Westpac Banking Corporation: Application of Zheng

These proceedings were commenced by summons filed by Westpac Banking Corporation on 21 October 2021, seeking an order pursuant to s 95 of the Trustee Act 1925 (NSW) and r 55.9 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) that the amount of $1,443,544.65 held by Westpac be paid into court.

The amount paid into court by Westpac represented the net proceeds of sale following the exercise in May 2021 by Westpac of its power of sale as mortgagee over a property in Killara the registered proprietor of which was Nina Flynn Zhu.

The matter that is now before the Court is a notice of motion filed on 6 October 2022 by Xiaoqing Zheng by which Mr Zheng seeks the following orders:

UCPR r 6.27 is the rule that governs the joinder of a person as a party to proceedings. UCPR r 55.11 relevantly provides:

UCPR r 41.3 is concerned with the withdrawal of deposited funds and materially provides:

It may be that the rule that is most appropriate is UCPR r 55.11, as that rule is part of Part 55 that relevantly deals with money paid into court pursuant to s 95 of the Trustee Act 1925 (NSW). Rule 41.3 is concerned with the release of deposited funds, which is a term defined in r 41.1 as meaning money that has been deposited in a bank in accordance with r 41.2. Rule 41.2 requires the Registrar within one day after money is paid into court to deposit the money into the Court's bank account. Mr Zheng only specifically relied on r 55.11 in his written submissions. In this case, it will make no material difference whether the Court acts upon either of these rules or its inherent power, and it will not be necessary to consider this issue further.

Mr Zheng's claim against Ms Zhu arose out of an agreement apparently entered into in about April 2015, whereby Mr Zheng agreed to invest in the development of a block of residential apartments in Lindfield that Ms Zhu was proposing to undertake with her brother, Marlas Zhu. The essence of the agreement was that Mr Zheng would make a loan to a new company to be formed and would receive a 70% shareholding in that company and be entitled to 70% of the profits from the development. A special purpose vehicle, PIC Lindfield 19 Pty Ltd (“PIC Lindfield”), was subsequently incorporated with Mr Zhu as the director. Between 21 May and 20 August 2015, by way of five separate payments, Mr Zheng provided a loan of $6,190,000 to PIC Lindfield in accordance with the agreement. From June 2015 to February 2018 the company used Mr Zheng's investment to undertake the development and sold 38 of 40 units that had been constructed, generating a net profit of at least $6,832,857. PIC Lindfield failed to pay Mr Zheng any amount in accordance with the agreement.

On 16 August 2019, the Court made an interim freezing order restraining Ms Zhu from disposing of her assets up to the unencumbered value of $6,190,000. Ms Zhu was served with a copy of the Court's freezing order on 16 August 2022. On 22 August 2019, the Court extended the operation of the freezing order until further order of the Court.

At the time of the making of the freezing order, Ms Zhu was the registered owner of a property at Killara. On or about 29 August 2019, Mr Zheng's previous solicitors made a request to the Registrar General to have the freezing order noted on the title to the Killara property.

On 8 October 2021, PIC Lindfield was placed into liquidation.

On 23 August 2022, Adamson J gave judgment in proceedings in this Court instituted by Mr Zheng against Ms Zhu. Her Honour entered default judgment for Mr Zheng against Ms Zhu in the amount of $2,988,996.40, which included interest in the sum of $798,996.40. Her Honour also ordered Ms Zhu to pay Mr Zheng's costs in the sum of $9,000. A formal judgment to that effect was issued by the Court on 23 August 2022: Zheng v Zhu [2022] NSWSC 1135.

The evidence establishes that Ms Zhu has not paid any amount of the judgment to Mr Zheng. The object of Mr Zheng's 6 October 2022 notice of motion is to recover part of the outstanding judgment from Ms Zhu.

On 1 September 2022, Mr Zhu was made bankrupt.

At the hearing of the notice of motion that occurred in the Applications List on 2 December 2022, Mr Zheng was represented by Mr A Cheshire of senior counsel and Mr M Davies of counsel. There was no appearance for Ms Zhu when the matter was called outside the courtroom.

Ms Zhu is apparently an Australian citizen who has for some time been residing in the People’s Republic of China (“PRC”).

Before I consider the position of Ms Zhu, I should refer to the evidence directed at excluding the possibility that there is some party other than Mr Zheng, who may have a claim to the money that is in Court in opposition to Mr Zheng's claim.

The affidavit filed in support of Westpac's claim to pay the balance of the proceeds of sale of the Killara property into Court only identified Ms Zhu and Mr Zheng as interested parties who had possible claims to the money paid into Court.

On this application, Mr Zheng's evidence disclosed that a Mr Li had a potential claim against Ms Zhu. The relevant information is contained in Exhibit A tendered at the 2 December 2022 hearing, being certain correspondence between Mr Zheng’s solicitors and Mr Li’s solicitors. Mr Li's solicitor advised Mr Zheng's solicitor that Mr Li was an unsecured creditor of Ms Zhu who has ongoing proceedings in this Court against her for a claim of $9.2 million plus interest, which has been proceeding since 2017. However, by email dated 1 December 2022, Mr Li's solicitor advised Mr Zheng's solicitor: "We are instructed not to press Mr Li's claim. Accordingly, we will not be in attendance tomorrow." The reference to tomorrow was to the date of the hearing of Mr Zheng's notice of motion on 2 December 2022. The evidence satisfies me that Mr Zheng gave Mr Li notice of his notice of motion and the date of the hearing, but Mr Li elected not to appear and make a claim in opposition to Mr Zheng's claim.

The only other potential claimant known to Mr Zheng relates to proceedings which Mr Zheng understands to be Local Court proceedings brought by an Owners' Corporation against Ms Zhu in 2022. The solicitor on record for the plaintiff in those proceedings has been notified about the present application, but the plaintiff did not appear at the hearing.

Finally, the liquidators of a company of which Ms Zhu was a director have also been notified of the application. Mr Zheng is not aware that the liquidators have made any claim against Ms Zhu personally, but the notification was given for more abundant caution.

At the hearing, I expressed during the course of the submissions made on behalf of Mr Zheng some concern about the consequence of the Court ordering the money that had been paid into court being wholly paid out to one unsecured creditor, because of the possibility that there may be unsecured creditors, other than Mr Li, who have valid claims against Ms Zhu for which they are entitled to share equally in the estate of Ms Zhu available to be paid to unsecured creditors.

In response, senior counsel for Mr Zheng relied upon s 118 of the Bankruptcy Act 1966 (Cth), which relevantly provides:

Consequently, if the Court orders that the money in court be paid out to Mr Zheng, the practical result will not be different to the situation where Ms Zhu had consented to that payment being made in partial payment of the judgment entered against her by the Court. It is a matter for any other unsecured creditors to take available steps to bankrupt Ms Zhu, and if they do then s 118 of the Bankruptcy Act may have the effect that Mr Zheng has to pay the amount received by him to the official trustee of Ms Zhu so that Ms Zhu's unsecured creditors will be treated equally.

For authority for the circumstances in which the Court will make an order that funds in court be paid out to a judgment creditor, Mr Zheng relied upon the decision of Kunc J in Eldsure Pty Ltd v Sheridan Legal Pty Ltd [2020] NSWSC 1616. I respectfully agree and adopt the summary of the principles set out by his Honour at [16]-[19] as follows:

As his Honour found, the Court may make the order sought by Mr Zheng under UCPR r 55.11, or alternatively, the Court may make the same order by analogy with garnishee proceedings.

The evidence establishes to my satisfaction that the Court should make the order sought by Mr Zheng that the money in court be paid out to him in partial satisfaction of the judgment that he has obtained against Ms Zhu.

The only further issue that requires consideration is whether it is significant that Ms Zhu was not formally served with Mr Zheng's notice of motion, and has not appeared at its hearing.

As senior counsel for Mr Zheng observed in his submissions, Ms Zhu was served with the statement of claim in the proceedings in which Adamson J gave judgment for Ms Zheng, and if Mr Zheng had been required to obtain the money that is now in Court by obtaining a formal garnishee order, UCPR r 39.34(2) would have authorised the Court to deal with Mr Zheng's notice of motion in the absence of the parties, and without the need for service on Ms Zhu, unless the Court ordered otherwise. Senior counsel submitted that, as the Court is entitled to deal with Mr Zheng's application by analogy with the garnishee process, it will be proper for the Court to make the order sought by Mr Zheng without evidence that Ms Zhu was effectively served with the notice of motion in the PRC. I accept that submission.

In any event, the preponderance of the evidence on the hearing of the notice of motion concerns the significant lengths to which Mr Zheng went to provide Ms Zhu notice of the application that he had made.

The steps that were taken by Mr Zheng to achieve this end were as summarised in his written submissions as follows:

Had it been a strict requirement that Ms Zhu be served personally with the notice of motion, then the steps outlined above may not have been adequate in the absence of an appropriate order for substituted service. Having regard to the Court's long experience of the effectiveness of communications sent by electronic means such as email, Facebook and LinkedIn, I am satisfied that there is a very high likelihood in fact that Ms Zhu became aware of Mr Zheng's application and that Ms Zhu has decided to reside in the PRC in an attempt to avoid her creditors.

Be that as it may, I am satisfied, in all of the circumstances that the Court should make the orders sought by Mr Zheng.

The Court's orders are: