FEDERAL COURT OF AUSTRALIA

Yang v L & H Group (a limited partnership) [2015] FCA 932

THE COURT ORDERS THAT:

1.    Upon the third and fourth respondents filing with the Court a notice in the form annexed by no later than 45 days from the date of this order by way of confirming that the following events have occurred:

(a)    BRI Ferrier (SA) Pty Ltd has received payment of the amount of $23,393.56 in satisfaction of its claim against the estate of the applicant;

(b)    CNW Pty Ltd has received payment of the amount of $18,117.06 in satisfaction of its claim against the estate of the applicant;

(c)    the Deputy Commissioner of Taxation has received payment of the amount of $180,989.72 in satisfaction of his claim against the estate of the applicant;

(d)    an amount of $859,790.76 has been paid into the Suitor’s Fund of the District Court of South Australia in respect of Action No. DCCIV 1832 of 2014 to be held on trust in the Fund pending further order of that court in that proceeding or subject to further order of this Court; and

(e)    $45,812.89 has been paid to the third and fourth respondents by way of meeting the reasonable remuneration and expenses incurred by the third and fourth respondents in their capacity as trustees of the applicant’s estate,

the bankruptcy of Han Kun Yang is annulled pursuant to s 153B of the Bankruptcy Act 1966 (Cth).

2.    The third and fourth respondents are excused from any obligation otherwise arising under regulation 8.12C of the Bankruptcy Regulations 1996 (Cth) to give a remuneration claim notice.

3.    The applicant pay the respondents’ costs of and incidental to this application, save for any costs otherwise embraced within order 1(e).

4.    If the condition for annulment referred to in order 1 is not triggered, then the costs of the respondents referred to in order 3 shall be treated as part of the costs and expenses of the administration of the applicant’s estate.

5.    There be liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Annexure

No: VID 87/2015

Han Kun Yang

Applicant

L & H Group (a limited partnership) ABN 19 730 781 473

First Respondent

Zhenfa Trading Company Pty Ltd ACN 141 334 483

Second Respondent

David Charles Quin and Clyde Peter White (as Trustees of the Bankrupt Estate of Han Kun Yang)

Third and Fourth Respondents

Notice pursuant to order made by Justice Beach on 26 August 2015

The third and fourth respondents are satisfied that each of the events specified in paragraph 1(a)–(e) of the orders made in this proceeding on 26 August 2015 (Orders) has occurred, such that the bankruptcy of the applicant (Han Kun Yang) can be annulled in accordance with the Orders.

……………………………

Third [or Fourth] Respondent

Date:        2015

REASONS FOR JUDGMENT

1    The applicant, Mr Yang, has sought to annul his bankruptcy pursuant to s 153B of the Bankruptcy Act 1966 (Cth) (the Act). He has relied upon affidavits affirmed by him on 25 February 2015 and 1 April 2015; he also relies upon an affidavit of his father affirmed on 2 April 2015. Generally, the applicant contends that:

(a)    he was able to pay his debts at the time of the making of the sequestration order and that the order ought not to have been made; and

(b)    in the exercise of the Court’s discretion, his bankruptcy should be annulled.

2    The first respondent, who was the petitioning creditor, consents to an annulment of the applicant’s bankruptcy. Moreover, the applicant’s trustees, the third and fourth respondents (the Trustees), do not now oppose the annulment, provided that it is made conditional upon the Trustees’ fees and expenses being paid. The applicant does not resist such a condition.

3    The second respondent (Zhenfa) is another creditor of the applicant. The liability of the applicant to Zhenfa is said to arise from claims under various guarantees. It has opposed the annulment application. During the course of the hearing, I raised the possibility of the application being granted on terms that Zhenfa’s debt be discharged or that security for its payment be given. The parties were given the opportunity to file further written submissions on that question after the conclusion of the hearing.

4    In summary, I have decided to grant the applicant’s application but only on terms, the form of which I will discuss later. On the facts now known, the sequestration order ought not to have been made; instead, the creditor’s petition should have been adjourned. But I reject the applicant’s assertion that the sequestration order should not have been made because on the facts now known, s 52(2)(a) of the Act would have been satisfied.

THE SEQUESTRATION ORDER

5    The relevant facts may be shortly stated.

6    On 18 September 2014, the first respondent presented a creditor’s petition relying upon a judgment debt of $103,575.76. The relevant act of bankruptcy relied upon was non-compliance with a bankruptcy notice on or before 2 July 2014 that the petitioning creditor had served on the applicant.

7    On 21 October 2014, the applicant executed an authority under s 188 of the Act authorising Mr Maris Rudaks of BRI Ferrier (Adelaide) to take control of his estate and to call a meeting of his creditors so as to make a proposal to his creditors for a personal insolvency agreement under Part X.

8    On 25 November 2014 and 16 December 2014 meetings of the applicant’s creditors were held to consider the Part X proposal. The proposal was rejected.

9    On 22 January 2015, Registrar Burns made a sequestration order against the applicant’s estate and appointed the Trustees as trustees of the estate. An application by the applicant to adjourn the creditor’s petition was refused.

10    Subsequently, the applicant filed the present application to annul.

SOLVENCY

11    The applicant has asserted that he was solvent at the time of the making of the sequestration order.

12    It is difficult to see how such a submission could be maintained given:

(a)    the sequence of events that I have just described concerning the Part X proposal;

(b)    the fact that the disclosures made in his various statements of affairs indicate a substantial excess of liabilities over assets at the time of the making of the sequestration order (see for example his statement of affairs dated 2 February 2015 disclosing assets of $26,400 and liabilities of $930,000 although the applicant now says that this provided an “incomplete overview”), indeed now;

(c)    the Trustees’ investigations and reports to date, which demonstrate that he was at the time of the making of the sequestration order and is now insolvent.

13    Nevertheless, the applicant asserts that he was solvent at the time of the making of the sequestration order. To support that position, he relies upon an arrangement he had with his father by way of gift. He also relies upon this arrangement to say that he is now or can become solvent.

14    His father has deposed to the following at [9] to [18] of his affidavit:

9.    In or around December 2014, I became aware of my son’s financial difficulties in paying his creditors.

10.    On or around 22 December 2014, during a telephone conversation with my son, I indicated to him that, upon his request, and so long as it was within my financial capacity, I would be prepared to gift to him any sum of money he required to pay his debts.

11.    I also indicated to my son that, before I made any gift of money to him, he would need to visit me in Hong Kong. This was so that I could better understand his financial difficulties, and the logistics of effecting a gift of money to him.

12.    On or around 6 January 2015, I met my son in Hong Kong to discuss his financial difficulties and the logistics of my proposed gift. We agreed at that meeting that, upon my son’s request and subject to my financial capacity:

(a)    I would gift to him any amount of money he required to pay his debts; and

(b)    this gift would be effected through an immediate bank transfer from my bank account with Hang Seng Bank Limited to my son’s Australian bank account.

13.    In accordance with this agreement, as at 22 January 2015, had my son requested, I would have gifted him the amount of money he required to pay his debts then due and payable.

14.    Annexed and marked “WSY-1” is a true copy of a bank statement issued by Hang Seng Bank Limited on 27 March 2015 setting out the balance of the deposits held in my name with the bank as at the close of business on 22 January 2015.

15.    As noted on page 3 of this bank statement, the total value of the deposits noted in the statement is equivalent to HKD 23,533,384.81 applying the exchange rate offered by Hang Seng Bank Limited on 22 January 2015.

16.    As at 22 January 2015, using the Reserve Bank of Australia HKD/AUD exchange rate for that day as noted on the spreadsheet “Exchange Rates-Daily-2014 to Current” downloadable from the Reserve Bank of Australia website (namely, HKD 6.2574 = AUD 1), HKD 23,533,384.81 equated to AUD 3,760,888.68. Annexed and marked “WSY-2” is a copy of an extract of the spreadsheet downloaded from the Reserve Bank of Australia website.

17.    The deposits held in my name with Hang Seng Bank Limited on 22 January 2015 were readily available to be transferred to my son to allow him to pay his debts then due and payable.

18.    If the Court does order my son’s bankruptcy to be annulled, and should my son require it to remain solvent, I will gift him sufficient money for him to pay his creditors to the extent that the claims of his creditors relate to debts which are due and payable.

15    I have a number of difficulties with this arrangement in terms of whether it establishes that the applicant was solvent at the time of the sequestration order or now.

16    First, even though the father had such money at the time of the sequestration order, there is no evidence as to the father’s overall financial position then and now and other demands that may have been or may be placed on such funds by the father’s other creditors, notwithstanding what was said at [17].

17    Second, the conversation in or around 6 January 2015 had the qualification “subject to my financial capacity”.

18    Third, the arrangement seems to have been qualified in terms of paying “his debts then due and payable” (see at [13]). Given the incorrect characterisation by the applicant of Zhenfa’s debt as only contingent, which I later discuss, this statement has a latent and important qualification.

19    Fourth, as this was an agreement to confer a gift, its enforceability is problematic to say the least.

20    Fifth, if this was truly property available to the applicant, it should have been disclosed in the applicant’s statement of affairs as an asset which was then available to the Trustees to deal with. It was not disclosed in that context.

21    Sixth, in terms of addressing the question of solvency now, the conditionality of what was said in [18] does not suggest that the applicant is presently solvent.

22    Seventh, and relatedly, the gift is not and has never been unconditional. In addition to the father’s description, the applicant’s description of his father’s proposed gift is in the hypothetical phraseology of “would gift to me any sum of money I required”, “if he were to proceed with his proposed gift”, and “upon my request … he would gift to me”.

23    Generally, apart from this arrangement with the father, there is no other material to demonstrate that at the time of the making of the sequestration order or now, the applicant was solvent.

ZHENFA’s DEBT

24    The applicant has sought to diminish the opposition of Zhenfa to the present application by asserting that it was only a contingent creditor.

25    In documents completed and signed by the applicant, or prepared with information that he provided, he acknowledged the liability to Zhenfa. See for example:

    The applicant’s statement of affairs dated 21 October 2014 completed in his handwriting and signed by him for the purposes of the Part X proposal referring to the Zhenfa liability as “Director’s guarantee” in the amount of $585,054.25;

    The report to creditors dated 12 November 2014 of Mr Rudaks, the controlling trustee, referring to the liability to Zhenfa of $681,078;

    The report to creditors dated 28 November 2014 of Mr Rudaks referring to the liability to Zhenfa of $859,790 (claimed) and $585,054.25 (advised by the applicant as referred to in his statement of affairs);

    The applicant’s statement of affairs prepared on 2 February 2015 in his handwriting and signed by him referring to the Zhenfa liability of $600,000 as “Total amount owing”.

26    Zhenfa’s claim is not merely as a contingent creditor despite the applicant’s assertion. True it is that Zhenfa’s claim is under various guarantees, but its position is that the principal debts became due and owing and demands were then made under the relevant guarantees (see the demands attached to Zhenfa’s solicitors’ letter dated 15 July 2014 to the applicant). Such demands were not met. Accordingly, the amounts demanded then became due and owing by the applicant to Zhenfa. It is accepted that the applicant disputes that debt, but it is not merely a contingent claim or liability. Further, the fact that legal proceedings have been instituted in the District Court of South Australia and not resolved does not make the liability of the applicant to Zhenfa contingent as such. I should also say that the applicant has not put forward any substantive evidence showing that he has a good defence to Zhenfa’s claim. All that he has done is to annex the pleadings in that proceeding to his affidavit and then assert that he has a “good defence”. Contrastingly, Zhenfa’s director, Milton Mao Teng Zhou, has provided an affidavit affirmed 17 April 2015 annexing relevant documents and providing detailed evidence supporting the existence of the relevant debt. Finally, some of the disclosures made by the applicant in his various statements of affairs would appear not to be consistent with his present position.

SECTION 153b(1) — THE CONDITION AND THE DISCRETION

27    Section 153B(1) provides as follows:

If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.

28    The trigger for the exercise of discretion under s 153B(1) is that the Court is “satisfied that a sequestration order ought not to have been made”. If that condition is satisfied then the Court’s power is enlivened and its discretion may be exercised to annul. Section 153B is to be contrasted with s 153A where annulment can occur automatically if and when all the bankrupt’s debts have been paid.

29    The principles applicable to s 153B(1) are not in doubt:

(a)    First, the applicant carries a heavy burden. He is required to place before the Court all relevant material concerning his financial affairs.

(b)    Second, in determining whether “a sequestration order ought not to have been made”, the Court should not confine its attention only to whether the order should have been made on the facts then known to the court making the earlier order. The Court must consider other facts existing at the earlier time, even if those facts were not placed before the court making the sequestration order. Those facts and whether they were known at the earlier time are to be ascertained by the Court in considering the annulment application. But facts that have occurred since the sequestration order was made should be excluded in considering the condition, although they are relevant to the exercise of the discretion to annul if the condition is satisfied.

(c)    Third, the phrase “ought not to have been made” requires some clarification. The question is whether on the facts at the time, now known to have existed at the time, the court making the sequestration order would have been bound not to make the sequestration order. The test is not whether such a court might not have made the order or that it was likely that the court would not have made the order. The question is whether that court was bound not to make the order.

(d)    Fourth, even if the condition is satisfied, nevertheless the Court may still refuse to exercise its discretion to order an annulment. The Court may consider in the exercise of its discretion:

•    whether the applicant is solvent at the time of the annulment application;

•    whether the applicant has made full disclosure of his financial affairs;

•    any failure by the applicant not to attend the hearing concerning the making of the sequestration order or to oppose such an order, and the explanation for such conduct;

•    any failure by the applicant to put before the earlier court facts then known to the applicant and the explanation for that failure;

•    whether the applicant has delayed in making the annulment application and the time that has elapsed since the making of the sequestration order;

•    the preparedness of the applicant to pay the costs thrown away by reason of the annulment application and the trustee’s costs and expenses of the bankruptcy to the extent that they have not otherwise been recovered from the bankrupt’s estate;

•    the rights and interests of the creditors, including the applicant’s preparedness to pay any outstanding debts as an alternative arrangement to the continuation of the bankruptcy;

•    the conduct of the applicant during the period of the bankruptcy, including the applicant’s co-operation with the trustee and also whether there has been any conduct that may give rise to bankruptcy offences;

•    the steps taken by the trustee to investigate and realise the estate and whether there has been any impediment due to the conduct of the applicant or a third party;

•    whether it is fair or just to the applicant or the creditors to grant the annulment;

•    the public interest.

30    See Bulic v Commonwealth Bank of Australia Ltd (2007) 5 ABC(NS) 122 at [12] per Tracey J, Francis v Eggleston Mitchell Lawyers Pty Ltd (2014) 12 ABC(NS) 25 at [16] per Rares, Flick and Bromberg JJ, Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at [16] per Emmett J, Re Raymond; Ex parte Raymond (1992) 36 FCR 424 at 426 per Spender J, Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 402 and 403 per Fisher J, Hudson v Whalan [1999] FCA 189 at [7] to [14] per Sackville, North and Hely JJ, Rigg v Baker (2006) 155 FCR 531 at [62] per French J and at [109] per Cowdroy J and Heinrich v Commonwealth Bank of Australia [2003] FCAFC 315 at [20] per Carr, Finn and Sundberg JJ.

31    Finally, in granting an annulment application, the Court may do so on terms, including that:

    the trustee’s costs and expenses to the date of the annulment be paid or secured;

    any outstanding debt be paid or secured.

Should the sequestration order have been made?

32    The applicant has raised two arguments in support of the proposition that the sequestration order ought not to have been made, namely:

(a)    First, he was solvent at the time on the facts that could have been presented on the hearing of the petition; accordingly s 52(2)(a) of the Act was satisfied;

(b)    Second, the hearing of the petition ought to have been adjourned. On that analysis, the sequestration order would not have been made. It therefore follows, so it is said, that the sequestration order ought not to have been made.

33    I reject the first basis, but uphold the second basis in the unusual circumstances of the case.

34    As to the first basis, it is said that the applicant was solvent at the time of the sequestration order and that, accordingly, the sequestration order ought not to have been made. But there is a difficulty with this conclusion, even if one was to accept the premise. The question of solvency arises under s 52(2)(a). But that provision provides that if that limb is satisfied, the court may dismiss the petition. The dismissal is not mandated. Satisfaction of s 52(2)(a) does not establish that the court was bound not to make the sequestration order. In other words, even if the premise was established, I am not satisfied that the conclusion for establishing the condition required by s 153B(1) would be made good.

35    But this first basis fails on the facts in any event. First, it seems apparent from the material placed before me that, at the time of the sequestration order, the applicant did not have sufficient assets or resources, including those that could be readily realised or drawn upon by sale, mortgage or pledge, to meet his liabilities or generally an ability to pay his debts as and when they fell due. Second, the flimsy and conditional arrangement between father and son at that time and thereafter did not cure that deficiency for the reasons that I have previously discussed. Even if I accept that an arrangement between a debtor and a third party, short of a binding contractual obligation, that the debtor can call upon may be considered to be part of the debtor’s resources for the purposes of considering s 52(2)(a), nevertheless the arrangement between father and son would not have, together with the applicant’s other assets, enabled the applicant to have satisfied s 52(2)(a). I can readily accept that a more flexible position may apply than as set out in Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ as to the extended scope of the debtor’s “resources” to be considered; see for example Eykamp v Deputy Commissioner of Taxation [2010] FCA 797 at [7] per Buchanan J and Rigg v Baker at [104] and [106] per Cowdroy J. But on the facts, that does not avail the applicant.

36    At the time of the sequestration order, on the current material, if it had been placed before the court at the time of the sequestration order, s 52(2)(a) would not have been satisfied.

37    Of course, it also follows that on that same material, the applicant is not now solvent. That would be a basis for refusing to exercise my discretion to annul the bankruptcy even if the s 153B(1) condition was satisfied. But I am able to deal with any question of a lack of solvency established by the present material by imposing a condition, as I will, that the annulment will only be effective upon discharge of all debts which are still due and payable, including the debt owed to Zhenfa. If the applicant cannot discharge the condition, there will be no annulment. If he can, the solvency question becomes relevantly moot at least so far as present creditors of the applicant are concerned.

38    As to the second basis upon which it is said that the s 153B(1) condition has been satisfied, on balance on the material now known, if it had been placed before the court at the time of the hearing of the petition, an adjournment ought to have been granted. A high threshold applies to show that a discretionary decision to adjourn should have been differently exercised, but I am satisfied that such a threshold has been established in the unusual circumstances of the present case. I accept what the applicant has said in [26] to [28] of his affidavit of 25 February 2015. If all of the background and detail to these assertions had been before the court together with greater detail of the father/son arrangement and greater detail of the South Australian proceedings, the court ought at the least to have adjourned the petition. If that had occurred, the sequestration order would not have been made; the s 153B(1) condition is satisfied.

DISCRETIONARY FACTORS

39    Given that the s 153B(1) condition has been satisfied, the following factors weigh in favour of the exercise of my discretion to annul:

(a)    First, the annulment application has been made promptly.

(b)    Second, the applicant has provided an appropriate overview of his financial position. The Trustees have identified at least one creditor that was not included in the applicant’s statement of affairs, but there is no suggestion of any deliberate omission.

(c)    Third, although the applicant sought to oppose the creditor’s petition, the form of that opposition was to unsuccessfully seek an adjournment of the hearing of the creditor’s petition at its first return, on the basis that the applicant had been overseas and settlement of the debt of the petitioning creditor was considered possible.

(d)    Fourth, the applicant has reached an arrangement with the petitioning creditor regarding payment of both the debt of the petitioning creditor and the costs of obtaining the sequestration order. Further, the applicant has at all stages been willing to give an undertaking that, if his bankruptcy is annulled, he will meet both the reasonable costs and expenses of the Trustees and any costs orders made in this proceeding.

(e)    Fifth, the annulment will result in various creditors being paid or having their debts secured.

(f)    Sixth, the Trustees have confirmed that the applicant has complied with his responsibilities under the Act and been co-operative with the Trustees concerning their activities and the discharge of their functions.

(g)    Seventh, subject to the applicant meeting the condition that I have imposed, there is no public interest in not annulling the bankruptcy; the position of present creditors is to be addressed by the condition that I will impose and the position of future creditors is sufficiently ephemeral such as not to outweigh the foregoing considerations, even if the applicant’s financial position on annulment may not have a secure foundation.

CONDITIONS AND COSTS

40    It would be inappropriate for the Court to make any order annulling the bankruptcy under s 153B without proper provision for the repayment of various substantive debts including an order being made to secure Zhenfa’s debt.

41    Zhenfa has said that it would withdraw its opposition if an appropriate condition was imposed which secured the repayment of its debt.

42    Zhenfa’s debt should be secured by the payment of an amount into the appropriate fund managed by the District Court of South Australia. This is preferable to having it put in a trust account held by the Trustees as it would avoid the need for their further involvement and incurring additional expenses in administering the trust account. By letter dated 21 May 2015, the Trustees have said that they do not wish to hold those funds on trust and anticipate practical problems and costs if they do so.

43    The applicant has opposed the imposition of a condition in favour of Zhenfa as the price for the annulment. But if this condition was not imposed, I would have refused the applicant’s application for annulment.

44    First, the applicant says that the position adopted by Zhenfa in the proceeding was to actively resist the relief sought by the applicant, apparently with a view to Zhenfa securing (in return for its non-opposition) payment of its claim in full or, alternatively, having the full amount of its claim paid into court pending the determination of that claim. That may be correct, but Zhenfa was entitled to take that position.

45    Second, the applicant says that Zhenfa will suffer no prejudice if the applicant’s bankruptcy is annulled. It says that, upon annulment, Zhenfa’s claim will no longer be confined to being made against the bankrupt’s estate (being the current position and under which Zhenfa is unlikely to recover any amount in respect of its claim). It is said that annulment will enable Zhenfa to resume the litigation of its claim against the applicant and his fellow former director. Even if this be accepted, that does not deny to Zhenfa the right to oppose the present application unless appropriate conditions are imposed securing its debt. It should not be discriminated against, particularly as I am satisfied that its debt is of substance, its claim is not merely contingent and, on the present material, I am not satisfied that the applicant has any reasonably arguable defence; I am not, however, deciding that latter question.

46    In summary, it is said that the effect of imposing the Zhenfa condition would be to provide security for the entire amount of Zhenfa’s claim, in circumstances where:

(a)    Zhenfa is an unsecured and contingent creditor of the applicant; and

(b)    the sum claimed by Zhenfa is capable of recovery from another person, also a defendant to the South Australian District Court proceeding.

The premise that Zhenfa is only a contingent creditor is flawed. Further, the second argument does not justify not imposing the appropriate condition.

47    It is appropriate that any annulment be conditional upon the applicant discharging various outstanding debts, paying the Trustees’ costs and expenses and providing security with respect to Zhenfa’s debt.

48    The applicant submits that there should be no order as to the costs of this proceeding. But the applicant should pay the respondents’ costs of this proceeding. First, the applicant has in one sense sought an indulgence from the Court. Second, it was the applicant that was at fault in not putting forward all relevant material at the time to justify an adjournment of the creditor’s petition. Third, Zhenfa was quite entitled to oppose the annulment application. It was not merely a contingent creditor. Fourth, there had to be a Court hearing in any event given the nature of the s 153B application. Fifth, Zhenfa had previously invited the applicant to secure its debt, which proposal had been rejected by the applicant.

49    I will make orders in the terms envisaged.

Associate:

Dated:    26 August 2015