Richard Zhao Lawyers Limited v Chen
[2016] NZHC 1134
•27 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2086 [2016] NZHC 1134
UNDER the Insolvency Act 2006 IN THE MATTER OF
the bankruptcy of JIE PING CHEN
BETWEEN
RICHARD ZHAO LAWYERS LIMITED Judgment Creditor
AND
JIE PING CHEN Judgment Debtor
Hearing: 27 May 2016 Appearances:
F D Deliu for Judgment Creditor
P F Chambers for Judgment DebtorJudgment:
27 May 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Henley-Smith Law, Auckland, for Judgment Debtor
Richard Zhao Lawyers Limited, Auckland, for Judgment Creditor
Counsel:
F D Deliu, Auckland, for Judgment Creditor
Paul F Chambers, Auckland, for Judgment Debtor
RICHARD ZHAO LAWYERS LIMITED v CHEN [2016] NZHC 1134 [27 May 2016]
[1] Richard Zhao Lawyers Ltd applies for Ms Chen to be adjudicated bankrupt. The application says that Ms Chen owes Richard Zhao $4,000 for a costs order made against her on 5 August 2015. The act of bankruptcy alleged is that she did not comply with a bankruptcy notice served on her on 28 September 2015.
[2] The debtor’s notice of intention to oppose the application sets out a number of grounds, but the essential ground of opposition is that she has certain credits which either reduce or extinguish her liability under the costs order.
Background
[3] There is a useful background in a judgment of French J in the Court of Appeal. Richard Zhao has appealed against the costs order made on 5 August 2015 and will maintain that the costs ordered should be much higher. French J gave a decision on a review of the decision of the Registrar of the Court of Appeal declining
to dispense with security for costs. She said:1
The first appellant, Richard Zhao Lawyers Ltd (the company), is a law firm operated by the second appellant, Mr Zhao, a legal practitioner. The appellants acted for the second respondent, Ms Chen, in relationship property proceedings against her former husband. Ms Chen became dissatisfied with the services provided by Mr Zhao and instructed new solicitors.
Ms Chen wanted trust funds held by the company to be transferred to her new lawyers. The funds in question were sale proceeds of $212,370.40 from the sale of a property at issue in the relationship property proceedings. Mr Zhao refused to transfer the funds on the grounds his company had a lien over the funds for unpaid legal fees of $13,402.25, and because he had given an undertaking to the husband’s solicitors not to disburse the money until the relationship property dispute was resolved.
On the application of Ms Chen, the Family Court ordered the company to transfer all of the funds to Ms Chen’s new lawyers to be held undisbursed by the new lawyers without any further payment being made, unless Ms Chen and her husband agreed otherwise or there was a Court order, whichever occurred first. Mr Zhao continued to refuse to transfer the funds. This resulted in the Family Court finding him to be in contempt of Court and referring the matter to the New Zealand Law Society.
1 Richard Zhao Lawyers Ltd v Family Court at Auckland [2015] NZCA 596 at [2]-[9].
The company then issued proceedings in the High Court seeking judicial review of the various rulings made by the Family Court. Justice Asher quashed the decisions made by the Family Court on the grounds Mr Zhao had not been given an adequate opportunity to be heard and the existence of the undertaking and lien had not been brought to the attention of the Family Court.
In his decision, Asher J recorded that during the course of the hearing, it had been agreed by counsel he should direct payment of half of the money less the unpaid legal fees to Ms Chen’s new lawyers and discharge Mr Zhao from his undertaking in respect of the monies transferred. Orders were made accordingly.
In a separate costs decision, Asher J recorded that Ms Chen was entitled to the monies released and that the background procedural tangle had left her with little alternative but to oppose the judicial review proceeding. If she had not done so, given the “unbending position” of Mr Zhao at that stage, the result would have been that the monies to which she was entitled and needed could have been tied up indefinitely. Having regard to that background, the Judge said Ms Chen had acted reasonably in electing to defend the proceeding.
Justice Asher then went on to state that, had it not been for the sensible compromise reached during the course of the hearing, the relief he granted Mr Zhao may well have been significantly qualified, which in turn would have warranted a partial award of costs against Mr Zhao.
The Judge concluded that, while he could not ignore the fact Mr Zhao had been successful, equally he could not ignore the merit of Ms Chen’s claim to have her monies released to her and the fact the ultimate decision was a significant practical compromise. In those circumstances, the fair solution was to make a modest award for costs in the company’s favour, but one that was “considerably less” than full costs.
[4] It is necessary to add some detail. In his hearing of the judicial review application, Asher J dealt with dispersal of the funds held in Mr Zhao’s trust account. 2
[52] Mr Deliu on behalf of Mr Zhao accepted in the course of submissions that Mr Zhao’s unwillingness to pay the money to another firm of lawyers stemmed from the existence of the undertaking and the existence of his lien. If he retained security for the fees that he claimed of $13,402.25 and was released from his undertaking, he would have no objection to the balance of the funds being paid to Ms Chen’s new lawyers.
[53] This was discussed during the course of the hearing by both Mr Chambers and Mr Deliu and it was agreed that to enable Ms Chen to get access to funds and for matters to progress without them becoming bogged in other procedural litigation rounds, I
2Richard Zhao Lawyers Ltd v Family Court at Auckland [2015] NZHC 983, [2015] NZAR 1038 at [52]-[53], [55].
should direct that the net balance be paid to Ms Chen’s current
solicitors Henley-Smith Law, and that the correct figure should be
$94,274.84. This sum was calculated on the basis that the amount presently held in the trust account is $215,354.19, including interest to the hearing date, and that Ms Chen’s half share of that is
$107,677.09. If from that sum the amount of Mr Zhao’s fees of
$13,402.25 is deducted, the net balance that Mr Zhao is content to transfer is $94,274.84, providing he is released from his undertaking.
…
[55] I substitute for those decisions [of the Family Court] a direction to Mr Zhao to pay to Ms Chen’s current solicitors, Henley-Smith Law, the sum of $94,274.84 from the sum held by him on behalf of Ms Chen and Mr Wang, the money then to be held by Henley-Smith Law for Ms Chen and Mr Wang. I discharge Mr Zhao of his undertaking to Ms Chen to hold those monies, although it remains in respect of the balance until discharged by agreement between Ms Chen, Mr Wang and Mr Zhao, or by order of the Court.
[5] I note that the $94,274.84 was to be held by Ms Chen’s new lawyers on behalf of both herself and Mr Wang. I infer from that that so far Ms Chen has not been able to have access to that money. Counsel advised me as to progress on the relationship property proceeding in the Family Court. The husband has instructed counsel. The parties are presently going through discovery. Mr Chambers did not anticipate that a hearing would be available in the Family Court until some time next year.
[6] I note that in terms of any relationship property claim Mr Wang might have to the proceeds of sale of the Panmure property, he is protected insofar as half the net proceeds of sale are held in Mr Zhao’s trust account, and $94,000 is held in the trust account of Henley-Smith Law. He is unprotected only to the extent of $13,402.25 which, under Asher J’s decision, was ear-marked to be available to Ms Chen to meet fees charged by Richard Zhao. Under these arrangements, Mr Wang’s position has been adequately protected. The sum of $13,402.25 is arguably available to Ms Chen to meet her obligations to Richard Zhao Lawyers Ltd. Admittedly the sum was set aside simply for legal fees, but for reasons that I will go on to explain it is also available to meet other liabilities to Richard Zhao Lawyers Ltd.
[7] Asher J fixed costs on the judicial review proceeding in his costs decision.3
He awarded costs of $4,000 inclusive of disbursements against Ms Chen. Although Richard Zhao Lawyers Ltd has appealed against that decision, Ms Chen has not. There is no stay of execution of that order for costs. It is also undisputed that she did not comply with the bankruptcy notice served on her.
[8] Ms Chen applied to set aside the bankruptcy notice. That application foundered on procedural grounds. Doogue AJ held that the application to set aside the bankruptcy notice was not validly served in accordance with s 387 of the Companies Act 1993 and accordingly, in the absence of valid service, the application
had to be dismissed.4 Doogue AJ’s decision deals only with procedural matters - the
service of the setting aside application. He did not address the substantive merits of the setting aside application. Nothing he said in his decision bears on the substantive matters Ms Chen relied upon. Instead, she is entitled to raise them afresh in resisting the bankruptcy application. Doogue AJ ordered Ms Chen to pay costs to Richard Zhao Lawyers Ltd. Those costs were fixed at $9,893.30. Richard Zhao Lawyers Ltd issued a fresh bankruptcy notice based on that costs order.
[9] Ms Chen has a third liability to Richard Zhao Lawyers Ltd. That is for its work while acting for her in the Family Court proceeding. She has invoked the procedures available under the Lawyers and Conveyancers Act 2006 to have the charge of $13,402.25 reviewed.
[10] The Lawyers Complaints Service appointed an experienced family lawyer to review the fees. A report by that lawyer recommends that the fair and reasonable fees for the work carried out by Richard Zhao Lawyers Ltd, including instructing counsel, was $4,185 including GST and disbursements. That report is a recommendation. Richard Zhao Lawyers Ltd has objected to that report on the ground that the lawyer had unilateral communications with Ms Chen’s lawyer. It appears that there may be further steps before the amount of the fee is finally fixed, but for the purpose of this proceeding, I will treat Ms Chen as indebted to Richard
Zhao Lawyers Ltd for legal fees for a minimum of $4,185.00 while noting that
3 Richard Zhao Lawyers Ltd v Family Court at Auckland [2015] NZHC 1837.
4 Richard Zhao Lawyers Ltd v Chen [2015] NZHC 3230.
Richard Zhao Lawyers Ltd may wish to use further procedures under the Lawyers and Conveyancers Act to have that sum increased.
[11] In a bankruptcy application it is appropriate to take into account all a debtor’s liabilities to a creditor even if the creditor has relied on only one debt in its application. I find that Ms Chen is indisputably indebted to Richard Zhao Lawyers
for these amounts:
[a] costs order of Asher J $4,000.00 [b] costs award of Associate Judge Doogue $9,803.30 [c] fees according to recommendation $4,185.00 TOTAL: $17,988.30
[12] I record that as a minimum amount of Ms Chen’s indebtedness to Richard Zhao Lawyers Ltd, while noting the potential for that amount to be increased, either by the appeal against Asher J’s costs order or by further developments in the review of the fees under the Lawyers and Conveyancers Act.
[13] The question is whether the funds held by Richard Zhao Lawyers Ltd can be applied to reduce that liability.
[14] A result of the decision of Asher J is that, as I have explained, $13,402.25 has been earmarked for fees for Richard Zhao Lawyers Ltd, with the rest of the funds held under the continuing undertaking for both Mr Wang and Ms Chen. I do not regard the $107,000 component as available to meet Ms Chen’s liability to Richard Zhao Lawyers Ltd. She could not have recourse to those funds or any part of them while they remain held subject to the undertaking. The $13,402.25 element is not subject to any undertaking to Mr Wang. I regard him as adequately protected. Because of Asher J’s decision Mr Zhao would not breach any undertaking, if the
$13,402.25 component were applied towards his own fees. I also regard him as entitled to have recourse to those funds to meet fees and also other debts owed to him by Ms Chen by virtue of s 113(2) of the Lawyers and Conveyancers Act. That makes it clear that while funds held in a solicitor’s trust account are protected, they may be applied towards meeting any just claim or lien that a practitioner may have
against that money. I regard a costs order as a just claim against money held in a
solicitor’s trust account where the solicitor is the creditor under the costs order.
[15] I am reinforced by the Court of Appeal’s decision in Shand v M J Atkinson Ltd (in liq).5 In that case the Court of Appeal held that insolvency set-off was available on bankruptcy where a lawyer holding funds on trust for a client claimed debts owed to him by the client and the client went into liquidation. Although that was a liquidation case, the Court of Appeal applied insolvency set-off. The Court relied on s 204 of the Bankruptcy Act 1908 and s 71(4) of the Law Practitioners Act
1955. The current corresponding provisions are s 254 of the Insolvency Act 2006 and s 113(2) of the Lawyers and Conveyancers Act 2006.
[16] In a bankruptcy application, the court is entitled to (and in my judgment should) take into account any insolvency set-off under s 254 of the Insolvency Act. If the application of insolvency set-off on adjudication would eliminate the creditor’s debt altogether, there is little point in allowing that creditor to maintain an application for adjudication. Section 254 says:
254 Mutual credit and set-off
(1) If there have been mutual credits, mutual debts, or other mutual dealings between a bankrupt and another person,—
(a) an account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and
(b) an amount due from one party to the other must be set off against an amount due from the other party; and
(c) only the balance of the account may be proved in the bankruptcy, or is payable to the Assignee, as the case may be.
(2) However, a person (A) may not claim the benefit of any set-off against an amount due by the bankrupt if, when A gave credit to the bankrupt, A had notice of an available act of bankruptcy by the bankrupt.
(3) A creditor of the bankrupt who claims a set-off must declare in
5 Shand v M J Atkinson Ltd (in liq) [1966] NZLR 551 (CA).
that person’s creditor’s claim form that, when the creditor gave the bankrupt credit, the creditor did not have notice of an available act of bankruptcy by the bankrupt.
See, for example, my decision in Commissioner of Inland Revenue v The Fishing
Company Ltd.6
[17] In short it is arguable for Ms Chen that upon adjudication the sum of
$13,402.25 can be applied against her total indebtedness to Richard Zhao Lawyers Ltd. But that will not eliminate her indebtedness altogether. It would leave her short by $4,586.05 (without taking into account any adjustments for interest either way).
[18] In a bankruptcy application, the court has a discretion whether to order an adjudication. The net indebtedness of Ms Chen is a relatively small sum of
$4,586.05 (disregarding costs). As an alternative to bankruptcy, it is appropriate to give her the opportunity to clear that indebtedness. I intend to take that course. I adjourn this proceeding until 16 June 2016. The case is to be called in the miscellaneous list at 11:45am on that day. I shall be taking that bankruptcy list. I have adjourned the matter to give Ms Chen the opportunity to clear her indebtedness by paying Richard Zhao the sum of $4,586.05.
[19] I have left to one side the question of costs. I invite counsel to confer as to costs. It is possible that by 16 June there may be outstanding differences as to costs. If so, I shall hear the parties as to costs and decide what orders to make. But if Ms Chen has cleared her indebtedness by paying the sum of $4,586.05, it is most unlikely that I would make an order for her adjudication.
[20] I record that this hearing took a quarter of a day.
Associate Judge R M Bell
6 Commissioner of Inland Revenue v The Fishing Company Ltd HC Auckland, CIV-2010-404-
4955, 14 December 2010.
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