Li and Another v Wu

• Jurisdiction: Australian Capital Territory
• Judge: Elkaim,Loukas-Karlsson,Rangiah JJ
• Judgment Date: 16 May 2019
• Date: 16 May 2019
• Court: Court of Appeal of ACT
• Docket Number: File Number: ACTCA 47 of 2018

[2019] ACTCA 14

SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY COURT OF APPEAL

Before:

Elkaim, Loukas-Karlsson & Rangiah JJ

File Number: ACTCA 47 of 2018

Yuxin Li

(First Applicant)

Hong Chen

(Second Applicant)

and

Tao Wu

(Respondent)

Representation:

Counsel

Mr Neal with Mr Flecknoe-Brown (First and Second Applicant)

Mr Karam with Mr Thomas (Respondent)

Cases Cited:

Aliprandi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250

Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; 71 NSWLR 577

Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; 245 ALR 780

Challis v Hoffmann [2017] NSWSC 870; 121 ACSR 585

Flower & Hart (a firm) v White Industries (Qld) Pty Ltd [1999] FCA 773; 87 FCR 134

Hall v Poolman [2009] NSWCA 64; 75 NSWLR 99

Li v Wu [2013] FCA 1067

Li v Wu [2016] FCCA 2836

Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859

Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; 101 ACSR 233

Re Featherston Resources Pty Ltd; Tetley & Ors v Weston & Ors [2014] NSWSC 1139; 288 FLR 265

Re Karinya Haulage Pty Limited [2017] NSWSC 888

Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; 42 ACSR 313

Varawa v Howard Smith & Co Ltd (1911) 13 CLR 35

Vouris as liquidator of Cadima Express Pty Ltd v Deputy Commissioner of Taxation [1999] NSWSC 1143; 33 ACSR 527

Williams v Spautz (1992) 174 CLR 509

Wu v Li [2015] FCAFC 109

Wu v Li [2017] FCA 500

Legislation Cited:

Corporations Act 2001 (Cth) s 237

Bankruptcy Act 1966 (Cth) ss 40(1)(g), 52(2)

Limitation Act 1985 (ACT) ss 11(1), 33

APPEAL — GENERAL PRINCIPLES — In General and Right of Appeal — Application for leave to appeal against primary judgment — good faith and solid foundation in derivative action

Decision:

See [108]

THE COURT:

1 On 17 August 2018, Associate Justice McWilliam granted Mr Wu ( Respondent) leave to commence a derivative proceeding in the name of Golden Constructions Pty Ltd (in liq) ( Golden Constructions) against Mr Li ( First Applicant) and Ms Chen ( Second Applicant). This is an application for leave to appeal against that judgment.

2 In their draft notice of appeal, Mr Li and Ms Chen allege that the primary judge erred:

• (a) in failing to be satisfied that Mr Wu lacked good faith in pursuing the proposed derivative proceeding;

• (b) in failing to conclude that the proposed derivative proceeding lacked a solid foundation.

3 For the reasons that follow, we consider that leave to appeal should be granted, and that the appeal should be allowed in part.

Background

4 Golden Constructions is in liquidation. Mr Wu is a former director of Golden Constructions and the holder of 35% of its shares.

5 Mr Li holds 30% of the shares in Golden Constructions and Ms Chen, his wife, holds the remaining 35%.

6 The present litigation arises out of a series of business dealings between Mr Wu, Golden Constructions, Mr Li and Ms Chen. It is necessary to outline those dealings and the subsequent course of litigation in order to understand the basis of the derivative proceeding.

7 Mr Li and Ms Chen are Chinese citizens who wished to immigrate to Australia. They entered into a business relationship with Mr Wu and several companies that Mr Wu had incorporated. This included Mr Li lending money to at least one of those companies. Mr Wu's “corporate group” collapsed in August 2011.

8 Mr Li commenced proceedings against Mr Wu in the Federal Court of Australia, and on 6 November 2013, he obtained judgment in the amount of $976,866.80 plus interest: Li v Wu [2013] FCA 1067. Mr Wu appealed and Mr Li cross-appealed.

9 On 6 December 2013, Mr Li issued a bankruptcy notice to Mr Wu based upon the judgment debt. The time to comply with the bankruptcy notice was successively extended pending judgment upon the appeal and cross-appeal.

10 On 17 August 2015, the Full Court of the Federal Court varied the judgment so that Mr Wu was ordered to pay Mr Li $1,076,767 plus interest: Wu v Li [2015] FCAFC 109.

11 On 9 September 2015, Mr Wu applied to the Federal Circuit Court to set aside the bankruptcy notice, including on the ground that he had a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment debt. That application was dismissed on 11 September 2015. On 6 October 2015, Mr Li presented a creditor's petition against Mr Wu.

12 In the meantime, the liquidator of Golden Constructions asserted that Mr Li and Ms Chen owed debts to Golden Constructions. The first alleged debt was an amount said to be owed by Mr Li and Ms Chen under a contract pursuant to which Golden Constructions was to construct a residential dwelling at a property located at 48 Akame Circuit, at O'Malley, in the ACT ( the Building Contract). The second alleged debt was a loan said to have been made by Golden Constructions to Mr Li in the sum of $572,998.02 ( the alleged loan).

13 On 13 August 2014, the liquidator entered into a Deed of Assignment with Mr Wu, assigning to him, relevantly, all claims that Golden Constructions may have against Mr Li and Ms Chen in relation to the construction of the dwelling. The consideration for the assignment was $16,000 plus 5% of the proceeds of any such claims.

14 On 9 October 2015, three days after the creditor's petition was presented, Mr Wu commenced the present proceedings against Mr Li and Ms Chen in the ACT Supreme Court claiming:

• (a) $1,283,804.75 pursuant to the Building Contract or, alternatively, $2,807,999.40 on a quantum meruit; and

• (b) $572,998.02 in respect of the alleged loan.

15 On 30 October 2015, in the Federal Circuit Court, Mr Wu filed a notice of opposition to the creditor's petition raising a ground that in light of his off-setting claim, there was “sufficient cause” under s 52(2) of the Bankruptcy Act 1966 (Cth) ( Bankruptcy Act) for a sequestration order not to be made.

16 The creditor's petition was heard in the Federal Circuit Court on 3 May 2016 and judgment was reserved. On 5 October 2016, while judgment was still reserved, the creditor's petition expired.

17 On 4 November 2016, the Federal Circuit Court upheld the creditor's petition and made a sequestration order against Mr Wu's estate: Li v Wu [2016] FCCA 2836. The presiding judge held, inter alia, that Mr Wu was insolvent; he had not satisfactorily explained the delay between taking the assignment in August 2014 and bringing the proceedings in October 2015; and his prospects of success were poor because Mr Li and Ms Chen had not consented to the assignment. His Honour relied upon the slip rule to overcome the expiry of the creditor's petition.

18 On 7 April 2017, the Federal Court allowed an appeal against the judgment of the Federal Circuit Court on the basis that the slip rule was not available in the circumstances of the case. The sequestration order against Mr Wu was set aside: Wu v Li [2017] FCA 500.

19 Mr Li and Ms Chen filed a defence to the present proceedings on 16 March 2016. They defend the proceeding on the basis, inter alia, of cl 18(a) of the Building Contract which states that:

Neither party will assign the rights or obligations under this Contract without the written consent of the other.

20 Mr Li and Ms Chen plead that, as they did not consent to the assignment to Mr Wu, there is no valid assignment of any relevant cause of action.

21 On 10 November 2017, Mr Wu made his application to bring a derivative proceeding on behalf of Golden Constructions. The purpose of the application appears, on the face of it, to be to overcome the effect of the non-assignment clause in the Building Contract. However, that purpose is disputed by Mr Li and Ms Chen.

22 On 24 August 2017, the liquidator had entered into a Deed of Agreement with Mr Wu, under which the liquidator consented to the derivative proceeding being brought. Mr Wu agreed to pay the liquidator 5% of any net proceeds, to indemnify the liquidator and Golden Constructions against any adverse costs orders and to provide security for the indemnity. The liquidator has deposed that this agreement represents the only prospect of a return to the creditors of Golden Constructions.

23 The hearing of Mr Wu's application for leave to bring the derivative proceeding took place before the primary judge on 9 April 2018, and judgment was delivered on 17 August 2018 granting leave. These dates are relevant to consideration of the limitation period issues raised by the parties.

24 The amended statement of claim permitted under the orders of the primary judge had not been filed by the date of the hearing of the appeal.

The judgment of the primary judge

25 Mr Wu's application for leave to bring a derivative proceeding on behalf of Golden Constructions relied upon the Court's inherent jurisdiction. The primary judge noted that the parties had agreed that the applicable principles were those set out in Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; 71 NSWLR 577 at [34] ( Carpenter).

26 Her Honour summarised the principal issue as being whether the proposed proceedings, “have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success”. Her Honour described the basis of the proposed claims as follows:

14. The claim as articulated turns primarily on the Building Contract, a copy of which was in evidence. It includes on the front page the Company as the builder and the defendants as the contracting parties, although only [Mr Li] appears to have signed each page. Further, some of the appendices to the Building Contract were incomplete and not signed by anyone. The Company was contracted to build a residential dwelling at the site in...