Wu v Li [2017] FCA 501 | Case summary

Federal Court of Australia|2017-04-28|Before: Rares J

Background 3 The parties accepted that I had power, rather than making the order setting aside the sequestration order to make an order under s 153B of the Bankruptcy Act annulling the sequestration order as Nicholson J and Jacobson J each contemplated in Pattison v Hadjimouratis (2006) 155 FCR 226 at 233 [18] and 239 [80], and Allsop CJ, Katzmann and Perry JJ accepted was possible in Flint v Richard Busuttil & Company Pty Ltd (2013) 216 FCR 375 at 384-385 [49]-[51]. 4 The purpose of making an order annulling the bankruptcy under s 153B would be to protect the entitlement of the trustees to recover their costs and remuneration from the property of the bankrupt. However, an unconditional order for an annulment would throw the entire burden of the trustees' costs and remuneration on the bankrupt whose appeal against the making of the sequestration order had succeeded: Flint 216 FCR at 385 [52]; see too Pattison 155 FCR at 233 [18]-[20] per Nicholson J, and 239 [80], [82] per Jacobson J. The solution adopted in Flint 216 FCR at 385 [55], was to exercise the appellate power of the Court under s 28 of the Federal Court of Australia Act 1976 (Cth) to make orders against the solvent, successful appellant and her creditor requiring them to pay the trustees' costs and remuneration in the proportions 75% by the appellant, and 25% by the creditor.

The parties' submissions 5 Mr Wu argued that the creditor should pay the entire costs of the appeal and the proceedings below and 75% of the trustees' costs and remuneration, while Mr Wu would bear the 25% balance. In contrast, the creditor argued that Mr Wu should pay the costs of the proceedings below up to 6 October 2016 and the creditor should pay Mr Wu's costs thereafter, and that each party should pay his own costs of the appeal. The creditor contended that Mr Wu should pay the whole of the trustees' costs and remuneration out of his estate in the same way as would occur in consequence of an order for annulment. He argued that it was not fair that the burden of the trustees' costs and remuneration fall entirely or at all upon the creditor alone and that Mr Wu had not brought an application to stay the orders promptly. The creditor argued that Mr Wu was "hopelessly insolvent", as the trustees' report to creditors of 21 December 2016 demonstrated. The creditor submitted that there was a risk that, had he not sought to persuade the trial judge to act under the slip rule to extend the life of the petition after it had lapsed (once the trial judge drew that to the parties' attention on 12 October 2016), the creditor might have been liable for the whole of the costs of the trial because of the dismissal of the proceedings at that point of time.

Consideration 6 I am of opinion that the creditor is substantively responsible for all of the costs and expenses incurred after 6 October 2016, including the trustees' costs and remuneration. 7 This case is unlike the situation in Flint 216 FCR 375, where the law may have been unclear in respect of a petition that lapsed three months after the federal magistrate had reserved his decision. Here, the creditor was aware of the decisions in Flint 216 FCR 375 and Griffiths v Boral Resources (Qld) Pty Ltd (2006) 154 FCR 554, to which his lawyers made detailed reference in their submissions to the trial judge. In those submissions the creditor contended that his Honour could, and should, make orders under the slip rule once the problem emerged on 12 October 2016. Thus, the creditor's conduct of the proceedings caused his Honour to proceed to make the orders on 4 November 2016, and those orders, in turn, caused all of the trustees' costs and remuneration to be incurred together with the expenses to be incurred by Mr Wu under the sequestration order and in his conduct of the appeal. 8 As at 12 October 2016, the law was clear. As the Full Court had said in Flint 216 FCR at 385 [54], the creditor should bear some of the responsibility for the trustees' costs and remuneration. They said: In its own interests it ought to have applied for an extension of the period for compliance with the creditor's petition before the statutory period lapsed. It could have recognised that there was doubt about the validity of the federal magistrate's order and the risks of moving on the petition in those circumstances (especially having regard to the impact on third parties). It could have issued a fresh bankruptcy notice. It could have conceded the point at the heart of the appeal. (emphasis added) 9 In my opinion, although the then solicitor for the creditor, Mr Kay, was not aware of the application of s 52(4) or of the lapsing of the petition until the trial judge raised that matter on 12 October 2016, the creditor then made a deliberate decision to pursue the course of attempting to persuade his Honour to make the order under the slip rule, when that course was not justified in the circumstances of a five month delay. The two Full Court decisions to which I have referred made that plain. Instead of commencing afresh, the creditor chose to pursue a course that was obviously risky and failed on appeal. He has only himself to blame. 10 Both parties have applied for a certificate under s 10(2) of the Federal Proceedings (Costs) Act 1981 (Cth) in respect of the costs each had incurred up to 6 October 2016 by reason of the trial judge being unable to continue with, or give judgment in, the proceedings below once the petition had lapsed on that date. In my opinion, it is appropriate to grant each of the parties a certificate. In the circumstances, the costs incurred up to that time by each party became wasted. 11 I am also of opinion that I should order that the creditor pay the trustees' costs and remuneration as either agreed or reviewed under Div 2 of Pt VIII of the Bankruptcy Act, as if an administration had been conducted. However, that liability should be subject to the creditor being in a position to either obtain a repayment, or gain credit for the benefit of any work that the trustees may already have done, in the event that Mr Wu is again made bankrupt or becomes subject to some other form of the administration of his assets under the Bankruptcy Act. His statement of assets and liabilities showed he has virtually no assets that are unsecured, apart from his superannuation entitlements, and has debts to creditors of over $6 million. 12 Although Mr Wu offered to pay 25% of the money due to the trustees, I am concerned that they would be at risk in light of his financial position in recouping that sum, even if I were to make an annulment order, which I am not persuaded I should. He should not have been made bankrupt on a lapsed creditor's petition as he had argued unsuccessfully below and successfully on the appeal. I do not think that an order that Mr Wu should bear 25% of the costs and remuneration of the trustees would be calculated to protect their position or to be just in the circumstances. Moreover, he should not have to pay for the administration of his estate which, unlike the position in Flint 216 FCR at 385-386 [58], did not appear to benefit him. 13 The creditor should pay, in the first instance, the trustees' costs and remuneration. After all, restitutio in integrum is the right of every successful litigant, as Murphy, Wilson, Brennan, Deane and Dawson JJ held in the Commonwealth v McCormack (1984) 155 CLR 273 at 276, applying Lord Field's dictum in Cox v Hakes (1890) 15 App Cas 506 at 547.

Conclusion 14 I will order that the orders made by the Federal Circuit Court on 4 November 2016 be further varied by orders that it be noted that the proceedings lapsed pursuant to s 52(4) of the Bankruptcy Act on 6 October 2016 and that the respondent pay the appellant's costs incurred below after 6 October 2016, but otherwise there be no order as to costs. Then in the appeal, I will make orders that the respondent pay the appellant's costs and that a certificate be granted to each party under s 10(2) of the Federal Proceedings (Costs) Act by reason of the trial judge being unable to continue with, or give judgment in, the proceedings in the Federal Circuit Court after the creditor's petition lapsed on 6 October 2016 in respect of each party's costs up to and including 6 October 2016 in those proceedings. 15 I will order that the respondent pay the fair reasonable remuneration and expenses of Louisa Sijabat and Nick Combis (the trustees) in the administration of the estate of the appellant pursuant to the orders made by the Federal Circuit Court on 4 November 2016 up to and including 7 April 2017: (a) as if the administration were being conducted on the Bankruptcy Act and, subject to the application of Div 2 of Pt VIII of that Act, for the review of claims for the remuneration and costs; (b) provided that, in the event that the trustees are, or either of them is, appointed in any capacity under the Bankruptcy Act to administer the estate of the appellant in the future, any such remuneration and expenses for which the respondent is liable pursuant to this order, shall be reduced, or repaid to the respondent if paid beforehand, to the extent that the work which the trustees undertook in the period between 4 November 2016 and 7 April 2017 reduces or benefits the work or expenses necessary to be incurred in that subsequent administration. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Bankruptcy Act 1976(Cth)

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) RARES J: 1 On 7 April 2017, I gave reasons and made orders allowing the appeal by the bankrupt, Tao Wu, from orders made by the Federal Circuit Court on 4 November 2016 that had extended, by five months, the time before which the creditor's petition that Yuxin Li (the creditor) had filed on 6 October 2016 would lapse: Wu v Li [2017] FCA 500. The trial judge had made the extension order after the creditor's petition had already lapsed on 6 October 2016. I found that, in the circumstances, the trial judge had no power under the slip rule or r 39.05(h) of the Federal Court Rules 2011 to extend, retrospectively, the time under s 52(5) of the Bankruptcy Act 1966 (Cth) before which the creditor's petition lapsed. I ordered that the sequestration order, costs order and order for extension of time made by the Federal Circuit Court on 4 November 2016 be set aside and that the parties confer and prepare draft orders in respect of the costs of the trial and the appeal and the protection of the position of the trustees who had been appointed to administer Mr Wu's estate and that, in default of agreement, each party file his draft orders and submissions.

Wu v Li

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