Zhu v Xu HC Auckland CIV 2005-404-6817

[2009] NZHC 2562

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2005-404-006817

BETWEEN  ZHUOYING (DIANA) ZHU Plaintiff

ANDCHUNHUA XU First Defendant

ANDYUWEI WANG Second Defendant

ANDQIHUA MIAO Third Defendant

Hearing:         22 July 2009

Counsel:         Gareth Neil for Plaintiff

No appearance for Defendants

Judgment:      17 August 2009 at 4:00pm

RESERVED JUDGMENT OF HUGH WILLIAMS J.

This judgment was delivered by The Hon. Justice Hugh Williams On

17 August 2009 at  4:00pm

pursuant to Rule 11.5 of the High Court Rules

……………………………………………..

Registrar/Deputy Registrar

A         There will be judgments for the plaintiff against the first and second defendants as appearing in this judgment.

B          The plaintiff is also entitled to judgment against the first and second defendants for indemnity costs and disbursements as detailed in  paras [74] and [75] of this judgment.

ZHU V  XU AND ORS HC AK CIV-2005-404-006817  17 August 2009

Introduction

[1]      This judgment deals with an application by the plaintiff, Ms Zhu, by way of formal proof for judgment against the first and second defendants, Mr Xu and his wife, Ms Wang.  The plaintiff earlier settled with the third defendant, Mr Miao.

[2]      Both Mr Xu and Ms Wang filed statements of defence at an earlier stage of this proceeding but ceased giving instructions to their lawyers and left New Zealand. Their solicitors were advised of the fixture but clearly had no instructions to participate or to adduce evidence in support of the statements of defence.  The matter accordingly proceeded on a formal proof basis.

Facts

[3]      Ms Zhu came to New Zealand from her native China in August 2002 and met the three defendants and another Ms Zhu, the wife of Mr Miao (“Mrs Miao”), in early 2003.

[4]      Significant funds held by Ms Zhu on term deposit with the bank fell due in

November 2004.  She decided to convert her funds into US currency.

[5]      Mr Miao had approached her on a number of occasions to allow a company called Unifin International Finance Group Limited to manage her funds.   Unifin, Ms Zhu now knows, was incorporated on 20 January 2003 with $1000 share capital. Mr Xu and Ms Wang were directors and although, perhaps, not formally appointed as such, Ms Zhu and her expert witnesses regarded Mr Miao as a director also.

[6]      Unifin’s business included undertaking foreign currency transactions, acting as introducing broker for two New York-based foreign exchange futures traders, and providing a managed fund for investors.

[7]      Ms Zhu exchanged NZD$500,000 into USD via Unifin on 22 November

2004.  Whilst there, Mr Miao again asked her to let Unifin handle her funds.  She knew nothing of the foreign exchange market and was risk averse but says he told her some of Unifin’s foreign exchange investment schemes were completely risk free.

[8]      Allied   with   that,   Unifin   advertised   extensively   in   Chinese   language newspapers published in New Zealand.   It promoted its investment schemes and represented Messrs Miao and Xu as experts in foreign exchange trading.  They also lectured on the topic and spoke over New Zealand Chinese radio.

[9]      Mr Miao gave her a document which, in translation, described itself as a “Foreign Exchange Asset Management Agreement” and said Unifin offered “low- risk and high-return asset management consultancy services”.  Of the various types of investment options offered, Ms Zhu chose the “Fixed Proceeds Type” which was described as:

Fixed Proceeds Type:  When the investment cycle finishes, with no regard to profit or loss of the account, Party B [Ms Zhu] can always obtain the fixed proceeds of 5% and the deficit part will be filled in by Party A [Unifin].

[10]     The  agreement  was  signed   by  Ms   Zhu  and  recorded  her  funds   as

USD$349,480, the equivalent of the $500,000 at the then prevailing exchange rate.

[11]     At  the  time  of  signing  the  22  November  2004  agreement,  Ms  Zhu  said Mr Miao told her it would be easy for Unifin to make 10% pa on her investment.  In reliance on that and Unifin’s obligation to reimburse her for losses, she decided to invest in the fixed term scheme for the “investment cycle” of six months.

[12]     Unifin transferred her investment to KVB Kunlun New Zealand Limited with which  it  held  an  agreement  for  the  conversion  and  remittance  of  funds.    KVB Kunlun converted her money into USD.   On 29 November 2004 Unifin directed KVB Kunlun to transfer the USD$349,500 to Mr Xu’s USD account and the following day Mr Xu transferred USD$349,382 (Ms Zhu’s funds less bank fees) to his personal forex capital markets bank account.

[13]     Over the period November 2004-March 2005 the plaintiff spoke with Mrs Miao on a number of occasions but sought no information concerning her investment as she knew the agreement entitled Unifin to refuse information requests.

[14]     Mrs Miao telephoned the plaintiff in March 2005 at Mr Xu’s request to tell her losses had been made on her account.   No amount was discussed.   Through discovery in this case, she now knows that at 31 March 2005 her account stood at only USD$39,268.03.   Mr Xu asked the plaintiff to extend her investment for six months and promised full payment with interest no later than November 2005.  After some hesitation, Ms Zhu agreed.

[15]     Then, on 26 August 2005, Mrs Miao rang the plaintiff to tell her all her funds had been lost.  She sought legal advice almost immediately and met Messrs Xu and Miao on the evening of 31 August 2005.  Mr Xu said he was “very sorry they had lost my money” but when the plaintiff asked him for a tangible plan for repayment over a time frame, Mr Xu dissembled.  The plaintiff agreed to give Unifin a week to come back with a repayment plan.   Nothing happened.   When, after difficulty contacting Mr Xu, the plaintiff spoke with him late on the evening of 6 September

2005, he gave her no firm repayment proposal but suggested he could still make a profit on the funds and effect full repayment in about six months.  He said he was selling some of his assets.

[16]     The plaintiff confronted Mr Xu on the evening of 7 September 2005.  He did not deny her money was paid to his personal bank account but said his personal assets should not be involved.  She demanded repayment of half the principal within three days and said Mr Xu replied that “he would prefer me to sue him”.  She now knows that by that date the balance of her account stood only at USD$2115.03.

[17]     Her lawyer demanded payment on 12 September 2005 and complained to the

Serious Fraud Office and the Securities Commission.

[18]     Ms  Zhu  issued  a  statutory  demand  against  Unifin  for  her  $500,000  on

22 September 2005.  Nothing was paid.  She issued liquidation proceedings.  Unifin was placed in liquidation by order of this Court on 9 February 2006.  Proofs of debt

totalling $857,854.98 were lodged with Ms Zhu’s being by far the largest.   The liquidators retired on 19 July 2007, the liquidation having been completed.  Ms Zhu received nothing from the liquidation and issued these proceedings in consequence.

[19]     The actions of Unifin and its directors and employees were investigated by experts assisting Ms Zhu.

[20]     Mr White, director of a treasury advisory company and someone with lengthy professional experience in risk management advisory services, said foreign exchange trading was the only activity undertaken on Ms Zhu’s account from the time of her investment until September 2005.   The first trade occurred on 1 December 2004. Losses occurred immediately.  Indeed, a series of trades on 3 December resulted in losses of USD$99,000 on that day alone, and by the beginning of January 2005

Unifin had lost USD$232,889.23 or about 67% of Ms Zhu’s original investment, all through foreign exchange trading.   Losses exceeded profitable trades by 12:1. Recouping the position from there would have required 12 possible trades to one loss just to break even, a ratio “unheard of” in Mr White’s experience.   By the end of February 2005 nearly 88% of Ms Zhu’s investment had been lost through foreign exchange trading.   By 31 March 2005 there was only USD$39,268.03 left in her trading account and in Mr White’s view it would have been “impossible for Unifin to repay” Ms Zhu by the promised date, November 2005.  His view was that as early as December 2004 it ought to have ceased trading on her account or injected significant equity to support ongoing trading.

[21]     More generally, Mr White made the point that foreign exchange markets globally  are  “consistently volatile  and  there  will  frequently  be  significant  price movements”.  Thus such trading requires significant skills and discipline and “robust money management”, typically to have average profit per trade at two to three times the average loss.   This is essential, he said, because even “experts” are unable to predict future exchange rates and movements.

[22]     After reviewing the range of Unifin’s investments listed in the 22 November

2004 agreement and in numerous advertisements, he concluded it traded in global foreign exchange markets without anywhere near enough equity or other financial

support to ensure contracted returns.  Capital guarantees could be met.  Reviewing a number of other investors with Unifin, he discovered all had suffered significant losses of capital as a result the company’s foreign exchange trading.

[23]     Mr White was dismissive of the representations made to the plaintiff by Mr Miao about the investment schemes having a good return and being risk-free. Even successful traders, he said, seldom achieve a success rate significantly above

50% and “trying to pick market direction on an ongoing basis is an inappropriate foundation” for such trading.  Unifin followed that approach.  Mr White said that :

“I have been unable to positively identify any investment traded [by Unifin] in foreign exchange that returned a profit to the investor.  In many instances the principal itself was either substantially eroded or lost.”

[24]     He took the view Unifin was never in a position to guarantee or make good the losses to Ms Zhu.   It was therefore highly misleading to represent to her that investing in the fixed return option in foreign exchange market was risk-free.

[25]     Mr  White  was  similarly  disparaging  of  the  agreement’s  requirement  for Ms Zhu to receive 10% per annum return on her investment at expiry with Unifin making up any shortfall because the company was in no position to guarantee or make good her losses.   It had insufficient capital and sustained losses on all other foreign exchange investments.

[26]     Mr  White  considered  that  foreign  exchange  currency  trading  was  so inherently risky that Unifin’s officers should have advised Ms Zhu of market volatility and that Unifin’s financial position was such it could not meet her guaranteed return.  Messrs Xu and Miao and Ms Wang knew the position as they all signed risk disclosure statements with the New York foreign currency futures traders through whom they invested.

[27]     Mr Jordan, a highly experienced chartered accountant, said Unifin was under- capitalized from incorporation.   By March 2004 its loss of $172,952 plus the estimated value of future foreseeable losses plus the value of its guaranteed investments should have been covered by its share capital.  Instead, it was reliant on funding  and  support  from  shareholders.    They  advanced  only  $254,000  to  the

company in April 2003, only enough to fund trading losses to March 2004 and meet shareholders’ drawings.

[28]     Throughout  the  period  from  March  2004-September  2005,  Unifin  had negative net assets and working capital.  Its 2005 result was over-stated in recording a profit of $330,000 but making no allowance for Ms Zhu’s losses (and probably others) to January 2004.

[29]     He said Unifin was either insolvent or near insolvent at the time Ms Zhu invested in November 2004.  It would at that stage have failed at least one limb of the Companies Act 1993 solvency test because at 31 October 2004 its assets were nearly $150,000 less than its liabilities - including the shareholders’ current account - it had a working capital deficit, and was not reporting losses where Unifin had guaranteed the investment.

[30]     When Ms Zhu reluctantly agreed to extend her investment in March 2005

Unifin’s liabilities exceeded its assets by nearly $200,000, it had an increased working capital deficit and had incurred significant contingent debt, notably losses to Ms Zhu.  Thus, without significant capital injection, Unifin had “no ability” to repay Ms  Zhu.    He  could  see  no  basis  on  which  its  directors  could  reasonably have believed it would be able to meet its guarantee.

Pleadings

[31]     Ms Zhu’s claims against all defendants are, first, for breach of s 37 of the Securities Act 1978;  secondly, for breach of trust or knowing assistance or receipt; and thirdly under s 301 of the Companies Act 1993.

[32]     Under  the  Securities  Act  cause  of  action,  she  claimed  Unifin  offered securities  to  the  public  for  subscription  and  she,  as  a  member  of  the  public, subscribed her USD$349,480 when there was no registered prospectus.  She asserts Mr Xu and Ms Wang as directors of Unifin are personally liable to repay her funds plus interest as Unifin did not repay the money to her within two months after the date it received it.

[33]     Mr  Xu  and  Ms  Wang’s  statements  of  defence  admitted  Unifin  offered securities to the public for subscription but denied or claimed a lack of knowledge of most of the particulars.   They acknowledge there was no prospectus but denied personal liability.

[34]     On the breach of trust claim, Ms Zhu submitted her funds were received by Unifin on trust for her under s 36A of the Securities Act 1978 pending repayment and the defendants were constructive trustees.    She asserted the transfer of her monies to Mr Xu’s bank account was in breach of trust with Ms Wang having actual or constructive knowledge of that breach.   The first and second defendants’ participation in the use of the money is also pleaded to have been in breach of trust or in circumstances where the defendants had actual or constructive knowledge of the breach.  Accordingly, she pleads, Mr Xu and Ms Wang are personally liable to her to repay her funds.

[35]     Again, Mr Xu and Ms Wang denied the allegations or claimed not to know of them.

[36]     The Companies Act cause of action asserted that Unifin’s directors’ duties included duties not to allow its business to be carried on in a manner likely to create a substantial risk of serious loss to its creditors and not to agree to Unifin incurring an obligation unless they believed on reasonable grounds it would be able to perform the same when required.   They are pleaded to have had an obligation to exercise powers with the same care, diligence and skill of a reasonable director.

[37]     They are pleaded to have breached those duties by allowing Unifin to trade when insolvent from 31 March 2004 until late 2005.

[38]     It is pleaded they did not believe on reasonable grounds Unifin would be able to perform its obligations to Ms Zhu having regard to the way they traded her funds. It is therefore claimed they are under an obligation to repay her money with interest.

[39]     Again, the response of Mr Xu and Ms Wang is either a denial or a pleaded lack of knowledge.

Legal Issues

[40]     The  provisions  of  the  Securities  Act  1978  relevant  to  this  matter  are  as follows:

36A      Subscriptions must be held in trust

An issuer must ensure that subscriptions for securities offered to the public are held in trust for the subscribers until the securities are allotted or until the subscriptions are repaid to the subscribers under this Act.

37        Void irregular allotments

(1)       No allotment of  security offered to the public for subscription shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security.

...

(4)Any  allotment  made  in  contravention  of  the  provisions  of  this section shall be invalid and of no effect.

(5)Where subscriptions for securities are received by or on behalf of an issuer,  but,  by  virtue  of  this  section,  the  securities  may  not  be allotted, or for any reason the securities are not allotted, the issuer shall ensure that—

...

(b)The subscriptions, together with such interest (if any) as has been earned thereon, are repaid to the subscribers as soon as reasonably practicable.

(6)If any subscriptions to which this section applies are not so repaid within 2 months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) of this section applies, within 5 months after the date of the registered prospectus), the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions, together  with  interest  at  a  rate  prescribed  from time  to  time  by regulations made under this Act from the date on which the subscriptions were received by or on behalf of the issuer:

[41]     Section  2D(1)  defines  “security”  as  meaning  “any  interest  or  right  to participate in any capital assets, earnings, royalties or other property” and includes a “debt security”.

[42]     There can be no doubt that Ms Zhu’s entitlement to Unifin profits gives her an interest in its earnings.   Alternatively, hers was a “debt security” as defined in s 2(1) as “any interest in or right to be paid money that is or is to be deposited with, lent to or otherwise owing by” any person.  Further, the financial services contract including its right to participate in Unifin’s profit was clearly a “debt security” as defined by the Privy Council in Culverden Retirement Village v Registrar of Companies [1997] 1 NZLR 257, 260.

[43]     Mr Xu and Ms Wang admit Unifin had no registered prospectus throughout the period of Ms Zhu’s investment.  The numerous advertisements put in evidence and further evidence about seminars and other talks makes clear Unifin was offering securities to the public.   Authority demonstrates that “offering” securities to the public for subscription requires no more than public communication to that end (DFC Financial Services Limited v Abel [1991] 2 NZLR 619, 626).

[44]     The advertisements and other promotional activities were clearly an offer of securities  to  the  public  within  the  definition  in  s  3  and  the  terms  of  the advertisements.

[45]     Ms Zhu clearly “subscribed” within the meaning ascribed to that term in s 2 by contributing by way of cash.

[46]     In those circumstances the allotment to Ms Zhu of her “security” is, in terms of s 37(4) “invalid and of no effect”.   Unifin did not ensure her subscription and interest was repaid “as soon as reasonably practicable” and certainly not within two months of her investment.  In terms of s 37(6) Mr Xu and Ms Wang thereby become jointly and severally liable as directors as defined in s 2 to repay the subscription plus interest at the rate prescribed by regulations made under the Act from the date when her subscription was received.  (See also Clark v Libra Developments Limited [2007] 2 NZLR 709, 738 para [179] and cases there discussed; Clark v Libra Developments Limited [2007] NZSC 16 paras [8] and [9]).

[47]     Unifin  purported  to  allot  Ms  Zhu  an  interest  in  the  security  within  the definition of “allot” in s 2 - the agreement is sufficient evidence of that - but it could

not actually allot a security to her because of the lack of a registered prospectus and the consequent illegality of its receipt of her money.

[48]     Even if Ms Wang was, as she pleads, not a director of Unifin in November

2004 or thereafter, the evidence makes clear she acted as a director and accordingly is a director within the authorities discussed.

[49]     Ms Zhu seeks judgment in USD relying on FXHT Funds Managers Limited (In Liquidation) v Overholster (HC Whangarei CIV-2007-488-285, 9 April 2009, Venning J, para [121]).

[50]     It will be recalled she expressly asked for her New Zealand funds to be exchanged into USD.  That was done and all of Unifin’s trading with her money was thereafter in  USD.    In  those circumstances,  she is  entitled  to judgment  for  her principal invested, with the quantum of that payment to be USD$349,480.

[51]     The Securities Regulations 1983 for the relevant period provided in Reg 27A

for interest at 10% per annum.

[52]     Accordingly,  on  the  first  cause  of  action  against  the  first  and  second defendants, the plaintiff is entitled to judgment against them jointly and severally for USD$349,480 plus interest on that sum at 10% per annum from 22 November 2004 to the date of judgment and from the date of judgment to the date of payment.

[53]     Under the breach of trust for knowing assistance/knowing receipt claim the plaintiff’s funds were held under a statutory trust until repayment pursuant to s 36A.

[54]     Unifin and its directors plainly acted in breach of that trust in the way they dealt with the plaintiff’s funds, particularly by transferring them to Mr Xu’s personal foreign capital trading account.

[55]    In De Alwis v Chean (HC Auckland CIV-2007-404-5357, 4 July 2008) Associate Judge Faire observed:

[55]     It is necessary now to consider evidence as to what the defendant actually knew.  [Counsel] referred to two Canadian authorities, Air Canada v M & L Travel Limited (1991) 77 DL:R (4th) 536 affirmed [1993] 3 SCR 787 at 608 DLR; 812 SCR and St. Mary’s Cement Corporation v Construc Limited  (1997)  32  OR  (3d)  595.     Those  cases  are  authority  for  the proposition that if a trust is imposed by statute, the person receiving the funds will have deemed knowledge of the creation of the trust.  That arises from the fact that ignorance of the law is no defence:  Burton v Bevan [1908]

2 Ch 240 at 247.

[56]     Both  Mr  Xu  and  Ms  Wang  were  intimately  involved  in  the  running  of Unifin’s business.  Indeed, at one point Mr Xu was said to have taken over personal responsibility from Mr Miao in trading with Ms Zhu’s investment.   Ms Wang was also an intermediary and involved in the initial transfer of the funds into USD and then to Mr Xu’s account.

[57]     In those circumstances, both Mr Xu and Ms Wang became trustees de son tort  as  participating  in  improper  conduct  by  a  trustee  against  the  beneficiary’s interest (48 Hal’s Laws 4th ed 2007 Reissue para 698 p 481;  Butler et al Equity and Trusts in New Zealand 2003 para 15.3 p 463ff).  Possession or control of the trust funds is sufficient (Ecurie Topgear S.A. v Kerr (1997) 11 PRNZ 127, 131-132).

[58]     Here, Mr Xu received Ms Zhu’s monies into his personal account.  He and his wife had control over the Unifin monies and were signatories to its bank account. By moving Ms Zhu’s funds as they did, they were plainly acting in breach of the statutory trust and must be taken to have been knowingly involved in that activity. Mr Xu must, additionally, be held to have been in knowing receipt of Ms Zhu’s funds when they went into his account.

[59]     In the circumstances, particularly given the immediate and continuing losses, Mr Xu and Ms Wang’s actions must be taken to satisfy the necessary requirements of dishonesty or want of probity for a knowing assistance claim (Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378; US International Marketing Limited v National Bank of New Zealand Limited [2004] 1 NZLR 5889 at paras [7]-[8]).

[60]     Therefore, additionally to judgment on the first cause of action, the plaintiff is entitled to judgment against the first and second defendants under the fourth cause of action for the sum of USD$349,480.  However, interest on that sum should only

be at the rate prescribed under the Judicature Act 1908, not the special rate under the Securities Regulations.   Interest will run from 22 November 2004 to the date of judgment and from the date of judgment to the date of payment.

[61]     In relation to the cause of action brought under s 301 of the Companies Act

1993, the directors’ duties earlier summarised from the pleadings are those found in ss 135-137 of the Act.   The test for satisfaction of breach of that section is well- settled and is to be found in Mason v Lewis [2006] 3 NZLR 225, 233-234 paras [47]-[51]:

[47]      ...  First, in Nippon Express (NZ) Ltd v Woodward (1998) 8 NZCLC

261,765, Anderson J held that the duty under s 189 of the Companies Act

1955 (the equivalent to the present s 135) was not breached by directors until disclosure of a large debt made it clear that the company was hopelessly insolvent. In respect of the period before this disclosure, Anderson J noted at p 261,773:

“Of course if a company operates at a loss for an extended period and has few, if any, realisable assets, there must be some risk to creditors. Section 189 is concerned, however, with not mere risk but substantial risk of serious loss.” (Emphasis added.)

[48]      As to what is meant by “substantial risk” and “serious loss”, Ross,

Corporate Reconstructions: Strategies for Directors (1999), suggests at p

40:

“The first phrase, ‘substantial risk’ requires a sober assessment by directors as to the company’s likely future income stream. Given current economic conditions, are there reasonable assumptions underpinning the director’s forecast of future trading revenue? If future liquidity is dependent upon one large construction contract or a large forward order for the supply of goods or services, how reasonable are the director’s assumptions regarding the likelihood of the company winning the contract? Even if the company wins the contract,  how  reasonable  are  the  prospects  of  performing  the contract at a profit?”

[49]     Secondly,  both  the  High  Court  and  this  Court  have  drawn  a distinction between the taking of legitimate and illegitimate risks: see Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 263,570.   ...   The distinction  between  legitimate  and  illegitimate  business  risks  was  also utilised by Ellen France J in Walker v Allan (High Court, Nelson, CP 13/00,

18 March 2004), in respect of an action under s 135 of the current Act.

[50]     Thirdly, in addition to the risk being a substantial and illegitimate one, the weight of authority is that in deciding whether particular conduct is inappropriate under s 135, New Zealand Courts will take an objective approach: see, in particular, Fatupaito v Bates [2001] 3 NZLR 386. There, O’Regan J pointed out that where a company has little or no equity directors

will need to consider very carefully whether continuing to trade has realistic prospects of generating cash that will service both pre-existing debt and meet the commitments that such trading inevitably attracts.

[51]      The essential pillars of the present section are as follows:

•  the duty which is imposed by s 135 is one owed by directors to the company (rather than to any particular creditors);

•  the test is an objective one;

•  it focuses not on a director’s belief, but rather on the manner in which a company’s business is carried on, and whether that modus operandi creates a substantial risk of serious loss; and

•    what  is  required  when  the  company  enters  troubled  financial waters is what Ross (above at para [48]) accurately described as a “sober assessment” by the directors, we would add of an ongoing character, as to the company’s likely future income and prospects.

[52]      We observe that it is important not to conflate the provisions of s

135 and s 301 of the Companies Act when determining the “liability” issue. The issues are twofold; should there be liability, then, what is the appropriate

relief?

[62]     Here Mr Xu and Ms Wang, as directors of Unifin, embarked on significant trading in a highly volatile and risky area of business with a company which was insufficiently capitalized and insufficiently supported by its shareholders.   It had negative assets and negative equity almost from the outset – certainly before Ms Zhu invested - and thereafter ran up large losses almost instantly in relation to her funds. It continued to trade disastrously with her funds – and those of many others – thereafter.  The company was almost certainly insolvent when it accepted Ms Zhu’s money.  No director could conscientiously have believed it could meet its guarantee, if not precisely at the date the funds were received then certainly within a few days thereafter, and increasingly as time passed.   Not only did their course of trading imperil – and finally lose – all Ms Zhu’s investment, the same could be said of funds contributed by other investors.  Creditors were thereby placed at substantial risk of serious if not total loss.

[63]     Unifin should plainly have ceased trading – certainly with Ms Zhu’s funds within a fortnight of receiving them or, at most, within two months.  Any objective view of Unifin’s financial position and the trading results to date would have shown it was not merely insolvent but could not perform its obligations to her.

[64]     The plaintiff is accordingly entitled to succeed against Mr Xu and Ms Wang under ss 135-137 of the Act.

[65]     The question is then, as Mason says, what should be the appropriate relief?

[66]     Section 301(1)(c) empowers the Court on a creditor’s application to order persons such as its directors to “pay or transfer the money or property or any part of it with interest at a rate the Court thinks just to the creditor” if the directors’ action justifies such an order.

[67]     Normally, of course, orders under s 301 are for persons against whom they are made to restore the funds to the company for distribution among all creditors – indeed, initially, Ms Zhu’s claim included such relief – but the Court has a discretion to award monies to the creditor rather than the liquidator or the company: Marshall Futures Limited v Marshall [1992] 1 NZLR 316, 332-314.

[68]     This is a case where ordering payment to Ms Zhu as a creditor is appropriate. Unifin has been liquidated.  The liquidation has been finalised without payment to Ms Zhu.  The same must be the case in respect of all other creditors though none, as far as is known, has taken Court proceedings against the directors.   The company may, by now, have been struck off.

[69]     In  the  circumstances  of  this  matter,  in  particular  having  regard  to  the egregious way in which Mr Xu and Ms Wang dealt with Ms Zhu’s funds and continued to trade with them long after they should have or must have realised it would be impossible for Unifin ever to recoup the position, it is appropriate that, in addition to judgment on the other causes of action, the plaintiff should be entitled to an order under s 301(1)(c) requiring the first and second defendants jointly and severally to pay the plaintiff the sum of USD$349,480 plus interest at the same rate and for the same period as awarded under the fourth cause of action.

[70]     Two riders should, however, be added to the terms of those judgments.

[71]     The first  is that the judgments  will only be satisfied by the payment to Ms Zhu of the amount of New Zealand currency corresponding to the judgment in USD at the exchange rate prevailing at the date of payment.

[72]     The second is that Ms Zhu has settled with Mr Miao.   Plainly, she is not entitled to receive payment from the defendants of a sum exceeding the loss she has suffered including interest.  Accordingly, if and when sums are paid to her to satisfy any of the judgments entered or other amounts to which she is entitled to achieve satisfaction of the total amount payable, the payer will be entitled to a deduction from the sum otherwise payable for principal and interest of any sums previously received by Ms Zhu from another debtor.

Result

[73]     In the result there will be judgment for the plaintiff against the first and second defendants in the sums and for the amount of interest detailed in this judgment, subject to the two riders just discussed.

[74]     The plaintiff  is  entitled  to  costs  against  the first  and  second  defendants. Having regard to the way in which they dealt with her funds, it is appropriate she receive an order for indemnity costs against the first and second defendants jointly and severally in the sum submitted by Mr Neil by memorandum and to the extent approved by the Registrar.

[75]     Ms Zhu is also entitled to judgment against the first and second defendants jointly for disbursements and witnesses expenses including all Court filing fees, her experts’ fees and the costs of all translation incurred by her, again in a sum included in Mr Neil’s memorandum and to the extent approved by the Registrar.

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HUGH WILLIAMS J.

Solicitors:

Meredith Connell (G Neil), PO Box 2213 Auckland 1140

Copy for:

Case Officer:  Indra[email protected]