HUNAN HENGYU INVESTMENT GUARANTEE CORP LTD v BCH INVESTMENTS LTD [2020] NZHC 650

HUNAN HENGYU INVESTMENT GUARANTEE CORP LTD v BCH INVESTMENTS LTD [2020] NZHC650 [25 March 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-000018[2020] NZHC 650UNDER Part 19 of the High Court Rules and theLand Transfer Act 2017IN THE MATTER OF An originating application for orders thatcaveat not lapseBETWEEN HUNAN HENGYU INVESTMENTGUARANTEE CORPORATION LIMITEDApplicantAND BCH INVESTMENTS LIMITEDRespondentHearing: 17 March 2020Appearances: D Hickson for ApplicantA Barker QC and J Barrow for RespondentJudgment: 25 March 2020JUDGMENT OF ASSOCIATE JUDGE P J ANDREWThis judgment was delivered by Associate Judge Andrewon 25 March 2020 at 3.00 pmpursuant to r 11.5 of the High Court RulesRegistrar / Deputy RegistrarDate..Solicitors:PCW Law Ltd, AucklandIntroduction[1] The applicant, Hunan Hengyu (a limited company), seeks orders pursuant to s143 of the Land Transfer Act 2017 (LTA) preventing the lapse of its caveat over therespondent's 28 properties at a subdivision in Gill Road, Albany (the Gill Roadproperties).[2] The Hunan Hengyu application arises out of the business dealings between twoChinese families – the Zhou family (represented by Hunan Hengyu) and the Tangfamily (represented by the respondent, BCH). The two families had a number ofinvestments together in China and New Zealand, including what is known as theAlbany Rose development (i.e. the Rose Garden Apartment complex near theWestfield mall in Albany).[3] The company developing the Albany Rose development is now known as NZRose Garden Development Ltd (RDL).[4] Hunan Hengyu says that it advanced funds to RDL through Mr Junwei Tangfor the purpose of the Albany Rose development. That was originally a jointdevelopment between the families, until Mr Zhou withdrew. When that happened,Hunan Hengyu says that RDL returned the advances that had been made to Mr Tangwho was then required to pass them on to Hunan Hengyu.[5] Hunan Hengyu alleges that instead of returning the funds, Mr Tang advancedthem into a separate company, namely, BCH. Those funds were then used, it is alleged,to develop the Gill Road properties owned by BCH.[6] Hunan Hengyu contends for a beneficial interest in the Gill Road properties onthe basis of a constructive trust that has arisen from the actions of Mr Tang.[7] BCH says there is no basis for the claim. It says it never received the fundsthat Hunan Hengyu alleges it was paid and that no money from Hunan Hengyu wasused in the purchase or development of the Gill road properties. Furthermore, even ifHunan Hengyu was able to establish an evidential basis for its claim, BCH says thiswould only support a claim in debt and does not support any proprietary claimessential to maintaining the caveat.Background facts[8] BCH purchased the Gill Road properties (the subject of the caveat), in April2013. The purchase price was NZ$9.2m. Mr Tang says there was an ANZ loan forNZ$4.625m and that the balance of the purchase price came from BCH's shareholders(each contributing an equal amount).[9] Hunan Hengyu says that between September 2013 and December 2013, itadvanced approximately NZ$5.89m to Mr Junwei Tang for him to on-lend those fundsto RDL, to then be used in the Albany Rose development.[10] In January 2014, Hunan Hengyu decided to withdraw from its investment.Hunan Hengyu alleges that RDL then repaid the investment to Mr Tang, who was thenmeant to pay the funds back to Hunan Hengyu. It is said that RDL made repaymentsto Mr Tang totalling NZ$5,601,000.[11] Of that amount repaid, Hunan Hengyu says that NZ$500,000 was depositedinto Mr Zhou's account and the rest, NZ$5,101,000, was deposited into the account ofMr Tang's father, Mr Wenbing Tang. However, Mr Zhou says that he never actuallyreceived the NZ$500,000 because the account that money was paid into was anaccount which Mr Junwei Tang had access to and control over.[12] It is Hunan Hengyu's case, and the basis for its caveat, that the NZ$5.6m whichit lent to Mr Junwei Tang (which he has allegedly failed to repay to Hunan Hengyudespite having received the money back from RDL) is being used to fund thedevelopment of BCH's Gill Road properties.[13] There have been previous disputes and litigation between the Zhou and Tangfamilies in relation to their general business affairs. This has included a developmentat Ormiston Road which had Green Land Investment Ltd (Green Land) as itsdevelopment company (the Green Land development). The relevance of those otherdevelopments (also disputed by Hunan Hengyu) is explained below.[14] The first proceeding was when Hunan Hengyu registered a caveat over landbelonging to Green Land. Green Land applied for its removal, however, before anysubstantive documents were filed, the proceedings were settled. The terms of thesettlement essentially ensured that the sale proceeds in that development would beheld on trust, pending the resolution of the dispute between Green Land'sshareholders. That agreement was signed in May 2016.[15] In August 2016, Mr Zhou applied to wind up Green Land on the just andequitable ground under s 241(4)(d) of the Companies Act 1993. BCH says that at issuein those proceedings was the way that Green Land had allegedly dealt with loans itreceived from Hunan Hengyu. Those loans included advances totalling NZ$5.89m,which BCH says are the basis of Hunan Hengyu's application in these proceedings.[16] The liquidation proceedings then led to a settlement agreement between theshareholders and Green Land. The terms of that settlement (the second settlement)were as follows:The settlement agreement represents that all the co-operation projects andinterpersonal debt and credit relationships between the Tang family and theZhou family in China and New Zealand have been totally cleared. Amongthem, Hunan Hengyu Guarantee Investment Co Ltd, Hengyu privateinvestment and Hunan concrete mixing station will have the share of the Tangfamily unconditionally transferred to Bingyan Zou, and all the court cases ofBingyan Zhou or under the name will be unconditionally withdrawn. Thethree parties agree that the current court case about the Green Land disputewill undergo withdrawal by the lawyer within five working days from the dateof this agreement. Meanwhile, neither the Tang family nor the Zhou familywill individually pursue responsibilities of any party, now or in the future From now on it will be totally cleared.[17] Hunan Hengyu says that BCH's funding arrangements for the development ofthe Gill Road properties (the subject of the caveat) are unclear, but included a loanfacility of NZ$20m from ASAP Finance between April 2015 and June 2019, andanother from OneLend of NZ$11.75m from June 2019 (to repay lending from ASAPFinance).Relevant legal principles[18] A caveator, in response to the caveat lapsing procedure under the LTA, mayapply for an order that the caveat not lapse.1[19] I adopt the following principles in relation to Hunan Hengyu's application tosustain a caveat over the properties at issue:2(a) The burden of establishing that the applicant has a reasonablyarguable case for the interest claimed is upon the caveator;3(b) The caveator must show an entitlement to, or beneficial interest in, theestate referred to in the caveat by virtue of an unregistered agreementor an instrument or transmission, or of any trust expressed or implied;4(c) The summary procedure involved in an application of this nature iswholly unsuitable for the determination of disputed questions of fact5– an order for removal of the caveat will not be made unless it is clearthat the caveat cannot be maintained either because there was no validground for lodging it or that such valid ground as then existed nolonger does so;6(d) When an applicant has discharged the burden upon the applicant, thereremains a discretion as to whether to remove the caveat, which willbe exercised cautiously;7(e) The Court has jurisdiction to impose conditions when making orders.Analysis and decision[20] The critical issue for determination is whether Hunan Hengyu has dischargedthe burden of establishing that it has a reasonably arguable case for a beneficial interestin the land. That turns, in this case, on a close assessment of the evidential and legalbasis for the claimed beneficial interest, namely a constructive trust arising from themisappropriation of funds.1 Land Transfer Act 2017, s 143.2 Cube Building Solutions Ltd v Kingloch Holdings Ltd HC Christchurch CIV 2009-409-935,15 October 2010 at [13] (citations omitted) (footnotes added).3 New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA) at 43;and Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36 at [30] citingNational Bank of New Zealand v Radisich HC Hamilton CIV 2003-419-928, 25 August 2003 at[6].4 Land Transfer Act 2017, s 138.5 New Zealand Limousin Cattle Breeders Society Inc v Robertson, above n 3, at 43.6 Sims v Lowe [1988] 1 NZLR 656 (CA) at 659–660.7 Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA); and Pacific Homes Ltd (in rec) vConsolidated Joineries Ltd [1996] 2 NZLR 652 (CA).[21] Hunan Hengyu's critical contentions are that RDL paid the NZ$5.89m loanfunds to Mr Tang who then diverted them, contrary to Mr Zhou's instructions, to BCH.In these circumstances, Hunan Hengyu contends that Mr Tang was its agent and thathe held the funds, when returned to him by RDL, as a fiduciary. In acting contrary toMr Zhou's instructions and diverting the funds to BCH, Mr Tang is said to have actedin breach of his fiduciary obligations and BCH (being a Tang family company) knewthat Mr Tang had no authority to act as he did.The evidential basis for the claim[22] It is clear that, as the applicant, Hunan Hengyu must discharge the onus ofestablishing a reasonably arguable case. A mere assertion of a certain state of affairsis not sufficient and some positive evidence is required. As Bell AJ held in VirtualSpectator Ltd v Rothlander:8To establish a reasonably arguable case there must be evidence tending toprove the facts relied on. Assertion, whether in pleadings or affidavit, is notenough. The evidence need not be extensive as that given in a hearing on thesubstantive merits. It may be circumstantial. But if there is no evidence toprove the facts contended for, the caveator will not have made out a reasonablyarguable case for those facts.Furthermore, it is not enough for an applicant to make a general assertion, andthen seek to prove its claim through the lack of any response.[23] In Trustees Executors v Steve G Ltd, it was held that until the caveator makesout an arguable case, the registered proprietor is not required to answer. Furthermore,no inference can arise against a registered proprietor for not giving evidence inresponse to an unproved allegation.9[24] Hunan Hengyu submits that the following evidence compromises "strongcircumstantial" proof that the NZ$5.6m loan funds have been used to help fund thedevelopment of the Gill Road properties:(a) The NZ$5.6m loan has not been repaid by Mr Tang;8 Virtual Spectator Ltd v Rothlander [2016] NZHC 499 at [9].9 Trustees Executors Ltd v Steve G [2013] NZHC 16 at [98]. See also Re Lord Cable [1976] 388All ER 417 at 431.(b) there is a complete absence of evidence from BCH as to where the BCHshareholders got the money to fund their 50 per cent share of the costsof the Gill Road development; and(c) Mr Zhou's personal knowledge of the financial circumstances of BCHshareholders, which indicates that they could not possibly have fundedtheir share of the development expenses without recourse to funds fromsome other source.[25] I reject that submission. The fundamental problem for Hunan Hengyu is thatthe evidential basis for its claims is tenuous. There is a great deal of uncertainty aboutkey aspects of Hunan Hengyu's claim, including how much BCH borrowed for theGill Road property development, where the funds came from, and why the Zhoufamily is still in dispute with the Tang family over these funds where the evidence(though disputed) suggests that the matter has been settled pursuant to the secondsettlement agreement. On the evidence before me, the financial arrangements of BCHmay well be "murky", as Mr Hickson submitted. However, it is not enough for HunanHengyu to raise some suspicion based on the amounts of the funds being similar (i.e.the additional loan of NZ$5.5m Mr Tang says was taken out for re-financing). Rather,Hunan Hengyu must discharge the onus of establishing a reasonably arguable case.[26] I accept that Hunan Hengyu has established a reasonably arguable case that thefunds at issue were paid by RDL to Mr Tang. The documentation provided is proof.However, Hunan Hengyu has not established a proper evidential basis for its claimthat the funds were then diverted to BCH. It is the cumulative effect of theuncertainties and unanswered factual issues that leads me to the conclusion that theevidence Hunan Hengyu relies upon does not establish a reasonably arguable case.There is insufficient evidence to prove the facts relied upon. The weakness of theevidence is apparent from the following:(a) The evidence does tend to establish that BCH must have borrowedsubstantial funds for the development of the Gill Road property.However, there is clear uncertainty as to the nature of the fundingarrangements, including how much exactly the shareholders of BCHcontributed. In any event, Hunan Hengyu places great reliance onMr Zhou's assertion that the loan funds must have been used by BCHbecause he does not know where else it could have got the money from,and the Tang family could not have otherwise afforded it. WhileMr Zhou may know the shareholders of BCH personally and theirfinancial circumstances, the parties have been in dispute for a long timeand his assertions are not supported by any documentation or concretefacts.(b) Mr Zhou says that, of the NZ$5.6m funds repaid by RDL to Mr Tang,some NZ$500,000 was deposited into his account but he never actuallyreceived those funds because the account was one which Mr Tang hadaccess to and control over. However, no explanation is provided as towhy Mr Tang has control of Mr Zhou's account.(c) Mr Tang accepts that he received the funds at issue from Hunan Hengyubut says he did not receive them personally. He says the money waspaid into an account of Green Land. I do not accept that I can safelyconclude that such evidence is obfuscatory and irrelevant, asMr Hickson submitted. To the extent that there is evidence before me,it does tend to establish that the previous litigation between the Zhouand Tang families is relevant and that the funds now in dispute werealso at issue in the August 2016 proceedings and intended to be part ofthe second settlement.10The statement of claim in the liquidation proceedings (where Mr Zhouwas represented by senior counsel) expressly refers to and sets out thedetail of the loan in dispute in these proceedings (i.e. the same loan isat issue here).11 The settlement that was ultimately reached expresslyreferred to Hunan Hengyu. It is also apparent that the parties clearlyintended that the dispute over these funds as between the Tang andZhou families would end. Mr Hickson's submission that the reference10 See terms recorded above at [16].11 At paragraph 22 of the statement of claim dated 30 August 2016.in the statement of claim to the same loan funds in dispute here was amistake simply raises more questions. It does not provide anysatisfactory answer. It may also, strictly speaking, be correct thatHunan Hengyu was not a party to that second settlement. However, itis apparent from the documentation before me that the disputes betweenthe Tang and Zhou families were to come to an end, and that settlementwas reached at a time when the loan funds at dispute here were clearlyan issue between the parties.[27] I now turn to address the legal basis for the caveat. The question becomes: HasHunan Hengyu established a reasonably arguable basis for a beneficial interest in theland?The legal basis for the claim[28] It is well settled that a person who advances money to another to purchase orimprove land does not have a caveatable interest:12An unsecured creditor has only personal rights against a debtor and thereforehas no right to lodge a caveat against title to the debtor's land. This is so evenif the unsecured creditor has lent money to the debtor for the express purposeof buying the land or paying off mortgages on the land or if the unsecuredcreditor has provided goods and services that have been used to improve theland.[29] It is also well settled that an institutional constructive trust may give rise to aninterest in land sufficient to lodge and sustain a caveat but a remedial constructive trustdoes not. Because a remedial constructive trust does not exist until it is created byorder of a court, a caveat cannot be lodged in respect of it prior to the date of such anorder.13[30] The distinction between an institutional constructive trust and a remedialconstructive trust is discussed by Tipping J in Fortex Group Ltd v MacIntosh:1412 Campbell on Caveats 3rd ed, 2019 at [10.101(a)].13 Three Chicks Ltd v NZ Building & Projects Ltd (2001) 12 NZCPR 799.14 Fortex Group Ltd v MacIntosh [1998] 3 NZLR 171 and adopted by Matthews AJ in Three ChicksLtd v NZ Building & Projects, above, at [19].For present purposes, these three types of trusts can be described as follows.An express trust is one which is deliberately established and which the trustdeed deliberately accepts. An institutional constructive trust is one whicharises by operation of the principles of equity and whose existence the courtsimply recognises in a declaratory way. A remedial constructive trust is onewhich is imposed by the court as a remedy in circumstances where, before theorder of the court, no trust of any kind existed.The difference between the two types of constructive trust, institutional andremedial, is that an institutional constructive trust arises upon the happeningof the events which bring it into being. Its existence is not dependent on anyorder of the court. Such order simply recognises that it came into being at theearlier time and provides for its implementation in whatever way isappropriate. A remedial constructive trust depends for its very existence onthe order of the court; such order being creative rather than simplyconfirmatory.[31] Bell AJ in Trustees Executors Ltd v Steve G, held that when funds have beenmisappropriated, the owner may be able to trace them because ownership neverchanged.15 However, when the owner has voluntarily changed ownership, the ownercan no longer claim continued ownership unless he or she can show that the transferredassets have been re-vested as an under recision.16 Even though the contract underwhich the funds were transferred may be set aside because the agreement was taintedfrom misrepresentation, mistake, duress or some other vitiating factor, the transferredtitle remains effective unless or until the contract is rescinded.[32] Bell AJ further held, in reliance on Collings v Lee,17 that the rationale for theprinciple, as it applies to a transfer of property, is that even where the transfer isobtained by fraudulent misrepresentation, the transferor nevertheless intends that thewhole legal and beneficial ownership in the property shall pass to the transferee.[33] I also note that under a standard loan contract, the lender transfers ownershipof the funds advanced to the borrower, who may use them and their proceeds as he orshe wishes. The borrower is required to repay an equivalent sum (plus interest ifapplicable) but he or she does not hold the funds on trust for the lender.[34] Even if I am wrong to conclude that the evidential basis for Hunan Hengyu'sclaim is insufficient, I note that the funds at issue were the subject of a voluntary loan15 Trustees Executors Ltd v Steve G, above n 9.16 At [39].17 Collings v Lee [2001] 2 All ER 332 (EWCA) 337.and it is difficult to see how Hunan Hengyu can claim continued ownership or haveany other valid basis for saying that Mr Tang held the funds on trust. The principlesarticulated by the Supreme Court in Paper Reclaim Ltd v Aotearoa International,18 acase relied upon by Mr Hickson, do not assist Hunan Hengyu. As the Supreme Courtnoted, a relationship is not fiduciary in nature merely because the parties may bedepending upon one another to perform the contract in its terms.[35] I acknowledge that institutional constructive trusts (which may support acaveat) can arise, for example, where the proceeds of a fraud are used to acquire aregisterable interest in land, or where there has been a non-consensual transfer of aninterest in land from a vendor to a purchaser, as a result of a fraud perpetrated on thevendor by the purchaser.19 However, I find there is no reasonably arguable case thatan institutional constructive trust arises on these facts. As Mr Barker submitted, if (asappears to be the case) Hunan Hengyu was alleging fraud through themisappropriation of funds, then a commensurate degree of proof is required.20 Theevidential basis of Hunan Hengyu's claim here falls well short of that standard. Thereare simply too many unexplained factors, including the apparent intention of thesecond settlement agreement that all disputes over the funds at issue in this proceedinghave been settled, to conclude that the necessary threshold has been established for aninstitutional constructive trust. Even if it could be established that there was a validclaim against Mr Tang for the return of the funds, there is simply too much doubt aboutwhether the funds have been transferred to BCH and applied in the manner HunanHengyu contends.[36] For all these reasons, I conclude that Hunan Hengyu has not established asufficient evidential and/or legal basis for the caveat. It has not discharged the burdenof establishing that it has a reasonably arguable claim for a beneficial interest in theland.[37] On that basis, the application that the caveat not lapse, must be dismissed.18 Paper Reclaim Ltd v Aotearoa International [2007] 3 NZLR 169.19 Campbell on Caveats, above n 12, at [10.009], with reference to Trustees Executors Ltd v EdenHoldings (2010) Ltd [2010] NZCA 626.20 Schmidt v Pepper NZ (Custodians) Ltd [2012] NZCA 565.Result[38] The application by Hunan Hengyu Investment Guarantee Corporation Ltd foran order that Caveat No. 11620565.1 not lapse, is dismissed.[39] I award costs to the respondent, BCH Investments Ltd, on a 2B basis plusdisbursements.__________________________Associate Judge P J Andrew