NZ Causeway Bay International Trading Limtied v Wang
| Jurisdiction | New Zealand |
| Judge | Tahana J |
| Judgment Date | 20 September 2022 |
| Neutral Citation | [2022] NZHC 2411 |
| Docket Number | CIV 2019-404-000955 |
| Court | High Court |
[2022] NZHC 2411
Tahana J
CIV 2019-404-000955
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA
TĀMAKI MAKAURAU ROHE
Companies — claim for breach of directors duties — duty of directors to act in good faith and in best interests of company — powers to be exercised for proper purpose — misappropriating company funds for personal use definition of “director” — whether majority shareholder was entitled to relief as a prejudiced shareholder — Companies Act 1993
C Jiang for the Plaintiffs
This judgment was delivered by me on 20 September 2022 at 3.00pm Pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Mr Cao advanced funds to Ms Wang to establish a health supplements business in Mt Eden, Auckland. NZ Causeway Bay International Trading Ltd (Causeway Bay) was incorporated for this purpose with Mr Cao holding 70 per cent of the shares and Ms Wang 30 per cent. Despite Mr Cao being the sole director, Ms Wang assumed responsibility for the management and operation of the business.
Mr Cao and Causeway Bay (the plaintiffs) allege that Ms Wang used Causeway Bay funds to purchase stock for her own competing businesses, Hong Da Tong Ltd (HDTL) and Fresh Start NZ Ltd (Fresh Start). They also allege that Ms Wang spent Causeway Bay funds for her own purposes and diverted revenue owing to Causeway Bay to herself.
After commencing trading in February 2018, Causeway Bay ceased operating in May 2019. Causeway Bay owes monies to third parties and has negative equity. Mr Cao has not recovered any of his investment.
The plaintiffs seek judgment on a formal proof basis against Ms Wang. The issues to be determined are:
(a) Whether Ms Wang was acting as a de facto director and has breached her duties under ss 131 and 133 of the Companies Act 1993 (the Act) thereby causing loss to Causeway Bay; and
(b) Whether Mr Cao is entitled to relief under s 174 of the Act as a result of Ms Wang's conduct.
Mr Cao is a Chinese national and having previously visited New Zealand, in 2017, he decided to immigrate with his family. Ms Wang had lived in New Zealand for several years. At the time, she was the store manager at a health supplement store on Dominion Road in Mt Eden. Mr Cao met Ms Wang when shopping at this store.
In late 2017, Ms Wang and Mr Cao agreed to set up a health supplement store. Ms Wang would contribute her industry experience and Mr Cao would provide capital of $100,000. Causeway Bay was incorporated on 25 January 2018 for this purpose.
Unbeknown to Mr Cao, around the same time, on 31 January 2018, Ms Wang also incorporated Fresh Start. She was a 40 percent shareholder in, and a director of, that company.
In February 2018, Causeway Bay leased a shop at 467 Dominion Road, Mount Eden. It began trading the following month. Between January and May 2018, Mr Cao advanced funds ($210,000) and paid for stock ($83,036.99) for Causeway Bay.
Mr Cao did not speak English and was frequently in China. Mr Cao says he delegated his authority as a director to Ms Wang.
Ms Wang and Mr Cao were both signatories on the bank accounts of Causeway Bay. Initially Ms Wang provided bank statements to Mr Cao so he had visibility of the finances of Causeway Bay. This stopped after a couple of months.
Mr Cao deposes that he returned from China in April 2019 and visited the store. He says Ms Wang would not provide information as to the financial position of Causeway Bay. He says when visiting the store he became aware that Ms Wang had another store across the road trading as “Oceania Health Care Product.” This was the business of HDTL. HDTL was incorporated on 25 September 2018.
Mr Cao says he discovered that Ms Wang had displayed her own “Wechat Pay” barcode at Causeway Bay's store counter. This meant customers of Causeway Bay paid Ms Wang instead of the company. Mr Cao also contacted customers who provided payment confirmations showing that sales revenue owing to Causeway Bay was paid to HDTL.
Mr Cao also deposes that he located signed receipts at the Causeway Bay store which were signed by Ms Wang. The stock was not in the store. When Mr Cao confronted Ms Wang he says she admitted to using Causeway Bay's funds to pay for stock for HDTL. Mr Cao reported his concerns to the police.
Causeway Bay stopped trading on 23 April 2019. A final stock take disclosed stock valued at $20,925.66.
From May to July 2019 Mr Cao advanced further funds ($17,000) so Causeway Bay could pay creditors.
On 24 May 2019, the plaintiffs filed these proceedings. They obtained freezing and ancillary orders against Ms Wang and HDTL.
While Ms Wang initially defended the proceeding and filed a statement of defence, her solicitor applied to withdraw in January 2020 when Ms Wang returned to China.
The plaintiffs obtained non-party discovery and sought further discovery from Ms Wang and HDTL. When it became apparent Ms Wang was no longer defending the claim, the plaintiffs sought judgment by way of formal proof.
In support of the formal proof application, the plaintiffs filed an affidavit of Mr Cao and an affidavit from Ms Burson, a chartered accountant. Ms Burson has reviewed the discovered documents, prepared financial statements for Causeway Bay and has sought to determine how the funds of Causeway Bay were spent, as explained below.
The plaintiffs abandoned their claim against HDTL given the absence of documentation and financial information.
The remaining causes of actions against Ms Wang are breach of director duties and relief under s 174 of the Act as referred to at [4] above.
Ms Wang was employed by Causeway Bay as a “Shop Supervisor.” An undated one-page employment agreement has been provided to the Court. It does not specify Ms Wang's salary or include a job description, so I am unable to determine the scope of her duties in that capacity.
Ms Wang was not named as a director of Causeway Bay in the Companies Office register. However, Mr Cao deposes that he was away in China for much of the time and delegated his powers and responsibilities as a director to Ms Wang. He says Ms Wang effectively operated and controlled Causeway Bay. Ms Wang had access to the company's bank accounts, employed staff, procured stock and was responsible for the financial management of Causeway Bay.
The question, therefore, is whether in these circumstances Ms Wang was a “de facto director.”
A “director” is defined in s 126 of the Act, as follows:
126 Meaning of director
(1) In this Act, director, in relation to a company, includes—
(a) a person occupying the position of director of the company by whatever name called; and
(b) for the purposes of sections 131 to 141, 145 to 149, 291A to 293, 298, 299, 301, 318(1)(bb), 383, 385, 385AA, 386A to 386F, and clause 3(4)(b) of Schedule 7,—
…
(iii) a person who exercises or who is entitled to exercise or who controls or who is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; and
(c) for the purposes of sections 131 to 149, 291A to 293, 298, 299, 301, 318(1)(bb), 383, 385, 385AA, 386A to 386F, and clause 3(4)(b) of Schedule 7, a person to whom a power or duty of the board has been directly delegated by the board with that person's consent or acquiescence, or who exercises the power or duty with the consent or acquiescence of the board;
…
The circumstances in which a person may be considered a “de facto” director have been considered by this Court Delegat v Norman, as follows: 1
[31] … The concept of de facto director is confined to those who willingly or voluntarily take upon themselves the role, either by usurping the office or by continuing to act once their formal role has ceased. It does not extend to a person who does not willingly adopt the role of director.
[32] I accept the submissions of counsel for Mr Norman that in order to establish that a person is a de facto director of a company, it is necessary to plead and prove that he or she undertook functions in relation to the company that could properly be discharged only by a director. There needs to be clear evidence that the person was either the sole person directing the affairs of the company or if there were others who were true directors that he or she was acting on an equal footing with the others in directing the affairs of the company. If it is unclear whether the acts of the person are referable to an assumed directorship or to some other capacity, such as shareholder or consultant, the person must be entitled to the benefit of the doubt.
The manner in which the business was operated is consistent with Mr Cao's evidence that he spent much of his time in China and left Ms Wang to direct the affairs of Causeway Bay. While Ms Wang was an employee, she was also a shareholder and had access and control over the bank accounts of Causeway Bay. Ms Wang was also responsible for engaging external accountants and managing all of the company's affairs. I accept that she had full control and the authority that would ordinarily be discharged by a director.
In the above circumstances, Ms Wang was occupying the position of director and exercised control of Causeway Bay. I accept that Ms Wang was a “de facto” director within the meaning of s 126(1)(c) of the Act.
Section 131(1) of the Act provides that directors must act in good faith and in what the director believes to be the best interests of...
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