Federal Court of Australia

Cao v Yu, in the matter of Cao [2025] FCA 1102

ORDERS

THE COURT ORDERS THAT:

1.    The application filed on 30 April 2025 for review of the Registrar’s decision be summarily dismissed under rule 26.01(1) of the Federal Court Rules 2011 (Cth).

2.    The applicant pay the respondent’s costs of the proceedings on an indemnity basis in the lump sum of $3,250.00 (inclusive of GST).

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

REASONS FOR JUDGMENT

PERRY J:

1    By an interim application filed on 30 April 2025, Mr Howard Hao Ting Cao (the bankrupt) seeks review of a decision of a Registrar dismissing an application to set aside a bankruptcy notice issued to him by the creditor on 18 November 2024 (the review application). The respondent is Mr Meng Yu, a creditor of the bankrupt. Both parties had legal representation.

2    The bankruptcy notice relates to a debt owed to the creditor by Option Holdings Pty Ltd and Mr Cao, the sole director of Option Holdings, under a deed dated 16 November 2022 (the Deed). Under the Deed, Mr Cao and Option Holdings were required to pay $1,000,000 to Mr Yu by 30 June 2023 in settlement of earlier court proceedings between them. An application by Option Holdings and Mr Cao alleging that the amount payable under the Deed had been extended to 31 October 2024 was summarily dismissed on 3 September 2024 by the Supreme Court of NSW (the Judgment) which ordered payment by the applicants in the sum of $1,096,955.83 to the creditor and awarded indemnity costs in the gross sum of $19,254. An application for leave to appeal against the Judgment made on 30 September 2024 was dismissed by the NSW Court of Appeal on 25 February 2025 in Option Holdings Pty Ltd v Meng Yu [2025] NSWCA 18.

3    On 9 December 2024 Mr Cao applied to set aside the bankruptcy notice on the ground that the issue of the bankruptcy notice constituted an abuse of process because the creditor had failed to take steps to enforce the judgment debt between 3 September and 18 November 2024. Specifically, at [16]-[18] of his submissions filed on 9 March 2025, Mr Cao submitted:

It is significant that from the entry of the Judgment on 3 September 2024 to the time of issue of the Bankruptcy Notice on 18 November 2024, the Respondent had taken no steps to attempt to enforce the Judgment against the Applicant. Thus, the Respondent issued no Examination Notice, sought no Garnishee Order, and make no application for the issue of a writ for the levy of property of the Applicant.

It is submitted that the Respondent’s failure to take any step to attempt to enforce the Judgment prior to the issue of the Bankruptcy Notice support the inference that the Bankruptcy Notice was issued for an improper purpose, rather than to invoke the Court’s jurisdiction in relation to insolvency.

Accordingly, the Bankruptcy Notice is liable to be, and should be, set aside as an abuse of process.

4    On 10 April 2025, a Registrar dismissed the application to set aside the bankruptcy notice.

5    On 30 April 2025, Mr Cao filed an application for review of the Registrar’s decision seeking that:

Pursuant to the Court’s inherent power, an order that the Bankruptcy Notice BN274660 issued to the Applicant on 22 November 2024 be set aside on the ground that the issue of the Bankruptcy Notice constitutes an abuse of process.

6    On 8 May 2025, Mr Cao appointed a controlling trustee pursuant to s 188 of the Bankruptcy Act 1966 (Cth). As a consequence, on 21 July 2025, the creditor filed an interlocutory application seeking summary judgment against Mr Cao under rule 26.01(1) of the Federal Court Rules 2011 (Cth) (FCR) on the ground (as is conceded) that the appointment of a controlling trustee itself is an act of bankruptcy: Bankruptcy Act 1966 (Cth) s 40(1)(i); Compton v Ramsay Health Care Australia Pty Ltd [2017] FCAFC 221; (2017) 256 FCR 345 at [28] (the Court); Investec Australia Finance Pty Ltd v Naude [2016] FCA 731 at [7] (Farrell J); Anscor Pty Ltd v Clout (Trustee) [2004] FCAFC 71; (2004) 135 FCR 469 at [20] (Lindgren J (with whose reasons Wilcox and Moore JJ relevantly agreed at [1])). Thus, as Mr Cao accepted, the proceeding has no utility following the appointment of the controlling trustee. As the creditor submits, even if the review were successful (which is far from clear, as the creditor also submits), an act of bankruptcy had already taken place which would provide a basis for a bankruptcy petition. The review application therefore lacks any reasonable prospects of success and should be summarily dismissed under rule 26.01(1) of the FCR. It follows that the only remaining question is whether indemnity costs should be awarded against the bankrupt under s 43(3)(d) and (g) of the Federal Court of Australia Act 1976 (Cth), as sought by the creditor.

7    The bankrupt did not file written submissions in support of the review application, or in response to the application for summary judgment. However, the bankrupt’s solicitor sent an email to the Court on 2 August 2025:

Dear Associate,

I refer to the respondent's Submissions dated 21 July 2025 filed pursuant to the orders made by her Honour Justice Perry on 15 June 2025.

The applicant now accepts that there is no utility of continuing this proceeding in light of the authority provided by the applicant to a controlling trustee, Mr Thyge Trafford-Jones, on 8 May 2025 under s 188 of the Bankruptcy Act 1966. Accordingly, the applicant makes no submissions in respect of any order for the dismissal of the proceeding or any consequential costs order, and leaves it to the Court to make such orders as the Court determines may be appropriate.

I apologise to her Honour and the respondent's lawyer for not communicating the above earlier, which was due my inability in obtaining timely instructions.

8    I recently summarised the general principles on indemnity costs in Federal Commissioner of Taxation v Rawson Finances Pty Ltd (Costs) [2024] FCA 19; (2024) 301 FCR 365 at [11]-[13] as follows:

This Court has a broad discretion to order costs under s 43 of the Federal Court of Australia Act 1976 (Cth): Wills v Chief Executive Offıcer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43 at [20] (Logan, Griffiths and Perry JJ). That discretion includes power to order that costs be paid on an indemnity, rather than a party/party, basis: Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 (Colgate-Palmolive) at 232-233 (Sheppard J).

The ordinary rule is that a party is entitled to costs on a party/party basis only. However, the ordinary rule may be departed from where there is “some special or unusual feature in the case to justify the Court in departing from the ordinary practice”: Colgate-Palmolive at 233 (Sheppard J). That said, as the applicant submits, references in the cases to general rules or ordinary practices for the award of costs should not be understood as fettering the discretionary nature of such decisions: GR Vaughan (Holdings) Pty Ltd v Vogt [2006] NSWCA 263 at [20] [(Bryson JA (with whose reasons Hodgson and Santow JJA agreed at [1] and [2]))]. Thus, the “categories in which the discretion may be exercised are not closed”: Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd [1991] FCA 225 at [8] (French J). “The question”, as Sheppard J explained in Colgate-Palmolive at 234, “must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis”.

It is also well-established that “costs are awarded to indemnify a successful party in litigation, not by way of punishment”: Oshlack v Richmond River Council (1998) 193 CLR 72 (Oshlack) at [1] (Brennan CJ).

9    In the present case, I consider that the particular facts and circumstances do warrant an order for indemnity costs, as the creditor contends. The review application was made, as earlier explained, on the basis that the issue of the bankruptcy notice was an abuse of process because the creditor had failed to take steps to enforce the judgment debt prior to its issue. However, as the creditor also submitted, making a demand for payment, or exhausting other avenues for recovery, is not a precondition for the issue of a bankruptcy notice; nor is the failure to take such steps a basis on which to infer that the bankruptcy notice was issued for an improper purpose: Nobarani v Mariconte [2021] FCAFC 96 at [43] (the Court). The review application was therefore without any merit. Furthermore, as the creditor submitted, the bankrupt did not file submissions and otherwise failed to prosecute his case. Nor has the bankrupt indicated any willingness to pay the debt he owes. Rather the review application has served only to delay and increase costs for the creditor in the context of a “long saga of litigation”, as the creditor described it. Moreover, once the controlling trustee was appointed on 8 May 2025, the bankrupt should have discontinued the proceedings. I agree with the creditor that these factors satisfy the requirement of a “special or unusual feature in the case” to justify departure from the ordinary practice of costs being paid on a party/party basis in line with the principles earlier explained.

10    The final question is whether this is an appropriate case in which to make a lump sum determination and, if so, the quantum of costs sought by the creditor is appropriate. The relevant principles were articulated in Jadwan Pty Ltd v Rae & Partners (A Firm) [2023] FCAFC 182 at [9] (the Court (accepting the principles articulated by the primary judge)) as follows:

(1)    The purpose of the lump sum costs provisions is the avoidance of the expense, delay and aggravation involved in protracted litigation arising out of taxation ….

(2)    The costs fixed should be proportionate to the nature, including the complexity, of the case ….

(3)    In assessing quantum, the court is entitled to take into account the evidence that is before it, its own observations of the proceedings and the judge’s own assessment experience …

(4)    Of its nature, determination of a gross sum is not the result of a process of taxation or assessment of costs …

(5)    The gross sum can only be fixed broadly having regard to the information before the court, which involves applying a much broader brush than would be applied on taxation …

(6)    The approach taken to estimate costs must be logical, fair and reasonable …

(7)    Although it is the usual practice of the court when making a lump sum costs order to apply a discount to the amount that the party was liable to pay to its lawyers, that does not mean that the court must apply a percentage discount to the sum sought. Rather, the court must be astute not to cause an injustice to the successful party by applying an arbitrary “failsafe” discount on the costs estimate. Thus, if the court can be confident that there is little risk that the sum includes costs that might be disallowed on assessment the case for a discount is seriously undermined …

(Citations omitted.)

11    The creditor relied on an affidavit of his solicitor, Leo Lam, affirmed on 21 July 2025, which specified solicitor’s costs of $1,665.02 and counsel’s costs of $1,601.50. This gave a total lump sum, calculated on an indemnity basis, of $3,266.52 inclusive of GST. The description of the work involved in defending the interim review application and preparing the summary judgment application was, in my view, reasonable. The amount in issue is relatively small and the cost of undertaking a taxation of the costs is likely to be disproportionate to that amount. I also do not consider that this is a case where there is a risk that the lump sum sought might include costs which might be disallowed on a taxation. Accordingly, a gross sum costs order rounded down to the amount of $3,250.00 is warranted: Jadwan at [9] (the Court).

12    In the circumstances, I am therefore satisfied that it is appropriate to award costs in a lump sum in the amount of $3,250.00 (incl. GST).

Associate:

Dated:    9 September 2025