THE MINISTRY OF JUSTICE FOR THE PEOPLE'S REPUBLIC OF CHINA V TOP INTERNATIONAL LIMITED HC AK CIV 2010-404-2918

THE MINISTRY OF JUSTICE FOR THE PEOPLE'S REPUBLIC OF CHINA V TOP INTERNATIONAL LIMITED HC AK CIV 2010-404-2918 13 April 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2010-404-2918BETWEEN THE MINISTRY OF JUSTICE FOR THEPEOPLE'S REPUBLIC OF CHINAPlaintiffAND TOP INTERNATIONAL LIMITEDDefendantHearing: 13 April 2011Appearances: Yoon Lee for plaintiffP J McPherson for defendantJudgment: 13 April 2011JUDGMENT No.2 OF ALLAN JSolicitors/parties :Yoon Lee, DX CP 24183, TakapunaDepartment of Judicial Assistance and Foreign Affairs, People's Republic of China:zhangxiaoming@moj.govt.cnHesketh Henry, Auckland Patrick.mcpherson@heskethhenry.co.nz[1] Before me this morning is an application by the plaintiff for a freezing order and applications by the defendant for an order striking out the proceeding, and in the alternative, for security for costs.[2] The latter applications were set down for hearing as a nominal date, in the expectation that notices of opposition would be filed. In the event, no such notices have been filed and served, but Mr McPherson accepts that in the circumstances as they now exist, it is appropriate to stand those applications over for further consideration at a later date. Accordingly, the Court is presently concerned with theplaintiff's application for a freezing order.[3] Mr Lee appears this morning to seek an adjournment for that application on behalf of the plaintiff. The application is opposed.[4] In order to place the adjournment application in its proper context, it is necessary to outline something of the history of this proceeding, and anotherproceeding in which Limin Yang and Jasmine Liu (Mrs Yang's daughter) wereplaintiffs, and Mr Paul Chen was the defendant. In the latter proceeding the principal issue in dispute related to the ownership of the shares in three companies including Top International Ltd (Top), the present defendant.[5] The trial of the Yang v Chen1 proceeding commenced in this Court in late April 2010, and continued well into June. At the outset of that proceeding, the present plaintiff sought to play a role. It was represented by counsel who sought to have the Ministry of Justice joined as a party. I declined that application and suggested that the better course would be for the Ministry to commence a separate proceeding. That was duly done. The present plaintiff also filed an application for a freezing order. The principal objective of that application was to secure a sum, then of the order of about $2.6 million, held by a firm of Auckland solicitors, pending the outcome of the Yang v Chen litigation. The fund was the property of Top, and so the1 Yang v Chen HC Auckland CIV 2007-404-1751, 5 October 2010.outcome of the other proceeding would determine as between the Yangs and Mr Chen, who had the beneficial entitlement to the sum so held.[6] The present plaintiff did not seek to bring on its freezing order application for hearing. At that time, it was perhaps understandable that that should be so, given that in effect the fund of $2.6 million was frozen by an earlier order of the Court. But after the trial in Yang v Chen had been completed, and while judgment was awaited in that proceeding, the present plaintiff sought to take judgment by default against Top, that company having filed no statement of defence.[7] At the time, Mr Chen was in control of Top, in that he was the only shareholder appearing on the register of members, and also the only director of the company. Whether he was entitled to remain on the register was an issue that lay at the heart of the Yang v Chen litigation.[8] Ms Yang and her daughter became aware that the Ministry proposed to take judgment by default, and sought to intervene in the present proceeding, although they had no formal status to do so. It was agreed between counsel for the plaintiff and counsel for Ms Yang, that the Court would be asked to determine whether Ms Yang and her daughter had status to intervene in the present proceeding for the purpose of seeking a stay. If a stay was granted, the plaintiff's present freezing orderapplication would not be determined until judgment was available in Yang v Chen.[9] It was also important to Ms Yang that she obtain a stay because Mr Chen'sposition was that there was no defence to the present proceeding, and that it was appropriate for the plaintiff to take judgment by default. Ms Yang believed that Top had a good defence.[10] I heard argument in the present proceeding in respect of the application by Ms Yang and her daughter for intervener status and for a stay on 1 September 2010, and gave judgment on 10 September 2010. In that judgment I upheld the argument by Ms Yang and granted a stay of the proceeding as a whole, so precluding the plaintiff from entering judgment by default. The stay was to inure until a stipulated period following the delivery of the judgment in Yang v Chen. Judgment in the latterproceeding was given on 5 October 2010. In broad terms Ms Yang and her daughter were successful, and were declared to be the owners of the shares in Top.[11] I directed in my judgment of 10 September 2010 in the present proceeding that in the event that Ms Yang and her daughter were successful in the other litigation, they were to have a stipulated period in which to file a statement of defence in the present proceeding. They duly did so. Thereafter, this proceeding has carried on in the ordinary way as a defended proceeding. It was then incumbent upon the plaintiff to take steps to bring on for hearing its application for a freezing order.[12] Following delivery of the judgment in Yang v Chen on 5 October 2010, I discharged the freezing order under which the sum of $2.6 million was held by a firm of Auckland solicitors. That was done on Mr McPherson's application, on thefooting it was to be replaced by an undertaking by his firm to the Court that the sumwould be held in his firm's trust account until further order of the Court. There was no formal opposition to that course, Mr Pidgeon having no instructions on the point but not raising any serious concern. The sum concerned remains in the trust account of Hesketh Henry, pursuant to the undertaking.[13] As part of the process of advancing the present proceeding as a whole, theCourt allocated a fixture for the hearing of the plaintiff's present application for afreezing order. Timetable directions were given, and the application was set down for hearing as a one day fixture on 25 March 2011. In the event, the application was not able to proceed to hearing on that day because I had a conflicting judicial commitment. An alternative fixture for 13 April (today) was allocated instead, in consultation with counsel.[14] From the Court's point of view, there matters stood until Friday of last week,that is 8 April 2011, when the Court received a memorandum by Mr Pidgeon, in which he indicated that the plaintiff was in difficulty in meeting today's fixture, that there had been a level of misunderstanding and miscommunication between him and his client, and that an adjournment would be sought on the footing if it was notgranted, Mr Pidgeon would seek leave to withdraw. Mr McPherson subsequently filed a memorandum in which he indicated that an adjournment would be opposed.[15] On the afternoon of 12 April 2011 the Court received a memorandum which appears to have been sent by e-mail direct from Mr Xiaoming Zhang, the Director of the Department of Judicial Assistance and Foreign Affairs with the Ministry of Justice of the People's Republic of China (PRC). Mr Zhang has had the carriage of the matter in the Ministry over the past year or so. The memorandum was presumably sent direct to the Court in order to save time, having regard to the pendency of the present fixture.[16] In it, Mr Zhang took issue with one or two of the statements made by Mr Pidgeon in his memorandum, and advised that Mr Pidgeon would no longer berepresenting the plaintiff because of "serious misunderstanding and breakdown incommunication between Senior Counsel and the Ministry".[17] This morning, Mr Lee, the solicitor on the record for the plaintiff, hasappeared largely as a matter of courtesy to explain the plaintiff's position. AlthoughMr Lee has a general obligation by virtue of his status as solicitor on the record, he has not been heavily involved in the conduct of the proceedings in recent times, and in particular only in the last day or so has he become aware of the difficulties arising in the communications between Mr Pidgeon and the Ministry. On the plaintiff'sbehalf, he advanced the application for adjournment, but was able to add little to what appears in the brief memoranda filed by Mr Pidgeon and Mr Zhang.[18] Mr McPherson opposes the application on twin grounds. The first is that there is no proper basis on which it would be right to accede to the adjournment application, having regard to the procedural history. The second is that the application has no prospect of success on the merits.[19] I deal with the first of those grounds, namely the history of the litigation. It must have been readily apparent to the plaintiff that, as from the date of my judgment in Yang v Chen, (5 October 2010), there would be a defence to the present proceeding, and that the current application for a freezing order would be opposed.Despite that, nothing has been filed by the plaintiff in relation to the freezing order application during the past six months (beyond procedural memoranda), and counsel for the plaintiff has not been furnished with the material necessary to enable him to advance the case for the plaintiff on the present application.[20] Mr Zhang places the responsibility for that unsatisfactory state of affairs upon the shoulders of Mr Pidgeon, and Mr Lee has reinforced that argument, albeit without significant personal knowledge of the circumstances.[21] I have some difficulty in accepting that contention at face value. Mr Pidgeon was instructed by the plaintiff presumably for his experience and status as a Queen'sCounsel. He is very experienced, senior member of the bar, and well aware of his responsibilities both to his client and to the Court.[22] My concerns are not allayed by Mr McPherson's advice to the Court that inopen correspondence with Mr Pidgeon, he (Mr McPherson) has been kept advised of Mr Pidgeon's difficulty in obtaining meaningful instructions from the plaintiff, to thepoint at which Mr Pidgeon saw a looming difficulty in respect of the conduct oftoday's hearing, some time ago.[23] In Mr Zhang's memorandum there is some suggestion that, at the outset, the plaintiff had considered that the application for the present freezing order would ultimately be unopposed. There would have been some justification for that view during the middle of last year when Mr Chen was in control of Top. But Mr Chen has been in China for more than a year now, assisting the Chinese authorities with their investigations into the affairs of a number of entities in which fraudulent activities have been uncovered. At this point it is appropriate to mention that Ms Yang's husband, Mr Liu Guiting, was on 1 April 2009 found guilty of a number of offences including fraud and embezzlement, and was sentenced to life imprisonment. The funds currently held by Top are said to be the product of Mr Liu's criminal activities. I will return to that point shortly.[24] I return to the situation which confronts the Court today. In simple terms itappears that the plaintiff has done nothing towards preparing for today's application,albeit that the 25 March fixture was allocated in December 2010, and so there was ample opportunity for the plaintiff to adduce appropriate evidence and prepare argument.[25] It is difficult to attach great weight to Mr Lee's argument that the plaintiffought to be permitted a further opportunity to put its house in order and that it would be appropriate to adjourn the application to enable that to occur. There are two broad reasons for that; first it cannot reasonably be contended that the Ministry is not sufficiently resourced in order to prepare its case, nor can it be suggested that it did not have the benefit of the services of a very experienced counsel. Second, theparties have had a significant period within which to prepare for today's hearing, andthe explanations put forward in the memoranda of Mr Pidgeon and Mr Zhangprovide no hint as to why it was not possible for the plaintiff to prepare for today'sapplication.[26] There is another compelling factor to my mind. It is this: applications for freezing orders are, of their very nature, draconian and invasive. That point has been made over and over again in the earlier cases. Mr McPherson has helpfully referred in his synopsis to Bank Mellat v Nikpour,2 in which Donaldson LJ referred to the remedy of a mareva injunction (the precedessor to a freezing order) as draconian and equivalent to "nuclear weapons". A party ought not to be placed in a position wherefor many months it is facing the prospect of a freezing order. Such a party is prevented, at least in theory, from dealing with the asset while the freezing order application is pending, and is left in a state of doubt before the application is heard as to whether any dealing with that asset would be proper, and if so on what terms. A party which applies for a remedy such as a freezing order is in my view bound to bring on the application with celerity, and to do all it can to have the Court resolve it at the earliest possible time.[27] Here, the reverse has occurred. The plaintiff appears to have accorded the application no priority at all.2 Bank Mallet v Nikpour [1985] FSR 87 at 92.[28] Of themselves, those considerations suggest to me it would be appropriate to refuse the application for adjournment, but another relevant factor is the strength of the application itself. In a case where the merits of the application might be thought to be overwhelming, the Court will ordinarily look with greater sympathy on an application for an adjournment, even where the procedural basis for it might be weak. Here, I accept Mr McPherson's submission that, on the face of it, the substantive proceeding lacks substance. For one thing the statement of claim is pleaded economically, as I observed in an earlier judgment, and appears to represent an amalgam of a claim to a constructive trust, and a claim to recovery of the proceeds of criminal activity.[29] Insofar as the statement of claim constitutes a claim to recover assets which Top is said to hold for the plaintiff, there is jurisdiction for the Court to grant a remedy, but only at the suit of a party which has status to sue. Here, the defendant has taken the trouble to file expert evidence as to relevant aspects of Chinese law, which is a matter of fact in this Court. That evidence stands unchallenged. The appropriate plaintiff in a claim based on constructive trust will be the beneficiary of that trust. The information appearing in the statement of claim leads to the conclusion that the company concerned is an entity called Suifenhe Fuquan, which was a corporate entity registered in the PRC. But, that company is insolvent and has been struck off the relevant register in China. Accordingly, it has no existence for legal purposes.[30] Mr Zhang says the Ministry has the legal entitlement to pursue the claim on behalf of the company, but the Court has not been supplied with the legal basis upon which the claim is advanced.[31] As Mr McPherson submits, one would readily understand that a body or person having a status akin to that of liquidator or Official Assignee, might well be empowered to issue proceedings to recover the funds concerned, but there is no suggestion of that in the statement of claim, nor in any affidavits filed by the plaintiff. That being so, there must be a grave doubt as to whether the plaintiff has the necessary status to sue on the alleged breach of constructive trust.[32] The alternative basis on which the claim may well be advanced by the plaintiff, depends upon the conviction of Mr Liu and the making of confiscation orders in the PRC. One can understand that the plaintiff's position might well bethat Mr Liu's activities included business transactions which led to the remission offunds from China to New Zealand and which have found their way into the hands of Top. But there is nothing in the records of the Chinese Courts currently available to this Court, nor in the affidavits filed on behalf of the plaintiff, to suggest that the $2.6 million held by Top is the product of criminal activity which resulted in Mr Liu'sconviction.[33] Mr Zhang does touch upon the topic, but he stops short of asserting the funds were the direct product of the charges on which Mr Liu was convicted, and there is certainly no trail of evidence by way of documentation or sworn evidence to satisfy the Court that there may be some connection.[34] Indeed, in his synopsis this morning, Mr McPherson pointed to certain evidence to the contrary. It is to be found in the transcript of interviews between Mr Liu and a third party and investigating officials in China.[35] Quite apart from that however, there is the apparently insurmountable obstacle of the inability of this Court to grant any remedy which would amount to the enforcement of a criminal confiscation order made in a foreign country.[36] Mr McPherson has helpfully referred the Court to several authorities to that effect. Among them is the judgment of the English Court of Appeal in Attorney- General of New Zealand v Ortiz.3[37] It seems to me clear beyond argument that this Court cannot, sitting in its civil jurisdiction, grant the plaintiff a remedy which would amount to the enforcement in this country of a criminal sanction imposed in China.[38] As Mr Lee accepts, the enforcement of foreign forfeiture orders in this country is covered by the provisions of the Mutual Assistance in Criminal Matters3 Attorney-General of New Zealand v Ortiz [1984] 1 AC 1 (CA).Act 1992. China is a signatory to the protocols which are relevant to the administration of that Act, and so, at least in theory, the PRC will be entitled to ask New Zealand to assist in enforcement in such orders as have been made against Mr Liu. There is some suggestion in the memoranda filed on behalf of the plaintiffthat steps are in train to that end. But that aspect of the plaintiff's claim is not amatter for this Court. Accordingly, insofar as the claim relies upon enforcement of foreign forfeiture orders, it could not possibly succeed in the present proceeding.[39] For these reasons I accept Mr McPherson's submission that the underlyingproceeding is, of itself, weak, and accordingly, the plaintiff is unable to call upon the strength of the underlying claim as a factor to be weighed in the balance in determining whether an adjournment ought to be granted.[40] In situations such as the present, the Court will always consider carefully the grounds advanced in support of an adjournment application. Parties ought not to be kept from what is sometimes called the judgment seat, particularly in circumstances where problems are not of the party's own making.[41] Here, however, I have concluded without difficulty that the Ministry could,and should, have prepared its case in time for today's hearing. I am not convincedthat any misunderstandings between the plaintiff and Mr Pidgeon were of such character or duration as to lead to the position confronting the Court; namely thatthe plaintiff has done nothing about preparing for today's application.[42] Justice requires the Court to take into account not only the plaintiff's position, but also that of the defendant. The defendant's solicitors gave anundertaking in respect of the fund of $2.6 million many months ago. The intention was that the undertaking would inure until disposal of the present application. Mr Lee submits that little would be lost if the application was adjourned for a matter of a few weeks and brought on for hearing on the merits then, but there are two compelling considerations preventing that course being followed. First is theapparent weakness of the plaintiff's case, and second, the entitlement of thedefendant, and of its directors and shareholders, to know where it stands. In otherwords, it ought not to be placed in a position where it must endure a further period of weeks or months, before the disposition of the fund can be determined.[43] For these reasons the application for an adjournment is refused.[44] At this point I should indicate that I am grateful to Mr Lee for his attendance today. He does so pursuant to his general obligations to the Court as solicitor on the record, but he has been placed in a somewhat difficult position, because he has not been directly involved to any significant extent in the conduct of this proceeding until very recently. He has done his best to advance every possible argument that could be employed to secure an adjournment, and his attendance and assistance are appreciated.[45] Mr Lee is not in a position to advance the application for a freezing order on its merits today. Mr McPherson seeks an order dismissing the application. In the circumstances as outlined, that is the only possible outcome, and the application is accordingly dismissed.[46] It follows also that it is appropriate to discharge Hesketh Henry from its undertaking to hold the funds until disposal of the present application. That firm is discharged accordingly.Costs[47] The defendant having succeeded, it is entitled to an order for costs. Mr McPherson is content with an order calculated in accordance with category 2B.[48] There will be an order accordingly; the order to include all reasonable disbursements.[49] The application for an order striking out the proceeding and the accompanying application for security for costs remain extant.[50] In a telephone conference presided over by Associate Judge Matthews on 5 April 2011, the parties were directed, in the event that the proceeding was not struck out today, to deal with discovery issues prior to the next conference date. Associate Judge Matthews contemplated that I would give discovery directions. However, in the circumstances as they now are, Mr McPherson is not disposed to pursue discovery matters, particularly in view of the fact that the plaintiff presently has no counsel.[51] Accordingly, I give no procedural directions.[52] There is a telephone conference set down for 10 am on 18 August 2011. No doubt the management of the file as a whole will be reviewed at that stage. The parties are at liberty to file such applications as they choose prior to August, and indeed, to seek a conference if circumstances arise which warrant that course.C J Allan J