Zhou v Lu
[2016] NZHC 1865
•11 August 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-001778 [2016] NZHC 1865
BETWEEN JUN ZHOU
Plaintiff
AND
XIAOWEN LU First Defendant
SONG KEE FRUIT AND VEGETABLE
2013 LIMITED Second Defendant
AND
DA SHENG CHAN Third Defendant
Hearing: 5 August 2016 Appearances:
R B Hucker and D L Lang Siu for Plaintiff
B Norling for first defendant and as agent for solicitor of third defendant
Judgment:
11 August 2016
JUDGMENT OF PALMER J
This judgment is delivered by me on 11 August 2016 at 2 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Counsel/Solicitor:
Hucker & Associates, Auckland ([email protected]) Norling Law, Auckland ([email protected])
ZHOU v LU & ORS [2016] NZHC 1865 [11 August 2016]
Summary
[1] Dysfunctional relationships between directors of a substantial fruit and vegetable business in Newmarket, Auckland, are putting the business at risk. I grant interim interim relief to stabilise the situation pending resolution of the application for interim relief.
Facts
Fruit and vegetables
[2] Mr Jun Zhou, the plaintiff, and Ms Xiaowen Lu, the first defendant, are the shareholders and directors of Song Kee Fruit & Vegetable 2013 Ltd (Song Kee), the second defendant. Song Kee is a substantial retail and wholesale fruit and vegetable business in Newmarket, Auckland.
[3] Mr Zhou and Ms Lu knew each other through family connections in China and their immigration to New Zealand was arranged together in 2012. They lived in the same flat in Newmarket and jointly purchased the Song Kee business for
$1 million. The company commenced business in July 2013. It specialises in retail and wholesale of fruit vegetables from South East Asia that are otherwise hard to get in New Zealand. Ms Lu was responsible for the financial management of the business. Along with a manager, the day to day business has been managed by Mr Zhou and his wife Ms Cynthia, or Lixia, Shen.
[4] At the end of October 2013 Ms Lu moved out of the flat. There were disagreements between her and Mr Zhou and Ms Shen, both personal and relating to the business. Ms Lu married and had a child in 2014. She stepped aside from the business though she appears to have continued to authorise payments remotely. The turnover of the business has been built up from $3.1 million when it was purchased to around $5.6 million.
A falling out
[5] Family intervention did not improve relationships. Ms Lu re-engaged with the business through lawyers, alleging mismanagement, from April 2015. She and Mr Zhou have fallen out.
[6] There have been efforts between the parties to agree on sale and purchase of the business from late 2015. Ms Lu has offered to sell and to buy, and Mr Zhao to buy, the business. But they can’t agree on the value or the process of valuing the business. Some of the behaviours about which accusations have been made may be linked to attempts by one party or the other to gain an advantage in those negotiations.
[7] Each accuses the other of mismanaging and harming the business. Mr Zhou accuses Ms Lu of refusing to authorise payments to Inland Revenue, creditors, suppliers and staff, harassing staff, denying access to the accounts to, and purporting to dismiss, the company accountant. He says this has caused major disruption to the business.
[8] Ms Lu accuses Mr Zhou of misappropriation, financial mismanagement and irregularities. She says Mr Zhou has acted aggressively toward her and she is not comfortable with communicating with him in close physical proximity. She says once she raised her concerns he denied her access to financial information. She denies she has refused to authorise payments and says that Mr Zhou and Ms Shen have been unwilling to approve bills for payment. She seeks cooperation to ensure all payments can be promptly paid.
[9] Ms Lu engaged an accountant, Mr Wing Wong. In January 2016 Ms Lu and Mr Wong are said to have removed records from the business, accompanied by security guards who physically restrained Mr Zhao from entering the business, leading to a Police callout. After that it is said trespass notices were issued, more records were removed, the Police were called again and threats were made regarding immigration status. While Ms Lu now has resident status in New Zealand through marriage, Mr Zhao and Ms Shen’s status is said currently to rest on the business.
[10] Around 28 June 2016 Ms Lu appointed Mr Da Sheng Chan, the third defendant, as an alternate director. She says Mr Chan has agreed to assist her to protect the business and she wants him to tighten the internal controls of the company. She says she is intimidated by Mr Zhou. On 16 July Mr Chan posted a notice in the business asserting his authority to carry out Ms Lu’s duties. The Police were called again. There has been a series of acrimonious interactions during July
2016. Mr Zhou says Mr Chan appears to have interests in competing fruit and vegetable businesses and suspects he is a possible purchaser if Ms Lu’s liquidation application succeeds. Mr Zhou accuses Ms Lu, Mr Chan, Mr Wong and/or their security guards of intimidating him, his wife, staff and customers.
[11] I also note that, apparently at the instigation of counsel, the accountancy firm Ecovis has been appointed as an independent monitor of the financial management of the company.
The applications
[12] In separate proceedings (CIV 2016-404-424) Ms Lu has applied to put the business into liquidation, which Mr Zhou opposes.
[13] In the proceedings before me, filed on 29 July 2016, Mr Zhou applies for an injunction, and an interim injunction, under ss 164, 169, 170 and 174 of the Companies Act 1993 (the Act). The matter had its first call in the duty list on
3 August 2016 and Mr Hucker, for Mr Zhou, pressed the application for interim interim relief. Without that, he submitted, the business may not survive until the application for interim relief is dealt with. It relies on goodwill, its turnover and its client base to survive. The current dysfunction threatens that. On 5 August 2016
I held a one hour hearing of the interim interim relief application.
Law
The Companies Act
[14] The title of the Act is:
An Act to reform the law relating to companies, and, in particular,—
(a) to reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks; and
(b) to provide basic and adaptable requirements for the incorporation, organisation, and operation of companies; and
(c) to define the relationships between companies and their directors, shareholders, and creditors; and
(d) to encourage efficient and responsible management of companies by allowing directors a wide discretion in matters of business judgment while at the same time providing protection for shareholders and creditors against the abuse of management power; and
(e) to provide straightforward and fair procedures for realising and distributing the assets of insolvent companies
[15] The sections relied on are in part 9, entitled “Enforcement”:
(a) Section 164 of the Act empowers a shareholder or director to apply for an order restraining a company or director from engaging in conduct that would contravene the constitution of the company. If the court does so it may also grant “such consequential relief as it thinks fit” (s 164(3)).
(b)Section 169 empowers a shareholder to bring an action against a director for breach of a duty.
(c) Section 170 empowers a court to order a director “to take any action that is required to be taken by the directors under the constitution of the company” and to grant any such other consequential relief as it thinks fit.
(d)Section 174 empowers a shareholder or director who considers the affairs of a company have been, are being or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to apply for various orders.
Interim injunctions
[16] An interim injunction under s 164 is preventative or prohibitory in nature. It is not available “in relation to conduct or a course of conduct that has been completed” (s 164(4)). As Keane J observed in JJ International Ltd v Streetsmart Ltd the s 164 jurisdiction is not confined to, but does not ignore, the usual considerations of equity.1 So whether there is a serious consideration to be tried and an assessment of the balance of convenience are relevant. And, as a statutory power it must, of course, be exercised in accordance with the purpose of the Act.2
[17] I agree with Keane J’s observations in JJ International that the s 164 power is conferred to provide a remedy where the integrity of a company is being or is likely to be compromised. I consider that is the situation here and I rely on s 164 in making orders against Mr Chan. Section 170 is the source of authority for the injunctions sought in relation to Ms Lu. I do not engage with s 174. I do not regard the evidence before me as providing a sufficient basis for me to assess whether the pre-conditions for exercise of that section are satisfied.
[18] There is no magic in an “interim interim” injunction that makes it qualitatively different from an interim injunction. The difference will usually be that an interim interim injunction is likely to be in force for a shorter period of time than an interim injunction. And the balance of convenience may be a more important consideration than the strength of the underlying cases, since an interim interim injunction will usually be based on less evidence.
[19] In this case, the interim interim injunction will be in force until determination of the application for an interim injunction which I set down for hearing on
23 September 2016. Of course, the parties may agree, or the court may then decide,
to adopt or adapt the current interim interim orders on an ongoing basis.
1 JJ International Ltd v Streetsmart Ltd (2005) 9 NZCLC 263 at [19] relying on Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd [2002] NSWSC 741, (2002) 42 ACSR 605.
2 JJ International Ltd v Streetsmart Ltd, above n 1, at [19]-[22].
Application of law to facts
Submissions
[20] Counsel for Mr Zhao and Ms Lu have offered alternative views of orders they consider could be made. Mr Hucker, for Mr Zhao, submits that orders are necessary to ensure suppliers and staff are paid on an ongoing basis and the company complies with its tax obligations. He says they are based on the principle “pay now, fight later”. He has modified his proposed orders to take into account some, but not all, of the points made in alternative orders proposed on behalf of Ms Lu. The orders he proposes in relation to Mr Chan are based on the legal powers of an alternate director which he says are confined, under clause 17.11 of the Company’s constitution. Under that clause an alternate director “may only attend meetings, voting and signing resolutions in the absence of the director who appointed him”.
[21] Mr Norling, for Ms Lu, says that she is seeking to ensure that the company’s financial statements are legitimate and her obligations are fulfilled. He submits the orders proposed by Mr Zhao would lead to payments being made in circumstances where debts cannot be verified. He proposes alternative orders.
[22] Despite my encouragement, and warning that neither may like the result of court imposed orders, Mr Zhao and Ms Lu could not agree on the terms of interim interim orders.
Analysis
[23] For the purposes of this application, I do not engage with the merits of all the accusations that have been traded as readily as the fruit and vegetables. I do observe that the dysfunctional relationships are impinging directly on the operation of the business. They are likely to harm the business and may even result to harm to the participants.
[24] I do not need to rehearse the orders proposed by the parties. The overall purpose of the interim interim relief that I grant is designed to put the business in a
stable holding pattern while the legal applications are worked through. Ideally, of course, the situation would be resolved more permanently by sale and purchase.
[25] In relation to Ms Lu I make orders based on, but not being the same in all respects, as those proposed by Mr Hucker, modified to take into account aspects of Ms Lu’s concerns.
[26] I also accept the basis proposed by Mr Hucker for orders against Mr Chan. There may be alternative interpretations available of clause 17.11 which can be explored in fuller argument at the hearing of the interim injunction. But I accept that the Constitution does not envisage an alternate director involving themselves in the management of a company in the presence of, and support for, the director for whom they are an alternate. My orders are intended to significantly circumscribe Mr Chan doing so. I consider that the independent monitoring role of Ecovis will be a sufficient safeguard against the payments being made where debts cannot be verified.
[27] I also make an order proposed by Mr Norling that the powers that are to be exercised by the Board, under the Constitution, are to be exercised by Mr Zhao and Ms Lu jointly. Mr Zhao must not think that he can cut Ms Lu out from exercising her powers and functions as a director.
[28] My orders should not be taken to exhibit any view of the merits of the dispute and allegations. They are designed simply to allow the business to continue to run while minimising the effects of the dysfunctional relationships. I consider Mr Zhao’s undertaking as to damages to be sufficient to found the orders. I have no more reason to question the integrity of his undertaking than I have to question the integrity of statements made by other parties.
[29] I have also considered whether to make more extreme orders against Ms Lu, Mr Chan and also against Mr Zhao. If the current orders are not effective, I would consider doing so. In the meantime I do not consider that is necessary. The “meantime” need only last until determination of the application for an interim injunction.
[30] As discussed with counsel I set that down for hearing for one day at 10 am on
23 September 2016. I do not consider cross-examination is required in order to resolve that application. I direct that, at the same hearing, the parties should also make submissions as to whether these proceedings should be consolidated with the application for liquidation and as to whether a judicial settlement conference should be ordered.
Orders
[31] Under ss 164 and 170 of the Companies Act 1993, until resolution of the application for an interim injunction in these proceedings, I order that:
(a) Ms Xiaowen Lu must:
(i) authorise payment of all future supplier invoices within
48 hours of receiving advice in writing from or on behalf of Mr Jun Zhao that the invoices are properly payable and upon receipt of an invoice from the supplier that has been initialled by the manager of Song Kee Fruit & Vegetable 2013 Ltd or by Mr Zhao.
(ii)authorise Song Kee Fruit & Vegetable 2013 Ltd’s bankers to authorise payment of all wages to employees as advised to Ms Lu by Mr Zhao or the manager in writing as being properly payable within 48 hours of receiving:
(a) a copy of the timesheets completed by any employee;
(b)advice (which can be contained in a bank batch report) as to the amounts to be paid to each individual employee;
(c) where the employee is a new employee who has not previously been employed by Song Kee Fruit &
Vegetable 2013 Ltd, a copy of that employee’s
employment agreement.
(iii)Authorise Song Kee Fruit & Vegetable 2013 Ltd’s bankers to authorise payment of GST and PAYE due from it to Inland Revenue within 72 hours of being advised by Mr Zhao in writing or by email that the amounts are properly payable and upon being provided with a draft of the PAYE or GST return to which the payment relates together with the working papers to which the return relates.
(iv)Not interfere with the day to day management of Song Kee Fruit & Vegetable 2013 Ltd and/or the management decisions made by Mr Zhao.
(b) Mr Da Sheng Chan is restrained from:
(i)Using or disseminating any document, information and/or record (whether in electronic form or otherwise) obtained as an alternate director of Song Kee Fruit & Vegetable 2013 Ltd for any purpose inconsistent with his duties as an alternate director and to deliver up to Mr Zhao’s solicitors all documents and copies of documents already obtained.
(ii) Entering the premises at 5-11 Kent St, Newmarket, Auckland
1023, from which Song Kee Fruit & Vegetable 2013 Ltd trades.
(iii)Approaching or communicating with staff members, wholesale or retail customers and/or suppliers of Song Kee Fruit & Vegetable 2013 Ltd.
(iv) Interfering with the day to day management of Song Kee Fruit
& Vegetable 2013 Ltd and/or the management decisions made by Mr Zhao.
(c) Mr Jun Zhao is to have responsibility for the management of Song
Kee Fruit & Vegetable 2013 Ltd on a day to day basis.
(d)Mr Zhao and Ms Lu must exercise, jointly, all powers that must be exercised by the Board at law and under the Constitution. Neither may exercise, unilaterally, a power reserved to the Board.
(e) Leave is reserved to any of the parties to apply to vary these orders on two working days’ notice.
[32] I set down for, one day at 10 am Friday 23 September 2016, hearing of: (a) Mr Zhao’s application for an interim injunction;
(b)whether these proceedings should be consolidated with the application for liquidation; and
(c) whether a judicial settlement conference should be ordered. [33] The timetable leading up to that hearing is as follows:
(a) Any further evidence must be filed on behalf of Mr Zhao by 5 pm
Friday 19 August 2016.
(b)Any further evidence must be filed on behalf of Ms Lu and Mr Chan by 5 pm Friday 2 September 2016.
(c) Any evidence strictly in reply must be filed on behalf of Mr Zhao by
5 pm Friday 9 September 2016.
(d)Brief written submissions (with a maximum of 15 pages) must be filed by Mr Zhao by 5 pm Monday 12 September 2016.
(e) Brief written submissions (with a maximum of 15 pages) must be filed by Ms Lu and Mr Chan by 5 pm Tuesday 20 September 2016.
[34] Costs are reserved.
..................................................................
Palmer J
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