Chenyi Pty Ltd v Vrkic, in the matter of Chen

NESKOVCIN J: 1 The respondent, Danny Vrkic in his capacity as Trustee of the Bankrupt Estate of Jian Chen, sought orders: (a) pursuant to section 90-15(1) of the Insolvency Practice Schedule (Bankruptcy), being Schedule 2 to the Bankruptcy Act 1966 (Cth) and, alternatively, s 30(1) of the Bankruptcy Act, that the respondent is justified, and would otherwise be acting reasonably, in entering into and giving effect to the settlement set out in Annexure A to the interlocutory application; (b) pursuant to ss 37AF and 37AG of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, that Confidential Exhibit DTV-1 to the affidavit of Danny Tony Vrkic sworn on 7 February 2025 is not to be published and/or accessed, except pursuant to an order of the Court, until 11 February 2030 or such later date as ordered by the Court. (c) that the Trustee's costs of and incidental to the interlocutory application filed on 7 February 2025 be costs in the Bankrupt Estate of Jian Chen 2 A central piece of background to the respondent's application was that the trial of the proceeding was scheduled to commence on 11 February 2025. The respondent stated that it was only upon the exchange of outlines of submissions in December 2024 and January 2025 that the parties' cases were crystallised, and it was at that point that he was in a better position to assess the potential risks in the proceeding. The respondent stated that, having obtained advice from counsel and having considered a number of other factors mentioned below, he considered the terms of settlement reached with the applicant to be in the best interests of creditors. 3 The respondent relied on two affidavits which he had sworn on 13 April 2023 and 7 February 2025 and an affidavit of Yue Liu sworn on 10 February 2025. Exhibited to the respondent's second affidavit as Confidential Exhibit DTV-1, was a memorandum from the respondent's counsel setting out counsel's opinion on the respondent's prospects of success in the proceeding. As part of the application, the respondent sought an order pursuant to ss 37AF and 37AG of the Federal Court Act that Confidential Exhibit DTV-1 not be published or accessed, except pursuant to an order of the Court, for a period of five years or longer. 4 Consistently with the terms of settlement, the applicant did not oppose the application. The respondent notified creditors of his intention to apply for the orders set out above and no creditors appeared to oppose the application. 5 For the reasons set out below, I made orders substantially in the form sought by the respondent.

background 6 The respondent adopted the background to the proceeding set out in the outline of submissions filed by the applicant for the purpose of the trial. While the respondent provided some further detail in his affidavits, the background as set out below is uncontentious. 7 The applicant held 20 of the 100 issued shares in Chengcheng (Aust) Enterprise Melbourne Pty Ltd, which operated a restaurant from premises in Melbourne. 8 On or about 17 August 2018, the applicant, Chengcheng and the Bankrupt executed a "Share Transfer Agreement" for the sale and transfer of the applicant's shares in Chengcheng to Suncity Food and Beverage Group Pty Ltd (the Purchaser) for $932,469.94. The Share Transfer Agreement provided, amongst other things, that: (a) the applicant had entered into an agreement with the Purchaser for the sale of 20 shares in Chengcheng; (b) the Bankrupt had agreed to receive payment of the sum of $932,469.94 (Sum) on behalf of the applicant; (c) the Purchaser will pay the Sum to the Bankrupt; (d) upon receipt, the Bankrupt will hold the Sum on trust for the benefit of the applicant absolutely; (e) the Bankrupt will transfer the Sum to the applicant on 30 September 2018; (f) the Bankrupt grants the applicant "an equitable charge over its respective interest in any real and personal property both present and future and wheresoever situated with the amount of the Sum on the completion date of the Transaction", with "Transaction" defined as the agreement of the applicant to sell 20 fully paid ordinary shares in Chengcheng to the Purchaser for the Sum. 9 On 2 September 2018, an amount of $1,020,000 was transferred to the Bankrupt's Crown Casino account by a person associated with the Purchaser, being the amount and method for payment of the "Deposit" for the sale of 60 shares in Chengcheng under a share sale agreement to which the applicant was not a party. The fact of this payment was ascertained by the applicant upon obtaining access to documents via subpoenas issued in the proceeding. 10 The Bankrupt failed to make payment to the applicant pursuant to the Share Transfer Agreement. In response to demands from the applicant, the Bankrupt stated that he needed more time to pay, which the applicant regarded as an acknowledgement of the debt. 11 On 18 August 2020, the Bankrupt voluntarily declared bankruptcy by filing a debtor's petition. 12 On 10 August 2022, the applicant submitted a proof of debt in the bankruptcy. The amount claimed in the proof of debt was $1,292,684.36, comprising a "debt payable pursuant to [the Share Transfer Agreement]" in the sum of $932,469.94, plus interest in the sum of $360,214.42 (then calculated to 10 August 2022). The debt was characterised as wholly secured. The applicant later accepted that its claim for interest was limited to the period up until the date of bankruptcy (18 August 2020) and was unsecured. 13 On 30 January 2023, the respondent notified the applicant that its proof of debt had been rejected in full. 14 Chengcheng had entered into voluntary administration in March 2022. By means of a settlement with the administrators of Chengcheng, the applicant recovered $40,000 referable to its debt under the Share Trading Agreement and subsequently recovered an additional $1,000 from another person. 15 On 20 February 2023, the applicant commenced this proceeding, seeking orders to reverse or vary the respondent's decision to reject the applicant's proof of debt and an order that the applicant be admitted as a secured creditor of the Bankrupt Estate in the sum of $932,469,94 and as an unsecured creditor of the Bankrupt Estate in the sum of $134,858.43. 16 The respondent opposed the orders sought by the applicant and raised a number of arguments in opposition to the applicant's claims, including that the Share Transfer Agreement was voidable pursuant to ss 120 and/or 121 of the Bankruptcy Act. 17 On 4 February 2025, after the parties had filed their outlines of submissions for trial, the parties reached an agreement to resolve the applicant's claims on the following terms of settlement: (a) the proceeding be dismissed with no orders as to costs; (b) the parties fully and finally release each other from all claims arising from or incidental to the subject matter of the proceeding; (c) the security for costs paid by the applicant is released to the applicant; (d) the respondent admit the applicant as a secured creditor of the Bankrupt Estate of Jian Chen in the sum of $700,000; (e) the respondent admit the applicant as an unsecured creditor of the Bankrupt Estate in the sum of $367,328.37 comprised of: (i) $232,469.94 (being $932,469.94 less $700,000); (ii) plus $134,858.43; (f) the above offer is conditional upon the respondent obtaining orders from the Court pursuant to s 90-15 of the Insolvency Practice Schedule (Bankruptcy) to the effect that the respondent is justified in entering into the above settlement with the applicant; and (g) the Applicant agrees not to oppose the application referred to in [f] above. 18 According to the respondent, as at 7 February 2025 the Bankrupt Estate had net funds (after remuneration and expenses) of $1,043,503.48. Further, the Bankrupt Estate had claims of creditors exceeding $40,000,000, including the Applicant's claims to be a secured creditor in the sum of $932,469.94 and an unsecured creditor for the sum of $134,858.43.

legal principles 19 The Court has power under s 90-15(1) of the Insolvency Practice Schedule (Bankruptcy) to make such orders as it thinks fit in relation to the administration of a regulated debtor's estate. The Court may exercise this power on its own initiative, or on an application under s 90-20: s 90-15(2). 20 Section 30(1) of the Bankruptcy Act also confers wide powers on the Court and provides: 30 General powers of Courts in bankruptcy (1) The Court: (a) has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX,X or XI coming within the cognizance of the Court; and (b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter. 21 Similar principles that apply to applications under s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth), apply in determining applications under s 90-15 of the Insolvency Practice Schedule (Bankruptcy): Mansfield v Thousand Angeles Island Pty Ltd (in liq), in the manner of Thousand Angeles Island Pty Ltd (in liq) (No 2) [2021] FCA 283 at [36] (Farrell J). 22 The relevant principles are set out in Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654 at [19]-[21] (Yates J) and Official Trustee in Bankruptcy v Kent (No 2) [2023] FCA 1396 at [18]-[23] (Rares J) and may be stated briefly: (a) The power under s 90-15 of the Insolvency Practice Schedule (Bankruptcy) extends to the giving of judicial advice and direction: Goyal at [19]. (b) Similar considerations to those that apply where a court gives judicial advice to a trustee of a trust estate are relevant to an application by a trustee of a regulated debtor's estate under s 90-15(1) of the Insolvency Practice Schedule (Bankruptcy) for an order in relation to the administration of the debtor's estate: Kent at [19]. (c) The power under s 90-15 is not appropriately exercised where the court is merely being asked to sanction a business or commercial decision in respect of which no particular legal issue is raised or in respect of which there is no potential to bring into question the propriety or reasonableness of the decision: Goyal at [19]. (d) As explained by Goldberg J in In the matter of Ansett Australia and Korda (No 3) [2002] FCA 90; 115 FCR 409 at [65]: … the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment.

consideration 23 The respondent, in his capacity as Trustee of the Bankrupt Estate, has applied to the Court for an order under s 90-15 of the Insolvency Practice Schedule (Bankruptcy) that he is justified in entering in to and giving effect to the terms of settlement that will resolve the applicant's claim in the proceeding and result in the respondent admitting the applicant as a secured and unsecured creditor of the Bankrupt Estate. The evidence from the respondent was that it was not until the parties had exchanged outlines of submissions in December 2024 and February 2025 that the parties' cases were finally crystalised. At that point and having obtained advice from counsel as to the respondent's prospects of success, the respondent says that he was in a better position to assess the potential risks in the proceeding and formed the view that the settlement was in the best interests of creditors. 24 The respondent stated that he had regard to the following factors in agreeing to the terms of settlement: (a) The proceeding has been ongoing since February 2023 and has been hard fought. (b) Whilst the respondent had intended initially to rely upon evidence given by the Bankrupt, in January 2025, the Bankrupt indicated that he was reluctant to attend court and the respondent was forced to seek a subpoena to procure his attendance. As counsel for the respondent submitted, the Bankrupt's evidence was relevant to a number of matters in contention and the respondent would have been forced to conduct the trial without knowing what evidence the Bankrupt might have given on a number of key issues. This caused the respondent to be concerned that the Bankrupt's position would impact upon the respondent's prospects of success in the proceeding. (c) As at 7 February 2025, the Bankrupt Estate had net funds (after remuneration and expenses) of $1,043,503.48. The applicant claimed to be a secured creditor in the sum of $932,469.94 and an unsecured creditor for a sum of $134,858.43. If the applicant was successful in establishing its claim and was admitted as a secured creditor, there would be no funds available for distribution to unsecured creditors having regard to the costs that would have been incurred in defending the trial. (d) Even if the respondent was successful in defending the applicant's claim at trial, it would be open to the applicant to appeal, which would add cost and delay to the administration of the Bankrupt Estate. (e) The terms of settlement will enable the Bankrupt Estate to avoid the risks and costs of the trial, which was set down for five days, although the respondent considered it would likely take three to four days. 25 The respondent stated that he considered that the terms of settlement were in the best interests of creditors because they provide the certainty of a return to creditors, whilst avoiding the costs and risk of a trial. The respondent said, however, that entering into the terms of settlement required him to form a judgement, based on the information available to him, as to the likely outcome of the litigation and he was concerned that one or more creditors may object to the terms of settlement and he might be exposed to criticism or claims from creditors who hold a different view as to the merits of the settlement. 26 The Court's powers under s 90-15 are intended to facilitate the performance of the Trustee's functions. To justify the exercise of the Court's power to make an order that provides protection of the kind sought here, the Trustee must establish a basis which is more than a desire for reassurance about the Trustee's decision. Having regard to the materials before the Court, I am satisfied that the Trustee has established a basis for the exercise of the Court's powers under s 90-15, namely the Trustee's concern regarding the issue of or challenge to the propriety or reasonableness of the exercise of the Trustee's power to compromise litigation and resolve the applicant's claims in the proceeding. I am therefore prepared to make an order under s 90-15 that the Trustee is justified in entering into and giving effect to the terms of settlement reached between the applicant and the Trustee. 27 I am also satisfied that it is appropriate to make an order under s 37AF of the Federal Court Act, on the ground that the order is necessary to prevent prejudice to the proper administration of justice under s 37AG(1)(a), for the suppression and non-publication of Confidential Exhibit DTV-1. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Neskovcin.