Zheng v Deng

[2024] NZHC 586

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-002730

[2024] NZHC 586

BETWEEN

LU ZHENG

First Plaintiff

ORIENT CONSTRUCTION LIMITED
Second Plaintiff

AND

DONGLIN DENG

First Defendant

BIN JIANG
Second Defendant

ORIENT HOMES LIMITED

Third Defendant

.../intituling cont over

Hearing:

11 March 2024

Counsel:

DK Wilson for Plaintiffs

JD Turner for First Defendant

Judgment:

19 March 2024

JUDGMENT OF DOWNS J

(Taking an account of the partnership)

This judgment was delivered by me on Tuesday, 19 March 2024 at 11.30 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Advent Ark Lawyers, Auckland.

McVeagh Fleming Lawyers, Auckland. DK Wilson, Auckland.

ZHENG v DENG [2024] NZHC 586 [19 March 2024]

EVERSOLID CONSTRUCTION LIMITED

Fourth Defendant

HONGLAN LIU
Fifth Defendant

D & R HOMES LIMITED
Sixth Defendant

YAN JIN
Seventh Defendant

TONG ZHU
Eighth Defendant

YAOKUN CHEN
Ninth Defendant

The issue

[1]        This judgment addresses six disputes arising from the taking of an account of a partnership  between  Lu  Zheng  and  Donglin  Deng.  Their  partnership  ended  31 May 2015.

Background

[2]        I held no partnership existed.1 The Court of Appeal2 and Supreme Court3 corrected that. Important to both Courts was a document entitled, “Principles in Separation”.

[3]        The case returns to this Court as Mr Zheng and Mr Deng have been unable to reach agreement between themselves. Mr Zheng and Mr Deng were also unable to reach agreement about an expert to take an account of their partnership. So, I must do that, hence this judgment.

[4]        At my direction, the original forensic accountants—Tina Payne for Mr Zheng, and Andrew McKay for Mr Deng—prepared reports, conferred, and then prepared a joint statement identifying areas of agreement and disagreement. I record my gratitude to them. Many areas that might otherwise have been contentious have not been. I also record my gratitude to counsel. They sensibly agreed the parties should split the difference in relation to several, smaller items. This leaves the six disputes addressed here.

Analysis

Item 7

[5]        Mr Zheng and Mr Deng agreed Orient Construction Ltd, or OCL, would belong to Mr Zheng and Eversolid Construction Ltd, or ECL, would belong to Mr Deng. However, after 1 June 2015, Mr Zheng retained control of ECL’s bank account for a

1      Zheng v Deng [2019] NZHC 3236 [10 December 2019].

2      Zheng v Deng [2020] NZCA 614, [2021]

3      Deng v Zheng [2022] NZSC 76, [2022] 1 NZLR 151.

time. In this period, Mr Zheng made five transfers of money from ECL to himself. Mr Zheng also made three deposits to ECL (of much smaller sums).

[6]        As a result of this sequence, Mr Zheng says Mr Deng owes him $3,550.66, whereas Mr Deng says Mr Zheng owes him $102,996.26. The amount in dispute in relation to item 7 is thus $106,546.92.

[7]The experts’ competing contentions can be succinctly stated:

(a)Ms Payne says Mr Zheng’s transactions in relation to ECL are consistent with him conducting a global wash-up of the men’s interests across various businesses. Ms Payne says these transactions need to be considered against the totality of transactions between Mr Zheng and Mr Deng. Ms Payne says some of the transactions are circular, a feature discussed in evidence at trial. In particular, Ms Payne says the circular transaction or transactions do not constitute drawings by Mr Zheng.

(b)Mr McKay notes Mr Deng did not have control of ECL’s accounts at the time. Mr McKay says that Mr Zheng owes Mr Deng money from this sequence is consistent with the Principles in Separation document. Mr McKay disputes it discloses a circular transaction or transactions.

[8]        I prefer Ms Payne’s analysis. If one looks at the overall picture, the transactions are (entirely) consistent with the wash-up identified by Ms Payne. Events of 10 June 2015 are illustrative. On that day, Mr Zheng transferred $170,000 from his personal bank account to OCL. Mr Zheng then transferred $170,000 from ECL to his personal bank account. Bank statements show ECL had sufficient funds to complete these transactions, whereas OCL did not. This is consistent with Mr Zheng transferring $170,000 from ECL to OCL to pay accounts, in turn to finalise matters with Mr Deng.

[9]        Mr   McKay’s   contention   his   analysis   is   consistent   with   the Principles in Separation  document  overlooks  it  says   nothing   about   ECL’s   bank account.

[10]      I find Mr Deng owes  Mr Zheng  $3,550.66, rather than  Mr Zheng owing   Mr Deng $102,996.26 in relation to item 7.

Item 8

[11]      After 31 May 2015, ECL received $246,850 from OCL. Ms Payne says these transactions also comprised part of the washing-up process. They also enabled the respective companies to pay their bills. Ms Payne contends neither Mr Zheng nor  Mr Deng owes the other anything in relation to this item.

[12]      Mr McKay considers the transactions relate to materials bought by ECL on behalf of OCL, with the consequence Mr Zheng owes Mr Deng half: $123,425. The amount in dispute in relation to item 8 is thus that sum.

[13]      I prefer Ms Payne’s analysis for reasons akin to those in relation to item 7. Again, these transactions are consistent with the washing-up process to separate the men’s interests across the businesses, and to pay bills. Moreover, Mr McKay makes clear he is assuming these transactions concern materials bought by ECL on behalf of OCL. I am not persuaded there is sufficient underlying evidence to draw that conclusion.

[14]      I find neither Mr Zheng nor Mr Deng owes the other anything in relation to item 8.

Items 10 and 11

[15]Items 10 and 11 concern a property at 46 Universal Drive, Henderson.4

[16]In or about March 2015, Judy Lin bought Universal Drive from OCL for

$520,000. Ms Lin is Mr Deng’s partner. Mr Deng said it was known Universal Drive was not worth $520,000; Ms Lin deliberately “overpaid” $200,000, and that money was used as capital for OCL while it was short of funds.

4      Universal Drive.

[17]      A signed, supplementary agreement dated 16 March 20155 records OCL’s  obligations to demolish an existing structure on Universal Drive (item 11), as well as contributing $200,000 (item 10) towards construction of a new home there.

[18]      Ms Payne contends her analysis reveals there was no overpayment of $200,000 by Ms Lin; rather, this amount became an entry in Mr Deng’s current account.

[19]      Mr McKay appears to accept as much. However, he contends the supplementary agreement was never performed, with the consequence half of the value of the unperformed items, being $100,000, and half of the demolition costs, should be recognised in Mr Deng’s favour.

[20]      Ms Payne accepts this follows if the supplementary agreement is “valid”. However, she says the partnership could not have afforded these activities, hence   Mr Zheng’s explanation the supplementary agreement was really about offsetting otherwise payable GST is probably correct. That being so, Ms Payne says Mr Zheng owes Mr Deng nothing in relation to either item. Ms Payne notes on 24 March 2015, Mr Zheng recorded  on  the  supplementary  agreement  it  would  be  invalid  from  1 June 2015.

[21]      I see no reason to depart from the law’s customary approach to an apparently binding agreement; that is, to apply the supplementary agreement according to its terms. Plainly, Ms Lin did not agree to any amendment on 24 March 2015. In relation to item 10 then, I find Mr Zheng owes Mr Deng $100,000.

[22]      No evidence is offered  of likely demolition costs: item 11.  On behalf of   Mr Deng, Mr Turner observes r 16.22 of the High Court Rules 2016 provides:

16.22   Accounting and estimates

(1)Any amount which has been paid or credited must be brought into account.

(2)If there is no material before the account-taker which enables an amount to be ascertained with certainty, the account-taker may estimate the amount which in all the circumstances should reasonably be included.

5      The supplementary agreement.

[23]      It will be noted the rule specifically empowers the account-taker to estimate an amount when there is “no material before [her or him] which enables an amount to be ascertained with certainty”.6 The italicised phrase suggests an account-taker may decline to make an estimate when there is no evidence, whatsoever, on point. But, as the supplementary agreement provided for demolition, and as the likely demolition costs would be modest, I estimate them at $20,000. Mr Deng is entitled to half.

[24]In relation to items 10 and 11, Mr Zheng owes Mr Deng a total of $110,000.

Items 13 and 14

[25]      Item 13 is the largest in dispute. It concerns the value of Mr Deng’s 50 percent shareholding in OCL, which he transferred to Mr Zheng. As will be recalled, the men agreed OCL would belong to Mr Zheng. Mr  Deng  signed  a  share  transfer  in April 2016. It records the transfer as having occurred 1 June 2015. The transfer records $50 (only) as the value of the shares.

[26]      Ms Payne acknowledges it is “not known what, if any, consideration was given by Mr Zheng for the shares”. Mr McKay says $50 was inadequate, as the value of OCL encompassed “future cashflow … from the projects that were already in the pipeline … and the goodwill for the brand.” Mr McKay says Mr Deng’s shareholding was worth at least $36,764, and Mr Zheng owes this amount to Mr Deng. Mr Deng argues the value of his shareholding was $300,000, and Mr Zheng agreed to give him that sum for it. Mr Zheng denies doing so.

[27]      Mr Turner contends the $300,000 figure is supported by evidence. He notes OCL had two ongoing projects (at 31 May 2015), including a significant contract to build apartments in Rosedale. The Court of Appeal referred to this project as one belonging to the partnership.7     Mr Turner reminds me in my original judgment,       I considered the shareholding “was presumably worth something”.8

6      Emphasis added.

7      Zheng v Deng, above n 2, at [67].

8      Zheng v Deng, above n 1, at [123].

[28]      I am not persuaded Mr Deng’s shareholding was worth $300,000. Two reasons loom large. First, the figure is not supported by either expert. Mr McKay advances

$300,000 on the basis of Mr Deng’s testimony only; he does not advance it as representing the value of the company. Second, the figure is not supported by any documentation, contemporaneous or otherwise.

[29]The question then becomes whether Mr McKay’s much lesser figure of

$36,764 is adopted, or whether Mr Deng is held to the value recorded in the transfer, a document he signed (April 2016). While there is logic in each approach, I consider the former better. OCL had ongoing projects of value; $50 would not capture that; and this is not the first occasion in this case in which a document has not reflected reality.

[30]I find Mr Zheng owes Mr Deng $36,764 in relation to item 13.

[31]      Item 14 concerns the value of Mr Deng’s shareholding based on OCL’s goodwill. Mr McKay says there is inadequate information to offer a value. Ms Payne has not done so either.

[32]      Mr Turner invites me to (again) apply r 16.22. I decline to do so: ascribing a value to goodwill would be an outright guess. Instead, I find Mr Zheng owes Mr Deng nothing in relation to item 14.

Summary of conclusions

[33]A table may be useful:

Item 7	Mr Deng owes Mr Zheng $3,550.66.
Item 8	Neither owes the other anything.
Item 10	Mr Zheng owes Mr Deng $100,000.
Item 11	Mr Zheng owes Mr Deng $10,000.
Item 13	Mr Zheng owes Mr Deng $36,764.
Item 14	Mr Zheng owes Mr Deng nothing.

Costs in relation to the taking of this account

[34]      My preliminary view is that each party should bear their own costs. When all of the other agreed items are added, is it clear each has had some success. Expressed another way, no obvious victor emerges.

[35]      If agreement is not reached, that can be signalled at the telephone conference, discussed next.

Next steps

[36]      The Registrar is to convene a telephone conference on or after 6 May 2024. The conference is to discuss next steps, including whether any further determinations are required beyond costs in connection with the original trial. As to that, my preliminary view is that Mr Zheng should have costs given he ought to have succeeded in establishing a partnership, but  these  should  be  discounted  in  recognition  of  Mr Deng’s success on other causes of action, success undisturbed by either  the Court of Appeal or Supreme Court.

……………………………..

Downs J