Zheng v Jun Yue Investment Limited
[2023] NZHC 3560
•7 December 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-1743
[2023] NZHC 3560
BETWEEN YINJI ZHENG
First Plaintiff
FUJUN LIU
Second Plaintiff DefendantAND
JUN YUE INVESTMENT LIMITED
First Defendant
PING FAN
Second DefendantContinued next page
Hearing 29 November 2024 Appearances:
J W A Johnson and C Jiang for Plaintiffs T Cooley for Interim Receiver
B J Burt for Second Defendant
Judgment:
7 December 2023
JUDGMENT OF MUIR J
This judgment was delivered by me on 7 December 2023 at 11.30 am pursuant to Rule 11.5 of the High Court Rules 2016.
………………………………
Registrar/Deputy Registrar
Solicitors: Thompkins Wake, Plaintiffs
Anthony Harper, Second Defendant Brookfields, Interim Receiver
ZHENG v JUN YUE INVESTMENT LIMITED [2023] NZHC 3560 [7 December 2023]
YUE YANG
Third Defendant
HONTAO ZHANG
Fourth Defendant
Introduction
[1] In this proceeding the plaintiffs, Ms Yinji Zheng and Mr Fujun Liu, seek orders under s 174 of the Companies Act 1993 (the Act) as “prejudiced shareholders”. A three week trial has been set down and is scheduled to commence on 20 June 2025.
[2] On 13 July 2023, the plaintiffs obtained orders appointing Mr Benjamin Francis as interim receiver of the first defendant, Jun Yue Investment Limited (JYIL).1 Since his appointment, Mr Francis has realised various assets of JYIL, having obtained the prior consent of the Court.2
[3] On 24 October 2023, the plaintiffs filed an interlocutory application seeking further orders that Mr Francis be appointed interim liquidator on the basis that JYIL is both balance sheet and cashflow insolvent and that it had effectively reached the end of its commercial life. It is this application (and a related one for authorisation of sale of a JYIL real estate asset) which is now before me.
[4] The second defendant, Ms Ping Fan, is a significant shareholder in JYIL. She initially opposed appointment of a liquidator, but now joins with the plaintiffs in a consent application under s 241(2)(c) of the Act. The parties cannot, however, agree on the identity of the liquidator. The plaintiffs say that it should be Mr Francis. Ms Fan says it should be Mr Christopher McCullagh and Mr Stephen Lawrence, jointly.
[5]Ms Fan says that Mr Francis’ position is compromised by:
(a)his refusal, as interim receiver, to provide her with relevant information;
(b)his sale, at an undervalue, of certain assets of JYIL being three lots of land in Pokeno (the Pokeno lots); and
1 Zheng v Jun Yue Investment Ltd [2023] NZHC 1824.
2 Zheng v Jun Yue Investment Ltd [2023] NZHC 2169.
(c)the fact that sales of the Pokeno lots were on terms which breached s 134 of the Real Estate Agents Act 2008 (the REA).
[6] The plaintiffs, by contrast, say that Mr Francis has acted appropriately in what have been challenging circumstances and that there are significant efficiencies (and therefore economies) in his reappointment as liquidator. However, if I am not persuaded by that submission, they agree that the appointment of Messrs McCullagh and Lawrence would be appropriate.
[7] Mr Frances and Messrs McCullagh and Lawrence each consent to appointment accordingly.
Legal principles
[8]Section 280(2)(b) of the Act provides that:
(2) Unless the court orders otherwise, the following persons are disqualified from being appointed or acting as a liquidator of a company:
…
(b) a person who has, within the 2 years immediately before the commencement of the liquidation, been a director, an auditor, or a receiver of the company or of a related company.
[9] The provision is designed to ensure liquidator independence. In Re Southbury Insurance Ltd,3 Associate Judge Bell observed:
[13] A liquidator is a statutory agent with responsibilities to perform obligations under the Companies Act to distribute property divisible among creditors in accordance with the priorities under the Companies Act. The liquidator is required to act impartially and in the interests of the whole body of shareholders and the whole body of creditors. The restrictions under s 280 of the Companies Act are directed at ensuring the independence of the liquidator and the avoidance of any conflict of interest. The liquidator must be, and must appear to be, both independent and impartial
[10] Subsequently, Associate Judge Bell identified the key consideration behind an order under s 280(2) as being:4
3 Re Southbury Insurance Ltd (in rec) [2012] NZHC 1316.
4 At [14] (footnote omitted).
… whether there is a risk that the proposed liquidator’s independence and ability to carry out his or her task professionally and effectively could be compromised in the particular circumstances of the case.
[11] One of the principal reasons for appointing an existing or former receiver as liquidator will often be continuity and efficiency. This was the case in McGillivray v Extreme Gear NZ Ltd (in rec),5 where the parties were agreed that appointment of a receiver as liquidator would be “the most efficient and economical way for the company to be wound up given [the former receiver’s] familiarity with the company’s affairs”.6 However, any such efficiency gains must always be balanced against the overarching requirement of actual (and apparent) independence and impartiality. Where there is any realistic prospect that a liquidator might, in the words of Ms Fan’s counsel Mr Burt, be put in the position of effectively “marking their own homework as receiver”, that will clearly count against appointment.
[12] That said, I accept Mr Johnson’s submission on behalf of the plaintiffs that, where the receiver proposed to be appointed as liquidator has formerly held office as a court appointee, there will ordinarily be a superior claim to an order under s 280(2). That is because of the enhanced level of reporting and supervision to which court- appointed receivers are typically subject and the fact that, while the appointment subsists, the court can be considered to have implicit faith that the receivers’ obligations are being properly discharged.
[13] Thus, in Fisk v Ross Asset Management Ltd (in rec) for example,7 Associate Judge Gendall had little hesitation in approving the appointment of liquidators who had previously acted as court-appointed receivers of various entities associated with ponzi scheme architect, Mr David Ross. He noted that the former receivers had already acquired significant knowledge about the companies and their complex affairs and rejected as speculative a suggestion of conflict of interest by one creditor investor.8
5 McGillivray v Extreme Gear NZ Ltd (in rec) [2023] NZHC 2933.
6 At [5].
7 Fisk v Ross Asset Management Ltd (in rec) [2012] NZHC 3459.
8 At [18] and [22].
Discussion
[14] Mr Francis and Messrs McCullagh and Lawrence are each, in my view, demonstrably qualified to undertake the liquidation of JYIL. Mr Francis would not otherwise have been appointed as interim receiver, and the reputations of Messrs McCullagh and Lawrence as highly competent liquidators is accepted.
[15] I turn then to consider the various grounds on which Ms Fan submits that a clean break should be made and Messrs McCullagh and Lawrence appointed as liquidators.
Relationship between Mr Francis and Ms Fan
[16] I am not persuaded that Ms Fan demonstrates, by reference to her relationship with Mr Francis, any actual or apparent lack of independence and impartiality on Mr Francis’ part.
[17] It is clear that Ms Fan has an adverse view of Mr Francis but I accept Mr Johnson’s submission that this will at least in part be coloured by the fact that Mr Frances has, in the course of his work identified transactions in favour of Ms Fan and associated individuals and entities that may be the subject of future challenge and exposed inaccuracies in certain sworn statements previously made by her.
[18] I accept that Ms Fan regards Mr Francis’ requirement that communications occur only through solicitors as both frustrating and as adding to expense. Further, that she has a legitimate interest, not only as a shareholder of JYIL but as a guarantor of JYIL’s borrowings, in ensuring that recoveries by JYIL are maximised. However, I am not at the point of accepting her submission that there has been a deliberate strategy on Mr Francis’ part to restrict the flow of information to her. In respect of any information requirements that Ms Fan has raised with the Court, my experience as the assigned Judge is that he has been responsive. If appointed as liquidator, he would have an overriding obligation to act impartially and in the interests of the whole body of shareholders and creditors. Remedies would be available if he failed to do so.
Alleged sale at undervalue
[19] On 14 August 2023, Lang J gave authority, inter alia, for Mr Francis to market and on-sell the Pokeno lots, which JYIL had agreed to purchase from Godzilla Construction Limited (GCL).9
[20] At the time of purchase the lots were unsubdivided bare land. Each was purchased by JYIL for the sum of $382,609 plus GST10 with settlement five working days after issue of title. The agreements provided for unusually high deposits, being
$200,000 in respect of each section. No sunset clauses or other contractual protections were included in favour of JYIL.
[21] At the time the directions were made by Lang J it was not known when titles would issue. His Honour nevertheless recognised the position as urgent because of the requirement that JYIL “complete the purchase of the sections at very short notice”.11
[22] On receipt of authority to sell the lots, Mr Francis made enquiries of the vendor regarding an expected date on which titles would issue and was told February or March 2024. On that basis, he concluded a tender-based marketing plan over a one month period commencing approximately 1 September 2023.
[23] However, late on 8 September 2023, Mr Francis’ solicitors received notice that titles had issued and that settlement was required by 15 September 2023. As a result, the marketing plan had to be promptly modified to one specifying a deadline sale by 14 September 2023 with settlement the following day. Understandably, the pool of potential buyers was significantly reduced. Likewise price suffered. Whereas previously Harcourts had indicated a value in the order of $250,000 and had, in the first week of marketing, received price feedback in the range of $250,000–$300,000, the sale price achieved for each lot was $210,000 (plus GST) only.
9 Zheng v Jun Yue Investment Ltd, above n 2, at [11]–[12].
10 $400,000 including GST.
11 Zheng v Jun Yue Investment Ltd, above n 2, at [4].
[24] Ms Fan says that the sales were at significant undervalue. She references valuations by other agencies ranging between $390,000 and $500,000 with the result, she says, that the prices achieved represented a significant discount on value.
[25] Mr Francis acknowledges that the sale prices were low. His agents describe a situation where “the fire sale which we’d tried to tactfully avoid for the client was no longer available”. But Mr Francis says JYIL had, for reasons entirely attributable to decisions made by Ms Fan, been placed in an impossible situation; that is, without the liquidity to settle the sales, it faced the prospect of losing its deposits on the Pokeno lots, an amount totalling $600,000. The plaintiffs go further and suggest a relationship between Ms Fan and GCL. They say that the vendor (with Ms Fan’s inferred support) deliberately engineered a situation whereby there was a high risk of the receiver defaulting on the purchases with the result that the large deposits could be forfeited and the lots re-sold. Whether that was GCL’s strategy and what part Ms Fan may have played in it is yet to be established.
[26] Mr Burt says that any independent liquidator would wish to investigate these transactions with a view (possibly) to challenging Mr Francis’ actions. He submits that if Mr Francis is appointed as liquidator that is never likely to happen.
[27] In response, Mr Johnson refers to s 19 of the Receiverships Act 1993, which identifies that a receiver exercising powers of sale of property owes a duty12 to each of the grantor of the security, persons claiming through the grantor, unsecured creditors of the grantor and sureties. He points out that JYIL’s shareholders are unsecured creditors for their shareholder advances and could, in their personal capacities, therefore bring proceedings against Mr Francis for any breach of duty which they say arose.
[28] I approach the issue of conflict, as Associate Judge Gendall did in Fisk v Ross Asset Management Ltd (in rec), on a reasonably robust basis. I cannot totally preclude a claim against Mr Francis on the basis that the Pokeno lots were sold at undervalue but, in the circumstances in which he was placed, consider it unlikely to be a case
12 To “obtain the best price reasonably obtainable as at the time of sale”.
thought worthy of pursuing. I would not on this account alone consider him disqualified from appointment as liquidator.
[29] There is, however, an associated point which exercises me more and to which I now turn.
Alleged illegality of sales of the Pokeno lots
[30] The Pokeno lots were all purchased by either Mr Aman Gulia or by an entity of which he is a director. Mr Gulia is a real estate agent employed by the same Harcourts office as Mr Adam Gurr, who was the listing agent engaged by the interim receiver.
[31]Mr Burt relies on s 134 of the REA:
134 Contracts for acquisition by licensee or related person may be cancelled
(1)No licensee may, without the consent of the client for whom he or she carries out real estate agency work in respect of a transaction, directly or indirectly, whether by himself or herself or through any partner, sub-agent, or nominee, acquire the land or business to which the transaction relates or any legal or beneficial interest in that land or business.
(2)No licensee may, without the consent of the client, carry out or continue to carry out any agency work in respect of a transaction if the licensee knows or should know that the transaction will, or is likely to, result in a person related to the licensee acquiring the land or business to which the transaction relates or any legal or beneficial interest in that land or business.
(3)The client’s consent is effective only if—
(a)given in the prescribed form; and
(b)the client is provided with a valuation in accordance with section 135.
(4)The client may cancel any contract—
(a)made in contravention of subsection (1); or
(b)brought about by agency work carried out in contravention of subsection (2).
(5)No commission is payable in respect of any contract of the kind described in subsection (4), regardless of whether the client cancels the contract.
(6)The client may recover any commission paid in respect of any contract of the kind described in subsection (4) as a debt.
(7)For the purposes of this section, a person who is the client of an agent in respect of a transaction is also the client of any branch manager or salesperson whose work enables the agent to carry out real estate agency work for that client.
(8)This section and section 135 have effect despite any provision to the contrary in any agreement.
[32] He submits that Mr Gulia and his associated entity were related parties for the purposes of s 134; that no effective consent was given for the transactions because no valuation was provided in accordance with s 135; that Mr Francis was unable to contract out of that requirement by signing a waiver (as submitted by Harcourts); and that, as a result, the sales were able to be cancelled and no commission is payable on them.
[33] I consider there to be plausible arguments in this context and it may be that, were JYIL ultimately funded to pursue them, remedies might be available, particularly in respect of the commissions paid to Harcourts.13
[34] Although it would, in my provisional view, be inappropriate to criticise Mr Francis for what occurred, given that he was between the proverbial “rock and hard place” and Mr Gulia’s offers were the best of those submitted and considered capable of settlement within the brief time available, I accept Mr Burt’s proposition that Mr Francis may feel compromised, on account of the waiver signed by him, in investigating any claim that might arise out of these circumstances. It is a consideration in terms of my overall assessment.
Efficiencies and economies
[35] I accept that there are some efficiencies and economies in appointing Mr Francis as liquidator as opposed to Messrs McCullagh and Lawrence. Since his appointment as interim receiver on 13 July 2023, Mr Francis has clearly acquired a
13 Any claim to cancellation of the contracts would now have to take into account settlement thereof.
level of “institutional knowledge”. He is familiar with the consents attaching to JYIL’s most significant remaining asset — a commercial lot in Flatbush with a likely value in excess of $8 million (the Flatbush commercial lot). He has explored options for accelerating long term agreements for sale and purchase which JYIL has entered into in respect of three residential lots owned by it in Flatbush.14 He is cognisant of the duties owed to Ms Fan as guarantor of certain JYIL liabilities and has informed himself about JYIL’s outstanding tax obligations and the potential claims that it might have against Ms Fan and third parties.
[36] However, I consider that care is necessary to avoid over-stating this particular advantage. No substantial work has yet been done in relation to sale of the Flatbush commercial lot for the reason that Mr Francis has not yet had authority to do so. Similarly, although he has identified potential claims that may be available to JYIL, such claims have not yet been advanced, as they are properly the subject of assessment by a liquidator. And of course, much of what would otherwise have been required of a liquidator (sale of motor vehicles, settlement and on-sale of the Pokeno lots, successful acceleration of one of the Flatbush residential sales and significant reduction of company debt) has already been achieved.
[37] My own assessment is that a proper briefing of any incoming liquidator could occur in a half day or less, with an approximately equivalent time for any new appointee to become fully up to speed in identifying the work yet to be done. I consider that a relatively small price to pay for a successful transition to Messrs McCullagh and Lawrence were that otherwise indicated.
Conclusion
[38] Ultimately, I am faced with what I consider to be a fine judgment call. The relationship between Mr Francis and Ms Fan has, at least from Ms Fan’s perspective, become unsatisfactory. That cannot of itself be decisive, but there may be some utility in a “fresh start” without the “baggage” that the current relationship has attracted. That has to be balanced against the costs of transition. Although on the information
14 Comprising (originally) three residential lots in Flatbush. In respect of one lot Mr Francis successfully negotiated an acceleration of settlement in his capacity as interim receiver.
available to me, the prospects of establishing that Mr Francis sold the Pokeno lots at an undervalue seem low, that proposition has not yet been fully tested. I acknowledge also that there may be potential claims relating to commissions on the Pokeno transactions which Mr Francis likewise may feel constrained from advancing.
[39] On balance, and by a small margin, I appoint Messrs McCullagh and Lawrence as liquidators of JYIL. In this context, the Court must, as the authorities establish, be conscious of appearances as well as realities. And, although as I have said, reasonable robustness is necessary, I nevertheless need to be sensitive to any suggestion that arguable claims, like those in respect of the commissions, might go untested.
Application for authorisation of sale of the Flatbush commercial lot
[40] In addition to appointment of a liquidator the plaintiffs’ interlocutory application seeks orders authorising Mr Francis as Court-appointed receiver to market and sell the Flatbush commercial lot. It seeks additional orders that the above authorisations “will also apply to any liquidators of [JYIL]”.
[41] In the context of shareholder agreement that the Court place JYIL into liquidation under s 241(2)(a) of the Act, I do not regard it as necessary or desirable to maintain the interim receivership beyond a reasonable transition period. Nor do JYIL’s liquidators require any specific authorisation from this Court to proceed with disposition of any property. The liquidators must simply act impartially and independently having regard to the interests of the whole body of shareholders and creditors. Although this Court has been asked to adjudicate on identity of liquidator (effectively by way of an application by the plaintiffs for an order in Mr Francis’ favour under s 280(2)(b)), the rights, powers (and duties) of Messrs McCullagh and Lawrence are as set out in ss 253–279 of the Act. Supervision is likewise provided for under the Act and in particular ss 284 and 286. And any shareholder or director can apply to terminate the liquidation if considered appropriate.15
15 Companies Act 1993, s 250.
Result
[42] I make orders under s 241(2)(c) of the Companies Act 1993 placing JYIL in liquidation.
[43] I appoint Messrs McCullagh and Lawrence as joint and several liquidators of JYIL. I approve the current rates charged by their firm, PKF Corporate Recovery and Insolvency (Auckland) Ltd, as specified in para [2] of the liquidators’ consent to act dated 1 December 2023.
[44] I direct transfer of JYIL’s records by Mr Francis to Messrs McCullagh and Lawrence noting my expectation that Mr Francis will, as the Court’s interim receiver and at JYIL’s cost, also provide a full and expeditious briefing to Messrs McCullagh and Lawrence.
[45] After the transfer of company records has occurred and Messrs McCullagh and Lawrence have been appropriately initiated, I direct Mr Francis to provide a memorandum to the Court with a view to termination of the Court-appointed receivership.
[46] I reserve leave to the parties and Mr Francis to apply for any further directions considered necessary.
[47] The Court thanks Mr Francis for his services as Court appointed interim receiver.
Costs
[48] I have not been addressed on costs. Provisionally, there appears to be a reasonable argument for letting them lie where they fall having regard to the fact that:
(a)the parties were able to reach agreement that a liquidator be appointed by a mechanism other than that initially sought by the plaintiffs; and
(b)I have made an alternative appointment of liquidator to that which the plaintiffs proposed.
[49] If the plaintiffs seek costs, memoranda (maximum five pages plus any schedules) may be filed on the following timetable:
(a)plaintiffs by 15 December 2023;
(b)Ms Fan by 26 January 2024; and
(c)plaintiffs in reply by 2 February 2024.
Muir J
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