Osmond New Zealand Limited v Universal Pharmaceuticals Limited
[2023] NZHC 2559
•14 September 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-001549
[2023] NZHC 2559
Under Part 18 of the High Court Rules and the Companies Act 1993 BETWEEN
OSMOND NEW ZEALAND LIMITED
Plaintiff
AND
UNIVERSAL PHARMACEUTICALS LIMITED
First Defendant
TGA PHARMACEUTICALS LIMITED
Second DefendantLI MIN LIU
Third DefendantHAIBING DU
Fourth Defendant
Hearing: 7 September 2023 Appearances:
J P Nolen for Plaintiff/Respondent
J Johnson and A Ho for First Defendant/Applicant (by VMR) P Ahern for Second and Third Defendants
Judgment:
14 September 2023
JUDGMENT OF VENNING J
This judgment was delivered by me on 14 September 2023 at 11.45 am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: K3 Legal Limited, Auckland
Crimson Legal, Auckland Morrison Kent, Auckland
Counsel: J Johnson, Auckland
OSMOND NEW ZEALAND LTD v UNIVERSAL PHARMACEUTICALS LTD [2023] NZHC 2559 [14
September 2023]
Introduction
[1] Osmond New Zealand Limited (Osmond) is a substantial majority shareholder of Universal Pharmaceuticals Limited (Universal). TGA Pharmaceuticals Limited (TGA) and Li Liu hold the balance minority shareholdings. Haibing Du is the sole director of Universal and one of the directors of TGA. He is also a shareholder in TGA.
[2] In these proceedings Osmond alleges that the affairs of Universal have been conducted in a manner that are oppressive, unfairly discriminatory, or unfairly prejudicial to Osmond. Osmond seeks a variety of relief, including requiring the minority shareholders, TGA and Mr Liu to sell their interests in Universal to Osmond.
[3] At the same time as issuing the proceedings on 31 July 2023 Osmond sought, on a without notice basis, the appointment of managers to Universal, together with related orders under s 179 of the Companies Act 1993. The Court declined to deal with that application on a without notice basis. The application for the appointment of managers has been served and is scheduled for hearing on 19 October 2023.
[4] The parties have agreed to interim orders pending the 19 October hearing which, in short, confirm Universal will not terminate the employment of Ms Xiaoyu Zhang, Mr Xiaoji Zhang nor of any other employees who may give evidence prior to the hearing. Universal and the other defendants have also agreed not to recruit or employ new staff from overseas prior to the hearing.
This application
[5] In the meantime Universal has applied for an order declaring that Margaret Chen of K3 Legal Limited (K3 Legal) and any other practitioner at K3 Legal be debarred from acting as solicitor and/or counsel for Osmond in the proceeding.1 Universal says:
(a)Universal had previously engaged K3 Legal to act on various matters;
1 Where appropriate, K3 Legal refers to both Ms Chen personally and the firm.
(b)the third and fourth defendant had consulted with K3 Legal about the dispute with Osmond in February 2022;
(c)K3 Legal is in possession of Universal’s confidential and privileged information and has knowledge of its inner workings and processes;
(d)K3 Legal was personally involved in the matters which are being litigated; and
(e)there is a high likelihood Ms Chen may be called to give evidence.
[6]K3 Legal opposes the application. It says:
(a)the solicitor/client relationship between Universal and Ms Chen/K3 Legal came to an end prior to the issue of these proceedings;
(b)K3 Legal only acted for Universal on two discrete issues over a period February to June 2022;
(c)none of the issues raised on those engagements relate to issues in this proceeding;
(d)K3 Legal holds no confidential information that could be relevant to the issues in this proceeding;
(e)K3 Legal had no knowledge of the issues giving rise to this proceeding at the time of the prior engagements;
(f)K3 Legal holds no evidence of a contentious nature in this proceeding;
(g)K3 Legal will not be defending its own advice.
[7] K3 Legal also relies on a number of grounds to support its argument the Court should exercise any discretion (if it reached that stage) against disqualifying K3 Legal from acting for Universal in this case.
Preliminary issue
[8] Universal’s application was accompanied by an affidavit of Mr Du (translated by Mr Luo).
[9] The opposition was supported by an affidavit of (Margaret) Zhu Chen sworn on 30 August 2023. Universal responded with an affidavit of Mr Du of 1 September 2023 in reply which attached, for the first time, a number of WeChat messages.
[10]K3 Legal objected to Mr Du’s affidavit in reply.
[11] Rule 7.26 contemplates and provides for an affidavit in reply. However I accept Mr Nolen’s complaint that aspects of Mr Du’s affidavit in reply might have been expected to have been included in his original affidavit and, to that extent, went beyond matters of reply. In light of that, while the Court accepted Mr Du’s affidavit in reply, it also granted leave to K3 Legal to file a further affidavit of Ms Chen in response to the fresh matters raised in the reply.
[12] The Court has read and considered all the affidavits and also the further material counsel supplied to the Court (at the Court’s request) following the hearing.
General principles
[13] The general principles that arise on an application such as this were summarised in Li v Liu by Williams J giving the reasons of the Court of Appeal:2
The essential applicable principles are not in debate. The court has inherent jurisdiction to disqualify counsel or solicitors from acting where to allow them to do so would impair the integrity of the judicial process. That said, the court should not lightly interfere in a party’s fundamental right to counsel of their choice, particularly where considerations of delay in the application, inconvenience, or sunk cost favour the affected party. Further, the court should be vigilant in preventing objections whose purpose is only to disrupt or inconvenience the other side. To allow the judicial process to be played in this tactical fashion would itself be an unacceptable impairment.
2 Li v Liu [2018] NZCA 528 at [23] (footnotes omitted).
[14] In Mike Pero Mortgages Limited v Pero, there was a challenge to Buddle Findlay acting against an existing client.3 Associate Judge Matthews referred to the Supreme Court of Canada case of Canadian National Railway Company v McKercher LLP,4 and noted that Buddle Findlay owed a fiduciary duty to its existing clients, a fundamental element of which was loyalty, which it could not fulfil if it acted against its existing client. In Canadian National Railway Company v McKercher LLP the Supreme Court of Canada had said:5
The bright line rule is precisely what its name implies: a bright line rule. It cannot be rebutted or otherwise attenuated. It applies to concurrent representation in both related and unrelated matters. However the rule is limited in scope. It applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting. It applies only to legal – as opposed to commercial or strategic – interests. It cannot be raised tactically. And it does not apply in circumstances where it is unreasonable for a client to expect that a law firm will not act against it in an unrelated matter. If a situation falls outside the scope of the rule, the applicable test is whether there is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected.
[15] As Associate Judge Matthews noted, the Supreme Court’s approach mirrored that of the Court of Appeal in Black v Taylor.6 In Black v Taylor the Court of Appeal considered a challenge to a solicitor acting in proceedings involving the estate when he had previously acted over a number of decades for several members of a family, including the plaintiff and the deceased. The Court considered that reasonable members of the public would not consider that justice would be done by permitting the solicitor to act against the plaintiff. The solicitor should have disqualified himself from acting for the estate in accordance with his duty to the Court.
Existing relationship
[16] The first issue is whether there was a relevant existing and ongoing solicitor/client relationship between K3 Legal and Universal at the time K3 Legal accepted instructions from Osmond to act in these proceedings.
3 Mike Pero Mortgages Limited v Pero [2014] NZHC 2798.
4 Canadian National Railway Company v McKercher LLP [2013] 2 SCR 649.
5 At [41].
6 Black v Taylor [1993] 3 NZLR 403 (CA).
[17] Where there is a relevant existing solicitor/client relationship, to allow the solicitor to act against their other client could impair the integrity of the judicial process.
[18] Mr Johnson submitted that the factual circumstances supported an argument that K3 Legal had an ongoing retainer to act for Universal. While accepting there had been two discrete pieces of work that K3 Legal had acted for Universal on, namely employment issues and the Ministry of Primary Industries (MPI) matter (they being the matters bills were rendered on) he submitted there was an ongoing relationship. For example, a third account was rendered on 30 June 2022 which, even though it referenced the MPI investigation, was for services after that matter was concluded. Mr Johnson also referred to an email communication from K3 Legal to Universal regarding a letter of engagement on the employment matter which referred to “general employment consulting”. He also took the Court to a number of pages of WeChat messages between K3 Legal (Ms Chen) and Mr Du, which he submitted evidenced ongoing consultations and advice of some sort or other. He submitted the evidence was sufficient to establish that K3 Legal was an existing client of K3 Legal when the proceedings were issued on 31 July 2023. As such, for K3 Legal to act for Osmond would be a clear breach of the fiduciary duty it owed to its existing client, Universal.
[19] The evidence establishes that K3 Legal acted for Universal on two specific matters: an employment issue, and the MPI investigation. On 4 February 2022 Mr Du of Universal sought K3 Legal’s advice in relation to two allegedly underperforming employees. The matter was concluded by 25 February 2022. K3 Legal rendered an account on 28 February 2022, which finalised that instruction. I consider the reference in the letter of engagement to “general employment consulting” to be related to the nature of the advice at the time rather than signifying an ongoing and open-ended brief in relation to employment issues generally.
[20] On 11 April 2022 Mr Du again contacted Ms Chan and K3 Legal in relation to an investigation by MPI, and in particular sought advice and assistance in respect of a document published by Universal which on one view purported to be a certificate issued by MPI. On 31 May 2022, Ms Chen attended an interview with MPI with Mr Du which led to the matter being resolved.
[21] Ms Chen accepts that on the same day, 31 May 2022, Universal inquired as to how to deal with an employee who had stayed at home following an accident. Advice was provided following a review of the employment agreement but ultimately Universal opted to deal with the employee directly.
[22] Two weeks after the conclusion of the MPI matter Universal indicated they were considering terminating a department, and wished to engage an external professional to conduct the process. Ms Chen’s evidence is that no information or details as to which departments existed or which department Universal wished to dismiss were provided. The inquiry was general as to how a redundancy process might work. K3 Legal provided general advice about redundancy by email of 20 June 2022. Nothing further was received from Universal in response. The accounts K3 Legal rendered dated 30 April 2022 and 30 June 2022 addressed the MPI matter and the subsequent general consultations. Both were concluded by 30 June 2022.
[23] Mr Du also referred to and annexed emails in July 2022 in which he noted he had a company related employment question to consult with Ms Chen about relating to set working hours. Ms Chen responded the next day with some general advice. No further communication followed. No bill was rendered.
[24] Mr Du also refers to communications with Ms Chen in late June 2022 and July 2022, about a proposed lease agreement. While a letter of engagement was sent and signed, the lease was not reviewed as Universal did not proceed with it. There was then an inquiry in August about a roof leak in a leased building. In both instances the contact was recorded in time transactions but the time was written off and no bills rendered.
[25] A principal matter Universal relies on is a discussion in February 2022. Mr Du says that on 17 February 2022 he and Mr Xie discussed a potential shareholders’ dispute with Osmond with Ms Chen. Mr Du says it followed an initial mention of the issue on 9 February when Ms Chen had attended a meeting at the factory. Mr Du says that he provided information to K3 Legal that:
· the trust between Osmond and the minority shareholders had broken down;
· there was a cash flow issue which Osmond would not address;
· Osmond was making demands regarding voting rights which the minority shareholders had rejected;
· Universal was looking at leasing another warehouse for storage and needed advice whether Mr Du could do so under the shareholders’ agreement.
[26] Ms Chen denies that any such conversation took place. She maintains that Mr Du only mentioned in passing that he might have other company matters to instruct her on in the future, including shareholder issues but no detail or documents were ever provided.
[27] Mr Du refers to a communication from Ms Lian, Universal’s human resources manager, to Ms Chen on 17 February to support his evidence. Ms Lian’s communication was:
Also, I have forwarded your wechat to my colleague Lex, we also have shareholder issues we wish to consult on.
On the same morning, Mr Xie added Chen’s Webchat contact and said:
I’m Universal Lex. Hello lawyer Chen–
Please look after us in the future.
[28] Ms Chen’s evidence is that nothing came of that exchange. There was no subsequent discussion or instruction. Mr Xie did not contact her further. While Ms Chen continued to act on the employment matter at the time, nothing further was raised in relation to any detail of the shareholder issues. Nor were any instructions provided or advice sought. Further, Ms Chen only first obtained Mr Du’s contact details via the group chat on 11 April 2022 as a result of the MPI investigation. Mr Du only added Ms Chen’s direct contact details on 18 April 2022.
[29] There is a conflict between Mr Du’s evidence and Ms Chen’s on this point, particularly in relation to whether information regarding the possible shareholder dispute was provided, and advice sought.
[30] The onus remains on the applicant Universal. A number of factors support Ms Chen’s version. The exchange on 17 February refers to shareholders’ issues “we wish to consult on”, which is forward-looking and anticipates instructions in the future rather than referring back to a previous discussion. Further, there is no evidence of any further communications about the matter from Lex (Mr Xie). Mr Xie has not sworn an affidavit on this application to suggest there were any further discussions.
[31] Universal fails to establish that there was any detailed discussion, or instruction at all about “shareholder issues” other than the general suggestion of a briefing in the future about shareholder issues. Universal did not pursue the matter. Nor did K3 Legal. No file was opened, no letter of engagement was prepared and no fees were ever rendered in relation to the issue.
[32] Mr Du also refers to a number of other exchanges between K3 Legal and Ms Chen, which showed their close relationship, including one from Ms Chen when she queried whether there may be a position at Universal for a contact she had, and other general exchanges, including an invitation to client functions in May 2023.
[33] Despite those matters Universal does not satisfy the Court that at the time K3 Legal accepted instructions from Osmond in this proceeding it could be said to be acting for Universal on any matter. Importantly, there was, for instance, no ongoing brief with a retainer to confirm K3 Legal’s availability to act for Universal. Nor was there any general letter of engagement. K3 Legal’s letters of engagement related to specific transactions which were either completed or not pursued. Generally the extent of a solicitor’s obligation to their client will be defined by the particular brief and instructions given at the time.
[34] The fact that client invitations were sent and Ms Chen otherwise maintained contact with Mr Du is no more than a recognition that K3 Legal had acted for
Universal and expected that it may well act for Universal again in the future on specific instructions.
[35] The important point is that at the time that K3 Legal accepted instructions from Osmond in relation to these proceedings, it was not acting for Universal on any active files. As the Supreme Court noted in the Canadian National Railway Co case, it is not reasonable for a client to claim a law firm owes it exclusive loyalty in unrelated matters.
[36] Further, K3 Legal were not the only firm of lawyers used by Universal. Universal used other lawyers. Universal instructed Righteous Law on shareholder matters. Righteous Law acted for Universal on the shareholders’ agreement and deed of variation to the shareholders’ agreement. Prior to K3 Legal being instructed, Universal’s previous lawyers, PCW Law corresponded with Righteous Law about the dispute with Osmond.
[37] While the WeChat messages exchanged between Ms Chen and Mr Du established there were further communications between them, taken overall the evidence does not establish that K3 Legal was in an existing solicitor/client relationship with Universal when it accepted instructions in early to mid-2023 to issue proceedings on behalf of Osmond. There was no relevant existing client/solicitor relationship in relation to the matter in issue in these proceedings. Nor were there any other relevant ongoing instructions in which K3 Legal was engaged.
Confidential information
[38] Even where there is no relevant existing relationship, a lawyer will be prohibited from acting for a former client where the lawyer would in effect be defending their own advice or where they may be called to give evidence and/or give contentious evidence.
[39] Although Mr Du suggested Universal may wish to call Ms Chen to give evidence, neither of the above situations apply in the present case. There is no reasonable likelihood of either of those matters occurring despite the general submission made as to K3 Legal’s advice about employment issues. Evidence is only
admissible if relevant.7 Ms Chen’s evidence regarding the matters she acted for Universal on would not be relevant in relation to the current dispute. Nor is this a situation where K3 Legal and Ms Chen would be called on to support their own previous advice.
[40] The remaining issue is whether K3 Legal might hold confidential information about Universal which may be relevant to the proceedings in issue. K3 Legal holds certain historical information about Universal and Mr Du. The issue is whether that information is confidential to Universal and also may be relevant to the current proceedings. As the authorities confirm, even though there may be no ongoing relationship between the solicitor and client, the solicitor has a continuing obligation to protect the former client’s confidential information.
[41] In Torchlight Fund No 1 LP (In rec) v NZ Credit Fund (GP) 1 Ltd,8 Gilbert J referred to the Court of Appeal decision of Black v Taylor9 with approval and also the decision of Prince Jefri Bolkiah v KPMG (a firm),10 noting that in that case Lord Millett said:11
Accordingly, it is incumbent on a plaintiff who seeks to restrain his former solicitor from acting in a matter for another client to establish (i) that the solicitor is in possession of information which is confidential to him and to the disclosure of which he has not consented and (ii) that the information is or may be relevant to the new matter in which the interest of the other client is or may be adverse to his own. Although the burden of proof is on the plaintiff, it is not a heavy one. The former may readily be inferred; the latter will often be obvious.
[42] In the Torchlight case, after reviewing Black v Taylor and Prince Jefri Bolkiah v KPMG Gilbert J noted:12
[19] The fiduciary relationship between a solicitor and a client comes to an end when the retainer is terminated. However, the solicitor has a continuing obligation to protect the former client’s confidential information. This obligation is of fundamental importance and must be strictly observed. It is
7 Evidence Act 2006, s 7(2).
8 Torchlight Fund No 1 LP (In rec) v NZ Credit Fund (GP) 1 Ltd [2014] NZHC 2552.
9 Black v Taylor, above n 6.
10 Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 AC 222 at 234 (HL)
11 Torchlight Fund No 1 LP (In rec) v NZ Credit Fund (GP) 1 Ltd, at [17] citing Prince Jefri Bolkiah v KPMG (a firm), at 235.
12 Torchlight Fund No 1 LP (In rec) v NZ Credit Fund (GP) 1 Ltd, above n 8.
confirmed in r 8.7.1 of The Lawyers and Conveyancers Act (Lawyers:
Conduct and Client Care) Rules 2008, …
[43] The Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, provide:
A lawyer must not act for a client against a former client of the lawyer or of any other member of the lawyer’s practice where –
(a)the practice or a lawyer in the practice holds information confidential to the former client; and
(b)disclosure of the confidential information would be likely to affect the interests of the former client adversely; and
(c)there is a more than negligible risk of disclosure of the confidential information; and
(d)the fiduciary obligation owed to the former client would be undermined.
[44] In the recent decision of 100 Investments Ltd v Walker Campbell J also discussed the issue of a lawyer acting for a party against a former client.13 While accepting there was no absolute prohibition against a lawyer acting for a client with an interest adverse to their former client the Judge noted there were some circumstances in which a lawyer would be restrained from acting. Campbell J noted that Black v Taylor confirmed that the rationale behind any intervention in the case lay not in “some perception of disloyalty or impropriety” but in “the reasonable protection of confidential information”, which raised three questions:14
(a)Is confidential information held which, if disclosed, is likely to affect the former client’s interests adversely?
(b)Viewed objectively, is there a real or appreciable risk that the confidential information will be disclosed?
(c)If the first two questions were answered affirmatively, should the Court’s discretionary power to disqualify be exercised?
[45] The focus then is whether it can be said Ms Chen or K3 Legal hold information confidential to Universal. Mr Johnson produced a lengthy email exchange from Mr Du to Ms Chen in April 2022 in which he outlined the pressures and issues he was
13 100 Investments Ltd v Walker [2023] NZHC 2227, at [41] (footnote omitted).
14 At [46], citing Black v Taylor, above n 6, at [46].
facing at the time. The email was provided to assist Ms Chen to respond to the MPI matter. The suggestion for Universal is that was similar to information held by Buddle Findlay regarding Mr Kerr in Torchlight. However, I consider the situation in Torchlight (and also for that matter in Black v Taylor) to be quite different. In Torchlight Buddle Findlay’s knowledge of Mr Kerr’s personal confidential information and related interests was relevant to a specific issue before the Court, namely the interpretation of the clause of the agreement relating to the late payment fee. In Black v Taylor, the lawyer had acted for the members of the deceased’s family for some decades and in doing so, had acted for both the plaintiff and the plaintiff’s uncle (the deceased) whose estate was in issue. Mr Du’s email to Ms Chen in April 2022 was clearly directed at the MPI issue but his general references to his health and stress at the time does not meet the test of confidential information. Nor is it current or ongoing.
[46] Universal relies particularly on Mr Du’s evidence about the February shareholder issue as relevant confidential information. But for the reasons given above the Court is not satisfied that there was any confidential information disclosed in February 2022. Further, any brief reference to a shareholder dispute (even if there was such a reference) is not at risk of being misused if K3 Legal continues to act. Ms Chen has made it very clear in her affidavit that she has absolutely no recollection of any relevant details. In 100 Investments Campbell J noted that there was no record of the discussion that was said to be relevant. He also noted that Minter Ellison did not recall the event. While the present time period is shorter than in that case the fact there is no written record of the information and Ms Chen has no recollection confirms that the matter was not one of significance to Ms Chen. As noted, no file was opened. No record of any information exists.
[47] Putting the issue of the shareholders’ dispute to one side (for the above reasons) none of the issues raised in the present proceedings relate to Universal’s past instructions to K3 Legal.
[48] The application for the appointment of managers relates in part to Universal’s intention to enter a second lease commitment for a factory Osmond says it cannot
afford. However, K3 Legal did not act in relation to that proposed lease or give Universal relevant advice about it.
[49] Universal fails to satisfy the Court that K3 Legal holds relevant confidential information which, if disclosed, would be likely to adversely affect Universal. It follows there is no objective basis for the submission that such confidential information will be disclosed.
[50] Finally, I note in Russell McVeagh McKenzie Bartleet & Co v Tower Corporation the Full Court confirmed that, while recognising the significance and importance of the fiduciary relationship, the issue was ultimately whether the Court’s discretionary power should be exercised.15 The competing factors of a person’s right to the services of a lawyer of a choice and a corresponding right of a lawyer to offer his or her services to the public generally remain important considerations. In this case evidence has been given on behalf of Osmond as to the difficulty it experienced in obtaining solicitors or lawyers with the requisite understanding of its position. That supports the conclusion the Court should look carefully at Universal’s case to have K3 Legal prevented from acting.
Result
[51] For the above reasons the application by Universal to debar K3 Legal from acting is dismissed.
Costs
[52]At the request of counsel costs are reserved.
[53] In the event that the parties cannot agree on costs K3 Legal is to file and serve submissions by 29 September 2023. Universal is to reply by 13 October 2023. Any response by 20 October 2023. The Court will deal with the matter on the papers.
Venning J
15 Russell McVeagh McKenzie Bartleet & Co v Tower Corporation [1998] 3 NZLR 641 (CA).
3
0