PEOPLE'S REPUBLIC OF CHINA V TOP INTERNATIONAL LIMITED HC AK CIV 2000-404-2918

PEOPLE'S REPUBLIC OF CHINA V TOP INTERNATIONAL LIMITED HC AK CIV 2000-404-2918 10 September 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2000-404-2918AND BETWEEN THE MINISTRY OF JUSTICE FOR THE PEOPLE'S REPUBLIC OF CHINA Plaintiff AND TOP INTERNATIONAL LIMITED Defendant Hearing: 1 September 2010 Appearances: C R Pidgeon QC for plaintiff No appearance for defendant P J McPherson for Limin Yang and Jasmine Liu (intervening parties) Judgment: 10 September 2010JUDGMENT OF ALLAN JIn accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 3.30 pm on Friday 10 September 2010Solicitors: C R Pidgeon QC, colpidge@xtra.co.nzHesketh Henry Patrick.mcpherson@hesketchhenry.co.nz[1] This is an application by intervening non-parties (the interveners) for a stay of proceeding. [2] The plaintiff seeks to recover in this proceeding sums totalling US$5,590,798.74, together with interest. It alleges that the sum claimed was fraudulently misappropriated from a Chinese entity and that the defendant holds the funds on a constructive trust for that entity which is now insolvent and deregistered. The plaintiff alleges that it has the right according to Chinese law to recover the misappropriated funds. [3] The time for filing a statement of defence has expired. No statement of defence has been filed. The person appearing on the register maintained by the Registrar of Companies as director and sole shareholder of the defendant is a Mr Paul Chen. Mr Chen has formed the view that the defendant has no defence to the plaintiff's claim, and accordingly, has refrained from filing a statement of defence. [4] But ownership of the shares in the defendant is very much in dispute. For some three years, the interveners have been engaged in litigation in this Court aimed at obtaining declaratory and other relief consequent upon their claim to be the true owners of all of the shares in the defendant. The trial of that proceeding took place over many weeks between April and June 2010 before me. Judgment was reserved and at the time of the hearing of the present application had not been delivered. [5] The interveners take a very different view from Mr Chen of the present claim, which would be defended if they were in control of the defendant. The interveners now seek: a) Leave pursuant to s 165 of the Companies Act 1993 (the Act) to intervene in this proceeding and if leave is granted:(i) a stay of this proceeding until after judgment is delivered in the earlier proceeding (Yang v Chen), 1 or (ii) that the interveners be authorised to conduct this proceeding on behalf of the defendant pending judgment in Yang v Chenon the basis that the costs of the proceeding be met out of the funds of the defendant. b) Alternatively, an order for a stay granted in reliance on the Court's inherent jurisdiction pending delivery of the Court's judgment in Yang v Chen.[6] Although arguing with some vigour that the Court has no jurisdiction to accede to the present application, Mr Pidgeon responsibly accepted from the outset that the plaintiff ought not to seek to seal judgment by default pending resolution of the present application, and gave an undertaking to the Court on behalf of the plaintiff not to do so until this judgment is delivered.Background[7] The interveners (mother and daughter) came to New Zealand via Australia from China in 2002. Ms Yang's husband (Mr Liu) remained in China where he had extensive business interests, although he made a number of trips to New Zealand. The interveners had substantial funds which they wished to invest here. They formed a business relationship with Mr Paul Chen. He was born in Taiwan but had lived in New Zealand for many years, had much better English skills than they did, and had had considerable experience of New Zealand business. Mr Liu on the other hand, had an extensive network of business associates in China. [8] Significant assets were acquired in New Zealand. Three companies, including the present defendant, were incorporated for the purpose of holding those assets. Shares in the companies were held by the interveners, but later by Ms Yang alone.1 HC Auckland CIV-2007-404-1751.[9] By May 2006 Mr Liu had become the subject of investigation by the Chinese authorities. It was alleged that he had engaged in large scale fraud and embezzlement. Ultimately he was convicted of a number of offences and sentenced to two current terms of life imprisonment in China. [10] In May 2006, Ms Yang transferred her shares to Mr Chen. The basis of the transfer was recorded in a document entitled "Declaration of Trust" dated 12 May 2006. At trial, Ms Yang contended that her purpose in transferring the shares to Mr Chen was to place them beyond the reach of Chinese investigators. Mr Chen on the other hand, contended that the transaction involved no element of trust, but rather was simply an agreement pursuant to which Ms Yang, having transferred the shares to him, could repurchase them in the future, upon payment by her of Mr Chen's business losses. Those losses arose in consequence of certain dealings undertaken by Mr Chen direct with Mr Liu. They were involved together in various transactions including the sale of barley and of satellite equipment by American entities to Chinese interests, and in various loans involving Chinese companies, the present defendant, Mr Chen, and his company Heard Park Ltd. [11] The relationship between Mr Chen and the interveners deteriorated rapidly from about August 2006. In January 2007, the interveners purported to retransfer the shares in the three companies (including the present defendant) to themselves, in reliance upon a power of attorney contained in the declaration of trust. Mr Chen disputed their entitlement to do so and about a week later purported to restore his shareholding by notification to the Registrar of Companies. In the result, since January 2007, Mr Chen has been shown on the register maintained by the Registrar as being the shareholder and director of all three companies. It was in those capacities that he determined that Top International would not defend the present proceeding. [12] The interveners commenced their proceedings against Mr Chen in April 2007 and obtained a freezing order to which Mr Chen consented. The principal asset affected by the freezing order was a sum of approximately $2.6 million, representing the proceeds of sale of the defendants' main asset, a commercial building in central Auckland which had recently been sold. The freezing order remains in effect,although I subsequently made orders pursuant to which Mr Chen became entitled to fund his defence in Yang v Chen from the fund. [13] It is common ground that Top International has few, if any other, assets. As I understand it, the plaintiff's principal aim in the present proceeding, having obtained judgment, is to resort to the fund in order to satisfy the judgment, at least in part. [14] Against that background, I turn to the grounds relied upon by Mr McPherson.Section 165 Companies Act 1993[15] In s 165 of the Act provision is made for a shareholder or director to apply to the Court for an order granting leave to bring or participate in proceedings involving a company. Section 165 provides:165 Derivative actions(1) Subject to subsection (3) of this section, the Court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to— (a) Bring proceedings in the name and on behalf of the company or any related company; or (b) Intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be. (2) Without limiting subsection (1) of this section, in determining whether to grant leave under that subsection, the Court shall have regard to— (a) The likelihood of the proceedings succeeding: (b) The costs of the proceedings in relation to the relief likely to be obtained: (c) Any action already taken by the company or related company to obtain relief: (d) The interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1) of this section, only if the Court is satisfied that either— (a) The company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (b) It is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole. (6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.[16] Section 2 of the Act provides that the term "shareholder" has the meaning set out in s 96. That section provides:96 Meaning of "shareholder"In this Act, the term shareholder, in relation to a company, means— (a) A person whose name is entered in the share register as the holder for the time being of one or more shares in the company: (b) Until the person's name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company: (c) Until the person's name is entered in the share register, a person who is entitled to have that person's name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company.[17] In order to qualify as a "shareholder" the name of the person concerned must be entered into the share register of the company as the holder for the time being of one or more shares in that company (Mr McPherson accepts that the plain purpose of s 96(b) is to cover the case of a newly incorporated company where there may be a delay between incorporation and the act of entering the shareholder's name in the share register). [18] Section 2 defines the expression "share register" as meaning the share register required to be kept under s 87 of the Act. That section obliges the companyto maintain a share register that records the shares issued by the company. The company's share register is quite different from the register which the Registrar is bound to maintain under Part 20 of the Act. [19] Mr McPherson accepts that the defendant did not maintain a share register. On that narrow basis, it appears therefore that neither intervener can bring herself within s 96(a), and so neither qualifies as a shareholder for the purposes of s 165. Moreover, neither intervener appears as a shareholder on the register maintained by the Registrar of Companies. [20] In RPB Solutions Ltd v Avoca Holdings Ltd 2 Ellis J held that the s 96 definition of the term "shareholder" does not encompass those with beneficial interests or ownerships. That conclusion is, with respect, plainly right. The clear intention of the Legislature was to provide a statutory right to apply in respect of a legally identifiable class of persons. In other words, certainty is to prevail. The Court is precluded from considering applications by those who, although not falling within the statutory definition, nevertheless claim standing to apply by reason of asserted beneficial or unperfected interests. To permit such persons to invoke s 165 would be to invite large scale litigation simply upon the question of standing. [21] I consider, therefore, that the interveners had no standing to invoke s 165. The present application must stand or fall upon the Court's inherent jurisdiction.Inherent jurisdiction[22] There are two questions for the Court. The first is whether the Court's undoubted inherent jurisdiction extends to a case such as this. The second is whether, if jurisdiction does exist, it ought to be exercised in favour of the interveners. I do not regard the express power to grant a stay, appearing in r 5.1, as designed to cover the position in which the interveners find themselves here. [23] This Court has a wide inherent jurisdiction which exists in order to ensure that the Court is able to administer justice in a manner that is fair and equitable.Among the leading cases is Taylor v Attorney-General3 where at 682 Richmond J said:But when one speaks of the "inherent jurisdiction" of the Court to make orders of the kind now in question the problem really becomes one of powers ancillary to the exercise by the Courts of their jurisdiction in the primary sense just described. Many such ancillary powers are conferred by statute or by rules of Court, but in so far as they are not so conferred then they can only exist because they are necessary to enable the Courts to act effectively within their jurisdiction in the primary sense. In New Zealand the Supreme Court has "all judicial jurisdiction which may be necessary to administer the laws of New Zealand": Judicature Act 1908, s 16. The approach which I am endeavouring to make to this question of inherent ancillary powers is consistent with what Lord Morris said in R v Connelly [1964] AC 1254; [1964] 2 All ER 401: There can be no doubt that a Court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such jurisdiction. I would regard them as powers which are inherent in its jurisdiction. (ibid, 1301; 409). The essential nature of this inherent jurisdiction was aptly and succinctly described by Master Jacob in the course of an informative and instructive lecture on the subject which has been published in Current Legal Problems 1970. At pp 27-28 he said: The jurisdiction which is inherent in a superior court of law is that which enables it to fulfil itself as a court of law. The juridical basis of this jurisdiction is therefore the authority of the judiciary to uphold, to protect and to fulfil the judicial function of administering justice according to law in a regular, orderly and effective manner.[24] The Court's inherent jurisdiction must not be exercised in a manner, or for a purpose, which directly conflicts with a statute, rule or regulation. 4 The Court's inherent jurisdiction is procedural in character, and so must yield to inconsistent express statutory or regulatory provisions. [25] None of this is in dispute. But counsel are at odds as to the availability of the Court's inherent jurisdiction in the present case. Mr Pidgeon argues that to accede to the interveners' application would be to grant relief which s 165 of the Act precludes, and indeed, that the interveners lack standing to bring the present application, let alone have it determined in their favour.2 [2010] 2 NZLR 857 (HC) at [23].3 [1975] 2 NZLR 675 (CA)4 Taylor v Attorney-General; Paraha v Police [2008] NZAR 581 (HC) at [23].[26] For his part, Mr McPherson argues that, insofar as the present application invokes the inherent jurisdiction of the Court, it lies entirely outside the reach of s 165, and it is artificial and inappropriate to raise the question of standing where the Court is asked to exercise its inherent jurisdiction. [27] There is a significant degree of overlap between these two considerations. If the present application is subject to the provisions of s 165, then the interveners must fail because they are not shareholders of the defendant for the purposes of that section. But if the application is not caught by s 165 at all, the question of standing becomes irrelevant. [28] I consider the application not to conflict with s 165. Under s 165(1)(b), a shareholder is empowered to intervene in proceedings in which a company is a party for the purpose of " continuing, defending, or discontinuing the proceedings on behalf of the company ". [29] The interveners do not seek leave to act on behalf of Top International, nor do they act for the purpose of continuing, defending or discontinuing the present proceedings. Rather, they apply in their own right for a stay of the proceedings pending delivery of judgment in Yang v Chen. Moreover, the prohibition in s 165(6) upon a shareholder intervening in any proceedings in the name of, or on behalf of, a company (save as is provided in s 165 itself), does not extend to a case such as the present in which the interveners do not seek to take any step in the name of, or on behalf of, Top International. Their application is brought in their own right on the basis that they are both the equitable and legal owners of all of the shares in Top International, who would control the company but for the unilateral actions of Mr Chen. [30] Accordingly, I consider that to accede to the present application by exercising the inherent jurisdiction of the Court would not be to take a step which conflicts with s 165. I turn therefore to the second issue, namely whether in the exercise of its inherent jurisdiction the Court ought to grant a stay.[31] The starting point is that, Mr Chen having elected to take no step in the proceeding, the plaintiff is prima facie entitled to judgment by default. But there are several countervailing considerations. [32] The first is that the only asset of Top International, to which the plaintiff might have resort if judgment is obtained, is the sum of approximately $2.6 million, presently frozen by Court order. So a delay will not of itself imperil the plaintiff's prospects of recovering the fruits of any judgment. There is also an outstanding application by the plaintiff for a further freezing order in respect of the sum concerned. [33] A second, central, point is concerned with notions of fairness and the due administration of justice. At the time of the hearing of the application, there was a prospect that the interveners might be declared the legal owners of the shares in Top International in proceedings in which judgment is awaited, and thereafter in a position to determine whether or not that company ought to defend the present proceeding. It can fairly be said that to permit the plaintiff to obtain judgment by default in such circumstances would be to confer a benefit upon the plaintiff, simply by reason of the fortuitous timing of the commencement of its proceeding. To permit the plaintiff to seal judgment by default by reason of a decision taken by a person (Mr Chen) subsequently who might be declared to have no interest in the defendant, is not obviously consistent with the due and proper administration of justice. [34] Of course that consideration carries weight only if there is a basis upon which the proceeding might properly be defended. [35] The plaintiff's claim is pleaded economically. It says that it is the Department of the Government of the People's Republic of China which is lawfully entitled to recover misappropriated funds, either in the Republic or elsewhere. It pleads that Mr Liu in his capacity as Chairman and Managing Director of Beiya Industrial Group Co Ltd, fraudulently arranged for that company to remit moneys overseas to the defendant. Having provided particulars of the sums concerned, the plaintiff then pleads that the defendant is in a fiduciary relationship to Beiya inrespect of the funds, and that the defendant holds those funds on a constructive trust for the plaintiff. [36] If they are able to assume control of the defendant, the interveners propose to: a) seek particulars of the allegation of fraudulent misappropriation, and then defend such allegations (bearing in mind the fact that Mr Liu was not convicted in respect of charges relating to the alleged payments to the defendant); b) claim a set off in respect of repayments of approximately US$3.4 million made to Beiya in early 2006; c) consider the joinder of certain third parties who were arguably the ultimate recipients of substantial payments made by Top International; d) oppose the plaintiff's application for a further freezing order. [37] No evidence has been tendered in the present proceeding of the circumstances surrounding the alleged payments to the defendant; neither has any significant documentation been produced. However, the transactions concerned received considerable attention during the trial of Yang v Chen. For present purposes it is sufficient to say that the relevant transactions (including those with which the present case is concerned) are complex, and that it could not be said that any such defence mounted in the present proceeding would be vexatious. [38] Mr Pidgeon raises a concern in respect of costs. He points out that if the proceeding is defended, then the plaintiff would be obliged to adduce evidence which would entail the presence in New Zealand of one or more Chinese witnesses (or possibly the establishment of an appropriate video link for the taking of evidence). That is certainly a relevant consideration, but would simply be part and parcel of the resolution of the proceeding. In other words, it would not be anadditional cost which the plaintiff would not be obliged to incur if the interveners were in control of the defendant from the outset of the proceeding. [39] Mr Pidgeon also argues that, if the present application is allowed, it will create an unfortunate precedent by inviting any disgruntled shareholder to sidestep the requirements of s 165 by applying to intervene in the proceeding, in reliance on the Court's inherent jurisdiction. [40] It is difficult to see how this case could create a significant precedent. The circumstances are highly unusual. At the time of the hearing of the application the interveners and Mr Chen had completed three years of hard fought litigation culminating in an eight week trial in which judgment is awaited, and will be available shortly. In other words, a ruling as to the status of the interveners as shareholders of the defendant will soon be available in other proceedings. [41] I accept that it would not be appropriate for cases such as the present to be bogged down by arguments between rival claimants to the shareholding of a defendant. The significant distinguishing feature of the present case is the fact that there will shortly be a ruling in other proceedings as to the status of the interveners.Conclusion[42] I have reached the conclusion that the interveners are entitled to an order staying the present proceeding. To refuse a stay would effectively enable the plaintiff in the circumstances of this case to derive a benefit from the unresolved dispute between the interveners and Mr Chen. [43] At the time of the hearing of the present application judgment in that dispute is not available, but the interveners could be said to have a reasonable prospect of assuming control of the defendant.Result[44] On the application of the interveners there will be an order staying the proceeding until the expiration of a period of 14 days following delivery of judgment in Yang v Chen. Within that time the interveners (if successful in Yang v Chen) may take such steps as they see fit towards assuming control of the defendant, and of taking appropriate steps in the present litigation. If no such step has been taken, the plaintiff may thereafter enter judgment by default. If the interveners are unsuccessful in Yang v Chen the order for stay will lapse upon delivery of that judgment. [45] Costs are reserved. Counsel may file memoranda if they are unable to agree.C J Allan J