TEMPEST LITIGATION FUNDERS LTD v ZHANG [2022] NZHC 170

TEMPEST LITIGATION FUNDERS LTD v ZHANG [2022] NZHC 170 [14 February 2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-1376[2022] NZHC 170BETWEEN TEMPEST LITIGATION FUNDERS LIMITEDPlaintiff/RespondentAND WEN FEN ZHANGFirst Defendant TENG MA Second Defendant TIAN TIAN Third Defendant XIANG ZOU Fourth Defendant Contd./2Hearing: 2 February 2022Appearances: W van Roosmalen for the Plaintiff / Respondent MSP Pang for the Fifth Defendant / ApplicantJudgment: 14 February 2022JUDGMENT OF GORDON JThis judgment was delivered by meon 14 February 2022 at 4 pm, pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors: Adam Stevenson Botterill, Auckland, for Tempest Litigation Funders LtdCounsel W van Roosmalen, Auckland, for Tempest Litigation Funders LtdMSP Pang, Auckland, for Kelly YinKELLY YINFifth Defendant/ApplicantSHUANG QINSixth DefendantDANIEL OVERTON GOULDING LAWYERSSeventh DefendantIntroduction[1] On 25 March 2021 I gave judgment in favour of the plaintiff, Tempest Litigation Funders Limited (Tempest) on a formal proof basis against the fifth defendant Kelly Yin (judgment).1[2] Ms Yin subsequently filed an application to set aside the judgment. 2 In the alternative, Ms Yin seeks an order staying enforcement of judgment pending appeal. 3Factual background[3] The factual background is set out in the following paragraphs of the judgment:Background[3] Paul and Shirley Coleman (landlords) were the owners of the premises [a commercial property] at all relevant times. On or around 18 September 2012, the landlords entered into a Deed of Lease (lease) with Raister Ltd (Raister). The lease is a standard Law Society Fifth Edition 2008 lease. The first defendant, Wen Fen Zhang,4 is recorded on the lease as guarantor.[4] On or around 30 September 2014, Raister assigned the lease to MTZJ Ltd (MTZJ) pursuant to a Deed of Assignment of Lease dated 30 September 2014. The second defendant, Teng Ma, is recorded on the Deed of Assignment of Lease as the guarantor of the assignee, MTZJ.[5] On 1 August 2016, MTZJ assigned the lease to Shineton Trading Ltd (now in liquidation) (Shineton) pursuant to a Deed of Assignment of Lease which is dated simply July 2016. The third defendant, Tian Tian, and the fourth defendant, Xiang Zou, are recorded on the Deed of Assignment of Lease as the guarantors of the assignee.[6] It is alleged that on 5 December 2017 the landlords provided instructions to the seventh defendant, the law firm Daniel Overton Goulding Lawyers (Daniel Overton), that the new tenants, under the July/August 2016 assignment would be required to provide personal guarantees in respect of the lease. It is also alleged that on 6 December 2017, Daniel Overton wrote to Wong & Bong, Lawyers, whom it is alleged were the solicitors for Ms Yin and the sixth defendant, Shuang Qin, requiring that they provide personal guarantees on the lease.1 Tempest Litigation Funders Limited v Yin [2021] NZHC 614.2 Under r 15.10 of the High Court Rules 2016. On 25 November 2021, the Court made an interim order staying enforcement of the judgment (above n 1) pending determination of the application to set it aside.3 Ms Yin has not yet filed an appeal in the Court of Appeal as she first pursues this application to set aside the judgment.4 The name on the lease is Wen Feng Zhang (a different spelling from the name recorded in the proceeding).[7] On 22 December 2017, the shareholdings and directorships of Shineton were amended on the Company Register. Tian Tian was removed as a shareholder and the new shareholders were Ms Yin and Shuang Qin. The Company Register also records that Ms Yin was appointed a director of Shineton on 22 December 2017. The other director is recorded as Xiang Zou (the fourth defendant) with the date of appointment as 18 July 2016.[9] Tempest says that on or about April 2018, Shineton defaulted on and breached the lease by non-payment of rent, rates, and by failing to maintain the premises.[10] On 11 June 2019, the landlord assigned to Tempest all rights, title, and interest in the amount said to be owing (the debt) under the lease pursuant to a Deed of Assignment dated 11 June 2019.[11] On 27 September 2019, Shineton was placed into liquidation by order of the High Court at Auckland. Digby Noyce of Auckland was appointed liquidator.[12] Tempest says that as at 31 December 2019, the total amount owing to the landlords as a result of the alleged default on and breaches of the lease, is at least $133,227.49 (the debt). Tempest says this is made up of the following:(a) Non payment of rent in the sum of $106,140.12; and(b) Other costs and losses incurred by the landlords due to damage and the tenants' failure to maintain the premises in the sum of $27,087.37.Formal proof hearing[4] At the formal proof hearing Mr van Roosmalen for Tempest submitted that transfer of shareholdings to Ms Yin and Shuang Qin (and change of directorship to Ms Yin) was a deemed assignment of the lease to Ms Yin and Shuang Qin by the operation of cl 34.3 of the Lease. That clause reads as follows:34.3 WHERE any Tenant is a company which is not listed on the main board of a public stock exchange then any change in the legal or beneficial ownership of its shares or issue of new capital whereby in either case there is a change in the effective management or control of the company is deemed to be an assignment of this lease.[5] I accepted that submission and held that Ms Yin, as an assignee, was therefore liable under the terms of the lease. 55 At [19] - [20].[6] I then considered the individual sums claimed and found that Tempest had established a claim in the sum of $111,439.75. That was made up of $106,140.55 for rental arrears and $5,299.20 for labour for repairs to the premises. 6 I gave judgment in favour of Tempest against Ms Yin in the sum of $111,439.75. 7Application to set aside judgment – the law[7] Rule 15.10 of the High Court Rules 2016 (HCR) provides:15.10 Judgment may be set aside or variedAny judgment obtained by default under rule 15.7, 15.8, or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.[8] Although the r 15.10 discretion is unfettered and the Court is not limited in the considerations to which it may have regard, in circumstances where the judgment was regularly obtained (as Ms Yin accepts it was) there are three considerations long considered of dominant importance: 8(a) Whether the defendant has a substantial ground of defence;(b) Whether the defendant's failure to take any steps earlier is reasonably explained; and(c) Whether the plaintiff will suffer irreparable harm if the judgment is set aside.[9] In Caltex Oil (NZ) Ltd v McIntosh, after considering the above three factors, Eichelbaum J said: "I now have to stand off and consider the question of miscarriage of justice in a broad way".96 At [23].7 At [24].8 Andrew Beck and others (eds) McGechan on Procedure (online ed, Thomson Reuters) at [HR15.10.05].9 Caltex Oil (NZ) Ltd v McIntosh, HC Napier, CP123/87, 10 November 1988 at 7.[10] The defendant bears the onus of establishing that she has a substantial ground of defence. 10 In Sandall v Cardno, Hardie Boys J expressed the test as whether the defendant has a defence which ought to be heard.Is there a substantial ground of defence?[11] The Deed of Lease of 18 September 2012 (lease) was in the Auckland District Law Society (ADLS) standard form of Deed of Lease.[12] Clause 34 deals with assignment or subletting. I set out the parts of clause 34 that relate to assignment:ASSIGNMENT OR SUBLETTING34.1 THE Tenant shall not assign sublet or otherwise part with the possession of the premises or any part thereof without first obtaining the written consent of the Landlord which the Landlord shall give if the following conditions are fulfilled:(a) The Tenant proves to the satisfaction of the Landlord that the proposed assignee or subtenant is (and in the case of a company that the shareholders of the proposed assignee or subtenant are) respectable responsible and has the financial resources to meet the Tenant's commitments under this lease;(b) All rent and other moneys payable have been paid and there is not any subsisting breach of any of the Tenant's covenants;(c) In the case of an assignment a deed of covenant in customary form approved or prepared by the Landlord is duly executed and delivered to the Landlord;(d) In the case of an assignment to a company (other than a company listed on the main board of a public stock exchange) a deed of guarantee in customary form approved or prepared by the Landlord is duly executed by the principal shareholders of that company and delivered to the Landlord; and(e) The Tenant pays the Landlord's reasonable costs and disbursements in respect of the approval and the preparation of any deed of covenant or guarantee and (if appropriate) all fees and charges payable in respect of any reasonable inquiries made by or on behalf of the Landlord concerning any proposed assignee subtenant or guarantor. All such costs shall be payable whether or not the assignment or subletting proceeds.10 Pioneer Farms Ltd v Stoddart [2012] NZHC 3114 at [24] applying Sandall v Cardno, HC Blenheim, 2/87, 10 June 1987 at 3.34.3 WHERE any Tenant is a company which is not listed on the main board of a public stock exchange then any change in the legal or beneficial ownership of its shares or issue of new capital whereby in either case there is a change in the effective management or control of the company is deemed to be an assignment of this lease.[13] Mr Pang, for Ms Yin, submits that it is the change of shareholding event that constitutes a deemed assignment of lease for the purpose of subcl 34.3 of the lease. He submits subcl 34.3 does not result in a deemed assignment of lease to a shareholderin personam.[14] Mr van Roosmalen, for Tempest, sought to uphold the judgment. He submits subcls 34.1 to 34.3 are not mutually exclusive and the common-sense interpretation of the clause is to ensure the landlord has remedies against a new tenant in case of a breach of the lease. He submits it would be impossible for a landlord to have to permit a deemed assignment of which they have no knowledge potentially leaving the landlord without remedy against a tenant in respect of whom they have no visibility.Discussion[15] There is limited case law which considers the interpretation of cl 34 (or its equivalent). However, the way in which these decisions address the relationship between subcls 34.1 and 34.3 provides some assistance.[16] In Reddington v Hieber, Associate Judge Doogue discussed the relationship between the same clauses in an earlier version of the ADLS standard form Deed of Lease, saying: 11[12] Clause 35.1 to 35.412 were provisions of the lease which were concerned with assignment of letting. Clause 35.1 stated that the tenant shall not assign, sublet or otherwise part with the possession of the premises or any part thereof without first obtaining the written consent of the landlord which the landlord "shall give" if a number of conditions were fulfilled. These included that the proposed assignee or sub-tenant was a suitable person, that the rent was up to date, that in the case of assignment a deed of covenant "in customary form" is executed and delivered to the landlord and that in the case of assignment to a company that "a deed of guarantee in customary form11 Reddington v Hieber, HC Auckland CIV-2009-404-7524, 17 December 2010 at [12].12 Identical to subcls 34.1 to 34.4 in the later ADLS standard form Deed of Lease which was used in this case.approved or prepared by the Landlord" is duly executed by the principal shareholders of that company and delivered to the landlord. Clause 35.4 dealt with a situation where there was a change of ownership of the company. In summary it provided that any change in the legal or beneficial ownership of the shares of the company or a change in the effect of management or control of the company were deemed to amount to assignments of the lease. The effect of clause 35.4 was that if the events such as change of ownership of shares occurred then an assignment was deemed to have taken place. That in turn would trigger the provisions of clause 35.1.(emphasis added)[17] The Court in Reddington was concerned with whether the requirement for the landlord's consent was triggered by a change in ownership caused by the guarantor's death and whether the guarantee, contained in a bespoke clause in the lease, would be discharged. On appeal, the Court of Appeal upheld the Associate Judge's interpretation and held that: 13Whenever the change of ownership of shares in RWS occurred, it was a deemed assignment.Written consent of the P&L Trust (ie the Landlord) was required [18] The effect of this interpretation was that the circumstances governing the change of ownership of shares was not relevant to whether or not an assignment was deemed. Further, once deemed, the assignment triggered the requirements contained in subcl 35.1.[19] In Detour Clothing Ltd v Star Five Ltd, 14 Heath J considered the relationship between two clauses in a lease agreement which used substantially the same wording as the standard form lease used in this case. Relevantly, Heath J considered that a conceptual difference existed between the deliberate assignment of a lease from one entity to another, and the deemed assignment which was triggered by a change in the legal or beneficial ownership of shares. The latter circumstance "assumes that the corporate tenant remains in occupation, but with a different person (or persons) having the effective management or control of its business". 1513 Hieber v Reddington [2011] NZCA 679 at [42].14 Detour Clothing Ltd v Star Five Ltd [2017] NZHC 1172.15 At [50].[20] Heath J went on to say:[51] The use of the term "deemed assignment" ... has the potential to conflate the different types of arrangements to which [the relevant clauses] apply. I accept that the term appears to have been used loosely in other Court decisions in which it was unnecessary to distinguish the concepts. ... In my view, while the term "deemed assignment" might be regarded as a useful shorthand expression in cases where there is no real difference between the two situations, it has the potential to create confusion in a case such as this.[21] In the present case, the difference between a deliberate assignment under subcl 34.1 and a deemed assignment triggered by a change of shareholders under subcl 34.3 may be relevant to whether Ms Yin has an arguable defence. The assignment of a lease under subcl 34.1 requires a transfer from one entity to another. The lease was assigned from MTZJ to Shineton on 1 August 2016 in this way. However, (contrary to my decision in the judgment) Ms Yin may be able to argue that when Shineton amended its shareholdings on 22 December 2017, the lease was effectively transferred between Shineton under its original shareholder and director structure, to Shineton under a new structure. In other words, it was not an assignment to her as a shareholder.[22] There is no suggestion in the above cases or in the wording of the clauses that the "deemed assignment" would be an assignment to the new shareholders. Rather, the change of shareholders is itself deemed to be an assignment which (on the view expressed by Associate Judge Doogue in Reddington v Hieber) 16 brings subcl 34.1 into operation. The purpose of deeming an assignment under subcl 34.3 is to enable the lessor to take steps to protect its own interests by engaging the consent requirement set out in subcl 34.1. While Heath J took a different view on the latter point, that may be explicable by a bespoke addition to the standard clause regarding landlord's consent. But in neither case was there a suggestion that a deemed assignment operated so that the lease was assigned to the new shareholders.[23] For these reasons, I accept that Ms Yin has a defence which ought to be heard.[24] Mr Pang also raised an alternative defence, namely that Ms Yin was never a guarantor as she had not signed a guarantee which had been requested by the landlords.16 Above n 11.At the formal proof hearing, Tempest did not seek to advance its case on the basis that Ms Yin was a guarantor.17 Similarly, at the hearing of the application to set aside judgment, Tempest accepted that Ms Yin had not signed the proposed guarantee. It is therefore not necessary to address the defence that she was not a guarantor.Is Ms Yin's failure to take any steps earlier, reasonably explained?[25] Ms Yin in her affidavit in support of her application relies on two broad grounds:(a) Her "illiteracy in the English language"; and(b) Reliance on the advice of her former solicitor.[26] A brief chronology of events relevant to this consideration follows. Damien Grant, who swore two affidavits on behalf of Tempest in opposition, says that on 20 June 2019 Tempest wrote to Ms Yin demanding an immediate payment of $88,338.19. The demand was said to be pursuant to the Deed of Assignment of Lease dated 1 August 2016 and the assignment of debt to Tempest. The letter encloses a copy of the Notice of Assignment of Debt and Security dated 11 June 2019.[27] Ms Yin denies receiving the letter. Even if Ms Yin in fact received the letter, both the Notice of Assignment of Debt and Security and the letter refer to Ms Yin as a guarantor under the lease. The demand is made on the alleged basis that she had guaranteed all Shineton's obligations under the lease. However, as already noted above, although the landlord, through solicitors, had sought a guarantee from Ms Yin, she did not sign a guarantee.[28] On 30 April 2020, Mr van Roosmalen, as (then) in-house counsel for Tempest, sent an email attaching a draft statement of claim and list of documents to solicitors which Tempest believed acted for Ms Yin. The email refers to the liability of guarantors of the lease. There is no evidence of any response from those solicitors.17 At [16].[29] On 11 May 2020, Ms Yin sent an email to Mr van Roosmalen which states:I'm sorry, I couldn't get a lawyer to help me during the lockdown. My current lawyer won't be available until June. I hope you can make some adjustments to extend the reply time to June.[30] Ms Yin says she typed this response in Chinese using a free on-line automatic translator. She says she did so without any context or knowledge of what had been sent to her by the solicitors who received the 30 April 2020 email from Tempest.[31] On 22 May 2020, solicitors Wong & Bong wrote to Tempest. They confirmed that they acted for Ms Yin and that they had read: the Deed of Lease dated 18 September 2012; the Deed of Assignment of Lease dated 30 September 2014; the Deed of Assignment of Lease dated 1 August 2016; and the draft statement of claim. The letter asserted that it was clear that Ms Yin had never been a party to the lease and concluded with the following request: "Please remove our client from the debt collection".[32] On 9 September 2020, Tempest effected service by email on Wong & Bong of: Notice of Proceeding and Statement of Claim, both dated August 19 August 2020; list of documents for initial disclosure; and a letter to Ms Yin dated 9 September 2020. Only the covering email was annexed to Mr Grant's affidavit.[33] On 14 September 2020, Wong & Bong, solicitors, responded by email to Tempest stating that they did not have the authority to accept service of the proceedings. They further stated that Tempest was welcome to serve the documents directly on Ms Yin. As a consequence, also on 14 September 2020, Mr van Roosmalen sent an email to Ms Yin advising that he was one of the solicitors for Tempest and that they had some documents for service on her. He asked Ms Yin to give him a telephone call to discuss the situation. Mr Grant says that Tempest engaged a process server to serve Ms Yin with the documents personally, because she did not respond.[34] On 2 November 2020, a process server for Tempest served Ms Yin personally with the notice of proceeding, statement of claim, list of documents for initial disclosure and bundle of documents for initial disclosure.[35] Ms Yin did not respond. On 24 March 2021, Tempest's formal proof application was heard in this Court. On 1 April 2021, Tempest obtained a sealed copy of the judgment and sent it to Ms Yin's email address.[36] Ms Yin says that following discussions (in Mandarin) with two solicitors at Wong & Bong she was given to understand that:(a) It was impossible for Tempest to claim against her;(b) She was never a party to the lease and that she was neither a tenant or assignee nor a guarantor at any time;(c) The solicitors would via their legal correspondence remove her from any civil claims that could be made by Tempest against her personally; and(d) If she ever received any demand letters from Tempest, not to worry about them.[37] Ms Yin refers to the 22 May 2020 letter from Wong & Bong and says she believed that it had the effect of removing her from any civil claims that Tempest could make against her personally. This belief was supported by the last paragraph, which said: "Please remove our client from the debt collection".[38] Ms Yin says that for many months after Wong & Bong sent the 22 May 2020 letter, she heard nothing from Tempest. She says that some time in November 2020 a man handed her a stack of papers. She said she could see a red-coloured English word which seemed to match the logo of what she believed to be Tempest. Ms Yin says she looked at the cover sheet and her name was not there (Ms Yin's name appears as fifth defendant on a second page). Ms Yin says it seemed that Tempest was only pursuing the three defendants on the cover sheet.[39] In reliance on the advice of the solicitors from Wong & Bong, she ignored the documents, believing them to be a "long-winded Letter of Demand to harass [her]".Ms Yin says it did not cross her mind that they were Court documents as she believed her lawyers had removed her from the civil claims procedure as previously discussed.[40] Ms Yin says that in late August 2021, someone dropped a document in the front yard of her house. She said it had the Tempest logo on it and there was a seal. On 27 September 2021, two days after the COVID-19 alert level for the Auckland region dropped to Level 3, Ms Yin says she called the Court's telephone number with the help of her sister who speaks "a bit of English, but barely". She said she then called Wong & Bong and emailed photos of each page of the document to one of the solicitors. She now knows this document was the sealed order of the Court. She says she was extremely concerned and called the solicitor a total of 18 times between 27 September and 13 October 2021, but he never gave her any response of substance. In the week ending 22 October 2021 Ms Yin retained her current legal representatives. She filed her application to set aside the judgment on 26 October 2021.[41] Mr van Roosmalen submits that Tempest did everything possible to bring the proceedings to Ms Yin's attention and that given the substantial volume of documents contained within the initial disclosure, it is not credible to say Ms Yin thought it was merely a demand letter from Tempest.[42] However, in the absence of cross-examination, the Court is left with Ms Yin's sworn statement that she believed she had been removed from the civil claim, given what she had been told by her lawyers. Her explanation is not so incredible that the Court is able to reject it out of hand without having the evidence tested.[43] In relation to Ms Yin's statement that she is illiterate in the English language, Mr van Roosmalen refers to email communications from Ms Yin annexed to the evidence of Mr Coleman, one of the landlords. However, there is Ms Yin's evidence regarding her use of an on-line translation tool which translates a communication typed in Mandarin into English. It is common ground that Ms Yin had the assistance of an interpreter at all in-person meetings with the landlord.[44] The proceeding was served on Ms Yin on 2 November 2020. It was almost a year later that Ms Yin filed the current application, on 26 October 2021. The delay islengthy. However, Ms Yin gives an explanation for the delay. It is also apparent that when she became aware that she had been served with a sealed order of the Court, she acted promptly to apply to set aside the judgment. In all the circumstances, the delay, while lengthy, is excusable.Will the plaintiff suffer irreparable harm if the judgment is set aside?[45] Mr van Roosmalen submits that significant time and expense has already been incurred in obtaining judgment and enforcement against Ms Yin to remedy breaches of the lease and subsequent losses incurred by the landlords.[46] However, Ms Yin is not the only defendant in this proceeding. There are six other defendants, including guarantors and a firm of solicitors. The substantive proceeding against those other defendants is still in the discovery stage. Ms Yin says she has a statement of defence ready to file. If the judgment is set aside, Tempest will be in the same position in relation to Ms Yin as it is in relation to the other defendants. In all those circumstances, there would be no irreparable harm to Tempest if the judgment were to be set aside.[47] For completeness, I note that Mr Pang criticised both submissions that were made at the formal proof hearing and evidence that was before the Court at that time. Tempest strongly rejected those criticisms. It is not necessary for me to address them in this judgment as I have been able to determine the issue of irreparable harm on the basis set out above.Overall conclusion[48] Standing back and considering the question of miscarriage of justice in a broad way, I consider this is a case where the judgment should be set aside. Ms Yin has a defence to Tempest's claim which ought to be heard; her delay in responding to the service of the proceeding on her is lengthy, but excusable; and there will be no irreparable harm to Tempest if the judgment is set aside.Result and Orders[49] Ms Yin's application to set aside the judgment in Tempest Litigation Funders Ltd v Yin [2021] NZHC 614 is granted.[50] I direct Ms Yin to file and serve her statement of defence forthwith.Costs[51] Although Ms Yin has been successful, her application was only required because of her default. I leave it open to Ms Yin to make an application for costs, but indicate my preliminary view that this may be a case where costs should lie where they fall. Any such application should be made within 10 working days of the date of this judgment. Tempest may reply within a further 10 working days. I will determine costs on the papers.________________________________Gordon J