LIAO v ZHENG [2020] NZHC 920

LIAO v ZHENG [2020] NZHC 920 [6 May 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-002148[2020] NZHC 920BETWEEN HONGBING LIAOPlaintiffAND CHAO ZHENG (AKA PETER CHAOZHENG)DefendantHearing: 20 April 2020Appearances: R Rao for PlaintiffK Sun for DefendantJudgment: 6 May 2020JUDGMENT OF ASSOCIATE JUDGE P J ANDREWThis judgment was delivered by Associate Judge Andrewon 6 May 2020 at 3.00 pmpursuant to r 11.5 of the High Court RulesRegistrar / Deputy RegistrarDate..Introduction[1] The plaintiff, Mr Liao, seeks summary judgment against the defendant,Mr Zheng, for recovery of $457,760.06 (plus interest and costs) pursuant to aguarantee under a general security agreement (GSA). Mr Liao claims that he paid themonies by way of a shareholder's advance (the advance) to Good Value Group Ltd(GVG Ltd), a company formed by the parties in October 2012, as the vehicle throughwhich Mr Liao would become a partner in Mr Zheng's existing door-to-door salesbusiness.[2] Mr Zheng opposes summary judgment on the grounds that the documentssigned by the parties were a sham, and that they are thus void and did not reflect themutual intention of the parties. Mr Zheng alleges dishonest conduct by Mr Liao. Hesays that Mr Liao claims to have acquired a 50 per cent stake in his business withoutpaying any purchase price to him. Mr Zheng also relies on the defence of non estfactum.[3] The critical issue I must determine is whether the defences of Mr Zheng are soinherently improbable and/or lacking in credibility that I can safely conclude thatMr Liao, as the plaintiff, has demonstrated that Mr Zheng has no defence to the claim.Factual background[4] Mr Zheng was the sole beneficial owner of Good Value Import Ltd, a companyincorporated in January 2009. The business owned several trucks outfitted to bemobile retail stores selling consumer goods such as electronics and clothing. Whetherthe business was profitable is in dispute.[5] Mr Zheng says that on or about October 2012 he and Mr Liao verbally agreedthat Mr Liao would purchase a 50 per cent stake in the business for the purchase priceof $200,000 (the verbal agreement).[6] On 30 October 2012, the parties signed a Shareholders' Agreement and theGSA. The documents were prepared by a solicitor, Mr Kevin Lo.[7] The recital to the Shareholders' Agreement reads:The parties propose:A. Forming a company, to be known as Good Value Group Ltd ("thecompany") for the purposes of carrying out a door-to-door sale andhire purchase business;B. The parties wish to record their agreement on certain matters relatingto their respective shareholdings in the company.[8] Clause 5.1 reads:5 Shareholder Advances5.1 Each party shall, on the commencement date, contribute to thecompany in the following manner:(a) For Harvey (Liao): by way of shareholder advance the sum of$200,000 secured by general security agreement pursuant tocl 4.1(b), copy attached; and(b) For Peter (Mr Zheng): by way of transferring all businessassets (tangible and intangible assets included) specified inthe first schedule under the ownership of Good Value ImportLtd ("assets") in which Peter is one of the shareholders, whichis agreed to be valued at $200,000.[9] Clause 5.2 of the Shareholders' Agreement provided that if GVG Ltd's revenuegenerated in the first year of business did not reach $1.5m, then the advance would berepaid immediately to Mr Liao.[10] The GSA provided as follows:A. It defined the secured money as all monies at the time of theagreement by the company to Mr Liao or at any time in the future;B. Provided that the company would pay the secured money to Mr Liaoas provided by a secured agreement, and to the extent that there wasno such agreement, then upon demand;C. Provided that events of default included the company failing to paythe secure money when due or the appointment of receivers or aliquidator, and that in the event of default Mr Liao would be entitledto appoint a receiver.[11] Mr Zheng signed the GSA as a guarantor of GVG Ltd's obligations to Mr Liao.[12] On 31 October 2012, Mr Liao transferred $200,000 to Mr Zheng's personalbank account. Mr Zheng says this was the purchase price following the verbalagreement earlier that month.[13] Between November 2012 and July 2013, both parties say they investedadditional funds into GVG Ltd. Mr Liao says that the additional investment by him,totalling $200,000, was in fact a secured loan. Mr Zheng disputes that and claims hematched Mr Liao's investment "dollar for dollar".[14] On 15 January 2014, Mr Liao's solicitors wrote to Mr Zheng raising concernsabout how Mr Zheng was conducting the business. They alleged that a number of thebusiness practices being employed were "potentially unlawful", including the upliftingof critical company records and acting contrary to the provisions of the Shareholders'Agreement by applying some of the initial shareholder advance of $200,000 forMr Zheng's own purposes.[15] On 29 January 2014, Mr Liao served a notice of demand on GVG Ltd andMr Zheng demanding repayment of the advance and his additional investments, whichwere claimed at that time to be in the amount of $400,000.[16] On 6 March 2014, Mr Liao appointed a receiver to GVG Ltd pursuant to theGSA.[17] On 17 April 2014, a new company, Better Life Corporation Ltd (Better Life),was incorporated with Mr Liao as its majority shareholder and sole director.[18] On 13 May 2014, Better Life acquired all of the assets of GVG Ltd for$130,000 (by way of off-setting the shareholder advances).[19] On 7 September 2015, GVG Ltd was placed into liquidation at the instigationof Mr Liao.[20] The summary judgment amount Mr Liao seeks, namely $457,760.06, includesa sum of $270,000 for "the outstanding amount of advances". Mr Liao says that thepurchase price of $130,000 Better Life paid to acquire GVG Ltd's assets was by wayof a corresponding reduction to the debt GVG Ltd owed him (and thereby reduced theoutstanding amount of the advances from $400,000 to $270,000).Relevant legal principles[21] Rule 12.2(1) of the High Court Rules 2016 provides:The court may give judgment against a defendant if the plaintiff satisfies thecourt that the defendant has no defence to a cause of action in the statement ofclaim or to a particular part of any such cause of action.[22] The relevant principles are summarised in Krukziener v Hanover Finance Ltd:1[26] The principles are well settled. The question on a summary judgmentapplication is whether the defendant has no defence to the claim; that is, thatthere is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1(CA) at 3. The court must be left without any real doubt or uncertainty. Theonus is on the plaintiff, but where its evidence is sufficient to show there is nodefence, the defendant will have to respond if the application is to be defeated:MacLean v Stewart (1997) 11 PRNZ 66 (CA). The court will not normallyresolve material conflicts of evidence or assess the credibility of deponents.But it need not accept uncritically evidence that is inherently lacking incredibility, as for example where the evidence is inconsistent with undisputedcontemporary documents or other statements by the same deponent, or isinherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at341. In the end the court's assessment of the evidence is a matter of judgment.The court may take a robust and realistic approach where the facts warrant it:Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA).[23] In Gardner v Gardner, Associate Judge Osborne also summarised the relevantconsiderations in relation to issuing summary judgment. These include:2(a) Common-sense, flexibility and a sense of justice.(b) In determining whether there is a genuine and relevant conflict of facts,the Court is entitled to determine and reject spurious defences or plainlycontrived factual conflict. It is not required to accept uncritically every1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.2 Gardner v Gardner [2015] NZHC 2018 at [20].statement put before it, however equivocal, imprecise, inconsistent withundisputed contemporary documents or other statements, or inherentlyimprobable.(c) In assessing a defence, the Court will look for appropriate particularsand a reasonable level of detailed substantiation. The defendant isunder an obligation to lay a proper foundation for the defence in theaffidavits filed in support of the notice of opposition.(d) In weighing these matters, the Court will take a robust approach andenter judgment even where there may be differences in certain factualmatters if the lack of a tenable defence is plain on the material beforethe Court.(e) The need for judicial caution in summary judgment applications has tobe balanced with the appropriateness of a robust and realistic judicialattitude when that is called for by the particular facts of the case.Analysis and decision[24] The parties have completely different versions and interpretations of thetransactions in dispute. Mr Zheng's version is fundamentally inconsistent with thewritten documentation including, importantly, the shareholders' agreement and theGSA.[25] Mr Zheng claims that the loans/advances at issue are a sham and arise from thedishonest conduct of Mr Liao. This gives rise, so he says, to the following defences:(a) A right to cancel the shareholders' agreement and GSA in accordancewith s 37 of the Contract and Commercial Law Act 2017 (CCLA)because Mr Zheng was induced to enter the documents by Mr Liao'smisrepresentation.(b) A right to cancel the documents because Mr Liao, being in trade,engaged in misleading and deceptive conduct contrary to ss 9 and 43 ofthe Fair Trading Act 1986.(c) In accordance with ss 24 and 28 of the CCLA, Mr Zheng is entitled tocancel the documents because he was induced to enter them by amistake known to the plaintiff and which resulted in a substantiallyunequal exchange of values.(d) In accordance with the doctrine of non est factum, the documents arevoid because they are substantially different to the agreements that theparties entered into.[26] Central to the defences advanced, which Mr Sun accepted are essentiallyallegations of fraud, is the claim by Mr Zheng that the agreements reflected in thedocuments are so commercially bizarre and oppressive that it is inherently unlikelythat they reflect the agreement of the parties.[27] Mr Sun submitted that the commercially bizarre and oppressive arrangementsrecorded in the documents is demonstrated by the diagrams and explanation below.[28] Mr Zheng asserts that he sold a 50 per cent stake in his business to Mr Liao for$200,000, which was then transferred to Mr Zheng's personal bank account. Thecontractual benefit to both parties under this transaction can be demonstrated asfollows:Benefit to Mr Zheng Benefit to Mr LiaoReceipt of $200,000 as thepurchase priceAcquisition of a 50% stake in thebusiness[29] However, and by contrast, Mr Liao asserts that he acquired a 50 per cent stakein the business by lending $200,000 to GVG Ltd, which was secured by the assets ofthe company, and guaranteed by Mr Zheng. The contractual benefit to both partiesunder this alleged transaction can be demonstrated as follows:Benefit to Mr Zheng Benefit to Mr LiaoNothing, as Mr Zheng gaveaway 50% ownership in thebusiness for freeAcquisition of a 50% stake inthe businessInterest on the loan of $200,000as well as further advancesMinimal risk on the loan(s)because of security over thecompany's assets and guaranteeby Mr Zheng.[30] Mr Sun then submitted that under the transactions recorded in these documents(upon which Mr Liao relies), Mr Liao was able to acquire a 50 per cent stake in thebusiness from Mr Zheng, whilst retaining the ability to demand repayment of hisinvestment from Mr Zheng. On this basis, and in contrast to ordinary corporatetransactions (including a convertible note), Mr Liao was able to become an equityowner whilst retaining all of the rights and protections of a lender. Moreover, Mr Liaowas able to effectively acquire a 50 per cent stake in GVG Ltd without paying anypurchase price to Mr Zheng.[31] It was further contended by Mr Sun that the net effect of the receivership meantthat Mr Liao was able to acquire 100 per cent of the assets of the business (includingthe $200,000 cash injected by Mr Zheng into the company) without paying anypurchase price whatsoever.[32] I accept that there are good reasons to be sceptical of Mr Zheng's claims anddefences, and that it is necessary to look critically at the evidence. However, the testis not one of mere scepticism but rather, as Mr Rao acknowledged, whether there is a"plainly contrived factual conflict that should not be permitted to muddy the waters ofwhat is claimed to be a straightforward summary judgment application to which thereis no reasonably arguable defence".[33] Where, as here, there are allegations of fraud dependent on findings ofcredibility, the Court must obviously tread carefully. Equally, allegations of fraud ordishonesty are very serious and should not be advanced by counsel unless they havereasonably credible material to establish a prima facie case.3 Ultimately, however, theburden of establishing a lack of defence rests with the plaintiff.[34] Mr Zheng says that Mr Liao exploited his poor English ability and misled himto believe that the documents accurately reflected their purchase agreement. He alsosays his first company was profitable, and had Mr Zheng simply wanted to borrowmoney, he would have approached third-party lenders without having to give away a50 per cent stake in his business for nothing.[35] In response, Mr Rao contended that the documents, reflecting a fundamentallydifferent arrangement, make it clear that the business was in financial difficulty andthat the agreements are not in any way bizarre or oppressive, as alleged. The partieswere not known to each other and it is undisputed that Mr Liao responded to anadvertisement on a Chinese community website. Mr Liao naturally required securityfor his advances. It is apparent from cl 5.5(a) of the shareholders' agreement the firstcompany was in financial difficulty and that part of the advance was for rescuing itsbusiness assets, with a view to transferring them to the GVG Ltd, which the partieshad agreed to set up.[36] I accept the allegations of fraud are based largely on the alleged bizarre andoppressive nature of the agreements recorded in the documentation. However, I findthat I cannot safely conclude that Mr Zheng's claims of dishonesty and fraud are soimplausible or untrustworthy that they cannot succeed. The fundamental problem forMr Liao is that too many of the critical facts are in dispute and, ultimately, it will benecessary for all of this evidence to be tested at trial. The matters in dispute include:(a) The question of whether the business was in financial difficulty at thetime of the various agreements;(b) the role of Mr Kevin Lo, the solicitor who drafted the documentation;(c) the nature and details of the advertisement placed by Mr Zheng on theChinese community website;3 Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].(d) the reasons why the advance was paid by Mr Liao to Mr Zheng'spersonal bank account; and(e) whether, as alleged, Mr Zheng was a relatively experiencedbusinessman who, in a Chinese cultural context, placed significantweight on the strength of Mr Liao's word and placed no importance onthe written contractual documentation – except as an assurance that itaccurately reflected their mutual intention.[37] In addition to the factual matters in dispute, there is arguably some uncertaintyarising on the face of the documents, which should properly be tested at trial. Thisincludes:(a) The absence of any express clause in the Shareholders' Agreementstating that the parties are to be 50 per cent shareholders in thecompany; and(b) the absence of an express clause in the Shareholders' Agreementproviding that, in the event that GVG Ltd did meet its targets, theshareholder advances would not be repayable.[38] I accept that many of the contentions advanced by Mr Rao cast real doubt onMr Zheng's claims that he was in fact misled and that he did not understand what thecontractual documentation clearly stated. This includes the fact that the first timeMr Zheng raised any objection or opposition to Mr Liao's demands for payment waswhen he filed his notice of opposition in these proceedings. However, Mr Zheng'sexplanation that he sought advice from a solicitor, Mr Wang, who told him that he hadno defence to claims based on the contractual documentation, provides somejustification for the lack of response over a six-year period.[39] I also accept that there is no independent or documentary evidence before theCourt confirming Mr Wang's role and/or advice. However, I cannot safely concludeat this stage that Mr Zheng's evidence on this point is wholly lacking in credibility.Whether that explanation is true, and its consequences, are matters which, in my view,can only be resolved at trial.4[40] Mr Rao also relied on contradictions in Mr Zheng's evidence that cast furtherdoubt on its credibility. For example, despite claiming that he matched Mr Liao'sinvestment "dollar for dollar", Mr Zheng never made a claim in the company'sliquidation and has provided no explanation for that. Similarly, the claim by Mr Zhengabout the net effect of the receivership (allegedly enabling Mr Liao to acquire 100 percent of the business without paying any purchase price) ignores the fact that thereceivers sold the assets through a public tender process. However, none of thesematters mean, either individually or cumulatively, that I can safely concludeMr Zheng's defences are wholly lacking in credibility.[41] The circumstances surrounding the signing of the documentation by Mr Zhengare troubling and provide further support for Mr Rao's submission that the defenceslack substance. However, notwithstanding my reservations, these are still matterswhich should properly be tested at trial.[42] Mr Liao says that Mr Kevin Lo, who drafted the Shareholders' Agreement andthe GSA, was a contact of Mr Zheng ("a good friend") and that before preparing thedocuments both Mr Liao and Mr Zheng met with Mr Kevin Lo to explain what theywanted. Mr Liao also contends that they collected the draft shareholders' agreementfrom Mr Kevin Lo a day or two before they signed it, because Mr Kevin Lo wantedboth of them to take the documents home to read over. Mr Liao further relies on thefollowing two factors:(a) The GSA also expressly states "as a warning" on the signature page:"It is recommended that legal advice be obtained before completingand signing this agreement".4 Whether the defendant has waived privilege in relation to Mr Wang's advice may be an issue fordiscovery and/or evidence at trial.(b) The company's office manager witnessed Mr Zheng's signature (whichtends to confirm Mr Liao's account and contradict Mr Zheng's accountof the signing).[43] Mr Zheng's evidence is that he and Mr Liao signed the documents at the officeof Mr Kevin Lo, that the documents were not provided to him before that meeting andthat Mr Kevin Lo did not explain the content of the documents to him. He said hisEnglish is poor and that he could not read the content of the documents himself. Hefurther says that he had no reason to suspect the documents did not accurately reflectthe agreement he had reached with Mr Liao. He says he signed the documents in frontof Mr Lo and Mr Liao.[44] If Mr Liao's version of events is correct, then it is hard to accept thatMr Zheng's claims have much credibility. However, as I am emphasising, the factsare in dispute and there is, for example, no evidence before the Court from Mr KevinLo as to what occurred. His evidence may well prove to be critical, includingconfirmation as to who he was in fact acting for. If he was a friend of Mr Zheng asalleged, it seems hard to believe that he would have allowed Mr Zheng to signdocuments in English without making him aware in careful terms as to the nature ofthe agreements they contained. Furthermore, if, as Mr Liao alleges, Mr Zhengexpressly chose not to obtain legal advice it may well be that he will not be able toestablish his defence of non est factum. A defence of non est factum is only availableif the signatory has acted with reasonable care.5 Again, however, such matters canonly be determined at trial.[45] In support of his submission that it is not unusual for experienced Chinesebusiness people to overlook the importance of written contracts in a "Westerncontext", Mr Sun referred to a recent report published by the Super Diversity Institutefor Law, Policy and Business, where the following observation was made aboutChinese parties:65 Saunders v Anglia Building Society [1970] 3 WLR 1078 (HL) at 1082; see also Golden GardenLtd v Zhou [2017] NZCA 227.6 Mai Chen "Culturally and linguistically diverse parties in the courts: a Chinese case study" SuperDiversity Institute for Law, Policy and Business (New Zealand, November 2019) at [33].Chinese parties are less likely to use written contracts or agreements in theirbusiness or familial transactions. If contracts are used, then they will often bebrief and may not have had any legal input.[46] In the context of a summary judgment application it would be wrong for me tomake any finding on this issue, except to note that it does provide some support forMr Zheng's defence (although the absence of legal input is not a factor here). I wouldalso note that Mr Zheng does not rely solely on the Chinese cultural circumstances –he has laid a wider evidential foundation for his defences in his affidavit.[47] For all these reasons, I conclude that the plaintiff, Mr Liao, has notdemonstrated that Mr Zheng has no defence to his claims. Accordingly, theapplication for summary judgment must be dismissed.Result[48] The application by the plaintiff, Mr Liao, for summary judgment, dated 4October 2019, is dismissed.[49] Costs are reserved.[50] I also make the following directions:(a) The parties are to provide standard discovery with affidavits ofdocuments to be filed and served by 12 June 2020. The listing andexchange protocol in Schedule 9 of Part 2 to the High Court Rules 2016will apply;(b) The proceedings will be called in the Chambers List on Friday, 3 July2020 at 2.15 pm.__________________________Associate Judge P J Andrew