Zhang v Yan

Case [2021] FCA 905

FEDERAL COURT OF AUSTRALIA

Zhang v Yan [2021] FCA 905

Appeal from: Yan v Zhang [2019] FCCA 2990
File number(s): VID 1244 of 2019
Judgment of: O'BRYAN J
Date of judgment: 5 August 2021
Catchwords:

BANKRUPTCY AND INSOLVENCY – appeal against a decision of the Federal Circuit Court of Australia dismissing an application for review of a sequestration order made by a registrar of the Federal Circuit Court – where sequestration order based on a judgment debt obtained in the Supreme Court of Victoria – where primary judge determined that it was appropriate to “go behind” the judgment debt to assess whether the debt was owing – circumstances in which a bankruptcy court is permitted to “go behind” a judgment debt – respondents’ notice of contention allowed in part – appeal dismissed

CONTRACTS – whether deed of settlement on which judgment debt was based is unenforceable as contrary to public policy – where complaint of criminal conduct had been made and accepted in China – where Australian legal proceedings had been settled on terms that included a promise to withdraw the criminal complaint made in China – whether promise was contrary to public policy in Australia – where appellant failed to adduce evidence before the primary judge of Chinese law, including whether promise was illegal or unenforceable in China – whether question of enforceability should be determined in circumstances where relevant obligations under the deed had been performed and no application had been made to enforce those promises – whether unenforceable promises in the deed are severable – whether deed was entered into under duress
Legislation:

Bankruptcy Act 1966 (Cth) s 52

Evidence Act 1995 (Cth) s 136

Federal Court of Australia Act 1976 (Cth) s 27
Cases cited:

A v Hayden(No 2) (1984) 156 CLR 532

Addison v Brown [1954] All ER 213

A-G (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86

A-G (UK) v Heinemann Publishers Australia Pty Ltd [No 2] (1988) 165 CLR 30

Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313

Barton v Armstrong [1976] AC 104

Birstar Pty Ltd v The Proprietors “Ocean Breeze” Building Units Plan No 4745 [1997] 1 Qd R 117

BP Exploration Co (Libya) Ltd v Hunt [1980] 1 NSWLR 496

Brooksv Burns Philp Trustee Co Ltd (1969) 121 CLR 432

Carney v Herbert [1985] AC 301

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337

Commonwealth Bank of Australia v Jeans [2005] FCA 978

Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40

Damberg v Damberg (2001) 52 NSWLR 492

Doggett v Commonwealth Bank of Australia [2019] FCAFC 19

Electric Acceptance Pty Ltd v Doug Thorley Caravans (Aust) Pty Ltd [1981] VR 799

Electric Acceptance Pty Ltd v Doug Thorley Caravans (Aust) Pty Ltd [1981] VR 799

Evanturel v Evanturel (1874) LR 6 PC 1

Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215

Florance v Andrew (1985) 58 ALR 377

Foster v Driscoll [1929]…

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AGLC
Zhang v Yan [2021] FCA 905
Case
[2021] FCA 905
Decision Date

CaseChat Overview and Summary

Zhang v Yan involved an appeal against a decision of the Federal Circuit Court of Australia dismissing an application for review of a sequestration order made by a registrar of the Federal Circuit Court. The sequestration order was based on a judgment debt obtained in the Supreme Court of Victoria. The appeal focused on whether the bankruptcy court was permitted to "go behind" the judgment debt to assess whether the debt was owing. The primary judge had exercised her discretion to "go behind" the judgment in the 2018 Supreme Court proceeding in order to be satisfied that the debt relied upon by the respondents was truly owing. The primary judge concluded that clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution, but that clauses 1.10 to 1.12 were severable and clause 1.8 remained enforceable. The appellant argued that the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were severable and in failing to find that the Deed is, in its entirety, or alternatively as to clause 1.8, void and unenforceable for illegality and as being contrary to public policy. The respondents contended that the primary judge erred in exercising the discretion to go behind the judgment because there were not sufficient or substantial reasons, or exceptional circumstances, to enliven the discretion and the issues now raised by the appellant to go behind the judgment were not raised in good faith. The court found that the primary judge did not err in exercising her discretion to "go behind" the judgment. The court held that the primary judge was not bound by the conduct of the parties at trial and was concerned with protecting the interests of third parties who were not participants in the litigation which led to the judgment in question. The appeal was dismissed, and the parties were to file and serve written submissions in relation to the costs of the appeal, limited to 3 pages, to be determined on the papers.

Orders

Orders of the court

THE COURT ORDERS THAT:

1. The respondents’ notice of contention be allowed in part.

2. The appeal be dismissed.

3. Within 14 days, the parties are to file and serve written submissions in relation to the costs of the appeal, limited to 3 pages, to be determined on the papers.

Background

Background to the litigation

At the hearing of the appeal, I allowed the affidavit to be read on the issue of the orders to be made if the appeal were allowed and subject to the s 136 ruling sought by the respondents. I informed the parties that, if the appeal were upheld, they would be afforded a further opportunity to address the Court on the orders to be made and, if appropriate, adduce further evidence in relation to the orders.Factual Background The following background facts were not in dispute on the appeal. Certain of the facts were the subject of findings in the 2018 SC proceeding (which will be designated as SC) and others were the subject of findings in the primary judgment. The 2015 SC proceeding The first respondent, Mr Yan, is the director and legal representative of the second respondent, Yingyue (SC [7]). The appellant, Mr Zhang, is the director of the companies Ausen International Pty Ltd (Ausen) and Shanghai Jie'En Furniture Co Ltd (SC [8]). In the 2015 SC proceeding, Mr Yan and Yingyue (as plaintiffs) alleged that Mr Zhang (as defendant) was personally liable to pay them approximately Chinese RMB25 million pursuant to two personal guarantees executed in October 2012 and May 2013 respectively, and a number of oral loan agreements made between December 2012 and March 2013 (SC [14]). Mr Zhang denied the allegations. In that proceeding, Mr Yan and Yingyue also applied for, and obtained, freezing orders in the course of the proceeding against the assets of Mr Zhang, Ausen and Mr Zhang's wife, Ms Xiao Qun Huang (SC [15]). On 3 May 2017, the parties attended a court ordered mediation. At the mediation, the parties reached an agreement to compromise the 2015 SC proceeding which was recorded in the Deed. In the hearing before the primary judge, evidence was adduced as to the sequence of offers of settlement that were made at the mediation to determine whether clauses 1.10 to 1.12 of the Deed were first proffered by the respondents or were first sought by the applicant. As discussed below, I do not consider that that evidence is legally relevant to the proper construction of the Deed, including the question of severance, but the evidence is admissible on the issue of duress.Deed of Settlement The Deed was entered into on 3 May 2017 between Mr Yan and Yingyue (as plaintiffs in the 2015 SC proceeding), Mr Zhang (as defendant in the 2015 SC proceeding) and Ausen and Ms Huang (who were subject to freezing orders made in the 2015 SC proceeding). The allegations made in the 2015 SC proceeding are defined as the “Claims” and Mr Zhang’s denial of the Claims is defined as the “Dispute”. The recitals to the Deed stated that “[i]n order to avoid the costs and expenses associated with litigation, the parties have agreed to settle the disputes between them without any admission of liability on and subject to the terms and conditions of this deed of settlement”. Section 1 of the Deed is titled “Settlement obligations” and consists of twelve clauses as follows:(a)Clause 1.1 provided that:The parties undertake the obligations set out in clause 1 of this deed in full and final settlement of the Dispute.(b)Clause 1.2 provided that:Zhang and Ausen hereby irrevocably direct and authorise the immediate payment of the single sum of AU$500,000 in cleared funds, out of the funds held in the trust account of Gadens, Zhang and Ausen's solicitors, pursuant to the Freezing Orders, unconditionally to Yan and Yingyue.(c)Clauses 1.3 to 1.7 required Mr Zhang to sell a residential property located in Melbourne and to pay the balance of the sale proceeds after deducting selling costs, the mortgage loan and all outgoings on the property.(d)Clause 1.8 provided that:Zhang agrees to pay Yan and Yingyue the sum of AU$1 million (Balance) in cleared funds transferred to the trust account of SBA Law, the solicitors for Yan and Yingyue, by 3 May 2018.(e)Clause 1.9 required the parties to submit consent orders in a form attached to the Deed. Amongst other things, the consent orders provided for the discharge of the extant freezing orders against Ms Huang and Ausen, the discharge of all previous unexecuted costs orders and the dismissal of the proceeding without any adjudication on the merits.(f)Clauses 1.10 to 1.12 are set out earlier and concern “criminal complaints” made by Mr Yan and Yingyue against Mr Zhang (and Yang Maoqiang) in China.

Evidence

Evidence Before The Court

As a result of those findings, the appeal must be dismissed.New evidence on the appeal At the hearing of the appeal, the appellant sought to read two affidavits. The first was an affidavit of Associate Professor Andrew Godwin sworn 10 September 2020. Mr Goodwin is an Associate Professor in the Melbourne Law School at The University of Melbourne. His positions are the Director of the Transactional Law Group, Director of Studies in Banking and Finance Law and Associate Director (Asian Commercial Law) in the Asian Law Centre. He holds honours degrees in Arts and Law, a master’s degree in Law and a Doctor of Philosophy degree from the University of Melbourne. He has been involved in legal practice in Australia and other countries for over 20 years, 10 of which were spent in Shanghai in the Peoples’ Republic of China, where he was a partner and chief representative of the international law firm Linklaters. The affidavit exhibited a report from Mr Goodwin expressing his opinion on the following questions:(a)Does any of the matters within clauses 1.10 to 1.12 of the deed of settlement dated 3 May 2017 provide for something that might constitute the commission of a criminal offence in the People’s Republic of China?(b)Does any of the matters within clauses 1.10 to 1.12 of the deed of settlement dated 3 May 2017 provide for something that might be considered contrary to public policy in People’s Republic of China and would it be void or unenforceable as a result?(c)In Australia, a contract to stifle a public criminal prosecution is void and unenforceable as being contrary to public policy: Kerridge v Simmonds (1906) 4 CLR 253; Public Service Employees Credit Union v Campion (1984) 75 FLR 131. Is there a similar prohibition on stifling a criminal prosecution in the People’s Republic of China? Senior Counsel for the appellant submitted that the evidence was adduced to counter a submission by the respondents on this appeal that there was no evidence before the primary judge concerning Chinese law. The appellant submitted that no such submission had been advanced before the primary judge and, if it had been advanced, the appellant would have adduced evidence. As the matter was raised for the first time on appeal, the appellant sought to meet the point by the expert evidence. The evidence was also said to correct a misquotation of certain provisions of the Chinese Criminal Code by the primary judge. Counsel for the respondents objected to the affidavit on three bases. First, it had been filed and served only two working days before the hearing (which had been listed for some time), which gave the respondents an inadequate opportunity to consider and respond to the evidence. Second, no application had been made under s 27 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) for the Court to receive the evidence on the appeal, and the appellant had failed to demonstrate that reasonable diligence had been exercised to procure the evidence for the trial and that, if the evidence had been available at the trial and had been adduced, a different result would have been produced: Orr v Holmes (1948) 76 CLR 632 at 635, 640; Florance v Andrew (1985) 58 ALR 377 (Florance); Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313. Third, the evidence was inadmissible to prove the content of Chinese criminal law because there was no evidence that Assoc Prof Goodwin was a qualified Chinese lawyer or had practised or was experienced in Chinese criminal law.

Decision

Reasons for decision

On 21 October 2019, the primary judge delivered judgment and made orders dismissing the application for review of the sequestration order made on 8 August 201: Yan v Zhang [2019] FCCA 2990 (which will be designated as the primary judgment or PJ). In making her decision, the primary judge exercised her discretion to “go behind” the judgment in the 2018 SC proceeding in order to be satisfied that the debt relied upon by the respondents (as petitioning creditors) was truly owing (PJ [10] and [36]-[37]). Her Honour concluded that:(a)clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution (PJ [40] and [51]);(b)however, clauses 1.10 to 1.12 were severable and clause 1.8 remained enforceable (PJ [51]);(c)the Deed was not unenforceable for reasons of duress (PJ [41]);(d)accordingly, the appellant owed the respondents the amount of the judgment debt (PJ [64]); and(e)the appellant was not solvent and there was no other reason for which he should not be made bankrupt (PJ [64]). The appellant appeals from the primary judge’s orders on two principal grounds:(a)first, the appellant contends that her Honour erred in concluding that clauses 1.10 to 1.12 of the Deed were severable and in failing to find that the Deed is, in its entirety, or alternatively as to clause 1.8, void and unenforceable for illegality and as being contrary to public policy;(b)second, the appellant contends that her Honour erred in failing to find that clause 1.8 of the Deed is unenforceable on the grounds of duress. The respondents filed a notice of contention by which they contend that the primary judgment should be affirmed on the following grounds:(a)first, the primary judge erred in exercising the discretion to go behind the judgment because there were not sufficient or substantial reasons, or exceptional circumstances, to enliven the discretion and the issues now raised by the appellant to go behind the judgment were not raised in good faith;(b)second, the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution because:(i)those clauses merely compelled the respondents to submit a request to Chinese authorities to seek to withdraw a criminal complaint and to take only reasonable steps within their power to support the termination of those criminal prosecutions;(ii)there was no evidence as to the relevant criminal procedure in China or what steps the Chinese authorities had taken, or were likely to take, in response to any request submitted by the respondents;(iii)the evidence of the appellant was to the effect that the criminal complaint against him had not been withdrawn and therefore no prosecution had, in fact, been stifled;(iv)those clauses did not operate to stifle any relevant public authority in the prosecution of a criminal complaint such as to warrant rendering those clauses unenforceable in accordance with principle; and(c)third, the primary judge ought to have found that the question whether clauses 1.10 to 1.12 were enforceable, and/or whether those clauses could be severed, were hypothetical questions and therefore not justiciable in circumstances where the respondents' obligations pursuant to 1.10 had been performed and were wholly executed, so that no question of the operation of clause 1.11 arose.

Ratio Decidendi

Legal Principle Established

The appellant argued that the facts and circumstances in this case were analogous to those in Ramsay: both parties were represented by counsel in the 2018 SC proceeding; the issue sought to be raised by the appellant in the bankruptcy proceeding could have been agitated and determined in the 2018 SC proceeding, but it was not and no appeal was taken from that decision. Conversely, the facts in Doggett were not analogous: the debtors conceded in that case that they were seeking to agitate in the bankruptcy proceeding a duress claim that had been raised before the court that gave judgment against them on the same evidence (at [47] - [49]). Similarly, in Commonwealth Bank of Australia v Jeans [2005] FCA 978, Hely J concluded that the issue raised by the debtor was not raised in good faith because the matters on which the debtor sought to rely upon as enlivening the power of the Bankruptcy Court were the same matters upon which the debtor had unsuccessfully relied before the court that gave judgment in support of an application to withdraw admissions (at [19]).Consideration of the first issue In the 2018 SC proceeding, the appellant defended the summons for judgment upon breach of clause 1.8 on the basis that the respondents failed to comply with their obligation in clause 1.10. In so doing, the appellant relied upon clauses 1.10 to 1.12 of the Deed and the appellant’s defence was based upon the validity and enforceability of those clauses. Indeed, that position was expressly affirmed by counsel for the appellant at the hearing before Justice Kennedy. The appellant’s defence based on a breach of clause 1.10 by the respondents failed. In the subsequent bankruptcy proceeding before the primary judge, the appellant advanced a new defence, that clauses 1.10 to 1.12 were void or unenforceable as being contrary to public policy thereby rendering the Deed, or at least clause 1.8, unenforceable. That defence was inconsistent with the defence raised in the 2018 SC proceeding, which had been based on the enforceability of those clauses. Further, in the 2018 SC proceeding, the appellant made a positive election not to raise that defence after enquiry by Justice Kennedy. The question raised in this appeal is whether, in the circumstances so presented, the primary judge erred in the exercise of her discretion to allow the appellant to go behind the judgment resulting from the 2018 SC proceeding. The High Court majority (Kiefel CJ, Keane and Nettle JJ) in Ramsay affirmed the following principles:(a)First, by reason of s 52 of the Act, a Bankruptcy Court must be satisfied with the proof of “the fact that the debt … on which the petitioning creditor relies is … still owing”, if the court’s power to make a sequestration order is to be enlivened (at [39]).(b)Second, a Bankruptcy Court is not obligated to treat a judgment as satisfactory proof of the petitioning creditor’s debt. A Bankruptcy Court exercising jurisdiction under s 52 of the Act may, in some circumstances, “go behind” a judgment in order to be satisfied that the debt relied upon by the petitioning creditor is truly owing. The Bankruptcy Court may take this course in order to satisfy itself that there is an extant petitioning creditor’s debt as a necessary foundation for the making of a sequestration order (at [1]).(c)Third, the circumstances in which a Bankruptcy Court may go behind a judgment are not limited to cases involving default judgments or cases involving fraud, collusion or miscarriage of justice (at [39], [43]). A Bankruptcy Court may go behind a judgment, notwithstanding that the judgment was obtained after a contested hearing (at [44]).(d)Fourth, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order does not involve an attempt to impeach the judgment; nor is a Bankruptcy Court concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned only with the question whether the debt on which the application for a sequestration order is based is truly a basis for the making of the order (at [54]).(e)Fifth, the scrutiny required by s 52 of the Act as to whether there is, in truth and reality, a debt owing to the petitioning creditor serves to protect the interests of third parties, particularly other creditors of the debtor; their interest in being paid their debts in full should not be prejudiced by the making of a sequestration order in reliance on a judgment debt which does not reflect the true indebtedness of the debtor to the petitioning creditor (at [55]).(f)Sixth, the principle that a party is bound by the conduct of their case at trial is not a sufficient reason for a Bankruptcy Court not to look behind a judgment. That is because a Bankruptcy Court is concerned, not to discipline litigants or to protect finality in the administration of justice as between parties to litigation, but to protect the interests of third parties who were not participants in the litigation which led to the judgment in question (at [67]).