Li v Wu

Federal Court of Australia|2020-06-09|Before: Griffiths J

The estate of Tao Wu be sequestrated under s 43(1) of 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). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The applicant (Mr Li) filed a creditor's petition on 7 November 2019. He seeks a sequestration order under s 43 of the Bankruptcy Act 1966 (Cth) against the estate of the respondent (Mr Wu). The judgment debt underlying the bankruptcy notice (BN226119) arose from ongoing litigation between the parties, which dates back to 2012. Mr Wu opposes the petition on the basis of an asserted offsetting claim under s 52(2) of the Bankruptcy Act. 2 The lengthy history of litigation between the parties has included previous proceedings in this Court, in the Full Court of this Court, the Federal Circuit Court of Australia and the Supreme Court of the Australian Capital Territory (ACTSC), including the Court of Appeal in that jurisdiction. Some of that litigation will be described later in these reasons.

Mr Li's submissions summarised 29 Mr Li's submissions in respect of the creditor's petition may be summarised as follows. The petition is brought on the basis of an act of bankruptcy from Mr Wu's failure to comply with the requirements of the bankruptcy notice BN226119. Mr Li accepted that he needed to persuade the Court of the following matters as set out in s 52(1) of the Bankruptcy Act: (a) the matters stated in the petition; (b) the service of the petition; and (c) the petition remains owing. 30 Mr Li also accepted that the Court may consider the matters in s 52(2) of the Bankruptcy Act in considering whether or not to dismiss the petition. 31 Mr Li summarised the background to the matter. He said that in 2011 he commenced proceedings against Mr Wu in this Court in circumstances which are described by Jagot J in Li v Wu [2013] FCA 1067 at [1]-[2] (see also her Honour's earlier reasons for judgment in Li v Wu [2012] FCA 164 in which Mr Wu failed in his application to restrain Mr Li's solicitor from acting for him). In brief, there were four groups of claims in substantive proceedings before Jagot J. The first was a claim under the indemnity provisions of two shareholder agreements entered into in 2006. The second was a claim of misleading and deceptive conduct under the ACT's fair trading legislation by which Mr Wu is alleged to have induced Mr Li to enter into another agreement in February 2008. The third was a claim of alleged breaches of contract, including express and implied terms, of an agreement entered into in March 2005. The fourth was a claim of equitable compensation for losses Mr Li was said to have suffered by reason of Mr Wu's breaches of fiduciary duties. The proceedings were complex, involved various contested loan arrangements between the parties and included various companies within the Golden Constructions group. 32 Justice Jagot made the following findings in respect of Mr Li's claim of misleading and deceptive conduct at [51] and [52] of her Honour's reasons for judgment in Li v Wu [2013] FCA 1067 published on 22 October 2013: 51. Second, and in contrast to Mr Li, I found Mr Wu a most unimpressive witness. He was frequently evasive. He routinely appeared to change his evidence when it suited him including denying he had said things in the witness box and using allegedly flawed interpretation as his excuse. I formed the strong impression that he understood English reasonably well and used the interpreter to give him more time to formulate his answers and to shield himself from direct cross-examination. The fact is he had acted as Mr Li's interpreter on many occasions during their dealings. Mr Wu has lived in Australia since 1990. He obtained a Masters Degree in International Management from the Australian National University in 2004. The course was conducted and examined in English and Mandarin. I accept that the conclusions about Mr Wu's lack of credit as a witness should not be drawn lightly. But the unfavourable impression I formed of Mr Wu given both the content of and manner in which he gave evidence was so strong that these matters must be said. The examples of the lack of credibility of his evidence are so numerous that selecting examples is not easy. Nevertheless, I consider it clear that Mr Wu was in the business of referring prospective Chinese immigrants to Australia to migration agents for a fee from about 2000 onwards. His denials were unconvincing in the face of the uncontested evidence of Ian See and indeed Mr Wu's own evidence, let alone that of Mr Li. I consider it clear that Mr Wu did perceive Mr Li, a wealthy Chinese businessman who wanted to migrate to Australia with his family, a good prospect not only for Mr Wu's migration business but also for the future advancement of Mr Wu's business ambitions in Australia. I consider it clear that Mr Wu's insistence that Mr Li knew from the outset about the companies Mr Wu had established, Golden Crop Australia Pty Ltd, GII, and Golden Constructions Pty Ltd, unconvincing. Mr Wu may not have deliberately concealed the existence of those companies from Mr Li in a fraudulent manner but the evidence indicates that he did not take any step to ensure that Mr Li was aware of those companies or the dealings of those companies with GEI which Mr Wu arranged. 52. I do not accept the submission that Mr Wu was having difficulties with the interpretation of questions to him and his answers. It was clear from the course of his evidence as a whole that, when it suited him, he understood English and when it did not suit him he relied on the interpretation and alleged misinterpretations. This is not apparent from the transcript which records only the questions and answers in English. But it was apparent from the hearing. Mr Wu, when he wanted to make a point, would speak in English. Sometimes he would not wait for the translation of the question into Mandarin. On almost every occasion when I gave a direct instruction to Mr Wu he would respond in English before the instruction had been translated. Moreover, none of the other Mandarin-speaking witnesses seemed to have any problem with the interpretation and it did not cause them to obfuscate, retract evidence, deny what documents disclosed to be true until the documents were put to him, and make self-justifying speeches when it suited. When there was a problem with an interpreter during one morning of Mr Wu's evidence the problem was quickly picked up and the interpreter replaced. 33 On 6 November 2013, judgment for Mr Li was entered in the proceedings before Jagot J in the sum of $976,866.80 plus interest (see Li v Wu [2013] FCA 1265 at [2]). Mr Wu appealed Jagot J's judgment. On 17 August 2015 the Full Court dismissed the appeal and varied her Honour's orders to provide judgment for Mr Li in the total sum of $1,076,767.00 (Wu v Li [2015] FCAFC 109 at [94]). 34 On 6 October 2015 Mr Li presented a creditor's petition against Mr Wu based on his failure to meet that judgment. Three days later, on 9 October 2015, Mr Wu brought proceedings in the ACTSC against Mr Li and his wife. Mr Wu claimed in those proceedings that there was a debt arising out of a construction contract assigned to Mr Wu on 13 August 2014, which was shortly after the last hearing date of the appeal to the Full Court from Jagot J's decision. Mr Wu claimed that building work had been conducted by Golden Constructions on Mr Li's residence in the Canberra suburb of O'Malley. On 30 October 2015, Mr Wu filed a notice of grounds of opposition to the creditor's petition claiming that the ACTSC proceedings were an offsetting claim, such that there was "other sufficient cause" for a sequestration order not to be made. 35 On 4 November 2016, in the Federal Circuit Court Judge Neville delivered reasons for judgment in Li v Wu [2016] FCCA 2836 in which sequestration orders were made. Judge Neville found that: (a) Mr Wu had confirmed his inability to pay the sizable judgment debt; (b) Mr Wu had not satisfactorily explained the delay between taking the assignment in August 2014 and bringing the proceedings in the ACTSC in October 2015; (c) the fact that Mr Li and his wife had not consented to the assignment cast doubt about the prospects of Mr Wu's claims in the ACTSC; and (d) Mr Wu had failed to show "other sufficient cause" not to make a sequestration order. 36 In circumstances where the creditor's petition had expired prior to Judge Neville delivering his decision on 4 November 2016, Judge Neville sought to overcome this by relying on the slip rule. 37 An appeal to the Federal Court against Judge Neville decision was upheld. In Wu v Li [2017] FCA 500, it was held that the slip rule was not available. Mr Li emphasised, however, that the Court noted at [64] that there was a "lack of any apparent merit in the bankrupt's opposition to the creditor's petition". 38 On 17 August 2018, McWilliam AsJ made interlocutory orders in the ACTSC proceeding to allow Mr Wu to bring derivative proceedings in the name of Golden Constructions against Mr Li and Ms Chen. This decision was appealed to the Court of Appeal of the ACT. On 16 May 2019, the Court of Appeal dismissed the appeal and declined to overturn McWilliam AsJ's decision (see Li v Wu [2019] ACTCA 14). 39 On 10 October 2018, Mr Wu brought further proceedings in the Federal Circuit Court seeking to have BN226119 set aside relying inter alia on the same offsetting claim which is presently relied upon by him. In Wu v Li [2019] FCCA 1190, Judge Street dismissed Mr Wu's application. Relevantly, he found that the nature of the ACTSC proceeding was an alleged joint liability by Mr Wu and his wife which lacked the necessary mutuality. 40 Mr Li emphasised that Mr Wu has taken no further steps in the ACTSC proceeding since 16 May 2019. 41 Mr Li relied upon Mr Gavagna's affidavit dated 7 November 2019 to support [1] to [3] of the creditor's petition. 42 In response to Mr Wu's ground of opposition, Mr Li submitted that Judge Neville's findings were a complete answer to Mr Wu's opposition to the present petition. In addition he advanced the following three grounds in response to Mr Wu's notice of opposition. 43 First, Mr Li submitted that an issue estoppel operated to prevent Mr Wu relying on an offsetting claim which had previously been considered and rejected in relation to BN226119. He said that this was the case in respect of both Judge Neville's decision and then that of Judge Street. Mr Li accepted that Judge Neville's judgment was overturned, but not its substantive findings. Mr Li acknowledged that this meant that the decision may not satisfy the requirement of finality. Even so, Mr Li submitted that Judge Street's judgment still stands and operates to prevent a re-determination of the issue applying the principle of issue estoppel. 44 Secondly, Mr Li relied on lack of mutuality by submitting that BN226119 relates to a debt owed to Mr Li alone, whereas the supposed offsetting claim is a claim brought by Mr Wu against Mr Li and his wife, Ms Chen, jointly. Mr Li cited the Full Court's decision in Stec v Orfanos [1999] FCA 457 at [24] as applied by Judge Neville at [43]. The Full Court (Beaumont, Branson and Sundberg JJ) held there that 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. Their Honours said at [24]: The primary judge then said that there was a more general answer to all the alleged cross demands. This was that in answer to a bankruptcy notice issued by several joint creditors, the debtor may not raise a debt owed by one or some of them individually. Mr Stec's claims were not against all those described in the notice as "the creditor". His Honour relied on James at 643 and on an earlier decision of his own, Emanuele v Grey (unreported 17 December 1997), which also relied on the passage in James. 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) 27 SR (NSW) 296; James v Abrahams (1981) 51 FLR 16 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. See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518. Here three of Mr Stec's claims were against ERI alone. There is thus no mutuality in relation to these claims. His other claim was against Messrs Conroy, Rybak and Georgopolos. Again there is no mutuality because one of the joint creditors, ERI, is not the subject of the cross claim. 45 Thirdly, Mr Li submitted that Mr Wu's proceedings in the ACTSC were an abuse of process and had not been brought in good faith and had insufficient prospects to satisfy the Court of "some other reason". He relied upon Judge Neville's reasons in Li v Wu [2016] FCCA 2836, particularly at [66], [88], [91], [97(a)]-[97(h)], [98], [101], [106], and [121]. 46 In particular, Mr Li relied on Judge Neville's findings that: (a) Mr Wu himself deposed that he did not then have sufficient funds to satisfy the principal judgment debt; (b) the unexplained delay of 13 months by Mr Wu after bringing the ACTSC proceeding was still unexplained; and (c) the ACTSC proceeding had a "very, if not extremely, low" likelihood of success having regard to the fact that the assignment had not been consented to by Mr Li and Ms Chen, other identified defects in Mr Wu's contract case and several defects in the quantum meruit case, as well as adverse credit findings against Mr Wu in the Federal Court proceedings. 47 Mr Li submitted that the ACTSC proceedings were not intended to be genuinely prosecuted to completion as Mr Wu did not have the funds to do so. He emphasised that steps were taken in those proceedings only when Mr Wu found it necessary to defend claims against him in bankruptcy. Mr Li further emphasised that the ACTSC proceeding was commenced three days after the creditor's petition was served on Mr Li on 6 October 2015, even though he could have brought those proceedings in the previous 13 months. Mr Li urged the Court to infer that the ACTSC proceeding was commenced solely for opposing the petition. 48 Finally, Mr Li submitted that Mr Wu carried the burden of persuading the Court that there was "some other reason" why a sequestration order ought not to be made and that he had failed to give direct evidence in the previous three years of his purpose in maintaining the ACTSC proceeding. Mr Li submitted that absent direct evidence on oath from Mr Wu explaining why the ACTSC proceedings are meritorious, the Court should not find that Mr Wu has reasonable prospects of recovering "all the transactions he confected as "loans" to Mr Li".

Mr Wu's submissions summarised 49 Relying primarily on Mr Kazar's affidavit dated 9 September 2015 (which, as noted above, was originally filed in the ACTSC proceeding and was not filed in this proceeding), Mr Li submitted that around August 2008 Golden Constructions entered into a building contract with Ms Chen and himself, pursuant to which the company was to construct a residential dwelling at 48 Akame Circuit, O'Malley. Mr Wu contended that between August 2008 and June 2011 Golden Constructions substantially fulfilled its obligations under that construction contract. 50 On 2 August 2011, Mr Kazar was appointed administrator or the Company and, on 6 September 2011, appointed liquidator. 51 Mr Wu submitted that Mr Kazar came to the view that there was a debt in the amount of approximately $2.8m owed to the Company by Mr Li and Ms Chen in respect of the construction of the property. He also determined that Mr Li owed the company the sum of approximately $573,000 on account of unpaid loans advanced to him. Both these debts were demanded from Mr Li. On 19 October 2012, Mr Li's solicitors claimed that there was no valid contract in place in respect of the building because Ms Chen had not signed the building contract. 52 Remaining of the view that the debts were owing, the liquidator explored various ways of securing their repayment, short of litigation because of lack of funds. 53 On 13 August 2014, Mr Wu and Mr Kazar, in his capacity as liquidator, entered into a deed of assignment in which all claims that Golden Constructions had against Mr Li and Ms Chen in relation to the construction of the dwelling were assigned with a consideration of $16,000 plus five percent of the proceeds of any such claims (see Li v Wu [2019] ACTCA 14 at [13]). 54 On 9 October 2015, Mr Wu commenced the ACTSC proceeding in which he sought recovery of the property debt and the loan debt. The Court of Appeal of the ACT noted in Li v Wu [2019] ACTCA 14 at [14] that the ACTSC proceeding involved a claim of approximately $1.2m pursuant to the alleged building contract or, alternatively, approximately $2.8m on a quantum meruit and approximately $573,000 in respect of the alleged loan. 55 In their defence filed on 16 March 2016 in the ACTSC proceeding, Mr Li and Ms Chen admitted for the first time that they were parties to the building contract but they denied any liability for the debt on the basis that the building contract prohibited the assignment of the Company's rights of action against them under the contract. 56 Meanwhile, proceedings between Mr Li and Mr Wu were commenced in the Federal Court relating to a wider group of companies, including Golden Constructions. It was these proceedings which resulted in Jagot J's judgment referred to above at [32]. 57 On 24 August 2017, Mr Wu entered into agreement with Mr Kazar, as liquidator, relating to Mr Wu's proposed application to bring proceedings in the name of the Company. 58 On 10 November 2017, Mr Wu sought leave in the ACTSC to bring a derivative proceeding, with the purpose of overcoming the effect of the non-assignment clause in the building contract. 59 Although McWilliam AsJ granted the application, Mr Wu emphasised that part of the reason for doing so was because her Honour was satisfied that the proceedings had reasonable prospects. He pointed to [20] of her Honour's reasons for decision in Wu v Li [2018] ACTSC 224 where her Honour stated that the evidence established "that this is a claim that is arguable and has reasonable merit on the basis of the documentary evidence before the Court". Her Honour's comments were directed to the proposition that, if the deed of assignment was ineffective, the legal claim to pursue the debts lies with company, with the consequence that the company may be the proper plaintiff to pursue recovery of the debt. 60 Mr Wu also emphasised that the Court of Appeal dismissed the appeal from McWilliam AsJ's decision (noting that the Court of Appeal published its reasons for judgment on 16 May 2019). He emphasised what was said in Li v Wu [2019] ACTCA 14 at [89]: Leaving aside the issue of the limitation period for the moment, there is no reason to doubt that there are reasonable prospects of success in the derivative proceeding. Mr Li and Ms Chen appear to have had the benefit of having their residence constructed by Golden Constructions without paying for it. Golden Constructions also appears to have made payments to Mr Li recorded as a loan in the company's accounts. Such prospects of success and the prospect of a substantial return provide Mr Wu with an incentive to prosecute the derivative proceeding to its conclusion. 61 Mr Wu cited Beach J's decision in Stratton v Bowles (No 2) [2015] FCA 43 at [27] to [30] as setting out the relevant principles relating to s 52(2)(b), as well as his Honour's summary at [38] to [42] regarding offsetting claims. 62 In brief, Mr Wu submitted that his ACTSC proceedings were in respect of a substantial offsetting claim which amounts to "other sufficient cause" to decline the making of a sequestration order. He explained that he was not able to raise this as an offsetting claim in the Federal Court as the claim had not been assigned to him when the proceedings were before Jagot J. He claimed that the ACTSC proceedings are based on an assignment of causes of action made by Mr Kazar in favour of him on 13 August 2014. Mr Wu also relied upon his affidavit dated 27 April 2020 as providing a basis for his belief that his claims against Mr Li and Ms Chen have merit. 63 Mr Wu submitted that he had not prosecuted the ACTSC proceeding because of a lack of funding and that he had been "significantly distracted" by Mr Li's numerous bankruptcy notices. 64 In response to the three matters relied upon by Mr Li, Mr Wu submitted as follows. As to issue estoppel, he submitted that Judge Street's judgment dealt with an application under s 40(1)(g) of the Bankruptcy Act, as opposed to s 52(2)(b). 65 As to Judge Neville's judgment, he submitted that it dealt with a different alleged act of bankruptcy and was in any event eventually set aside. He emphasised that Judge Neville's proceedings predated his application in the ACTSC to bring a derivative proceeding. 66 As to mutuality, Mr Wu submitted that cases such as Stec were distinguishable because it and other cases relied upon by Mr Li dealt with the question whether or not to set aside a bankruptcy notice under s 40(1)(g), as opposed to a proceeding such as this under s 52(2)(b). He submitted that issues of mutuality did not arise in the context of a case raising the question whether a creditor's petition should be dismissed for "other sufficient cause". 67 As to Mr Li's claim that the ACTSC proceedings were an abuse of process, Mr Wu pointed to the Court of Appeal's conclusion in Li v Wu [2019] ACTCA 14 at [90] that there was no error in McWilliam AsJ's finding that Mr Wu's prosecution of the derivative proceeding "would be in good faith, and that its commencement would not be an abuse of process". 68 Mr Wu also said that it was a neutral factor that he had previously admitted that he did not have sufficient funds to satisfy the underlying debt because this is often the case where a respondent is insolvent but has the possibility of obtaining a favourable judgment in respect of an offsetting claim. 69 Finally, Mr Wu raised for the first time in his outline of submissions that he would seek leave to file a further affidavit which would deal with Mr Li's failure to comply with order 3 made by Rares J on 28 April 2017 in Wu v Li (No 2) [2017] FCA 501. In the events that occurred, no such affidavit was filed. 70 Mr Wu submitted that the Court should be slow to accede to Mr Li's application when he has failed to comply with the Court's previous orders to pay bankruptcy trustees appointed by him.

(c) Mr Li's submissions in reply summarised 71 In reply, Mr Li filed an additional affidavit dated 13 May 2020 affirmed by Mr Musso, which attached a copy of the defence and counter-claim in the ACTSC proceeding. 72 In his reply submissions, Mr Li reiterated his contention that Mr Wu had not discharged the burden of proof in respect of the merits of his alleged offsetting claim. In particular, he emphasised that Mr Wu had not adduced any evidence to make good any of the claims set out in his statement of claim filed in the ACTSC proceeding. It was also pointed out that Mr Wu had failed to provide the proposed amended statement of claim that would join Golden Constructions in those proceedings. 73 Mr Li submitted that Mr Wu's quantum meruit claim is defective and that, although those defects were identified by Judge Neville back in 2016 (see Li v Wu [2016] FCCA 2836 at [102]-[107]), Mr Wu had not taken any steps to remedy them. In particular, Mr Li emphasised that Mr Wu's pleadings do not suggest that quantum meruit arises due to the unenforceability of the contract (citing Mann v Paterson Constructions [2019] HCA 32 at [5] and [50] per Kiefel CJ, Bell and Keane JJ). Mr Li submitted that Mr Wu's pleaded quantum meruit claim seeks to recover amounts that are not envisaged under the contract, which is pleaded by both parties. He submitted that only amounts allowed under the contract need to be pleaded and that where Mr Wu claims $1,283,804.75 as the amount that he says would be allowed under the contract, this is the maximum he could recover under a quantum meruit claim. 74 In addition, Mr Li submitted that the alleged offsetting claim is less than the amount of the bankruptcy notice. This is because the bankruptcy notice is in the amount of $2,610,714.80 and the quantum meruit claim is capped at the amount calculated under the contract, again applying Mann. 75 Finally, in respect of mutuality, Mr Li rejected Mr Wu's contention that the issues of mutuality raised in Stec are only relevant to the Court's discretion whether or not to allow the application to set aside the bankruptcy notice. He placed reliance on Judge Neville's tentative views on this question, even though no concluded view was given. Mr Li submitted that acceptance of Mr Wu's submission would produce an inconsistency, namely that mutuality arises on the question whether or not the Court should make a sequestration order, yet is not able to be raised in setting aside a bankruptcy notice. Such an inconsistency would encourage waste of resources, so submitted Mr Li.

(a) Relevant statutory provisions 76 It is desirable to set out ss 43 and 52(1) and (2) of the Bankruptcy Act: 43 Jurisdiction to make sequestration orders (1) Subject to this Act, where: (a) a debtor has committed an act of bankruptcy; and (b) at the time when the act of bankruptcy was committed, the debtor: (i) was personally present or ordinarily resident in Australia; (ii) had a dwelling house or place of business in Australia; (iii) was carrying on business in Australia, either personally or by means of an agent or manager; or (iv) was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager; the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor. (2) Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until: (a) he or she is discharged by force of subsection 149(1); or (b) his or her bankruptcy is annulled by force of subsection 74(1) or 153A(1) or under section 153B. … 52 Proceedings and order on creditor's petition (1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. … (2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. …

(b) The litigation history 77 The history of litigation involving the parties is somewhat convoluted. At the risk of some repetition, it may assist to outline that history, drawing heavily on the description provided by the Court of Appeal in Li v Wu [2019] ACTCA 14. 78 The proceeding in the ACTSC by which Mr Wu sought leave to commence a derivative proceeding in the name of Golden Constructions arises out of a series of business dealings between Mr Wu, Golden Constructions, Mr Li and Ms Chen. 79 Mr Li and Ms Chen are Chinese citizens who wished to immigrate to Australia. They entered into a business relationship with Mr Wu and several companies which had been incorporated by him. This included Mr Li lending money to at least one of those companies. The Golden Constructions Group collapsed in August 2011. 80 Mr Li brought proceedings against Mr Wu in the FCA and obtained a judgment on 6 November 2013 in his favour in the amount of $976,866.80 plus interest (Li v Wu [2013] FCA 1067). There was an appeal by Mr Wu and a cross-appeal by Mr Li. 81 On 6 December 2013, Mr Li issued a bankruptcy notice to Mr Wu based upon the judgment debt and the time for compliance with it was successfully extended pending judgment upon the appeal and cross-appeal. 82 On 17 August 2015, the Full Court varied Jagot J's judgment so that Mr Wu was ordered to pay Mr Li $1,076,767.00 plus interest (Wu v Li [2015] FCAFC 109). 83 On 9 September 2015, Mr Wu applied to the Federal Circuit Court to set aside the bankruptcy notice, including on the ground that he had a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment debt. Judge Neville dismissed this application on 11 September 2015 and on 6 October 2015 Mr Li presented a creditor's petition against Mr Wu. 84 In the meantime, the liquidator of Golden Constructions (Mr Kazar) asserted that Mr Li and Ms Chen owed debts to Golden Constructions. The first alleged debt was an amount said to be owed by them under a contract pursuant to which Golden Constructions was to construct a residential dwelling at their property in O'Malley. The second alleged debt was a loan said to have been made by Golden Constructions to Mr Li in the amount of $572,998.02. 85 On 13 August 2014, Mr Kazar (as liquidator) entered into a Deed of Assignment with Mr Wu, assigning to him (relevantly) all claims that Golden Constructions may have against Mr Li and Ms Chen in relation to the construction of the residential dwelling. The consideration for the assignment was $16,000 plus five percent of the proceeds of any such claims. 86 On 9 October 2015, three days after the creditor's petition was presented, Mr Wu commenced proceedings against Mr Li and Ms Chen in the ACTSC claiming: (a) $1,283,804.75 pursuant to the building contract or, alternatively, $2,807,999.40 on a quantum meruit; and (b) $572,998.02 in respect of the alleged loan. 87 On 30 October 2015 in the Federal Circuit Court, Mr Wu filed a notice of opposition to the creditor's petition raising a ground that, in light of his off-setting claim, there was "sufficient cause" within the meaning of s 52(2)(b) of the Bankruptcy Act for a sequestration order not to be made. 88 The creditor's petition was heard in the Federal Circuit Court on 3 May 2016 and judgment was reserved. On 5 October 2016, while judgment was still reserved, the creditor's petition expired. 89 On 4 November 2016, the Federal Circuit Court upheld the creditor's petition and made a sequestration order against Mr Wu's estate (Li v Wu [2016] FCCA 2836). Judge Neville held that Mr Wu was insolvent, that he had not satisfactorily explained the delay between taking the assignment in August 2014 and bringing the proceedings in the ACTSC in October 2015 and that his prospects of success were poor because Mr Li and Ms Chen had not consented to the assignment. The slip rule was relied upon by Judge Neville to overcome the expiry of the creditor's petition. 90 On 7 April 2017, the Full Court allowed an appeal against Judge Neville's decision on the basis that the slip rule was not available and the sequestration order against Mr Wu was set aside (Wu v Li [2017] FCA 500). 91 Mr Li and Ms Chen filed a defence in the ACTSC proceeding on 16 March 2016. Their defence included their reliance on cl 18(a) of the building contract which stated that neither party will assign the rights or obligations under the contract without the written consent of the other. They pleaded that, absent their consent, there was no valid assignment of any relevant cause of action. 92 On 10 November 2017, Mr Wu applied in the ACTSC for leave to bring a derivative proceeding on behalf of Golden Constructions. Although there was a dispute as to the purpose of the application, the Court of Appeal observed at [21] that, on its face, the purpose of the proposed derivative proceeding was to overcome the effect of the non-assignment clause in the building contract. 93 On 24 August 2017, Mr Kazar (as liquidator) entered into a Deed of Agreement with Mr Wu, under which he consented to the derivative proceeding being brought by Mr Wu. Mr Wu agreed to pay Mr Kazar five percent of any net proceeds, to indemnify him as liquidator and also Golden Constructions against any adverse costs order and to provide security for the indemnity. 94 On 17 August 2018 McWilliam AsJ granted Mr Wu leave to commence a derivative proceeding in the name of Golden Constructions (Wu v Li [2018] ACTSC 224). 95 On 16 May 2019, the Court of Appeal granted Mr Li leave to appeal and allowed the appeal in a minor part, but otherwise dismissed the appeal by Mr Li and Ms Chen (Li v Wu [2019] ACTCA 14).

(c) Summary of relevant legal principles 96 Relying upon cases such as Ling v Enrobook Pty Ltd [1997] FCA 226; 74 FCR 19, Rigg v Baker [2006] FCAFC 179; 155 FCR 531, Qun Xiong (Kenny) Yu v Todaytech Distribution Pty Ltd [2006] FCA 131, Russell v Polites Investments Pty Ltd [2012] FCA 11 and Stratton, and the various relevant authorities referred to therein, the following relevant principles apply. (a) A petitioning creditor has a "prima facie right" to a sequestration order once proof of the matters required by s 52(1) has been satisfied. Nevertheless, there is a discretion to refuse such an order for inter alia "other sufficient cause" as referred to in s 52(2)(b). (b) The circumstances which may give rise to "other sufficient cause" are highly variable and cannot be exhaustively be defined. (c) The debtor carries the burden of establishing the existence of "other sufficient cause". The debtor must establish that he has real cross-claim against the creditor that is likely to succeed and that its amount equals or exceeds the creditor's claim. (d) On the proof of the matters mentioned in s 52(1), the Court will proceed to make a sequestration order and it is for the debtor to show some cause overriding the interest of the public in the stopping of the unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. (e) A debtor does not establish a real cross-claim that is likely to succeed for the purposes of s 52(2)(b) merely by producing a statement of claim in an action against the creditor or by pointing to the existence of current litigation against the creditor. (f) While the Court does not try the cross-claim in advance, the debtor must adduce sufficient evidence to show that it a real claim which is likely to succeed. There is a distinction between a cross-claim which is likely to succeed and a cross-claim which is bona fide and reasonably arguable, but where the judgment debtor does not establish that the cross-claim is likely to succeed. (g) Even if the Court is satisfied that the debtor has demonstrated "other sufficient cause", that merely enlivens the Court's discretion to refuse to make a sequestration order. The power in s 52(2) is permissive and not mandatory. Thus even if a debtor can bring himself or herself within the terms of that provision, that does not entitle him or her to have a sequestration order refused. The matter remains within the Court's discretion. (h) Where a debtor relies upon pending proceedings in another Court as providing a basis for a conclusion that there is "other sufficient cause" for the purposes of s 52(2)(b), the Court should address that litigation, not for the purpose of resolving the proceeding which is before another Court, but for the more confined and different purpose of determining whether any or one of those other proceedings may fall within s 52(2)(b). (i) Where the discretion conferred by s 52(2)(b) is enlivened, the Court can take into account the history of the litigation relied upon as providing the basis for the cross-claim, including whether or not it has been diligently prosecuted, whether or not a sufficient explanation has been provided for any delay and whether the debtor has complied with orders made by other Courts without adequate explanation. 97 I am satisfied that Mr Li has provided sufficient proof of the three matters set out in s 52(1) of the Bankruptcy Act, namely that: (a) Mr Wu owes Mr Li the amount of $2,610,740.80; (b) the creditor's petition was served on Mr Wu; and (c) the debt remains owing. Mr Wu did not contest any of these three matters. 98 As noted, once a petitioning creditor has provided sufficient proof of the matters required by s 52(1), he or she has a "prima facie right" to a sequestration order subject, however, to the Court's discretion to refuse to make such an order where the debtor has demonstrated "other sufficient cause" as referred to in s 52(2)(b). Mr Wu carries the burden of establishing the existence of some "other sufficient cause" which, in his case, relates to the off-setting claim relied upon him which is the subject of proceedings in the ACTSC. The nature of those proceedings has been outlined above. 99 Significantly, it is insufficient for Mr Li to demonstrate that his proceedings in the ACTSC are bona fide and reasonably arguable. Rather, he must show that those proceedings involve a "real claim which is likely to succeed". This is a higher standard. 100 Mr Wu relied upon four matters as demonstrating that there was material to support a finding that the derivative proceedings was a "real claim which is likely to succeed": (a) Mr Kazar's belief as stated in his affidavit dated 9 September 2015; (b) Mr Wu's belief as stated in his affidavit dated 27 April 2020; (c) findings and observations made by McWilliam AsJ in the proceedings where Mr Wu was granted leave to bring a derivative proceeding; and (d) observations of the Court of Appeal of the ACT in the course of hearing Mr Li's application for leave to appeal/appeal from McWilliam AsJ's judgment. 101 For the following reasons, I consider that only the fourth of those matters provides some limited assistance to Mr Wu in discharging the burden which he carries. I will also explain why that assistance is insufficient for him to persuade the Court that his derivative claim in the ACTSC amounts to a "sufficient cause" why a sequestration order ought not to be made. 102 I do not consider that the burden has been discharged by Mr Wu's reliance upon parts of Mr Kazar's affidavit dated 9 September 2015 or his own affidavit dated 27 April 2020. As previously mentioned, although Mr Wu referred to Mr Kazar's affidavit dated 9 September 2015 in his notice stating grounds of opposition to the creditor's petition in these proceedings, a copy of that affidavit was not filed in this Court. The only affidavit sworn by Mr Kazar which was filed in these proceedings is his affidavit dated 8 April 2018 (which, as mentioned, was originally filed in the ACTSC proceeding ACT379/2015). In that affidavit, Mr Kazar gave evidence concerning Mr Wu's financial position, the likely legal costs of the ACTSC proceeding and the value of the indemnity provided, as well as monitoring those proceedings. Nowhere in that affidavit does Mr Kazar express any view as to the strength or otherwise of the ACTSC proceeding. 103 As to Mr Wu's affidavit dated 27 April 2020, as mentioned above, Mr Wu deposed that he believed that his claims in the ACTSC proceeding "have merit". He deposed that this belief was shared by Mr Kazar, with reference to Mr Kazar's affidavit dated 15 November 2017 which was filed in the ACTSC proceeding (but not in the present proceeding). In his affidavit, Mr Wu extracted two paragraphs from Mr Kazar's affidavit dated 15 November 2017, which included a statement by Mr Kazar that, based on his investigation into the affairs of Golden Constructions as both administrator and liquidator, "I am of the view that the allegations contained in the draft amended statement of claim have merit and that the Proceeding should be pursued on behalf of Golden Constructions". Mr Wu also relied upon Mr Kazar's statement in his 15 November 2017 affidavit that he remained of the opinion that the debt to Golden Constructions was due and payable and that he would have taken steps as liquidator to pursue the debt if he had had sufficient funds to do so. 104 It is notable that the stated belief held by both Mr Wu and Mr Kazar are simply that the ACTSC proceeding has merit. This is insufficient to discharge the burden which Mr Wu carries. Rather, evidence is required to satisfy the Court that the ACTSC proceeding involves a real claim that is likely to succeed. Merely because there is evidence that there is a claim which is "bona fide and reasonably arguable" (or has merit) is insufficient (see [96(f)] above). 105 Nor am I persuaded that the burden is discharged by the matters relied upon by Mr Wu in respect of McWilliam AsJ's reasons for judgment. The observations of McWilliam AsJ at [20] of her Honour's reasons for judgment were that the claim was "arguable and has reasonable merit on the basis of the documentary evidence before the Court" (see at [59] above). This falls short of meeting the necessary legal standard as it simply focusses upon the issue of merit of the claim. 106 The position is different, however, in respect of observations of the Court of Appeal. I have set out at [60] above what the Court of Appeal said at [89]. It is also relevant to note what their Honours said at [88]: If, after leave were granted to commence the derivative proceeding, Mr Li brought fresh bankruptcy proceedings upon the judgment debt, those proceedings may well fail. The reason is that Mr Wu could demonstrate that he may recover an amount greater than the judgment debt as a result of the assignment and the derivative proceeding. That exposes the connection between the derivative proceeding and potential bankruptcy proceedings, and their connection with Mr Wu's purpose or purposes. By succeeding in the derivative proceeding, Mr Wu would have not only the benefit of 95% of the net proceeds (the judgment sum could be up to $3,380,995 on the liquidator's estimation), but could avoid bankruptcy upon the judgment debt obtained by Mr Li against him. The former purpose must be at least as important a purpose of prosecuting the derivative proceeding as the latter. Even if having a purpose of setting up a defence to potential bankruptcy proceedings is an illegitimate collateral purpose, it cannot be regarded as Mr Wu's predominant purpose. Further, Golden Constructions interests coincide with those of Mr Wu - both would benefit from the successful prosecution of the derivative proceeding. 107 It is evident from the terms of [88] that the Court of Appeal did not in that paragraph assess the prospects of Mr Wu succeeding in the derivative proceeding. At [89] as set out at [60] above, however, the Court of Appeal stated there was "no reason to doubt that there are reasonable prospects of success in the derivative proceeding" (emphasis added). This is because their Honours observed that it appeared that Mr Li and Ms Chen had had the benefit of having their O'Malley residence constructed by Golden Constructions without paying for it and that Golden Constructions also appeared to have made payments to Mr Li which were recorded as a loan in the Company's accounts. Their Honours concluded that such prospects of success and the prospect of a substantial return provided Mr Wu with an incentive to prosecute the derivative proceeding to its conclusion. In circumstances, however, where Mr Wu's counsel considered before the Court of Appeal that the non-assignment clause would not defeat the claim for the alleged loan, the Court of Appeal varied the orders made by the primary judge by revoking leave to commence a derivative proceeding in respect of the alleged loan. Otherwise, the appeal was dismissed (with the effect that Mr Wu had leave to bring a derivative proceeding in respect of the building contract). Mr Li and Ms Chen were ordered to pay Mr Wu's costs of the proceedings in the Court of Appeal. 108 Even if it be accepted that these observations of the Court of Appeal provide sufficient material for this Court to find that Mr Wu's derivative proceeding involves a "real claim which is likely to succeed", there remains the issue of mutuality. The derivative proceeding is against both Mr Li and Ms Chen, whereas Mr Li is the only petitioner who has brought the creditor's petition. I accept Mr Li's submission that the principle of mutuality (as discussed and applied in Stec) applies not only to a proceeding to set aside a bankruptcy notice under s 40(1)(g), but also to a proceeding such as this under s 52(2)(b). That is the view that has been adopted and applied in cases such as International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 at [55] per Katz J and Baker v Perpetual Trustee Company Limited [2012] FCA 553 at [88] ff per Katzmann J. I can see no reason in principle why the requirement of mutuality should apply to a proceeding in respect of s 40(1)(g) and not under s 52(2)(b). In those circumstances, it is unnecessary to determine the other two legal matters raised by Mr Li concerning issue estoppel and abuse of process. 109 Even if I am wrong in finding that Mr Wu has failed to demonstrate "other sufficient cause" why a sequestration order ought not to be made, I would have exercised the discretion under s 52(2)(b) in Mr Li's favour. I would do so for the following reasons. (a) Mr Wu has failed diligently to prosecute the proceeding in the ACTSC. As noted above, the proceeding in the ACTSC was commenced on 9 October 2015, three days after Mr Li presented a creditor's petition against Mr Wu. It is reasonable to infer that the two steps were connected. Significantly, shortly thereafter, Mr Wu filed a notice of grounds of opposition to Mr Li's creditor's petition relying upon the ACTSC proceeding as an off-setting claim. The history of the proceeding before Judge Neville is outlined at [35] to [37] above. The history of Mr Wu's proceedings in the ACTSC and Court of Appeal are outlined at [38] above. The Court of Appeal dismissed Mr Li's appeal on 16 May 2019. Significantly, Mr Wu took no further steps to prosecute the ACTSC proceeding since that time and up until 27 April 2020, when he deposed in his affidavit in this proceeding that he had that day instructed his lawyers to make an application under r 76 of the Court Procedures Rules 2006 (ACT). That particular rule relates to reinstating a proceeding which has been dismissed under rule 75. Rule 75 provides that a proceeding is taken to be dismissed if inter alia a party does not take a step in the proceeding before the end of 1 year after the day the last step was taken in the proceeding. Mr Wu's instructions to his solicitor to make an application under rule 76 implicitly acknowledges that his proceeding in the ACTSC has been dismissed under rule 75 because of his failure to prosecute the proceeding. It is telling that Mr Wu only took this step in the context of Mr Li's creditor's petition. I am not persuaded that Mr Wu genuinely intends to prosecute the proceedings in the ACTSC. (b) I have noted what Mr Wu has said in his affidavit dated 27 April 2020 as to the financial constraints which he says have made it difficult for him to obtain the necessary funds to prosecute the ACTSC proceeding. It is notable that none of these claims are supported by any independent evidence. In particular, there was no independent evidence of Mr Wu's current financial circumstances, including the balance of his superannuation accounts. It was open to Mr Wu to provide documentary evidence in support of his claims regarding his financial position. He failed to do so. Nor is there any independent and corroborating evidence to support Mr Wu's confidence that he will receive "more financial support for legal fees from my wife and friends in Australia and China". Nor is there any independent or corroborating evidence to support his claims that there have been difficulties over the last 12 months obtaining funding from his friends in China, partly because of currency restrictions imposed by the Chinese Government, together with problems associated with the COVID-19 virus. Mr Wu has failed to provide any independent documentary or affidavit evidence regarding his current financial circumstances, let alone his financial circumstances as at 16 May 2019 when the Court of Appeal published its reasons for judgment in his favour. Mr Wu's own evidence on these matters is self-serving and amounts to little more than bare and uncorroborated assertions. 110 Having regard to the matters set out immediately above, if it had proved necessary to rule on the matter, I would not have exercised my residual discretion under s 52(2)(b) otherwise than in Mr Li's favour.

Conclusion 111 For all these reasons, I consider that an order should be made that the estate of Tao Wu be sequestrated under s 43(1) of the Bankruptcy Act 1966 (Cth) and that the applicant creditor's costs be taxed and paid from the respondent debtor's estate in accordance with the Bankruptcy Act 1966 (Cth). Orders will be made accordingly. I certify that the preceding one hundred and eleven (111) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.

Court Procedure Rules 2006(ACT)

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Judgment (10 paragraphs)

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