Federal Court of Australia

Tse v Evans as trustee in bankruptcy for Ngo [2024] FCA 787

ORDERS

THE COURT ORDERS THAT:

1.    The applicants have leave to adduce evidence in respect of prayer for substantive relief 1 pursuant to s 192A of the Evidence Act 1995 (Cth) in the form of that served being:

(a)    the affidavit of Gordon Kar Ming Tse affirmed 10 April 2024 together with Exhibit GT-1;

(b)    the affidavit of Tiehong Chen affirmed 10 April 2024 together with Exhibit TC-1;

(c)    the affidavit of Hai Xia Song affirmed 10 April 2024 together with Exhibit HS-1;

(d)    the affidavit of Yang Liu affirmed 11 April 2024 together with Exhibit YL-1;

(e)    the affidavit of Kanin Lwin affirmed 25 April 2024 together with Exhibit CH-1.

2.    Leave is granted under s 58(3)(b) of the Bankruptcy Act 1966 (Cth) to the applicants to continue proceeding no. 2023/00231043 in the Supreme Court of New South Wales against Viet Trung Ngo, the first defendant in those proceedings.

3.    In the event that no agreement is reached on the issue of costs, on or before 4:00pm on Wednesday 24 July 2024, the applicants are to file and serve a short submission, of no more than 5 pages, in support of their position in respect of costs.

4.    On or before 4:00pm on Wednesday 31 July 2024, the respondent is to file and serve any submission, of no more than 5 pages, in response on the issue of costs.

5.    On or before 4:00pm on Wednesday 7 August 2024, the applicants are to file and serve any submissions in reply of no more than 3 pages.

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

REASONS FOR JUDGMENT

PERRY J:

1.    INTRODUCTION

1    This is an application for leave under s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (Act) for the applicants to proceed against Mr Viet Trung Ngo in Supreme Court of New South Wales proceeding No. 2023/00231043 (the NSWSC Proceeding).

2    The NSWSC Proceeding was commenced on 20 July 2023 by the applicants in the present proceedings, Gordon Kar Ming Tse, and Tiehong. The primary question in issue in the NSWSC proceeding is whether there was a partnership between the applicants and Mr Ngo. The applicants contend that from about 2012, there was a partnership between them and Mr Ngo, the business of which was the consignment of car accessories to Australia by the applicants of sales through E-commerce stores, including eBay. In the NSWSC Proceeding, Mr Ngo has denied the existence of a partnership between him and the applicants. This is despite evidence that Mr Ngo had acknowledged that the relationship between him and the applicants was one of partnership, for example, in WeChat messages in 2022 and allegedly at various meetings with the accountant, Yang Liu, in 2022 and 2023.

3    The relief sought against Mr Ngo in the NSWSC Proceeding includes:

(1)    a taking of accounts; and

(2)    a declaration that the warehouse at Unit 5, 115-117 Orchard Road, Chester Hill NSW (Chester Hill Warehouse) is partnership property.

4    In support of the claim for relief, the applicants contend that they approved a lease of the Chester Hill Warehouse by the partnership in 2015. Mr Ngo then deducted rent from the Australian operation of the partnership between 2015 until (at least) August 2022, before sending profits to the applicants in China. However, the applicants contend that Mr Ngo failed to disclose that he and his then wife had in fact purchased the Chester Hill Warehouse in 2015 and that on 19 June 2020, he became the sole registered proprietor of the warehouse.

5    The applicants further contend that it may well be that under-reported partnership funds of at least $640,000 (according to the evidence of Ms Chris Han, a chartered accountant, in her report dated 12 December 2023) were used by Mr Ngo to pay the mortgage on the Chester Hill Warehouse, in breach of his fiduciary duties. If so, the applicants contend that they hold a proprietary interest in the warehouse, rather than merely a personal remedy for an account of profits: see, eg, Alesco Corporation Limited v Te Maari [2015] NSWSC 469 at [162]–[167] where Hallen J granted an equitable charge over a property purchased with funds misappropriated from the respondent’s employer. Alternatively, the applicants contend that the circumstances would establish the existence of a constructive trust in the same or similar terms: ibid.

6    On 9 February 2024, Mr Ngo gave an undertaking in the NSWSC Proceeding not to dispose of, or otherwise deal with, the Chester Hill Warehouse. On 1 March 2024, Mr Ngo filed his defence in the NSWSC Proceeding. On 16 February 2024, the applicants lodged the first tranche of security for costs in the sum of $60,000. Shortly thereafter and, the applicants submit, “no doubt seeing that the noose was tightening” (Applicants’ Submissions (AS) at [35]), Mr Ngo filed a voluntary petition for bankruptcy on 7 March 2024. Further, on 9 February 2024, two companies of which Mr Ngo was the sole director, Great Current Australia Pty Ltd (which the partnership allegedly used to receive, store and sell car accessories in Australia) and Smart Shop International Pty Ltd (which was also related to the partnership) were joined to the NSWSC Proceedings. On 4 March 2024, Mr Ngo put Great Current and Smart Shop into liquidation.

7    In their first report to creditors dated 8 April 2024, the trustees advised with respect to the applicants’ claim in the NSWSC Proceeding that “[f]rom our initial perusal of the documents provided to us to date, there does not appear to be any compelling documentary evidence to support the claim by Mr Tse and Mr Chen”. As such, at this stage, the trustees have not accepted the applicants’ claims. Consequently, the trustees reported that they consider that Mr Ngo’s interest in the Chester Hill property has vested in them as an asset of his bankrupt estate and they have lodged a caveat on the title of the property to secure their interest.

8    An order was also originally sought in the NSWSC Proceeding that Mr Ngo restore the applicants’ administrator access to eBay stores operated for the partnership’s business. However, on 24 April 2024, the Applicants settled the proceedings as against the liquidators of Great Current and Smart Shop. The Court was advised that the applicants now seek to enlist the assistance of eBay to permit them to restart the operation of the eBay stores.

9    The trustees in bankruptcy neither consent to nor oppose the present application for leave: see notation 4 to the Orders made on 3 July 2024. The trustees appeared at the hearing of the application for leave and made short observations clarifying certain matters that had arisen during the course of the hearing.

10    At the hearing on 10 July 2024, I granted leave to the applicants to proceed against Mr Ngo, with my reasons to be published subsequently. These are my reasons for making those orders.

2.    EVIDENCE

11    In support of their application for leave, the applicants relied upon the following affidavits:

(1)    Affidavit of Gordon Kar Ming Tse affirmed 10 April 2024 and Exhibit GT-1

(2)    Affidavit of Tiehong Chen affirmed 10 April 2024 and Exhibit TC-1.

(3)    Affidavit of Yang Liu, accountant, affirmed 11 April 2024 and Exhibit YL-1.

(4)    Affidavit of Hai Xia Song, bookkeeper, affirmed 10 April 2024 and Exhibit HS-1.

(5)    Affidavit of Kanin Lwin, solicitor, affirmed 25 April 2024 and Exhibit CH-1.

(6)    Affidavit of Kanin Lwin affirmed 26 April 2024 and Exhibit KL-3.

(7)    Affidavit of Kanin Lwin affirmed 20 May 2024 and Exhibit KL-3A.

12    The applicants also filed written submissions in advance of the hearing of the application.

3.    LEGAL PRINCIPLES

13    The Bankruptcy Act does not specify the factors to be taken into account in considering whether leave should be granted under s 58(3)(b) of the Bankrupcty Act. While the discretion is at large, in Yan v Spyrakis as trustee in bankruptcy for Liu [2022] FCA 872, Katzmann J at [11] identified the following matters as weighing in favour of an applicant for leave:

(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 [v Midland Credit Ltd [1977] FCA 14;] 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].

14    Similarly, in Hillig in the matter of Battaglia [2019] FCA 2191, Wigney J summarised the relevant principles at [6] to [8] as follows:

The principles concerning leave under s 58(3)(b) of the Bankruptcy Act are fairly well settled. The purpose of the requirement for leave is to ensure that a bankrupt is not subjected to a multiplicity of actions which would be both expensive and time-consuming, and in some cases unnecessary: see Zervas v Burkitt [2019] NSWCA 112 at [15].

The requirement for leave focusses attention on the choice between litigation and the proof of debt procedure in a bankruptcy. It will generally be appropriate for leave to be granted in cases where the issues would be better and more comprehensively dealt with by a contested trial of the action in a court proceeding than would be the case if the creditor was required to lodge a proof of debt in the debtor’s bankruptcy: see Allanson v Midland Credit Ltd (1977) 30 FLR 108; [1977] FCA 66. That would particularly be the case where the creditor’s claims involve other parties.

The relevant factors to be taken into account cannot be stated exhaustively and will vary from case to case: see Burkitt at [15]. Nevertheless, the factors generally considered to be relevant to such applications include: the amount and seriousness of the claims; the degree and complexity of the legal and factual issues involved; the stage to which the proceedings have progressed; the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt; whether the claim has arguable merit; whether proceedings are already in motion at the time of the bankruptcy; whether the proceedings will result in prejudice to creditors; whether the claim is in the nature of a test case for the interest or large class of potential claimants; whether the grant of leave will result in further litigation; whether the cost of the hearing will be disproportionate to the size of the bankrupt estate; the risk of delay; and whether pre-trial procedures such as discovery and interrogatories are likely to be required or beneficial: see Cassegrain v Gerard Cassegrain & Co Pty Limited (in liq) [2012] NSWCA 435 at [33].

4.    CONSIDERATIONS IN SUPPORT OF THE GRANT OF LEAVE

15    Applying these principles, this is a clear case where leave should be granted to the applicants to permit them to pursue the NSWSC Proceeding against Mr Ngo. The primary considerations which lead me to that view can be briefly summarised as follows.

16    First, it is clear that the applicants’ claim against Mr Ngo involves relatively complex legal and factual issues. As the applicants contend:

[T]he pleadings and particulars show there is contest almost across the board, including whether :

a.    (as contended for by the Applicants) the parties were in a partnership and, if so, what the nature of the duties were; and, if there was no partnership, whether there was a joint venture or agency for distribution (and if so what duties were owed by Mr Ngo); or

b.    (as contended for by Mr Ngo in correspondence from his former Solicitors, Selective Lawyers) the business relationship was simply one for the sale of goods.

(Empasis and citations omitted.)

17    Those issues would be more comprehensively and appropriately determined by way of a contested trial in the Supreme Court proceedings, rather than through the process of the submission of a proof of debt and possible appeal. This is particularly so where, if a partnership exists, the applicants seek a proprietary remedy in relation to the Chester Hill Warehouse, including a declaration that the warehouse is partnership property.

18    Secondly, there is at least a serious claim against Mr Ngo in the NSWSC Proceedings.

19    Thirdly, the NSWSC Proceeding was commenced well before the date of Mr Ngo’s bankruptcy and there is no evidence to suggest that the application was made to gain any advantage over other creditors.

20    Fourthly, the NSWSC Proceeding was well progressed by way of pleadings and evidence.

21    In the fifth place, as the applicants contend, the resolution of the issues in dispute would likely be assisted by the usual pre-trial compulsory procedures for the production of documents and information, such as by way of interrogatories, discovery and subpoenas. As they also contend, these are quintessential issues for a judge to case manage.

22    Finally, I accept the applicants’ submission that, absent leave, the applicants may suffer irreparable prejudice in the following respects.

(1)    Money and other assets, which the applicants contend are not properly characterised as belonging to Mr Ngo but rather as belonging to them, may be distributed to other creditors before the questions with respect to their ownership are the subject of judicial determination.

(2)    The Trustees, despite their considerable statutory powers, have at least to date apparently been unable to determine the destination of considerable funds of the business, in respect of which the applicants claim to be entitled to a share. Absent leave being granted, the applicants would be prevented from conducting investigations under the control of the Supreme Court into the destination of partnership moneys.

(3)    At least as at the time of their First Report and the hearing before me, the Trustees have not accepted the applicants’ claims to have been in partnership with Mr Ngo, that the Chester Hill Warehouse is partnership property, and otherwise with respect to alleged misappropriated partnership funds.

(4)    As earlier explained, the applicants now seek to enlist the assistance of eBay to permit them to restart the operation of the eBay stores. In order to effect this, the applicants may need to join eBay to the NSWSC proceedings, which will require a judgment by the Supreme Court. Unless this can be achieved, the applicants submit that their settlement with the liquidators (the terms of which are confidential) may well be pyrrhic.

23    As such, this case squarely aligns with the kinds of situations in which leave is typically granted.

5.    CONCLUSION

24    In all of the circumstances, leave should be granted to the applicants to proceed against Mr Ngo in Supreme Court of New South Wales proceeding No. 2023/00231043. I note that at the hearing, I reserved the question of costs.

Associate:

Dated: 18 July 2024