Darmali v Chu, in the matter of Darmali
[2025] FedCFamC2G 1081
•11 July 2025
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Darmali v Chu, in the matter of Darmali [2025] FedCFamC2G 1081
File number(s): SYG 2561 of 2024 Judgment of: JUDGE LAING Date of judgment: 11 July 2025 Catchwords: BANKRUPTCY - application seeking the setting aside or review of decisions relating to extensions of time for compliance with bankruptcy notices – where events have overtaken the proceeding, including presentation of a debtor’s petition – orders relating to one of the bankruptcy notices set aside – question of costs Legislation: Bankruptcy Act 1966 (Cth) ss 5, 32, 31, 82, 109, 115
Bankruptcy Regulations 2021 (Cth) r 25
Federal Circuit and Family Court of Australia Act 2021 (Cth) s 256
Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy Rules) Rules 2021 (Cth) r 2.02
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) r 17.05, 21.02, 21.04
Cases cited: Boensch v Costin [2005] FCA 1249
BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 22
Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766
Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52
Lawman v Queensland Building Services Authority (No 2) [2000] FCA 174
Owen v Sandhu [2024] FCA 198
Re Hankey; ex parte Kratzmann (1986) 11 FCR 512
Re Hardwick [1976] Qd R 264
Re Schmidhofer; Ex Parte American Express International Inc [1991] FCA 936
Re Sellars, W.G. v Ex parte Clively, N.P. [1989] FCA 707
Sockhill v Deputy Commissioner of Taxation [2000] FCA 1208; (2000) 178 ALR 113
Thompson v Lane (Trustee) (No 4) [2022] FCA 616
Division: General Number of paragraphs: 58 Date of last submission/s: 4 July 2025 Date of hearing: 27 June 2025 Place: Sydney Applicant: No appearance Counsel for the Respondents: Mr D Meyerowitz-Katz Solicitor for the Respondents: McCabes Lawyers ORDERS
SYG 2561 of 2024 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
IN THE MATTER OF DAVID DARMALI
BETWEEN: DAVID DARMALI
Applicant
AND: HONG CHU
First Respondent
XUEPING XU
Second Respondent
ORDER MADE BY:
JUDGE LAING
DATE OF ORDER:
11 JULY 2025
THE COURT ORDERS THAT:
1.To the extent necessary, time be extended pursuant to r 21.02 of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 in relation to the application filed on 2 December 2024.
2.Order 1 made on 15 October 2024, as amended on 25 October 2024, be set aside insofar as it relates to Bankruptcy Notice BN 273604.
3.Order 2 of the orders dated 26 November 2024, as amended, be set aside insofar as it relates to Bankruptcy Notice BN 273604.
4.The applicant’s application filed on 14 October 2024 is dismissed.
5.The respondents’ costs of the proceedings are to be taxed and paid out of the property of the bankrupt with the priority of the costs of a successful petitioning creditor, in accordance with s 109(1)(a) of the Bankruptcy Act 1966 (Cth).
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE LAING:
By an application filed on 2 December 2024 (Review Application), the respondents seek an order pursuant to r 17.05(2)(a) of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) (GFL Rules) that orders made on 15 October 2024, as amended on 25 October 2024, be set aside. Alternatively, the respondents seek review of a decision made by a Judicial Registrar on 26 November 2024, dismissing an application for review of the decisions made on 15 October 2024 and 25 October 2024, pursuant to s 256 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) (FCFCOA Act). Associated orders are also sought.
The applicant (Mr Darmali) has not opposed the relief sought. As will be elaborated upon below, Mr Darmali is bound by undertakings given in related proceedings before the Federal Court of Australia to consent to the relief sought in the Review Application.
EVIDENCE RELIED UPON
The respondents rely upon the following evidence:
(a)material before the Registrar when the impugned orders were made, being:
(i)an affidavit of Andrew Lacey dated 6 November 2024 (Lacey 1), and Exhibit AJL-10 to that affidavit;
(ii)affidavits of Marcus Rodney Connor dated 14 October 2024 and 15 November 2024, and Exhibits MRC-1 and MRC-2 to those affidavits (tendered only as evidence of what material was before the Registrar, and not as to the truth of their contents) (Exhibits C and D);
(b)the transcript of the hearing before the Registrar on 26 November 2024, and of the Registrar’s ex tempore reasons (Exhibit E); and
(c)the following further evidence:
(i)an affidavit of Andrew Lacey dated 23 January 2025 (Lacey 2), and exhibit AJL-16 to that affidavit;
(ii)an affidavit of Andrew Lacey dated 12 June 2025 (Lacey 3);
(iii)correspondence with Mr Darmali (Exhibit A); and
(iv)correspondence from the trustee (Trustee) of Mr Darmali’s bankrupt estate (Exhibit B).
BACKGROUND
The following background is taken from the unchallenged evidence of the respondents, set out above.
Mr Darmali was party to a proceeding involving the respondents before the Federal Court of Australia. Judgment in that proceeding was delivered on 15 July 2024: Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766 (FCA Judgment). In consequence of that judgment, final orders were made on 23 August 2024 requiring Mr Darmali to pay the respondents a collective sum of $9,861,905.31 (plus costs) (Exhibit AJL-10, p 1).
The day that reasons for judgment were delivered on 15 July 2024, Mr Darmali’s wife registered a company named Silver Altum Pty Ltd (Silver Altum). On 8 August 2024, Mr Darmali purported to enter into a contract for the sale of property to his wife and Silver Altum. The sale was completed 8 days later. The proceeds (in an amount of nearly $2 million) entered and exited a bank account. The respondents understand that Mr Darmali claims they have been transferred to his mother (Lacey 1, [17]-[22]) (Exhibit AJL-10, pp 190-196).
On 20 September 2024, Mr Darmali filed an appeal in relation to the FCA Judgment.
On 26 September 2024, a copy of Bankruptcy Notice BN273604 (Chu Bankruptcy Notice), in respect of the amount owing to the first respondent (Ms Chu), was sent to Mr Darmali by email. A copy of Bankruptcy Notice BN273635 (Xu Bankruptcy Notice) was also sent, in respect of the amount owing to the second respondent (Mr Xu) (Lacey 1, [17]-[22]) (Exhibit AJL-10, pp 127-138). Collectively, the Chu Bankruptcy Notice and Xu Bankruptcy Notice will be referred to as the “Bankruptcy Notices”. The time for compliance with the Bankruptcy Notices was expressed to be within 21 days (ending on 17 October 2024).
On 14 October 2024, Mr Darmali filed an application seeking orders extending the time for compliance with, or the setting aside of, the Bankruptcy Notices (Lacey 1, [9]) (Exhibit AJL-10, p 139).
On 15 October 2024, Mr Darmali’s solicitors emailed the Registry at 1.34 pm seeking urgent interim relief in relation to the application. This email was copied to the respondents’ solicitors, but was sent without the consent of, or prior notification to, the respondents (Lacey 1, [10]) (Exhibit AJL-10, pp 140-142).
On 15 October 2024, orders were made by a Registrar in Chambers granting Mr Darmali an extension of time for compliance with the requirements of the Xu Bankruptcy Notice to 26 November 2024 (Lacey 1, [11]) (Exhibit AJL-10, pp 143).
On 18 October 2024, a creditor’s petition was presented in reliance upon the Chu Bankruptcy Notice, which had not been the subject of the 15 October 2024 orders (Creditor’s Petition). The Creditor’s Petition was served upon Mr Darmali through email to his lawyers on 24 October 2024. This was in circumstances where those lawyers had advised, by email, that they held "instructions to accept service of any and all documents on behalf of Mr Darmali, even where personal service is specified by the relevant rules” (Lacey 1, [14]) (Exhibit AJL-10, pp 149-150).
On 25 October 2024, Mr Darmali’s representatives emailed the respondents’ representatives attaching revised orders made by a Registrar. The orders, apparently revised by reference to r 17.05(2)(e) of the GFL Rules, expressed that time was also extended in relation to the Chu Bankruptcy Notice. As will be apparent from the above, revision of the orders occurred after the act of bankruptcy relied upon in the Creditor’s Petition. The respondents did not have any advance notice of any application or request for amendment of the 15 October 2025 orders in this fashion (Lacey 1, [15]) (Exhibit AJL-10, pp 151-154).
On 6 November 2025, the respondents filed an application seeking that the orders made by the Registrar on 15 October 2024, as amended on 25 October 2024, be set aside or, alternatively, reviewed. An extension of time was sought in relation to the review, to the extent that it was necessary.
On 14 November 2024, Mr Darmali filed an application in the Federal Court seeking to stay the orders made by Jackman J on 23 August 2024 (Lacey 2, [11]).
On 26 November 2024, a Judicial Registrar dismissed the respondents’ application in relation to the 15 October 2024 and 25 October 2024 orders. Time for compliance with the Bankruptcy Notices was extended to 4 February 2025.
On 2 December 2024, the respondents filed the Review Application.
On 20 December 2024, a stay was granted in the Federal Court proceeding by Thawley J regarding orders made by Jackman J on 23 August 2024. Mr Darmali was required to provide security for costs in the amount of $275,875, by 21 January 2025. The stay was granted on the condition that Mr Darmali pay the sum of $1,900,000 into an account meeting a specified description. The stay was also granted on the condition of the following undertakings (Lacey 2, [12]) (Exhibit AJL-16, pp 1281-1286):
8. The parties give the following undertakings:
(a)The first and second respondents and Darmali undertake to their reasonable endeavours to obtain such orders/directions that will have the effect, pending the determination of Darmali’s Appeal, of retaining the status quo in relation to the first respondent’s Creditor’s Petition based on bankruptcy notice BN273604 in Federal Court of Australia proceeding NSD 1474/2024 (the Creditor’s Petition), the respondents’ existing application for review in Federal Circuit and Family Court of Australia proceeding SYG 2561/2024 (First Review Application), and Darmali’s application for extension of time to comply with the bankruptcy notices BN 273635 and BN 273604 (Bankruptcy Notices), with the intention that:
(i)If Darmali’s appeal is successful, no act of Bankruptcy will have been committed by Darmali by reason of non-compliance with the Bankruptcy Notices; or
(ii)If Darmali’s Appeal is dismissed and the orders made against him by the primary judge are upheld, then:
(A)Darmali will have committed an act of bankruptcy on 18 October 2024 by reason of his non-compliance with bankruptcy notice BN 273604; and
(B)it will be open to the first respondent to move on the Creditor’s Petition;
(b)In order to give effect to the undertakings in (a) above, the parties further undertake as follows:
(i)On 24 January 2025, the parties will jointly apply for the respondents’ review application to be adjourned until 14 days after the determination of the appeal;
(ii)on 4 February 2025:
(A) Darmali will:
(I)seek a further extension of the time to comply with the Bankruptcy Notices before the Registrar of the Federal Circuit and Family Court of Australia; and
(II)draw the Registrar’s attention to these orders and undertakings;
(B) the first and second respondents will:
(I)inform the Registrar that they oppose the further extension; but
(II)otherwise make no submissions in opposition to the further extension;
(iii)in the event a further extension is granted by the Registrar on 4 February 2025, the first and second respondents will prepare and file an application to review the Registrar’s decision to grant that extension (Second Review Application);
(iv)the parties will jointly apply for the First Review Application and the Second Review Application to be adjourned until 14 days after the determination of the appeal;
(v)if Darmali’s appeal is successful, the first and second respondents will consent to the dismissal of the First Review Application and the Second Review Application;
(vi)If Darmali’s Appeal is dismissed and the orders made against him by the primary judge are upheld, then Darmali will consent to the relief sought in the First Review Application and the Second Review Application.
(c)The above undertakings are without prejudice to the rights of Damali or the first and second respondents to approach the Court for leave to vary the undertakings following the determination of the appeal in the event that any party applies or proposes to apply for special leave to appeal to the High Court.
Consistently with the above, the review application in this proceeding was adjourned pending the appeal. However, Mr Darmali did not provide the required security for costs or pay the amount of $1,900,000 into an account (Lacey 2, [17]).
On 30 January 2025, the Trustee was appointed, following presentation of a debtor’s petition (Lacey 3, [6]) (Exhibit AJL-1, pp 6-10).
On 19 May 2025, Mr Darmali’s Federal Court appeal was dismissed (Lacey 3, [9]) (Exhibit AJL-4, pp 16-18). The respondents were relieved from undertakings that they had given. No such relief was ordered in relation to the undertakings given by Mr Darmali.
The respondents accordingly seek to give effect to the relief contemplated in the undertakings, consistent with the expressed intention that Mr Darmali will have committed an act of bankruptcy on 18 October 2024 by reason of his non-compliance with the Chu Bankruptcy Notice. The respondents consider that this continues to have utility because of its effect upon the date of the commencement of bankruptcy as defined in ss 5 and 115 of the Bankruptcy Act 1966 (Cth) (Act).
POSITIONS OF MR DARMALI AND THE TRUSTEE
Mr Darmali did not appear at the hearing of this matter, having referenced earlier in correspondence an inability to afford legal assistance. In any event, as explained above, Mr Darmali has undertaken to consent to the relief sought in the Review Application.
The Trustee also did not appear. Correspondence involving the Trustee was tendered by the respondents. The Trustee has indicated that they do not oppose the relief sought, except on the question of costs. This will be considered further below.
CONSIDERATION
As noted above, the respondents sought that the orders made on 15 October 2024, as amended on 25 October 2024, be set aside pursuant to r 17.05(2)(a) of the GFL Rules. That provision provides for variation or setting aside of a judgment or order after it has been entered if it was made in the absence of a party.
The respondents contended that the making of the orders on 15 October 2024 and 25 October 2024 denied them procedural fairness. Relying upon BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 22 at [133]-[134] (Spigelman CJ), the respondents submitted that they were “entitled as of right” to have set aside the orders made without notice to them and without giving them an opportunity to be heard.
The respondents also relied upon the decision of Dowsett J in Sockhill v Deputy Commissioner of Taxation [2000] FCA 1208; (2000) 178 ALR 113 (Sockhill). In that case, time for compliance with a bankruptcy notice had been extended by a Deputy Registrar to the first directions listing date on an extension of time application that had been made pursuant to s 41(6A) of the Act. At [10]-[11], his Honour considered:
10The power exercised by the Court pursuant to subs 41(6A) is a judicial power. It ought generally be exercised only upon the request of a party having an appropriate interest. An application to extend time does not necessarily imply an application for an interim ex parte order of the kind made by the Deputy Registrar in this case. The Deputy Commissioner does not dispute that there is power to grant such interim relief in an appropriate case. As much seems to follow from the decision of Heerey J in Re Nguyen Ex parte Commissioner of Taxation (1994) 54 FCR 403. However it does not follow that such relief should be granted at the instigation of a registrar rather than a party. In any event, it is now clear, although there may previously have been some doubt, that the Court has power to extend time for compliance even after expiry of the time specified in the bankruptcy notice. See Guss v Johnstone (2000) 171 ALR 598 at par 58. In those circumstances, there will rarely be any justification for making an interim order of the kind contemplated in this case. A registrar, if asked to make such an order, should keep in mind this possibility.
11Order 77 r 14 distinguishes between proceedings in court and other proceedings. This reflects the well-known distinction between proceedings in court and proceedings in chambers. It may be that the practice described above reflects some confusion concerning that distinction and the distinction between judicial and administrative functions. The judicial function is usually exercised in public. On some occasions, it is exercised in chambers but even then, it is usually exercised in the presence of the parties, or at least in the presence of the moving party and after the other has been served, and so given an opportunity to be heard. It is true that in recent times, with the advent of hearings by telephone and video-link, it is not always obvious that this is the case, but in principle and reality, it is so. There is a difference between an exercise of the judicial power in chambers, after allowing the affected parties to be heard, and a private exercise of such power without a hearing. It is true that on occasions, orders are made judicially without hearing an affected party. That is an exception with which I will deal in a moment. Nonetheless, in general, judicial power should be exercised in the presence of the parties, or at least in the presence of the moving party and after reasonable notice to the other party. In this context, “presence” includes video or telephone attendance. Of course, orders made by consent may involve different considerations.
At [12], his Honour expressed that considerations that may be relevant to the exercise of discretion, including under s 41(6C) of the Act, were unlikely to be “adequately addressed other than at a hearing”. At [13]-[14], his Honour considered:
13A further complication in the present case is that the Deputy Registrar proceeded ex parte. The Deputy Commissioner had no notice of the proceedings and no notice of the intention to grant interim relief. Indeed, the applicant had no such notice. The courts, not infrequently, act ex parte, but only because special circumstances compel that course. It is only where, for some reason, it is not practicable to serve the other side or where such service is likely to negate the relief sought, that a court will so proceed. A party asking a court to proceed ex parte must demonstrate the necessity for it. There is nothing in the evidence in this case suggesting a proper basis for ex parte proceedings. To establish such a basis, it would have been necessary for the applicant to justify his delay in making the application and also to demonstrate that it was not reasonably practicable for him to serve the Deputy Commissioner before the latest practicable time for the hearing of the application for interim relief. Given that the Deputy Commissioner has a well-known place of business, it is difficult to see how the applicant could ever have discharged that obligation. It is true that O 77 sub-rule 14(1) contemplates an ex parte application, but it does not follow that proceedings should normally be ex parte or that the Court should so proceed simply because the applicant has chosen to bring the application at a very late stage. Ex parte proceedings must be seen as the exception rather than the rule, justifiable only by a compelling reason.
14There is a further obligation placed upon an applicant who asks the Court to proceed ex parte. He or she must make full and fair disclosure of all circumstances relevant to the relief sought. This has been the law for a very long time. I refer particularly to the decision of Isaacs J (as his Honour then was) in Thomas A Edison Limited v Bullock (1912) 15 CLR 679, especially at 681-682. The passage is well-known to all who practise in the commercial jurisdiction and in other jurisdictions in which ex parte relief is occasionally sought. The applicant who moves ex parte is obliged to take the position of the absent party and to say everything contrary to the application which that party might say were he or she in attendance. Such a high price is by no means unreasonable considering the very serious consequences which may flow from ex parte proceedings.
In Sockhill, orders were made setting aside the order of the Deputy Registrar extending time under s 41(6A) of the Act, as well as a subsequent order that had been made further extending time.
The respondents submitted that although Mr Darmali had sought an extension of time in the present case, this was an insufficient reason for making the order without allowing them an opportunity to be heard. They further submitted that Mr Darmali did not make sufficient disclosures to the Court in his ex parte application. In particular, Mr Darmali did not draw to the Court’s attention his recent asset disposals in making the case for extension.
There is apparent force in the respondents’ submission that they were denied procedural fairness through the orders made on 15 October 2024 and amended on 25 October 2024. Such an approach appears inconsistent with the decision of Dowsett J in Sockhill. I also accept that certain information appears not to have been provided to the Registrar that may have had a bearing on the orders made, specifically Mr Darmali’s activities regarding the movement of his assets.
However, the respondents subsequently participated in a hearing before a Judicial Registrar of this Court on 26 November 2024, at which such arguments were considered. I did not understand the respondents to contend that they had been denied procedural fairness at this listing, nor been unable to bring the concerns they had regarding Mr Darmali’s movement of assets to the Court’s attention. Orders extending the time for compliance with the Bankruptcy Notices were made on this occasion. I understood the respondents to accept that this was able to occur (although they did not concede that it should have occurred) even if the October 2024 orders had been set aside.
As part of their application to set aside the October 2024 orders, the respondents observed that the prejudice relied upon by Mr Darmali as warranting intervention under s 41(6A) of the Act (i.e. potential bankruptcy) had occurred in any event. This consideration is also relevant to the second basis relied upon by the respondents for setting aside the October 2024 orders, namely review of the decisions under s 256 of the FCFCOA Act.
For the reasons that follow, I accept that in the updated circumstances of this case, the outcome of such a review ought to, at least, result in the setting aside of the 25 October 2024 decision extending time in relation to the Chu Bankruptcy Notice. The respondents submitted, and I accept, that they do not need to go beyond this in order to achieve the outcome effectively sought through their application. I therefore consider this to be an appropriate basis upon which to determine the application before the Court.
Section 256 of the FCFCOA Act allows a party to apply for review of the exercise of powers delegated to a Registrar, within the time prescribed or within such further time as may be allowed. The prescribed time was within 21 days after the day on which the power was exercised: r 2.02(3) of the Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy Rules) Rules 2021 (Cth). The exercise of power on 25 October 2024 was more than 21 days before the Review Application was filed. However, an earlier review application was filed regarding this exercise of power, within time, on 6 November 2025. That application was dismissed on 26 November 2024. The Review Application was filed within time seeking review of that exercise of power. In any event, in these circumstances and given the matters considered below, I accept the respondents’ suggestion that it would be appropriate to make an order extending time, to the extent necessary, to put the question of timing beyond doubt.
Rule 21.04(1) of the GFL Rules provides that a review of the exercise of power by a Registrar under s 256 of the FCFCOA Act must proceed by way of a hearing de novo. This means that the Court is required to consider afresh whether time ought to be extended for compliance with the Chu Bankruptcy Notice.
The exercise of discretion under s 41(6A) of the Act was considered recently by Feutrill J in Owen v Sandhu [2024] FCA 198 at [71] (Owen):
71Subject to s 41(6C), the discretion to extend time conferred by s 41(6A) of the Bankruptcy Act is not fettered and should be exercised based upon the facts and circumstances of the particular case: Sharpe v W H Bailey & Sons Pty Ltd [2014] FCA 921; (2014) 317 ALR 738 at [26] and the authorities there cited. Further, the power to extend time under s 41(6A)(b) does not depend on the existence of a valid application to set aside the bankruptcy notice of the kind that is necessary for there to be an automatic extension under s 41(7): Coshott v Prentice, in the matter of Coshott (No 2) [2016] FCA 1531 at [165]-[166] (Bromwich J). The discretion is ‘at large’: Re Taylor; Ex parte Deputy Commissioner of Taxation (1983) 74 FLR 377 at 379. Nonetheless, in the exercise of the discretion the Court will be guided by matters identified in authorities as relevant to the exercise of the discretion. Factors considered relevant include the following.
(1)Whether proceedings to set aside the judgment or order have been instituted (including proceedings of that nature such as an appeal).
(2)Whether a stay of the judgment or order has been sought or obtained.
(3)That failure to comply with a bankruptcy notice is ‘an act of bankruptcy that is a different order of gravity for the change of status brought about by the making of a sequestration order’.
(4)The interests of the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later.
(5)In the absence of a stay of the judgment or order, the extent to which there is evidence of the means of the debtor to satisfy the judgment debt and, in any event, whether it would be appropriate to order security for the debt as a condition of any extension of the time for compliance.
(6)While, in general, it is undesirable to undertake a provisional review to determine the correctness of the judgment or order, the merits may be relevant at least where it is apparent that prospects of success are either ‘slight’ or ‘unusually strong’. In this regard, if an appeal has already been dismissed and the proceeding in question is an application for special leave to make a further appeal, that would be a relevant consideration reinforcing the Court’s reluctance to extend time in the absence of a stay.
See, e.g., Re Geard; Ex parte Reid [1994] FCA 45; (1994) 217 ALR 191 at 193-194 (Sheppard J); Byron v Southern Star Group Pty Ltd [1997] FCA 151; (1997) 73 FCR 264 at 270-271 (Lehane J); Kakavas v Paradise Enterprises Limited [2010] FCA 915 at [8] (Tracey J); Sharpe at [26]-[29] (Gleeson J)
I accept the respondents’ submission that time ought not to be extended under s 41(6A) of the Act, in the circumstances considered above.
It is not apparent what utility there could be in extending the time for compliance, in circumstances where bankruptcy has already occurred. Mr Darmali has not identified any prejudice that he would suffer now, as a result of not extending time. The prejudice he was concerned with before the appointment of the Trustee appears to have centred around the potential for him becoming bankrupt. That consequence will not be avoided by making orders under s 41(6A) of the Act. As bankruptcy has already occurred, it is also not apparent how Mr Darmali could be said to have the means to satisfy the judgment debt.
The appeal in relation to the FCA Judgment has concluded, with the appeal having been dismissed. The stay of orders has ceased.
As was observed by Feutrill J in Owen, it is relevant to consider the interests of creditors in ensuring that the relevant act of bankruptcy occurs earlier rather than later. This is consistent with the position taken by the respondents, who are concerned by whether Mr Darmali may have entered into other transactions following the orders made by Jackman J. Given what has been discovered regarding the movement by Mr Darmali of assets so far, this concern on the part of the respondents appears to be understandable.
In any event, s 41(6C) of the Act would stand in the way of extending time for compliance with the Bankruptcy Notices. Mr Darmali’s appeal was not prosecuted with due diligence. Mr Darmali did not pay the required security for costs. Following appointment of the Trustee, the proceeding was ultimately not prosecuted at all, resulting in its dismissal (Lacey 3, [6]-[10]). In the circumstances of this case, it is unclear how there could be said to be any proper basis for extending time under s 41(6A) of the Act.
The above, within the context of the presentation of the debtor’s petition, presents a different situation to that which was considered when orders were made in October and November 2024. I accept that the present situation compels orders that have been sought by the respondents setting aside, at least, the orders extending time for compliance with the Chu Bankruptcy Notice. Such a result achieves the position envisaged in the undertakings given before Thawley J in December 2024.
THE SITUATION REGARDING COSTS
The respondents sought an order under s 32 of the Act that their costs be paid out of the estate with the priority of the costs of a successful petitioning creditor.
The respondents observed that where a costs order is made against a person who has become bankrupt, the ordinary position is that the costs are not provable in the bankruptcy, but rather are payable by the bankrupt personally: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 (Foots) at [65]-[67] (Gleeson CJ, Gummow, Hayne and Crennan JJ). The respondents observed that an exception is “the taxed costs of the petitioning creditor”, which are payable out of the bankrupt estate pursuant to s 109(1)(a) of the Act. Pursuant to r 25(2) of the Bankruptcy Regulations 2021 (Cth), those costs include costs relating to a petition brought by a creditor who had applied for a sequestration order against the estate, but whose petition has not been proceeded with because a debtor's petition presented by the bankrupt has been accepted by the Official Receiver.
The costs order sought was opposed in correspondence from the Trustee, although the Trustee did not appear at the hearing of this matter. In correspondence with the respondents’ representatives (Exhibit B), the Trustee stated:
…We do not accept that the costs of an application to set aside the a bankruptcy notice fall within the wording of the items given for priority in reg 25(1) of the Bankruptcy Regulations 2021, namely item 7 of the table which extends only to (our emphasis) “…(a) if a creditor applied for (i) a sequestration order against the estate…the taxed costs of the creditor in relation to the application”. This type of application is always conducted as a separate proceeding to a sequestration order application and thus cannot be captured by section 109(1)(a).
As to a special costs order under section 32 of the Bankruptcy Act, we note the cases cited both related to applications for costs of creditor’s petitions (and the issuing of preceding bankruptcy notices) where an intervening debtor’s petition prevented the hearing of that creditors’ petition. These decisions were prior to the law changes (currently represented by reg 25(2) of the Bankruptcy Regulations 2021, formerly reg 6.01(2) to the Bankruptcy Regulations 1996) which qualified item 7 of the table to expressly include the costs of creditor’s petition which was dismissed due to an intervening debtor’s petition. Your submissions do not refer to any caselaw where section 32 orders were made specifically in relation to applications to set aside bankruptcy notices and refer to no caselaw at all after the change in law occurred to expand the costs covered by section 109(1)(a) to incorporate those under reg 25(2). There do not appear to be any authorities which follow
Applications to set aside bankruptcy notice are very common (and commonly do not succeed), however our attention has not been drawn to any authority where, during a later sequestration application, the costs of the failed earlier application were given priority under sections 32 or 109(1)(a), or otherwise. Our experience is that a later sequestration application would not account for the earlier application’s costs at all and those costs would then go on to be treated as a non-priority provable debt in that bankruptcy. Although the current situation departs from the norm in that the bankruptcy has already occurred, we account for the decision of Foots v Southern Cross Mine Management Pty Ltd, which is well settled authority that post-bankruptcy costs orders will not be treated as provable debts in a bankruptcy. This is further justification not to elevate this costs order to a priority debt in the bankruptcy, as following Foots, it would not form a debt of the current bankruptcy at all (unless it could be captured by section 109(1)(a)).
The respondents relied upon the cases of Re Hankey; ex parte Kratzmann (1986) 11 FCR 512 (Hankey) and Re Schmidhofer; Ex Parte American Express International Inc [1991] FCA 936 (Schmidhofer) (Burchett J) as authority for the proposition that the Court has the power under s 32 of the Act to order that costs associated with a bankruptcy notice are payable out of the bankrupt estate with priority as though they were the costs of a successful petitioning creditor under s 109(1)(a) of the Act. In Schmidhofer, a debtor’s petition was presented before service of the creditor’s petition could be effected. Justice Burchett considered:
…What the creditor now seeks is a special order in respect of the costs incurred in relation to the bankruptcy notice and petition. I take the view that, so far as the costs of the petition are concerned, the creditor is not really in a different position from that of a would-be litigant who expends money in having counsel settle a statement of claim, and then is paid in full before the statement of claim is served upon the debtor. In such a case, the creditor's expense would normally be thrown away. However, I think, as a matter of exercise of discretion, one can draw a distinction in respect of the bankruptcy notice. Doubtless, the fact that a bankruptcy notice had been served upon him and that he had been unable to comply with it, was a factor in the debtor's decision to file his own petition. In those circumstances, it seems to me that a discretion could reasonably be exercised in favour of the creditor, so far as the costs of and incidental to the service of the bankruptcy notice are concerned.
In Re Hankey; ex parte Kratzman (1986) 66 ALR 702, a debtor presented his own petition prior to the hearing of a creditor's petition, and as a consequence of the presentation of the debtor's petition, he became bankrupt. The petitioning creditor sought an annulment which I refused, being of the opinion that a case for annulment had not been made out. However, I considered that it was open to me, pursuant to s. 32 of the Bankruptcy Act, to make a special order in respect of the costs of the petitioning creditor, and I did so. That order was in respect of his costs up to the date when his solicitors received notice of the presentation of the debtor's petition.
In the present case, for the reasons I have already given, I do not think so complete a provision in respect of the creditor's costs is appropriate, but I make an order that the creditor's costs of and incidental to the issue and service of the bankruptcy notice be taxed and paid as if I had made a sequestration order on the creditor's petition, and had ordered that those costs of the petitioning creditor be taxed and paid in accordance with the Act. That is the form of order that was made in Re Hankey; Ex parte Kratzman, and I think it is the appropriate order to cover such a case.
The respondents submitted that their application was supported by other cases, including Boensch v Costin [2005] FCA 1249 (Lindgren J) (Boensch). In that case, a Registrar had dismissed an application to set aside a bankruptcy notice or extend time for compliance with it. An application for review was unsuccessful, following which the contended debtor appealed to the Federal Court. However, a sequestration order was made before the appeal was heard. The appellant did not appear at the hearing before the Federal Court. The appeal was dismissed, with Lindgren J further considering, in that dispute regarding a bankruptcy notice, that the appropriate order in relation to costs was “that the respondent creditor's costs of this appeal be treated as part of his costs as petitioning creditor for the purposes of s 109(1)(a) of the Bankruptcy Act 1966 (Cth)” (at [7]).
Other cases relied upon by the respondents included Re Hardwick [1976] Qd R 264 (Dunn J), Re Sellars, W.G. v Ex parte Clively, N.P. [1989] FCA 707 (Jenkinson J), Lawman v Queensland Building Services Authority (No 2) [2000] FCA 174 (Heerey, Drummond and Dowsett JJ) and Thompson v Lane (Trustee) (No 4) [2022] FCA 616 (Logan J). The respondents observed that a common theme in a number of the cases was that costs had been incurred in pursuit of sequestration orders for the benefit of the creditors generally. It was submitted that this was applicable in the present case, in which it may be inferred that Mr Darmali would not have become bankrupt if the respondents had defended this proceeding in the manner that they did.
I accept the respondents’ submission that the present case is, in important respects, analogous to cases such as Schmidhofer and Boensch. The main costs of the bankruptcy procedures invoked appear to have been incurred in relation to the dispute regarding the Bankruptcy Notices. When the outcome of that dispute appeared inevitable, following events contemplated in the orders of Thawley J, a debtor’s petition was presented.
I am not persuaded, in the absence of development of the argument by the Trustee, that the legislative amendments referenced in their correspondence warrant a different outcome. Amendments specifically bringing the situation of a creditor’s petition interrupted by a debtor's petition within the rules of priority does not appear to be inconsistent with the exercise of discretion sought under s 32 of the Act.
I am also not persuaded, absent development of the argument, that the decision in Foots compels a different outcome. That case concerned interpretation of s 82(1) of the Act and whether a particular costs order fell outside of it. However, the debt in question in that case did not involve a costs order of the type sought by the respondents under s 32 of the Act. The High Court was not called upon to consider, and does not appear to have overturned, the decisions in Schmidhofer, Hankey or Boensch.
Although I have found that orders ought only to be made setting aside previous orders in relation to the Chu Bankruptcy Notice, this is on account of expediency, rather than lack of merit. It is in circumstances where the respondents advised that they did not require orders beyond this in order to achieve the outcome sought. Making orders in this fashion avoids certain questions of retrospective effect. In circumstances where the case presented was relevantly presented on behalf of both respondents, I consider that the same costs order ought to be made in relation to each of them.
Having regard to the above, I have been persuaded to make the costs order sought.
CONCLUSION
For the above reasons, I will grant an extension of time in which to seek review of the challenged decisions, to the extent that this is necessary.
I will also make orders setting aside the orders made extending time in relation to the Chu Bankruptcy Notice. As discussed above, although the respondents sought in the Review Application that the October 2024 orders be set aside more generally, at hearing the respondents accepted that granting relief in relation to the Chu Bankruptcy Notice would achieve the purposes of their application and that they would not need to press their case for relief beyond this. In these circumstances, I consider it appropriate to grant relief in the narrower form that has been sought.
Relatedly, I will make an order dismissing Mr Darmali’s application filed on 14 October 2024. I will also order that the costs of the proceedings be taxed and paid out of the property of the bankrupt with the priority of the costs of a successful petitioning creditor, in accordance with s 109(1)(a) of the Act.
Orders have been sought regarding quantification of the costs involved. A timetable was proposed without knowledge of the date of handing down of judgment in this matter and therefore appears to be (at least potentially) overly generous. I will hear from the respondents as to whether a truncated timetable is now sought.
I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Laing. Associate:
Dated: 11 July 2025
0
21
5