Zhao v Yang

[2013] NZHC 1323

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-004239 [2013] NZHC 1323

IN THE MATTER OF       the Companies Act 1993

BETWEEN  JING ZHAO Plaintiff

ANDBIN BIN YANG First Defendant

ANDSUNSHINE QUALITY FOODS LIMITED

Second Defendant

Hearing:                   4 June 2013

Appearances:           C T Patterson and D J Powell

No Appearance of or for the First and Second Defendants

Judgment:                6 June 2013

JUDGMENT OF DUFFY J

This judgment was delivered by Justice Duffy on 6 June 2013 at 2.30 pm, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar
Date:

Counsel:     C T Patterson and D J Powell of Auckland

ZHAO v YANG and ANOR [2013] NZHC 1323 [6 June 2013]

[1]      The plaintiff, Ms  Zhao,  and  the  first  defendant,  Ms Yang,  each  held  50 per cent of the shares in, and were directors of the second defendant (Sunshine).  In

2011 Ms Zhao commenced this proceeding seeking an order from this Court putting Sunshine into liquidation.  The order was made on 3 October 2011.  Following that event, Ms Zhao amended her statement of claim to include claims against Ms Yang: first, a claim under s 174 of the Companies Act 1993 alleging the affairs of Sunshine were being conducted by Ms Yang in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to Ms Zhao in her capacity as a shareholder of Sunshine; secondly, a claim for breach of an implied shareholder’s contract as to how Sunshine would be operated; and thirdly, a claim for restitution of funds that Ms Yang had unlawfully taken from Sunshine for her personal benefit and direction. The claims all arise from the manner in which Ms Yang operated the business of Sunshine.    In  short,  Ms  Yang  is  alleged  to  have  excluded  Ms  Zhao  from  the operation of Sunshine’s business, to have taken funds from Sunshine for her own benefit, and to have sold Sunshine’s business and appropriated the proceeds for her own benefit.   As a result of steps Ms Zhao took to obtain a freezing order in July 2011, some of Sunshine’s funds have been retrieved.

[2]      The proceeding was set down for a three day hearing before me.  However, there was no appearance from Ms Yang.  This was not surprising as on 17 May 2013, Ms Yang’s counsel was given leave to withdraw following Ms Yang’s withdrawal of instructions and her non-attendance at a judicial settlement conference scheduled for that day.  However, the instructing solicitors were directed to remain solicitors on the record until such time as Ms Yang filed a formal notice of change of representation and address for service.   No such steps have been taken, and it is understood that Ms Yang has returned to China.  Since then, I am informed that Ms Yang’s solicitors have been served with a copy of Ms Zhao’s brief of evidence in this proceeding. The proceeding was called and Ms Yang did not appear.

[3]      Following Ms Yang’s non-appearance, the hearing of the claims against her proceeded  by  way  of  formal  proof.    Consequently,  the  oral  evidence  given  by Ms Zhao was not challenged.   I have given careful consideration to Ms Zhao’s evidence.  She impressed me as an honest and reliable witness.  I am satisfied on the balance of probabilities that Ms Zhao’s evidence establishes the factual basis for her

claims under the first and third cause of action.  As I am also satisfied that Ms Zhao has made out the legal grounds for those claims, I see no need to deal with the second cause of action.

[4]      The evidence shows that Ms Yang excluded Ms Zhao from the operation of Sunshine’s fruit and vegetable retail business.   In short, this exclusion went to the extent of effectively driving Ms Zhao away from the day to day operation of the business; denying her access to Sunshine’s financial records, including changing Sunshine’s banker so that Ms Zhao could not access the company’s bank accounts; taking funds from Sunshine for her personal benefit, including funds that were not declared for tax purposes; selling Sunshine’s business without the knowledge or consent of Ms Zhao; and applying the sale proceeds for Ms Yang’s personal benefit or for the benefit of her personal associates or family.  The various acts or omissions constituting this exclusion are set out at paragraph 51 of the second amended statement of claim.

[5]      I am satisfied that this conduct  comes within the ambit of s 174 of the Companies Act: it is conduct in the affairs of the company carried out by Ms Yang that is oppressive, unfairly discriminatory or unfairly prejudicial to Ms Zhao as a shareholder of the company.   Ms Zhao’s investment in the company has been diminished through significant funds of the company being applied for the personal benefit of Ms Yang.

[6]      The  sale  of  the  fruit  and  vegetable  retail  business  was  the  sale  of  the company’s only operating business and, as such, it constituted a major transaction in terms of s 129 of the Companies Act.  None of the requirements in s 129 for the sale of  a  major  transaction  were  followed.    Further,  once  the  sale  was  completed, Ms Yang  banked  the  proceeds  ($456,000)  in  Sunshine’s  accounts  (as  she  was required to do) but then over a short period of time she withdrew tranches of those funds and banked them in her own bank account.  Thus, the funds that represented value for the company’s sole business were then disposed of without regard to the requirements of s 129.  Some of the funds were later recovered by the liquidator of Sunshine.   However, at the time of the hearing, the sum of $223,000 was still outstanding.  Ms Zhao seeks an order under s 174(2)(b) requiring Ms Yang to pay

compensation in the sum of $223,000 to Sunshine’s liquidator.   I am satisfied that she is entitled to that order.

[7]      Ms Zhao has also established to my satisfaction that Ms Yang has unlawfully taken funds of $273,750 from Sunshine.  These funds constitute the business revenue of the company.  In the second amended statement of claim, these funds were said to amount to $248,927.17.   However, Ms Zhao gave evidence setting out how the misappropriated business revenue amounts to the total sum of $273,750.   I am satisfied from the evidence provided by Ms Zhao and the documents in the agreed bundle of documents, including reports from Grant Thornton, accountants, that the sum of $273,750 as calculated by Ms Zhao is correct.   I consider that Ms Yang would have had notice of this increased sum through service of Ms Zhao’s brief of evidence on Ms Yang’s address for service.  The unlawful removal of a sum of this amount from Sunshine also qualifies under s 174 as conduct justifying an award of compensation under s 174(2)(b).  The evidence outlined by Ms Zhao informs me that Ms Yang has conducted the affairs of Sunshine as if it were her own private business and with no regard whatsoever for the rights of Sunshine or Ms Zhao.  Such conduct is oppressive, unfairly discriminatory and unfairly prejudicial to Ms Zhao.   It has damaged the interests of Sunshine and, in doing so, damaged Ms Zhao’s interests as a shareholder of that company.

[8]      In addition, the personal benefits that Ms Yang has unlawfully enjoyed at the expense of Ms Zhao and Sunshine mean that Ms Yang as a director of Sunshine has acted in breach of her fiduciary duties.  Further, she has been unjustly enriched by the breaches of fiduciary duties.  Hence, Ms Zhao has proved her claim under the third cause of action.

[9]      In the second amended statement of claim, Ms Zhao had sought to have the Court direct that: for the first cause of action, funds wrongfully taken by Ms Yang be paid to the Official Assignee; and for the third cause of action, those funds be paid to Ms Zhao in proportion to her entitlement as a shareholder of Sunshine.  However, at the hearing, Ms Zhao simply sought orders from the Court directing Ms Yang to pay the   sums   of   $223,000   and   $273,750   (being   in   total   $496,750)   to   the Official Assignee as liquidator of Sunshine.   In this way, once the funds become

available to the liquidator, he can apply the funds to meet the company’s obligations, including its obligations to its shareholders, and therefore Ms Zhao.  This approach will have the benefit of allowing the Official Assignee to have regard to the payment of tax obligations on any part of the retrieved funds that Ms Yang had not recorded in the  company’s  accounts.    It  will  also  mean  that,  in  principle,  Ms  Yang  as  a shareholder of Sunshine may enjoy some benefit herself.  Ms Zhao has not sought to benefit herself directly.  Instead, all she seeks is to have Sunshine restored to the best possible position to meet its obligations in the hope that she will enjoy a worthwhile benefit.

[10]     Ms Zhao has not as yet filed an affidavit of service confirming service of the brief of evidence on Ms Yang’s address for service.  The orders I make are to lie in the body of the Court until such time as Ms Zhao files an affidavit of service.

[11]     Ms Zhao claimed interest under the Judicature Act 1908 on the principal sum. Such interest would also be payable to the Official Assignee.  No submissions were advanced at the hearing as to the date at which interest should take effect.  Here, the funds have been removed from Sunshine over a period of time, rather than on one occasion.   In principle, while Sunshine was still operative as a company, it would have been open to the shareholders to ratify what had occurred.   But once the company went in to liquidation, that could not occur.  Accordingly, I consider that the date the company went into liquidation (3 October 2011) would be an appropriate date from which to calculate the interest that is now payable.   I reserve leave to Ms Zhao to make further submissions on this topic, should she wish to do so.

[12]     Ms Zhao sought an award of increased or indemnity costs.  Ms Zhao drew the Court’s attention to conduct on the part of Ms Yang that would warrant an award of increased or indemnity costs.

[13]     First,  it  was  submitted  that  although  Ms  Yang  was  obliged  to  disclose Sunshine’s accounts to Ms Zhao, she had not done so and it had been difficult for Ms Zhao to obtain a clear impression of Sunshine’s sales records and the profit it was making.  Thus, Ms Zhao had to take extraordinary steps to obtain information about Sunshine’s affairs that she was entitled to as a director and shareholder of

Sunshine.  I accept, therefore, that Ms Yang made it difficult for Ms Zhao to access information that was necessary to establish this claim.

[14]     Secondly, Ms Zhao pointed to Ms Yang’s conduct regarding a variation to the freezing orders.  Ms Zhao contends that the freezing orders covered a property that Ms Yang owned with another person.  Ms Zhao saw that Ms Yang was attempting to auction this property.  Ms Zhao drew this to her lawyer’s attention, following which there was discussion between the parties’ legal practitioners.  It was agreed that the freezing order could be varied to allow the property to be sold, on condition that Ms Yang’s share of the sale proceeds would be held in her solicitor’s trust account until the claims in this proceeding were resolved.  Ms Zhao said in her evidence that during negotiations about the terms on which the freezing order could be varied, Ms Yang’s counsel indicated that Ms Yang’s share would probably be less than

$50,000.  I note that in the same letter, Ms Yang’s counsel stated that, in her view, the freezing orders did not affect the subject property.  Whether they did or they did not, ultimately it was agreed by the parties that the freezing orders would be varied, with Ms Yang’s share of the sale proceeds being held in her solicitor’s trust account.  The agreement was recorded in a joint memorandum of counsel signed on 19 April 2013. The Court varied the freezing order as sought in the joint consent memorandum.

[15]     After the sale of the subject property was settled, Ms Yang’s solicitor advised that there was no money left for retention in the trust account as per the variation of the freezing order.   It then became clear that sums of money of $15,645.77 and

$14,872.50 had been, or were to be paid to Ms Yang’s mother.  She had lodged a caveat  against  the  title  to  the  property  on  8  September  2011,  which  was  after Ms Zhao had obtained the freezing order over the property. The term loan agreement supporting the caveat has subsequently been provided to Ms Zhao.  The date of the agreement is written as 18 January 2011, but Ms Yang’s solicitor has confirmed that he was not provided with a copy of the agreement until August 2011, which was after Ms Zhao obtained the freezing order over the property.   Further, the loan agreement is only signed by Ms Yang, and not by her mother.

[16]     Ms Zhao invited me to draw an adverse inference from these circumstances, namely to infer that the loan agreement was actually entered into after the freezing

orders were made in July 2011, and the loan agreement and caveat were constructed for the purpose of defeating the effect of the freezing orders.   I accept the circumstances of the loan are suspicious but, without knowing more, I would not be prepared to draw such an inference against Ms Yang and her mother.  To do so would entail me concluding that not only Ms Yang, but also her mother, were prepared to enter a sham loan for the purpose of defeating a court order.  I consider it would be inappropriate and wrong for me to reach that conclusion in circumstances where one of the persons concerned (Ms Yang’s mother) was not a party to the proceeding and, therefore, had not been put on notice of the possibility of such an adverse inference being drawn against her.

[17]     Rule 14.6 of the High Court Rules provides for awards of increased and indemnity costs.  HR 14.6.02 of McGechan On Procedure sets out the principles for awarding increased costs, and HR14.6.03 sets out those for awarding indemnity costs. Also see discussion in Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) for awards of increased costs, and Bradbury v Westpac Banking Corporation Ltd [2009] 3 NZLR 400 (CA) regarding indemnity costs.

[18]     In  this  proceeding,  Ms  Zhao  made  an  oral  application  for  increased  or indemnity costs at the end of the hearing.  Specific submissions on costs were not prepared. As matters stand, I do not consider that the submissions that were made to me at the hearing are sufficient to lay a foundation for an award of increased or indemnity costs.  This proceeding strikes me as something that would ordinarily fall within category 2B.  If Ms Zhao wishes to pursue her application for indemnity or increased costs, I will give her further opportunity to do so, but she should file a detailed memorandum setting out the basis as contemplated by r 14.6 for either an award of increased costs or indemnity costs.

Result

[19]     Ms Zhao has proved her claims in the first and third causes of action.

[20]     I order Ms Yang to pay the total sum of $496,750 to the Official Assignee. However, this order is to lie in the body of the Court until Ms Zhao files an affidavit

of service confirming service of her brief of evidence on Ms Yang’s address for

service.

[21]     Ms  Yang  is  ordered  to  pay  the  Official  Assignee  interest  under  the Judicature Act 1908 on the principal sum from 3 October 2011 to the date of this judgment.  Leave is reserved to Ms Zhao to make submissions on an alternative date, should she wish to do so.

[22]     Leave is reserved to Ms Zhao to file a memorandum setting out the basis on which she seeks an award of increased or indemnity costs, otherwise costs will be fixed at category 2B.

Duffy J