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IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2009-404-003620
THE HAT FACTORY 2006 LIMITEDFourth Defendant F C Deliu and R Zhao for plaintiffB M Cunningham for defendants RESERVED JUDGMENT OF HUGH WILLIAMS J
This judgment was delivered by
The Hon. Justice Hugh Williams
on
pursuant to Rule 11.5 of the High Court Rules
…………………………………………….
Registrar/Deputy Registrar
XUE YING ZHU V HUA CHEN And Ors HC AK CIV-2009-404-003620 [14 August 2009] Leave is granted to Ms Zhu to bring a derivative action in the name of
The Hat Factory 2006 Limited and Classic Living Limited against the
individual defendants.
There will be freezing orders pending further order of the Court against
all assets in the name of Mr and Mrs Parkar, or in the names of the
trustees of any trust in which they have a beneficial interest including
the properties at 113 and 115 Rostrevor Street Hamilton and 16/201
Gore Street, Auckland, with the details of any assets qualifying under
this order beyond those specifically listed being provided by affidavits by
the second and third defendants to be filed and served within 14 days of
delivery of this judgment.
There will be a freezing order issued against 70A Wheturangi Road,
GreenLane, Auckland, extending to Mr Chen and the proprietors of that
property and the trustees of any trust in which he has a beneficial
interest.
Introduction
Between October/November 2005 and June 2008 the plaintiff, Ms Zhu, made available to the defendants 13 sums totalling NZD$660,000 plus RMB3.37m.
The phrase “made available” is used advisedly since one of the issues central to this proceeding is whether those sums were loans to defendants or investments in the two corporate defendants, The Hat Factory 2006 Ltd and Classic Living Ltd, and whether any of the sums made available have been repaid or properly dealt with as Ms Zhu seeks leave to commence proceedings against the first three individual defendants, Mr Chen and Mr and Mrs Parkar, in the names of the corporate defendants. She also seeks freezing or charging orders against various assets of the individual defendants, including Ms Liao, the sixth defendant and Mr Chen’s wife, and freezing orders against the corporate defendants.
This judgment deals with those applications.
Procedural
The following procedural observations are pertinent: Ms Zhu originally sought the freezing and charging orders on a “without notice” basis but Priestley J directed, on 17 June 2009, that The individual defendants have sought an order against Ms Zhu for security for costs. Mr Cunningham, counsel for the defendants, sought to argue that application at the hearing on 13 July, but that was not one of the applications set down by Asher J on 22 June 2009 for hearing on 13 July. Accordingly that application remains outstanding.
When judgment was reserved at the conclusion of the 13 July hearing, counsel were asked if interim arrangements were in place or needed pending delivery of the judgment, or whether the Court’s assistance was required. Nothing further has been heard on that issue.
Accordingly this judgment proceeds on the assumption the parties have either agreed no interim arrangements are required or have This application proceeded on the assumption that neither of the corporate defendants were in liquidation. Counsel informed the Court at the hearing that there were liquidation proceedings extant against at least one of the corporate defendants but they were, at that date, unresolved. No advice has been received from counsel since then concerning those or the threatened liquidation proceedings against the other corporate defendant. Should either or both the corporate defendants have been liquidated by the time this judgment is delivered there will need to be further argument on the Court’s powers in that eventuality as discussed within the body of the judgment.
As – apart from issues of repayment and corporate investment - there is no great difference between the parties on the facts, a relatively brief summary is Ms Zhu has run businesses in China dealing with vehicle parts manufacture over a number of years and has two large companies. She considers herself an She first met Mr Chen in 2001 when she came to New Zealand to study English. Shortly afterwards he offered to help her acquire permanent residency but she declined his offer and acquired permanent residency in principle in 2003 conditional on her depositing NZ$1m into a New Zealand account. She decided not to proceed with permanent residency at that stage. But, back in China, a foundling baby girl was deposited at her door whom Ms Zhu later adopted. That revived her interest in New Zealand residency to give her daughter a better place to learn English She had maintained contact with Mr Chen and in about 2005 he proposed they (as to 25% each) and Mr Parkar (as to the remaining 50%) invest in a new venture in New Zealand to assist her apply for residence under the Entrepreneurial Immigration Category. She declined at that stage.
In October/November 2005 Mr Chen and Ms Liao sold their Auckland house and asked Ms Zhu to lend them $100,000 to buy a more expensive replacement. She says the money was to be repayable within one month and they offered 7.6% interest until sale of another property. They say they repaid the advance by “paying back money to the business for which she received shares” both in Hat Factory and The replacement property was 70A Wheturangi Road, GreenLane, Auckland, one of the properties over which Ms Zhu seeks a charging order. It was bought by the H Chen Family Trust in January 2006.
In December 2005 Ms Zhu agreed to lend a further $100,000, she says for one month at 7.6% interest, in order to purchase a New Zealand business. She came to New Zealand the following month because Mr Chen and Ms Liao had bought Hat Factory and Classic Living. During her visit she was given “borrowing notes” which, she says, are evidence of a loan in China and are valid for two years. The note, signed by Mr Chen alone, was for a loan for two years at 7.6% for the first year and “highest bank interest” for the second, the term commencing on 11 January 2006. Mr Chen said the whole of the $200,000 lent by Ms Zhu was put into the Ms Zhu said during her visit to New Zealand Mr Chen told her he had made her a shareholder of the corporate defendants – though without her permission – and she attended a shareholders’ meeting. Mr Chen, she said, suggested she attend because he “wanted to use the companies as a conduit to sponsor me for permanent residency”. She thought it was wrong and might affect her residency application though she agreed to convert the $200,000 loan into a purchase of 10% of the shares She said she appears to hold 20% of the shares in each company, though they were transferred into her name only on 10 August 2006. She put in evidence a shareholders’ agreement for Classic Living dated 13 March 2006 which lists her as a party even though the signature for her is plainly that of Mr Chen. Mr Chen agrees Ms Zhu holds 200 of the 1000 shares in each company.
Ms Zhu said over the period from early 2006 Messrs Chen and Parkar assured her both businesses were running well with high margins of profits, though promised monthly financial reports did not arrive. Mr Chen said he kept Ms Zhu fully informed of the company’s affairs. The profit figures she quoted were cash On 28 July 2006 Ms Zhu agreed at Mr Chen’s request to lend a further $200,000 for one year at 10% interest. She said she was told this was a temporary advance to assist the companies’ cash-flow but the document evidencing the loan, on Classic Living letterhead, said Messrs Parkar and Chen as directors had borrowed the funds. She claims the loan was to Mr Chen alone, relying on a further undated document in the same form signed by Mr Chen only “following up the old document” with a start date for the loan of 1 August 2008.
Mr Chen said Ms Zhu’s funds were paid into the joint account for his wife and himself and he “subsequently paid that amount into the company accounts” for On 15 September 2006 Ms Zhu agreed to lend more funds as Mr Chen told her the businesses were going well but they were again short of cash. She agreed to lend a further RMB800,000 for three months at 10%. The loan was evidenced by a further document on Classic Living letterhead in the same terms as previously, signed by both Messrs Parkar and Chen. Despite that, Ms Zhu said the loan was to Repayment did not occur at the end of the term. Ms Zhu taxed Mr Chen to be told that on 9 December 2006 they had missed some sales. He gave her an IOU signed only by himself dated 9 December 2006 saying “today borrowed from Xue Ying Zhu’s friend” RMB800,000 for “two year from 10 December 2006 to 09 March 2007”. Ms Zhu had borrowed the funds from a friend for on-lending.
Repayment was not made in March 2007. Again Ms Zhu taxed Mr Chen on the topic. She said he told her the companies were going well and were profitable but were short of money and asked to extend the loan for a year. After obtaining her friend’s consent, Ms Zhu agreed and confirmation was given in writing, this time on Hat Factory letterhead but otherwise identically phrased as with the previous receipts, signed by both Messrs Parkar and Chen and saying that as directors they had borrowed RMB800,000 for 12 months at 13% interest.
A year later, March 2008, brought no repayment. Ms Zhu telephoned Mr Chen on a number of occasions. She says he told her he had financial problems though the businesses were going well and asked to extend the loan for a further year. Ms Zhu’s friend consented and a further receipt was signed by Messrs Parkar and Chen on Hat Factory letterhead in identical terms to the previous receipts.
A year later again, February 2009, Ms Zhu repeatedly asked Mr Chen for repayment but was told the “money had gone to the companies”. He gave her an undated receipt signed only by himself for RMB904,000 at 13% with a start date of 8 March 2009 “following up the old document”.
Despite her later emails and texts asking for repayment, neither replies nor She said that in response to Mr Chen’s September 2006 request for a loan of RMB1m she was only able to lend RMB800,000 and he continued to pester her for the balance. She sent RMB200,000 on 7 January 2007, evidenced by an identical receipt on Hat Factory letterhead for RMB200,000 “start 7th of January 2007” following which there was, she says, a renewal one year later, this time evidenced by a receipt signed by Mr Chen alone on Classic Living letterhead for RMB255,400.00 at 13% “start 7th of January 2009” and again “following up the old document”.
Then, in response to Mr Chen’s many requests for her to lend more money to meet a large order, on 13 March 2007 she lent RMB550,000 for three months at 12%, evidenced by an identical receipt on Hat Factory letterhead undated but “to start 13th of March 2007” signed by both Messrs Parkar and Chen and a renewal, though on Classic Living letterhead, signed only by Mr Chen, evidencing a loan of RMB690,000.00 at 12% “start 13th of March 2009 . following up the old In addition, on 19 March 2007, she lent a further RMB100,000 for four months at 12%. The receipt is on Hat Factory letterhead, undated but signed by both Messrs Parkar and Chen and records “start 19th of Mar latest return back will be before 3th of Aug”. That, she said, was renewed by another receipt on Classic Living letterhead undated but signed by Mr Chen alone, evidencing a loan for RMB125,500.00 at 12% “start 19th of March 2009 . following up the old Ms Zhu said she queried Messrs Chen and Parkar in May 2007 concerning her immigration application and was told she needed to have a 25% shareholding in a New Zealand business so Mr Parkar transferred to her 10% of the joint shareholding with his wife in each of the corporate defendants and in return she paid $200,000 into Classic Living’s account. However, on 9 May 2007 she received a letter from Mr and Mrs Parkar’s solicitors saying the two corporate defendants were to be amalgamated with 25% of the shareholding to be allocated to a Mr Cavanagh.
Thus all other shareholders’ interests would be reduced, Ms Zhu’s to 15% of the companies. A receipt dated 12 May 2009 signed by Mr Parkar alone said that two days later Ms Zhu transferred $200,000 to him to “purchase 10% (totalling 20% of shares) of Classic Living” with the funds being invested for Ms Zhu to qualify under the Investor Category for Immigration. The receipt said that “funds have been transferred into the business”. That may be supported by a 2008 deed between Classic Living and Mr and Mrs Parkar evidencing their loan to the company of $200,000 being the advance made on 1 July 2007, repayable on demand, to which were added attached share transfers of 27 shares in Classic Living from each of Mr and Mrs Parkar to Ms Zhu and 30 shares from each of Mr and Mrs Parkar to Exhibited annual returns of both companies show her with 90 shares in each.
The next series of transactions began in June 2007 when, because of the fluctuating exchange rate, Ms Zhu wished to exchange funds into US dollars but Mr Chen persuaded her to lend him the money which would be put into a company so if the exchange rate exchanged negatively it could take the loss. On 13 June 2007 she lent RMB600,000 in cash to Mr Chen for one year at 10% which he then changed to USD$76,000 with the loan being evidenced by the usual receipt on Hat Factory letterhead, signed by both Messrs Parkar and Chen, for RMB600,000 for 12 months at 10%, undated but “start 13 of June 2007” and what she says was a renewal, this time on Classic Living letterhead but in the same terms, signed only by Mr Chen, for RMB660,000 at 10% “start 13th of June 2008 . following up the old On 16 July 2007 Mr Chen persuaded Ms Zhu to lend another RMB300,000 for a Chinese supplier. The same process was used as in the previous month with the loan being on Hat Factory letterhead, signed by both Messrs Parkar and Chen, for RMB300,000 for 12 months at 10% “start 16th of July 2007”, with the renewal on Classic Living letterhead as with the previous receipts for RMB330,000 signed by Mr Chen alone “start 16th of July 2008 . following up the old document”.
She lent a further RMB330,000 on 1 August 2007 at 10% for one year, being given an IOU for that sum “borrower: Danny” (Mr Chen’s English name) followed by Classic Living’s name. That was renewed by the usual Classic Living receipt signed by Mr Chen alone for RMB363,000 “start 1st of Aug 2008 . following up the old document”. She said on 24 August 2007 Messrs Chen and Parkar told her they were forming a new company called Pegasus Floats Limited to sell horse floats.
Mrs Parkar asked for funds to meet an “urgent order of hats” for one month and Ms Zhu lent $60,000 to Hat Factory on 25 July 2007, receiving a receipt on Hat Factory letterhead signed by Mr Parkar alone confirming that company was in receipt of those funds repayable with 10% interest by 5 November 2007.
The next transaction occurred on 18 June 2008 when Mr Chen told Ms Zhu the company urgently needed RMB450,000 to overcome a cash-flow problem and sought a one year loan at 10%. The receipt was signed again only by “Danny” but using Classic Living’s name and recording the loan of that date. The renewal was a Classic Living receipt for RMB450,000 signed by Mr Chen alone “start 18th of June 2008 . following up the old document”.
Ms Zhu then said that on 13 April 2009 Mr Chen emailed her a documentary receipt setting out the list of amounts, dates and interest rates of the loans, but she said that Mr Chen and Mr and Mrs Parkar had borrowed the funds. The receipt was signed by all three and evidences all the loans already detailed.
However, the three signatories claim they signed the document under duress.
Mr Chen claims Ms Zhu threatened Mr Parkar in New Zealand – though in the joint affidavit of Mr and Mrs Parkar no similar conduct is asserted – and Mr Chen also claims Ms Zhu told him she would commit suicide if all three did not sign a document evidencing their personal liability. He spoke of Ms Zhu’s friend claiming he would keep Mr Chen in a Changzhou hotel until the money was repaid, and of his being forced to sign a paper saying Mr Chen had borrowed money from the friend for the company. All three deponents claim Ms Zhu asserted she had borrowed money from people who had kidnapped her daughter and would harm the daughter if they did not sign the document evidencing personal liability. Mr and Mrs Parkar claim Ms Zhu forced them to buy a return ticket from Auckland to Shanghai, despite her already having a ticket. They all assert the kidnapping story was later found to be false. Mr and Mrs Parkar’s affidavit exhibits an email of 23 May 2009 couched Ms Zhu’s reply affidavit does not discuss this incident.
Ms Zhu put in evidence a letter dated 8 May 2009 sent by Mr Parkar on Classic Living letterhead apologizing for the fact that from “September 2007 funds were transferred to Classic Living and Hat Factory from Pegasus Floats without your consent . as these companies were not performing well” and attaching a schedule of at least $185,500 transferred. Promises of repayment were made “as soon as the companies started to recover” but Mr Parkar said that “Hat Factory and Classic Living are in serious financial difficulty and I am unable to repay the debt from these companies but I undertake to repay these funds as soon as I can through other business avenues”. Repayment by instalments was promised with the addressees – including Ms Zhu – having the “right to revoke this contract at any time”.
Ms Zhu also exhibited a Classic Living letter dated 6 May 2009 signed by Mr and Mrs Parkar and Mr Chen, saying an attached schedule of borrowings was invested into Classic Living and Hat Factory with Ms Zhu having been “informed that the companies were trading well” but that “unfortunately in the last two years the trading has declined and the companies have made a combined loss”. The signatories also say the information given to Ms Zhu as to the performance of the companies was “incomplete” and she was “misinformed”. The letter promised the company (singular) would repay the money “as and when it is able”. The schedule is in Chinese and is untranslated but it speaks of RMB3.33m, RMB377,900 and NZD$660,000 being advanced to Classic Living.
Similar letters were in evidence, one on Classic Living letterhead dated 9 April 2009 in identical terms but proposing instalment repayments and another on Classic Living letterhead dated 7 May 2009 “Subject: Pegasus Floats” saying no funds had ever been transferred from any of the three companies to Ms Zhu. Ms Zhu was given the companies’ financial statements I May 2009 but doubts their accuracy as they do not reflect the statements in the letters just reviewed. They do, however, show significant loans by Mr and Mrs Parkar and Mr Chen to the companies.
Classic Living’s bank statements show financial intermingling between Hat Factory and Pegasus Floats with, again, payments being made by the companies on the individual defendants’ behalf. She also put in evidence an asset sale agreement dated 26 May 2009 between Hat Factory and “Anamousity” Limited covering the stock, equipment and intellectual property of Hat Factory. Settlement was set for the Ms Zhu sought freezing and charging orders because she understood Mr Chen was trying to sell his house and Mr and Mrs Parkar were moving to the Middle East, assertions she supported by conversations to that effect. In particular she said Mr Parkar told her “he did not have the money to pay me back and that I Mr Chen denied he was attempting to defeat creditors either of the companies or himself and said he intended to repay the companies’ creditors though not being He said his house is owned by the H Chen Family Trust and he has “so few assets that I have applied for Legal Aid to fund my defence”. He said the trust is selling the leasehold property at 70A Wheturangi Road as it cannot meet the mortgage. He gives details of his considerable indebtedness and said that he has “lost all of the money I invested in the companies which amounts to $1,250,000”.
Mr and Mrs Parkar make similar comments concerning their financial position but acknowledge Mr Parkar is “leaving for the Middle East to see if there are any business opportunities there so that he can repay his creditors”. Mrs Parkar and the children will remain. They, too, say that they have “lost everything we own” with three Hamilton properties having “borrowings over the value of the share of the property held in trust for us”. Supporting evidence from a Bank is that the two commercial properties in Hamilton may be worth $950,000. The registered proprietors are the Ali and Cherie Parkar Family Trust and the Hussain and Arifa Parkar Family Trust as to one-third and two-thirds respectively with mortgages to the Horizon Trust of $354,516 as at 3 July 2009 and to the Ali and Cherie Parkar Family Trust of $518,726. The equity may therefore be modest but, additionally, Mr and Mrs Parkar also put in evidence demands by a financier under a trade finance facility issued to all three companies for $1,505,500 repayable on 18 May Finally, Ms Zhu said she wished to bring derivative claims in the names of Hat Factory and Classic Living against Mr and Mrs Parkar and Mr Chen because of what she regards as intentional reckless conduct in their operation of the companies, treating them as “sham entities to advance their own interests”.
All three deny those assertions and say the businesses failed because of declining sales and reduced margins, increased costs of supply and operating costs in the current financial climate. Mr Chen says “shareholders’ loans to the business amounting to close to $5 million are lost”.
Leave to commence derivative action under s 165 Companies Act 1993
Section 165 of the Companies Act 1993 empowers the Court on the application of a shareholder or director of a company to grant leave to that person to bring proceedings in the name on and on behalf of the company if the company does not intend to bring such proceedings itself – such being admitted in this case – and Derivative Actions
Without limiting subsection (1) of this section, in determining whether to grant leave under that subsection, the Court shall have regardto— The likelihood of the proceedings succeeding: The costs of the proceedings in relation to the relief likely to beobtained: Any action already taken by the company or related company toobtain relief: The interests of the company or related company in the proceedingsbeing commenced, continued, defended, or discontinued, as the casemay be.
The leading case on the approach to applications for leave to bring derivative actions is Drij v Boyle [1995] 3 NZLR 763. Although the decision dealt with s 209X of the Companies Act 1995, that section was effectively identical to s 165 and the principles in the case continue to apply and are adopted for this case.
The cases later than Drij dealing with derivative action leave applications and as collected in the texts are largely examples of the statutory criteria and the issues discussed in Drij in action, but the following are noted.
Ms Zhu’s position is such that she is unable to allege the shareholders are in deadlock and accordingly proceedings should issue under Where, as here, the assertions against directors include alleged breach of their fiduciary duties, there are authorities suggesting a higher test should be applied than the “prudent business person” but, if anything, directors’ duties are of such importance in company law that if an arguable case for breach of their fiduciary duties is made out by the proposed plaintiff, it would seem almost inevitable that a prudent business person test would lead to the granting of leave.
There are authorities suggesting that where, as here, the intended corporate defendants are no longer trading, a derivative action should not proceed but, with respect, that would appear to be simply a factor to be taken into account on the leave application.
As the authorities discussed demonstrate, it is by no means clear whether the appointment of a liquidator removes a shareholder’s right to bring a derivative action. Section 165 does not cover this situation but the preferable position appears to be that discussed in Hedley v Albany Power Centre Ltd (In Liquidation) [2005] 2 NZLR 196 at para [55] where Wild J concluded, after a careful and comprehensive review of the authorities, that once a company is placed in liquidation the Court either no longer has jurisdiction under s 165 or, even if jurisdiction persists beyond liquidation, the Court ought not to (See generally Brookers Company and Securities Law Vol 1 para CA165.02-CA165.10 p1-1004(a)-1-1006(f)).
The interests of the corporate defendants must be regarded as being advanced by a derivative action being taken in their name – and at their cost: s 166 - since, if their financial affairs are proved to have been mismanaged by the individual defendants, it is plainly in the companies’ interests for that situation to be uncovered Mr Deliu, leading counsel for Ms Zhu, reviewed the authorities just discussed and pointed to what he submitted was a lack of response by the defendants to issues such as using the corporate letterheads interchangeably, why they appear to have accepted personal liability but later recanted, what use the defendants have made of Ms Zhu’s funds, and the manner of their management of the corporate defendants He also drew attention to procedural deficiencies in the defendants’ case, including breaches of timetables, failure to serve the plaintiff with full copies of defendants’ affidavits and the contradictions inevitably arising from Mr and Mrs Parkar ostensibly swearing a joint affidavit but failing to differentiate between themselves and making statements of which one of them must have been unaware.
He submitted Ms Zhu has incurred all costs to date relating to the leave application and, if the defendants’ assertions concerning the companies’ financial circumstances prove to be correct, she will be forced to bear the costs of bringing the derivative action and prosecuting it to completion.
For the corporate defendants, Mr Cunningham opposed leave being granted for Ms Zhu to commence a derivative action. He submitted there was little likelihood of the proceedings succeeding because, he submitted, there was no proof the individual defendants breached their directors’ duties. Thus, he submitted, no prudent business person would risk their funds in such a claim. He submitted no relief sought in the derivative action would increase any damages payable to Ms Zhu and her better course would be to issue proceedings as a shareholder under s 174.
Personal and derivative actions would risk double recovery, he submitted, and he pointed to the winding-up proceedings issued by two creditors against Classic Living, with the likelihood one would also issue liquidation proceedings against Hat Factory. He also made the point that Mr Chen and Mr and Mrs Parkar have the power to liquidate the corporate defendants but he appeared to have little satisfactory answer as to why such had not occurred if their financial situations were as dire as In considering the first criterion in s 165(2), the likelihood of the proceedings succeeding, Drij makes clear that the broad discretion conferred by the subsection is undiminished by the specific criteria set out later in the section, and the appropriate test is that which would be “exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim” (Drij at 765).
In this case, that advances were made by Ms Zhu not being seriously contested, there must be a reasonable likelihood of a derivative action succeeding.
But the real question is what has become of her funds and whether they were loans to individual defendants or investments in the corporate defendants. That must be coupled with whether Ms Zhu’s interests might be better advanced by her suing individual directors in her capacity as a shareholder under s 169, issuing a statutory demand to the companies for funds acknowledged to have been invested, and follow those with liquidation proceedings or a combination of those forms of action.
Inevitably, it would appear, should Ms Zhu be granted leave to bring the derivative action, she will also need to include alternative causes of action against individual defendants personally lest the litigation discloses her funds were advanced to them That issue laps over into the second consideration, namely the cost of the proceedings balanced against the relief likely to be obtained.
In Ms Zhu’s case, if she sues in the alternative, it seems likely she will obtain judgment against the individual defendants should her funds be shown to have been loans to them but, if the funds were investments in the corporate defendants, the return is significantly more in doubt. This is therefore one of those unusual cases where the personal and corporate claims may well turn out to be mutually exclusive, but Court processes are required to establish that fact (Drij at 767).
That is particularly the case when counsel advised there were already winding-up proceedings brought by other creditors current against either or both of This is not a case where either corporate defendant has taken any step to obtain relief such as that which might be obtained by Ms Zhu in a derivative action.
Then, the individual defendants do not appear to contest the fact that over a lengthy period Ms Zhu made substantial sums of money available either to them personally or as an investment or loan to the companies. What is significantly in doubt is whether they were loans to the individual defendants, loans to the corporate defendants or investments in the latter.
As the documentary trail earlier reviewed shows, there are contradictions not so much as to whether the funds were made available but as to whom, on what terms, what has become of them and, if they were for the corporate defendants, whether they were handled by Mr Chen and Mr and Mrs Parkar as the companies’ directors in ways required by the Companies Act 1993 or the general law.
In order to sort that out, a combination of personal action by Ms Zhu and a derivative action brought by her in the names of the corporate defendants seems the avenue best designed to resolve the issue. For her to endeavour to launch liquidation proceedings requires her to elect that some if not all of her funds were for the purchase of shares in the corporate defendants, or investment in them, but that is antithetical to the stance she currently takes which is that most if not all of her funds were loans to the individual defendants, though in some cases for investment in the Similarly, s 174 proceedings may not be the best avenue to achieve the result she seeks and she would have to demonstrate that the companies’ affairs have been or are likely to have been conducted in an oppressive, unfairly discriminatory or unfairly prejudicial way as far as she is concerned. Those are substantial evidentiary hurdles and are coupled with the necessity for her to prove that the overall affairs of the companies have been conducted in a way which is “unjustly detrimental” to her (Thomas v H W Thomas Ltd [1984] 1 NZLR 686, 693).
The conclusion must accordingly be that it is in the interests of both Hat Factory and Classic Living for leave to be granted to Ms Zhu to bring a derivative action in their names against the individual defendants. There will be an order to Should either or both have been wound-up by creditors, there will need to be further argument as to the effect of that or those liquidations on the derivative proceeding. Leave is reserved to argue that issue should it arise.
Counsel not having argued the matter, within 14 days of delivery of this judgment, counsel are to file a memorandum dealing with whether the costs of the derivative action are to be met by the corporate defendants (s 166), either as the case proceeds or ultimately, and what conditions should be imposed on the granting of Freezing and Charging Orders
The application for freezing orders was brought under r 32.2. Authorities show the applicant must demonstrate a good arguable case and the risk of dissipation if the orders are not granted (McGechan on Procedure para HR32.2.01 p 1-3404 and In his submissions Mr Deliu again rehearsed contradictory aspects of the evidence. In particular he stressed the documentary evidence under which Mr Chen and Mr and Mrs Parkar accepted personal responsibility and may have made improper use of company assets. He was disparaging of their evidence that those documents were signed under duress. He submitted the individual defendants had consistently disguised the true financial position concerning the companies and there was a real risk, on the individual defendants’ own admission, that they were disposing of assets and, in Mr Parkar’s case at least, proposing to leave New Zealand. He particularly relied on the decision in An Ying International Financial Ltd v Li (HC AKL CIV-2004-404-6952, 9 December 2004, Winkelmann J) where the Judge made a freezing order on a bank account in the name of the defendant’s family trust. Similarly, in Allen v Allegra Corp Ltd (HC AKL CP1850/91, 9 March 1992, Tompkins J) a Mareva order was extended not just to a party to the proceedings but to third parties in possession or control of assets to which the party All defendants oppose the making of the order on the ground Ms Zhu had no tenable cause of action against them, and they had bona fide defences to any claim.
Mr Cunningham submitted there was no proof any of the defendants were removing, concealing or disposing of assets with the intention of defeating creditors or leaving New Zealand. Mr Cunningham argued there was no justification for making charging or freezing orders under any of the causes of action currently pleaded.
Mr Parkar’s absence from New Zealand was temporary and there was no evidence, he submitted, that any defendant would remove assets from New Zealand.
The following is clear from the evidence: As earlier discussed, the plaintiff has made available significant funds to the individual or corporate defendants.
The corporate defendants have ceased trading and may be under threat The corporate defendants’ financial position is parlous and the individual defendants claim to have lost significant sums of money as Mr Parkar is proposing to leave New Zealand to work overseas. Even if his initial absence is only temporary, if his quest for work is successful, it is clear he and his family intend to reside out of New The property owned by Mr Chen’s family trust is on the market and they are unable to meet the outgoings but they have also borrowed money from friends and family. Mr and Mrs Parkar’s equity in the Neither Mr Chen nor Mr or Mrs Parkar give any undertaking that any funds derived from the sale of assets owned by them or their trusts will be held or utilized towards meeting the plaintiff’s claims.
In all those circumstances, as far as Mr and Mrs Parkar are concerned, Ms Zhu must be held to have a reasonable cause of action against them having regard to the evidence. They are selling up their assets. There must be at least a reasonable prospect of them leaving New Zealand on a long-term basis. They give no undertaking which might give any assurance the proceeds of their asset sales in this country will be available to meet the plaintiff’s claims. There must accordingly be a risk of dissipation should no freezing order be made.
In those circumstances freezing orders will be made pending further order of the Court against all assets owned by Mr and Mrs Parkar or in the names of the trustees of any trust in which they are beneficially interested including the properties at 113 and 115 Rostrevor Street Hamilton and 16/201 Gore Street, Auckland, with the details of any assets qualifying under this order beyond those specifically mentioned being provided by affidavits by the second and third defendants to be filed and served within 14 days of delivery of this judgment (to the extent not As far as Mr Chen is concerned, the evidence suggests greater involvement on his part in the obtaining of Ms Zhu’s funds and greater potential responsibility.
He acknowledges having lost significant investments in the corporate defendants and being now in such reduced circumstances as to qualify for Legal Aid in relation to these proceedings. The family home owned by his trust is in the process of sale because the proprietors can no longer meet the mortgage. There is no offer by Mr Chen concerning retention of funds to meet what may turn out to be his liability In those circumstances the conclusion must be that Ms Zhu has made out an arguable course of action against Mr Chen and a reasonable risk that he and those associated with him will dissipate funds arising from the sale of assets.
There will accordingly be a freezing order issued against 70A Wheturangi Road, GreenLane, Auckland, extending to Mr Chen and the proprietors of that property and the trustees of any trust in which he has a beneficial interest. There appears no justification for extending that order beyond the Chen Family Trust home. The only other assets owned by Mr Chen in which he has an interest appear Within 14 days of delivery of this judgment Mr Chen is to file and serve an affidavit setting out all his other assets including bank accounts, investments and the like, and giving full details of the same (to the extent not provided since).
There is no justification for making a freezing order or charging order against the assets of the corporate defendants in light of the leave granted to Ms Zhu to bring Leave is reserved generally to the parties to apply should there be any difficulty in the implementation of the orders made.
Result and General
In the result, there will be orders in terms of this judgment, particularly Ms Zhu is entitled to costs against the individual defendants on a 2B basis, with disbursements as fixed by the Registrar. Leave is reserved to the parties to apply by memorandum (maximum 5 pages) in the event the quantum of this order Mr Cunningham applied for an order striking out the name of the sixth defendant, Ms Liao, Mr Chen’s wife. The application was made orally during the course of the hearing under r 4.56(2) which says that an order striking out a party However, the application was brought without prior notice to Mr Deliu and accordingly the Court was not prepared to entertain it at the hearing. But it is to be noted that the only factual allegation against Ms Liao in the claim is that she and Mr Chen asked Ms Zhu to lend them the first $100,000 on 4 November 2005 to assist them in buying a home. That may prove to be a somewhat insubstantial basis for retaining Ms Liao as a party to the proceeding. Ms Zhu may care to reconsider her position in that regard should an application be brought to strike out Ms Liao as a HUGH WILLIAMS J.
Solicitors:
Royal Reed & Associates, P O Box 305379 North Shore City 0757
Stephen R Anderson P O Box 932 Shortland Street, Auckland 1140
Copy for:
F C Deliu/Richard Zhao, Amicus Chambers, P O Box 76 899 Manukau City 2241
Brett M Cunningham, P O Box 3599 Shortland Street, Auckland 1140
Case Officer:

Source: http://justitiachambers.co.nz/wp-content/uploads/2013/01/13-Zhu_Civil_Corporate.pdf