Li v Wu
[2016] FCCA 2836
•4 November 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| LI v WU | [2016] FCCA 2836 |
| Catchwords: BANKRUPTCY – Long history of litigation between parties in Federal Court of Australia – judgment debt entered by primary judge which was increased by decision of the Full Court of the Federal Court – complex factual history of litigation including more recent litigation filed in the ACT Supreme Court by debtor who claims to have a counter-claim against the petitioning creditor – extension of time of petition under “slip rule” – explanation by debtor of delay between obtaining benefit of assignment of right of action under building contract from liquidator of one of his companies and commencing action in Supreme Court – challenge to decision of NSW Supreme Court of Appeal that otherwise would prevent the debtor’s action in the ACT Supreme Court proceeding – claims by debtor of quantum meruit claim – challenge to assignment of debt by liquidator to debtor – sequestration order made. |
| Legislation: Bankruptcy Act 1966 (Cth), s.52(2)(b) Corporations Act 2001 (Cth), s.477(2)(c) |
| Cases cited: AON Risk Services Australia Limited v Australian National University (2009) 239 CLR 175 Li v Wu [2013] FCA 1067 Ling v Enrobook Pty Ltd (1997) 74 FCR 19; (1997) 143 ALR 396 |
| Applicant: | YUXIN LI |
| Respondent: | TAO WU |
| File Number: | CAG 70 of 2015 |
| Judgment of: | Judge Neville |
| Hearing date: | 3 May 2016 |
| Date of Last Submission: | 17 October 2016 |
| Delivered at: | Canberra |
| Delivered on: | 4 November 2016 |
REPRESENTATION
| Counsel for the Applicant: | Mr B Katekar |
| Solicitors for the Applicant: | Mills Oakley (until 31st October 2016) Vertex Legal Group |
| Counsel for the Respondent: | Dr Ward |
| Solicitors for the Respondent: | McInnes Wilson Lawyers |
ORDERS
The Order of 3 May 2016, adjourning the matter be varied, pursuant to r.39.05(h) of the Federal Court Rules 2011 (Cth), by the addition of an Order that the period at the expiration of which the petition will lapse is a period of twelve months commencing on 3rd May 2016.
The estate of Tao Wu be sequestrated under the Bankruptcy Act 1966 (Cth)
The Applicant creditor’s costs be taxed and paid from the estate of the Respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
NOTATION
A.The date of bankruptcy is 12th September 2015.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT CANBERRA |
CAG 70 of 2015
| YUXIN LI |
Applicant
And
| TAO WU |
Respondent
REASONS FOR JUDGMENT
Introduction
By Order, dated 4th December 2015, the District Registrar of this Court referred the current matter for determination to a Judge of this Court, which concerns an Application by Mr Li to proceed with his creditor’s petition, following extensive litigation in the Federal Court of Australia that was determined in Mr Li’s favour.
That litigation resulted in a judgment debt entered by Jagot J in the sum of $976,866.80 (plus interest),[1] which was slightly increased in an unsuccessful appeal brought by Mr Wu against Mr Li. Pursuant to the Orders of the Full Court of the Federal Court of Australia, it was ordered that the Applicant [Mr Li] “be indemnified by the Respondent [Mr Wu] for the sum of $1,076,767.” There was also an award of interest on that sum in Mr Li’s favour, as well as an Order for costs.[2]
[1] Li v Wu [2013] FCA 1067.
[2] Wu v Li [2015] FCAFC 109.
The primary issue to be determined is whether the creditor’s petition, which was filed by the Applicant (Mr Li) against the Respondent (Mr Wu) on 6th October 2015, should proceed or be stayed and a sequestration Order issue, pending the determination of Mr Wu’s proceedings commenced in the Supreme Court of the Australian Capital Territory (“ACT Supreme Court proceedings”).
Mr Wu filed a Notice of Opposition on 30th October 2015 in which he contended that, pursuant to s.52(2) of the Bankruptcy Act 1966 (“the Act”), he has an offsetting claim against Mr Li which is the subject of the Supreme Court proceedings. Accordingly, he claims that there is sufficient cause for a sequestration Order not to be made.
A secondary issue that arises because of the time between the matter being heard and the determination of the primary issue is whether or not the creditor’s petition can and should be extended.
For the reasons that follow, (a) Mr Wu’s Notice of Opposition should be dismissed, (b) an extension to the creditor’s petition should be granted until 3rd May 2017, and a sequestration Order should be made against the Respondent.
Background & History of Litigation
The following factual and litigious background to the current and on-going contest, to the degree relevant, is taken from (a) the primary judgment of Jagot J (earlier noted), (b) where relevant from the judgment of the Full Court (also earlier noted), and (c) the judgment of the Registrar, dated 11th September 2015.[3] Later in these reasons there is reference to and consideration of matters that are set out in the Statement of Claim filed by Mr Wu in the ACT Supreme Court. A copy of that Statement of Claim is annexure A to an affidavit of Ms H Griffiths (a solicitor in the employ of Mr Wu’s lawyers), filed 2nd May 2016. A copy is also annexed to Mr Wu’s affidavit, filed 30th October 2015.
[3] It is unclear if the parties ever received a copy of the Registrar’s written reasons, which bear a certification, dated 18th September 2015, that the oral reasons were revised from the transcript. It is also unclear if either party ever sought a copy of the written reasons. Be that as it may, because the Application before the Court is not formally a review of the Registrar’s decision, in my view, the reasons of the Registrar are more historical record (noting that oral reasons were delivered in Court on 11th September 2015) than anything else, and obviously they support the Orders made on 11th September 2015. It is primarily for that reason – namely, for historical record rather than formal reliance upon it - that I have quoted from the Registrar’s reasons in some detail.
Proceedings in the Federal Court of Australia
In the proceeding before Jagot J there were four groups of claims. As set out in her Honour’s judgment, at [2] she explained:[4]
… The first is the claim under the indemnity provisions of two shareholder agreements entered into in 2006. The second is the claim for misleading and deceptive conduct under the Fair Trading Act 1992 (ACT) (Fair Trading Act) by which Mr Wu is alleged to have induced Mr Li to enter into another agreement in February 2008. The third is the claim for alleged breaches of contract, including express and implied terms, of an agreement entered into in March 2005. The fourth is the claim for equitable compensation for loss Mr Li is said to have suffered by reason of Mr Wu’s breaches of fiduciary duties.
[4] Li v Wu [2013] FCA 1067.
Then at [6], her Honour set out the six issues to be determined. I need not detail them for current purposes. What is of some moment are Jagot J’s comments, at [32] – [34], where her Honour sets out some basic factual matters in relation to funds provided by Mr Li and the contractual relationship between the parties. Her Honour said:
[32] The second documentary source in respect of the loans made by Mr Li to GEI and SG is the February 2008 agreement between Mr Li and Mr Wu. As should be apparent, I consider that the agreement performs at least two functions. First, it is a contract between Mr Li and Mr Wu and operates according to its terms. Second, it contains admissions by both Mr Li and Mr Wu. I can see no reason why the parties should not be bound by those admissions. As set out above, the 2008 agreement, at least as between Mr Li and Mr Wu for the purposes of cl 5 of the GEI shareholder agreement, effectively deems that Mr Li loaned GEI $5,751,925.37 as at 18 February 2008. The 2008 agreement also records that Mr Li in fact lent GEI $4,520,349.20 “excluding amounts used for O’Malley, personal amounts and amounts used for the farm”. O’Malley is Mr Li’s own home which was constructed. Personal amounts are amounts expended on Mr Li and his family while in Australia. The farm is the property at Harden.
[33] Contrary to the submissions for Mr Wu I can see no basis to construe this provision as indicating that these personal expenses have not been deducted from the amount of $4,520,349.20. The language of the 2008 agreement does not support the submission for Mr Wu. In context, it also makes little sense because the whole purpose of the 2008 agreement was to work out the net position of each party and provide a basis for future work together between Mr Li and Mr Wu. Hence, the 2008 agreement sets out calculations under which the total (netted off) amount owing to Mr Li was $5,336,422.91, Mr Wu was owed $13,353.19 with Hong Chen and Ms Ji both having incurred a loss of $48,402.11 each. The 2008 agreement says that if these figures are not repatriated (that is, repaid) then these amounts shall continue to be regarded as the amounts of individual investment into any new project and the corresponding interest shall continue to be calculated. In other words, at least as between Mr Li and Mr Wu, for any new project these amounts, if not repaid (which they were not), were to be treated as loans for the new project and also subject to the indemnity provisions in cl 5.
[34] Consistent with my primary conclusion above, I consider that the effect of the 2008 agreement is that as between Mr Li and Mr Wu it must be taken that Mr Li loaned GEI $5,751,925.37 as at 18 February 2008. The statement of agreed facts records additional loans by Mr Li to GEI after 18 February 2008 of $134,448.76 on 15 December 2010 and $136,363.24 on 11 January 2011. There were no loans from Mr Li to SG after 18 February 2008.
The purpose of noting these matters from the primary judgment in the Federal Court is simply to highlight that (a) there were various, and contested, loan arrangements between the parties which was conducted through various companies, and (b) part of the contest, albeit not formally part of the proceedings before her Honour, related to claims that some building work had been conducted, allegedly by Mr Wu through his company Golden Constructions on Mr Li’s residence in the Canberra suburb of O’Malley. It is work done and funds claimed in relation to the O’Malley property that forms the substance of the litigation on foot in the ACT Supreme Court proceedings brought by Mr Wu.
It is as well here to pause briefly to note that, however gauchely described, for current purposes there are relevantly three companies with which both parties, in different ways, are involved: GEI Pty Limited (“GEI”), Golden Constructions Pty Limited (“Golden Constructions”), and Golden Crop Pty Limited (“Golden Crop”). To speak generally, at various times, in and through these companies various funds were lent/used by the parties. There is contest over those funds including their source and their use(s).
On 9th February 2011, an administrator was appointed to GEI. On 2nd August 2011, an administrator was appointed to Golden Constructions.
On 6th September 2011, Golden Constructions was wound up by way of a creditors’ voluntary liquidation. On 10th November 2011, GEI was placed in liquidation. Mr Kazar is the liquidator of Golden Constructions; he was so appointed on 2nd August 2011. Mr Kazar has sworn an affidavit at the request of Mr Wu’s solicitors. That affidavit was filed on 10th September 2015. It will be necessary to come back to Mr Kazar’s affidavit in due course.
The Appeal to the Full Court of the Federal Court
On appeal in the Federal Court, the following matters may be noted briefly.
First, Ground 5 of the appeal stated (emphasis added): “Ground 5: whether the primary judge erred in holding that at best the completion of the liquidation of GEI might see the companies repay to the creditors less than 1 cent in the dollar when there was evidence before the primary judge from the liquidator that Mr Li owed a substantial debt to Golden Constructions Pty Ltd and that Golden Constructions Pty Ltd was liable to repay a sum to GEI.”
In answer to this ground, the Court noted the following comments by the liquidator (Mr Kazar) of Golden Constructions. The Full Court said, at [44] and [45]:
[44] Mr Kazar, the liquidator of GEI and other Golden Group companies, gave evidence that on the information then available to him, creditors would receive a dividend of 0.88 cents in the dollar which may be greater if GEI successfully pursued a claim against a related company, Golden Constructions Pty Ltd (“Golden Constructions”), for the repayment of moneys that GEI had advanced Golden Constructions which Golden Constructions had used for the construction of Mr Li’s personal residence at O’Malley. Whilst he did not agree with the proposition put to him by counsel for Mr Li that the final dividend from GEI would not exceed 0.88 cents in the dollar, he gave evidence that GEI’s only creditor other than Mr Li had not expressed any intention to indemnify Mr Kazar for any further work on GEI’s liquidation and that he had taken no step towards obtaining any litigation funding and that obtaining litigation funding was merely a “possibility”. He also gave evidence that he was considering disallowing Mr Li’s proof of debt but he accepted that the only consequence of doing so would be to reduce the dividend payable to him below the 0.88 cents in the dollar. In summary, the only definite evidence available about the amount that might be payable to Mr Li in GEI’s liquidation was the sum of 0.88 cents in the dollar and that as at 19 August 2013, the liquidator had intended to declare a first and final dividend on that basis.
[45] In light of that evidence, it was open to the primary judge to find, as her Honour did, that Mr Li would only recover less than one cent in the dollar in respect to the amounts that he had lent to GEI.
I simply note here that there was no discussion about, or reference to, any proposed or possible assignment of a debt by the liquidator (on behalf of Golden Constructions) to Mr Wu, discussed below, which now forms one of the grounds of the ACT Supreme Court litigation between the parties, and which is a primary ground of the present Application before this Court to stay or dismiss the creditor’s petition.
There is one further area discussed by the Full Court which, in my view, should be set out in full. At [47] – [55], the Full Court considered an Application for the introduction of fresh evidence on appeal regarding the expected dividend to creditors. As already indicated, it is as well to set out the Full Court’s comments in full because they outline the attempt by Mr Wu to rely upon evidence from Mr Kazar. At the paragraphs indicated, the Full Court said (internal citations omitted; emphasis added):
[47] Mr Wu was granted leave to adduce, and rely on, further evidence from Mr Kazar concerning the potential claim against Golden Constructions. In substance, Mr Kazar’s further (and unchallenged) evidence was to the effect that had Mr Li made good his debts to Golden Constructions, Golden Constructions would in turn have been able to repay its indebtedness to GEI with the effect that the expected dividend to creditors of GEI would have been 49 cents in the dollar, provided that the debt shown in the books and records of the Golden Group as being owed by Mr Li to Golden Constructions was immediately repaid.
[48] It was put that by failing to make good his obligations to Golden Constructions, Mr Li was the author of his own misfortune and should not be permitted to take advantage of the clause 5 remedy in those circumstances, as to do so would be to enable him to profit from his own wrong. The submission is tendentious as it assumes the existence of a liability which is yet to be proved and which, on the evidence, is disputed by Mr Li. Accordingly, the fresh evidence does not advance Mr Wu’s case any further and ground 6 fails.
The Alternative Calculation
[49] Before dealing with the question of costs in ground 7, it is appropriate to deal with the alternative calculation put to the Court on behalf of Mr Wu in reply on day two of the appeal.
[50] This alternative calculation posits as the starting point the Statement of Agreed Facts which lists 28 transactions, being advances made by or on behalf of Mr Li “for various purposes”. It was put that the Statement of Agreed Facts:
... represents an admission by Mr Li of the total amounts that he advanced for all projects ...
[51] The analysis then proceeded as follows:
(a) a “simple adding up” of the relevant amounts results in a total “advance” of $6,970,069.02;
(b) from this amount must be deducted those amounts which on Mr Li’s own evidence were not advanced for the purposes of the GEI Project;
(c) on Mr Li’s own evidence, the only transactions made specifically for the purpose of the GEI Project which it was submitted for Mr Wu “could possibly attract the indemnity under clause 5 of the GEI Shareholder Agreement” totalled $2,764,584 (being transactions 1, 2, 3, 4, 5, 6, 10, 11 and 12);
(d) thus, the starting point for the indemnity calculation is the sum of $2,764,584;
(e) from the sum of $2,764,584 must be deducted amounts paid by GEI for Mr Li’s personal expenses and the amount of any likely dividend from GEI.[52] It was further argued that transactions 7, 8, and 9 of the Statement of Agreed Facts (totalling the sum of $389,102.27) were not “member loans” because on Mr Li’s pleaded case, those funds were loaned by Mr Li to GEI for the purpose of enabling GEI to lend those funds to SG to assist with the purchase of the Harden property. Thus, it was submitted, it was then GEI which loaned those funds to SG, not Mr Li.
[53] This alternative calculation was not argued before the primary judge. Significantly, the case was not conducted on behalf of Mr Wu before the primary judge raising the two premises on which the alternative calculation is based, viz: (1) that the Statement of Agreed Facts represented an admission by Mr Li of the total amounts he advanced to GEI; and (2) that on Mr Li’s own evidence the only funds advanced to GEI and used for the purpose of the GEI Project were transactions 1, 2, 3, 4, 5, 6, 10, 11 and 12. In the circumstances, Mr Li was not required to meet such a case and it was not addressed by the primary judge. Nor was the point taken that transactions 7, 8, and 9 of the Statement of Agreed Facts were not “member loans” under the SG Shareholder Agreement because the funds were advanced by GEI.
[54] Senior counsel for Mr Li contended that the Statement of Agreed Facts did not represent an admission by Mr Li of the total amounts that he advanced. Rather, it was said, the Statement of Agreed Facts was only an admission as to the facts and particulars of transactions that, for various reasons, were “the subject of particular attention in [Mr] Li’s evidence” and that the role that those transactions had played in the factual substratum of the case as pleaded was misrepresented. Mr Li deposed that between 12 November 2004 and 1 February 2011, he made or arranged for a total of 28 payments to be made to GEI at Mr Wu’s request. Mr Li set out the payments made and the purposes for which Mr Wu had requested that the funds be provided. It was submitted that these loan transactions were not the foundation of Mr Li’s case at trial on the indemnity claim but rather the evidence was directed at supporting other claims made by Mr Li against Mr Wu and “at no stage did [Mr] Li contend that they were the only transactions which ever occurred” and “that is why the amounts in the 2008 agreement, upon which Mr Li relies, are higher than the sum of the individual transactions in the [Statement of Agreed Facts] up to that date”. It was submitted that the indemnity claim as pleaded relied directly on the loan figures as set out in the 2008 agreement. These submissions are supported by a review of the Second Further Amended Statement of Claim, in particular at [184] and [194].
[55] In view of the basis upon which Mr Li put his case below and the failure of Mr Wu below to answer that case by advancing the alternative case as it is now put, Mr Wu should not now be permitted to advance that alternative case on appeal. Parties are bound by the way in which their cases are conducted by their counsel, who make forensic decisions about what issues to contest, what witnesses to call, what evidence to lead or to seek to have excluded, and what lines of argument to pursue…
Finally, at [70] – [72], the Full Court summarised the indebtedness of Mr Wu to Mr Li as follows:
[70] In summary:
(a) The primary judge was correct to hold that Mr Wu’s agreement as to the amounts that Mr Li loaned GEI, as recorded in the 2008 agreement, could be relied upon as an admission by Mr Wu, namely the sums of $4,520,349.20 (GEI) and $644,865.76 (SG) respectively;
(b) The primary judge erred by not taking those figures as the starting point for the calculation as to the amount of the indemnity under clause 5 of the Shareholder Agreements;
(c) The sum of $4,520,349.20 (GEI) was net of Mr Li’s personal expenses;
(d) The primary judge has not been shown to be wrong in quantifying the post February 2008 amounts spent by GEI on Mr Li’s personal expenses in the amount of $807,644.50;
(e) The post February 2008 loans should not have been included in the calculation; and
(f) The GEI liquidation dividend was calculable at $50,502.11.[71] Accordingly, the correct way to determine Mr Li’s total entitlement to indemnity from Mr Wu under clause 5 of the Shareholder Agreements was:
$4,520,349.20 (GEI loan) plus $644,865.76 (SG loan) minus $807,644.50 (post 2008 personal expenses) less $50,502.11 (GEI liquidation dividend) multiplied by 0.25.
[72] The result is that judgment ought to have been given for Mr Li on the indemnity claim in the sum of $1,076,767.
In my view, these factual and other matters canvassed by the Full Court are relevant to providing both a factual and legal background to the current contest in this Court, and to the degree relevant, to this Court considering the proceedings in the ACT Supreme Court – discussed later in these reasons.
The Bankruptcy Proceedings
On 6th December 2013, a bankruptcy notice was issued to Mr Wu. The amount claimed in it as being owed was based on the debt pursuant to the judgment of Jagot J - Li v Wu [2013] FCA 1067.
On 23rd December 2013, Mr Wu filed an Application in this Court in which he sought an extension of time for compliance with the bankruptcy notice. By various Orders, time was so extended until 11th September 2015.
On 9th September 2015, Mr Wu filed an Application in this Court to set aside the bankruptcy notice.
On 11th September 2015, the Application by Mr Wu was dismissed. The reasons of the Registrar for the dismissal are considered later in these reasons.
On 6th October 2015, Mr Li filed a creditor’s petition. The amount claimed, as set out in the bankruptcy notice, and similarly in the creditor’s petition, is $1,178,524.33.
On 9th October 2015, Mr Wu filed originating proceedings in the ACT Supreme Court naming Mr Li and Ms Hong Chen as Defendants. In those proceedings, Mr Wu seeks relief against Mr Li in the sum of $1,283,804.75 pursuant to a stated building contract, and $572,998.02 in relation to certain loan funds. In the alternative, he seeks as against Mr Li, $2,807,999.40 on a quantum meruit, and the same sum already noted in relation to loan funds. For current purposes, I need not detail the sums claimed against Ms Chen.
In paragraphs 27 – 33 of the Statement of Claim filed in the ACT Supreme Court, Mr Wu pleads that:
(a)Golden Constructions was placed into liquidation on 6th September 2011, at which time Mr Kazar was appointed liquidator of that company;
(b)On or about 20th March 2012, the liquidator issued a demand on behalf of Golden Constructions to Mr Li (and Ms Chen) requesting payment of $3,380,997.43. No payment has been made in satisfaction of the amount sought by the liquidator;
(c)By deed dated 13th August 2014, Golden Constructions, by the liquidator, assigned to Mr Wu all rights, actions, suits, claims and demands that Golden Constructions may have against Mr Li (and Ms Chen). Written notice of that assignment was given to Mr Li (and Ms Chen) on or about 14th August 2014;
(d)It is pursuant to the assignment pleaded that Mr Wu brings suit against Mr Li (and Ms Chen) in the ACT Supreme Court.
On 17th March 2016 a Defence and Counter-claim were filed by Mr Li in the ACT Supreme Court.[5] Among other things (discussed later in these reasons), Mr Li says that the assignment as between the liquidator and Mr Wu was/is prohibited under the relevant building contract; clause 18 of that contract prohibits the assignment of rights under the contract without the written consent of the other party. Mr Li says further that there was no relevant consent, and that the assignment as between the liquidator and Mr Wu was/is solely for the purposes of avoiding the bankruptcy proceedings.
[5] A copy of these documents are also annexed to the affidavit of Ms Griffiths, earlier referred, filed 2nd May 2016, Annexure B.
Pursuant to the Counter-claim, Mr Li alleges (among other things) that Mr Wu breached his fiduciary duties owed to Mr Li in relation to the loan of certain funds that total $800,000, and that the work alleged to give rise to the quantum meruit either was not performed and or was performed defectively. Under the counter-claim, Mr Li seeks recovery of $848,587.39 from Mr Wu, plus interest and costs.
On 30th October 2015, Mr Wu filed a Notice of Opposition to the creditor’s petition. The grounds of opposition are stated to be:
The Respondent [Mr Wu] has an offsetting claim against the Applicant [Mr Li] and accordingly there is “other sufficient cause” for a sequestration order not to be made (see section 52(2) of the Bankruptcy Act 1966).
The Registrar’s Decision of 11th September 2015
Although there was no appeal from or review of the Registrar’s decision, it is helpful to record the following from the oral reasons (revised from the transcript, dated 18th September 2015) for the decision to refuse Mr Wu’s Application to set aside the bankruptcy notice.
At the outset, the Registrar confirmed that the amount set out in the bankruptcy notice was comprised of the amount of the judgment debt awarded in the Federal Court by Jagot J, plus interest.
The sole ground upon which the Applicant (Mr Wu) had sought to extend time for compliance with the bankruptcy notice was so as to allow Mr Wu’s appeal to the Full Court from her Honour’s judgment to be determined.
At [4] – [7], the Registrar noted the number of occasions (and dates thereof) when time for compliance had been extended. The Registrar noted that by the time the matter came before him in September 2015, 21 months had passed since the Application to set aside the bankruptcy notice had been filed.
At [11], the Registrar noted that it could be argued that because the Full Court had actually increased the amount of the judgment debt against Mr Wu, of itself this may have been grounds enough to set aside the bankruptcy notice. However, the Registrar recorded (in my view significantly) that no Application or submission to this effect was put on behalf of Mr Wu.
Accordingly, because there was only one ground, namely that of the [pending] appeal, the Application to set aside the bankruptcy notice was dismissed. But that was not the end of the matter.
By Application filed on 9th September 2015, Mr Wu sought Orders, among other things, that the bankruptcy notice be set aside on the basis that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt, and to extend time for compliance with the bankruptcy notice. In relation to these matters, the Registrar noted, at [14] – [17], the nature of the newly announced claim, and the response of Mr Li, thus (emphasis added):
[14] The essence of the Applicant’s claim was that he had a cross demand against the Respondent founded on a debt assigned to the Applicant on 13 August 2014. The assignor, Henry Joseph Kazar in his capacity as liquidator of Golden Constructions Pty Limited (ACN 13 970 106) (”Golden Constructions”), asserted a debt in the amount of $3,380,997.43 for expenses incurred in or about 2008 in relation to the construction of the Respondent’s residential property at 48 Akame Circuit, O’Malley ACT.
[15] In short minutes handed up, the Applicant sought a further extension of time and two-week adjournment for the hearing on a date after 1 October 2015.
[16] In oral submissions, the Respondent opposed the Applicant’s reliance on the interlocutory application on the following grounds:
(i) The interlocutory application was not served at least three clear days prior to the hearing date; and
(ii) Any application pursuant to ss 40(1)(g) and 41(7) of the Bankruptcy Act ought to have been made earlier given that the alleged cross demand claim arose in August 2014.
[17] In reply, the Applicant’s submissions as understood by the Court were as follows:
(i) Until the Full Court of the Federal Court delivered judgment in the appeal proceedings, the Applicant could not commence the application to rely on ss 40(1)(g) and 41(7) of the Bankruptcy Act as there was a substantial overlap in issues between the appeal and the foreshadowed application; and
(ii) Since the Full Court delivered judgment in the appeal proceedings on 17 August 2015, the Applicant had taken steps to file the present interlocutory application as soon as possible.
I pause here simply to observe that in the course of the hearing before me, and in subsequent written submissions, in answer to questions from this Court about why Mr Wu’s recent ACT Supreme Court claim had not been traversed in the Federal Court (or why it would/could not now be dealt with in the Federal Court), Mr Wu disavowed that there was sufficient connection between the proceedings in the Federal Court and what is now being litigated in the ACT Supreme Court as to warrant the current contest in that Court being heard in the Federal Court. If this be so, then it is curious (and perhaps something more) that the submission put to the Registrar was as highlighted, namely that “there was a substantial overlap in issues between the appeal and the foreshadowed application.”
At [18] and following, in significant detail the Registrar went through the requirements for compliance with Rules 2.01(3) and 3.02(1) of the Bankruptcy Rules regarding, inter alia, interlocutory applications and the detail required in relation to same. The Registrar dealt at some length with the delay in bringing the Application by Mr Wu, as well as the exercise of discretionary matters. For example, at [22], quoting from the transcript of the hearing, the Registrar said (emphasis added):
DISTRICT REGISTRAR: No one is suggesting that Mr Wu had to commence proceedings, but if he wished the bankruptcy notice to be set aside or time enlarged on that ground, then it should have been referred to in the original application and some affidavit material, if not before, certainly as soon as reasonably practicable after the effective assignment, you say some time in August 2014; that’s 13 months ago. So Mr Kay’s point is here we are 13 months later after the assignment. The Appeal Court has found against your client – or the Full Court, rather, on appeal of a decision of a single judge – and your client is now seeking to enlarge the grounds on which to challenge the bankruptcy notice by including a counterclaim when it wasn’t raised initially.
And in the same place, also from the transcript as quoted in his judgment, the Registrar said (emphasis added):
… Bankruptcy Rule 2.3 makes it quite clear that an application to set aside a bankruptcy notice must state each section of the bankruptcy out, each regulation, and each nature of the claim to be brought. So there was no reference to the counterclaim at the time that the proceedings were brought. And indeed, on a literal reading, the court requires that issue to be, you know, identified three days before the first return date. Now, the fact is that the court will allow parties to amend originating process for applications of this kind, provided it’s done where the time for compliance with the bankruptcy notice has been extended. That all has happened. The court’s concern is that you’re essentially asking the court now to grant leave to mount a separate case. The original basis for the claim was the judgments challenged and disputed. That’s on appeal. You failed. So now you file an interlocutory application which completely reframes the case, and I just can’t understand why the nature of the claim wasn’t identified earlier.
Then at [24], the Registrar said:
If the Applicant had filed his application to set aside the Bankruptcy Notice based on the cross demand earlier, by the time the proceedings returned to Court both parties would likely to have been in a position to proceed to hearing. The late filing of the interlocutory application by the Applicant, in the words of Mason CJ and Gaudron J in Banque Commerciale SA v Akhil Holdings Ltd [1990] HCA 11 at [18], denied the Respondent of “the opportunity of meeting the case against him”. It was not merely an issue that the Applicant had failed to meet the requirement to serve the application at least 3 days prior to the hearing under r 3.02(3) of the Bankruptcy Rules. In the context of the whole proceedings, the Court found that the Applicant had not raised his cross demand in a timely manner. No submissions were made which persuaded the Court to exercise its discretion to dispense with the requirement under the Bankruptcy Rules…
More generally, in relation to the claim made by Mr Wu, the Registrar said, at [29] – [34]:
[29] The total amount of the cross-demand was claimed to be $3,380,997.43, which was approximately $2,202,473.10 in excess of amount claimed under the Bankruptcy Notice.
[30] The affidavit of Mr Kazar sworn 9 September 2015 purported to provide further details of the cross-demand. Although solicitor for the Applicant referred the Court to the deed of assignment dated 13 August 2014, nothing in the deed showed the nature or calculation of the alleged demand by Golden Constructions against the Respondent. Nor did Mr Kazar’s report to creditors, which merely alluded to the alleged debts, and correspondence between the parties’ solicitors seeking further information regarding the debts, as attached to Mr Kazar’s affidavit, assist the Court in identifying the elements which needed to be proved to find that the Applicant had a prima facie cross demand.
[31] Solicitor for the Applicant also handed up his own affidavit sworn on 11 September 2015 in support of the interlocutory application. The affidavit deposed to the fact that counsel had been instructed and that proceedings to pursue the assigned debt may be instituted. While the Court may note that the Applicant appeared genuine in his intention to pursue the cross demand, the affidavit itself did not advance the Applicant’s argument that there was a sufficiently particularised cross demand.
[32] It was submitted for the Applicant that if the two-week adjournment sought on this occasion were to be granted, then the Applicant may “file a statement of claim which can be annexed to a further affidavit in this proceedings” (extract from transcript). However, it is recognised that the mere production of a statement of claim filed in another Court would not be sufficient on its own to satisfy the Bankruptcy Court that a counter-claim, set-off or cross demand was available: Massih v Esber [2008]FCA1452 per Flick J at [18], citing Re Cox (1934)7ABC 98. It must also be considered that the time for proving a counter-claim, set-off or cross demand is at the first hearing of the application to set aside the bankruptcy notice: Patane v Asteron Life Ltd (formerly Royal & Sun Alliance Financial Services Ltd) (ACN 001 698 228) [2004]FCA232 at [85] (Lander J). In the present case, the time for proving the Applicant’s cross demand was at the hearing on 11 September 2015. In this regard, the Court notes that although the interlocutory application stated the hearing date and time was “to be advised”, both parties were notified by Chambers that it would hear the Applicant on its interlocutory application on 11 September 2015.
[33] On the materials before the Court on 11 September 2015, the Applicant’s alleged cross demand consisted of no more than “bare statements”: Dekkan v Macquarie Leasing Pty Limited (No. 2) [2008]FCA1431 at [15] (Buchanan J). As a result, the Court concluded that the Applicant’s interlocutory application had not particularised the details of the cross demand to the requisite standard in compliance with r 3.02(2) of the Bankruptcy Rules.
[34] In circumstances where the application to set aside the Bankruptcy Notice would have been dismissed but for the interlocutory application and taking into account the significant time which had lapsed since the originating application was filed, it would be prejudicial to the Respondent if the Court were to grant the Applicant an adjournment to file further materials. The Court considered that the prejudice to the Respondent by being prevented from pursuing a judgment debt which was not stayed (albeit, subsumed by a higher appeal judgment debt) outweighed the prejudice to the Applicant if the application was dismissed. The consequence of dismissing the application was that the Applicant would be deemed to have commenced an act of bankruptcy, but this would not be as serious a consequence as the making of a sequestration order.
There was another important matter considered by the Registrar, but ultimately not decided, for not acceding to Mr Wu’s Application. It concerned the issue of “mutuality.” In this regard, the Registrar said, at [36] – [41] (emphasis added):
[36] Even if the Court were to grant leave to the Applicant to rely on the interlocutory application, the Court expressed concerns that the Applicant would have had to overcome the burden of establishing mutuality between the parties. The Applicant intended to commence proceedings against both the Respondent and Ms Hong Chen for the cross demand. The test is whether the Applicant is able to demonstrate that he is legally entitled to claim against the Respondent for several liability, independently of any claim against Ms Chen.
[37] The requirement for mutuality was explained in the following terms by Beaumont, Branson and Sundberg JJ in Stec v Orfanos [1999] FCA457 at [24]:
Where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a cross demand which equals or exceeds the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross demand on the other must be mutual and due in the same right: Re Anderson; Ex parte Alexander [1927] NSWStRp 35; (1927)27SR(NSW)296; James v Abrahams [1981] FCA 46; (1981)51FLR16 at 27. The requirement that the two claims be “in the same right” is directed to the capacities in which the claimants claim. Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee.
[38] Lack of mutuality is fatal to the establishment of a set-off: James v Abrahams (1981)51FLR16, 24 (Deanne and Lockhart JJ); Lahdo v Spearwood Holdings (WA) Pty Ltd [2014]FCCA2285 at [25] (Lucev J).
[39] It was submitted for the Applicant that the loan account, forming part of the cross demand, was a several debt. The Court was taken to a spreadsheet annexed to the affidavit of Mr Kazar sworn 9 September 2015. The spreadsheet and working papers displayed an itemised account of alleged loans made to the Respondent and Ms Chen individually and/or jointly. Not all items identified to whom the loans were made. It was not apparent which claims were made against the Respondent and Ms Chen severally. However, the mere fact that the Applicant may choose to join Ms Chen to future proceedings does not on its own negate the existence of mutuality: James v Abrahams (1978) 36 FLR126 at [29].
[40] Substantive submissions on the issue of mutuality were not made and there was not any evidence to establish that there was. In any event, it was not necessary for the Court on this occasion to make any finding on whether the Applicant’s claim against the Respondent was due in the same right.
[41] Further, if the Court were to embark upon the task of examining whether or not the cross demand exceeded the debt under the Bankruptcy Notice, a potential outcome may be that the cross demand claimed in the amount of $3,380,997.43 would be reduced. A question then arises as to whether the Applicant would have been able to prove that the quantum of his cross demand exceeded the judgment debt of $1,170,387.73 as required under s 40(1)(g) of the Bankruptcy Act.
In the event, Mr Wu’s Application was refused with an Order for costs in favour of Mr Li.
I turn now to the Applications before me: (a) by Mr Li for a sequestration Order against the estate of Mr Wu, and (b) by Mr Wu, for the creditor’s petition to be dismissed. In turn, (i) I set out the written submissions of each of the parties, (ii) discuss and determine the two Applications, and (iii) deal with the extension of time of the petition. Before doing so, I set out a detailed chronology provided on behalf of Mr Li, followed by relevant details regarding the ACT Supreme Court proceedings.
Detailed Chronology
The Applicant’s detailed chronology was in the following terms:
| Date | Details | Reference |
| 5 October 2004 | Golden Enterprise Investment Pty Ltd (“GEI”) incorporated | |
| 11 August 2006 | GEI shareholders’ agreement entered between Mr Li, Mr Wu, and Xiu Zheng Ji | |
| 11 August 2006 | Loan agreement entered between Mr Li and GEI | Exhibit to Gavagna affidavit of 16/11/15, pages 77 - 82 |
| 18 February 2008 | Agreement between Mr Li and Mr Wu about amounts outstanding, including $4,520,349.20 invested by Mr Li “excluding amounts used for O’Malley, personal amounts and amounts used for the farm”. | Exhibit to Gavagna affidavit of 16/11/15, pages 83 - 102 |
| 7 May 2008 | Golden Constructions Pty Ltd (“Golden Constructions”) incorporated | Exhibit to Kazar affidavit of 9/9/15 Pages 1 - 7 |
| Undated | Home building contract allegedly entered between Golden Constructions and Hong Chen | Exhibit to Gavagna affidavit of 16/11/15, pages 1 - 41 |
| 17 August 2008 | First entry in Golden Constructions’ loan account for Mr Li is a loan to Mr Li of $800,000. Mr Li says that he had instructed Mr Wu to withdraw this from money Mr Li had lent to GEI, but it now emerges that instead, Mr Wu instead accounted for it as a loan to Mr Li from Golden Constructions. | Exhibit to Kazar affidavit of 9/9/15 Page 140 |
| 18 August 2008 | From this date, Golden Constructions applies money allegedly spent on the O’Malley property against a ledger now said to be owing by Mr Li to Golden Constructions. | Exhibit to Kazar affidavit of 9/9/15 Pages 130-139 |
| 13 – 16 October 2010 | Mr Li makes a series of transfers from China to Australia, totalling $758,587.39. Mr Li says that this was a repatriation of the $800,000 he had instructed Mr Wu to withdraw from GEI in August 2008. This was intended to increase Mr Li’s loan to GEI. Instead, Mr Li says that Mr Wu directed the money to his own company, Golden Crop, unbeknownst to Mr Li. | Exhibit to Kazar affidavit of 9/9/15 Pages 157, 163 (transactions 19-21) |
| 9 February 2011 | Voluntary administrator appointed to GEI | |
| 1 April 2011 | GEI Deed of company arrangement entered (“GEI DoCA”) | |
| 30 June 2011 | Second last entry in Golden Constructions ledger for O’Malley property now claimed to be owing by Mr Li, being “Mitchell Warehouse Rental Fee” for $88,000. | Exhibit to Kazar affidavit of 9/9/15 Page 139 |
| 2 August 2011 | Administrator appointed to Golden Constructions | Exhibit to Kazar affidavit of 9/9/15 Page 17 |
| 3 August 2011 | Last entry in Golden Constructions ledger for O’Malley property now claimed to be owing by Mr Li, being $24.79 for “internet” paid to TPG Internet Pty Ltd. | Exhibit to Kazar affidavit of 9/9/15 Page 139 |
| 29 August 2011 | Administrator of Golden Constructions identifies claim by Golden Constructions against applicant | Exhibit to Kazar affidavit of 9/9/15 Page 21 |
| 6 September 2011 | Golden Constructions wound up by way of creditors’ voluntary liquidation | |
| 30 September 2011 | Mr Li files Federal Court claim against Mr Wu | |
| 26 October 2011 | Liquidator identifies claim by Golden Constructions against Mr Li | Exhibit to Kazar affidavit of 9/9/15 Pages 63, 71 |
| 10 November 2011 | GEI DoCA terminated and GEI placed into liquidation | |
| 20 March 2012 | Letter of demand from Williams Love Nicol to Goodman Law regarding alleged debt by Mr Li to Golden Constructions | Exhibit to Kazar affidavit of 9/9/15 Page 130 -141 |
| 22 March 2012 | Letter from Goodman Law to Williams Love Nicol seeking particulars of alleged debt | Exhibit to Kazar affidavit of 9/9/15 Pages 142 - 143 |
| 30 March 2012 and 4 April 2012 | Letters of demand from Williams Love Nicol to Goodman Law regarding alleged debt by Mr Li to Golden Constructions | Exhibit to Kazar affidavit of 9/9/15 Pages 144 - 150 |
| 21 September 2012 | Letter of demand from Bradley Allen Love Lawyers to Goodman Law regarding various Golden Group matters, including alleged debt by Mr Li to Golden Constructions | Exhibit to Gavagna affidavit of 16/11/15, pages 43 - 76 |
| 17 October 2012 | Liquidator restates claim by Golden Constructions against Mr Li | Exhibit to Kazar affidavit of 9/9/15 Pages 81, 82 |
| 19 October 2012 | Goodman Law response to letter of demand from Bradley Allen Love Lawyers | Exhibit to Kazar affidavit of 9/9/15 Pages 151 - 169 |
| 22 October 2013 | Reasons for judgment of Jagot J in Federal Court claim | |
| 6 November 2013 | Orders of Jagot J in Federal Court claim | |
| 25 November 2013 | Appeal from decision of Jagot J filed by Mr Wu | |
| 6 December 2013 | Bankruptcy notice issued by AFSA to Mr Wu | |
| 23 December 2013 | Mr Wu files application in Federal Circuit Court of Australia seeking extension of time for compliance with bankruptcy notice (time extended by various Court orders to 11 September 2015) | |
| 22 May 2014 | Day 1 of appeal hearing before Full Federal Court | |
| 28 May 2014 | Liquidator identifies claim by Golden Constructions against Mr Li and Hong Chen | Exhibit to Kazar affidavit of 9/9/15 Page 110 |
| 13 June 2014 | Golden Constructions creditors’ meeting called to vote on resolution for assignment of alleged debt owed by Mr Li and Hong Chen | Exhibit to Kazar affidavit of 9/9/15 Page 115 |
| 4 August 2014 | Day 1 of appeal hearing before Full Federal Court | |
| 13 August 2014 | Liquidator assigns Golden Constructions alleged debt to Mr Wu | Exhibit to Kazar affidavit of 9/9/15 Page 249 - 263 |
| 17 August 2015 | Federal Court of Australia appeal judgment delivered | |
| 9 September 2015 | Respondent files application seeking to set aside bankruptcy notice with Federal Circuit Court of Australia | |
| 11 September 2015 | Federal Circuit Court of Australia Orders dismissing application to set aside bankruptcy notice | |
| 6 October 2015 | Mr Li filed creditor’s petition with Federal Circuit Court of Australia | |
| 9 October 2015 | Mr Wu files Originating claim and Statement of claim in ACT Supreme Court against Mr Li and Hong Chen | Annexure A to affidavit of Tao Wu, sworn 24 October 2015 |
| 30 October 2015 | Mr Wu files notice of grounds of opposition to creditor’s petition. |
ACT Supreme Court Proceedings
Although some basic detail of this proceeding has been noted earlier in these reasons, for ease of reference it is as well to return to them before outlining submissions which, in certain respects, refer to them.
First: issues of “timing”.
Mr Li commenced proceeding against Mr Wu in the Federal Court of Australia on 30th September 2011. According to the liquidator of Golden Constructions, Mr Kazar, he identified a claim by that company against Mr Li on 26th October 2011. A letter of demand was sent to Mr Li in relation to this claim on 20th March 2012. The liquidator confirmed the claim of Golden Constructions against Mr Li on 17th October 2012.
The judgment of Jagot J in favour of Mr Li against Mr Wu was delivered on 22nd October 2013, with Orders made by her Honour on 6th November 2013.
On 25th November 2013, Mr Wu lodged an appeal against the decision of Jagot J.
On 6th December 2013, a bankruptcy notice issued to Mr Wu. On 23rd December 2013, Mr Wu filed an Application for an extension of time for compliance with the bankruptcy notice.
On 28th May 2014, the liquidator identified a claim by Golden Constructions against Mr Li and also against Mr Li’s Wife, Ms Chen.
On 13th June 2014, the creditors of Golden Constructions voted on a resolution to assign the alleged debt owed by Mr Li and Ms Chen to that company.
On 13th August 2014, the liquidator assigned the Golden Constructions [alleged] debt to Mr Wu.
On 17th August 2015, the Full Court of the Federal Court dismissed Mr Wu’s appeal and allowed (in part) Mr Li’s cross-appeal.
On 9th September 2015, Mr Wu filed an Application in this Court to set aside the bankruptcy notice. On 11th September 2015, that Application was dismissed, with costs.
On 6th October 2015, Mr Li filed a creditor’s petition in this Court against the estate of Mr Wu.
On 9th October 2015, Mr Wu commenced proceedings in the ACT Supreme Court against Mr Li.
On 30th October 2015, Mr Wu filed a notice of grounds of opposition to the creditor’s petition.
As to the ACT Supreme Court proceeding, I note the following.
As earlier noted, on 9th October 2015, Mr Wu filed originating process in the ACT Supreme Court naming Mr Li and Ms Hong Chen as Defendants. In those proceedings, Mr Wu seeks relief against Mr Li in the sum of $1,283,804.75 pursuant to a stated building contract, and $572,998.02 in relation to certain loan funds. In the alternative, he seeks as against Mr Li, $2,807,999.40 on a quantum meruit, and the same sum already noted in relation to loan funds. For current purposes, I need not detail the sums claimed against Ms Chen.
In paragraphs 27 – 33 of the Statement of Claim filed in the ACT Supreme Court, Mr Wu pleads that:
(a)Golden Constructions was placed into liquidation on 6th September 2011, at which time Mr Kazar was appointed liquidator of that company;
(b)On or about 20th March 2012, the liquidator issued a demand on behalf of Golden Constructions to Mr Li (and Ms Chen) requesting payment of $3,380,997.43. No payment has been made in satisfaction of the amount sought by the liquidator;
(c)By deed dated 13th August 2014, Golden Constructions, by the liquidator, assigned to Mr Wu all rights, actions, suits, claims and demands that Golden Constructions may have against Mr Li (and Ms Chen). Written notice of that assignment was given to Mr Li (and Ms Chen) on or about 14th August 2014;
(d)It is pursuant to the assignment pleaded that Mr Wu brings suit against Mr Li (and Ms Chen) in the ACT Supreme Court.
On 17th March 2016 a Defence and Counter-claim were filed by Mr Li in the ACT Supreme Court.[6] Among other things (discussed later in these reasons), Mr Li says that the assignment as between the liquidator and Mr Wu was/is prohibited under the relevant building contract; clause 18 of that contract prohibits the assignment of rights under the contract without the written consent of the other party. Mr Li says further that there was no relevant consent, and that the assignment as between the liquidator and Mr Wu was solely for the purposes of avoiding the bankruptcy proceedings.
[6] A copy of these documents are also annexed to the affidavit of Ms Griffiths, earlier referred, filed 2nd May 2016, Annexure B.
Pursuant to the counter-claim, Mr Li alleges (among other things) that Mr Wu breached his fiduciary duties owed to Mr Li in relation to the loan of certain funds that total $800,000, and that the work alleged to give rise to the quantum meruit either was not performed and or was performed defectively. Under the counter-claim, Mr Li seeks recovery of $848,587.39 from Mr Wu, plus interest and costs.
In his affidavit, filed 30th October 2015, Mr Wu deposed that (a) he did not raise the “cross-demand” (now pleaded in the bankruptcy proceedings) in the matters argued before the Federal Court because, at the relevant time, he was no longer the controlling director of Golden Constructions, (b) because of that fact (and the appointment of the liquidator to Golden Constructions) he had no personal right to bring suit against Mr Li, and (c) because the assignment of that right only occurred on 13th August 2014, it was only after that date that he was in a position to bring proceedings against Mr Li.
In that same affidavit, Mr Wu confirmed (at par.15) that he does not [presently] have sufficient assets to satisfy the principal judgment against him. If made bankrupt, he says that he would “almost certainly” be unable to prosecute the cross-demand.
At pars.20-21 of Mr Wu’s submissions, it was contended that it would have been inappropriate for the ACT Supreme Court proceedings to be commenced prior to the delivery of judgment in the Full Court of the Federal Court of Australia. The Full Court’s judgment was delivered on 17th August 2015; there was thus a delay of some two months or so between that judgment and the commencement of the ACT Supreme Court proceedings.
Applicant’s Submissions
The Applicant’s primary submissions were as follows:
1) The Applicant (Mr Li) seeks a sequestration order against the estate of the Respondent (Mr Wu) by reason of Mr Wu’s failure to comply with a bankruptcy notice served on 23 December 2013, and which expired on 11 September 2015.
2) Mr Wu concedes that he cannot pay the amount in the bankruptcy notice, being the amount he was ordered to pay Mr Li by the Full Federal Court following proceedings brought by Mr Li against Mr Wu in September 2011.
3) In October 2013, the Federal Court held that Mr Wu was liable to pay Mr Li $976,866.80 plus interest from 14 November 2011 to 22 October 2013 of $193,520.93, and costs. This is the debt referred to in the bankruptcy notice (being $1,178,524.33 (including interest up to the date of the notice)). Mr Wu’s appeal failed, but Mr Li’s cross-appeal was successful in part, resulting in the principal being increased to $1,076,767.00.
4) The only issue is whether the sequestration order should not be made for “other sufficient cause” under s52(2)(b) of the Bankruptcy Act 1966 (Cth) (Act). Mr Wu contends that he now has an offsetting claim against Mr Li, arising from an alleged debt that Mr Wu bought on 13 August 2014 from the liquidator of Golden Constructions Pty Ltd (in liquidation) (Golden Constructions).
A. Reasons why the argument should be rejected
5) Mr Wu’s challenge to the sequestration order should be rejected because the requirements outlined by Allsop J (as his Honour then was) in Totev v Sfar (2006) 230 ALR 236 at [33]-[51] are not met:
a)Mr Wu’s cross claim is not a real claim that is likely to succeed against Mr Li. This is because:
i.The purported assignment of the claim under the alleged contract between Golden Constructions and Mr Li and Ms Chen is invalid because Mr Li and Ms Chen did not consent to it (as is required under the contract).
ii.The purported assignment of the quantum meruit claim fails because it could only be assigned with the contractual claim. On its own, it is a bare cause of action that Mr Wu bought only to try to stave off bankruptcy. Such an assignment is invalid.
iii.Even if the quantum meruit claim could be run by Mr Wu, it is flawed because Golden Constructions paid for the construction of the O’Malley house using Mr Li’s money. Mr Li had funded Golden Constructions to undertake the work (and other projects) via Golden Enterprise Investments Pty Ltd (GEI). In February 2008, Mr Li and Mr Wu agreed that the O’Malley costs were applied in reduction of Mr Li’s loan to GEI. Thus, Mr Li has already paid for the construction costs on his O’Malley home via GEI; he does not owe Golden Constructions anything.
iv.The same applies to Mr Wu’s claim that Mr Li should pay Golden Constructions for $572,998.02 in personal expenses. All of it was Mr Li’s money to begin with, and in February 2008, Mr Li and Mr Wu had agreed that such expenses were to be applied in reduction of Mr Li’s loan to GEI. Thus, these personal expenses are not “outstanding” from Mr Li to Golden Constructions.
v.Further and in any event, the Golden Constructions loan ledger has a positive balance only because of a wrong $800,000.00 entry.
b) Mr Wu’s new claim against Mr Li would not, in any event, result in Mr Wu’s bankruptcy being of a short duration. The ACT Supreme Court proceedings commenced by Mr Wu just over a month ago will take over a year to complete. Thus even if it was a real claim that was likely to succeed, s52(2) of the Act is not satisfied anyway.
c) Further, the discretion under s52(2) would not be exercised in the circumstances of this case. It has taken Mr Li four (4) years to succeed in his claims against Mr Wu. Mr Wu’s purchase of Golden Constructions’ claim is just a stunt in a desperate attempt by Mr Wu to escape his responsibility to Mr Li.
B. Mr Wu’s new claim against Mr Li
6) The claim filed by Mr Wu against Mr Li in the ACT Supreme Court on 9 October 2015 has the following components:
a) First, a claim for unpaid construction costs of Mr Li’s home in O’Malley, on two alternative grounds:
i.$1,283,804.75 under the Building Contract allegedly entered into between Golden Constructions on the one hand, and Mr Li and Ms Chen on the other; and
ii.alternatively, a quantum meruit claim of $2,807,999.40 (although without stating the basis on which this alternative claim arises so as to replace the contract claim).
b) Second, a claim of $572,998.02 for amounts allegedly loaned by Golden Constructions to Mr Li for payment of his personal expenses. This sum is less than half of the debt in the bankruptcy notice.
C. The assignment of the rights under the Building Contract is invalid
7) Clause 18 of the Building Contract provides that neither party may assign the rights and obligations under it without the written consent of the other. Mr Li and Ms Chen did not provide that consent, so the assignment is invalid.
8) Section 477(2)(c) of the Corporations Act 2001 (Cth) does not allow a liquidator to assign a contractual right when the contract does not permit it: Owners of Strata Plan 5290 v CGS & Co Pty Ltd (2011) NSWLR 285 at [56]-[74].
9) Thus Mr Wu does not have the right to pursue this claim.
D. The assignment of the quantum meruit claim is invalid
10) The claim in quantum meruit is put as an alternative. However, any such claim could only arise if the contract is unenforceable or it has been repudiated, and that repudiation has been accepted: Sopov v Kane Constructions Pty Ltd (No. 2) (2009) 24 VR 510; [2009] VSCA 141 at [9]-[12], Condon Investments Pty Ltd v Lesdor Properties Pty Ltd (2013) 29 BCL 329; [2013] NSWCA 184 at [94]. Neither of those preconditions has been pleaded nor evidenced.
11) Even if the quantum meruit claim could be said to exist at all, since the contractual claim remains with Golden Constructions, on its own it is a bare right of action that is assignable only if the assignee has a legitimate commercial interest in acquiring it[7].Mr Wu is shown as a creditor of Golden Constructions[8] but, despite showing interest in doing so at one point, Mr Wu did not fund the liquidator to pursue the claim against Mr Li[9]. It was only after Mr Wu lost the proceedings against Mr Li at first instance, and after the Full Federal Court hearing, that Mr Wu then purported to buy the claim[10]. It was not until after the decision of the Full Federal Court dismissing his appeal[11] that he commenced proceedings[12].
[7] Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at [53] per French CJ, Crennan and Kiefel JJ
[8] Kazar affidavit, Ex HJK1, pages 39, 71
[9] Kazar affidavit para 13, Ex HJK1, pages 83, 96, 97
[10] Kazar affidavit para 14, Ex HJK1, page 249ff
[11] [2015] FCAFC 109 is dated 17 August 2015; Mr Wu’s affidavit, para 6.
[12] ACT Supreme Court proceedings commenced on 9 October 2015: Mr Wu’s affidavit, para 13, annexures A and B.
12) It is plain that Mr Wu bought this claim in order to set up a cross claim for the purposes of seeking to stave off bankruptcy. This is not a “genuine commercial interest” of a kind required for the validity of an assignment of a bare cause of action: ICM Agriculture Pty Ltd v Young [2009] FCA 109 at [116], [124], citing Monk v The Australian & New Zealand Banking Group Ltd (1994) 34 NSWLR 148 at 152.
13) This case is different from Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 in a number of respects, but most centrally because the quantum meruit claim is not ancillary to any assigned contractual rights - because the contract assignment failed, and those rights remain with Golden Constructions.
14) Mr Wu has no pre-existing commercial interest that receives ancillary support from the assignment: National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 at 540 per Lindgren J; see also EWC Payments Pty Ltd & Ors v Commonwealth Bank of Australia [2014] VSC 207 at [65]-[78]. The assignment of the quantum meruit claim therefore fails.
E. It was Mr Li’s money all along anyway
15) Between 2004 and 2011, Mr Li advanced over $7 million to GEI and Spring Grove Pty Ltd (Spring Grove)[13]. Over $6 million of that was advanced prior to 18 February 2008, when Mr Li and Mr Wu reached the “February 2008 Agreement” referred to by the Federal Court and the Full Federal Court in the Li v Wu proceedings. Mr Li thus funded GEI, and GEI funded Golden Constructions (which was incorporated after the February 2008 Agreement).
[13] Kazar affidavit, Ex HJK1, pages 162 - 164
(a) “Amounts used for O’Malley”
16) The February 2008 [sic: agreement] expressly states that Mr Li’s loan to GEI is reduced by amounts used for O’Malley. This agreement was referred to and relied upon by the Federal Court and the Full Federal Court. The O’Malley costs were excluded from the calculation of the outstanding loan amount, which in turn formed the basis of Mr Wu’s liability to Mr Li under the GEI shareholders agreement.
17) The effect of the exclusion of the O’Malley costs from the loan by Mr Li to GEI was that the money sent by Mr Li to GEI, which was then used to pay for Mr Li’s O’Malley home, was treated as a repayment of Mr Li’s loan to GEI.
18) There was no change to that agreement after Golden Constructions was incorporated. Mr Li funded GEI. Mr Wu had control of GEI’s funds, and he arranged for GEI’s funds (provided by Mr Li) to be used by Golden Constructions. That expenditure was accounted for in Golden Constructions’ books. However, Mr Wu accounted for GEI’s financial contribution to Golden Constructions as a loan – amounting to $1,975,699[14]. GEI was, in turn, indebted to Mr Li in the amount of $5,042,220[15].
[14] Kazar affidavit, Ex HJK1, pages 71
[15] Kazar affidavit, Ex HJK1, pages 71.
19) The payments thus made by Golden Constructions on Mr Li’s O’Malley home were not, in reality, by was [sic: “way”] of a loan by Golden Constructions to Mr Li, or otherwise somehow create a liability by Mr Li to Golden Constructions. It was Mr Li’s money to begin with. In the February 2008 agreement, this reality was recorded: costs for O’Malley were treated as a reduction in Mr Li’s loan to GEI.
20) Thus, as between Mr Li and Mr Wu, at all times it was agreed that Mr Li was paying for the construction of his O’Malley home.
(b) Mr Li’s personal expenses
21) The same applies to Mr Li’s personal expenses. The February 2008 agreement excluded Mr Li’s personal expenses from Mr Li’s outstanding loan balance from GEI – for which Mr Wu was 25% liable under the GEI shareholders agreement. Thus, to the extent that Mr Li’s money was used to meet his personal expenses, that was treated as a reduction in his loan to GEI. Mr Wu’s agreement to this is recorded in the February 2008 agreement.
22) There is a further reason why the claim for repayment of Mr Li’s personal expenses of $572,998.02 is doomed to fail: the first entry in the ledger (annexure A to the Statement of Claim) is for $800,000.00 to the Iceland Group. Mr Li’s answer to this entry is as follows:
a) In August 2008, Mr Li needed $800,000 returned to China out of the approximately $6 million he had by then lent to GEI.
b) Mr Li instructed Mr Wu to arrange for that amount to be returned by GEI.
c) That occurred on 17 August 2008, but Mr Wu did not account for it as a reduction in Mr Li’s loan to GEI, but as a loan from Golden Constructions to Mr Li. This was not known by Mr Li, and was contrary to his instructions.
d) Mr Li arranged for that money to be repaid to GEI in October 2010[16] through a series of transfers from China to Australia, totalling $848,587.39 (the difference in amount attributable to exchange rate fluctuations). However, instead of this money being allocated against Mr Li’s loan from Golden Constructions, Mr Wu allocated this as a loan from Mr Li to Golden Crop Australia Pty Ltd (Golden Crop).
[16] Kazar affidavit, Exhibit HJK1, pages 157, 163 (transactions 19-21)
e) This explains why Golden Crop’s accounts show a loan from Mr Li in the amount of $758,597[17]. There is no other reason for the existence of this loan. Golden Crop was Mr Wu’s own company; Mr Li was not a shareholder in it, and did not even know about it at the time of the transactions.
[17] Kazar affidavit, Exhibit HJK1, page 71
F. Mr Wu’s new claim is not a real claim that is likely to succeed
23) By reason of the above matters, it is submitted that the Court should not be satisfied that Mr Wu’s new claim against Mr Li in the ACT Supreme Court is a real claim that is likely to succeed. Mr Wu does not overcome the first hurdle in resisting a sequestration order under s52(2).
24) In addition to the above matters, Mr Li claims that the work done on the O’Malley house was defective[18]. Mr Li intends to bring a cross-claim in the ACT Supreme Court proceedings against Golden Constructions for liability for defective work. This would substantially reduce the quantum meruit claim, even if it could otherwise succeed.
25) There are other problems with the quantum meruit claim. Mr Li disputes that the expenses claimed to have been spent on the O’Malley property were in fact so spent. One example is the second last entry dated 30 June 2011: $88,000 for the “Mitchell warehouse rental fee”[19]. That cannot have anything to do with building a house at O’Malley. Further, Golden Constructions engaged in other construction projects[20], so the entries on the ledger do not necessarily relate to the O’Malley project, and they would need to be substantiated. The work done by Mr Li’s solicitors suggests that the true figure is much less than the amount claimed[21].
G. Bankruptcy will not be of a short duration
26) It is not sufficient for Mr Wu to establish that he has a real claim that is likely to succeed. Also relevant is the stage of the litigation and the length of time for its vindication: Totev v Sfar at [42]-[44]. Here, Mr Wu also fails. The earliest evidence of Mr Wu indicating his interest in buying the claim from Mr Kazar is in the Report to Creditors of 31 January 2014[22]. The assignment was dated 13 August 2014[23] but the proceedings were not commenced until 9 October 2015.
27) Mr Gavagna estimates that the ACT Supreme Court proceedings will not be resolved until at least 2017 (at first instance).
H. Discretion under s52(2)
28) All of the circumstances of the case should be considered when exercising the discretion under s52(2): Totev v Sfar at [44]. Here, Mr Wu has conceded that he cannot pay the judgment debt of over $1 million. That debt is the culmination of four (4) years of litigation between Mr Li and Mr Wu, the outcome of which is that Mr Li has finally been vindicated. Mr Wu could have funded the liquidator of Golden Constructions from the time the claim was first identified in October 2011[24]. The first evidence of any interest by Mr Wu in buying the debt was in January 2014[25] – a month after the bankruptcy notice was served on him. He did not enter into the Deed of Assignment until 13 August 2014 – 9 days after the second and final day of the appeal hearing. He did not commence proceedings until over a year later, in October 2015, two (2) months after he lost the appeal.
29) Having so delayed in obtaining and bringing the claim, Mr Wu’s bankruptcy would last at least a year even if he is ultimately successful on the claim. Mr Wu only has himself to blame for this.
30) Mr Wu has done everything he can to prevent Mr Li from enforcing his rights against him. This new claim is another aspect of his attempt to frustrate Mr Li, and make it difficult for Mr Li to succeed against him, all the way from Beijing.
31) This is not a case in which the discretion under s52(2) should be exercised – quite the contrary.
[18] Kazar affidavit, Exhibit HJK1, page 159
[19] Kazar affidavit, Exhibit HJK1, page 139
[20] Kazar affidavit, para 6
[21] Kazar affidavit, Exhibit HJK1, page 157
[22] Kazar affidavit, Exhibit HJK1 page 92 at 96
[23] Kazar affidavit, Exhibit HJK1 page 249
[24] Kazar affidavit, Exhibit HJK1 p57 at 64
[25] Kazar affidavit, Exhibit HJK1 p92 at 96, 97
Respondent’s Submissions
The Respondent’s primary submissions were as follows:
1) Mr Li seeks a sequestration order against the estate of Mr Wu founded upon a bankruptcy notice which expired on 11 September 2015.
2) The circumstances giving rise to the present application are complex. They involve proceedings brought by Mr Li against Mr Wu in the Federal Court in which Mr Li sued upon a shareholders agreement which contained within it a contractual indemnity (the Shareholders Agreement). The Shareholders Agreement was in respect of the shares in Golden Enterprise Investments Pty Ltd (in liquidation).
3) Mr Wu and Mr Li were the shareholders in a substantial property development business which involved the following corporate entities:
a) Golden Enterprise Investments Pty Limited (in liq) (GEI);
b) Golden International Investments Pty Limited (in liq);
c) Golden Crop Pty Limited (in liq);
d) Golden Constructions Pty Limited (in liq) (Golden Constructions); and
e) Spring Grove Enterprise Investments Pty Limited (in liq).
(collectively, the Golden Group).
4) Mr Li was at all relevant times a citizen of China.
5) Mr Li commenced proceedings in the Federal Court (ACD 54 of 2011) seeking damages pursuant to the contractual indemnity in the shareholders agreement.
6) On or about 6 November 2013, judgment was entered in favour of Mr Li in the Federal Court proceedings in the sum of $976,886.80 plus interest (Principal Judgment). Justice Jagot reached that figure by accepting that the contractual indemnity contained in the Shareholders Agreement required Mr Wu to indemnify his co-shareholder Mr Li in respect of funds advanced by Mr Li to Golden Enterprise Investments Pty Ltd.
7) In November 2011, Mr Wu appealed from the Principal Judgment (Appeal). The Appeal was dismissed and Mr Li succeeded on his cross appeal as a result of which the amount to be indemnified was increased from $976,886.80 to $1,076,767.00.
8) By ACT Supreme Court proceedings commenced on 9 October 2015, Mr Wu asserts the existence of a substantial offsetting claim.
9) It is uncontroversial that a member of the Golden Group, Golden Constructions constructed a very substantial home in the suburb of O’Malley for Mr Li and his wife, to be their primary residence. The contract price for the construction was $1.8 million.
10) In the ACT Supreme Court proceedings, Mr Wu alleges that Golden Constructions has not been paid by Mr Li or his wife for the construction of the house at O’Malley. Evidence to that effect in the primary proceedings will be given by the Liquidator of Golden Constructions.
11) The issue of the unpaid Golden Constructions debt was ventilated before Jagot J, who determined that it was unnecessary to decide, because Golden Constructions was not a party to the Federal Court proceedings and the claim should be brought by Golden Constructions independently ([2013] FCA 1067 at [35]).
12) At that point Mr Wu sought the assistance of the Liquidator. By Deed of Assignment dated 13 August 2014, the Liquidator assigned the rights of Golden Constructions to Mr Wu, who then commenced the proceedings before the Supreme Court of the ACT.
13) Mr Li now seeks to assert before this Court that he advanced some $7 million to the Golden Group. He appears to assert, by submission, that in that event he would have claims that exceed the offsetting claim (notwithstanding the affidavit evidence to the contrary already filed in the Federal Court proceedings by the Liquidator of Golden Constructions).
14) These fundamental factual issues, if seriously put, are matters to be resolved after a full hearing on the issues, not on this application in the absence of evidence. A hearing of the issues will involve affidavit evidence from all concerned, an inspection of the books and accounts of Golden Constructions, and inspection of the bank records of Mr Li.
15) The position now advanced by way of counsel’s submission to this Court is directly inconsistent with evidence previously filed by Mr Li in the Federal Court. There, Mr Li led evidence that he had provided very limited funds to the Golden Group, although he did assert that funds had been provided by various Chinese corporate entities, many unrelated to him, in obscure circumstances (see, for example paragraphs [64] - [78] of the affidavit of the applicant affirmed on 20 March 2013).
16) At least $800,000 of the funds now said by Mr Li’s submissions to have been advanced to the Golden Group were, on Mr Wu’s case, advanced by Mr Li to repay funds previously withdrawn by Mr Li from the Golden Group to fund cashflow shortages in Mr Li’s businesses in China.
17) Again, these issues require full investigation at the hearing of the matter. They are incapable of resolution on this application.
18) The liquidator, Mr Kazar, will give evidence in the ACT Supreme Court proceedings to the following effect:
a) the major claim remaining in GEI was the recovery of a loan account in a related company, Golden Constructions, based on “monies paid by that company on behalf of Mr Li for the construction of his house in the order of $3 million or thereabouts together with an amount paid by Golden Constructions on his behalf…” (Transcript p.55.39-43);
b) GEI had a claim against Golden Constructions by way of intercompany loan account which “if the claim in Golden Constructions was successful would see funds flowing back to GEI … which would then allow a dividend to be paid.” (Transcript p.55.44-46);
c) On or about 19 August 2013 Mr Kazar had believed that on the information then available to him he would be in a position to declare a dividend of 0.88 cents in the dollar. (Transcript p.70.13-15);
d) After 19 August 2013 he had begun to contemplate disallowing Mr Li’s proof of debt (Transcript p.71.5-8);
e) He did not agree with the proposition put to him by counsel for the applicant to the effect that whatever happened the final dividend from GEI would not exceed 0.88 cents in the dollar (transcript p.74.37-38) because, in part, Mr Li owed Golden Constructions “three or four million dollars” and he was contemplating “through GEI seeking to recover those monies from Mr Li…” (Transcript p.75.2-8);
f) Had the applicant made good his debts to Golden Constructions, Golden Constructions would in turn have been able to make good its indebtedness to GEI with the effect that GEI would have paid some 63 cents in the dollar to creditors.
19) This Court has undoubted power to dismiss the present application for sequestration.
Section 52(2) of the Bankruptcy Act 1966 (Cth) (the Act), provides that:
“If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:…(b) that for other sufficient cause a sequestration order ought not to be made it may dismiss the petition.”
20) For the reasons given above, it is both in the public interest (to permit justice to be done such that all issues between the parties may be litigated to finality) and in the interests of the parties themselves that the sequestration be dismissed. Mr Li asserts that the ACT Supreme Court proceedings are brought for an improper purpose. Plainly they are not. They are brought because Jagot J concluded that the proper party to bring them was Golden Constructions, and because the Full Court on appeal did not disturb that finding.
21) Mr Li has been aware since 26 October 2011 that either the Liquidator or Mr Wu intended to bring the present claim. Because the issue was alive before Jagot J in the Federal Court proceedings, and on the appeal to the Full Court, it was entirely inappropriate to commence the proceedings until they had been resolved.
22) The application for sequestration is nothing more than an attempt by Mr Li to prevent the issues between the parties, which are of substance, and which are supported by existing affidavit evidence, ever being determined by a Court. This Court should not permit him to take that course.
23) It is clear that a claim sounding in money by the debtor against the petitioning creditor may amount to sufficient cause.
“A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor’s debt will amount to “other sufficient cause” not to make a sequestration order. The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purpose of s 52(2)(b).”[26]
“the public interest in allowing Mr Ling to prosecute his action against the Commonwealth…is…a public interest which overrides the … present respondent’s interest and prima facie entitlement to a sequestration order.”[27]
24) The Court’s assessment of the claim by the debtor involves a consideration of the strength of that claim on liability, the strength of that claim on quantum and the stage, if any, which the prosecution of that claim has reached.[28] The length of time for its vindication is also a relevant consideration for the Court.[29]
25) Mr Li suggests by his written submissions to this Court that the ACT Supreme Court proceedings will fail because they are brought by Mr Wu pursuant to a contractual assignment of rights by the Liquidator. He suggests that clause 18 of the Building Contract required the consent of Mr Li and his wife to any assignment, and that the assignment of rights by the Liquidator to Mr Wu is therefore ineffective.
26) Firstly, this is a matter that should be resolved at trial, as it is primarily a question for the ACT Supreme Court.
27) Secondly, the argument in any event does not affect the pleadings based on a quantum meruit, which substantially exceed the amount now claimed. Nor does it affect the allegations relating to loan funds given by Golden Constructions to Mr Li unrelated to the house at O’Malley, including payment of school fees, wages paid to Mr Li’s personal and corporate employees and motor vehicle purchases and expenses. Those loan funds amount to $572,998; that is, almost one half of the amount now claimed.
28) In any event, the argument is wrong. Mr Li relies upon Owners of Strata Plan 5290 v CGS & Co Pty Ltd. That case turned on a clause which was drafted in entirely different terms to clause 18 of the present Building Contract. The present clause would, on its true construction, prevent the assignment of rights during the pendency of the construction process between the parties. It does not preclude the assignment by a liquidator under section 477 of the Corporations Act 2001 where, absent the assignment, Mr Li and his wife would escape their contractual obligations.
29) In the event that, contrary to these submissions, this Court or the ACT Supreme Court at trial considered that the decision in Strata Plan 5290 had any application to the present circumstances, Mr Wu will contend that the decision of the Court of Appeal of New South Wales ought not be followed, or that it was wrongly decided. That issue is one that would fall to be determined by a Full Court of the Federal Court on this application, or a specially convened Full Bench of the ACT Supreme Court.
30) For the reasons given above, the present application for sequestration order should be dismissed and the primary proceedings be allowed to proceed.
[26] Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25-26.
[27] Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 26.
[28] International Alpaca Management Pty Ltd v Evsar [1999] FCA 72 at [54] per Katz J.
[29] Totev v Sfar [2006] FCA 470 at [44] per Allsop J.
Supplementary submissions
After the trial had concluded, the Court made a request via email from Chambers for the parties to address two further issues:
1) Whether the Supreme Court proceedings could either be transferred to the Federal Court or otherwise re-commenced in the Federal Court. In making this inquiry, this Court may be able to take judicial notice of the Federal Court's National Court Framework and National Practice Area Judges across a broad range of commercial areas, and the more local knowledge of the ready availability of trial dates in the Federal Court;
2) Can or should the Court have any regard to the commencement of Mr Wu's claim in the ACT Supreme Court, as opposed to the Federal Court, having regard to (i) the general knowledge of the Supreme Court's areas of expertise being, primarily at least, in criminal matters, while the expertise of the Federal Court is primarily in commercial matters, and (ii) Mr Wu had been unsuccessful in previous and related litigation in the Federal Court.
The parties then both filed Written Submissions to address the above questions.
The Applicant filed his Supplementary Submissions on 5th May 2016. They were as follows:
1) These submissions are made in response to the request from Judge Neville on 3 May 2016, for brief comments on the following two issues:
(a) Whether the Supreme Court proceedings could either be transferred to the Federal Court or otherwise re-commenced in the Federal Court. In making this inquiry, this Court may be able to take judicial notice of the Federal Court's National Court Framework and National Practice Area Judges across a broad range of commercial areas, and the more local knowledge of the ready availability of trial dates in the Federal Court; and
(b) Can or should the Court have any regard to the commencement of Mr Wu's claim in the ACT Supreme Court, as opposed to the Federal Court, having regard to (i) the general knowledge of the Supreme Court's areas of expertise being, primarily at least, in criminal matters, while the expertise of the Federal Court is primarily in commercial matters, and (ii) Mr Wu had been unsuccessful in previous and related litigation in the Federal Court.
2) Mr Li is not aware of any authority that suggests that section 30(1) of the Bankruptcy Act 1966 (Cth) (the “Act”) - or any other provision - could empower the Federal Circuit Court to require Mr Wu to transfer his ACT Supreme Court proceedings to the Federal Court, or to require Mr Li to agree to that transfer. Mr Li would not consent to any such transfer.
3) Mr Li also submits that any order to transfer the proceedings - as part, perhaps, of an adjournment order - would deny Mr Li procedural fairness.
Procedural fairness
4) Mr Wu opposed the creditor's petition on the basis that he has an offsetting claim amounting to “other sufficient cause” not to make the sequestration order, under s52(2) of the Act. Mr Li defended that claim - not an application for an adjournment, or a forced transfer.
5) Mr Wu commenced the ACT Supreme Court proceedings after his application to set aside the bankruptcy notice failed in September 2015. The Federal Court was always available to Mr Wu, since the underlying conduct occurred entirely in the ACT: O'Neill v Mann (2000) 101 FCR 160.
6) The Court may infer that Mr Wu's choice to commence proceedings in the ACT Supreme Court was informed by the adverse credit findings made against him by the Federal Court (including that certain of his conduct “was inescapably dishonest and designed to advance himself at Mr Li's expense.” paragraph [56] of Jagot J's judgment).
7) However, in response to the request for comment now made by the Court, Mr Wu may say that he is happy to transfer the matter to the Federal Court, and may deny that his choice of the ACT Supreme Court had anything to do with Justice Jagot's findings. If he does, Mr Li would be prejudiced, since he has not had the opportunity to bring evidence about it, or challenge Mr Wu in cross-examination.
8) If Mr Wu had wanted an adjournment of the creditor's petition, coupled with a transfer to the Federal Court on the basis that a quicker hearing would be likely, he should have applied for those things in advance of the hearing on 3 May 2016. Had he done so, Mr Li could have brought evidence and argument to meet it.
Transfer would not necessarily produce any benefit
9) The Federal Court is not necessarily a more appropriate Court for the determination of Mr Wu's claims. The ACT Supreme Court has expertise in construction litigation. Associate Justice Mossop of that court regularly deals with such cases, and has renowned expertise in doing so.
10) Whilst the Federal Court's National Court Framework does cover a broad range of commercial areas, those areas do not expressly include construction. This is unsurprising, as construction litigation does not fall within any of the well-recognised categories of Federal jurisdiction. In contrast, for example, the NSW Supreme Court has a Technology & Construction List.
11) A transfer would not necessarily result in an earlier hearing. This is because:
a) The original proceedings between Mr Li and Mr Wu were commenced in September 2011 and were not heard until September 2013. The appeal was not determined until August 2015
b) The trial in September 2013 ran for 10 days - which is the same as Mr Gavanga's estimate for the trial of the ACT Supreme Court matter. That estimate assumed that Mr Li's cross-claim for defective work was included. Mr Li's entitlement to bring that claim as part of the ACT Supreme Court proceedings was confirmed by Dr Ward SC on 3 May 2016.
c) The existing timetable in the ACT Supreme Court proceedings brings the matter back in October 2016, at which time a further timetable for expert evidence (on the defects issue) will be required.
12) If the ACT Supreme Court proceedings are transferred to the Federal Court, Mr Wu would be liable for costs incurred by Mr Li by reason of the transfer, including costs thrown away. It is hard to envisage a circumstance in which Mr Li might recover those costs. Mr Wu has already said that he cannot pay the debt referred to in the Bankruptcy Notice of $1.18 million. In addition, Mr Li has an unsatisfied costs order from the Federal Court proceedings, in respect of which a certificate of taxation was issued by the Federal Court on 4 February 2016 for $1.638 million (copy attached).
13) For the above reasons, Mr Li would not consent to any transfer of the ACT Supreme Court proceedings to the Federal Court. It is submitted that this Court would not have the power to impose it upon him.
The Respondent filed his Supplementary Submissions on 9th May 2016. Those submissions were as follows (citations omitted):
1) The Respondent makes the following submissions in response to Justice Neville's questions posed to the parties by way of email dated 3 May 2016.
2) There is no basis upon which the Court could reach any conclusion that the Supreme Court of the ACT was not a perfectly legitimate choice of forum for the resolution of the building contract dispute between Mr Wu (as assignee of the Golden Constructions Pty Ltd (in liq) claim) and Mr Li.
3) In fact, the Supreme Court of the ACT is the natural and most appropriate forum for determining Supreme Court of the ACT proceeding SC 379 of 2015 (Supreme Court Proceeding). The construction claim does not raise any federal matter falling naturally within the jurisdiction of the Federal Court.
4) The Federal Court of Australia's jurisdiction is "the authority to adjudicate derived from the Commonwealth Constitution and laws.” The Federal Court of Australia Act 1976 (Cth) created the Federal Court as a Court of limited original and appellate jurisdiction.
5) The exercise of the Federal Court's civil jurisdiction is subject to section 39B(1A)(c) of the Judiciary Act 1903 (Cth) (Judiciary Act). The Federal Court also has jurisdiction to hear and determine any matters arising under the Constitution through the operation of section 39B of the Judiciary Act. The Federal Court is vested with jurisdiction: in any matter; arising under any laws of the Commonwealth Parliament. Section 39B(1A)(c) of the Judiciary Act operates according to its terms as a general conferral of jurisdiction.
6) The “matter” is the justiciable controversy between the actors to it comprised of the substratum of facts and claims representing or amounting to the dispute or controversy between or amongst them, it is the “subject matter for determination in a legal proceeding.”
7) The subject matter for determination in the Supreme Court Proceeding is a claim arising under a building contract based on the contract price or alternatively on a quantum meruit basis. The Supreme Court Proceeding may be broadly described as construction litigation. It does not constitute a “matter” for the purposes of the exercise of Federal jurisdiction.
8) By contrast, the justiciable controversy of the earlier proceedings between the parties (and giving rise to the earlier judgments in the Federal Court) related to misleading and deceptive conduct and breaches of (as it was then) the Trade Practices Act 1974 (Cth).
9) While the Respondent acknowledges that it would have been possible for the Supreme Court Proceedings to have been commenced in the Federal Court as a cross-vested matter by reason of section 9(3)(a) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth), the cross-vesting of a matter is an exceptional, rather than an ordinary, course.
10) The Respondent submits that the most appropriate forum for the determination of the Supreme Court Proceedings is in the Supreme Court of the ACT.
11) The ACT Supreme Court has specific expertise in construction litigation. Associate Justice Mossop of the ACT Supreme Court regularly deals with construction litigation and has considerable expertise in doing so. As Mr Li also notes in his supplementary submissions, the Supreme Court has considerable experience with ACT Building Contracts.
12) The Federal Court's National Court Framework does include a broad range of commercial areas but does not expressly include construction disputes. Construction litigation does not ordinarily involve a claim for common law or equitable relief in respect of (or over) a right which owes its existence to federal law.
13) The ACT Supreme Court Proceedings has a detailed timetable in place to progress the matter such that it is capable of being listed for Hearing in October 2016.
14) Mr Wu does not intend to seek to transfer the Supreme Court Proceedings to the Federal Court and does not consent to such a transfer.
15) Mr Wu did not have any ulterior motive for commencing the Supreme Court Proceedings in the selected jurisdiction. It is obvious that the issue of Mr Wu's credit will be raised irrespective of the selected forum for determining the subject matter of the Supreme Court Proceedings. That formed no basis for the decision to commence in the natural forum.
In turn, because the assignment in question must be considered to be so problematic, and because the assignment is fundamentally a cornerstone of Mr Wu’s ACT Supreme Court proceedings, my assessment of the likelihood of success of those proceedings is very, if not extremely, low. As well, there is a paucity of detail from the liquidator about the relevant assignment.
There are many question marks in relation to the quantum meruit claim, including the size of it compared to the amount specified in the building contract, as well as relevant lack of precision in the claim, also indicate that there is little likelihood of success in relation to that separate head of the claim in the ACT Supreme Court action.
Further, (a) the adverse credit findings against Mr Wu in the Federal Court, (b) the findings of Jagot J in relation to certain loans between the parties, and (c) the findings in relation to the use and characterisation of those funds, additionally lead me to the view that the prospects of success in the ACT Supreme Court proceedings are low.
Mr Wu has confirmed his inability to pay the very sizeable judgment debt. His “solvency” was not relevantly addressed in his submissions. It is a further consideration that is adverse to the Court granting the Orders he seeks to set aside the petition. As the Full Court said in Ling v Enrobook (quoted by Katzmann J in Baker v Perpetual Trustee at [40]):
… the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally.
Accordingly, by reference to relevant authorities that speak about “a real chance of success”, or that such claim is “likely to succeed” (as opposed to being simply or merely “arguable”), such an assessment on the evidence and in the light of the submissions, leads the Court to the conclusion that, in accordance with s.52(2)(b) of the Act, (a) Mr Wu has not established, to the relevant or requisite degree, that he has “other sufficient cause” that a sequestration order ought not to be made, and therefore, (b) the Orders sought by the petitioning creditor, Mr Li, should be made.
Extension of Time of the Petition
When the matter was heard in May of this year, all involved (including the Court) may reasonably have held the view that a decision would have been forthcoming within a relatively short period of time. In my view, it is reasonable to assume also that, if all involved in the hearing (including the Court) had any apprehension that there would be some delay in delivering a judgment an application would have been made to extend the petition. Indeed, this is precisely to what the petitioning creditor’s solicitor has now deposed by way of affidavit, filed 17th October 2015.
Further to this, both parties filed written submissions in relation to the extension of time of the petition. The Applicant’s submissions were as follows:
1) The applicant, Yuxin Li (Mr Li), seeks an order, under r 39.05(h) of the Federal Court Rules 2011 (Cth) (FCR), to extend, retrospectively, the lapsing date of the creditor’s petition to which this proceeding relates, from 5 October 2016 to 3 May 2017.
2) The order is sought on the basis that:
a) there was an “accidental slip or omission” on 3 May 2016;
b) there was an “omission arising in a judgment or order” as a result; and
c) had there not been the accidental omission not to seek the extension at the conclusion of the hearing of the creditor’s petition on 3 May 2016, the Court would have extended the lapsing date of the petition then (prior to its expiry on 5 October 2016).
3) Mr Li relies on the affidavit of Harry John Kay of 17 October 2016.
B. SOURCE OF POWER TO MAKE THE ORDER
4) The relevant rule, r 39.05(h), is contained in the FCR. The Federal Circuit Court Rules 2001 (Cth) do not contain any equivalent to the “slip rule”. However, by operation of s 43(2)(b) of the Federal Circuit Court of Australia Act 1999 (Cth), and r 1.05(2) of the Federal Circuit Court Rules 2001 (Cth), r 39.05 of the FCR applies to judgments and orders that have been made and entered by the Federal Circuit Court.[45]
[45] Gilbert (trading in partnership as Gilbert + Tobin) v Stolyar [2016] FCCA 743 at [6], per Judge Manousaridis; Flint v Richard Busuttil & Co Pty Ltd [2013] FCAFC 131; (2013) 216 FCR 375 at [20] per Allsop CJ, Katzmann and Perry JJ.
C. NECESSITY FOR THE ORDER
5) Mr Li’s creditor’s petition was presented on 6 October 2015, and therefore, subject to any order made under s 52(5) of the Bankruptcy Act 1966 (Cth), was due to lapse on 5 October 2016.
6) The hearing of the petition took place on 3 May 2016. On that date, at the conclusion of the hearing, the Court made an order that “[t]he matter be adjourned on dates and times to be advised by the Court, pending judgment delivery”.
7) On 5 October 2016, during the period of the adjournment, the creditor’s petition expired.
8) There is no power under the Bankruptcy Act 1966 (Cth) for a court to make an order extending the lapsing date of a petition after the 12 months has elapsed. Section 52(5) only empowers the Court to extend the life of a petition prior to its expiry.
9) On 12 October 2016, judicial staff from the Chambers of Judge Neville sent an email to the parties’ legal representatives, advising that the Court expects to deliver judgment by the end of October 2016, asking the parties to “advise … whether any issues in relation to “time” arise, and whether any extension of time needs to be sought”, and stating that his Honour “wishes to ensure that there are no procedural difficulties … in this matter”.
D. REQUIREMENTS TO SATISFY IN ORDER TO INVOKE THE “SLIP RULE”
10) The authorities establish the following propositions:
a) it is possible for a creditor’s petition to lapse during the period after hearing and before the delivery of judgment, that is, the period of time during which judgment is reserved;[46]
[46] There are numerous examples, including Bankstown Grammar School Ltd v Park [2000] FCA 1205 at [2], per Lindgren J; and Griffiths v Boral Resources (Qld) Pty Ltd (2006) 154 FCR 554 at [22]-[28], per Spender ACJ, Dowsett and Collier JJ.
b) the power under s 52(5) of the Bankruptcy Act 1966 (Cth) to order any extension of the lapsing date of a creditor’s petition beyond the initial 12-month period can only be exercised during that period;[47] and
[47] Ramsay Health Care Australia Pty Ltd v Compton [2016] FCAFC 125 at [14], per Rares, Gleeson and Markovic JJ.
c) however, where the requirements of the “slip rule” are satisfied, the “slip rule” may be invoked to extend the life of a creditor’s petition after it had lapsed.[48]
[48] Ramsay Health Care Australia Pty Ltd v Compton [2016] FCAFC 125 at [21]-[23], per Rares, Gleeson and Markovic JJ.
11) The authorities establish that, for the “slip rule” to be engaged in these circumstances:
a) there must be a judgment or order upon which the rule can operate;[49]
[49] Griffiths v Boral Resources (Qld) Pty Ltd (2006) 154 FCR 554 at [43], per Spender ACJ, Dowsett and Collier JJ.
b) there must be an accidental slip or omission. This is not confined to errors or omissions of the Court; it extends to errors or omissions resulting from inadvertence by a party’s legal representative;[50]
[50] Flint v Richard Busuttil (2013) 216 FCR 375 at [26]; Ramsay Health Care Australia Pty Ltd v Compton [2016] FCAFC 125 at [21], per Rares, Gleeson and Markovic JJ.
c) there must be an error “in a judgment or order” as a result;[51] and
[51] Ramsay Health Care Australia Pty Ltd v Compton [2016] FCAFC 125 at [35], per Rares, Gleeson and Markovic JJ.
d) an order extending the lapsing date would otherwise have been made.[52]
[52] Flint v Richard Busuttil & Co Pty Ltd [2013] FCAFC 131; (2013) 216 FCR 375 at [36] per Allsop CJ, Katzmann and Perry JJ.
E. THE REQUIREMENTS OF THE “SLIP RULE” ARE SATISFIED IN THIS CASE
12) It is submitted that the requirements for the engagement of the “slip rule” are satisfied in this case for the following reasons.
13) There is an order upon which the rule can operate. At the conclusion of the hearing on 3 May 2016, formal orders were made, including that the matter be adjourned. This provides the relevant judgment or order upon which the “slip rule” can operate, and is distinguishable from the situation considered in Griffiths v Boral Resources (Qld) Pty Ltd (2006) 154 FCR 554, where no formal orders were made and recorded, but rather the Magistrate merely stated “I will reserve my decision”.[53] His Honour, Judge Neville, made formal orders which were signed and entered on 3 May 2016[54].
[53] Griffiths v Boral Resources (Qld) Pty Ltd (2006) 154 FCR 554 at [43], per Spender ACJ, Dowsett and Collier JJ. In any event, there is doubt as to the correctness of that aspect of the decision (see Flint v Richard Busuttil & Co Pty Ltd [2013] FCAFC 131; (2013) 216 FCR 375 at [36] per Allsop CJ, Katzmann and Perry JJ).
[54] Affidavit of Harry Kay dated 17 October 2016, at Annexure B.
14) In this case, as in other cases,[55] the accidental slip or omission was the inadvertence of Mr Li’s legal representative (and possibly the Court), who did not appreciate that there was any prospect that the petition might lapse during the period of time between the conclusion of the hearing of the petition and the delivery of judgment. It did not occur to him that such an order was required on 3 May 2016[56].
[55] Ramsay Health Care Australia Pty Ltd v Compton [2016] FCAFC 125 at [5], [8] and [10], per Rares, Gleeson and Markovic JJ.
[56] Affidavit of Harry Kay dated 17 October 2016, at paragraph 5.
15) This gave rise to an error “in a judgment or order”, namely “[t]he error in the orders arose from the omission of an order under s 52(5) that would enable … his Honour to deliver judgment before the petition lapsed”[57].
[57] Roskell v Snelgrove [2008] FCA 427; (2008) 246 ALR 175 at [55] per Lindgren J.
16) Had it occurred to Mr Kay on 3 May 2016 that the creditors petition may lapse prior to delivery of judgment, he would have instructed counsel to apply for an order extending the lapsing date of the petition to 3 May 2017 (to give the Court sufficient time to deliver judgment).[58]
[58] Affidavit of Harry Kay dated 17 October 2016, at paragraph 7.
17) It is submitted that this case is similar to Bankstown Grammar School Ltd v Park [2000] FCA 1205. In that case, the Court heard argument on 10 August 2000 but reserved judgment and the creditor’s petition expired a week later. Justice Lindgren said at [3]:
[3] If I had appreciated on 10 August that the petition was to lapse in only seven days' time, I certainly would have made an order under subs52(5) of the Act extending the period of the currency of the petition. I have no doubt also that if counsel appearing on 10 August had appreciated the position, they would have drawn my attention to it and agreed that an order extending time should be made. Due to the inadvertence of all concerned the petition has lapsed and it is no longer possible for me to exercise the power given by subs52(5) of the Act since, according to the terms of that subsection, the power can be exercised only before the expiration of the period of twelve months from the presentation of the petition on 17 August 1999.
18) In this case, the relevant inadvertence was the need for an extension past 5 October 2016 to give the Court sufficient time to deliver judgment.
19) It is submitted that the Court may infer that, had that extension of the creditors petition been sought, it would have been granted because:
a) his Honour indicated, in order 2 on 3 May 2016,[59] that he would be delivering judgment. “[A]n order under s 52(5) would enable … his Honour to deliver judgment before the petition lapsed”;[60]
b) the email from his Honour’s Chambers confirms that his Honour would have wanted to avoid any procedural difficulties arising from any lapse of the petition pending delivery of judgment;[61] and
c) had the extension been sought it is clear the Court would have granted it. On 3 May 2016, it could not be said with certainty that judgment would be delivered before 5 October 2016; the hearing of the petition had concluded; and the only step outstanding was the delivery of judgment. The Court ordered an adjournment to allow this final step to occur and, due to the inadvertence of Mr Li’s representative, was not asked to extend the life of the creditor’s petition past 5 October 2016 to enable sufficient time for judgment to be delivered before the petition lapsed.
d) This is case is distinguishable from Flint v Richard Busuttil & Co Pty Ltd [2013] FCAFC 131 because in that case the court could not infer that the extension would have been granted had it been sought.
[59] Affidavit of Harry Kay dated 17 October 2016, at Annexure B.
[60] Roskell v Snelgrove [2008] FCA 427; (2008) 246 ALR 175 at [55] per Lindgren J.
[61] Affidavit of Harry Kay dated 17 October 2016, at Annexure C.
F. CONCLUSION
20) The requirements to invoke the “slip rule” are met in this case. The Court may now vary the orders of 3 May 2016 in order to effect a retrospective extension of the lapsing date of Mr Li’s creditor’s petition.
21) An order can, and should, be made that “the order of 3 May 2016 adjourning the matter be varied pursuant to r 39.05(h) of the Federal Court Rules 2011 (Cth) by the addition of an order that the period at the expiration of which the petition will lapse is a period of twelve months commencing on 3 May 2016”.
The Respondent’s submissions were as follows:
1) The respondent makes the following submissions in response to Justice Neville's [sic] question posed to the parties by email dated 12 October 2016.
Background
2) The following events are relevant:
6 October 2015 The creditor's petition in proceeding CAG70/2015 was presented by the applicant (the Petition).
30 October 2015 The respondent filed a notice stating grounds of opposition to application, interim application or petition (the Notice) in which notice was given of the respondent's intention to oppose the Petition on grounds that there was “other sufficient cause” that a sequestration order ought not to be made for the purposes of section 52(2)(b) of the Bankruptcy Act 1966 (Cth) (the Act).
3 May 2016 The Petition was heard by Judge Neville (the Hearing)
and the following orders were made:
i.The matter be formally reserved.
ii.The matter be adjourned on dates and times to be advised by the Court, pending judgment delivery.
6 October 2016 The Petition lapsed, by operation of section 52(4) of the Act.
3) The respondent submits that an order for sequestration cannot now be made by the Court given that the Petition has lapsed, by operation of section 52(4) of the Act. That section states:
(4) A creditor's petition lapses at the expiration of:
subject to paragraph (b), the period of 12 months commencing on the date of presentation of the petition; or
if the Court makes an order under subsection (5) in relation to the petition--the period fixed by the order;
unless, before the expiration of whichever of those periods is applicable, a sequestration order is made on the petition or the petition is dismissed or withdrawn.
4) Section 52(5) of the Act states:
(5) The Court may, at any time before the expiration of the period of 12 months commencing on the date of presentation of a creditor's petition, if it considers it just and equitable to do so, upon such terms and conditions as it thinks fit, order that the period at the expiration of which the petition will lapse be such period, being a period exceeding 12 months and not exceeding 24 months, commencing on the date of presentation of the petition as is specified in the order.
5) The applicant has failed to make an application for the Petition to be extended under section 52(5) of the Act, either at the Hearing or otherwise prior to 6 October 2016. Consequently, the Court has not made any order extending the life of the Petition under section 52(5) of the Act.
6) The Court cannot now make an order under section 52(5) of the Act given that the period of 12 months commencing on the date of presentation of the Petition has expired.
Section 33(1)(c) of the Act
7) Section 33(1)(c) of the Act cannot be invoked to extend the life of the Petition retrospectively. In Re Young; Ex parte Smith (1985) 5 FCR 204 the Full Court of the Federal Court held that section 33(1)(c) of the Act was not available as a source of power for the making of a post-expiry extension order. A petition does not survive beyond the initial period of 12 months without a prior order of the court.
Slip rule
8) In Griffiths v Boral Resources (Q/d) Pty Limited [2006] FCAFC 149 ( Griffiths) and Flint v Richard Busuttil & Company Pty Ltd [2013] FCAFC 131 ( Flint) it was held that an order may be made under the 'slip rule' retrospectively extending the life of a lapsed creditors' petition in an appropriate case, notwithstanding the express wording of section 52(5) of the Act. However, there are limitations on the use of the 'slip rule' (discussed below). It is submitted that those limitations apply in the present circumstance.
Availability of the slip rule
9) The Federal Circuit Court Rules 2001 (Cth) (FCC Rules) do not contain a rule equivalent to the 'slip rule' found at rule 39.05 of the Federal Court Rules 2011 (Cth) (Federal Court Rules).(See FCC Rule 16.05)
10) Rule 16.05 of the FCC Rules is the closest equivalent to rule 39.05 of the Federal Court Rules. However, rule 16.05 of the FCC Rules does not apply to errors arising from accidental slips or omissions.
11) Section 43(2)(b) of the Federal Circuit Court of Australia Act 1999 (Cth) (the FCCA Act) provides that .the Federal Court Rules apply, with necessary modifications, to the practice and procedure of the Federal Circuit Court to the extent that the FCC Rules are insufficient.
12) Rule 1.05 of the FCC Rules states:
(1) It is intended that the practice and procedure of the Court be governed principally by these Rules.
(2) However, if in a particular case the Rules are insufficient or inappropriate, the Court may apply the Federal Court Rules ... in whole or in part and modified, or dispensed with, as necessary.
(3) Without limiting subrule (2):
(b) the provisions of the Federal Court Rules set out in Part 2 of Schedule 3, apply, with necessary changes to general federal law proceedings.
13) Rule 39.05 of the Federal Court Rules is not mentioned in Part 2 of Schedule 3 of the FCC Rules. Notwithstanding that, these submissions proceed on the basis that rule 39.05 of the Federal Court Rules may be applied by the Federal Circuit Court in appropriate cases, given the broad language used in rule 1.05(2) of the FCC Rules (ie, rule 1.05(2) of the FCC Rules allows the Federal Court Rules to be applied where the FCC Rules are 'insufficient or inappropriate' 'as necessary').
Application of the slip rule
14) Rule 39.05 of the FCR Rules may only be invoked if there is a 'judgment or order' in need of correction due to 'an accidental slip or omission'. (See rule 39.05 of the Federal Court Rules)
a) Was there a judgment or order?
15) As noted earlier, on 3 May 2016 Judge Neville ordered that:
1) The matter be formally reserved.
2) The matter be adjourned on dates and times to be advised by the Court, pending judgment delivery
16) It is submitted that the orders made on 3 May 2016 are not orders that can be subject to the power contained in rule 39.05 of the Federal Court Rules. The orders made on 3 May 2016 are identical in effect to the orders considered in Griffiths where the Federal Magistrate reserved his decision on the petition, rather than ordered an adjournment of the hearing itself. (Griffiths at [3].)
17) In Griffiths, the Full Court of the Federal Court said [at [62]]:
We do not mean to imply that an adjournment may never be the subject of an order. If an order for adjournment is pronounced, it may or may not satisfy the test to which we have referred. For example, where one party seeks an adjournment over opposition, the decision to adjourn or not to adjourn may be determinative of the parties' respective rights to have the question determined judicially. In such a case, the decision to adjourn would be a judgment or order for all practical purposes. However that is hardly the effect of an indication by a judge that he or she is presently unable to give a judgment and will do so at a later time.
18) While, in the present case, an adjournment order was formally made, the adjournment was not referable to the hearing. Rather, it was referable to the matter generally and was made so that judgment could be delivered on a date to be advised by the Court. It is submitted that the facts of Griffiths are analogous to those in the present case and that therefore this Court is bound to find that the orders made on 3 May 2016 are not orders that can attract the operation of rule 39.05 of the Federal Court Rules.
19) Rule 39.05 of the Federal Court Rules cannot be relied on retrospectively to extend the life of the Petition, where no 'identifiable order' that is capable of correction has been made within the life of the Petition, that is, on or before 6 October 2016.
(b) Assuming that an order was indeed made, was there an accidental slip or omission?
20) If an 'order' was indeed made on 3 May 2016 (which the respondent does not concede, for the reasons outlined above) the conditions precedent necessary for the invocation of Rule 39.05 of the Federal Court Rules do not arise in the present proceeding.
21) The only possible 'error' in the orders made on 3 May 2016 was the omission of an extension to the life of the Petition pursuant to section 52(5) of the Act. The primary responsibility for making application for such an order rested with the applicant. (Griffiths at [68])
22) The Petition was presented on 6 October 2015 and heard on 3 May 2016. At the time judgment was reserved (on 3 May 2016), slightly longer than 5 months remained until the expiry of the Petition.
23) In Griffiths the Full Court of the Federal Court observed that at the time at which judgment was reserved almost 10 months remained until the petition would lapse and that it could not be inferred that the respondent ought to have applied for an extension of time, and that the failure to do so was an accidental slip or omission. The Full Court of the Federal Court held that with 10 months to run it was most unlikely that anybody would have anticipated that judgment might not be given within the lifetime of the petition, and therefore the failure to take the step of applying for an extension of the life of the Petition at that stage was not an error, slip or omission. (Griffiths at [69])
24) In the present circumstance, there is no reason to infer that Judge Neville expected that his judgment would be reserved for a period that would extend beyond the lapsing of the Petition. It cannot be said that Judge Neville committed any accidental slip or omission.
25) Rule 39.05 of the Federal Court Rules can only be invoked where there was an identifiable 'order in need of correction', (Flint at [35]) rather than the failure to make an order that had not been applied for. It is not possible to characterise the court's failure to make an order that was not applied for as “an accidental slip or omission.” (Griffiths and Flint)
26) Rule 39.05 cannot be invoked where it was unclear whether judicial discretion would have been exercised to make the extension sought had the matter been adverted to, or whether some other course might have been adopted. (Flint at [35], [38]) In Flint the Full Court of the Federal Court held (at [39] emphasis added)
Furthermore, the evidence is not sufficient to support an inference of error or omission by the creditor's lawyer or the federal magistrate. No doubt at some time after the petition had lapsed, most likely during the preparation of the reasons for judgment, the federal magistrate realised that there was a need to extend the petition and that he should have done so earlier. That is not the point. The question is whether or not there was an accidental slip or omission on 29 August 2012 [the date of the last hearing prior to expiry of the petition].
Conclusion
27) On the proper construction of sections 33(1)(c) and 52(5) of the Act, the Court has no power to remedy the lapsing of the Petition in this proceeding. Further, the slip rule contained in rule 39.05 of the Federal Court Rules cannot be invoked as a legal foundation to extend the life of the Petition retrospectively, as there was no judgment or order made on 3 May 2016 which is capable of correction. Even if there was such an order (which is not conceded), there was no error requiring correction due to an accidental slip or omission.
28) The respondent seeks the following orders:
a) The Petition be dismissed.
b) The applicant pay the respondent's costs of the Petition as agreed or assessed.
Consideration & Disposition: Extension of Petition
It is unnecessary to outline factually the time-frame and circumstances that arose between the time of the hearing on 3rd May 2016, and expiration of the creditor’s petition on 5th October 2016, and the inquiry by the Court of the parties in relation to any extension of the petition. Those factual matters are set out in the submissions of the parties. In those circumstances, I need only note the following matters.
In terms, the Applicant rightly points out that there is no “slip rule” provision in this Court’s Rules, at least not as typically set out, for example, in Rule 39.05(h) of the Federal Court Rules. That said, in my view, it is more than arguable that Rule 16.05(3) is sufficiently wide as to provide a basis for a Court amending or correcting an Order, akin to a “slip rule.” Rule 16.05(3) states:
The rule does not affect the power of the Court to vary or terminate the operation of an order by a further order.
The Applicant properly referred to the comments by the Full Court in the recent decision of Ramsay Health Care Australia Pty Ltd v Compton where, at [21], their Honours (Rares, Gleeson and Markovic JJ) said (emphasis added):[62]
The primary judge correctly acted on the basis that the slip rule extends to authorising correction of an omission resulting from inadvertence by a party’s legal representative, as Mason A-CJ, Wilson and Deane JJ held in L. Shaddock and Associates Pty Ltd v Parramatta City Council [No 2] (1982) 151 CLR 590 at 594; and see too at 597.
[62] Ramsay Health Care Australia Pty Ltd v Compton [2016] FCAFC 125. There is no reference to this Full Court decision in the submissions filed on behalf of Mr Wu.
Mr Kay has filed an affidavit, as I have noted, in which he outlined his inadvertence in not instructing his Counsel at the hearing to seek an extension to the petition. There is no evidence opposing Mr Kay’s affidavit. I accept Mr Kay’s evidence, as well as the statement of principle outlined by the Full Court in Ramsay Health Care to which I have referred.
I should also add the following further matter. As at the date of the hearing on 3rd May 2016, I was aware that a fellow Judge in this Registry was scheduled to retire in mid-July. It is well known that the jurisdiction of this Court is extremely wide, ranging from bankruptcy to migration, industrial matters under the Fair Work Act, human rights, and other general federal law areas, as well as the broad range of matters that come under the family law jurisdiction of the Court. It is also well known that the volume of work in this Court is oppressive. The Government has consistently stated that retiring judges of this Court would/will be replaced quickly. Unfortunately, this promise has not been kept. Had I turned my mind to it, the imminent retirement of one of my colleagues in this Registry, and given the history of lack of timely replacement of judges, should have alerted me to the possibility of an even greater increase in the workload of the Court that would have impacted on my ability to attend to all judgments as expeditiously as I would have wished and intended.
In my view, the matters to which I have referred satisfy the requirements for the operation of the “slip rule.”
Having noted these matters, it is unnecessary to consider the other matters set out in the submissions of the parties. Otherwise, I accept the submissions on behalf of Mr Li.
In my view, whether under r.16.05(3) of this Court’s Rules, or by operation of s 43(2)(b) of the Federal Circuit Court of Australia Act 1999 (Cth), and r 1.05(2) of the Federal Circuit Court Rules 2001 (Cth), r 39.05 of the Federal Court Rules applies to judgments and orders that have been made and entered by the Federal Circuit Court, there should be an amendment to the earlier Orders of this Court in May of this year; they should be varied in the following terms:
The Order of 3rd May 2016, adjourning the matter be varied, pursuant to r.39.05(h) of the Federal Court Rules 2011 (Cth), by the addition of an Order that the period at the expiration of which the petition will lapse is a period of twelve months commencing on 3rd May 2016.
I certify that the preceding one hundred and thirty-six (136) paragraphs are a true copy of the reasons for judgment of Judge Neville
Date: 4th November 2016
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