Yan v Spyrakis as trustee in bankruptcy for Liu

1. Leave be granted to the applicant under s 58(3)(b) of the Bankruptcy Act 1966 (Cth) to continue proceeding no. 2019/00082170 in the Supreme Court of New South Wales against Wensheng Liu, the second defendant in that proceeding. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

KATZMANN J: 1 Wensheng Liu is a bankrupt. He was made bankrupt on 11 November 2021 on his own petition. The report to creditors prepared by the trustee of the bankrupt estate in March this year discloses that the debts owed to all known creditors exceed $63 million. At the time of his bankruptcy Mr Liu was one of a number of defendants in a proceeding pending in the Supreme Court of New South Wales (the Supreme Court proceeding). The other defendants include The Won Capital Pty Ltd and The One International Corporation Pty Ltd, two Australian companies, of which Mr Liu is said to be the sole director and shareholder, and GR Capital Group Pty Ltd, another Australian company, of which Mr Liu is said to be a director and sole shareholder. GR Capital Group entered into a deed of company arrangement on 18 February 2019 and an order is sought nunc pro tunc in the Supreme Court proceeding for leave to commence the proceeding against it. 2 By an application filed on 3 June 2022, the plaintiff in the Supreme Court proceeding - Jianhua Yan - applies for an order that he be given leave to continue that proceeding. The respondent, Mr Liu's trustee in bankruptcy, was informed of the application on 22 June 2022 and neither objects nor consents. Mr Liu, himself, has no right to be heard: Commissioner of Taxation v Yeo (Trustee) (No 2) [2019] FCA 1188 at [30]-[44] (Anderson J); Kitay (Liquidator) v Trenfield (Trustee) [2021] FCA 508 at [12]-[16] (Jackson J). 3 Mr Yan elected to have the application determined on the papers. 4 Mr Yan's application is supported by two affidavits affirmed on 3 June 2022 and 6 July 2022 by Frank Ngo, Mr Yan's solicitor in the Supreme Court proceeding. Exhibited to those affidavits were more than 730 pages of documents, primarily affidavits filed in that proceeding and copious exhibits and/or annexures. At Mr Ngo's request, orders were made by another judge of this Court for the application to be determined on the papers. Submissions were filed on 20 July 2022 in accordance with those orders. Unhelpfully, no index to the exhibits was provided and only two of them were mentioned in the submissions. And not all of the submissions were apparently supported by evidence. 5 Two questions arise: whether leave is required and, if so, whether it should be granted. Mr Yan's submissions addressed only the second question. 6 Section 58(3) of the Bankruptcy Act 1966 (Cth) relevantly provides that, except as provided by the Act, after a debtor becomes a bankrupt it is not competent for a creditor, except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. A "provable debt" is a debt provable in bankruptcy. With certain exceptions which are not presently relevant, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy: Bankruptcy Act, s 82(1). They include demands in the nature of unliquidated damages by reason of a contract, promise or breach of trust: Bankruptcy Act, s 82(2). 7 The requirement for leave is consistent with the purpose of the Act and s 58(3) in particular, namely, to assist in the orderly administration of the bankrupt estate by protecting the bankrupt and the bankrupt's property against the enforcement of remedies. This is achieved "by enabling the court to supervise the handling of claims through the procedure of proof of debt (administered by the trustee or liquidator), by ensuring that the assets of the estate are not expended on costs in a multiplicity of litigation, and by ensuring that no one creditor gets an advantage over others" (citations omitted): Hudson v Sigalla (2015) 235 FCR 122 at [25] (Allsop CJ, Jagot and Katzmann JJ). 8 In the Supreme Court proceeding Mr Yan alleges that Mr Liu is indebted to him for a substantial sum of money and seeks to recover the amounts allegedly owing. On the face of the pleadings, the Supreme Court proceeding is "a proceeding in respect of a provable debt". In any event, in a case such as this, it is open to the Court to proceed on the assumption that leave is required: Allanson v Midland Credit Ltd [1977] FCA 14; 30 FLR 108 at 115; 16 ALR 43 at 49 (Bowen CJ, Riley and Deane JJ); Lawrence & Hanson Group Pty Ltd, in the matter of Pugliese v Pugliese [2016] FCA 1278 at [26] (Gleeson J). 9 An application for leave to bring or continue legal proceedings cannot be made in the Supreme Court. Section 27 of the Bankruptcy Act confers concurrent jurisdiction on this Court and the Federal Circuit and Family Court of Australia (FCFCoA) (Div 2), to the exclusion of all other courts except for the High Court under s 75 of the Constitution and the FCFCoA (Div 1) under s 35 or 35A of the Bankruptcy Act. See also Truthful Endeavour Pty Ltd v Condon (2015) 233 FCR 174 at [32]-[61] (Allsop CJ, Katzmann and Gleeson JJ). 10 So should leave be granted? 11 The Bankruptcy Act does not specify any factors that should be taken into account in considering whether leave should be granted. The discretion is at large. But the authorities indicate that the following matters weigh in favour of an applicant: (1) the proceeding the subject of the application involves parties other than the bankrupt and it might be necessary for the bankrupt to become a party: Re Rose; Ex parte Devaban Pty Ltd [1994] FCA 1082 (Hill J); (2) it is in the interests of justice that the claims made against the bankrupt are determined at the same time as the court determines the claims against the other parties: National Australia Bank Limited v Moore [2012] FCA 865 at [20] (Robertson J); (3) the facts are complex and the issues would be better and more comprehensively dealt with in a contested trial than if the creditor were required to lodge a proof of debt against the debtor alone: Allanson, 30 FLR at 114; 16 ALR at 48; (4) there is no opposition from the trustee in bankruptcy: SBA Music Pty Ltd v Hall (No 2) [2014] FCA 1116 at [28] (Wigney J); Health Services Union v Jackson (No 3) [2015] FCA 694 at [19] (Tracey J); (5) the proceeding was commenced well before the date of the bankruptcy and there is no evidence to suggest that the application was made to gain an advantage over other creditors: Stoker (Trustee), in the matter of Starr (Bankrupt) v Starr [2011] FCA 746 at [22] (Jacobson J); Jackson at [20]; and (6) the proceeding is otherwise ready for hearing such that the interests of unsecured creditors were unlikely to be prejudiced: Jackson at [20]. 12 All of these circumstances are present here. 13 The Supreme Court proceeding involves multiple parties. I infer from the evidence that the proceeding is contested, although the 700 plus pages of exhibits do not include any defences that may have been filed. Whatever else can be made of the myriad of documents, it is clear that the facts are undoubtedly complex and the issues would be better and more comprehensively resolved in a contested trial. 14 In his pleading Mr Yan alleges that he provided two loans each of $10 million (one to The Won Capital, the other to GR Capital Group); that the money was paid directly to Mr Liu on the express condition that it only be used for a particular purpose and that purpose only; that the money was held by him and/or the companies on trust; and that, in breach of that trust, Mr Liu and/or the companies applied the loan funds for other purposes. Mr Yan contends that he sought repayment of the loans on 4 February 2019. One, he claims, remains wholly unpaid with more than $711,000 interest owing. In the case of the other, $500,000 is said to have been repaid on 28 June 2018 but the rest is said to be outstanding and more than $652,000 claimed in unpaid interest. Mr Yan also alleges that Mr Liu provided false and misleading information to creditors of GR Capital Group (and the administrators) which can reasonably be expected to have been material to the creditors' decision to vote in favour of the resolution that the company execute the deed of administration. 15 While Mr Liu seeks to recover as debts the monies due under the loan agreements, with interest, and claims damages of $10,000 a day for breaches of the agreements, the Supreme Court proceeding is not merely concerned with the recovery of "provable debts". The relief claimed includes numerous orders and declarations. Among the orders sought is a claim for interlocutory relief to restrain Mr Liu from dealing with certain property, to require him to disclose his assets, and to enable the disbursement of the funds to be traced. The evidence does not indicate that those claims have yet been heard. In addition, he is applying for an order under s 445D of the Corporations Act 2001 (Cth) that the deed of arrangement be terminated. 16 Mr Liu is a necessary party, particularly if the preservation and tracing orders have not yet been made. It is plainly in the interests of justice that the claims made against him are heard and determined at the same time as the Supreme Court hears and determines the claims against the other defendants. 17 There is no evidence to suggest that the application was brought to gain an advantage over other creditors. The proceeding was commenced more than two years before the date of the bankruptcy. 18 Although Mr Ngo's affidavits said nothing on the subject, according to Mr Yan's submissions the proceeding is at an advanced stage, awaiting a hearing date. 19 Finally, the trustee in bankruptcy does not oppose the application. 20 The application was filed more than seven months after the date of bankruptcy and no explanation was given for the delay. Be that as it may, the report to creditors in March 2022 may well be the first Mr Yan knew of the bankruptcy and, in the absence of any objection from the trustee in bankruptcy, I would put little weight on the delay. 21 For these reasons, despite the unsatisfactory nature of the evidence and submissions, I am persuaded that an order should be made under s 58(3)(b). The order Mr Yan sought was that leave be granted to him to continue the proceeding "in which [Mr Liu] is named as the Second Defendant". I do not consider that to be an appropriate form of order. Rather, I intend to make an order that Mr Yan be granted leave to continue the proceeding against Mr Liu. First, as I have already observed, an application was made in the amended statement of claim for leave to be granted to commence the proceeding against GR Capital Group. Not only was this Court not asked to determine that application, but the submissions made no mention of it. Second, leave is not required to continue the proceeding against the other defendants. 22 No application was made for costs. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Katzmann.