Cheng v Zhang

Case [2020] FCA 1859

FEDERAL COURT OF AUSTRALIA

Cheng v Zhang [2020] FCA 1859

Appeal from: Zhang v Cheng (No 2) [2020] FCCA 507
File number: NSD 333 of 2020
Judgment of: STEWART J
Date of judgment: 23 December 2020
Catchwords:

BANKRUPTCY – creditor’s petition – sequestration order – whether power to extend life of creditor's petition under s 52(5) of the Bankruptcy Act 1966 (Cth) can be exercised retrospectively by invoking the slip rule – whether just and equitable to extend time – whether making of a sequestration order within the term of currency of the petition is a thing required or allowed to be done for the purposes of s 36(2) of the Acts Interpretation Act 1901 (Cth) – whether sequestration order could be made after expiry of the period of 24 months from date of presentation of the creditor’s petition when the last day fell on a Saturday despite s 52(4) of the Bankruptcy Act 1966 (Cth) – appeal dismissed

PRACTICE AND PROCEDURE – slip rule – whether use of rule to correct an accidental slip or omission – whether discretion to extend time before the creditor’s petition would lapse could be exercised in only one way – where an order made under the slip rule invalid – whether power can be exercised on appeal to correct orders made by the Court below

Legislation:

Acts Interpretation Act 1901 (Cth) s 36

Bankruptcy Act 1966 (Cth) ss 27, 43, 52(4), 52(5) and 306

Federal Court of Australia Act 1976 (Cth) s 28(1)

Federal Circuit Court Rules 2001 (Cth) rr 16.05(2)(d), 16.05(2)(h)

Cases cited:

Emanuele v Australian Securities Commission [1997] HCA 20; 188 CLR 114

Endresz v Commonwealth [2019] FCAFC 197; 273 FCR 286

Flint v Richard Busutill & Co Pty Ltd [2013] FCAFC 131; 216 FCR 375

Minister for Immigration and Border Protection v Kumar [2017] HCA 11; 260 CLR 367

Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132

Roskell v Snelgrove [2008] FCA 427; 246 ALR 175

Wren v Mahony [1972] HCA 5; 126 CLR 212
Division: General Division
Registry: New South Wales
National Practice Area: Commercial and Corporations
Sub-area: General and Personal Insolvency
Number of paragraphs: 74
Date of hearing: 16 December 2020
Date of last submissions 18 December 2020
Counsel for the Appellant: The appellant appeared in person with the assistance of an interpreter
Counsel for the First Respondent: S Burchett
Solicitor for the First Respondent: CSJ Legal
Counsel for the Second Respondent: The second respondent did not appear

ORDERS

NSD 333 of 2020
BETWEEN:

YE CHENG

Appellant
AND:

MEI ZHANG

First Respondent

OFFICIAL TRUSTEE IN BANKRUPTCY AS THE TRUSTEE OF THE BANKRUPT ESTATE OF YE CHENG

Second Respondent

ORDER MADE BY:

STEWART J

DATE OF ORDER:

23 DECEMBER 2020

THE COURT ORDERS THAT:

1.The order of Judge Dowdy in the Federal Circuit Court of Australia on 8 March 2019 as varied by Judge Street on 6 and 9 March 2020 is further varied to limit…

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AGLC
Cheng v Zhang [2020] FCA 1859
Case
[2020] FCA 1859
Decision Date

CaseChat Overview and Summary

In Cheng v Zhang, the appellant, Cheng, challenged the validity of a sequestration order made against his estate by the Federal Circuit Court. The sequestration order was based on a creditor's petition filed by Zhang, which relied on a default judgment entered against Cheng in the District Court of New South Wales. The underlying debt stemmed from a joint venture between Cheng and Zhang, involving several acknowledgements of debt. The dispute centred on the timing and validity of the creditor's petition and the subsequent sequestration order, particularly whether the court had the authority to extend the life of the petition beyond its statutory limit.

The legal issues before the court included whether the power under section 52(5) of the Bankruptcy Act 1966 (Cth) to extend the life of a creditor's petition could be exercised retrospectively, and if so, whether it was just and equitable to do so. Another issue was whether the making of a sequestration order within the term of currency of the petition was a thing required or allowed to be done for the purposes of section 36(2) of the Acts Interpretation Act 1901 (Cth). Additionally, the court had to determine whether a sequestration order could be made after the expiry of the 24-month period from the date of presentation of the creditor’s petition, particularly when the last day fell on a weekend.

The court concluded that the Circuit Court had the authority to make a sequestration order on 9 March 2020, despite the 24-month period having expired on 7 March 2020. The court found that the use of the slip rule to correct an error in the extension of the petition was valid, and the discretion to extend the petition could be exercised in more than one way. The court rejected Cheng's argument that there was sufficient cause to prevent the making of a sequestration order based on the appeal against the District Court's judgment. The court held that the judgment debt was reliable evidence of the debt, and there was no substantial reason to question the validity of the debt as reflected in the judgment. Consequently, the appeal was dismissed, and Cheng was ordered to pay Zhang's costs.

Orders

Orders of the court

1. The order of Judge Dowdy in the Federal Circuit Court of Australia on 8 March 2019 as varied by Judge Street on 6 and 9 March 2020 is further varied to limit the extension of the creditor’s petition that was presented on 8 March 2018 to 7 March 2020.

2. The appeal is dismissed.

3. The appellant to pay the first respondent’s costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

This is an appeal from a judgment of the Federal Circuit Court in which a sequestration order was made against the estate of the appellant. I have concluded that the appeal should be dismissed. The following are my reasons for that conclusion.The background to the underlying debt and sequestration order The background to the underlying debt on which the sequestration order was made can be set out in brief terms. In June, July and December 2016 the appellant executed acknowledgements of debt in favour of the first respondent arising from a joint venture that they had been involved in. Those debts were the debts underlying the judgment on which the sequestration order was ultimately made. On 26 October 2017, default judgment was entered against the appellant in favour of the first respondent in the District Court of New South Wales. The judgment was in the sum of approximately $715,000 inclusive of costs. On 2 November 2017, a bankruptcy notice was issued by the Official Receiver. The notice was served on the appellant on 13 November 2017. On 8 March 2018, the first respondent filed a creditor’s petition against the appellant in the Circuit Court. The creditor’s petition relied on the default judgment against the appellant. The petition was served on the appellant on 19 March 2018. On 20 March 2018, the appellant filed a notice of motion in the District Court to set aside the default judgment. On 24 May 2018, the appellant filed a notice of opposition to the creditor’s petition. The notice of opposition urged the Court to go behind the default judgment on the basis that “in truth and reality there is no debt”. On 8 June 2018, Dicker SC DCJ set aside the default judgment in the District Court. The first respondent applied for leave to appeal to the Court of Appeal against the judgment setting aside default judgment. That application was dismissed on 7 December 2018. Arrangements were then made by the first respondent to have her proceeding in the District Court progress to hearing. In the meanwhile, on 8 March 2019 Judge Dowdy in the Circuit Court made an order extending the life of the creditor’s petition to 8 March 2020. I will return to the particular circumstances of that order. The hearing in the District Court of the first respondent’s proceeding against the appellant took place on 2, 3 and 4 December 2019. On 28 February 2020 (although erroneously recorded in the reasons for judgment as 29 February 2020), Montgomery DCJ entered judgment for the first respondent against the appellant in the sum of approximately $860,000 and ordered that the appellant pay the first respondent’s costs of the proceeding. The judgment was based on the three acknowledgements of debt referred to above. On Friday 6 March 2020, the first respondent’s creditor’s petition against the appellant came on for hearing in the Circuit Court before Judge Street. The hearing was adjourned to Monday 9 March 2020 and an order was made varying the extension order made by Judge Dowdy on 8 March 2019 to extend the creditor’s petition to that day. As before, I will return to the circumstances of that extension.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

For the above reasons, it was open to the Circuit Court to make a sequestration order on 9 March 2020 notwithstanding that the period of 24 months after the presentation of the creditor’s petition expired on 7 March 2020. Grounds 1 and 2 of the amended notice of appeal must accordingly be dismissed.Ground 3: the finality of the judgment By ground 3, the appellant contends that he had an arguable appeal against the orders of Montgomery DCJ with the result that there was “other sufficient cause” why a sequestration order ought not to be made (within the meaning of s 52(2)(b) of the Bankruptcy Act). In the Circuit Court the appellant relied on his notice of appeal in the Court of Appeal against the judgment of Montgomery DCJ to contend that there was sufficient doubt in the correctness of that judgment to amount to sufficient cause not to make a sequestration order. The notice of appeal in the Court of Appeal set out the following grounds of appeal:1.The primary judge [erred] in finding that there was consideration given for the First Acknowledgment dated 16 June 2016 and Second Acknowledgment dated 6 July 2016.2. The primary judge erred in finding that there was consideration given in relation to the Third Acknowledgment dated 20 December 2016.3. The primary judge erred in finding at J[61]-[62] that the respondent's pleaded claim did not require her to establish adequate consideration had been given for the First Acknowledgment and Second Acknowledgment.4. The primary judge erred in finding at J[63]-[64], [92] and [94] that is was not necessary for the respondent to plead the bona fide claim which she alleged was being compromised as consideration for the Third Acknowledgment.5. The primary judge erred in finding at J[101] that the respondent had a genuine and honest belief that as at the time of signing the First Acknowledgment, Second Acknowledgment and/or Third Acknowledgment that she had a honest and genuine belief that she had a claim against the Applicant. Judge Street saw no basis to go behind the judgment of Montgomery DCJ ([22], [24] and [31]). His Honour held that none of the postulated grounds of appeal properly addressed the findings in respect of consideration that were identified in paragraphs [78], [84], [86], [110], and [111] of the judgment of Montgomery DCJ and on that basis concluded that the grounds of appeal “have no real prospect of success” ([28]). On that basis his Honour was not persuaded that there was sufficient cause why a sequestration order ought not to be made ([29]). His Honour also reasoned that the judgment debt was obtained as a result of a contested hearing and based on findings made by the learned trial judge that, on the face of the trial judge’s reasons, were clearly open in the context of the underlying acknowledgements that were put in evidence and the underlying agreement between the two shareholders that was put into evidence ([31]). In Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132, Kiefel CJ, Keane and Nettle JJ (at [68]) explained that for the purposes of s 52 of the Bankruptcy Act, a judgment may usually be taken to be sufficient evidence of a debt in that a judgment against a debtor in favour of a creditor obtained after a trial is, generally speaking, a reliable indication of the true state of indebtedness as between the creditor and debtor. It was reasoned that a Bankruptcy Court will in those circumstances usually have no occasion to investigate whether the judgment debt is a true reflection of the real debt. The words of Barwick CJ in Wren v Mahony [1972] HCA 5; 126 CLR 212 at 224-225 that the court’s discretion to accept the judgment as satisfactory proof of the debt “is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner” (emphasis added) were adopted and applied ([20], [65] and [72]). The judgment of Edelman J (at [111]) was to similar effect.

Ratio Decidendi

Legal Principle Established

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