Lifestyle Holdings Australia & New Zealand Pty Ltd, in the matter of Venice Lane Pty Ltd (in liq) v Wu

Introduction 1 The applicant, Lifestyle Holdings Australia & New Zealand Pty Ltd (Lifestyle), brought an application for judgment in default of defence against the first respondent (Mr Wu). Mr Wu has not participated in the proceeding at all. Orders for substituted service were made on 3 February 2023 and the relevant documents (the originating application, the concise statement and the statement of claim) were served on him by that means. Mr Wu has not filed a notice of appearance, or a defence, which was due on 9 June 2023 (pursuant to orders made on 10 March 2023, as extended by orders made on 23 May 2023). Accordingly, Mr Wu is in default of r 5.22 of the Federal Court Rules 2011 (Cth) (the Rules), and the court has power to make an order giving judgment against Mr Wu for the relief claimed in Lifestyle's statement of claim dated 24 April 2023. 2 Lifestyle's application was brought pursuant to r 5.23(2)(c) of the Rules, which provides as follows: If a respondent is in default, an applicant may apply to the Court for: … (c) if the proceeding was started by an originating application supported by a statement of claim or an alternative accompanying document referred to in rule 8.05, or if the Court has ordered that the proceeding continue on pleadings - an order giving judgment against the respondent for the relief claimed in the statement of claim or alternative accompanying document to which the Court is satisfied that the applicant is entitled; or …

Principles concerning Judgment in default of defence 3 The principles applying to an application for default judgment were summarised by Yates J in Chamberlain Group Inc v Giant Alarm System Co Ltd (No 2) [2019] FCA 1606 as follows (at [13]-[14], emphasis added): [13] The power to give judgment against a defaulting party is undoubtedly discretionary. The discretion must be exercised cautiously. Where the defaulting party is a respondent to a pleaded claim, the giving of judgment for final relief on the application will deliver complete success to the applicant without investigation of the merits of the pleaded claim: ACOHS Pty Ltd v Ucorp Pty Ltd [2009] FCA 577 at [27]. There is no requirement that the act or acts of default be intentional or amount to contumelious conduct. There is no requirement that the act or acts of default result in inordinate or inexcusable delay. That said, such features, if present, will be relevant to the exercise of the Court's discretion. So too will conduct that persuades the Court that the defaulting party is manifesting an inability or unwillingness to cooperate with the Court and the other party or parties to the proceeding. [14] Rule 5.23(2)(c) requires the Court to be satisfied that the applicant is entitled to the relief claimed in the statement of claim. This requirement has been interpreted as meaning that the Court must be satisfied that "on the face of the statement of claim" the applicant is entitled to the relief that is claimed. It is not a requirement that the applicant prove its claim by way of evidence. Put another way, the facts alleged in the statement of claim are taken to have been admitted: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2007] FCAFC 146; 161 FCR 513 at [42]. If, on inspection of the statement of claim, the Court is satisfied that the applicant would be entitled to the relief sought then this requirement of r 5.23(2)(c) will be met: CNIP Pty Ltd v Chan & Naylor Norwest Pty Ltd (No 2) [2011] FCA 1170 at [18]-[19]; Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227 at [23]. The Court may permit further evidence to be adduced, but not evidence that would alter the pleaded case: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2006] FCA 1427; 236 ALR 665 at [45], [48]-[50]; United Broadcasting International Pty Ltd v Turkplus Pty Ltd (No 2) [2010] FCA 1413 at [42]-[44]; Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352; 195 FCR 1 at [62]-[63].

Background facts 4 In the absence of a defence, the facts pleaded by the statement of claim are taken to have been admitted for the purposes of the present application. The relevant facts are as follows. 5 Lifestyle supplied furniture to Venice Lane Pty Ltd (the Company) and was, by virtue of those supplies, a trade creditor of the Company. 6 Mr Wu was a de facto director or shadow director of the Company within the meaning of s 9 of the Corporations Act 2001 (Cth) (the Act), and was one of the controlling minds of the Company from in or around February or March 2019. 7 Between 17 May 2019 and 12 March 2020, the assets and undertaking of the Company (including its stock) were transferred to a new company for no or inadequate consideration, and for no benefit to the Company. 8 The Company went into administration on 12 March 2020, and entered liquidation on 27 April 2020. The "relation back" day for the purposes of Div 2 of Pt 5.7B of the Act is 12 March 2020: ss 9, 91 and 513C. Lifestyle's proceeding was brought on 15 November 2022, which is less than three years after the relation back day: s 588FF(3). 9 The Company was insolvent from at least 12 July 2018, or became insolvent as a result of the Wu Transactions (which are detailed below). 10 On 26 August 2022, Lifestyle entered into a deed of assignment with the Company's liquidators, by which Lifestyle took an assignment of any and all claims the liquidators or the Company has against Mr Wu and the second defendant. Creditors of the Company approved entry into the deed of assignment. 11 Between 21 February 2019 and 12 March 2020, the Company paid Mr Wu the sum of $6,425,782.82 by a series of transactions, numbered 1 to 110 in Schedule A attached to the statement of claim (the Wu Transactions). Transactions numbered 59-110 occurred within six months of the relation back day and totalled $3,676,825.49. All of the Wu Transactions occurred within two years of the relation back day. 12 Mr Wu was also an unsecured creditor of the Company. By reason of the Wu Transactions, Mr Wu received more from the Company in respect of unsecured debts than he would have received if he proved for the unsecured debts in the winding up. 13 Lifestyle made a demand for payment in respect of the Wu Transactions by letter to Mr Wu on 16 December 2022. That demand was not met.

Causes of action 14 The statement of claim alleges that: (a) a sub-set of the Wu Transactions (transactions 59-110) are voidable transactions for the purposes of s 588FF of the Act by virtue of s 588FE(2) on the basis that they were unfair preferences as defined by s 588FA and insolvent transactions as defined in s 588FC that were entered into within six months ending on the relation back day; (b) all of the Wu Transactions are voidable transactions for the purposes of s 588FF of the Act by virtue of s 588FE(3) on the basis that they were uncommercial transactions as defined by s 588FB and insolvent transactions as defined by s 588FC, all of which were entered into within two years ending on the relation back day; and (c) all of the Wu Transactions are voidable transactions for the purposes of s 588FF of the Act by virtue of s 588FE(6A) on the basis that they are unreasonable director-related transactions as defined by s 588FDA and were entered into within four years of the relation back day. 15 Lifestyle's supplementary written submissions (prepared at the request of the court) stepped through the way in which each statutory integer was made good based on the facts alleged in the statement of claim (and taken for the purposes of this application to have been admitted) as follows (omitting footnotes referring to specific paragraphs of the statement of claim and sections of the Act): 11. It is submitted that each of the Wu Transactions are voidable transactions pursuant to s 588FE of the Act as follows: Unfair preferences - s 588FA 11.1 transaction numbers 59 to 110 of the Wu Transactions were in fact made to Wu and were insolvent transactions; 11.2 transaction numbers 59 to 110 of the Wu Transactions were made during the 6 month period ending on the RBD [the relation back day] (between 20 September 2019 and 13 February 2020); 11.3 Wu is a creditor of the Company in respect of each of the payments received in the 6 month period ending on the RBD (between 13 September 2019 and 12 March 2020); 11.4 at the time Wu received transaction numbers 59 to 110 of the Wu Transactions, the Company was insolvent or became insolvent as a result of the transactions; and 11.5 transaction numbers 59 to 110 of the Wu Transactions have resulted in Wu receiving more than he would receive if he were to prove for the debt in a winding up of the Company. Uncommercial transactions - s 588FB 11.6 the Wu Transactions were in fact made to Wu and were insolvent transactions; 11.7 the Wu Transactions were made during the 2 year period ending on the RBD (between 21 February 2019 and 12 March 2020); 11.8 at the time Wu received the Wu Transactions, the Company was insolvent or became insolvent as a result of the transactions; and 11.9 a reasonable person in the Company's circumstances would not have entered into the transactions. Unreasonable director-related transactions - s 588FDA 11.10 Wu was a shadow director of the company from in or around February or March 2019, alternatively a close associate of a director of the Company. 11.11 the Wu Transactions were in fact made to Wu, a director or close associate of a director of the Company; 11.12 the Wu Transactions were made during the 4 year period ending on the RBD (between 21 February 2019 and 12 March 2020); and 11.13 a reasonable person in the Company's position would not have entered into the Wu Transactions.

The Assignment of the Statutory cause of action 16 As noted above, Lifestyle brings the proceeding as the assignee of the liquidators' statutory cause of action. While s 588FF refers to an application being brought by a company's liquidators, I am satisfied that s 100-5 of the Insolvency Practice Schedule (Corporations), which is Sch 2 to the Act (the Schedule), permits the assignment of the cause of action to seek relief from the court in respect of voidable transactions. 17 It was open to the liquidators of the Company to assign the statutory cause of action pursuant to s 100-5 of the Schedule. Section 100-5 provides as follows: 100‑5 External administrator may assign right to sue under this Act (1) Subject to subsections (2) and (3), an external administrator of a company may assign any right to sue that is conferred on the external administrator by this Act. (2) If the external administrator's action has already begun, the external administrator cannot assign the right to sue unless the external administrator has the approval of the Court. (3) Before assigning any right under subsection (1), the external administrator must give written notice to the creditors of the proposed assignment. (4) If a right is assigned under this section, a reference in this Act to the external administrator in relation to the action is taken to be a reference to the person to whom the right has been assigned. 18 The effect and ambit of this provision were considered briefly in Aquisite Pty Ltd v Moss [2023] FCA 410. There, McElwaine J said as follows (at [19]): It was at one time doubted whether it was open to a liquidator to assign statutory causes of action vested in the liquidator and not otherwise assignable to a third party: see, for example UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667, per Hansen J; MG Corrosion Consultants Pty Ltd v Gilmour (2012) 202 FCR 354; [2012] FCA 383, per Barker J and Anderson v Canaccord Genuity Financial Ltd (2022) 161 ACSR 1; [2022] NSWSC 58 at [1271]-[1287] per Ward CJ in Eq. Clause 100-5(1) of the Insolvency Practice Schedule (Corporations) being Sch 2 to the Act now provides that an external administrator may assign any right to sue that is conferred by the Act. The defendants admitted the Assignment and did not contend that it was ineffective. I proceed on that basis. 19 Where s 588FF provides that the court has certain powers where it is satisfied that a transaction of the company is a voidable transaction "on the application of a company's liquidator", those words operate to confer the statutory cause of action on a company's liquidators. Where the liquidators have exercised their power to assign that cause of action, those words do not have any residual function precluding the court acting on an application brought by a liquidator's assignee. This is confirmed by the terms of s 100-5(4), which provides that, where the power to assign is exercised, a reference to the external administrator in relation to the action is taken to be a reference to the person to whom the right has been assigned. 20 The purpose of s 100-5 of the Schedule is to enable statutory rights of action to be assigned by liquidators. The sale and assignment of such rights of action stands to benefit creditors of a company by allowing the company to realise a negotiated value for such rights of action, which may otherwise go unexploited due to funding difficulties. These aspects of the provision for the assignment of statutory causes of action were referred to in the Explanatory Memorandum to the Insolvency Law Reform Bill 2016 (Cth) at [7.10] as follows: 7.10 The ability to take civil action to recover company property inappropriately dissipated prior to business failure and hold directors liable for insolvent trading are key mechanisms to address phoenix activity. The inability to obtain funding is a major obstacle to the commencement of these actions. The taking of these actions may also delay the finalisation of administrations as a whole, ultimately to the detriment of creditors. The sale of rights of action may enable the value in such rights to be realised in the absence of funding being available and may result in the pursuit of matters which would not otherwise have been able to be pursued. There is some uncertainty as to whether statutory rights of action arising under the Corporations Act may be sold, which is limiting the sale of such rights. 21 A purposive approach to s 588FF enables, in my view, orders to be made pursuant to s 588FF(1)(a) requiring payment to the assignee of the right of action (cf to the company directly).

Conclusion 22 As the elements of the statutory causes of action are established based on the pleaded facts (taken to have been admitted), and in the absence of any matter that would suggest the court should decline to exercise its discretion, I will enter judgment for Lifestyle in the sum sought against Mr Wu. 23 As the exercise of the court's power to make orders under s 588FF in favour of Lifestyle here arises from the existence of the deed of assignment, I requested that Lifestyle tender the deed, which it did during the course of the hearing. The deed of assignment provides that, subject to any extant appeal(s), Lifestyle is to pass on 40% of any "Funds" (being monies recovered in relation to any of the "Assigned Claims", as defined) over $1 million to the liquidators of the Company, and to remit those funds to the liquidators within 30 days of receipt. That entitlement of the liquidators is to the benefit of other creditors. 24 Having regard to that entitlement, I consider it appropriate, in exercise of the court's discretion, to make orders ensuring that 40% of recoveries of the kind referred to in the deed are remitted by Lifestyle to its solicitor's trust account, to be held until the 30 day period has elapsed, following which any such sum is to be remitted to the liquidators forthwith. Orders of that kind will protect the liquidators' contingent entitlement to funds, Lifestyle's solicitors were in court when orders to this effect were discussed with counsel. Counsel confirmed that Lifestyle consented to such funds as may be due to the liquidators being held in the trust account of Lifestyle's solicitors pending payment to the liquidators. 25 Orders will also be made for interest at the statutory rate from the date of commencement of the proceeding, and for costs. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button.