QU v THE OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF ZENG [2022] NZHC 3114

QU v THE OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF ZENG [2022] NZHC 3114[25 November 2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2015-404-002256[2022] NZHC 3114BETWEEN JIA JUN QUPlaintiffAND THE OFFICIAL ASSIGNEE IN THEBANKRUPTCY OF THE PROPERTY OFJUN ZENGDefendantparties continued overHearing: 3 August 2022Appearances: G P Blanchard KC and C Jiang for PlaintiffsJudgment: 25 November 2022Reissued: 11 August 2023JUDGMENT OF EDWARDS J[Liability]This judgment was delivered by me on 25 November 2022 at 4.30 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarCounsel/Solicitors:G P Blanchard KC, AucklandTompkins Wake, AucklandBETWEEN JIAN PING WANGSecond PlaintiffYAN QUThird PlaintiffJ M BUILDING MATERIALSCOMPANY LIMITEDFourth PlaintiffFORMODA REAL ESTATEDEVELOPMENT COMPANY LIMITEDFifth PlaintiffAND J & H DEVELOPMENT LIMITED(in Liquidation)Second DefendantHUIMIN ZHAOThird Defendant[1] The first, second and third plaintiffs (plaintiffs) seek judgment againstMs Zhao (third defendant) on claims of dishonest assistance and knowing receipt.[2] The claims follow entry of summary judgment in 2017 against Mr Zeng whohas since been made bankrupt (first defendant), and J & H Development Ltd("J & H") (the second defendant).1 The claims against Mr Zeng were for breach offiduciary duty, deceit, conversion, and money had and received.[3] Ms Zhao resides in China. She has been served with the proceedings inaccordance with orders of substituted service, but she has not taken any steps.Accordingly, this claim proceeds by way of formal proof.[4] Claims of this nature are not easily dealt with in the absence of a contradictor.I have relied heavily on counsel for the plaintiffs' submissions.Relevant facts[5] Mr Qu (first plaintiff) and Ms Wang (second plaintiff) are husband and wife.Yan Qu (third plaintiff) is their daughter. Yan Qu is referred to in the plaintiffs'affidavits as Margaret, and I will do likewise.[6] Mr Qu and Ms Wang are directors and shareholders of the fourth and fifthplaintiff companies ("JMB" and "Formoda" respectively).[7] Margaret met Mr Zeng in 2007 and they married in 2008.[8] While still married, Mr Zeng began a relationship with Ms Zhao. She wasmarried to a friend of his, Mr Wang, and they had known each other for some time.[9] Not long after his marriage to Margaret, Mr Zeng asked his parents-in-law formoney to assist with property development. Mr Zeng incorporated J & H for propertydevelopment purposes.1 Qu v Zeng [2017] NZHC 315.[10] Between 2008 and 2015 Mr Zeng and J & H obtained significant loans fromMr Qu and Ms Wang and their companies for alleged property developments inHamilton and Auckland. It is not necessary to canvass the details of most of thoseloans and property developments in this judgment as the claim against Ms Zhao onlyconcerns her alleged involvement with a property development project (the "FlagstaffJoint Venture").[11] The Flagstaff Joint Venture involved a development in Hamilton. Mr Zeng'sproposal was that Mr Qu and Ms Wang would fund the purchase of nine sections inFlagstaff, Hamilton. Construction would be carried out in two stages.(a) Stage one would involve the construction of a house each on four of thesections. Construction would be financed by Mr Qu and Ms Wang.These houses would then be sold and the sale proceeds would be usedto repay the costs of purchase and construction costs, plus interest.(b) Stage two involved constructing houses on another four sections.Construction costs for stage two would be financed by Mr Wang. Oncecompleted, these houses would be sold and the sale proceeds used torepay the costs of purchase and Mr Wang's construction costs, plusinterest.[12] The balance of the net sale proceeds were to be split equally between Mr Qu,Ms Wang and Mr Zeng on the one hand, and Mr Wang on the other. The remainingsection would be left empty for the meantime.[13] Between 22 March 2010 and 28 February 2012, Mr Qu and Ms Wang advanceda total of $1,722,576 to purchase nine sections in Flagstaff (the "Flagstaff LandLoans").2[14] The properties were registered in the name of either Mr Zeng, Ms Wang orMargaret.2 The nine properties are: 158 Cumberland Drive; 7 Nicks Way; 150 Cumberland Drive;4 Trent Lane; 5 Trent Lane; 144 Cumberland Drive; 4 Keston Crescent; 126 Cumberland Drive;and 3 Keston Crescent.[15] Between 2010 and 2015, Mr Qu and Ms Wang advanced a total of $4,759,313to Mr Zeng for construction costs of the Flagstaff Joint Venture ("the FlagstaffConstruction Loans").[16] However, instead of constructing houses, Mr Zeng sold most of the sections asvacant lots and kept the proceeds. The sections registered in his name were soldwithout the plaintiffs' knowledge.[17] Mr Zeng also sold two of the sections registered in Margaret's name withouther knowledge and by deceiving her into authorising the transfers by misrepresentingthe purpose of those transfers. The sale proceeds for these two properties, totalling$266,334.92, were paid into Margaret's account without her knowledge. All but$10,000 of the proceeds was then transferred into a joint account in Margaret's andMs Wang's names. The funds were then withdrawn by forging Margaret's signatureon two cheques.[18] On 30 May 2013, Mr Zeng entered into a sale and purchase agreement to sellone of the houses (158 Cumberland Drive) for $640,000. The sale settled on4 July 2013 and Mr Zeng used the net sale proceeds to make a payment towards theFlagstaff Land Loans. This was the only house Mr Zeng constructed in relation to theFlagstaff Joint Venture.[19] From 2014 to early 2015, Mr Zeng made various false representations toMr Qu, Ms Wang and Margaret. Those misrepresentations included that constructionon three houses had been suspended because Mr Wang had stopped funding it. Basedon this false representation, Mr Zeng obtained $250,000 from Mr Qu on the pretencethat it would convince Mr Wang to complete the Flagstaff construction (the"Misappropriated Funds"). This money was then diverted into Mr Zeng's ownaccounts.[20] By early 2015, the plaintiffs had become suspicious. They visited the Flagstaffsections and discovered Mr Zeng's fraud. They confronted him in March 2015. Headmitted his fraudulent conduct, and wrote a letter to Mr Qu, Ms Wang and Margaretin which he admitted to breaking the law and apologised.[21] In 2015, Mr Zeng made partial repayments to the plaintiffs. These wereapplied to loans other than the Flagstaff Land Loans. Ms Qu and Mr Wang sold threeof the remaining properties in the Flagstaff Joint Venture for a total of $1,803,960 andthese sums were applied to the Flagstaff Land Loans.[22] After discovering Mr Zeng's conduct, the plaintiffs issued these proceedingson 28 September 2015. Mr Zeng and J & H did not defend the proceedings. Withoutnotice freezing orders were made against Mr Zeng and J & H on 30 September 2015.3[23] Mr Zeng and J & H breached the freezing orders by dissipating assets.[24] The plaintiffs discovered Ms Zhao's involvement in late 2016. By this time,she had left to Shanghai. Evidence relied on by the plaintiffs to prove both causes ofaction against her is discussed in more detail later in this judgment.[25] On 2 March 2017, Fogarty J granted summary judgment in favour of theplaintiffs against Mr Zeng.4 The Judge found that Mr Zeng was clearly in a fiduciaryrelationship with the plaintiffs, and that trust had been reposed in him. He found thatMr Zeng and breached various contracts, had essentially been converting money, andhad been deceitful.5[26] In relation to the Flagstaff development, the Judge entered judgment for thefollowing sums:6(a) $250,000 (Misappropriated Funds);(b) In relation to the Flagstaff [Land] Loans:(i) $1,772,576 of principal;7 and3 Qu v Zeng HC Auckland CIV-2015-404-002256, 30 September 2015 (Minute of Woolford J).4 Qu v Zeng [2017] NZHC 315.5 At [16].6 At [28].7 This figure may be in error as judgment was also entered in relation to the Flagstaff Land Loansfor the principal sum of $1,211,132. That is the sum sought by the plaintiffs in this case.(ii) $1,193,952 of interest;(c) In relation to the Flagstaff Construction Loans:(i) $4,658,262 of principal; and(ii) $2,365,546 of interest.[27] Indemnity costs were also awarded against Mr Zeng.8 The proceedingsremained on foot to allow the plaintiffs to advance proprietary and tracing claimsagainst Mr Zeng's and J & H's assets.9[28] Mr Zeng was adjudicated bankrupt on 6 July 2017 and J & H was placed intovoluntary liquidation on 3 August 2017.[29] In June 2018, Woodhouse J held that Mr Zeng and J & H were in contempt ofCourt.10 Mr Zeng was sentenced to 250 hours of community service.11[30] On 9 August 2019, an application to add Ms Zhao as third defendant and tofile an amended statement of claim was filed. Orders granting that application weremade on 12 June 2020.[31] In November 2021, the plaintiffs and the Official Assignee reached an agreedposition whereby the plaintiffs decided not to pursue their proprietary and tracingclaims against Mr Zeng and J & H.[32] On 8 July 2022, the plaintiffs filed a third amended statement of claim, furtherparticularising their claims against Ms Zhao. Service was effected by way ofcompliance with substituted service orders, and, as previously mentioned, Ms Zhaohas not taken any steps in the proceeding.8 Qu v Zeng [2017] NZHC 315 at [33].9 At [29]–[31].10 Qu v Zeng [2018] NZHC 1300.11 Qu v Zeng [2018] NZHC 1395.Is Ms Zhao liable for dishonest assistance?[33] The plaintiffs seek judgment against Ms Zhao for dishonest assistance.[34] There are four elements that must be established for the dishonest assistancecause of action:12(a) The existence of a trust or fiduciary duty;(b) A breach of that trust or fiduciary duty by a trustee or fiduciary thatresults in loss;(c) Participation by a defendant third party (a stranger to the trust) byassisting in the breach of trust or fiduciary duty; and(d) Dishonesty on the part of the defendant.[35] The first two elements have already been determined by Fogarty J in Qu vZeng.13 It is the third and fourth elements at issue in this case.[36] The plaintiffs rely on various strands of evidence to prove their case as set outin their written submissions. I take each in turn.[37] First, there is evidence that Ms Zhao was listed as the co-owner with Mr Zengand signed the building contract for 158 Cumberland Drive (wrongly recorded as157 Cumberland Drive). Neither she, nor Mr Wang, were owners of that property, itbeing registered in Margaret's name.[38] Clearly, Ms Zhao must have known she was not the owner of that land. Herparticipation in relation to obtaining the construction loan in relation to this property,and her dishonesty, may be inferred from Ms Zhao's signature on this agreement – atleast in relation to the construction contract for this section.12 Sandman v McKay [2019] NZSC 41 at [46].13 Qu v Zeng [2017] NZHC 315 at [16], [27], [28], [30] and [32].[39] Next, the plaintiffs rely on evidence that Mr Wang's signature appeared on anumber of building contracts for construction of houses on various lots. Reliance isplaced on the fact that Mr Wang is Ms Zhao's ex-husband to infer that Ms Zhao (orMr Zeng) must have forged Mr Wang's signature. It is also asserted that Ms Zhaoassisted Mr Zeng to use Mr Wang's name to fraudulently obtain $250,000 ofadditional funding (the Misappropriated Funds) from the plaintiffs on false pretences.[40] This evidence, on its own, is not sufficient to establish Ms Zhao's participationin Mr Zeng's breach of fiduciary duty in relation to the building contracts concerned,and the Misappropriated Funds. The fact that Ms Zhao was previously married toMr Wang does not mean that she was involved in using his name as part of theFlagstaff development deception. That is particularly so in this case because Mr Wangwas also Mr Zeng's friend. Furthermore, the only evidence adduced in support of thisaspect of the claim suggests that it was Mr Zeng (as opposed to Ms Zhao) who forgedMr Wang's signature on the construction contracts.[41] Nevertheless, I accept that Ms Zhao's connection to Mr Wang is part of thepool of evidence from which dishonest participation may be inferred.[42] The plaintiffs rely on expert forensic accounting evidence which shows thatMs Zhao, and a company associated with her (ECF) received funds which Mr Zenghad obtained from the plaintiffs. I am unable to reconcile the evidence with thesubmissions on the exact quantum received, but I accept that some funds werereceived, and inferences may be drawn from that evidence.14[43] In addition, the plaintiffs rely on evidence to show that Ms Zhao received thefollowing sums as a result of Mr Zeng's breach:(a) A total of $93,378 from the sale proceeds in relation to five differentlots (150 Cumberland Drive, 158 Cumberland Drive, 7 Nicks Way, and3 and 4 Keston Crescent).14 The submissions refer to a total of $816,171 having been received by Ms Zhao. However, it is notclear where that figure is derived from. The updating affidavit of Mr Shaw refers to a total netamount of $755,937 having been received, being amounts received of $1,562,273 less amountspaid of $806,336.(b) A total of $92,432 of the Flagstaff Construction Loans.[44] In addition, a company set up to support Ms Zhao's immigration application(ECF) received $40,000 from the Flagstaff Land Loans, and $85,495 from theFlagstaff Construction Loans.15[45] Counsel for the plaintiffs submit that inferences may also be drawn fromMs Zhao's conduct after the plaintiffs issued proceedings against Mr Zeng. Thatevidence includes receiving ownership of a Porsche Cayenne from Mr Zeng andtransferring funds from New Zealand to China in over 30 transfers of around $10,000each. It also includes receipt of a large 250 kilogram shipment made of up 13 cartonsof 20 kilograms each from Mr Zeng in January 2016.[46] Standing back, and considering the evidence in its entirety, I am satisfied thatthere is sufficient evidence to draw the necessary inferences to establish Ms Zhao'sdishonest assistance in relation to the Flagstaff Land Loans and Flagstaff ConstructionLoans. However, I am not satisfied that there is sufficient evidence to establishdishonest assistance in relation to the Misappropriated Funds.Knowing receipt[47] The second cause of action against Ms Zhao is knowing receipt.[48] The elements of this cause of action are as follows:16(a) There is property subject to a trust;(b) The property is transferred;(c) The transfer is in breach of trust;(d) The property (or its traceable proceeds) is received by the defendant;15 Although this evidence is relied on to prove the dishonest assistance claim, it does not form partof the knowing receipt claim as it cannot be proved that Ms Zhao received the money flowingthrough ECF.16 Green & McCahill Holdings Ltd v Ara Weiti Developments Ltd [2021] NZHC 219 at [80].(e) The receipt is for the defendant's own benefit; and(f) The defendant receives the property with knowledge that the propertyis trust property and has been transferred in breach of trust, or if not abona fide purchaser of a legal estate without notice, retains the property,or deals with it inconsistently with the trust, after acquiring suchknowledge.[49] The only issues in relation to this cause of action are those set out in (d), (e)and (f) above. The plaintiffs rely on the same evidence relied on for the dishonestassistance claim. However, in this case they are only seeking judgment for the sum of$185,810 (being the total of the sums of $93,378 and $92,432 received by Ms Zhao asreferred to in [43] of this judgment). I am satisfied that the claim of knowing receiptis established.Limitation Act 2010[50] Counsel for the plaintiffs has drawn my attention to a potential defence underthe Limitation Act 2010.[51] To the extent that the plaintiffs' claim falls outside the six-year primary period,then I am satisfied that the plaintiffs did not become aware of Ms Zhao's relevantconduct until October or November 2016. Under ss 11 and 14 of the Limitation Act,a claim is not time-barred if it is filed within three years of the late knowledge date.The claim against Ms Zhao was filed on 9 August 2019, within the stipulated timeperiod.Relief[52] Although I have found Ms Zhao liable for both dishonest assistance andknowing receipt, I require further submissions directed towards the quantification ofloss, and the calculation of interest, before making any orders by way of relief. Thespecific issues to be addressed are set out in a separate minute delivered with thisjudgment.Result[53] The first, second and third plaintiffs' claim for dishonest assistance in relationto the Flagstaff Land Loans and Flagstaff Construction Loans, and knowing receiptare allowed, but only as to liability.[54] Counsel for the plaintiffs is directed to file further submissions on issuesrelating to relief as set out in the minute delivered with this judgment. Judgment onrelief, and costs, will issue thereafter.___________________Edwards J