Qun Xiong (Kenny) Yu v Todaytech Distribution Pty Ltd

Hartnett fm's reasons for decision 22 The central reasons for Hartnett FM's decision are summarised in the following passage: "The respondent [the appellant in the appeal] then counterclaimed the sum of $593,433.22 together with damages, interest and costs. The respondent has failed to prosecute that counterclaim. Indeed, the defence to the claim was struck out in the Supreme Court and it is that defence that the respondent relies upon by way of his counterclaim. The respondent provides to the court in these proceedings no evidence deposing to the factual matters on which his counterclaim is based. He has had more than adequate opportunity since the service upon him of the bankruptcy notice. Given the theft conviction there appears no merit in the respondent making any further application to the Supreme Court to proceed with his alleged counterclaim. The respondent deposes in affidavit sworn by him on 29 July 2005 to his belief that his counterclaim against the plaintiff is still on foot and that it needs to be re-pleaded, given that his defence was struck out pursuant to the order made by Master Wheeler on 5 November 2004. No issue of a counter-claim being one that could not have been set up in the action in which the judgment or order was obtained was raised in response to the service upon the respondent of the bankruptcy notice. Indeed a counterclaim was set up on the action or proceeding in which the judgment was obtained and such counterclaim was not prosecuted diligently or at all by the respondent. The respondent has made further application to a Master for order for payment of the debt by instalments."

THE APPELLANT'S SUBMISSIONS 23 The appellant contends that the sequestration order should not have been made and should be set aside. In his written contentions of law and fact, the appellant submitted that Hartnett FM: (a) wrongly found that the appellant has failed to prosecute his counterclaim against the respondent diligently or at all; (b) wrongly took into consideration that the appellant had not deposed to the factual matters upon which the appellant's counterclaim against the respondent was based; (c) wrongly found that there was no merit in the appellant making further application to proceed with his counterclaim against the respondent; (d) wrongly found that the appellant by his counterclaim relied on his defence; and (e) failed to take into consideration the fact that the appellant has a claim against the respondent which is a contingent asset sufficient to satisfy the debt owing to the respondent. 24 In an affidavit filed in this Court on 27 October 2005 ("the 27 October affidavit"), the appellant deposes that he believes that he has a valid counterclaim in the Supreme Court proceedings with a good chance of success in recovering an amount greater than that claimed in the bankruptcy notice. He deposes that he has not delayed in prosecuting the counterclaim but that the interlocutory applications in the Supreme Court and the bankruptcy proceedings in the Federal Magistrates Court have prevented him from progressing his counterclaim. If this Court determines that a sequestration order ought not be made, the appellant deposes that he will immediately seek to replead his counterclaim and prosecute it in the Supreme Court at the earliest possible opportunity. 25 In oral submissions, counsel for the appellant argued that the striking out of the appellant's defence and the entry of judgment in the Supreme Court proceedings did not affect the counterclaim. In his submission, the counterclaim was a separate proceeding which remained on foot, and the appellant did not need to make any further application to proceed with it in the Supreme Court. Counsel accepted that the appellant carried the burden of establishing that the counterclaim was a real claim against the petitioning creditor that had at least a reasonable prospect of success, but he contended that this burden could be discharged simply by looking at the terms of the pleaded counterclaim itself, and without the need for any additional affidavit evidence.

THE RESPONDENT'S SUBMISSIONS 26 The respondent contends that the appeal should be dismissed because each of the grounds of appeal relates to findings of fact which were open to Hartnett FM on the evidence. The appellant's appeal does not identify any error of law. 27 Section 52(2)(b) of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act") provides that the creditor's petition may be dismissed if the court is satisfied by the debtor that for other sufficient cause a sequestration order ought not to be made. While the authorities make it clear that one such sufficient cause may be that the debtor has a counterclaim against the creditor, the debtor (in this case the appellant) carries the onus of proving that the counterclaim has substance. 28 The respondent submits that the appellant was given ample opportunity to provide evidence of his counterclaim to the Federal Magistrates Court and yet he failed to do so. Moreover, the appellant's defence has been dismissed by the Supreme Court, and it relied on the same matters as the appellant seeks to agitate by counterclaim. In addition, the appellant entered a plea of guilty to a charge of theft that is inconsistent with the matters alleged by way of counterclaim. For these reasons, the respondent submits that the counterclaim in its current form is without merit and doomed to fail. 29 The respondent also submitted that the fact that a sequestration order has been made against the appellant does not prevent his trustee in bankruptcy from electing to proceed with the counterclaim in accordance with ss 60(2) and 60(3) of the Bankruptcy Act. Should the trustee decide not to proceed with the counterclaim, the appellant can request review of that decision by the Federal Magistrates Court pursuant to s 178 of the Bankruptcy Act.

nature of the appeal 30 Like appeals to the Full Court from a single judge of this Court, an appeal from a judgment of the Federal Magistrates Court is an appeal by way of re-hearing: see Abeyesinghe v Minister for Immigration and Multicultural and Indigenous Affairs [2004] FCA 1558 ("Abeyesinghe") at [4]; and Low v Commonwealth [2001] FCA 702 at [3]; see also Minister for Immigration and Multicultural Affairs v Jia Legeng (2001) 205 CLR 507 at 533 [75]; and Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157 at [50]-[54]. 31 The expression 'appeal by way of re-hearing' is used in contradistinction to the expressions 'appeal in a strict sense', and 'appeal by way of hearing de novo'. It is important to bear in mind what these expressions connote. In the case of an appeal in the strict sense, the function of the appellate court is to determine whether the decision in question was right or wrong on the evidence and the law as it stood when the decision below was given. Where an appellate tribunal can receive further evidence and its powers are not restricted to making the decision that should have been made at first instance, the appeal is usually described as an appeal by way of re-hearing. An appeal by way of hearing de novo is one in which the matter is heard afresh, and the decision is given on the evidence presented at the appellate hearing: see Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 ("Coal and Allied Operations") at 203 [12]-[13]. 32 In Coal and Allied Operations, at 203-204 [14], the High Court said that statutory provisions conferring appellate powers, even in the case of an appeal by way of re-hearing, are construed on the basis that, unless there is something to indicate otherwise, the power is to be exercised for the correction of error. A similar observation was made by the Full Court of this Court in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at 432-433 [21]. Thus, it has been said that this Court's appellate powers are only exercisable if the appellant can demonstrate that the orders under appeal are the result of some legal, factual or discretionary error: see Abeyesinghe at [4].

disposition of the appeal 33 The primary issue before Hartnett FM was whether the appellant's counterclaim was a 'sufficient cause' within the meaning of s 52(2)(b) of the Bankruptcy Act, such that a sequestration order ought not be made. Hartnett FM was satisfied that all the affidavits necessary for the making of a sequestration order were filed. 34 In St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [13] ("Helfenbaum"), Sundberg J said: "The existence of a cross‑claim may be a 'sufficient cause' within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of 'sufficient cause': Cain v Whyte (1933) 48 CLR 639 at 645‑646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the creditor's claim, it will not make a sequestration order. If the claim is likely to be less than the creditor's claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115‑116; Ling at 25‑26; Commonwealth Bank v McDonald [1999] FCA 984. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against the creditor: Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182; Player at 282, or by pointing to the existence of current litigation against the creditor: cf Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 at 23. While the Court does not try the cross‑claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed: cf Vogwell v Vogwell (1939) 11 ABC 83 at 88; Player at 282." 35 The appellant's counterclaim is set out in pars 50 and 51 of the defence and counterclaim. It states: "By way of Counterclaim the Defendant says: 50. The Plaintiff [the respondent in the appeal] is and was at all material times a corporation registered pursuant to the laws of the State of Victoria. 51. The Defendant refers to and repeats paragraphs 6 to 46 hereof as if they were set out hereunder seriatim." 36 The central allegations in pars 6 to 46 of the defence and counterclaim are that: (a) by a contract of employment made on or about 20 February 1992 which was varied by subsequent agreements, the appellant agreed to work for the respondent as a full-time warehouse distributor and delivery man ("the first contract"); (b) it was a term of the first contract that the defendant would receive such overtime, sick leave, annual leave and long service leave as he was entitled to received under statute ("the statutory entitlements"); (c) it was a term of a subsequent agreement that the appellant would receive a commission equal to 15% of the respondent's net profits ("the commission"); and (d) despite the appellant's requests and in breach of the agreements, the respondent has failed and/or refused to pay to the appellant the statutory entitlements and the commission and therefore the respondent is indebted to the appellant in the sum of $593,432.22. 37 The main thrust of the counterclaim (and the main basis on which damages were claimed to be payable to the appellant) is that the respondent is indebted to the appellant in the sum of $593,432.22 in unpaid statutory entitlements and commission. 38 The appellant further alleges that in or about July 2002 he agreed with the respondent that this indebtedness could be satisfied by the appellant withdrawing money from the cash takings of the respondent's business in Victoria and that, pursuant to this agreement, the appellant withdrew the sum of $188,387.70 between July and October 2002. This allegation is inconsistent with the plea of guilty entered by the appellant to the charge of theft in the County Court. 39 As noted by Sundberg J in Helfenbaum, it is insufficient for the appellant merely to produce the counterclaim. Sufficient evidence must be adduced to show that it is a real claim which is likely to succeed. On the hearing of the appeal, counsel for the appellant did not refer me to any evidence which supported the counterclaim. Rather, counsel submitted that it was unnecessary to look beyond the allegations contained in the counterclaim. He submitted that Hartnett FM had fallen into error simply by failing to take account of, and give weight to, the allegations contained in the counterclaim. I reject these submissions. 40 In her reasons for judgment, Hartnett FM refers to an affidavit sworn 29 July 2005 in which the appellant disposed to his belief that his Supreme Court counterclaim was on foot and needed to be repleaded. Apart from this belief, Hartnett FM said that the appellant had provided no evidence to the Federal Magistrates Court deposing to the factual matters on which the counterclaim is based, despite having more than adequate opportunity of doing so. In these circumstances, it is impossible to say that Hartnett FM erred by making the sequestration order. 41 The 27 October affidavit was not in evidence before Hartnett FM, and no application was made to me for leave to rely upon fresh evidence in this appeal. However, even if regard is had to the material in this affidavit and the exhibits thereto, it does not establish that the counterclaim has a real prospect of success. 42 Paragraph 6 of the 27 October affidavit states: "My Defence and Counterclaim in the Supreme Court Proceeding are based upon an agreement between myself and Todaytech to keep some of sales proceeds received by me and setting off same against my unpaid work entitlements of $593,432.27 owing to me by Todaytech for more than 10 years of employment with the company, including sick leave, annual leave, long service leave, unpaid commission. On 14 April 2004, I swore an affidavit in the Supreme Court Proceedings which deposed as to circumstances relevant to my Defence and Counterclaim. Annexed hereto and marked "KY3" is a copy of my affidavit in the Supreme Court Proceeding sworn on 14 April 2004." The affidavit that was sworn in the Supreme Court proceedings on 14 April 2004 contains some evidence about the appellant's employment with the respondent, and the appellant's claim to be owed unpaid entitlements. On its face the affidavit is vague and incomplete. For instance, it makes passing reference to various other affidavits and documents. These other documents include an admission by the appellant of his indebtedness to the respondent in the sum of $260,000 that is said to be recorded in a file note that is exhibited to an affidavit that has not been produced. 43 The affidavit also contains the following statement in par 13: "I distinctly recall that in or about April 2002, I again requested Mr. Zhong to pay me all my work entitlements. I was informed by Mr. Zhong that I could get paid from the cash out of cash sales when the Plaintiff did not require it for its cash-flow." This statement is directly inconsistent with the appellant's subsequent plea of guilty to a charge of theft of some or all of the same monies. 44 Hargrave J considered the affidavit of 14 April 2004 in the passage I extracted earlier in this judgment. I agree with his Honour's conclusion that the affidavit has been overtaken by the appellant's plea of guilty to the theft charge, and cannot be relied on to establish a defence on the merits. 45 The 27 October affidavit does not contain any reference to his criminal conviction, or any explanation of how his plea of guilty to the theft charge can be reconciled with the allegation in the counterclaim that the cash withdrawals were authorised by the respondent, or with the material which I have quoted from par 13 of his affidavit of 14 April 2004. 46 In all the circumstances, I am not satisfied that the counterclaim has any real prospects of success. Indeed, the matters to which I have referred, including in particular the fact that the appellant has been convicted of theft in the County Court, indicate that the prospects of success on the counterclaim are remote or non-existent. 47 Counsel for the appellant also argued that Hartnett FM made several other errors in her reasons for decision. 48 First, counsel referred to the statement by Hartnett FM in paragraph 11 of her reasons for judgment that 'the respondent was personally served with the bankruptcy notice on 22 December 2002, that being the latest at which the respondent was clearly aware of the order of Master Wheeler made 5 November 2004.' The reference to 22 December 2002 is an obvious typographical error. In the first paragraph of her reasons for judgment, her Honour stated that the bankruptcy notice was duly served upon the respondent on 22 December 2004. Plainly, the respondent could not have become aware of Master Wheeler's order of 5 November 2004 on a date in 2002, and her Honour intended to refer to service of the bankruptcy notice on 22 December 2004. There is no substance in this point. 49 Counsel for the appellant then criticised her Honour's finding that the appellant had filed to prosecute the counterclaim. I can see no error in her Honour's finding that the appellant has not prosecuted the counterclaim. The appellant's submission was based, at least to some extent, upon a formal distinction between the defence which had been struck out, and the counterclaim which remained on foot. The submission ignores the fact that the defence contained a plea of set-off, which was resolved adversely to the appellant by the entry of judgment. But, more fundamentally, it is not possible to avoid the substance of the matter in this way. The burden fell on the appellant to demonstrate that the counterclaim was supported by hard evidence and had a real prospect of success. The appellant simply failed to do so before the Federal Magistrates Court, and has not done so before me.

intervention by the trustee in bankruptcy 50 The trustee in bankruptcy of the bankrupt estate of the appellant, Mr Paul Anthony Pattison, filed an application seeking leave to be heard in connection with the appeal in the event that I proposed to allow the appeal. In that eventuality, the trustee indicated that he would seek the following orders: "1. The bankruptcy of the appellant be annulled pursuant to 153B(1) of the Bankruptcy Act 1966; 2. Compliance with Rule 35.03 of the Federal Magistrates' Court Rules 2001 be dispensed with; 3. Compliance by the Trustee with Order 77 subrule 44(1) of the Federal Court Rules be dispensed with; 4. The appellant pay the Trustee's costs of and incidental to this appeal, such costs to be taxed in default of agreement." 51 In view of the conclusions I have reached, it is unnecessary to deal with this application. I do not propose to make any orders dealing with the costs of the trustee's application.

CONCLUSION 52 The appellant has failed to demonstrate any error in the decision of Hartnett FM. There was no 'sufficient cause' for Hartnett FM to refrain from making a sequestration order. Moreover, I consider that on the material that has been placed before me, there was no sufficient cause for not making a sequestration order. 53 I note that, as the respondent pointed out, the fact that a sequestration order has been made against the appellant does not prevent his trustee in bankruptcy electing to proceed with the counterclaim in accordance with ss 60(2) and 60(3) of the Bankruptcy Act. 54 Accordingly, I order that the appeal be dismissed with costs. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Young.

Counsel for the Appellant: Mr D. Baker

Solicitors for the Appellant: David K. Kin Cheung Solicitors

Counsel for the Respondent: Mr R. Harris

Solicitors for the Respondent: R.B. Legal Pty Ltd

Counsel for the Trustee in Bankruptcy: Mr P. Agardy

Solicitors for the Trustee in Bankruptcy: Leonard Legal

Date of Hearing: 7 February 2006

Date of Judgment: 23 February 2006