A relationship beginning as friends ended with allegations of dishonesty in handling Chinese investment in the New Zealand wine industry. Xiaolin Chen was ordered to repay $1.2 million and Waihopai Valley Vineyard Ltd ordered to repay $1.17 million; money advanced to take Waihopai Valley Vineyard out of receivership in 2013. Chen interests subsequently sold Waihopai assets without accounting for the proceeds.
It was a friendship between their respective spouses that saw Xiaolin Chen, also known as Chris Chen, join forces with Hongzhao Huang back in 2006 with plans to develop vineyards in New Zealand. A New Zealand citizen since 2001, Mr Chen promoted New Zealand wines in China though franchised outlets branded as Chateau Kiwi. Mr Huang lived in China.
The Court of Appeal was told their joint business interests first commenced with plans to buy land in Matakana, north of Auckland, intending to develop a lifestyle subdivision within a vineyard. Ownership at Matakana was taken in the name of Mr Chen. Mr Huang stayed in the background; lacking New Zealand citizenship, he needed Overseas Investment Office consent before surfacing as an owner.
The Matakana purchase adjoined land owned by the Vegar family. They introduced Mr Chen to another business opportunity, developing a further vineyard in Marlborough; a proposal which eventually became Waihopai Valley Vineyard Ltd. The Vegars were to develop and manage this project on his behalf.
By 2013, the Marlborough project as in deep financial trouble: contractors unpaid; crop yields down; and a dispute with the Vegars over payments due for the current harvest. ASB Bank appointed receivers to protect its mortgage security over the vineyard and its current crop.
Mr Chen’s relationship with Mr Huang then got a lot more complicated. At a time when their Matakana business relationship was underway, Waihopai needed rescuing.
Mr Chen floated the idea of having ASB repaid by merging Matakana and Waihopai, with Huang interests putting in cash and taking an equity interest in the Marlborough vineyard.
The two were later in court arguing over the status of Mr Huang’s $2.3 million cash injection used to repay ASB.
Mr Huang claimed it was a loan, as yet repaid. Mr Chen said it was an equity investment. Mr Chen had some explaining to do, Mr Huang said.
The Court of Appeal was told Mr Chen sold off Waihopai assets after the company came out of receivership, distributing the $7.4 million proceeds to Chen interests, with nothing for Mr Huang. He learnt of the asset sales months after the event.
Litigation centred on Chinese cultural norms of guanxi, the importance of maintaining ongoing relationships unfettered by any need for written documentation, a practice most commonly seen with intra-family financial arrangements.
The Court of Appeal ruled this was not a case where guanxi was relevant. The two had a business relationship stretching back years. In their business dealings, the practice had been to formalise their relationship with legally-drafted contracts.
Mr Huang’s $2.3 million Waihopai cash injection was a loan, not an equity investment, the court ruled.
There was no evidence of an agreed integration of the Matakana and Waihopai businesses, such that Mr Huang was an equity investor in Waihopai. Both sides had circulated various merger options. These were no more than ‘suggestions’. Shareholdings were never decided, being dependent on further due diligence and asset valuations.
One stumbling block in their Waihopai merger negotiations had been Mr Huang’s demand to see copies of Waihopai’s financial statements, copies which Mr Chen never handed over. It was later discovered Mr Huang’s cash advances were recorded in Waihopai’s financial statements as loans, albeit as ‘shareholder loans.’
In addition, Mr Chen had confirmed to the Overseas Investment Office in 2018 that the $1.2 million he received from Mr Huang was a loan. This at a time when the Office was suspicious that Mr Chen had been improperly acting as trustee for Mr Huang, potentially part of a scheme to end-run overseas investment rules requiring Mr Huang to first get approval before making equity investments in New Zealand land.
The court ruled Mr Chen was personally liable to repay the $1.2 million received from Mr Huang. Waihopai was liable to repay $1.17 million it received direct from Mr Huang.
Action is being taken against Chen interests to recover cash stripped out of Waihopai following the Waihopai asset sales.
Chen v. Huang – Court of Appeal (1.03.24)
24.068