Bei v Wang
[2020] NZHC 897
•5 May 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-1164
[2020] NZHC 897
BETWEEN DUOYU BEI
Plaintiff
AND
CHAO WANG
First Defendant
AND
WILSON MCKAY TRUSTEE COMPANY (228904-10) LIMITED
Second Defendant
AND
MYST TRUSTEE LIMITED
First Third Party
AND
WEI KONG
Second Third Party
Hearing: 3 February 2020 Appearances:
DPH Jones QC and D-M Cross for Plaintiff, First Third Party and Second Third Party
D J Clark, J Clark and J Corlett for Defendant
Judgment:
5 May 2020
JUDGMENT OF WALKER J
This judgment was delivered by me on 5 May 2020 at 10.00 am Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
BEI v WANG & ORS [2020] NZHC 897 [5 May 2020]
Introduction
[1] The plaintiff, Duoyu Bei, alleges the first defendant, Chao Wang, is liable to him for misrepresentation, in deceit, and for breach of fiduciary duty. According to the pleadings, Mr Bei advanced money to Mr Wang. The advances were of two kinds. The first was in return for a 50 percent shareholding of Wang C Ltd. The second was to pay for a renovation of the nightclub business operated by Wang C Ltd. The payment to Mr Wang was to be attributed to the company. Wang C Ltd was placed in liquidation on 13 April 2017.
[2] The plaintiff’s case is that the majority of the money was not utilised by Mr Wang for loan purposes but for personal purposes, including on a property on Paritai Drive, Orakei. The registered proprietor of the Orakei property was the Wang C Trust. The second defendant is the trustee of the Wang C Trust.
[3] Mr Wang left New Zealand in early 2017. He has no known assets in New Zealand. The net proceeds from the sale of the Orakei property are held in the trust account of Wilson McKay pursuant to a freezing order. The freezing order was made by consent in December 2017. Among other things, Mr Bei alleges that the Wang C Trust is a sham such that the Trust assets are in fact Mr Wang’s assets. The pleading asserts that those Trust assets are held on constructive trust. Mr Bei claims a total of
$1.28M. The amount held on trust is around $975,000.
[4] Mr Wang denies the allegations. He has filed a counterclaim. He asserts, among other things, that the trustees of the Olympians Trust (for whom Mr Bei is said to have acted at all times) breached the shareholder agreement; that Mr Bei and others took control of the company’s affairs from January 2017, locking Mr Wang out of the management and affairs of the company and securing for their own benefit all income received by the business. Mr Wang also seeks relief under s 174(2)(b) of the Companies Act 1993. Mr Wang seeks damages for $1.1M representing the value of his lost shareholding, $400,000 for lost income, and general damages.
[5] The substantive trial was to commence on 12 August 2019. On the last working day before trial, the plaintiff and Court was notified that Mr Wang would be unable to attend unless entry visa issues were resolved. For reasons which will emerge, I vacated
the trial on 13 August 2019. A new trial is scheduled to take place commencing 15 February 2021.
[6]Three interlocutory matters arise following the adjournment of the trial:
(a)Plaintiff’s application for wasted costs;
(b)First defendant’s resurrected application for the taking of evidence at trial by AVL; and
(c)Defendants’ application to vary freezing orders.
[7] There are also ancillary costs issues. First, in respect of the plaintiff’s successful non-party discovery application determined by Jagose J on 4 November 2019. Jagose J reserved the question of costs at the request of the parties. Second, in respect of an application for a discovery enforcement order which was withdrawn by the defendants.
Wasted costs
[8] Wasted costs are inevitable where a trial is vacated at its commencement. There is an inherent jurisdiction to order wasted costs when a trial is postponed through the fault of a party. While there is no specific rule in the High Court Rules dealing with wasted costs, the principles underpinning the costs regime may be drawn on.
[9] Wasted costs include costs incurred for work undertaken that will not have any further benefit to the case of the claiming party, as well as the value of work which will be duplicated in preparing for the replacement trial.1 The Courts routinely recognise that there is inconvenience not only to the claiming party but also to other parties who are awaiting fixtures. The Court is entitled to sanction parties who cause fixtures to be vacated through their own default.
1 Burgess v Monk [2015] NZHC 1881.
[10] There are two issues for determination. First, the operative cause of vacating the trial. Secondly, the consequences for the party responsible.
Reason for vacating the trial
[11] As to the first issue, Mr Clark submits that there were many factors at play. He says that the time allocation for the fixture was a significant issue, aggravated by the plaintiff’s non-compliance with timetabling directions for exchange of evidence which led to unresolved evidential challenges. He submits that, had the plaintiff consented to the taking of Mr Wang’s evidence by AVL from China, the trial could still have proceeded in his absence and the plaintiff’s resistance to this course was unjustified.
[12] I am firmly of the view that there would have been no need to vacate the trial but for Mr Wang’s unexpected and inadequately explained absence from New Zealand at the start of the trial. Other factors contributed to the difficulties, but I am satisfied that the practical measures I proposed would have overcome those factors. This is for three reasons.
[13] First, counsel agree that Mr Wang’s evidence is critical. He is the first defendant. He is also the settlor and appointer under the Deed constituting the Wang C Trust. Allegations of dishonesty underpin the plaintiff’s case; thus Mr Wang’s credibility is a live and crucial issue in answering the plaintiff’s allegations and pursuing his own counter-allegations.
[14] Second, the chronology is telling. On 28 May 2019, the plaintiff’s solicitors put the defendants on unequivocal notice that the plaintiff required Mr Wang in New Zealand to give his evidence. The defendants’ solicitors responded stating that “Mr Wang has every intention of appearing at the trial and will be present”.
[15] On the last working day before the trial, Mr Clark raised for the first time the possibility of Mr Wang not returning to New Zealand. It was raised as a side-wind. Mr Clark advised the Court that visa difficulties were blocking Mr Wang’s ability to enter New Zealand. He signalled a likely mode of evidence application to have Mr Wang’s evidence by AVL from Shanghai. Mr Jones QC described this as part of a
stratagem by the first defendant to avoid coming back to New Zealand. He vigorously opposed any application to do so.
[16] I issued a Minute requiring a formal application with supporting material if that remained the position. My Minute noted that counsel will need to satisfactorily address any practical impact on the trial.2
[17] On the first day of trial, the first defendant made the signalled mode of evidence application for the evidence of Mr Wang and his father, Mr Rongbing Wang. It was supported only by a memorandum annexing an email from Mr Wang which stated in part:3
My visa was not granted because they told me that I had a long overstay before, and during the period of waiting for the Unconditional permanent residence visa card approval, I could not leave New Zealand. Unless there was an emergency, I had to apply for an exit visa in advance, otherwise I could not return to New Zealand once I left the country…
[18] Mr Jones was justifiably critical of the inadequacy of the material in support of the application, a point which Mr Clark responsibly acknowledged. The explanation was that a typhoon had hit China with consequent serious flooding, making evidence preparation impracticable and affirming an affidavit impossible. This was exacerbated by the civil unrest in Hong Kong which had closed the airport, meaning that affirmation of an affidavit in Hong Kong was out of the question.
[19] Both counsel acknowledged that the viability of the trial was in jeopardy if I declined the application. Mr Clark accepted that the defendants would need to elect whether to seek to vacate the trial and that this would likely be the only option in that event.
[20] I allowed a 24-hour grace period for the production of evidence in support of the application. Mr Clark provided an updating memorandum the next morning, 13 August 2019, reluctantly conceding that he had been unable to advance the evidential position.
2 Minute (No 2) dated 9 August 2019. In the ordinary course, at the time of the application, setting up AVL facilities effectively could take between 7-10 days.
3 Memorandum of counsel for defendants dated 11 August 2019.
[21] Mr Clark also advised that the time estimates for the trial were too light. He considered that up to seven (7) sitting days would be needed for the plaintiff/third party evidence alone. Mr Jones concurred but attributed the increase in trial length to the defendants’ introduction of a further witness – the new director and shareholder of the second defendant – as well as the production of new material not previously discovered, which raised evidential issues and various evidential challenges which would need to be dealt with as preliminary matters. Mr Clark resisted this attribution. In view of my conclusion that the increase in trial length could be accommodated by the practical measures I proposed, it is unnecessary to determine how and why the trial length needed to be extended.
[22] Mr Clark then sought to adjourn the application, in part because of practical difficulties setting up AVL evidence taking in a city affected by flooding. His memorandum concluded:
While it is possible that the trial could proceed, it will need to be adjourned part-heard pending the outcome of [Mr Wang’s] visa application. This is likely to take up to 30 working days. That leaves the option of an adjournment of the trial which may be the most appropriate option in order to deal with the AVL application should his visa be refused.
[23] Thus, while Mr Clark did not expressly apply to vacate the trial, and indeed was careful not to do so, the effect was a de facto application essentially forcing the position.4
[24] That left the plaintiff in an invidious position. It was impractical for Mr Jones to elect to open the plaintiff’s case knowing that an adjournment part heard was almost certain. Mr Jones was clear at that time, and continues to hold his position, that the inevitability of the outcome was due to the application by Mr Wang on the first day of the scheduled trial to have his evidence taken by audio visual link. I agree.
[25] Third, the responsibility for the visa issues lay squarely with Mr Wang. His affidavit evidence is that the steps he took to obtain an entry visa were no different from previous occasions. He deposes that he applied at a visa office in Athens in
4 I note the Registry advised that 7-10 working days were required in the ordinary course to make the necessary arrangements for overseas AVL evidence facilities.
June 2019 but was verbally advised his application was declined. He states that there is no paperwork because the Athens office did not finish processing the application once he indicated he would try again in China. He says that he then physically filed an application in the Shanghai ‘visa office’ on 1 August 2019 but did not keep a copy of that application. He was verbally advised about a week later that he would not be able to obtain the visitor’s visa, for reasons which have now transpired to be incorrect. Asked whether the application should be formally processed, he elected not to do so. He says that this was to avoid having an adverse record on his passport. Again, he says he kept no paperwork other than a receipt for a hotel stay in Shanghai during this period. I find this absence of documentary material remarkable, all the more so when Mr Wang must have been aware of the importance of his attendance in New Zealand and the representation that he intended to attend the trial to give his evidence.
[26] Mr Jones remains sharply critical of Mr Wang’s explanation. I apprehend that Mr Jones’ submissions impugning Mr Wang’s credibility have a wider objective than this application for wasted costs. Although there are reasonable grounds to doubt the reliability of Mr Wang’s explanation, it would be inappropriate in this context to make credibility findings on the basis of affidavit evidence without the benefit of cross- examination.
[27] I observe only that the affidavit of Matthew Simpson, in contrast to Mr Wang’s evidence, is compelling. It accords with common sense. Mr Simpson is a former Immigration New Zealand (INZ) Compliance Officer and now a licensed immigration adviser. He deposed to INZ’s usual practices as at 2012 when he left INZ. His evidence is that if any application for a visa is declined, INZ would issue a “decline” letter; if an applicant did not want to proceed with an application, he or she would need to formally withdraw it and that withdrawal would be confirmed by INZ; receipts are issued for all applications for visas; fees are also payable and again receipted. He also confirms that all applicants are entitled to request a full copy of the record of their applications from INZ’s computerised system.
[28] Far from there being evidence to show that Mr Wang had done everything practicable to obtain a visa, the converse is true. The explanation is unsatisfactory.
Mr Wang’s evidence is bereft of detail and lacks cogency. The absence of documents corroborating applications for a visa through official channels is inherently unlikely.
[29] I record for completeness that I have found it unnecessary to rely on the affidavit of Mr O’Neill dated 13 September 2019 in reaching my views. Mr Clark objected to much of the content in Mr O’Neill’s affidavit. It is unnecessary in the circumstances to make any ruling on those objections.
[30] I have concluded that the operative cause in this case was Mr Wang’s default. The plaintiff is entitled to an award of wasted costs.
Costs payable
[31] The second issue is the level of costs to be awarded. The plaintiff seeks net costs of $23,466.66 plus disbursements of $500.00. This sum is made up of one third of preparation costs and full attendance costs for a half-day based on the number of preparation days in Schedule 3 of the High Court Rules but at actual hourly rates rather than by the scheduled daily rate.
[32] Mr Clark submits that, in the event of an adverse costs order, 50 percent of scale costs are appropriate. On his calculation, these come to $7,631.90. Mr Clark includes the costs of this application for wasted costs in that figure on a standard 2B basis. He references the schedule produced by the plaintiff; however, my reading of that schedule is that 2B costs on the application for wasted costs alone comes to
$5,019.00.
[33] Drawing an analogy to the approach to indemnity costs under the High Court Rules 2016 is one approach to the exercise of the discretion, but the exercise is as much a matter of impression as anything else.5 Considering all the circumstances, I am satisfied that the appropriate measure is the hybrid proposed by Mr Jones, rather than on a standard 2B basis. This better reflects the dual purpose of the inherent jurisdiction.
5 Jeffreys v Morgenstern [2013] NZHC 1361 at [34].
Conclusion on wasted costs
[34]I make an order for wasted costs against the first defendant in the sum of
$23,466.00 made up of:
(a)One third of actual preparation costs for two counsel based on the
6.5 preparation days permitted by Schedule 3 and actual hourly rates of counsel – $19,066.00
(b)Costs of a half-day appearance for two counsel (combining days 1 and 2 of the intended trial at actual hourly rates rather than scheduled daily rate) – $4,400.00
[35] I make a further order for costs on a 2B basis in respect of the application for wasted costs, plus disbursements of $500.00. I note that the plaintiff’s schedule has calculated these to be $5,019.00 although there is no step included for the hearing (the schedule having been prepared pre-hearing). This means that the costs will be at least that sum with an allocation for the interlocutory hearing added. I expect that the parties can reach agreement on that additional step bearing in mind the proportion of time spent.
Costs of application for non-party discovery and on withdrawal of application for enforcement of an interlocutory order
[36] The application by the defendants for enforcement of an interlocutory order was withdrawn, once it came to counsel’s attention that the plaintiff had in fact complied with the order made by Associate Judge Smith before the application was filed. The plaintiff seeks an award of costs, although no steps were taken in response to the application short of advising that the order had been complied with. Those steps were minimal. I am not prepared to make an order for costs.
[37] The application for non-party discovery against INZ was opposed by Mr Wang on three bases: first, that documentation concerning his immigration status was private and confidential; second, that it was liable to be misused by Mr Bei; and, third, that it
was unnecessary or futile given the Mr Wang had deposed that any documents would not exist in the circumstances, as explained by him.
[38] The plaintiff succeeded in respect of two of three categories of documents. The concerns around confidentiality were responsibly met by a concession that any order may be made in the first instance for inspection by counsel only.6 The fact that success was limited to two of three categories is offset by the fact that the application ought not have been necessary. There were alternative routes to the same end had Mr Wang co-operated to meet his discovery obligations.
[39]The plaintiff is entitled to costs on a 2B basis.
Application as to mode of evidence
[40] The first defendant’s application for his evidence and that of his father to be taken by audio visual link is resurrected but based on changed circumstance. In short, he has changed tack. Mr Wang says that Mr O’Neill and Mr Wang are known to each other in Mr O’Neill’s previous capacity working for the New Zealand Police. Mr O’Neill has provided an affidavit in connection with immigration matters in support of the plaintiff’s application for wasted costs. There are aspects to that prior relationship which are said to pose safety concerns for Mr Wang and his father should they return to New Zealand.
[41] There is nothing in the evidence which persuades me on the balance of probabilities that there is any apparent risk to Mr Wang or his father from the asserted situation. More materially, in my assessment it is both unnecessary and futile to decide the AVL application at this stage.
[42] When the application was argued, the full extent of the Covid-19 crisis and its impact was unknown. Since then, New Zealand has been at Alert Level 4 and is now at Alert Level 3. There are strict border controls. There will likely be restrictions on entry into New Zealand for an indeterminate period. The mode of conduct of civil trials is changing. It will likely continue to evolve to accommodate those challenges.
6 There is also the prohibition on collateral use of discovered documents.
Technological developments will also continue apace to increase the efficiency of conducting trials ‘remotely’.
[43] This means that applications for alternative modes of giving evidence and consideration of the mandatory criteria under s 5 of the Courts (Remote Participation) Act 2010 may be decided in a different context and considering very different factors than those which existed in February 2020. There has to be an air of practical reality to such decisions.
[44]For that reason, I make the following directions:
(a)I adjourn the application for the taking of evidence by AVL link.
(b)The application may be brought on at the request of the first defendant with 21 days’ notice to the plaintiff provided it is no less than 30 days before the scheduled commencement of the trial.
(c)In that event, I will provide the parties an opportunity to update the grounds in support and opposition, including as to travel restrictions which may be in place or foreseeable at that time.
(d)Unless either party requires a further hearing, the application, if brought on, can be dealt with on the papers.
Application to vary Freezing Order
[45] The original application for a freezing order in respect of the net proceeds of sale of the Orakei property was served on 14 June 2017. Mr Bei affirmed an affidavit in support and subsequently made two further affidavits. He also filed affidavits from Yu Ming Shao, manager of the Zeus Nightclub; an affidavit from Tey Chen Teck, one of the contract builders working on the Zeus Nightclub renovation; and Wei Kong, who is the sole director and shareholder of Myst Trustee Limited – the corporate trustee of the Olympians Trust. Further affidavits were filed from Gareth Hoole, one of the liquidators of Wang C Limited; and from Mark Francis, the managing director of the owner of the building in which the Zeus Club operated as a nightclub.
[46] The basis of the application was that Mr Wang had no assets left in New Zealand after his departure in January 2017 and the Wang C Trust is a façade so that its assets – now comprising the funds in a solicitors’ trust account are really assets belonging to Mr Wang. Without a freezing order, it is surmised (and not challenged) that the Wang C Trust assets would move offshore. In that event, any judgment obtained against Mr Wang would be fruitless.
[47] The parties resolved the application for a freezing order by a consent position recorded in a joint memorandum dated 4 December 2017. I reproduce the relevant part of that memorandum in full:
Accordingly, the following freezing order can be made by consent over the subject funds:
(a)The nett (sic) proceeds of the sale of 108 Paritai Drive, Orakei, currently held in the trust account of Wilson McKay, solicitors for the first and second defendants, are hereby frozen until the substantive proceedings have been heard and determined or otherwise resolved.
(b)The only payments that can be made from the funds are for the reasonable legal cost of the defendants. Legal costs incurred dealing with the freezing order application and in conducting the defence of the substantive proceedings can be paid out of the frozen funds up to an overall maximum figure of $200,000 [emphasis added].
[48] In reliance on the contents of the memorandum, Brewer J granted the interlocutory application for a freezing order and made orders adopting the wording of the memorandum. An order dated 5 December 2017 was accordingly sealed.
[49] On my reading of the memorandum and the subsequent order, the combined total of “approved” legal expenditure was up to $200,000. This included both the defence up to that point of the freezing order application and substantive trial. It appears the sum has already been exceeded in that approximately $300,000 has been paid out to Wilson McKay on the understanding that the $200,000 only related to the substantive proceeding. Mr Jones did not take strong issue with that – his concern was more pragmatically about preserving the remaining fund for potential enforcement of any judgment against Mr Bei. That is sensible in the circumstances, since a freezing order must not prohibit the respondent from dealing with assets covered by the order
for the purpose of paying legal expenses related to the freezing order.7 Moreover, the estimated costs for what was then a seven-day trial would not sensibly have also covered the defence of the freezing order.
[50] The application before me seeks to vary the existing freezing order in one of two ways. First, by decreasing the amount required to be held. Second, in the alternative, by increasing the amount available for legal and (now) professional trustee cost expenditure. The grounds for variation are really three:
(a)The evidence now completed and exchanged in readiness for the trial shows that there is little, if not zero, prospect of Mr Bei being awarded any form of remedial relief against the entire funds subject to the freezing order;
(b)The proceeding has now become a 12 or 13 day trial, as opposed to the original seven (7) days allocated;
(c)The cost of the substantive trial would greatly exceed the original estimate of $200,000 given the hotly contested interlocutories combined with (b) above.
[51] Mr Clark, for the defendants, signalled the application for variation of the freezing order just prior to the adjournment of the fixture in August 2019. After the vacation of the trial date the plaintiff’s solicitors requested a breakdown of all legal expenditure to date and estimated future legal expenditure. That was refused, in part on the ground the information was legally privileged. The plaintiff therefore challenges the increase in legal costs as not justified. Mr Jones points out that no accounting has been provided for fees paid to date; there is no proper informed basis for the increase, wasted costs of the defendant should not be included in the sum allocated for fees, and there has been inadequate disclosure of fees claimed to date.
7 Rule 32.6(3)(b) High Court Rules 2016.
Revisiting the freezing order
[52] The first issue is the extent to which the defendants are now entitled to have a freezing order made by consent varied. In essence, the defendants seek to withdraw their original consent save for the sum of $105,000, which they concede for the purposes of this application may be traced to a benefit enriching the Wang C Trust. Mr Jones accepts that it is implicit in the freezing order jurisdiction that variations to a freezing order made by consent might be appropriate in certain circumstances, but not in this case.
[53] In the ordinary course, a freezing order expressly reserves leave to an affected party to vary or discharge the order.8 Even if the order on its face does not record the reservation of leave, courts will readily accept that such a right is implied. However, no case has been cited to me in which the terms of a consent order effectively state that no variation is contemplated pending determination of the substantive pleading. In this case, the order made by consent stipulates that the net proceeds are to be frozen until the substantive proceedings have been determined, save for the amount expressly carved out for payment of reasonable legal costs. This means that there is a good argument that the defendants assumed any risk of a foreseeable change in circumstances. The risk of underestimating the legal spend is a foreseeable change in circumstances unless wrought by the conduct of the other party.
[54] I reject the proposition that there has been a change of circumstances which would render continuation of the freezing order contrary to the interests of justice. There are three reasons.
[55] First, while interlocutory steps are now complete and evidence exchanged, the matters relevant to establishing a good arguable case for a freezing order against the Trust were always matters in the knowledge of the defendants. They could not have learned anything from the exchange of evidence or discovery which shifted the ground.
8 High Court Rules, r 32.8.
[56] Second, the fact that the freezing order is extended in duration by the adjournment of the trial is not something which I am prepared to factor in because the responsibility for this rests on Mr Wang.
[57] Third, I am satisfied that there is a good arguable case for a freezing order over the net proceeds of sale of the Trust property in their entirety, rather than reducing the freezing order to one over an amount traceable into the Trust.
[58]It is well established that to obtain a freezing order:
(a)an applicant must establish a good arguable case;
(b)there must be a risk that the assets will be dissipated or disposed of, the consequence of which would be to defeat in whole or in part the applicant’s ability to execute any judgment;
(c)the applicant must provide a meaningful undertaking as to damages; and
(d)the applicant must make full and accurate disclosure if the application proceeds on a without notice basis.
[59] Part 32 of the High Court Rules effectively codifies these requirements. Ultimately, the question is one of balancing the need to protect a plaintiff so as to ensure any judgment is not rendered pointless against any prejudice or hardship to a defendant and to third parties.
[60] For the purposes of the application for a freezing order, Mr Clark for the defendant concedes that there is an arguable case against the first defendant. This concession realistically reflects the low threshold. He also responsibly acknowledges that discharging the freezing order may mean that the assets will be moved out of the jurisdiction. The effect will be that any judgment which might be obtained against Mr Wang will not practically be of any value.
[61] There is jurisdiction to grant freezing orders against assets held by or on behalf of third parties, or assets held on trust, in appropriate cases without any need to establish a proprietary interest in those assets on the part of the applicant. There must be good reason for supposing there is a relevant interest in the assets purportedly belonging to the third party.9
[62] In this case, two bases are relied on. The first is a challenge to whether the Trust is properly a third party distinct from the defendant. The plaintiff alleges that the Trust property is in truth the property of Mr Wang, which should be preserved for execution of any future judgment against Mr Wang. The second basis is of a different character. It is an assertion that the Wang C Trust is a third party recipient of funds misappropriated from Mr Bei. In this respect tracing the flow of funds serves the evidential purpose of identifying the funds allegedly belonging to Mr Bei which may have ended up in the Trust’s hands.
[63] Mr Clark submits that the most the plaintiff can arguably say the second defendant ever received from the funds originating from the plaintiff is the sum of
$100,000, plus a payment of $5,520 paid by Wang C Limited in respect of work carried out on the Paritai Drive property. As I understand his argument, this is in essence the ‘high-water mark of a tracing exercise’. It puts aside arguments over whether tracing can be achieved when money comes from two accounts holding mixed funds.
[64] In my view, the more material issue is whether there is a sufficiently arguable case that the assets of the Trust are assets on which any freezing orders can “bite”. This relies on showing that the funds are in reality his funds. This falls to be answered in one of two ways. First, whether the trust documentation is a sham such that the structure of the Trust is a construct or façade. In this respect, Mr Jones relies on the following aspects of the Deed of Trust for the Wang C Trust:
(a)Mr Wang is settlor, appointor and final beneficiary. As appointor, Mr Wang has the ability to appoint and remove trustees at will and can appoint and remove beneficiaries unrestrained by any fiduciary obligations.
9 Shaw v Narain [1992] 2 NZLR 544 (CA).
(b)The Deed itself considers the appointer’s rights to constitute a personal property right.
(c)As final beneficiary, the Trust Deed provides fundamental benefits and powers to Mr Wang. The Trust fund is ultimately to be distributed to the final beneficiary on vesting day. Distribution of the capital before vesting day can occur if the trustee (in its absolute discretion) declares an earlier vesting day.
(d)Mr Wang therefore controls the identity of the trustee (and the directorship and shareholding of any corporate trustee); therefore, he has effective control of the fundamental decision-maker.
(e)The trustee’s discretion is unfettered and includes an ability to distribute the whole of the capital and income of the Trust to any one beneficiary.
[65] The director and shareholder of the corporate trustee has changed multiple times since the Wang C Trust was established. At one time, Mr Wang’s girlfriend was sole director and shareholder. There is evidence that Mr Wang is central to all key decisions and actions in respect of the Trust, including as to the Orakei property. Until the recent appointment of Mr Fitzpatrick as director of the corporate trustee and Mr Fitzpatrick’s company as shareholder of the corporate trustee, all evidence on behalf of the trust came from Mr Wang.
[66] According to the leading case of Official Assignee v Wilson, the key factors of a sham trust are:10
(a)An arrangement designed to conceal the true nature of what is going on;
10 Official Assignee v Wilson [2008] 3 NZLR 45 (CA). Strictly speaking, these were obiter comments; nonetheless, they are often cited.
(b)Both the settlor and trustee having a common intention (objective) at the creation of the trust to mislead;
(c)The settlor’s subjective intention alone is insufficient to set aside an ostensibly (objective) valid trust.
[67]More recently, the Court of Appeal in Vervoot Forrest & Ors stated:11
A sham trust arises where the trust structure that was set up was not intended by the parties who set it up to create the rights and obligations of a trust.
…
The intention to create different rights and obligations must be held subjectively by those creating the trust. For the Trust to be a sham, it must be shown when Mr Duffy settled the Trust in 1994 he had no intention of setting up an operating trust.
[68] It is correct that a court will only look behind the ostensible validity of a trust if there is good reason to do so. It was said in Wilson that “good reason” is a high threshold, since a premium is placed on commercial certainty.12 The plaintiff may face a hurdle in establishing any disqualifying common intention when the Trust was set up. There is no evidence before the Court as to the intention of the trustee at the inception. There has also been considerable academic criticism of the approach in Wilson, and there is, with respect, support for the view that the necessary intention should only be that of the settlor, objectively ascertained.13 and its emphasis on inferred intention. There are also real questions arising at later points in time when new trustees, Mr Wang’s father and girlfriend, were substituted. The question will be whether and to what extent any common intention at that point may be relied on given the focus by the Court of Appeal in Wilson on the intention at the inception of the Trust and later comments by the Court of Appeal in KA No 4 Trustee Ltd and Anor v FMA.14
[69] If legal title to property is transferred to a trustee of a sham trust, the property is not regarded as being owned by the trustee. Rather, there may be a resulting or
11 Vervoot Forrest & Ors [2016] NZCA 375, [2016] 3 NZLR 807 at [25]-[26].
12 Official Assignee v Wilson [2008] 3 NZLR 45 (CA) at [52].
13 Jessica Palmer in Andrew Butler Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009).
14 KA No 4 Trustee Ltd and Anor v FMA [2012] NZCA 370 at [50].
constructive trust in favour of the contributor which in this case may be Mr Wang and his father.15
[70] I further note that there is no evidence before the Court of a debt owed by the Trust to the settlor or contributor of the assets.
[71] The second basis for arguing that the defendant has an interest in the Trust assets relies on the Supreme Court authority of Clayton v Clayton.16 The proposition is that the rights, powers, interests and benefits in the Trust Deed are in themselves “property”. The test is one of effective control over the Trust’s assets. For the same reasons relied on by the plaintiff to allege that the Trust documents are a sham, the plaintiff says that Mr Wang’s powers of appointment and removal of trustees enable him to effectively control dealings with the Trust property, tantamount to ownership.
[72] At the heart of the freezing order jurisdiction is whether there is a real risk that any judgment may go unsatisfied.17 In my view, there is a pleaded and evidential basis to reasonably argue that Mr Wang has some interest in the net proceeds of sale of the Paritai Drive property to justify the freezing order. These are matters that should be explored at the substantive trial at which cross-examination will inform the actual position.
[73] I am also satisfied that, standing back, the overall justice supports retention of the freezing order in its current form. There is no specific prejudice pleaded. There is no suggestion that the funds are required for some purpose. I decline the application to discharge or vary the sum restrained.
Variation of the freezing order for legal and trustee expenses
[74] The last issue is whether the cap for ‘reasonable legal expenses’ agreed between the parties in December 2017 should now be increased to cover additional legal expenditure, and costs incurred or to be incurred by the independent trustee.
15 Rosebud Corporate Trustee Ltd v Bublitz & Others [2014] NZHC 2018 at [130].
16 Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551.
17 Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [18].
[75] In the freezing order regime, the legal expenses related to the substantive proceeding (as opposed to defending the application for a freezing order) is typically allowed as payments in the ordinary course of business. In this instance, the consent order carved out an allowance for reasonable legal costs to a ceiling of $200,000. This imports an element of objective reasonableness by agreement. Mr Jones protests that there is insufficient information to justify a doubling of the legal expenditure allowance. He has not been provided with any break-down of costs nor any other information to support the new estimates.
[76] Mr Clark has explained that there are unpaid invoices of $120,000 (as at shortly before the interlocutory hearing), further work in progress of around $20-30,000 and the agreed legal cost allowance of $200,000 has already been exhausted despite the fact that the fixture did not proceed. The defendants seek variation to permit deduction of a further $230,000 (inclusive of trustee costs). This means that instead of a legal spend of $200,000 for a seven-day trial, the estimated legal spend is $420,000 for a 12 or 13 day trial.
[77] It is self-evident that extending the duration of the trial increases costs. It does not follow however that the increase should be as formulaic as doubling the anticipated costs. Mr Jones’ submission that there is a dearth of supporting material is valid. Some of the increased costs must be attributable to steps which the first defendant need not have taken. I have in mind the opposition to the application for discovery against a non-party. That information could have been provided with the consent of the first defendant without the need for an application to the Court. The adjournment of the trial and attendant waste of costs on the defendants’ side is another disquieting aspect of the application to reduce the frozen fund further.
[78] In the absence of a break-down of invoices by reference to steps taken in the proceeding, I am not minded to grant the defendants’ application in full. This is not to be understood in anyway as criticism of the fees charged by Wilson McKay. The issue is the combative approach which the first defendant has instructed his solicitors to take in his defence of the case. A defendant is entitled to run his or her defence as they see fit; however, having consented to a freezing order with an agreed allowance for reasonable legal expenditure, there needs to be a good reason to resile from that
position. The defendants have elected not to provide material detailing the ‘good reason’. The fact that there is no evidence of a lack of an alternative source of funds to meet the litigation costs is telling.
[79] I accept that the current estimate of trial duration is however a change in circumstance for which the defendants are not responsible, and therefore warrants some adjustment to the freezing order.
[80] There will be an extra six days of attendance at the trial from the original estimate and a commensurate increase in preparation time.18 Working from Schedule 3 of the High Court Rules, additional hearing preparation will be 0.75 days multiplied by 6 or 4.5 days or $10,755.
[81] The additional six hearing days is calculated on a 2B basis (for two counsel) as $3,585 per day or $21,510. The total additional preparation and attendance time amounts to $32,265. I propose a 30% uplift on that sum which results in a figure of just under $42,000 which I round up to $45,000 for disbursements and witness expenses. I accordingly vary the freezing order to increase the sum permitted to be deducted from the funds held by Wilson McKay to $245,000.
[82] The last item is an allowance for the costs of Mr Fitzpatrick as professional trustee. The only information provided in his affidavit as to his relatively modest costs is:
I am also seeking the same of $10,000 to be allocated for the services that I will be charging to the Trust both in terms of the work that I have done to date as well as work in relation to any appearances at the hearing. I have estimated my costs to be $10,000 (GST inclusive).
[83] No invoices are provided. In my view, the reasonable costs of administration of the Trust should be payable from the funds currently held and subject to the freezing order. The costs of supporting the litigation are a different matter, however. I infer from the evidence filed from Mr Fitzpatrick that a reasonably significant part of the costs to date in fact may relate to preparation of evidence in support of the variation
18 The new estimates of trial time are 12-13 days.
of the freezing order rather than administration of the Wang C Trust. I make the directions in paragraph [85] below.
Summary of result
[84] I vary the freezing orders dated 5 December 2017 by varying paragraph 1(b) to read as follows:
(b)The only payments that can be made from the funds are for:
(i)the reasonable legal costs of the defendants. Legal costs incurred dealing with the freezing order application and in conducting the defence of the substantive proceedings can be paid out of the frozen funds up to an overall maximum figure of $245,000;
(ii)the reasonable professional fees of Mr Fitzpatrick/Comac Trustees Limited up to an overall maximum figure of
$10,000, in accordance with the directions set out below.
[85]I make the following directions in respect of Mr Fitzpatrick’s costs:
(a)Invoices rendered by Mr Fitzpatrick are to be provided to the plaintiff’s solicitors, shorn of any privileged information (if any);
(b)The plaintiff has seven (7) working days to raise in writing any issues about the nature of the invoice or sum charged;
(c)In the absence of any objection by the plaintiff in accordance with (b) above, the invoice may be paid from the frozen funds up to a total of
$10,000, GST inclusive.
[86] The first defendant is to pay costs to the plaintiff of $23,466.00 in respect of the vacated trial, plus costs in respect of the application for wasted costs on a 2B basis and in respect of the application for non-party discovery on a 2B basis.
[87] I make no order for costs in respect of the withdrawn application for discovery compliance.
[88] I make no determination in respect of the first defendant’s application for the taking of evidence by AVL. That application may be brought on by the first defendant in accordance with the directions in paragraph [44].
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Walker J
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