Credit Suisse AG v Gu (No 2) [2022] NSWSC 198

Supreme Court New South Wales

Medium Neutral Citation: Credit Suisse AG v Gu (No 2) [2022] NSWSC 198 Hearing dates: 2 March 2022 Date of orders: 3 March 2022 Decision date: 03 March 2022 Jurisdiction: Common Law Before: Davies J Decision: 1. The hearing of the proceedings fixed for 4 April 2022 is vacated. 2. These proceedings are transferred from this Court to the Federal Court of Australia pursuant to s 5(1)(b)(i) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth). 3. Costs thrown away by reason of the transfer reserved to the Federal Court. 4. Costs of the notice of motion filed 24 February 2022 be costs in the cause. Catchwords: CIVIL PROCEDURE – cross-vesting – transfer to Federal Court of Australia – related proceedings in Federal Court – special federal matter – property proceedings in Supreme Court – dispute over priorities of interests in land – bankruptcy of borrower/registered proprietor – proceedings in Federal Court for orders under ss 120 and 121 Bankruptcy Act arsing from interests of claimants – jurisdiction of Supreme Court in bankruptcy – more appropriate court - interests of justice Legislation Cited: Bankruptcy Act 1966 (Cth) ss 30,120,121 Conveyancing Act 1912 (NSW) s 12 Judiciary Act 1903 (Cth) s 39B Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) ss 3,5,6,12 Cases Cited: Bankinvest A G v Seabrook (1988) 14 NSWLR 711 BHP Billiton Ltd v Schultz (2004) 221 CLR 400; [2004] HCA 61 Docherty v Porter, in the matter of Docherty (Bankrupt) [2021] FCA 1227 Re Hamilton-Irvine (1990) 101 FLR 11 Seven Network (Operations) Limited v Harrison [2017] NSWSC 405 Truthful Endeavour Pty Ltd v Condon (Trustee), in the matter of Rayhill (2015) 233 FCR 174; [2015] FCAFC 70 Texts Cited: Nil Category: Procedural rulings Parties: Menghong (Michael) Gu (First Defendant) Great Lands Investment Pty Ltd (Second Defendant) Zhi Huang (Third Defendant) Ying Qin (Fourth Defendant) Zhenhua Zhang (Fifth Defendant) Po Hu (Sixth Defendant) Hongyun Liu (Seventh Defendant) I-Prosperity Pty Ltd (In Liquidation) (Eighth Defendant) Jing Spring Hill Pty Ltd (Ninth Defendant) Liyun Liu (Tenth Defendant) Representation: Counsel: J Wherrett (Second Defendant) S Docker (Third-Sixth Defendants) No appearance (Seventh Defendant) F Murray-Palmer (Eighth Defendant) S Wang (Ninth Defendant) No appearance (Tenth Defendant)

Solicitors: MJF Law (Third to Sixth Defendants) Norton Rose Fulbright (Eighth Defendant) Hall and Wilcox Lawyers (Ninth Defendant) Ashurst Australia (Tenth Defendant) File Number(s): 2020/313035 Publication restriction: Nil

Judgment 1. At the conclusion of the hearing of a notice of motion filed by the second, third, fourth and fifth defendants on 24 February 2022, I made orders vacating the hearing of these proceedings on 4 April 2022 and transferring the proceedings to the Federal Court. I reserved my decision on costs. These are my reasons for the orders, and in relation to costs. 2. These proceedings commenced as possession proceedings by the plaintiff in relation to a property owned by the first defendant in Superba Parade, Mosman. The plaintiff was the first registered mortgagee, and the first defendant, Menghong Gu, was the registered proprietor and mortgagor of the land. The other defendants were various parties who claimed interests in the land arising out of various transactions, including loans said to be secured on the land as well as claims for resulting and constructive trusts. 3. On 18 January 2021, the plaintiff entered into a contract to sell the land after having obtained possession. The contract was completed on 26 February 2021. After the plaintiff recouped from the proceeds of sale what it was owed, surplus funds of $5,287,560.97 ("the Surplus Funds") were paid into Court. 4. Cross-claims were then filed by four groups of defendants. In each case, the cross-claim named Mr Gu (who has never appeared) as a cross-defendant and, in addition, some or all of the remaining defendants. 5. The cross-claims are as follows: (a) On 12 May 2021, the third, fourth, fifth and sixth defendants ("the Hu Parties") filed a first cross-claim which was amended on 1 November 2021. The Hu parties claimed to be entitled to all of the Surplus Funds pursuant to an equitable charge securing a guarantee and indemnity given by Mr Gu for payment of a debt of $5,761,972.60 plus interest in a Deed of Guarantee and Indemnity dated 2 June 2020. The Hu Parties lodged a caveat on 2 June 2020; (b) On 22 June 2021, the eighth defendant, i-Prosperity Pty Ltd (in liquidation) ("IPPL"), filed a second cross-claim which was amended on 2 August 2021, claiming entitlement (i) to $1,278,611.62 of the Surplus Funds pursuant to a resulting (purchase money) trust arising from Mr Gu's purchase of the Mosman Property in 2017; (ii) alternatively, to $1,065,246.14 under a constructive trust on the basis that Mr Gu misappropriated this amount of the purchase price from IPPL; and (iii) $280,000 and $1,200,000 by reason of being subrogated to the position of the plaintiff and the second defendant, Great Lands Investment Pty Ltd ("Great Lands") respectively, for contribution to repayments to their loans. IPPL lodged a caveat on 21 August 2020; (c) On 1 July 2021, the second defendant, Great Lands filed the third cross-claim claiming entitlement to $3,000,000 or $1,800,000 (since $1,200,000 was repaid) plus interest out of the Surplus Funds pursuant to an equitable mortgage given by Mr Gu, which was said to secure a loan made under a loan agreement with Mr Gu dated 28 June 2019. Great Lands lodged a caveat on 28 June 2019; (d) On 13 July 2021, the ninth defendant, Jing Spring Hill Pty Ltd ("JSH") filed the fourth cross-claim, claiming to be entitled to $4.4 million plus interest from the Surplus Funds as assignee of an equitable mortgage from Chunshan Jing dated 24 April 2022. JSH alleges that Mr Jing's mortgage secures a guarantee given by Mr Gu in a Deed of Guarantee. JSH lodged a caveat on 17 September 2020. 1. Each of the active parties, that is, all of the defendants except the first defendant Mr Gu, the seventh defendant Hongyun Liu and the tenth defendant Liyun Liu, have filed defences to the cross-claims. It is not necessary to detail the defences raised; it is sufficient to say that there are issues of priority in relation to each of the claims put forward in the cross-claims. 2. The proceedings have been fixed for a hearing for five days commencing 4 April 2022. 3. On 24 February 2022, pursuant to leave given by me on that day, the Hu Parties filed a notice of motion seeking transfer of these proceedings to the Federal Court pursuant to s 5(1)(b)(i) or s 5(1)(b)(iii) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) ("the Cross-vesting Act") . The basis for the transfer is that there are Federal Court proceedings commenced by the Hu Parties on 8 February 2002. Those proceedings are brought against Great Lands, IPPL, JSH and Chunshan Jing (the person from whom JSH obtained an assignment of the equitable mortgage referred to in the fourth cross-claim above). Those proceedings arise from the fact that on 10 August 2021 Mr Gu was made bankrupt by the Federal Court. 4. On 17 January 2022, Mr Gu's trustee in Bankruptcy, David Kerr, entered into a Deed of Assignment and Sale with the Hu Parties in which the trustee assigned to the Hu Parties Mr Gu's right, title and interest in the Surplus Funds and the trustee's rights to sue in relation to the Surplus Funds, which included the trustee's causes of action against Great Lands and JSH under the Bankruptcy Act 1966 (Cth). Those causes of action are claims for declarations pursuant to s 30 of the Bankruptcy Act that each of the Great Lands mortgage and the Jing Mortgage is void pursuant to s 120, alternatively s 121 of the Bankruptcy Act, that the Surplus Funds are the property of the Hu Parties, and an order that the Surplus Funds be paid to them. Those claims are made in the Federal Court proceedings. 5. Section 120 of the Bankruptcy Act concerns undervalued transactions, and makes void a transfer of property by a person who later becomes a bankrupt if the transfer took place in a period beginning five years before the commencement of the bankruptcy and the transferee gave no consideration for the transfer or gave consideration of less than the market value of the property. 6. The Hu parties assert that the s 120 claim against Mr Jing and JSH will require the Court to determine: (a) the market value of the guarantee and equitable mortgage given by Mr Gu to Mr Jing on 24 April 2020. The market value of the guarantee and equitable mortgage on 24 April 2020 will depend on Mr Gu's ability at the time to satisfy his obligations as guarantor, both personally and from the Mosman Property; (b) whether the value of the consideration given by Mr Jing was less than the market value of Mr Gu's guarantee and mortgage. Mr Gu guaranteed the obligations of i-Prosperity Group Pty Ltd ("IPG") under a loan agreement between IPG and Mr Jing dated 14 May 2019 which IPG had failed to repay. The consideration given by Mr Jing was forbearance to sue IPG immediately, and to accept the amount owing in instalments. 1. Section 121 of the Bankruptcy Act deals with transfers to defeat creditors. Such transfers by a person who later became a bankrupt are void against the trustee in bankruptcy. 2. The Hu Parties assert that the s 121 claims depend on establishing that: (a) as a result of Mr Gu's loan from Great Lands and mortgage of the Mosman Property on 28 June 2019, or as a result of the guarantee and mortgage Mr Gu to Mr Jing on 24 April 2020, there was property that would probably have become part of Mr Gu's bankrupt estate that did not; and (b) Mr Gu's main purpose was to prevent this, or to defeat or delay creditors. That element can be satisfied by establishing Mr Gu was insolvent at the time of the transactions (s 121(2)), and accordingly, the s 121 claims will require consideration of not only the circumstances in which the claimed interests in the Mosman Property were taken but also Mr Gu's solvency in June 2019 and April 2020. If Great Lands' chose in action to recover the loan and its equitable mortgage and/or JSH's chose in action in the form of the guarantee and its equitable mortgage is void, the Hu Parties assert that this will affect the present proceedings, because that result would prevent them from claiming the Surplus Funds. 1. The Hu Parties have also claimed in the Federal Court proceedings a declaration and an order for payment of the Surplus Funds to them in their capacity as assignee from the trustee of Mr Gu's rights. Whilst Mr Gu's priority is behind any other proprietary interest in the Mosman property, that claim may have utility if most or all of the claims of the others fail. 2. Section 5(1) of the Jurisdiction of Courts (Cross-vesting) Act provides: 5 Transfer of proceedings (1) Where: (a) a proceeding (in this subsection referred to as the relevant proceeding) is pending in the Supreme Court of a State or Territory (in this subsection referred to as the first court); and (b) it appears to the first court that: (i) the relevant proceeding arises out of, or is related to, another proceeding pending in the Federal Court or the Federal Circuit and Family Court of Australia (Division 1) and it is more appropriate that the relevant proceeding be determined by the Federal Court or the Federal Circuit and Family Court of Australia (Division 1); (ii) having regard to: (A) whether, in the opinion of the first court, apart from this Act and any law of a State relating to cross‑vesting of jurisdiction and apart from any accrued jurisdiction of the Federal Court or the Federal Circuit and Family Court of Australia (Division 1), the relevant proceeding or a substantial part of the relevant proceeding would have been incapable of being instituted in the first court and capable of being instituted in the Federal Court or the Federal Circuit and Family Court of Australia (Division 1); (B) the extent to which, in the opinion of the first court, the matters for determination in the relevant proceeding are matters arising under or involving questions as to the application, interpretation or validity of a law of the Commonwealth and not within the jurisdiction of the first court apart from this Act and any law of a State relating to cross‑vesting of jurisdiction; and (C) the interests of justice; it is more appropriate that the relevant proceeding be determined by the Federal Court or the Federal Circuit and Family Court of Australia (Division 1), as the case may be; or (iii) it is otherwise in the interests of justice that the relevant proceeding be determined by the Federal Court or the Federal Circuit and Family Court of Australia (Division 1); the first court shall transfer the relevant proceeding to the Federal Court or the Federal Circuit and Family Court of Australia (Division 1), as the case may be. 1. The Hu Parties assert that the present proceedings are related to the Federal Court proceedings because (a) both proceedings concern the same transactions between Great Lands and Mr Gu, and between Mr Jing and Mr Gu, as well as Mr Gu's ownership of the Mosman property; (b) the outcome of the Federal Court proceeding may impact the result of the present proceedings; and (c) the claim as assignee of Mr Gu's rights is for the same Surplus Funds that are the subject of the present proceedings. 2. Although neither the seventh nor the tenth defendants has taken any part in the present proceedings, the Hu parties served the present notice of motion and supporting affidavit on them. They have not appeared. 3. The second Defendant, Great Lands, does not oppose the transfer of the present proceedings. Although at the directions hearing held last week, neither of the eight or the ninth defendants opposed the transfer, both of them did so at the hearing of the motion. 4. Ms Murray-Palmer for the eighth defendant, IPPL, submitted that the Hu parties had changed their position as to the reason for the transfer. She submitted that, based on the material filed in the Federal Court, the approach of the Hu parties was that this Court did not have jurisdiction to deal with the bankruptcy matters. She submitted that the present position of the Hu parties appeared to be that there is a dispute about whether this Court has jurisdiction. She submitted that the case should remain in this Court where it had been case-managed for over 12 months, and where a hearing date was fast approaching. She submitted that there had been delay in making the present application, pointing to a recital in the Deed of Assignment between the trustee in bankruptcy and the Hu parties which indicated that agreement for the assignment had been reached by 12 November 2021. 5. Mr Wang for the ninth defendant, JSH, said that he adopted Ms Murray-Palmer's submissions. 6. In Re Hamilton-Irvine (1990) 101 FLR 11, Beaumont J held (at 17), in the context of the Cross-vesting Act, that the words "related to" meant "associated" or "connected". 7. I am satisfied for the reasons put forward by the Hu Parties that the present proceedings are related to the proceedings pending in the Federal Court. 8. In Bankinvest A G v Seabrook (1988) 14 NSWLR 711, Street CJ said (at 714): [I]t can be seen to be highly desirable that the judicial administration of the day to day working of the cross-vesting scheme is not encumbered by an encrustation of judge-made pronouncements of principles to be applied when considering making a transfer order. It calls for what I might describe as a 'nuts and bolts' management decision as to which court, in the pursuit of the interests of justice, is the more appropriate to hear and determine the substantive dispute. Considerations of textured principle and deep learning – in particular principles of international law such as forums non conveniens – have no place in a cross-vesting adjudication. 1. This passage was approved in the joint judgment of Gleeson CJ, McHugh and Heydon JJ in BHP Billiton Ltd v Schultz (2004) 221 CLR 400; [2004] HCA 61 at [13]. 2. In Seven Network (Operations) Limited v Harrison [2017] NSWSC 405, Sackar J said: [33] The question of whether a court is "more appropriate" (s 5(1)(b)(i)) turns on a consideration of the interests of justice. It is not necessary for the first court to be a "clearly inappropriate forum" as is required in applications to stay on grounds of forum non conveniens. Rather, the question turns on whether, in the interests of justice, the second court is more appropriate; BHP v Shultz at 421 per Gleeson CJ, McHugh and Heydon JJ. As noted by Brereton J in this court, a court must be more appropriate and not merely equally appropriate to the other court in question; HIH Insurance Ltd (in liq) [2014] NSWSC 545 at [7]. [34] Further, as Gleeson CJ, McHugh and Heydon JJ observed in BHP v Shultz at 421, the interests of justice capture not just the interests of both the respective parties – competing or conflicting – but may also capture interests wider than those of either party. Brereton J discussed this aspect of BHP v Shultz in Valceski v Valceski (2007) 70 NSWLR 36 at [69]: "As BHP v Schultz makes clear, the interests of justice concern those of both parties, and rather than the selection of the most advantageous, or least disadvantageous, forum for one of them, the "interests of justice" are to be judged by more objective factors, such as facilitate identification of the "natural forum", in which objectively judged it might be expected that the dispute would fall to be resolved, with its concomitant juridical advantages and disadvantages for each party, whatever they may be: cf British American Tobacco v Gordon (at [47])." [35] Unsurprisingly, each case turns on the particular facts when determining the more appropriate court or "natural forum". Relevant factors identified in authorities have included the location of the alleged wrong, the location of the parties and witnesses, the substantive law by which the claim is to be determined, the inclusion of exclusive jurisdiction clauses, the stage of each proceedings, and the ability of the competing forums to dispose of the substantive dispute in a cost and time efficient way. [36] The term "interests of justice" (under provisions such as s 5(1)(b)(iii)) has been given a liberal construction. Wilcox J in Bourke v State Bank of New South Wales (1988) 22 FCR 378 at 394 held the expression: "ought to be read widely. Under that rubric the court is entitled to consider not only the ability of the particular court to deal with all aspects of the matter, and to make and to enforce all the orders to which a party may be entitled, but also adjectival matters such as the availability of particular evidence, the procedures to be adopted, the desirable venue for trial and the likely hearing date." 1. It is apparent that a determination of whether the Federal Court (in this case) is the more appropriate jurisdiction is closely bound up with what are the interests of justice in the proceedings. However, even on the assumption that this Court has jurisdiction to determine the matters arising under the Bankruptcy Act, it must be acknowledged that the Federal Court has the greater expertise in bankruptcy matters, because it is in that Court in which serious matters arising under the Bankruptcy Act are litigated. 2. Reliance is not placed by the Hu Parties on s 5(1)(b)(ii) of the Cross-vesting Act. If reliance had been placed on that sub-paragraph it would have been necessary to determine whether the Federal Court proceedings were capable of being instituted in this Court. It would seem, from the decision of the Full Court of the Federal Court in Truthful Endeavour Pty Ltd v Condon (Trustee), in the matter of Rayhill (2015) 233 FCR 174; [2015] FCAFC 70 at [34] and [60], that this Court has jurisdiction under s 4(1) of the Cross-vesting Act to hear the claims now commenced in the Federal Court. However, some doubt has been cast on that by Perram J in Docherty v Porter, in the matter of Docherty (Bankrupt) [2021] FCA 1227 at [16]-[37]. 3. Nevertheless, that issue has some relevance to the consideration of the interests of justice in this way. If a transfer to the Federal Court of the present proceedings was refused, and if issues raised in the Federal Court proceedings were incorporated into the present proceedings (whether by a transfer of the Federal Court proceedings to this Court and the joining up of those proceedings with these proceedings, or by an amendment made to the present proceedings to raise those issues), there might be some uncertainty about what the Court of Appeal, in an appeal from any first instance decision in this Court on those matters, might decide in relation to the issue between the Full Federal Court in Truthful Endeavour and Perram J in Docherty. The Court of Appeal would not be bound by the decision of the Full Federal Court. There is a risk, therefore, that if all of the issues were determined in this Court, it may be found that this Court lacked jurisdiction. 4. A further matter suggesting that the Federal Court is the more appropriate forum is the view of the Full Court of the Federal Court in Truthful Endeavour at [60] that the matters raised in the Federal Court proceedings are a special federal matter in s 3(1) of the Cross-vesting Act. Section 3(1) defines special federal matter as a "matter that is within the original jurisdiction of the Federal Court by virtue of section 39B of the Judiciary Act 1903 (Cth)". Section 6 of the Cross-vesting Act requires that special federal matters be transferred to the Federal Court unless there are special reasons for not doing so. 5. One factor pointing against the Federal Court being the more appropriate forum is the fact that the proceedings have a final hearing date in this Court on 4 April 2022. However, the Hu Parties submit that it is most unlikely that that hearing can be maintained if both proceedings are heard together, first, because there is a significant amount of further evidence which will need to be filed and served in respect of the s 120 and s 121 claims. That evidence includes: evidence on the value of the consideration given for the mortgages which requires valuing for the forbearance given by Mr Jing; evidence of the market value of the mortgages at the time they were given, including the valuing of the Mosman property in June 2019 and April 2020; evidence of Mr Gu's solvency at those dates, which will involve consideration of his arrangement of his companies including IPPL; and evidence of Mr Gu's main purpose in entering into the Great Lands and Jing transactions. 6. All of that evidence leads to the second reason that it is unlikely the present dates can be maintained for the hearing, namely, because with the amount of additional evidence there is no prospect that the proceedings could be completed in the five days allotted. 7. In my opinion, the issues in the present proceedings and the Federal Court proceedings are so inter-related that it would be quite inappropriate to have each of the proceedings dealt with separately. By reason of the doubt about whether this Court can deal with the bankruptcy claims, whether as a matter of jurisdiction or by reason of those matters being special federal matters, it is more appropriate that the present proceedings be heard in the Federal Court. 8. For those reasons also, and in circumstances where the present hearing date could not be maintained, if I had not determined that it was more appropriate that the proceedings be heard in the Federal Court, I would have held that it was otherwise in the interests of justice that the present proceedings be determined in the Federal Court. 9. Each of the other active parties seeks an order that the Hu parties pay the costs thrown away by reason of the transfer of the proceedings. IPPL also sought the costs of the motion. The principal submission made to justify a costs order was said to be the delay in making the present application. 10. The hearing date of 4 April 2022 was appointed by me on 18 August 2021. On 10 August 2021, Mr Gu was made bankrupt. There was no evidence whether anyone knew of his bankruptcy on 18 August, although it might have been regarded as irrelevant, since he was not an active party in the proceedings. The recitals to the Deed of Assignment say that after taking control of the bankrupt's estate, and no doubt making relevant enquiries, the trustee foreshadowed making claims against some of the parties to the present proceedings pursuant to ss 120 and 121 of the Bankruptcy Act. It appears to be at about that time that the Hu parties entered into negotiations with the trustee to obtain an assignment of his rights. 11. An agreement appears to have been reached by 12 November 2021 but the Deed was not executed until 17 January 2022. A notice under s 12 of the Conveyancing Act 1912 (NSW) was given on 28 January 2022. The Federal Court proceedings were commenced on 8 February 2022. 12. I do not consider that it is reasonable to expect that the present application could have been brought earlier than, perhaps, a week or so than it was. It was certainly not possible for the Federal Court proceedings to have been brought prior to the execution of the Deed and the giving of the s 12 notices. There must also be a reasonable prospect that if the trustee had not assigned his rights, he might have commenced similar Federal Court proceedings with the disadvantage that that would mean an extra party to the proceedings. 13. There can be no serious suggestion that costs spent preparing the present proceedings would not have been spent in any event. The present proceedings are not coming to an end, nor are they being curtailed. The strong likelihood is that all of the present evidence will be led when these proceedings are heard in the Federal Court. The hearing date is a month away, and the chances that final preparation costs were being incurred is remote. 14. I note s 12 of the Cross-vesting Act which authorises the transferee court to make costs orders in relation to pre-transfer costs. I think the fairer outcome to the parties is to reserve the question of costs thrown away by reason of the transfer for the consideration by the Federal Court at the conclusion of the proceedings. 15. The costs of the notice of motion should be costs in the cause, notwithstanding the opposition of the eighth and ninth defendants being unsuccessful. 16. The orders made on 2 March 2022 were these: 1. The hearing of the proceedings fixed for 4 April 2022 is vacated. 2. These proceedings are transferred from this Court to the Federal Court of Australia pursuant to s 5(1)(b)(i) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth). 1. I make the following additional orders: 1. Costs thrown away by reason of the transfer reserved to the Federal Court. 2. Costs of the notice of motion filed 24 February 2022 be costs in the cause.

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