Torchlight Fund no.1 LP (in receivership) v NZ Credit Fund (GP) 1 Limited

[2014] NZHC 2552

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

COMMERCIAL LIST

CIV 2014-404-002166 [2014] NZHC 2552

UNDER

Part 19 of the High Court Rules and

section 34 of the Receiverships Act 1993

IN THE MATTER

of TORCHLIGHT FUND NO. 1 LP (IN RECEIVERSHIP)

BETWEEN

TORCHLIGHT FUND NO. 1 LP (IN RECEIVERSHIP)

Plaintiffs

AND

NZ CREDIT FUND (GP) 1 LIMITED First Defendant

GEORGE CHARLES DESMOND KERR Second Defendant

TORCHLIGHT REAL ESTATE FUND LIMITED

Third Defendant

cont:…/2

Hearing:	10 October 2014
Appearances:	R B Stewart QC and B A Tompkins for the First, Second and Third Defendants N S Gedye QC and D T Broadmore for Buddle Findlay
Judgment:	17 October 2014

JUDGMENT OF GILBERT J

This judgment is delivered by me on 17 October 2014 at 2pm pursuant to r 11.5 of the High Court Rules.

..................................................... Registrar / Deputy Registrar

TORCHLIGHT FUND NO. 1 LP (In R’ship) v NZ CREDIT FUND (GP) 1 LTD [2014] NZHC 2552

[17 October 2014]

TORCHLIGHT FUND L.P. Fourth Defendant

TORCHLIGHT GP LIMITED Fifth Defendant

WILACI PTY LIMITED (Discontinued) Sixth Defendant

Introduction

[1]      Buddle Findlay acted for Mr George Kerr and his related entities for 14 years until 2012.  Mr Kerr was a major client of the firm and his instructions covered the whole range of his business activities.  Buddle Findlay handled hundreds of files for Mr Kerr and his entities over this period and the total fees paid to the firm amounted to approximately $10 million.  In one of these years, Mr Kerr was the firm’s second biggest client in terms of fees generated.   Mr Kerr says that he worked with a number of lawyers at Buddle Findlay and the firm gained an intimate knowledge of him personally, his business activities, his assets and their location, and how he operates.

[2]      The solicitor client relationship between Buddle Findlay and Mr Kerr ceased in 2012, sometime after the key relationship partner left the firm.

[3]      Buddle Findlay  has  now  accepted  instructions  to  act  against  Mr  Kerr’s

interests  in  this  proceeding  and  a  related  proceeding  (the  2136  proceeding).1

Mr Kerr objects to this.   He applies for an order restraining Buddle Findlay from acting against him or any party associated with him in this proceeding, the 2136 proceeding, or any other proceeding or related matter.

[4]      Buddle Findlay opposes Mr Kerr’s application for disqualification, describing it as “extraordinary” and “drastic”.  Buddle Findlay claims that such an order would be contrary to the interests of justice because it would unjustifiably deprive its new client of its choice of solicitors.  Buddle Findlay says that there is no risk that justice will not be done or be seen to be done in either of the proceedings as a result of it having acted in the past for Mr Kerr and his associated entities.   Buddle Findlay further claims that it does not possess any confidential information that might be relevant to the issues in either proceeding.  It asserts that any risk of disclosure of

confidential information should be disregarded as “fanciful or theoretical”.

1      Torchlight Fund No.1 LP v Johnstone & Ors CIV-2014-404-002136.

The proceedings

[5]      In about 2009, with Buddle Findlay’s assistance, Mr Kerr established the Torchlight group including Torchlight Fund No.1 LP (the Torchlight Fund), a limited partnership formed to acquire and realise distressed assets.  Buddle Findlay carried out significant work for the Torchlight group, including the Torchlight Fund.  This work included the acquisition of assets by the Torchlight Fund and dealing with limited partners entering the Torchlight Fund.

[6]      In 2012, Mr Kerr sought funding to assist the Torchlight Fund to acquire debt from  Bank  of Scotland  International.    He was  introduced  to  Mr John Grill,  an Australian financier.   In August 2012, Mr Grill’s trust, through Wilaci Pty Ltd as its corporate trustee, entered into a loan agreement for an advance of AUD37 million to the Torchlight Fund for a term of 60 days.

[7]      The Torchlight Fund was late repaying the principal.  It progressively repaid it from October 2013 to May 2014.  On 3 June 2014, Wilaci demanded payment of approximately AUD33.6 million in interest, fees and penalties.   This sum mostly comprised a late payment fee which accrued at the rate of $500,000 per week.  When payment was not made, Wilaci appointed the plaintiffs as receivers of the property of the Torchlight Fund on 10 June 2014.

[8]      Mr Kerr is a director of NZ Credit Fund (GP) 1 Ltd, the general partner of the Torchlight Fund.  On 26 August 2014, Mr Kerr arranged for the Torchlight Fund to commence the 2136 proceeding against the receivers and Wilaci claiming that the late payment fee is an unenforceable penalty.   The Torchlight Fund seeks a determination of the amount properly owing so that this can be paid, the security granted to Wilaci discharged, and the receivers removed.

[9]      Two days later, on 28 August 2014, the receivers commenced the present proceeding seeking declarations that assets currently held by Torchlight Fund LP, a limited partnership in the Cayman Islands, are subject to Wilaci’s security.   This claim   relates   primarily   to   an   investment   by   the   Torchlight   Fund   in   the Cayman Islands Torchlight Fund in December 2010.   Mr Kerr is also a director of

Torchlight (GP) Ltd, the general partner of the Cayman Islands Torchlight Fund. The receivers also seek orders compelling Mr Kerr and the other defendants to provide documents and information to them.

[10]     The issues in the 2136 proceeding are comparatively narrow.  However, the proceeding is at a preliminary stage and Mr Kerr is concerned that he may well be targeted personally, particularly if the late payment fee is held not to be a penalty. The prospect of personal liability arises because of Mr Kerr’s involvement as a director  of  various  Torchlight  entities,  including  the  general  partners  of  the Torchlight Fund and the Cayman Islands Torchlight Fund.

[11]       Mr Kerr says that he is upset and distressed that Buddle Findlay has chosen to accept instructions from Wilaci against him and his interests.   He believes that Wilaci will gain an unfair advantage as a result because of the extensive confidential information Buddle Findlay holds about him, his business activities and his assets in the course of acting as his solicitor for 14 years.

Legal principles

[12]     In Black v Taylor, the Court of Appeal confirmed that the Court has an inherent jurisdiction to disqualify a solicitor from acting against a former client.2

Richardson J considered that disqualification will normally be the appropriate response in cases where counsel’s representation of one party against another may impair the integrity of the judicial process:3

Disqualification  will  ordinarily  be  the  appropriate  remedy  where  the integrity of the judicial process will be impaired by counsel’s adversarial representation of one party against the other.  The decision to disqualify is not dependent on any finding of culpable conduct on  the lawyer’s part. Disqualification is not imposed as a punishment for misconduct.  Rather it is a protection for the parties and for the wider interests of justice.   The legitimacy of judicial decisions depends in large part on the observance of the  standards  of  procedural  justice.    Where  the  integrity  of  the  judicial process is perceived to be at risk from the proposed or continuing representation by counsel on behalf of one party, disqualification is the obvious and in some cases the only effective remedy although considerations of delay, inconvenience and expense arising from a change in representation

may be important in determining in particular cases whether the interests of justice truly demand disqualification.

[13]      McKay J  considered  that  the  Court’s  inherent  jurisdiction  to  disqualify counsel from acting in appropriate cases was essential to the proper administration of justice:4

It is essential to the functioning of the Court as a Court of justice that it must be able to prevent a barrister acting as counsel in a matter in which he has a conflict of interest, or in which he appears to have a conflict of interest such that justice will not be seen to be done.

[14]     McKay J  considered that the rules of professional conduct restricting the circumstances in which a practitioner may act against a former client accorded with the standards required by the Courts to enable them to discharge their functions in the administration of justice.  At that time, the relevant rule of professional conduct was as follows:

A practitioner  must  not  act  for  a  client  against  a  former  client  of  the practitioner when through prior knowledge of the former client or of his or her affairs which may be relevant to the matter, to so act would be or would have the potential to be to the detriment of the former client or could reasonably be expected to be objectionable to the former client.

[15]     After referring to this rule, McKay J noted:5

In the commentary to the rule it is pointed out that the practitioner may face a very difficult situation through acting or continuing to act against a former client.  Knowledge acquired while acting for the former client is confidential and privileged (r 1.07), and yet the practitioner is bound to disclose information received which relates to a present client’s affairs (r 1.08).  The commentary points out that such a situation is likely to give rise to a conflict, and in those circumstances it is not proper for the practitioner to continue to act.

The rule addresses situations such as that in the present case.  The standard of conduct which it imposes on barristers appears to me to accord with the standard which is necessary to enable the Courts to discharge their functions in the administration of justice.  I would adopt it, subject to the de minimis principle, as in an appropriate guide for the exercise of the inherent jurisdiction on an application such as in the present case.

[16]     In Prince Jefri Bolkiah v KPMG (a firm), Lord Millett stated that the Court’s jurisdiction to intervene on behalf of a former client is based on the need to protect confidential information:6

In the course of argument, however, he modified his position, accepting that there was no ground on which the court could properly intervene unless two conditions were satisfied: (i) that the solicitor was in possession of information which was confidential to the former client and (ii) that such information  was  or  might  be  relevant  to  the  matter  on  which  he  was instructed by the second client.  This makes the possession of relevant confidential information the test of what is comprehended within the expression “the same or a connected matter.”   On this footing the court’s intervention is founded not on the avoidance of any perception of possible impropriety but on the protection of confidential information.

My Lords, I would affirm this as the basis of the court’s jurisdiction to

intervene on behalf of a former client.

[17]     Lord Millett considered that the burden on a plaintiff seeking to restrain his former solicitor from acting against him for another client is not a heavy one:7

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.

[18]     Lord  Millett  emphasised  the  fundamental  importance  of  protecting  the former client from any avoidable risk of inappropriate disclosure of confidential information, particularly where the information is privileged:8

It is in any case difficult to discern any justification in principle for a rule which exposes a former client without his consent to any avoidable risk, however slight, that information which he has imparted in confidence in the course of a fiduciary relationship may come into the possession of a third party and be used to his disadvantage.  Where in addition the information in question is not only confidential but also privileged, the case for a strict approach is unanswerable.  Anything less fails to give effect to the policy on which legal professional privilege is based.   It is of overriding importance for the proper administration of justice that a client should be able to have complete confidence that what he tells his lawyer will remain secret.  This is a matter of perception as well as substance.  It is of the highest importance to the administration of justice that a solicitor or other person in possession of

6      Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 A.C. 222 at 234 (HL).

confidential and privileged information should not act in any way that might appear to put that information at risk of coming into the hands of someone with an adverse interest.

[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 confirmed in r 8.7.1 of The Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules

2008, which relevantly provides:

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.

Analysis

[20]     Mr Gedye QC submits that Mr Kerr has overstated “the nature and scale and potential usefulness” of the information held by Buddle Findlay.  Whether or not this is  so  is  beside  the  point.    Mr Gedye  accepts  that  Buddle  Findlay  does  hold confidential information belonging to Mr Kerr and his associated interests which it acquired during the course of acting for them.  He also accepts that Mr Kerr has not consented to the disclosure of any of this information.  Accordingly, the first limb of Lord Millett’s test is clearly satisfied in this case. The only contest relates to the second  limb  of  the  test,  namely,  whether  any  of  the  information  held  by Buddle Findlay is or may be relevant to the proceedings and, if so, whether there is a more than negligible risk of it being disclosed.

[21]     Mr Gedye argues that the present proceeding, which was commenced by the receivers, is not relevant because there was no basis for Wilaci to have been joined as a party.   Indeed, the plaintiffs have now discontinued their claim against Wilaci. Mr Gedye contends that the issues in this proceeding are for the receivers to resolve and they must act independently of Wilaci in doing so.   Further, he submits that

Buddle Findlay  has  no  confidential  information  relating  to  the  December  2012 transfer  to  the  Cayman  Islands  Torchlight  Fund  upon  which  the  proceeding  is focused.

[22]     Mr Gedye submits that none of the information held by Buddle Findlay could be relevant to the issues in the 2136 proceeding initiated by Mr Kerr.  He submits that these issues are narrowly confined to:

(a)       whether or not the late payment fee is a penalty; (b)    if so, whether relief should be granted; and

(c)      how much is owing under the loan agreement.

[23]     Mr Gedye observes that if the Torchlight Fund repays the amount owing after the Court has determined this, the question of recovery and the location of assets will not arise.

[24]     However, the proceeding is at an early stage and the pleaded issues may change.   In any event, I am satisfied that, even on the current pleadings, the information held by Buddle Findlay could be relevant.   For example, the defence filed by Buddle Findlay on behalf of Wilaci in the 2136 proceeding contains the following pleading in response to the Torchlight Fund’s claim that the late payment fee is an unenforceable penalty:

The late payment fee ... and all other terms of the loan agreement ... were negotiated between the plaintiff and the defendant in circumstances in which both parties:

(a)       were of relatively equal bargaining strengths; and

(b)      had the benefit of independent legal advice. Furthermore:

(c)       Mr Kerr is a highly experienced businessman who has been involved over the past five years (at least) routinely in the borrowing and lending of very significant sums of money;

(d)       the quantum of the late payment fee reflect the risk undertaken by the second defendant in lending to the plaintiff; and ...

[25]     The knowledge Buddle Findlay has about Mr Kerr’s business activities over many years, particularly concerning his borrowing and lending activities, is clearly relevant  to  this  issue.     Further,  Buddle  Findlay  has  confidential  information belonging to Mr Kerr and his related interests that would be relevant to the lending risk referred to in the pleading.

[26]     If the Torchlight Fund is unsuccessful in establishing that the late payment fee  is  a  penalty,  questions  of  recovery  are  likely  to  arise.    Buddle  Findlay’s knowledge concerning Mr Kerr’s assets could then be relevant.

[27]     I consider that Mr Kerr’s concerns about Buddle Findlay’s decision to accept instructions to act for Wilaci against him are justified. There is a very significant sum at stake.   He and his related entities entrusted Buddle Findlay with considerable confidential  and  privileged  information  over  a  14 year  period  in  the  course  of providing instructions on hundreds of matters.  Some of this information is plainly of potential relevance to the dispute.   It is unacceptable that Mr Kerr should now be exposed to the risk that this information could be misused to his detriment.

[28]     Buddle Findlay did not establish any information barrier when it accepted instructions from Wilaci.   Nor did it resist the application on the basis that an information barrier would eliminate the risk of disclosure of confidential and privileged  information.     However,  at  the  conclusion  of  his  oral  submissions, Mr Gedye advised that Buddle Findlay would be prepared to consider creating such a barrier.  The details of this have not been considered or formulated in any detail. Mr Stewart QC submitted that the Court should not entertain this belated and undeveloped proposal.

[29]     Given the extent of Buddle Findlay’s involvement in Mr Kerr’s affairs over such a lengthy period and the number of partners and staff involved, I doubt whether an information barrier would be effective in negating the risk of disclosure.  In any event, the matter was not raised in the notice of opposition and no evidence has been provided to establish that an information barrier would mitigate the risk of disclosure of confidential information so that it was no more than negligible.  I am therefore not satisfied that this proposal is an answer to the application.

Conclusion

[30]     For the reasons I have given, I am satisfied that the application should be granted.  Buddle Findlay has confidential information belonging to Mr Kerr and his associated entities which is or may be relevant to the matters at issue in this proceeding and the 2136 proceeding.  There is a more than negligible risk that this information  could  be  disclosed  or  misused  to  Mr  Kerr’s  detriment.    The  only effective way of avoiding this unacceptable risk is to disqualify Buddle Findlay from acting against Mr Kerr and his interests in the proceedings.

Result

[31]     I make an order restraining Buddle Findlay from acting for Wilaci Pty Ltd or any other party against  the first,  second  or third defendants  or any  other  party associated with Mr Kerr in respect of this proceeding, the proceeding brought by Torchlight Fund No.1 LP under CIV-2014-404-002136 and any matter relating to or connected with the loan by Wilaci to Torchlight Fund No.1 LP.

[32]     Any application for costs should be made by way of memorandum to be filed and served within 20 working days of the date of this judgment.  Any memorandum

in response should be filed and served within 10 working days thereafter.

M A Gilbert J