Bei v Wang
[2019] NZHC 223
•21 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-1164
[2019] NZHC 223
BETWEEN DUOYU BEI
Plaintiff
AND
CHAO WANG
First Defendant
WILSON MCKAY TRUSTEE COMPANY
(228904-20) LIMITED as sole and corporate trustee of the WANG C TRUST
Second Defendant
Hearing: 12 February 2019 Appearances:
D P H Jones QC for the Plaintiff D J Clark for the Defendants
Judgment:
21 February 2019
INTERIM JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 21 February 2019 at 2.00pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Cook Morris Quinn, Auckland D P H Jones QC, Auckland Wilson McKay, Auckland
BEI v WANG [2019] NZHC 223 [21 February 2019]
[1] The defendants apply for particular discovery of documents alleged to be in the control of the plaintiff that have not been disclosed in his lists of documents. The application is opposed by Mr Bei.
The parties
[2] The plaintiff (Mr Bei) is an Auckland businessman. The first defendant (Mr Wang) is a company director and businessman. Mr Wang formerly resided in a property at Paratai Drive, Orakei (the property).
[3] The second defendant is the corporate trustee of a trust associated with Mr Wang known as the Wang C Trust (the Trust). From 22 May 2017, Mr Wang's girlfriend, Danting Luo, has been the sole director of the second defendant. She has been its sole shareholder since 23 May 2017.
[4] Mr Wang is the named settlor and appointer under the deed which constituted the Trust. He is also a final beneficiary, and members of his family, as nominated by him as appointer, are discretionary beneficiaries.
[5] The Trust, through its current and former trustees, is the registered proprietor of the property.
Background
[6] A company called Wang C Limited (the company) was incorporated in July of 2013. Mr Wang was the sole director and sole shareholder.
[7] The company acquired leasehold premises and established and ran a nightclub business known as Zeus Club, in Durham Street, Auckland.
[8] Mr Bei alleges that Mr Wang made various representations to him that induced him to invest money in the company and the nightclub business. He says that Mr Wang had knowledge and control of the company and the nightclub business, and that he was reliant on the information supplied by Mr Wang and the representations made by Mr Wang, in his decision to invest. He says that in the circumstances,
Mr Wang owed him a fiduciary obligation to act in Mr Bei's interests in and about the investment.
[9] Mr Bei made his investment in the company by a combination of acquiring shares and lending money to the company. He made the investments through a trust (the Olympians Trust), which entered into a shareholders agreement with Mr Wang and the company on 22 December 2016. The shareholders agreement documented an earlier understanding between the parties, reached in June 2016, under which Mr Bei would purchase from Mr Wang 50 per cent of the ordinary shares in the company for
$400,000. The $400,000 would be paid by instalments. In addition, Mr Bei would lend the company $1,100,000 for the purpose of, and to be applied to, the cost of certain renovation works to be carried out at the Zeus Club. Mr Bei says that it was agreed that should the cost of renovation works exceed the figure of $1,100,000 by a margin of approximately 10 per cent, further contributions could be made.
[10] The investment was made as agreed, and 50 per cent of the shares in the company were transferred to the Olympians Trust. Mr Bei says that the shares acquired by the Olympians Trust are now registered in the name of the current corporate trustee of the Olympians Trust, namely Myst Trustee Limited (Myst).
[11] Between 14 June 2016 and 22 December 2016, loan payments were made to the company totalling $1,112,500.
[12] In about June 2016, Mr Wang had arranged for Team NZ Constructions Limited (the builder) to carry out renovation work at the Zeus Club. Mr Bei says that certain renovation work was carried out at the club between June and December 2016, but it was not in accordance with the scope of the renovation work which Mr Wang had represented to him. Mr Bei alleges that the work would have cost no more than
$400,000. He says that Mr Wang had overall control of the renovation process, and it was he who directed what renovation work would be done.
[13] Mr Wang denies those allegations, saying that at all material times Mr Bei was aware of, present during, and consented to the expenditure incurred on the renovation work between June and December 2016.
[14] Mr Bei also alleges that, in the second half of 2016, Mr Wang instructed the builder, together with other contractors and workers, to carry out renovation works at the property. Those renovation works are alleged to have been paid for by Mr Wang out of the money lent to the company for the Zeus Club renovations. Mr Bei contends that, at Mr Wang's direction, invoices for the work carried out at the property were illegitimately addressed to the company and/or Zeus Club, and attributed to renovation work carried out at the Zeus Club premises.
[15] The defendants admit that "certain minor renovation works" occurred on the property, but otherwise they deny the allegations that company loan money was used to fund the renovation work at the property.
[16] Mr Bei then alleges that, between 1 June 2016 and 31 January 2017, Mr Wang made unauthorised payments from the company's bank account for his own personal benefit. The total amount involved is said to have been approximately $1,588,000. In addition, Mr Bei alleges that Mr Wang diverted assets from or due to the company, including funds to or for himself or the Trust. Mr Bei alleges that the diversion and use of these company funds occurred without his consent or authorisation, in breach of the shareholders agreement, and in breach of Mr Wang's duties to the company.
[17] Mr Wang denies any improper use of company money, and refers to the explanation given by him in an affidavit affirmed on 23 August 2017 in this proceeding.1
[18] Mr Wang left New Zealand on or about 21 January 2017 and returned to China. Mr Bei contends that Mr Wang left New Zealand to avoid repayment of the moneys he had illegitimately obtained from Mr Bei, and illegitimately used. Mr Wang denies those allegations. He says that the only reason he left New Zealand was because Mr Bei physically locked him out of the company's business, and it was a condition of his New Zealand resident visa status that he needed to leave New Zealand prior to the
1 In opposition to an application Mr Bei had made for orders freezing Mr Wang's assets. That application was settled, on the basis that the net proceeds of sale of the property would be held in the trust account of the defendants' solicitors, subject to certain agreed expenditure, pending resolution of the dispute. The sale of the property was completed on 19 June 2017, and the sum of $1,275,681.97 has been retained by the defendants' solicitors in accordance with that agreement.
expiry of his visa (which only permitted him to work as a self-employed businessperson at the company).
[19] Mr Bei also alleges that Mr Wang had not been making payments due by the company to creditors, including the landlord. Mr Wang agrees that the company had not paid certain of its creditors, but says that that occurred because Mr Bei effectively locked him out of the company and refused him access to company bank accounts.
[20] Mr Bei contends that the Trust is a sham, designed to provide an illegitimate shield against recovery actions directed against the property. He says that when the Trust was formed (or when the property was transferred to the Trust) there was no intention for Mr Wang not to be able to dictate what happened to the property, how it would be maintained and who would benefit from its sale. He says that the Trust's corporate trustees have been under Mr Wang's full and effective control, and that it is Mr Wang who controlled and directed the work on the property, made payments for the work on the property (illegitimately using company funds), serviced the mortgage on the property (again, illegitimately using company loan funds), controlled and directed the decision to sell the property, and had control over the proceeds of sale of the property. Mr Bei says the Trust is in reality the alter ego of Mr Wang, and that property in the name of the Trust, including the property, is Mr Wang's property.
[21] Mr Bei's sham arguments are denied by Mr Wang. He says that the Trust was created under the advice and guidance of an Auckland law firm, and the arrangement and construction of the Trust is no different from how family trusts are normally used and operated in New Zealand.
The claim and the counterclaim
Mr Bei's claim
[22] Mr Bei first sues Mr Wang for alleged misrepresentations. First, he says that, before he made his investments in the company, Mr Wang provided him with handwritten cashflow records, supposedly for Zeus Club, which supported Mr Wang's stated value of the company. He contends that the cashflow was substantially overstated, but he relied on it in his decision to invest in the company.
[23] Secondly, Mr Bei alleges that Mr Wang misrepresented the scope of the renovation work to be carried out at the Zeus Club premises. He says he was induced by the representations to lend the company $1,112,500, when the renovation work was only worth approximately $400,000.
[24] Mr Bei says that he has suffered losses in the sums of $400,000 (the share purchase price), and $880,500, being the amount mis-used by Mr Wang and not applied to renovation works at the Zeus Club.
[25] Mr Wang denies the alleged misrepresentations. Among other defences,2 he says that the financial position of the company was recorded in the financial statements provided to Mr Bei in accordance with the shareholders agreement. Also, the shareholders agreement required Mr Bei and the Olympians Trust to undertake their own due diligence and take legal and tax advice on the financial statements.
[26] Mr Bei seeks damages against Mr Wang on the misrepresentation cause of action for the claimed losses of $1,280,500, together with a declaration that the Trust is a sham, and the assets held by the second defendant as trustee of the Trust are held under a constructive trust for Mr Bei.
[27] Mr Bei's second cause of action is in the tort of deceit. He relies on the same alleged misrepresentations, and seeks the same relief. Mr Wang denies these allegations, relying on the same defences pleaded in response to the misrepresentation claims.
[28] Mr Bei's third and last cause of action is for alleged breach of fiduciary duty by Mr Wang, in a number of pleaded respects, including providing false figures relating to the business (which illegitimately inflated the capital value and revenue), concealing facts from Mr Bei about the refurbishment and the business which he was required to disclose, and utilising funds advanced by Mr Bei for costs and/or expenses on the property.
2 It is not necessary for the purposes of this judgment to record them all.
[29] Mr Wang denies the allegations of breach of fiduciary duty, relying substantially on his defences raised in response to the misrepresentation and deceit causes of action. He also pleads contributory negligence on the part of Mr Bei, generally in failing to take reasonable care in looking after his own interests, or those of the Olympian Trust, in respect of the investments.
Mr Wang's counterclaim
[30] Mr Wang counterclaims against Mr Bei for breach of the shareholders agreement, in various respects.
[31] First, Mr Wang alleges that in the course of three meetings held between Mr Bei and Mr Wang (and on at least one occasion lawyers from Queen City Law) in January 2017, Mr Bei made certain threats against him. Having accused Mr Wang of substantially the same matters that are now the subject of Mr Bei's claims in this proceeding, Mr Bei is alleged to have threatened that unless Mr Wang immediately paid him the sum of $800,000 he would:
(i)contact Immigration New Zealand and threaten Mr Wang's immigration status;
(ii)lock Mr Wang out of the company and the business;
(iii)contact Inland Revenue and claim that Mr Wang, as a director of the company, was dealing in cash and failing to pay GST and PAYE.
[32] Mr Wang says that he refused to pay the $800,000, and Mr Bei proceeded to lock him out of the company's premises. He says that Mr Bei assumed total control of all of the company's affairs from 18 January 2017. Mr Wang does not allege that the threatened complaints to Immigration New Zealand and the Inland Revenue Department were actually made by Mr Bei.
[33] Mr Wang contends that Mr Bei continued to operate the nightclub business throughout January and February 2017, and then closed the business down. Throughout this period, he says that he remained excluded from the company.
[34] Mr Wang alleges that while he had control of the company, Mr Bei secured for his own benefit all of the income from the nightclub business, while failing to pay creditors or file GST or PAYE returns.
[35] Mr Wang says that Mr Bei proposed that the company should be placed in liquidation, and Mr Wang agreed to that. On 13 April 2017 Mr Bei's nominated liquidator, Mr Gareth Hoole of Ecovis KGA (Mr Hoole) was appointed liquidator.
[36] Notwithstanding Mr Hoole's appointment, Mr Wang alleges that Mr Bei seized all the company's chattels, fixtures, and stock, and secured the premises by acquiring the building where the nightclub was located. He alleges that Mr Bei paid nothing to the liquidator for the acquisition of the company assets and premises.
[37] Mr Wang contends that in taking those various actions, Mr Bei acted in breach of certain duties set out in the shareholders' agreement, and that he failed to follow the pre-emptive share transfer provisions by demanding the $800,000 and threatening to lay the complaints with Immigration New Zealand and the Inland Revenue Department.
[38] Mr Wang says that as a result of those alleged breaches, he has lost his shareholding in the company (value as at mid-January 2017, at least $1.1 million), and he has lost the remuneration he would have received as manager of the nightclub business (minimum $400,000 per annum). He claims damages of $1,100,000 for the lost shareholding, $400,000 for the loss of income, and $30,000 by way of general damages for distress and humiliation.
[39] In the alternative, Mr Wang seeks relief under s 174(2)(b) of the Companies Act 1993 (the Act) for what he says was oppressive, unfairly discriminatory, and unfairly prejudicial conduct by Mr Bei.
Mr Bei's reply and defence to counterclaim
[40] Mr Bei denies demanding the $800,000 from Mr Wang, or making the threats pleaded. He agrees that he confronted Mr Wang with the concerns he had in January 2017, saying that his concerns were discussed on four occasions in January 2017.
[41] Mr Bei denies that Mr Wang was locked out of the company premises, saying that Mr Wang was able to attend the Zeus Club premises when he wished. Also, Mr Wang remained the sole director, and a 50 per cent shareholder of the company, until Mr Hoole was appointed liquidator with the consent of all shareholders. He says that Mr Wang remained authorised and able to transact on the company's bank account throughout.
[42] As for the continuing operation of the Zeus Club, Mr Bei says that, due to low patronage, it remained in operation in January 2017 for only Friday and Saturday nights. It was closed on 14 February 2017. He denies that Mr Wang was required by the conditions of his New Zealand visa to return to China.
[43] Mr Bei says that takings from the operations of the Zeus Club from the date Mr Wang left New Zealand until 14 February 2017 were accounted for as income of the company. He also says that he paid the company's creditors between those dates from the takings of the Zeus Club and from his own personal funds. The business and tax obligations of the company were addressed as appropriate, taking into account Mr Wang's actions, his failure to provide financial information, and incomplete records. Mr Bei pleads that Mr Wang abandoned the Zeus Club and the company's chattels, fixtures and stock (which together would have been worth less than
$100,000), saying that the value of those assets was a matter for the liquidator. Negotiations in that regard were said to be ongoing.
[44] Mr Bei agrees that a company of which he is a director, Heng Hue Limited, has entered into an agreement to purchase the building in which the Zeus Club operated. Settlement is due in 2019.
[45] Generally, Mr Bei denies the other substantive allegations in Mr Wang's counterclaim.
The tailored discovery order
[46] On 5 December 2017, Brewer J ordered the parties to complete tailored discovery by 23 February 2018. The order was made by consent, in accordance with
a joint memorandum of counsel dated 4 December 2017. By minute dated 28 March 2018 the Court extended the time for compliance to 23 March 2018.
[47] The categories of documents for tailored discovery were not listed in the Court order and counsel did not draw to my attention any agreed list of categories of documents for tailored discovery. Nor was the particular discovery application based on any alleged failure by Mr Bei to disclose specific categories of documents that he had been ordered to provide by the Court. Rather, the argument proceeded as if the order had been an order for standard discovery, on the basis that the "adverse documents" test for relevance3 would apply. I will deal with the application on that basis.
The further discovery sought by Mr Wang
[48] Mr Wang originally sought further documents in eight separate categories. He also applied for non-party discovery. The non-party discovery application is not pursued, and counsel have been able to reduce the number of categories of documents in dispute on the particular discovery application down to three.
[49]The three remaining categories of documents sought by Mr Wang are:
(1)All correspondence (hardcopy and electronic, including WeChat conversations) between [Mr Bei] and Mr Wei Kong in relation to: [(a)] his acceptance of the directorship of [Myst] and any due diligence undertaken by the Olympian Trust [in respect of the acquisition of shares in the company]; [and (b)] … the alleged turnover and renovation misrepresentations and funds allegedly misappropriated; [and (c)] … the meetings held between [Mr Bei], Mr Wei and [Mr Wang] in January 2017; [and (d)] … immigration and tax issues of [Mr Wang] which will include correspondence with Immigration New Zealand and/or the Inland Revenue Department concerning [Mr Wang] and [the company]; [and (e)] … the operation of the Zeus Nightclub and the renovation and opening up of the Future Nightclub;
(2)All WeChat conversations between [Mr Bei], Mr Wei Kong and Yu Ming Shao in relation to the alleged renovation and turnover misrepresentations as well as engaging Mr Shao as an employee of the Future Club;
3 High Court Rules 2016, r 8.7.
(3)All correspondence (unredacted) between [Mr Bei] and [Mr Bei's] lawyer and counsel and Ecovis KGA, [between] Ecovis KGA and Sagi Trading, [and between Mr Bei] and any other corporate entity he is a director and shareholder of such as Bei Holdings Limited, and Ecovis KGA;
[50] Counsel advise that WeChat is a mobile phone app that facilitates the sending of (at least) text messages. A significant number of WeChat messages have been disclosed in the discovery to date, being communications between Mr Bei and Mr Wang. I am told that these messages have all been in Chinese, and have been translated into English for the purposes of the proceeding.
[51] Mr Clark accepted at the hearing that there is no evidence of the existence of hardcopy or electronic correspondence in the first of the categories set out above, apart from the WeChat communications between Mr Bei and Mr Wang. In the first two of the categories in respect of which particular discovery is sought, Mr Clark invites the Court to infer that there would likely have been WeChat communications between Mr Bei and others, including in particular Mr Wei Kong, a director of Myst who participated in at least some of the January 2017 meetings between the parties, and is likely to have been involved in any due diligence undertaken by the Olympian Trust in respect of its acquisition of shares in the company. Mr Wang's position is that Mr Kong would or might also have been involved in communications with the Inland Revenue Department, or with Immigration New Zealand, concerning Mr Wang and the company, associated with the threats allegedly made by Mr Bei to lodge complaints with those departments if Mr Wang did not pay $800,000.
[52] Mr Yu Ming Shao, referred to in the second of the disputed categories listed in paragraph [49] above, worked for the company when it operated the Zeus Club, and he was later employed by the Future Club, a nightclub apparently set up by or at the direction of Mr Bei following the liquidation of the company. The Future Club is said to operate from the same premises formerly used by the Zeus Club.
[53] The request for the third category of documents may be divided into three parts. First, communications between Mr Bei and his solicitors and counsel on the one hand, and Mr Hoole's firm, Ecovis KGA, on the other. Secondly, communications between Ecovis KGA and Sagi Trading, an entity associated with Mr Bei. Thirdly,
communications between Mr Bei (and any corporate entity of which he is a director or shareholder, such as Bei Holdings Limited) and Ecovis KGA.
[54] Mr Jones explained at the hearing that the passages redacted from the discovered communications were redacted on the basis that they are protected by litigation privilege, under s 56 of the Evidence Act 2006. While that privilege has been claimed, Mr Jones advised that he was content for the Court to examine both redacted and unredacted copies of the relatively few documents with which this request is concerned, and for the Court to rule on the proprietary or otherwise of the redactions. Mr Clark was content for me to proceed on that basis.
[55] At the hearing, Mr Jones provided me with redacted and unredacted sets of the relevant category 3 documents.
Applications for particular discovery — legal principals
[56]Rule 8.19 materially provides:
8.19Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a)to file an affidavit stating—
(i)whether the documents are or have been in the party's control; and
(ii)if they have been but are no longer in the party's control, the party's best knowledge and belief as to when the documents ceased to be in the party's control and who now has control of them; and
(b)to serve the affidavit on the other party or parties; and
(c)if the documents are in the person's control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.
[57] The principles applied by the Courts under r 8.19 were summarised by Asher J in Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd.4 In that case, the Judge followed a four-stage approach, as follows:5
(i)Are the documents sought relevant, and if so how important will they be?
(ii)Are there grounds for belief that the documents sought exist? This will often be a matter of inference. How strong is that evidence?
(iii)Is the discovery sought proportionate?
(iv)Weighing and balancing those matters, in the Court's discretion applying r 8.19, is an order appropriate?
The evidence
Mr Wang
[58] Mr Wang relied on an affidavit sworn by Ms Michelle Cappel, a legal secretary employed by the defendants' solicitors. Ms Cappel produced correspondence between the solicitors relevant to the defendants' particular discovery application.
[59] The first letter produced by Ms Cappel was a letter dated 7 February 2018 from the defendants' solicitors to Mr Bei's solicitors. The letter included a list of categories of documents the solicitors considered should be included in Mr Bei's discovery. The list included the following:
(e)All correspondence (including WeChat conversations) between Mr Kong and Mr Bei for the period June 2016 to the date relevant to the issues arising in this proceeding which not only include the creation of the Trust… but also the allegations made by [Mr Bei] regarding the money spent on the renovations, funds allegedly misappropriated, immigration and tax issues relating to [Mr Wang] in and around January 2017 to date. This should also include correspondence with Immigration NZ and/or IRD concerning
4 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760.
5 At [14].
[Mr Wang and/or the company] by or on behalf of [Mr Bei] including how [Mr Bei] came into possession of a copy of [Mr Wang's] passport.
(f)All WeChat conversations between [Mr Bei], Mr Kong and Yu Ming Shao.
…
(h) All correspondence, records and other forms of communication between [Mr Bei], Mr Kong and [Mr Hoole] which includes any invoices rendered by [Mr Hoole] to [Mr Bei] and/or the entities associated with Mr Bei.
[60] Mr Bei's solicitors replied by email dated 18 April 2018. In response to the categories of documents sought by the defendants' solicitors, Mr Bei's solicitors said (using the same paragraph numbering):
(e)[Mr Bei] will not be providing any and all correspondence between Messrs Kong and Bei from June 2016 to date, correspondence with Immigration New Zealand and/or the Inland Revenue Department and records in respect of Mr Bei having possession of a copy of Mr Wang's passport photo and Visa pages. Such are non-existent and/or irrelevant.
(f)[Mr Bei] will not be providing any and all WeChat conversations between Messrs Kong and Bei, and Yu Ming Shao. Again, this request relates to information that is either non-existent or irrelevant, and in any event amounts to no more than an illegitimate fishing expedition.
…
(h)Such correspondence has been listed for discovery, except where and to the extent it is privileged or includes privileged content.
[61] Ms Cappel also produced copies of the communications with Mr Hoole, many of which include redactions. I will address these communications later in this judgment, when I consider Mr Wang's request for discovery of the category 3 documents.
Mr Bei
[62] Mr Bei first relied on his affidavit of documents sworn on 23 March 2018, pursuant to the order for discovery made on 5 December 2017. In his discovery affidavit, Mr Bei affirmed the following:
5.In order to fulfil those obligations, I have diligently searched for all documents required to be discovered under the discovery order, and I have also taken the following particular steps:
(a)I searched for all audio, video, image, and text files from the We Chat application for communications exchanged between myself and others related to the subject matter of these proceedings and required to be discovered under the discovery order;
…
(c)I searched for all text messages and iMessages to and from my mobile phone for messages exchanged between myself and others related to the subject matter of these proceedings and required to be discovered under the discovery order;
…
(e)I enquired with Wei Kong, the sole director and shareholder of [Myst], which is the sole and corporate trustee of [the Olympians Trust], to provide any and all materials stored by Myst and required to be discovered under the discovery order;
…
(h) I enquired with Yu Ming Shao, manager previously employed by [the company], to provide any and all materials stored by him and required to be discovered under the discovery order; and
…
[63] Mr Bei stated in this affidavit that he had listed "the documents that I am required to discover", and the affidavit contained the usual statement that, to the best of the deponent's knowledge and belief, the affidavit was correct in all respects and carried out his obligations to date under the discovery order.
[64] Mr Bei also filed a brief affidavit in opposition to the application. This affidavit was affirmed on 30 January 2019.
[65] In respect of the documents sought in the first category of documents listed at paragraph [49] above, Mr Bei said that records between himself and Mr Kong (including of the recorded January 2017 meetings) as well as other materials relating to the immigration and tax position of Mr Wang, had already been discovered in his discovery list of 23 March 2018. He said that the only exception was for WeChat conversations between Mr Kong and himself. He said that he did not have any further
WeChat records to discover "beyond what I have already discovered". Mr Bei said that that was because both Mr Kong and he had changed cellphones since the dates in issue, and their WeChat messages from their old phones can now no longer be accessed.
[66] In respect of the category 2 documents referred to in paragraph [49] of this judgment, Mr Bei said there was nothing further to be discovered. He said "WeChat conversations between me, Mr Kong, and Mr Shao no longer exist. We have all changed cellphones since the dates in issue and our messages can no longer be accessed".
[67] In respect of the third category of documents listed at paragraph [49] above, Mr Bei said there is nothing further to be discovered. He said that relevant materials with both entities (Ecovis KGA and Sagi Trading) were contained in his original discovery list and in his supplementary list.
DISCUSSIONS AND CONCLUSIONS
The category 1 and 2 documents
[68]I will deal with the documents in these categories together.
[69] Mr Jones' submission was essentially that there is nothing further to discover in these categories. He submitted that the evidence shows that if the communications did exist, they no longer exist. As he put it, such documents are not available to be accessed, downloaded, or extracted, and any submission to the contrary is not supported by the evidence.
[70] Mr Clark submitted that this is a case like Craig v Slater, in which the Court dealt with an urgent application in respect of emails stored on a Google server that had been automatically deleted. Counsel for Mr Slater, whose documents they were, told the Court that his advice from a computer consultant was that the deleted documents could not be retrieved. Counsel's understanding was that the emails in question were never saved onto the drive of a local computer. Associate Judge Doogue noted that there appeared to have been a breach of r 8.3, which requires that, as soon as a
proceeding is reasonably contemplated, parties must take all reasonable steps to preserve documents that are (or are reasonably likely to be) discoverable in the proceeding. His Honour accepted that the emails might cast light on the matters in dispute, and he did not consider it fair that Mr Craig should be obliged to accept the opinion of Mr Slater's expert as to whether or not the emails could be retrieved.6
[71] Associate Judge Doogue considered that r 9.34, which provides generally for the making of orders for the inspection of property, could be applied in the situation, to allow Mr Craig's nominated expert to inspect the relevant computers. His Honour allowed time for the parties to confer on appropriate conditions which might attach to an order for inspection under r 9.34.
[72] I consider that there are grounds for believing that Mr Bei has not discovered documents in these categories. In his affidavit affirmed on 30 January 2019, Mr Bei said that documents in category (1), being records between himself and Mr Kong (including of the recorded January 2017 meetings, and other materials relating to the immigration and tax position of Mr Wang) had already been discovered in his 23 March 2018 list of documents. However, Mr Bei went on to say:
The only exception is for WeChat conversations between Mr Kong and myself. I do not have any further WeChat records to discover beyond what I have already discovered. This is because both Mr Kong and I have changed cellphones since the dates in issue and our WeChat messages from those old phones can now no longer be accessed.
[73] Similarly, in respect of the category 2 documents, Mr Bei said in his 30 January 2019 affidavit:
WeChat conversations between me, Mr Kong and Mr Shao no longer exist. We have all changed cellphones since the dates in issue and our messages can no longer be accessed.
[74] I think it is a reasonable inference from the statement quoted at paragraph [72] above that there existed discoverable WeChat conversations between Mr Kong and Mr Bei which have not been discovered, and thus constituted the "exception" (to his
6 Craig v Slater [2017] NZHC 740, at [19].
statement that the documents in this category have been discovered) to which Mr Bei referred.
[75] I note also that Mr Bei referred generally in his 30 January 2019 affidavit to "since the dates in issue", without stating what the dates "in issue" were. For example, were the cellphones changed before the proceeding was issued? Before Mr Bei affirmed his affidavit of documents on 23 March 2018?
[76] I note in this regard that an order for particular discovery under r 8.19 may require a party to file an affidavit stating whether particular documents "have been" in the party's control, and (to the extent such documents exist) when the documents were last in the party's control.
[77] I do not regard Mr Bei's evidence that the three individuals changed cellphones on some unspecified dates, and that it is no longer possible to recover WeChat messages from the old phones, as a sufficient discharge of his discovery obligation. Under r 8.14 of the High Court Rules, Mr Bei was required to conduct a "reasonable search" for relevant documents, and his affidavit of 30 January 2019 calls into question whether or not that duty has been discharged. And under r 8.15(2)(c), Mr Bei was required to give particulars in his discovery affidavit of the steps taken by him to fulfil his discovery obligations. If he changed cellphones before 23 March 2018, he was presumably well aware that relevant communications between himself and Mr Kong and/or Mr Shao would have been made on the old cellphone. In those circumstances, I think Mr Bei was obliged, in swearing his affidavit, to provide particulars of the steps taken by him to retrieve WeChat communications on the old cellphone. That would presumably have required Mr Bei to take some advice from an internet or IT professional — he has not sufficiently qualified himself as an expert in either of those fields for him to state unequivocally that copies of WeChat communications on the old cellphone are not able to be retrieved (for example, from a relevant server).
[78] I do not consider this is a situation where Mr Wang has failed to discharge the onus of proof on an application under r 8.19 – rather, I consider that Mr Wang, like any other party, is entitled to have an opposing party comply with the rules in providing discovery.
[79] I conclude that the appropriate order is to direct Mr Bei, within 15 working days of the date of this judgment, to file and serve a further affidavit stating the date or approximate date on which the old cellphone was substituted for a new one, and to state whether all contents of the old cellphone (including the WeChat app) were downloaded to the new cellphone and (if it is the case) that the old cellphone is no longer available for expert inspection. Mr Bei's affidavit is also to state the steps he has taken to ensure that any relevant WeChat communications on the old cellphone are not now recoverable (including any expert evidence he may have obtained or may wish to provide on that issue).
[80] Mr Wang may file any affidavits in response within 10 working days after service of Mr Bei's further affidavit or affidavits. I will then convene a telephone conference to hear from counsel on the additional evidence, and give such further directions as may then be appropriate.
[81]I make orders accordingly.
The category 3 documents
[82]Section 56 of the Evidence Act 2006 materially provides:
56 Privilege for preparatory materials for proceedings
(1)Subsection (2) applies to a communication or information only if the communication or information is made, received, compiled, or prepared for the dominant purpose of preparing for a proceeding or an apprehended proceeding (the proceeding).
(2)A person (the party) who is, or on reasonable grounds contemplates becoming, a party to the proceeding has a privilege in respect of—
(a)a communication between the party and any other person:
(b)a communication between the party’s legal adviser and any other person:
(c)information compiled or prepared by the party or the party’s legal adviser:
(d)information compiled or prepared at the request of the party, or the party’s legal adviser, by any other person.
…
[83]The learned authors of McGechan on Procedure note that:7
Litigation privilege is not limited to documents or written communications, but extends to oral communications made to or received or compiled by a party, or the lawyer of a party for the dominant purpose of preparing for proceedings: Jeffries v Privacy Commissioner [2010] NZSC 99, [2011] 1 NZLR 45. In that case, the Supreme Court held at [20] that s 56 attaches to any communication with the necessary dominant purpose "between the party's legal adviser and any other person", irrespective of how the communication arose. It attaches to any information "compiled or prepared" by the party's lawyer, irrespective of source.
The controlling purpose in s 56(1) applies broadly to any communication or information "made, received, compiled, or prepared", without reference to its provenance. Under s 56, as at common law, the important question remains simply the "character" in which the information is made, received, compiled or prepared. If a lawyer receives or compiles the information as legal adviser to a party and "for the dominant purpose of preparing for a proceeding or an apprehended proceeding", then the information or communication is privileged, however obtained. The purpose of a third party who supplies the information is not determinative, and the lawyer obtaining the information is not required to appreciate at the point of receiving it how it bears on his or her preparation.
[84] As I understand it, there is no evidence that other relevant documents exist in this category that Mr Bei has not disclosed — the sole issue is the propriety of the redactions made to the inspection copies.
[85] The first of the communications with Mr Hoole produced by Ms Cappel where part of the document was redacted was an email dated 5 May 2017, in which Mr Hoole reported to Mr Bei and to others, one of whom was Mr Bei's solicitor. The email was expressed to be an update on the progress of the liquidation to date, and Mr Hoole said that he had sent Mr Wang's solicitor a long questionnaire, to which he had not yet received a response. Mr Hoole said that he had been shown through the premises, and noted that some progress had been made in the re-fit. He confirmed that the improvements such as the bar, and lighting equipment, belonged to the company, and that under normal circumstances he would make arrangements with the landlord to remove the chattels, for sale by auction. He said that that is what Mr Wang's solicitor had been pressing him to do.
7 McGechan on Procedure [HR 8.25.07].
[86] Mr Hoole went on to propose in his 5 May 2017 email that, as Mr Bei was planning to purchase the property and continue the re-fit, and given that Mr Bei had agreed to cover Mr Hoole's reasonable costs of the liquidation, the company's assets should be sold to Mr Bei or his nominated entity. Mr Hoole could then meet his costs out of the sale proceeds. Mr Hoole invited discussion on what the assets were worth.
[87] Mr Hoole said that he would make demand on Mr Wang through his lawyer for funds that he considered were owing by Mr Wang to the company.
[88] The next document containing a redaction was an email dated 16 May 2017 from Mr Hoole to Sean Bei Group. The email reported on Mr Hoole's review of the company's bank statements.
[89] An email from Mr Bei's counsel to Mr Hoole dated 9 June 2017 contained substantial redactions. The unredacted portion contained a request for a report from Mr Hoole on what irregularities may have been discovered, and what concerns Mr Hoole had about how the company had been operated in the period 1 June 2016 to 31 January 2017.
[90] Mr Hoole reported by email to Mr Bei on 16 August 2017, saying that he had reconstructed a shareholder current account for Mr Wang. Mr Hoole's conclusion was that Mr Wang owed about $1.2 million, excluding interest. Mr Hoole invited further discussion with Mr Bei about a possible purchase of the company's chattels and goods. One short sentence was redacted from this email.
[91] Mr Hoole reported again to Mr Bei on 23 August 2017. The email followed a meeting between the parties to discuss the chattels at the Zeus Club, and Mr Hoole attached a list of the chattels with a valuer's report valuing them at $137,500. This email also contained substantial redactions.
[92] The next email with words redacted was an email from Sean Bei Group to Mr Hoole dated 5 September 2017. The email referred to a telephone discussion with Mr Hoole earlier in the day, and stated that the "claimed amount" totalled $1,280,500.
The email referred to page 17 of an attached statement, a copy of which was not provided to me. One short sentence has been redacted at the end of this email.
[93] The last of the emails with redactions was an email dated 12 September 2017 from Sean Bei Group to Mr Hoole, attaching what appears to have been a signed secured creditor's claim form. Sean Bei Group asked for a copy of the existing chattels valuation in editable format. One short sentence has been redacted from this email.
[94] I have now reviewed the unredacted copies of these documents, under r 8.25(2). I set out my decision on each of them below.
Email dated 5 May 2017 from Mr Hoole to Sean Bei Group, copied to Mr Bei's solicitor
[95] The information in the email appears to be concerned in substantial part with the steps being taken to realise the company's assets, including a proposal that Mr Bei's group should purchase the company's chattels. However, the email also makes it clear that Mr Hoole was contemplating making an application for summary judgment against Mr Wang, and that if that occurred Mr Bei's company would likely be funding the claim against Mr Wang (Mr Bei's group having agreed to cover the reasonable costs and expenses of the liquidation). In those circumstances I think there was a common interest between Mr Hoole and Mr Bei's group in the prosecution of a claim against Mr Wang that would be funded by Mr Bei's company, similar to the common interest which exists between an insurer and an insured where the insurer conducts litigation in the insured's name to recover the insured loss from a third party. As the UK Court of Appeal noted in Buttes Gas & Oil Co v Hammer (No. 3), where two parties share a common interest and a common solicitor, and exchange information for the dominant purpose of informing each other of the facts or the issues or advice received, or of obtaining legal advice in respect of contemplated or pending litigation, then the documents or copies containing that information are privileged from production in the hands of each of those parties.8
8 Buttes Gas & Oil Co v Hammer (No. 3) [1981] 1 QB 223, [1980] 3 All ER 475 (CA), at 267, 502.
[96] In this case the email was copied to the Bei Group's solicitor Mr Morris, and the redacted portions of the email do relate to the litigation against Mr Wang that the parties were both contemplating (and which would if successful benefit Mr Bei, who had a substantial claim against the company). I conclude on that basis that the claim to privilege for the redacted portions of the email was properly made. I decline to make any direction that Mr Bei disclose an unredacted copy of this email.
Email dated 16 May 2017 from Mr Hoole to Sean Bei Group
[97] I accept that the redacted portion of the email does appear to record an oral communication from Mr Bei's solicitor to Mr Hoole made for the dominant purpose of preparing for this proceeding. I accept the claim to litigation privilege made for the redacted part of this email, and that part of the email need not be disclosed.
Letter dated 9 June 2017 from Mr Jones QC to Mr Hoole
[98] In my view the redacted portions of this letter are protected by the s 56(1) privilege. The letter was sent on the same day this proceeding was filed, and in my view the redacted passages in it were prepared for the dominant purpose of preparing for this proceeding. I decline to make any direction that Mr Bei disclose an unredacted copy of this letter.
Email dated 16 August 2017 from Mr Hoole to Sean Bei Group
[99] The redacted sentence appears to be largely inconsequential, and in my view does not constitute or record a communication that can properly be described as preparation for this proceeding (or Mr Hoole's proposed claim against Mr Wang). It appears to be concerned with the price Mr Bei's company might pay to acquire the company's chattels. I direct that an unredacted copy of this email is to be provided to Mr Wang within 10 working days.
Email dated 23 August 2017 from Mr Hoole to Sean Bei Group (with copies to Mr Bei's solicitor and counsel)
[100] The email began with Mr Hoole discussing various issues associated with the chattels at the night club premises. Mr Hoole attached a list of chattels inspected by a
valuer in July 2017, and assessed as having a total value of $137,500. Mr Hoole then moved to the topic of his proposed claim against Mr Wang, noting along the way that liquidators fund their activities (including litigation they initiate) from the proceeds of assets they realise. Mr Hoole told Sean Bei Group that he could not proceed [against Mr Wang] without funding. A substantial part of what followed in the email has been redacted.
[101] The redacted portion consisted substantially of legal advice Mr Hoole had obtained from his solicitor, which he passed on to the addressees of his email. The advice records a communication from Mr Jones QC to Mr Hoole that appears to have clearly been made for the dominant purpose of preparing for this proceeding, and the liquidator's response to that communication. To that extent, I consider the redacted portion was properly redacted.
[102] I think the redactions here could also be justified on the basis of common interest privilege, as discussed at paragraph [95] above, and in part on the basis that the 10 lines at the bottom of the redacted part of the email were concerned with matters that do not appear to be relevant to any issue in the case. I decline to make any direction that Mr Bei disclose an unredacted copy of this email.
Email dated 5 September 2017 from Sean Bei Group to Mr Hoole
[103] The redacted portion of the email consists of a short sentence referring to the existence of a communication which on its face would almost certainly have been protected by the s 56 privilege. To the extent that no details of that communication are disclosed, I think the redacted sentence adds nothing of relevance on the issues in the case. Either way, I see no basis to direct disclosure of the redacted sentence, and I decline to do so.
Email dated 12 September 2017 from Sean Bei Group to Mr Hoole
[104] The same considerations apply to the short sentence that has been redacted in this email. The sentence is irrelevant to the issues in the case, and does no more than allude to a possible communication that would in any event almost certainly have been
protected by either the s 56 privilege or common interest privilege. I decline to direct Mr Bei to disclose an unredacted copy of this email.
Costs
[105] As this judgment is only an interim judgment, it would be premature to make a costs award at this stage. Costs are reserved.
Associate Judge Smith
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