zhang and Mr Li are Chinese nationals. They live in Xi’an, in Shaanxi Province in China. Mr Li is a successful businessman. Mrs Zhang is qualified as a teacher. They have a son, Zhuoyu Li.
[10] Mrs Dong is married to Mr Qi Chen. They have lived in New Zealand since
1995.
[11] In 2004 Mr Li was a member of an official delegation from Shaanxi Province to a number of countries including New Zealand. When in New Zealand Mr Li was introduced to Mrs Dong and her husband. The introduction was made by Mr Hong Guo. Mr Guo is a friend of Mr Li from Shaanxi Province who, by 2000, was living in New Zealand.
[12] In February 2008 the Li family came to New Zealand for a holiday. On the second to last day of their holiday Mr Guo arranged a social gathering at a restaurant in Auckland of the Li and Guo families, Mrs Dong and Mr Chen, and another family.
[13] In the course of conversation Mrs Zhang or Mr Li mentioned that they had begun considering the possibility of migrating to New Zealand. They were also interested in arranging for Zhuoyu to attend secondary school in New Zealand. Mrs Dong told Mrs Zhang and Mr Li that, through her company Tang Ming Group Ltd, she was able to assist them to obtain a two year work visa and, with Mrs Zhang as the principal applicant, to then obtain permanent residence permits for the Li family in New Zealand. Mrs Dong was enthusiastic to assist. However, Mrs Zhang and Mr Li did not pursue the matter because of Mr Li’s existing and substantial business interests in China and the fact that Mrs Zhang had a good job in Xi’an with good remuneration.
[14] In April 2008 Mrs Zhang and Mr Li met Mrs Dong in Xi’an. The discussion leading to the present issues began at this time against the earlier background. The discussions took place largely between Mr Li and Mrs Dong. Mrs Zhang confirmed her husband’s evidence.
[15] The essence of Mr Li’s evidence is that Mrs Dong said she had a problem with a lack of funds for her business and that, if Mr Li would lend her NZ$1.5 million, she would assist in obtaining permanent residence for the Li family. Mr Li said that Mrs Dong proposed that the loan would be secured by a temporary transfer of 40% of her shares in Tang Ming Group to Mrs Zhang, and the shareholding would also assist with the immigration application. There were 100 shares in the company, all owned by Mrs Dong. Mr Li said that Mrs Dong also proposed that Mrs Zhang would nominally be employed by Tang Ming Group, but without any expectation that she would do any work for the company. As Mr Li put it:
Hua Zhang has never worked at Tang Ming. Neither has she exercised any management rights or responsibility. At the time we believed that the plan, to both Yan Dong and us, was indeed one that worked perfectly for both sides – we could resolve the issue of New Zealand permanent resident status and Yan Dong could solve her problem of lack of funds, and the 1.5 million New Zealand dollars was not a big figure for me.
[16] Mrs Dong’s evidence is that matters were initiated by Mrs Zhang who, at a dinner in Xi’an, told Mrs Dong that she wanted to settle in New Zealand with her family and that she wanted her son to attend Saint Kentigern College in Auckland. Mrs Dong said that Mrs Zhang also told her that she and Mr Li would like to invest in Tang Ming Group.
[17] This was followed by discussions between Mrs Dong and Mr Li in Xi’an and then by phone on Mrs Dong’s return to New Zealand. Mrs Dong said that these discussions led to an oral agreement. The main terms of this agreement were summarised by Mrs Dong in her brief of evidence as follows:
(a) Tao Li and Hua Zhang were to purchase shares in Tang Ming Group
Limited; and
(b) the purchase was to be in the name of the plaintiff; and
(c) the price to be paid for the shares was to be $1.5 million; and
(d) the price was to be paid in two instalments, the first of 1 million dollars immediately following the signing of the documents giving effect to the agreement and the second of $500,000 after the plaintiff had obtained a work visa; and
(e) 39.5% of the shares in Tang Ming Group Limited were to be transferred to the plaintiff in consideration of the full payment; and
(f) the company was to promote the plaintiff’s application for a visa
through New Zealand Immigration; and
(g) once a visa had been obtained the plaintiff was to be engaged by the company as its office manager, a position that was vacant at the time.
[18] There is a written agreement dated 22 April 2008 for sale and purchase of shares in Tang Ming Group between Mrs Dong and Mrs Zhang. Mrs Zhang is said to be of Auckland and employed as an office manager. The agreement is for 39.5 of the 100 shares. There is a recital that “it is acknowledged that the total value of the company is $3,800,000 as per attached Ernst Young [sic] account of sales and assets as at 21 April 2008”. There is no Ernst & Young document attached to the agreement. A copy of an Ernst & Young letter to Mrs Dong dated 21 April 2008 was produced in evidence by Mrs Dong and is noted later. The agreed price for 39.5 shares is $1.5 million. $1 million was to be paid on execution of the agreement and the balance of $500,000 was to be paid upon Mrs Zhang’s obtaining a work visa. Mrs Zhang is, by the agreement, appointed general office manager of Tang Ming Group with a gross salary of $58,000 per annum. The agreement also provides that all fees associated with a residency application by Mrs Zhang were to be paid by Tang Ming Group, although Tang Ming Group is not a party to the agreement.
[19] There is a further agreement also dated 22 April 2008. This is between Tang Ming Group Ltd and a Chinese company, Xi’an Techteam Engineering and Industry Group. Xi’an Techteam is a company associated with Mr Li. The document produced in evidence is clearly incomplete. Counsel for both parties advised that no other pages are held. The incomplete copy produced came from Mrs Dong. A recital to the agreement records that Tang Ming Group “agrees to sale [sic] 40% of its shares in its company to” Xi’an Techteam “for the purpose of developing and
extending export business of” Tang Ming Group products in China. There are only two operative provisions in the copy produced. These are as follows:2
1. USE OF PERSONAL NAME
1.1In order to effect the above mentioned transaction, Xi’an Techteam agrees and authorises Hua Zhang to use, on its behalf, her personal name in the purchase of forty percent (40%) of the shares in Tang Ming Group.
2. APPOINTMENT OF HUA ZHANG
2.1For the benefit of both parties and to ensure on-going joint co- operation, Tang Ming Group agrees to appoint Hua Zhang, whom both parties agree has the high level of management experience in China to develop party Tang Ming Group’s business in China, as the Office Manager of its Head office in New Zealand on a salary of NZ$58,000.00 per annum.
[20] Both of the share purchase agreements were drafted by Mrs Dong’s solicitor in Auckland and forwarded to Mr Li in China for execution by Mrs Zhang and by Xi’an Techteam. The signed documents were then returned to Mrs Dong in New Zealand.
[21] On 30 April 2008 Mrs Zhang signed a letter of commitment in favour of Mrs Dong. By this letter Mrs Zhang agreed to pay NZ$1 million of the NZ$1.5 million total before 30 June 2008 and the balance of NZ$500,000 before 30 December 2008. The evidence is that this is a customary form of supplementary assurance from a party to a written agreement such as the agreement Mrs Zhang signed.
[22] There is a share transfer dated 30 April 2008 signed by Mrs Dong and Mrs
Zhang for 39.5 shares. Registration of the transfer was effected on 1 May, although
40 shares were registered in Mrs Zhang’s name. In respect of the first instalment of NZ$1 million, Mr Li transferred NZ$200,000 to Mrs Dong on 3 June 2008 and US$600,000 on 21 July 2008. There is no evidence of any issue being taken by Mrs Dong about the timing of the payments. On conversion of the US dollars the total payment was in fact NZ$1,020,000, but the claim is confined to the sum of NZ$1
million.
2 The document, unhelpfully, refers to Tang Ming Group as “Party A” and Xi’an Techteam as “Party
B”. The company names have been substituted in the quoted text.
[23] Between May and October 2008 steps were taken by Mrs Dong, directly or through her company, to assist in an application for a work visa for Mrs Zhang. A work visa for Mrs Zhang was issued to Mrs Zhang on 10 October 2008 with permission to work in New Zealand as an office manager for Tang Ming Group.
[24] Mrs Zhang came to New Zealand in October 2008 and remained in New Zealand for a month or so. There is a conflict of evidence in relation to some of the things that occurred during the period when Mrs Zhang was in New Zealand. I am satisfied that the following occurred:
(a) Mrs Zhang did not come to New Zealand intending to remain. She had made no arrangements for her own accommodation. She stayed in Mrs Dong’s home.
(b) Mrs Zhang was placed on the payroll of Tang Ming Group from 4
November 2008. She remained formally on the payroll, and was paid for over two years – until 30 November 3010. Over all of this period she was paid, fortnightly, at a rate of $58,000 per annum before tax. At no time did Mrs Zhang do any work for Tang Ming Group, of any description, in New Zealand or in China. There was no complaint about this from Mrs Dong; there was no apparent comment at all.
(c) On 4 November 2008 Mrs Dong paid Mrs Zhang NZ$20,000. Mrs Dong claims this was a loan. I am satisfied it was not a loan because Mrs Zhang had no need of a loan. It was payment of interest on the
$1 million that had been paid to Mrs Dong for the months of July through to October 2008 being interest at 6% per annum.
(d)At a later date $20,000 was paid to Mrs Dong. This was to cover expenses Mrs Dong was meeting for the visa application and the application to Saint Kentigern College. The expenses were subsequently itemised by Mrs Dong with a balance then being repaid to Mrs Zhang, as noted below.
(e) Mrs Zhang observed things relating to Tang Ming Group, and requests were made by Mrs Dong to Mrs Zhang, which indicated to Mrs Zhang that Tang Ming Group and Mrs Dong were in financial difficulty. This led to a decision by Mrs Zhang and Mr Li not to pay the remaining $500,000.
(f) Mrs Zhang and Mr Li also became concerned that Mrs Dong may have been breaching immigration rules in relation to the application for Mrs Zhang.
[25] On 3 December 2009 Mr Li emailed Mrs Dong and Mr Chen. Mr Li recorded that they had said that they “did not need the other $480,000 anymore”. He said: “I am happy because you have passed the difficult time period and develop healthily”. There was no challenge to this at the time.
[26] With the 3 December email Mr Li sent a draft of what is called a “supplementary agreement” between Mrs Dong and Mrs Zhang. Mr Chen is also referred to on the cover sheet, although not in the body of the agreement, as a party. Relevant provisions in this draft are:
(a) The original agreement for transfer of 40 shares at NZ$1.5 million was varied to purchase of 27 shares at NZ$1.02 million.
(b) A recital records that the NZ$1.5 million “was to provide [Mrs Dong]
with finance … for a period of time”.
(c) Mrs Zhang would have no right to be involved in the daily management of the company.
(d)Although Mrs Zhang was a shareholder she had no entitlement to any dividend.
(e) Mrs Dong was to pay interest at 10% per annum.
(f) Mrs Dong was to buy back the shares by 31 December 2011. Interest was to be paid in part by Tang Ming Group in the form of the salary.
(g)If an application by Mrs Zhang for permanent residence in New Zealand was not approved by 31 December 2011 Mrs Dong was then to buy back the shares. If it was approved Mrs Dong was to buy back the shares within four years of the payment of NZ$1.02 million.
(h)Mrs Dong had a right to purchase back all or part of the shares in other defined circumstances.
[27] On 8 January 2010 Mrs Zhang’s shareholding in Tang Ming Group was reduced from 40 shares to 23 shares. Mrs Zhang had no involvement in this and was not consulted. She was not asked to sign a share transfer. Mrs Dong said that this was implemented by her husband.
[28] The next communication in evidence is an email of 3 March 2010 from Mrs Dong to Mr Li. It is a friendly communication. It dealt only with a reconciliation in relation to the $20,000 paid by Mrs Zhang to Mrs Dong to cover immigration and school application expenses and some associated costs. Mrs Dong’s calculation resulted in a balance of $8,442 owing and Mrs Dong proposed that she pay this into Mrs Zhang’s New Zealand account. Mr Li’s reply, the next day, was that he was happy to leave the calculations to Mrs Dong and that Mrs Dong should simply transfer to Mrs Zhang’s account the balance as calculated. He also referred to an attached agreement drafted by his lawyers “in accordance with the terms we have agreed on”. The document itself was not produced in evidence, but emails indicate its terms were similar to the supplementary agreement referred to above. Mr Li asked Mrs Dong to review the draft agreement with Mr Chen. Mr Li said:
The only disagreement we have with the agreement is the proportion of shares held. My solicitor does not agree on 23%.3 If the calculation is based on the market value of the company at the time, $1M should amount to just over 26%. As you know, I don’t really care about the proportion of shares held, but the [lawyer thinks] there is no legal basis for this arrangement.
3 This obviously is a reference to the unilateral reduction of Mrs Zhang’s shareholding to 23 shares.
[29] Mrs Dong, in an immediate response, said she had sent the draft to her solicitor who had pointed out some problems. She said: “So we can’t sign it for now”.
[30] On 15 March Mrs Dong told Mr Li in an email:
My lawyer has decided that the agreement cannot be signed. Very sorry. Let’s see if we can genuinely sort out the matter in a better way.
I am satisfied from the evidence as a whole that what this meant was that Mrs Dong’s lawyer was concerned about the form of the arrangements; the lawyer considered that there was need to continue to record a shareholding. But there was no challenge to the substance of the arrangement which was that in the end Mrs Dong would need to repay $1 million to Mr Li.
[31] Between March and December 2010 there were some discussions between Mr Li and Mrs Dong and including, it appears, at least one discussion in New Zealand. There are no emails or other documents in relation to this period until an email of 30 December 2010 from Mr Li to Mrs Dong. In this email Mr Li referred to a meeting he had had earlier that month with Mrs Dong and which he says made him “very glad”. He was gladdened by advice he had obviously received from Mrs Dong that there had been some “very good development” in the businesses of Mrs Dong and her husband. Mr Li then referred to two matters which became the subject of a series of emails. The first related to a further draft agreement prepared by Mr Li’s lawyer which Mr Li asked Mrs Dong to consider with a view to signing. I will come back to this. The second matter concerned payment by Mrs Dong into a bank account of Mrs Zhang of what Mr Li described as interest. The correspondence in respect of these payments is summarised in the immediately following paragraphs.
[32] Tang Ming Group had ceased paying “salary” to Mrs Zhang on 30 November
2010. It is plain from Mr Li’s email of 30 December 2010 that, at the meeting earlier that month with Mrs Dong, she had agreed to pay interest to Mrs Zhang. Mr Li in the email provided details of Mrs Zhang’s bank account and said: “Please pay the interest to this account on a monthly basis.” In an email of 24 January 2011 Mrs Dong advised that payment “for December and January” would be made to Mrs
Zhang’s account by the end of the month. Following advice from Mrs Dong on 9
February that $10,000 had been paid there were some further enquiries from Mr Li as to which months the payment related to. Mrs Dong said she needed to check with her accountant. On 15 February 2011 she said:
Our accountant has come back. The ten thousand New Zealand dollars is the interest for December last year and January this year.
[33] Interest for two months on $1 million calculated at 6% per annum amounts to
$10,000. In cross-examination Mrs Dong said that her use of the word “interest” was inadvertent and that this was a typographical error and added that she had been misled by Mr Li. I do not accept this evidence.
[34] There were two further emails from Mrs Dong in March referring to payments that would be made to Mrs Zhang every two months for what is described in these emails as “your return”. On 1 April 2011 Mrs Dong advised Mr Li that there had been a further payment of NZ$10,000 to Mrs Zhang’s account for February and March 2011. There were no further payments, but there was further correspondence, directly from Mr Li or from his solicitor in Auckland, referring to what was said to be the oral agreement that Mrs Dong would pay interest at 6% per annum and that she would pay monthly.
[35] I come back to the first matter noted in the 30 December 2010 email from Mr Li – completion of a new written agreement to record the terms upon which, from the perspective of Mr Li and Mrs Zhang, the $1 million would be repaid. In that email, on this topic, Mr Li said:
Regarding the matter of the loan agreement between you and Hua Zhang, based on the results of the talk between the two of us, I have asked the lawyer to draft an agreement for your examination. Please make timely contact if there are any questions.
[36] There were two attachments, although neither of them was put in evidence. One is described in the email as an acknowledgement of debt and the other as a “GSA”, which is presumably a reference to a general security agreement. It is not in issue that draft documents were sent and it is plain from the subsequent emails that draft documents had been sent. It is also clear from the following communications
that Mrs Dong did not challenge Mr Li’s effective proposition that a new written
agreement was appropriate and that this followed from the discussions they had had.
[37] The communications about the written agreement, which continued until March 2012, were all directed to the best means of expressing the agreement – the form rather than the substance. The emails from Mrs Dong indicated, in essence, that there was a continuing concern on her side, arising from the advice she had received from her lawyer, that there should be no express reference to a loan from Mrs Zhang to Mrs Dong. For example, in an email of 24 January 2011, being Mrs Dong’s response to the 30 December 2010 email, she said:
Our common acknowledgement is that Hua Zhang did investment for immigration status, which should not be considered a loan. Furthermore my accountant will transfer the money for December and January to Hua Zhang’s account by the end of the month.
The word considered was added by Mrs Dong when she was asked in cross- examination what was recorded in the original Chinese text of the email. The sentence that followed, in relation to the December and January payments, is a reference to the payment subsequently made of $10,000 as discussed above.
[38] The question as to the form of words was addressed by Mr Li in an email to
Mrs Dong of 10 February 2011. He said:
Regarding the matter of the wording of Loan Agreement being inappropriate as mentioned in your reply letter last time, having thought for all these days, I have really not come up with a more suitable wording. I wonder what brilliant ideas you have.
Mr Li suggested that this matter of words should be capable of being sorted out by their respective lawyers in Auckland. Mrs Dong responded by saying that her lawyer was investigating to see whether a “method” satisfactory to both sides could be found.
[39] On 1 March 2011 Mrs Dong in an email to Mr Li denied that she had borrowed money from Mrs Zhang. She referred to a “legal agreement” to buy shares and, with reference to the letter of commitment from Mrs Zhang, to pay the further
$500,000. But she also said:
Last December, we jointly negotiated in Auckland about the matter of your side’s finishing the withdrawal of shares in different periods of this year and next year. The two of us basically reached consensus.
[40] Mr Li’s immediate response to this was:
Letter received. I feel very strange. What is between Hua Zhang and you is completely a relationship of loan. The so-called equity is only a form of guarantee [of] your loan. How can it be described as other than a loan?
Mr Li then expressed hope that, in effect, matters could be sorted out without much further delay with Mrs Dong and Mrs Zhang signing an agreement to record what had been agreed in December.
[41] Mrs Dong’s response, including a reference earlier noted in relation to
monthly payments, was:
I reiterate that we will buy back the shares at the end of this year and next year. At the moment your return will be paid every two months.4
[42] This was followed by letters in April and May 2011 between the lawyers for the parties. Each, in essence, recorded the positions that have been taken in this proceeding.
[43] There were no further written communications of relevance until emails between Mr Li and Mrs Dong in December 2011. It is apparent that there had been some oral communications before this. Then, in an email on 19 December 2011, Mr Li asked Mrs Dong to have the agreement between her and Mrs Zhang “signed as soon as possible”. He said that there had been no payment of “interest” for nearly a year. Mrs Dong’s immediate response contained no suggestion that a further agreement should not be signed. Her response was again concerned with the precise wording. In her email of 19 December in reply to Mr Li she said:
How are you? I have just return[ed] to Auckland. I saw my lawyer this afternoon. There [are] a few typing mistake[s], including the words on the cover page. It is okay that correction will be done on Wednesday and I will endeavour to send it back to you on Friday because holiday starts on Saturday.
[44] A further email from Mrs Dong on 21 December set out the matters that she wanted changed. One was to remove her husband’s name from the agreement and to remove a guarantee by Mr Chen. The other main point was a request that the word “interest” be deleted and the words “fix[ed] return of investment” be substituted. There is also some suggested re-wording of a provision for payment of 6% per year “over the money paid by Zhang to Dong” with provision for an increase to 10% per annum “if Dong is unable to pay Zhang the Purchase Back Price in full by 31
December 2011”. But there was no suggestion that the provision for periodic payments calculated at 6% per annum should be deleted.
[45] The final correspondence is between the lawyers in March and April 2012. Mrs Zhang’s lawyer said that if the “share purchase back agreement” had not been returned within two days, or payment made, proceedings would be issued. Mrs Dong’s lawyer responded with a handwritten note. This is as follows:5
Our client advises that she disapproved the terms of the [agreement] (drafted by you), [particularly] the proposed personal guarantee by her husband Qi Chen which is unfair and [unjustified].
[46] Formal demand was made by a letter from Mrs Zhang’s solicitor dated 24
April 2012 for payment of $1,060,000, being unpaid principal of $1 million and interest from April 2011 to March 2012 of $60,000.
[47] It seems that there were some further discussions between the lawyers. This was followed by one further email from Mrs Zhang’s solicitor to Mrs Dong’s solicitor which indicates reasonably clearly that the only impediment to completion of an agreement, as opposed to immediate payment, was finding adequate security for Mrs Zhang if Mr Chen was not to be a guarantor. Nothing eventuated from that and proceedings were issued.
Discussion
[48] Both counsel referred me to some cases relating to the law of contract, including cases on determining whether an agreement has been made and on
interpretation. However, the task in this case is a straightforward assessment of evidence in the context outlined at the beginning of this judgment: was there an oral agreement at the outset, as contended by Mrs Zhang and Mr Li, or were the terms of the earlier discussions between the parties limited to what is recorded in the agreements entered into in April 2008?
[49] Mr Wood submitted that the written agreements made at the outset are not consistent with the terms of the oral agreement advanced by Mrs Zhang and Mr Li. Mr Wood also referred to the parol evidence rule. He submitted, in effect, that Mrs Zhang’s case could not provide a clearer illustration of an argument in breach of the rule. The parol evidence rule has no application to the case advanced by Mrs Zhang. She is not seeking to rely on evidence extrinsic to the written agreements for the purpose of determining the meaning of the words used in the written agreements. What Mrs Zhang and Mr Li say is that the written agreements are not the entire agreement. If the terms of the oral agreement contended for by Mrs Zhang and Mr Li cannot be reconciled on any reasonable basis with the terms of the written agreements that would be likely to be an indication, and probably a strong indication, that the entire agreement is not as contended for by Mrs Zhang and Mr Li. But that
does not arise in this case.6
[50] There are a number of reasons why I am satisfied that the agreement between the parties was as contended for by Mrs Zhang and Mr Li. The first is that the written agreements relied on by Mrs Dong as recording the entire agreement in fact indicate that other matters must have been agreed that are not recorded in the documents. The two purported share purchase agreements, both drafted on Mrs Dong’s instructions by Mrs Dong’s solicitor, cannot readily be reconciled if the contract between the parties is confined to the documents. On the face of it 39.5% of the shares in Tang Ming Group were being sold to Mrs Zhang and 40% of the shares were being sold to Mr Li’s company Xi’an Techteam. It is clear that the same shares were being referred to, in essence. This is because it is also clear that there was no intention that Mrs Dong would dispose of more than 40% of her shareholding, and she was the only shareholder. And there are provisions in the incomplete copy of the
Xi’an Techteam agreement which make clear that the parties were dealing with exactly the same transaction because of the reference, in the Xi’an Techteam agreement, to Mrs Zhang and the proposal that she would be employed as office manager for Tang Ming Group in Auckland and at a salary of NZ$58,000 per annum. The Xi’an Techteam agreement did provide that Mrs Zhang’s name would be used for the purchase by Xi’an Techteam, but this agreement was nevertheless a purchase by Xi’an Techteam with the other agreement being a purchase by Mrs Zhang. There is also the fact that one agreement refers to 40% of the shares – that is, 40 shares – whereas the other refers to 39.5 shares. The difference in the percentage, although it is small, provides support for Mr Li’s evidence that shareholding details were of no
real consequence.7 The written agreements are in considerable measure window
dressing, and the window dressing was designed by Mrs Dong as a person with claimed knowledge of appropriate means by which Mrs Zhang and Mr Li, with their son, might obtain permanent residence in New Zealand.
[51] As between Mrs Zhang and Mr Li the evidence establishes that all decisions of any consequence were made by Mr Li. That is not to say that there was no consultation between Mrs Zhang and Mr Li; clearly there was. The point is, as Mrs Zhang herself acknowledged, that Mr Li made the business decisions and decisions relating to personal investments. If the transaction in this case had been a conventional share purchase, I am satisfied that Mr Li would not have proceeded without making some reasonable assessment of the financial viability of Tang Ming Group. But there was no investigation of any description. This absence of any form of due diligence was given emphasis by the fact that, although the agreement between Mrs Zhang and Mrs Dong referred to an Ernst & Young “account of sales and assets” it was not attached to the agreement and Mr Li at that date was unconcerned. The lack of any enquiry into the financial viability of the company is not consistent with purchase of shares on the basis that Mrs Zhang was to become beneficial owner of the shares with a financial interest in Tang Ming Group. This conclusion is not altered by the fact that the transaction was designed to assist immigration applications. The lack of any investigation of Tang Ming Group is more consistent with what Mr Li and Mrs Zhang say it was – a loan of money based
on trust to a person with whom they had formed a personal relationship, and with this personal relationship including Mrs Dong’s husband. There was also the fact that Mrs Dong had been introduced to Mrs Zhang and Mr Li by Mr Li’s old friend from Shaanxi Province, Mr Guo, and with Mr Guo having earlier established an association with Mrs Dong in New Zealand. In this regard there is no evidence casting doubt on Mr Li’s evidence that $1.5 million was a small sum for him: “Not a
big figure for me”.8 On this basis a loan of $1.5 million on trust, arising from a
personal association, is plausible. On the other hand, although $1.5 million may not have been a “big figure” for Mr Li, I am satisfied that this would not have altered the prudent steps regularly taken by an experienced businessman proposing to make an investment in a company.
[52] Following transfer of the shares to Mrs Zhang nothing happened that would usually happen, and perhaps would almost always happen to some extent, if a person had beneficially acquired 40% of the shares in a company. Mrs Zhang did not become a director. She was not consulted by Mrs Dong on anything to do with the company. She did nothing in relation to the company at all, a point noted further in relation to the question of employment. She received no financial statements from the company’s accountants or from Mrs Dong. Consistent with Mrs Zhang’s complete lack of involvement in the company, in any capacity, there are emails from Mr Li to Mrs Dong clearly written as an outsider so far as the company is concerned. For example, an email of 3 December 2009, to Mr Chen as well as to Mrs Dong, sends best wishes for the success of Tang Ming Group. There is Mr Li’s email when he said: “I don’t really care about the proportion of shares held.” The emails also cannot readily be reconciled with the proposition that Mrs Zhang was a beneficial shareholder, as opposed to a person holding shares as security for a loan.
[53] The fact that Mrs Zhang did not undertake any work for Tang Ming Group, in New Zealand or in China, also indicates firmly that the formal agreements did not, and do not, represent the full agreement between the parties and, more fundamentally, provides firm support for Mrs Zhang’s case. The agreement between Mrs Dong and Mrs Zhang expressly states that she was appointed general office
manager and was to be paid $58,000 per annum. When she did no work for the
8 See above at [15].
company there was no protest from Mrs Dong. Mrs Dong, by her own lack of protest or other action, acknowledged what she now denies; that there was more to the agreement than the document. In addition, and at least of equal importance, is the fact that a salary of $58,000 per annum was paid to Mrs Zhang for more than two years when Mrs Zhang did no work for Tang Ming Group. It is obvious, notwithstanding Mrs Dong’s protestations in evidence to the contrary, that the payments were in consideration for something of substance. It was not for work done for the company by Mrs Zhang. On the facts of this case the only other possibility is that it was payment related to the $1.5 million to be paid by Mrs Zhang to Mrs Dong. There is no realistic basis for concluding that $58,000 per annum was to be a dividend for the shareholding disguised as salary. There was no substantial challenge to the evidence from Mrs Zhang, in particular, that Mrs Dong and her company were in financial difficulty. That is direct evidence of what Mrs Zhang observed and consistent with Mr Li’s evidence that Mrs Dong asked him for a loan. Given the straitened circumstances of Tang Ming Group and Mrs Dong, some form of guaranteed and fixed return on a genuine share investment is implausible. The
$58,000 was part of what was agreed to be paid, by way of interest, on a loan.
[54] There were also the payments of $20,000 in 2008 and the two payments of
$10,000 in 2011.9 Mrs Dong said that the first payment was a loan by her to Mrs Zhang and the two later payments were a return on a genuine shareholding of Mrs Zhang in Tang Ming Group. I earlier recorded my conclusion that the first payment was not a loan. That was based on an assessment of the evidence relating to the circumstances at the time. When also considered in relation to the two further payments of $10,000 the initial conclusion is reinforced. Mrs Dong described the two later payments as, in effect, a return on Mrs Zhang’s shareholding. I have already discussed the implausibility of a dividend on shares taking the form of a fixed sum. It is readily identified as interest on $1 million at 6% per annum. And Mrs Dong herself used the word “interest” in an email. Also, as earlier recorded, I do not accept her contentions in evidence that the use of the word was inadvertent.
[55] There is a chronology in relation to the payments made by Mrs Dong to Mrs Zhang and by Tang Ming Group to Mrs Zhang which is consistent with Mrs Zhang’s case and in respect of which no persuasive answer to the contrary was provided by Mrs Dong. $1 million had been paid to Mrs Dong by July 2008. $20,000 was paid to Mrs Zhang by Mrs Dong on 4 November 2008. It was not a loan by Mrs Dong to Mrs Zhang. It does amount to interest at 6% per annum on $1 million for four months – July to October. From 4 November 2008 until 30 November 2010 Mrs Zhang was paid $58,000 per annum before tax. This sum does not equate to interest in full on $1 million at 6% per annum, but that does not cast any material doubt on the contentions of Mrs Zhang and Mr Li that it was orally agreed that this would be part of the interest on the loan. The loan, of course, was to have been $1.5 million so that the total interest payment, had the full amount been lent, would have been
$90,000 per annum at 6% per annum interest. And, of course, this part of the arrangement was presented as a salary for an office manager, with payment being made by Tang Ming Group. Tang Ming Group was not the vendor of the shares nor, on Mrs Zhang’s case, the recipient of the loan.
[56] The matters discussed to this point are sufficient in my judgment to find in favour of Mrs Zhang. However, there are further matters supporting her case. It is appropriate to record these.
[57] The $500,000 was not paid. Mr Li recorded in an email to Mrs Dong that she had said she no longer needed it. There was no protest from Mrs Dong about this until towards the end when the parties were at arms length. That is consistent with an original agreement to lend money, not with a share purchase. Mrs Dong agreed to buy back the shares still in Mrs Zhang’s name. There were the negotiations over an extended period for the $1 million to be repaid and for the shares to be transferred back to Mrs Dong. Mrs Dong, on legal advice, wanted this to be described as a repurchase of shares and did not want the word “loan” to be used. The tenor of Mrs Dong’s own communications, weighed with all the other evidence, supports the conclusion earlier recorded – from Mrs Dong’s perspective it was all a matter of form. But the underlying substance was that the $1 million was to go back to Mrs Zhang and all shares were to be transferred back to Mrs Dong. The written communications between Mrs Dong and Mr Li are either expressly consistent with
Mrs Zhang’s case or can readily be reconciled with it, but much of it is not reasonably able to be reconciled with Mrs Dong’s case. Although there was the debate over the wording of the supplementary agreement, I am satisfied that there was a binding oral agreement, which was not conditional upon completion of a written agreement, by which Mrs Dong effectively reaffirmed her obligation to pay back the $1 million, at which point all the shares would go back to her, and to pay interest in the meantime.
[58] The remaining consideration is what may be called the relative quality of the oral evidence of Mrs Zhang and Mr Li on the one hand and the evidence of Mrs Dong on the other. The evidence on both sides, as in any case where there is a marked conflict of evidence, needs to be weighed for reliability and credibility. I am satisfied, to the extent that I need to be satisfied, as to the credibility of Mrs Zhang and Mr Li and as to the reliability of what they said on matters of consequence. I found Mrs Dong’s evidence less persuasive for a number of reasons in addition to the matters already discussed.
[59] One point is that Mrs Dong effectively represented to Mrs Zhang and Mr Li that the shares in Tang Ming Group Ltd were worth $3.8 million. No evidence has been produced which comes close to supporting that figure. The Ernst & Young letter, which was to have been attached to the original agreement, does not confirm what Mrs Dong asserted it did confirm. What is more, Mrs Dong sought to distance herself from this by suggesting that the Ernst & Young letter was some sort of independent appraisal by that company. The letter itself expressly states that it is simply summarising information obtained from accounting records supplied by or on behalf of Mrs Dong.
[60] When the $500,000 was not paid Mrs Dong, without any referral to Mrs Zhang, had 17 of the 40 shares transferred back into her own name. In other words, this was done without a share transfer. Mrs Dong sought to distance herself from this by saying it was done by her husband. Mr Chen did not give evidence on this point. And it is not insignificant that he did not give evidence at all.
[61] Mrs Dong gave inconsistent evidence when cross-examined on the question as to whether Mrs Zhang had ever done any work for Tang Ming Group in New Zealand or in China. In the end it was clear that no work had been done, as I earlier recorded, and it was on this basis that Mr Wood made his final submissions for Mrs Dong. Mrs Dong was unable to provide any satisfactory explanation, consistent with her general case, as to why she had caused Tang Ming Group to pay Mrs Zhang a salary every two weeks for over two years.
[62] There was also the way in which the three witnesses gave their evidence. Caution is needed when assessing whether conclusions can be drawn from the way in which witnesses give evidence. With that reserve some observations are appropriate. I got no adverse impressions from the way in which Mrs Zhang and Mr Li answered questions in cross-examination. Both of them were straightforward. Mrs Dong was evasive. She was inconsistent. She was often over-emphatic. She protested unduly as to her integrity which she contrasted with what she described, in essence, as duplicity on the part of Mr Li. She was not able to provide any satisfactory explanation for significant things, the most prominent example being the fact that her company paid Mrs Zhang for over two years when Mrs Zhang did no work. There simply was no satisfactory evidence from Mrs Dong on this point, or on numbers of other points clearly emerging from the documentary evidence. When confronted with evidence of facts apparently consistent with Mrs Zhang’s case, Mrs Dong, when pressed for an explanation consistent with her own case, prevaricated and protested and on most occasions fell back on an generalised assertions as to the lack of integrity of Mr Li in particular.
[63] For all of these reasons I am satisfied that Mrs Zhang is entitled to judgment as sought for NZ$1 million.
[64] Mrs Zhang also seeks interest on $1 million at 6% per annum from February
2011. The emails put in evidence dated 30 December 2010 to 1 April 2011 indicate, as recorded in the narrative, that there were two payments of $10,000, one for December 2010 and January 2011, and the second, recorded in Mrs Dong’s email of
1 April 2011, for February and March 2011. The letter of demand from Mrs Zhang’s
lawyer sought interest from April 2011. The chronology provided for Mrs Zhang
also records both payments. Formal judgment, recorded below, therefore allows interest from 1 April 2011. However, leave is reserved to Mrs Zhang to apply to correct this if the evidence establishes that interest should be paid from an earlier date. In that event a memorandum with any relevant documents should be filed and served within one month of the date of this judgment.
Result
[65] There is judgment for the plaintiff against the defendant in a sum of NZ$1 million together with interest on NZ$1 million at 6% per annum from 1 April 2011 down to the date of this judgment.
[66] In respect of the commencement date for interest the plaintiff has leave to apply to vary the commencement date in accordance with [64] above.
[67] The plaintiff is entitled to costs on a 2B basis and reasonable disbursements.
Woodhouse J
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