Huang & Lu v Matakana Wines Ltd & Waihopai Valley Vineyard Ltd

• Jurisdiction: New Zealand
• Judge: Duffy J
• Judgment Date: 02 March 2021
• Neutral Citation: [2021] NZHC 348
• Date: 02 March 2021
• Docket Number: CIV 2021-404-304
• Court: High Court

Between

Hongzhao Huang

First Plaintiff

Jieyu Lu

Second Plaintiff

Matakana Wines Limited

Third Plaintiff

and

Waihopai Valley Vineyard Limited

Defendant

[2021] NZHC 348

Duffy J

CIV 2021-404-304

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Civil Procedure — application for freezing and ancillary orders in order to preserve proceeds of sale — the plaintiffs were taking proceeds against the defendants seeking the return of funds — the defendant had sold its primary asset — whether there were assets to which the order could apply — whether there was real risk of dissipation

Appearances:

D J Friar and B J Ward for the Plaintiffs

D Cooper for the Defendant

JUDGMENT OF Duffy J

This reasons judgment was delivered by me on 2 March 2021 at 4.45 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar / Deputy Registrar

1 On Wednesday 24 February 2021, counsel for the plaintiffs brought an urgent without notice application for interim freezing and ancillary orders against the defendant (Waihopai). Mr Cooper appeared as counsel for Waihopai on a Pickwick basis. I delivered a result judgment granting the orders sought in the application to remain in force until 5 pm Monday 8 March 2021.

2 On Friday 26 February 2021, the plaintiffs made a further urgent without notice application for freezing and ancillary orders against Chris Chen, Don Chen, Yi Lu and the Chris Chen Family Trust. Mr Cooper appeared as counsel for Chris Chen on a Pickwick basis. There was no appearance on behalf of Don Chen (who resides in Australia) or Yi Lu. I delivered a result judgment granting the orders sought in that application with some amendments. Those orders were also to remain in force until 5 pm Monday 8 March 2021.

3 Later, on 26 February 2021, the plaintiffs obtained an urgent telephone conference with the Court, and made an urgent oral application for freezing and ancillary orders against Yang Qi, the wife of Yi Lu. Mr Cooper also attended this conference, but he did not represent Yi Lu or Yang Qi. I delivered a result judgment granting those orders, which were also to remain in force until 5 pm Monday 8 March 2021.

4 My reasons for granting the various orders now follow.

Background to 24 February application for freezing orders and ancillary orders

5 In 2019 the plaintiffs filed proceedings against Chris Chen seeking repayment of $2,376,261 (plus interest and costs) which they allege Chris Chen owes them personally (the Chen claim). 1

6 Chris Chen and Yi Lu are shareholders and directors of Waihopai. Don Chen is a shareholder of Waihopai.

7 The Chen claim is due to go to trial in this Court on 8 March 2021. As part of the trial preparation the plaintiffs received late discovered material and evidence briefs from Chris Chen. This information revealed that Chris Chen intends to argue that the funds from the plaintiffs were capital contributions paid to Waihopai rather than personal loans to him. The documents Chris Chen has recently discovered show Waihopai recorded the funds as loans it received from the plaintiffs. However, Chris Chen intends to argue that the payments were for equity. The plaintiffs now realise they will need to proceed against Waihopai as well, in case Mr Chen's defence that the funds were not advanced to him personally succeeds at trial.

8 Plaintiffs will ordinarily bring proceedings in the alternative against both the company and the shareholder/director where the status of the legal recipient of advanced funds is unclear. However, here, the plaintiffs have only recently been alerted to the possibility that they may be pursuing the wrong defendant. It is now too late to amend the Chen claim to include a cause of action against Waihopai as a defendant. Instead, the plaintiffs have brought the present proceeding against Waihopai alleging that the company has received at least $2,376,261 either by way of loans or money had and received from the plaintiffs.

9 The plaintiffs knew that Waihopai's primary asset was a 150 hectare plot of land in Marlborough (the Waihopai land). In the Chen claim, Chris Chen has disclosed a valuer's report valuing the Waihopai land at $13.15 million, as at 19 October 2020. The plaintiffs say that they only learned that Waihopai had settled the sale of this land on Friday 19 February 2021 when they received Chris Chen's brief of evidence in the Chen claim on 22 February 2021. Chris Chen had not previously disclosed the fact the property was for sale or the expected sale price.

10 The sale of Waihopai's primary asset caused the plaintiffs to believe there was a real and immediate risk that Waihopai could dissipate the proceeds of sale. Nothing the plaintiffs learned from the lawyers acting for Mr Chen allayed those concerns. Accordingly, the plaintiffs commenced this proceeding and sought interim freezing and ancillary orders to preserve the proceeds of the sale.

Requirements for freezing and ancillary orders

11 The key requirements applicants must establish to obtain freezing and ancillary orders are:

• (a) They have a good arguable case;

• (b) There are assets to which the order can apply; and

• (c) There is a real risk of dissipation.

Do the plaintiffs have a good arguable case?

12 There is evidence to show funds of $2,376,261 have moved from the plaintiffs to either Chris Chen or Waihopai. The annual accounts of Waihopai for 2019 and 2020 record those funds as loans from the plaintiffs, which at least is an acknowledgment Waihopai has received those funds.

13 Mr Cooper, who appeared for Waihopai on short notice and without time to prepare a notice of opposition or evidence in opposition, submitted that the plaintiffs could not argue that the same funds were due from Chris Chen in one proceeding and Waihopai in the other. Superficially, this argument may have some attraction. However, it overlooks the fact the plaintiffs have responded in this way to counter Chris Chen's defence, which is essentially that they are pursuing the wrong defendant in the Chen claim.

14 Mr Cooper also argued that the plaintiffs' funds were provided by them to secure an investment in Waihopai rather than as a loan. This submission is contrary to Waihopai's treatment of the funds in its annual accounts. Commercial parties are free to agree to financial arrangements which are later structured differently and involve associated corporate entities, which may explain why the plaintiffs believe their funds went to Chris Chen whereas Waihopai has treated the funds as a loan to it. In short, the plaintiffs can show their funds were provided either directly or indirectly to Waihopai, and Waihopai has not disputed this. The plaintiffs now seek the return of those funds. Chris Chen disputes any obligation to repay the funds.

15 Given that: (a) in this proceeding there is evidence to show Waihopai has recorded the funds from the plaintiffs as a loan in the annual accounts for 2019 and 2020; (which is an acknowledgment that Waihopai has received those funds); (b) Chris Chen's stance in the Chen claim that he is not personally liable to repay the funds to the plaintiffs, I am satisfied that in this proceeding the plaintiffs have a good arguable case to recover the funds either as a loan to wai, or in the alternative as money had and received by Waihopai.

16 Even if Mr Cooper is correct and the plaintiffs have provided the funds to acquire a beneficial interest in Waihopai shares, which is not something I have evidence to support, the conduct of Chris Chen and Yi Lu in the way they as directors of Waihopai have handled the proceeds of sale is consistent with self-dealing directors acting in their personal interests and in breach of their fiduciary duties to Waihopai. This conduct would entitle persons with a beneficial interest in Waihopai shares to take action to stop the dissipation of the sale proceeds. The plaintiffs, therefore, have an available answer to this ground of opposition.

Are there assets to which the orders can apply?

17 On 24 February 2021 there was no reason to believe that the freezing and ancillary orders could not apply to the proceeds of the Waihopai land sale, presumed to be held by Waihopai. Evidence that the sale proceeds were no longer in the Waihopai bank account did not become available until later and was not considered until the hearing on 26 February 2021. Accordingly, at the time the decision to grant the orders was made the assets requirement was found to be satisfied.

Is there a real risk of dissipation?

18 At the time the freezing and ancillary orders were made on 24 February 2021 the evidence of a real risk of dissipation could be inferred from the conduct of Waihopai's directors in deciding to sell the company's primary asset so close to the trial date of the Chen claim as well as the circumstances in which it was sold. Nothing was said to the plaintiffs about the sale until after it had occurred. The property was considered relevant to the Chen claim because the October 2020 valuation was discovered in that claim. This suggests that developments relevant to the property, particularly a plan to sell it and the execution of a sale and purchase agreement, should also have been discovered as they arose rather than after the sale was settled. The failure to disclose this information earlier on is consistent with Waihopai's directors wanting to deprive the plaintiffs of the opportunity to stop the sale of the property or to take steps to preserve the proceeds of its sale. As it is the plaintiffs have taken steps in this direction, but under urgency and therefore with more limited opportunity to prepare their case.

19 There was another concerning matter. When Mr Cooper appeared on instructions from Waihopai he could not inform the Court about: (a) the sale price; (b) the whereabouts of the proceeds of sale; or (c) proposed use of the proceeds....