Zhong v Bains Brothers Limited
[2021] NZHC 583
•23 March 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000714
[2021] NZHC 583
BETWEEN XING ZHONG
Plaintiff
AND
BAINS BROTHERS LIMITED
First Defendant
TARA SINGH
Second Defendant
Hearing: 1 March 2021 Appearances:
Plaintiff in Person A Lau in attendance
M Singh for Defendants
Judgment:
23 March 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
XING ZHONG v BAINS BROTHERS LIMITED [2021] NZHC 583 [23 March 2021]
Introduction
[1] The parties, Xing Zhong and Tara Singh, are business associates. They are in dispute over a liquor store and superette in South Auckland.
[2] These proceedings relate to the sale of the Finlayson liquor store purchased by the company Xing Seng Ltd (XSL) in 2014. XSL was originally owned by Mr Zhong. The first defendant, Bains Brothers Ltd (BBL), was the vendor.
[3] Mr Zhong alleges that BBL breached a restraint of trade agreement when Mr Singh’s son set up a competing liquor store less than 3 kilometres from the Finlayson Liquor Store.
[4] This is one of five related proceedings. Two of those proceedings are liquidation proceedings.
[5] The defendants seek summary judgment and/or an order striking out the proceedings on the basis that they are incapable of success.
[6] Mr Zhong contends that as a former shareholder and director of XSL – the party entitled to the benefit of the restraint of trade – any losses suffered by that company at the time he was a shareholder and director are losses that he can personally sue for and recover. In response, the defendants contend that in law such losses are not recoverable; the only arguable losses are those of XSL, which is not a party to the proceedings and Mr Zhong has no authority to represent.
Factual background
[7] Mr Tara Singh, the second defendant, and his family have been involved in various business interests in South Auckland for many years. The following family- owned companies are relevant to the dispute:
(a)Satnam Enterprises Ltd (SEL), incorporated in 2014, owned a superette known as Finlayson Superette (the Superette). It sold the Superette to MEI Enterprises Ltd (Mr Zhong) in February 2014;
(b)BBL, the first defendant (and the original owner of the liquor store), was incorporated in 2010. It was removed from the Companies Register on 31 May 2019 by a special resolution of shareholders (and prior to any of these issues arising);
(c)SGAH Investments Ltd (SGAH), incorporated in 2014, owns the premises from which both the Superette and the liquor store operate:
(i)MEI Enterprises Ltd (MEL) is the lessee of the Superette premises; and
(ii)XSL is the lessee of the liquor store premises.
[8]The plaintiff, Mr Zhong, is a director of MEL.
[9] In August 2013, the Singh family first became acquainted with Mr Zhong when Mr Zhong expressed interest in purchasing the liquor store.
[10] XSL was incorporated on 11 April 2014 and for the purpose of purchasing the liquor store business. Mr Zhong was the sole shareholder and director. The business was sold in 2017. Mr Zhong was re-appointed as a director for a short period of time in 2018. For a similar limited period of time in 2018 he held shares in XSL. He is no longer a director or shareholder of XSL.1
[11] On 14 March 2014, an agreement for sale and purchase of the liquor store business was signed, with the plaintiff, Mr Zhong, or his nominee, as the purchaser, and SEL as the vendor. The solicitors acting for the vendor made a mistake in naming SEL as the vendor; it should have been BBL. In any event, nothing turns on the identity of the vendor party to the agreement.
1 Companies Office registration documents before the Court indicate that on 1 May 2017, Mr Sen Wang was registered as the 100 per cent shareholder of XSL and Mr Zhong was removed as a shareholder. Further documentation indicates that on 11 July 2018, 51 shares were allocated to Mr Zhong with 49 shares held by Mr Sen Wang. On 14 September 2018, the documents record that Mr Zhong was removed as a shareholder and the updated particulars of shareholding record Mr Wang Sen as 100 per cent shareholder. The documentation also confirms that Mr Zhong was appointed as a director of XSL on 10 July 2018 and ceased as a director on 13 September 2018.
[12] On 14 April 2014, Mr Zhong and Mr Singh, on behalf of BBL, entered into what Mr Zhong says is the restraint of trade agreement. It reads:
About finlayson liquor
We are agreeing 3 kilometres of premises away from 3/140 finlayson avenue, manurewa, Auckland, if we set up new liquor shop.
We will [train the purchaser for] two month[s] since they … purchase the liquor store.
[13] On 20 April 2014, Mr Singh and Mr Sen Wang, the director of XSL, jointly signed a letter which read as follows:
439 Roscommon Road bottle store
I, Mr Tara Singh, the Sole Shareholder and Director of Bains Brothers Ltd request permission to open a new bottle store on 439 Roscommon Road, Manurewa from Xin Seng Ltd (Mr Sen Wang).
[14] On 16 July 2014, XSL, as purchaser (and Mr Zhong’s nominee under the agreement for sale and purchase) settled the purchase of the liquor store.
[15] In July 2014, the company owned by Mr Tara Singh’s son, namely Crown Liquor Ltd, established a liquor store at Roscommon Road. That store was sold in May 2016.
[16] In 2017, Mr Zhong sold the liquor store business to Mr Sen Wang through a transfer of the shares in XSL from Mr Zhong to Mr Wang. Mr Wang Sen remains the sole director and shareholder of XSL.
[17] Mr Zhong has filed a number of statements of claim. The operative one, and the subject of the present summary judgment/strike out application, is the amended statement of claim dated 3 July 2020. That amended statement of claim was filed after Mr M Singh, counsel for the defendants, filed a memorandum on 24 June 2020 raising issue with Mr Zhong’s pleading. Mr M Singh contended that the proceedings were
flawed because Mr Zhong had never owned the liquor store at issue. Mr M Singh’s memorandum stated:
The statement of claim is materially defective. It contains insufficient particulars and discloses no reasonable cause of action against the second defendant. As such, the second defendant intends to file an application for summary judgment and/or strike-out. However, the present state of the pleading (and inadequate initial disclosure) and the self-represented status of the plaintiff point towards an opportunity first being given to the plaintiff to remedy these issues.
[18]Mr Zhong’s amended statement of claim dated 3 July 2020 asserts that:
(a)SEL took assignment of the liquor store from BBL (the first defendant) and was the true vendor of the liquor store;
(b)Mr Tara Singh asked Mr Zhong to prepare the restraint of trade in BBL’s name as opposed to SEL (the implication is that this was to avoid liability for SEL);
(c)Mr Tara Singh breached the restraint of trade by allowing his son’s company, Crown Liquor Ltd, to establish another liquor store within the restraint of trade area;
(d)Mr Zhong sold XSL at the end of 2016 and Mr Wang Seng took “possession [of] the business” on 30 January 2017;
(e)As a director and shareholder of XSL until mid-2017, he is entitled to sue BBL and Mr Singh for losses suffered by XSL until then;
(f)Mr Singh made promises to extend the lease for as long as Mr Zhong wanted; and
(g)There should have been no rent increases for the premises because this is based on turnover and, accordingly nil, due to the establishment of the other liquor store.
[19]The related proceedings referred to at [4] above include the following:
(a)CIV-2019-404-2656: MEI Enterprises Ltd v SGAH Investments Ltd and Satnam Enterprises Ltd (the promise proceedings):
(i)This is a claim by MEL against SGAH and SEL, primarily alleging that the defendants breached a promise to Mr Zhong that the lease for the Superette premises would be extended for as long as he wanted. MEL seeks equitable relief in the form of an order for specific performance and for an order that past rent reviews be set aside;
(ii)MEL is legally represented in the proceedings, which Duffy J heard in February 2021. That judgment is reserved.
(b)CIV-2020-404-1819: SGAH Investments Ltd v Mei Enterprises Ltd (the possession proceedings):
(i)In May 2020, SGAL served MEL with notices under ss 245 and 246 Property Law Act 2007 for alleged unpaid rental sums. The notice expired unremedied;
(ii)In October 2020, SGAH applied for an order for possession on the basis of the expired Property Law Act notices and the lease has now expired;
(iii)These proceedings were also the subject of a hearing before Duffy J in February 2021 (heard together with the promise proceedings). The judgment is also reserved.
(c)CIV-2020-404-1154: SGAH Investments Ltd v Mei Enterprises Ltd (the MEL liquidation proceedings):
(i)This was an application by SGAH for the liquidation of MEL due to non-payment of rent and outgoings since March 2020. A statutory demand served on 29 May 2020 expired unremedied;
(ii)These proceedings have been resolved with the outstanding debt paid on the date of the liquidation hearing.
(d)CIV-2020-404-2135: Zhong & MEI Enterprises Ltd v SGAH Investments Ltd (the SGAH liquidation proceedings):
(i)This was an application for liquidation filed by Mr Zhong on behalf of himself and MEL, as lessee, seeking the liquidation of the landlord, SGAH. The proceedings were discontinued on 4 December 2020.
Relevant legal principles
[20]Rule 12.2 of the High Court Rules 2016 reads:
(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
(2) The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff's statement of claim can succeed.
[21]Rule 15.1(1) reads:
Dismissing or staying all or part of proceeding
(1) The court may strike out all or part of a pleading if it –
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
[22] As noted in McGechan on Procedure, a defendant’s application for summary judgment is similar to a striking out application in that the defendant has to show that the plaintiff cannot succeed.2
2 A C Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR12.2.07(1)].
Analysis and decision
[23] The principal issue for determination is whether or not the defendants have established, for the purposes of r 12.2(2), that none of the causes of action in Mr Zhong’s statement of claim can succeed.
[24]The following material facts are not in dispute:
(a)the losses claimed by Mr Zhong, including loss of profit and losses in relation to rent, are those of the Finlayson liquor store business;
(b)at no material time has the liquor store business been owned by Mr Zhong. The losses claimed all relate to the period when XSL has owned the liquor store business; and
(c)XSL is not a party to the proceedings and Mr Zhong has no authority to represent XSL.
[25] I accept that it is arguable at this stage that Crown Liquor Ltd was at all material time, less than three kilometres away from the Finlayson liquor store and during the time that it operated, was in competition and took some business away from the Finlayson liquor store business.
[26] The substance of Mr Zhong’s claims are set out at in his amended statement of claim as follows:
11.Plaintiff sold Xing Seng Limited end of 2016 and the purchaser Wang Seng possession the business as at 30.1.2017.
12.Since the Xing Seng Ltd [was] sold to Wang Seng in mid-2017, Xing Zhong as sole director/shareholder of Xing Seng Ltd entitled to file claim against [the] 1st and 2nd defendant for the damages/losses before mid-2017.
13.Tara Singh ask plaintiff to prepare the 3 km restraining clause dated 14.4.2014 under Bains Brothers Ltd (BBL) but not SEL as BBL is the company as recorded in the financial year 31.3.2013 as the business of 140 Finlayson road where [were] given by second plaintiff while purchasing the business end of 2013/beginning of 2014.
…
16. In this case, even if 1st defendant [BBL] stopped business as at 31.5.2019, as sole director/shareholder of BBL, second defendant still liable for the 3 km restrain business rule.
[27] Mr Zhong has confirmed his position in his submission of 25 February 2021, where he states, in response to the defendants’ submissions that he is only claiming the loss/damages between the period 14 April 2014 to 4 May 2017 and at the time when he was a shareholder and director.3
[28] I agree with the submission of Mr Singh, for the defendants, that these proceedings are flawed and cannot succeed. The threshold in r 12.2(2) has been established (i.e. none of the causes of action in the plaintiff’s amended statement of claim can succeed).
[29] Mr Zhong is bringing the claim in his own name despite having never personally owned the liquor store business, having never been a party to the lease and he seeks to recover losses for which he has no right to sue. The restraint of trade can only be enforceable by XSL, but XSL is not a party to the proceedings and Mr Zhong has no authority to represent it.
[30] The principal contention of the amended statement of claim – that because Mr Zhong was previously a sole shareholder and director, is entitled to claim damages for losses before mid-2017 – is fundamentally untenable as a matter of law. That principal contention overlooks the basic principle of company law that directors of a company have no beneficial interest in a company and that the rights and powers of shareholders are in relation to the shares of the company and not in relation to the company’s assets.
[31] The relevant principles are helpfully set out in the following passages of the judgment of van Bohemen J in Mortyne and Ruke v Moana Supertee Pty Ltd.4 In that case, the plaintiffs contended that because the defendant company had been de-
3 “In this matter, the only argument from second defendant to be the failure for the restrain agreement between first defendant and Mr Wang Sen that where Mr Wang Sen is not director/shareholder of Xing Sen Ltd from 14 April 2014 to 4 May 2017; plaintiff only claimed the loss/damages between the period 14 April 2014 to 4 May 2017 and all material time when plaintiff in full control and sole director/shareholder of Xing Sen Ltd from 14 April 2014 to 4 May 2017.]”
4 Mortyne and Ruke v Moana Supertee Pty Ltd [2018] NZHC 2671 at [27]–[31].
registered and because it had no debtors or creditors and no liabilities, and because the plaintiffs were the sole former directors of that company, they were entitled to an order that a company property was held on constructive trust for them. Van Bohemen J held:
[27] That submission overlooks the basic principle of company law that directors of a company have no beneficial interest in a company, let alone the assets of the company. It is the shareholders that own the company while directors direct and supervise the management of the company’s business.
[28] Furthermore, the rights and powers of shareholders are in relation to the shares of the company and not in relation to the company’s assets. Under New Zealand law, those rights include the right to a share in dividends authorised by the board and the right to share in the distribution of the surplus assets of the company.5
[29] However, a shareholders’ ownership interest in the company does not extend to a legal or equitable interest in the assets of a company, even where the shareholder is the sole or majority shareholder in the company. As Lord Buckmaster said in Macaura v Northern Assurance Co Ltd,6 in a passage cited with approval by the Court of Appeal in Mahon v The Station at Waitiri Ltd:7
Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable estate therein.
[30] It follows that, under long-standing principles of company law, the plaintiffs have no beneficial interest in the Poseidon Way property, even if they had a contingent claim to a distribution of the property if the property was unsold at the dissolution of the company.
[31] I recognise that this is a disappointing result for the plaintiffs but it is the consequence of their decision to use their company to purchase the Poseidon Way property. As the Court of Appeal said in Mahon v The Station at Waitiri Ltd:8
If a commercial party chooses to hold an entity through a company, then that is the choice that they have made and by which they must be bound. A party cannot utilise an incorporated structure for the benefits it brings them and then disavow the necessary legal consequences of the use of that structure when it suits.
[32] Mr Zhong may have been a shareholder and/or director at a time when there was an arguable breach of restraint of trade by BBL (I assume that to be arguable), but that does not give him any right to sue personally for losses sustained by the company XSL. The losses at issue are only recoverable by XSL and it would have to be XSL that brought the proceedings at the instigation of Mr Weng Sen, its sole director. It is
5 Companies Act 1993, s 36.
6 Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL) at 625-626.
7 Mahon v The Station at Waitiri Ltd [2017] NZCA 387, (2017) 18 NZCPR 760 at [33].
8 Mahon v The Station at Waitiri Ltd [2017] NZCA 387, (2017) 18 NZCPR 760 at [37].
Mr Wang Sen who directs and supervises the management of the company’s business and he would have to authorise and then instruct a lawyer to bring proceedings in the name of XSL.9
[33] Even if it is arguable that Mr Tara Singh made actionable representations inducing the entering of the contract for the sale and purchase of the business, it is only the company, XSL, that could have suffered any loss since it is only the company that owned the business at the time when it is alleged that the losses were sustained. Mr Zhong may have signed the agreement for sale and purchase in his personal capacity, but he nominated the company XSL which purchased the business (i.e. from the date of settlement) and at no time has Mr Zhong personally owned that business.
[34] Mr Zhong’s second cause of action is likewise flawed. In that second cause of action he seeks that rent reviews in September 2014 and 2015 and May 2016, be declared void av initio and for an order that these be determined at market value. As Mr Singh submitted, that cause of action cannot succeed because Mr Zhong has never been a party to the lease (nor has Mr Tara Singh) and again Mr Zhong has no authority to sue on behalf of XSL, the correct party to the lease.
[35] I find that there is also substantial merit to the further submissions of Mr M Singh as to why the proceedings are incapable of success:
(a)Neither of the defendants breached any restraint of trade. The party said to have breached the restraint of trade, namely Crown Liquor Ltd,
9 At [3] of his minute of 22 October 2020, in SGAH Investments Ltd v MEI Enterprises Ltd HC Auckland CIV-2020-404-001819 Woolford J stated: “Mr Xing Zhong [i.e. the plaintiff here] appears today to represent MEI. I have explained to Mr Zhong that he has no authority to represent a company in these proceedings. A body corporate, which includes the plaintiff company, generally has to be represented in this Court by a lawyer. It cannot put forward a member or director and claim to be appearing personally. The rationale as I explained to Mr Xing Zhong, for this rule, is to ensure that legal proceedings are appropriately pleaded and managed, including by counsel who have a primary obligation to the Court. This is in part to ensure the company’s and shareholders’ interests are properly represented in any decision to participate in litigation. Where proceedings are commenced by a company, they may only be filed by a solicitor on behalf of the company. Only a solicitor who has authority under r 5.36 of the High Court Rules may act. This Court does retain a discretion to allow non-lawyers to appear on behalf of companies in exceptional circumstances, but the circumstances here are not of that kind.” See also, my case management review minute of 19 February 2020 in Suguo Ltd/MEI Enterprises Ltd v SGAH Investments Ltd CIV-2019-404-2656, where I also reinforced to Mr Zhong that he had no authority to represent MEI in that case.
is not named as a party to the proceedings and as a separate legal entity not bound by the restraint of trade.
(b)In any event, consent to the Crown Liquor store operating was sought and obtained from Mr Sen Wang of XSL on 20 April 2014. That consent was obtained before XSL commenced business.
(c)The Crown Liquor store business did not start operating until some four months after the agreement for sale and purchase and was sold in May 2016. No action has ever been taken against Crown Liquor Ltd, nor any complaint made about its operations by XSL until the current proceedings were filed in May 2020.
[36] However, it is not necessary for me to reach any conclusion on these matters. They do, nevertheless, highlight the dangers of self-represented parties not having access to competent legal counsel.10
[37] It is also not necessary for me to make any determination on Mr Zhong’s allegations about the consent to the restraint of trade (i.e. the issue of whether and when the letter of 14 April 2014 was signed) or whether there was or was not an error in the agreement for sale and purchase in failing to list BBL as the vendor. The issue of fake consent documents and who was the vendor party are irrelevant to my conclusions that the proceedings are incapable of success.
[38] In conclusion, I find that the defendants’ application for summary judgment should be granted. The defendants have established that none of the causes of action in the amended statement of claim can succeed.
10 It appears to the Court that Mr Zhong, in conducting this litigation, has been very reliant on the advice of Mr Lau. On a number of occasions during the oral hearing the proceedings were adjourned to enable Mr Zhong to speak to Mr Lau (at Mr Zhong’s request). In my face-to-face case management conference minute of 11 November 2020, I made it clear at [4] to both Mr Zhong and Mr Lau that Mr Lau cannot legally represent Mr Zhong and it would be very much in the interests of Mr Zhong were he to secure legal representation. I also noted at [3] of that minute that Mr Lau, at that time, was appearing with Mr Zhong to assist with translation. At the hearing before me on 1 March 2021, Mr Zhong was assisted by another interpreter and Mr Lau was clearly in attendance to assist Mr Zhong with the conduct of his case.
Result
[39] The defendants’ application for summary judgment is granted. That means these proceedings are now at an end.
[40] In the circumstances (because the proceedings are at an end) it is not necessary for me to deal with Mr Zhong’s interlocutory application for particular discovery or to join additional parties to the proceeding. Those applications are defunct.
[41] As to costs, I find that Mr Zhong should pay costs to the defendants on a 2B basis, together with disbursements.
Associate Judge P J Andrew
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