Landmark Cross-Border Insolvency Case Sees Court Vary Summons and Order Trustees to Pay Security for Costs

In Arab v Pan, in the matter of Pan (No 3) [2024] FCA 563, the Federal Court of Australia addressed critical issues concerning the scope and compliance of summonses for production in bankruptcy, which will also impact corporate insolvency proceedings and such proceedings in other common law jurisdictions. 

This case elicits several key issues pertinent to practitioners dealing with cross-border insolvency (and broader litigation) matters, including in respect of what appears to be the first instance of security for costs being ordered by an Australian court to be paid by an overseas bankruptcy trustee in respect of orders for production.

Insolvency practitioners who are considering the use of the extensive, and potent, Australian insolvency tools, as well as trustees faced with actions in Australia by overseas practitioners, should carefully consider the implications of this case.

Background 

The matter centres around Pan Sutong (Bankrupt), a prominent businessman who was adjudged bankrupt by the High Court of the Hong Kong Special Administrative Region Court of First Instance on 8 July 2022. This followed a bankruptcy petition filed by China CITIC Bank Corporation Limited and its affiliates, citing substantial debts. The proofs of debt from the petitioning creditors amounted to over HK$15 billion (approximately AU$3 billion), while additional claims, including those from Bank of China Limited, pushed the alleged total to an excess of HK$111 billion (approximately AU$21 billion).

Following the bankruptcy order, a general meeting of creditors on 11 August 2022 appointed Osman Mohammed Arab and Wong Kwok Keung, both of RSM in Hong Kong, as joint and several trustees of the bankrupt estate (Trustees). Subsequently, on 9 October 2023, the Federal Court of Australia recognised the Hong Kong bankruptcy proceeding as a “foreign main proceeding” under section 6 of the Cross-Border Insolvency Act 2008 (Cth) and Article 17(1) of the Model Law on Cross-Border Insolvency of UNCITRAL. 

On 6 November 2023, Registrar Segal made an order for the issue of summonses for production of documents, to each of Nicholas Charles Radford, Goldin Australia Pty Limited (GA), and Goldin Wines Australia Pty Limited (GWA) (together, the Applicants), in connection with the Bankrupt’s financial dealings. GA, incorporated in Victoria, operated a stud farm business, while GWA, incorporated in South Australia, manages a vineyard and wine production business. Mr Radford was a former director of GWA. The Bankrupt was previously a director of both GA and GWA. 

The Trustees’ notices for production sought extensive documentation from the Applicants to investigate the Bankrupt’s affairs. However, the Applicants, represented by Trevor Withane and Vivian He of Ironbridge Legal, with Steven Golledge SC leading Frank Tao as counsel, challenged the summonses, submitting they were overly broad and burdensome, leading to the initial application to be reviewed by Yates J.

The Applicants also sought, in the case that the summonses were to remain in place in some form, security for legal costs associated with compliance. 

Orders for Production 

Orders for production of documents are indispensable tools in bankruptcy and corporate insolvency investigations, enabling trustees and liquidators to summon documents essential for examining relevant financial dealings, including transactions, property, and related financial matters of the bankrupt or company. These orders are typically made on an ex parte basis (ie without giving notice to of the application to the respondent) by a Registrar. In this case, the review of the Registrar’s decision to issue orders for production requested by the Applicants under section 35A(5) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) placed the onus on the Trustees to justify the issuance of the summonses to the court’s satisfaction. This is because the court hears the Trustees’ initial application de novo – that is, afresh.  

Under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), the court can issue orders for production in respect of the documents going to the examinable affairs of the bankrupt (there is a similar provision in respect of corporate insolvency).  The term “examinable affairs” is defined under section 5(1) of the Bankruptcy Act to include a person’s dealings, transactions, property, and affairs, as well as the financial affairs of any associated entity relevant to the person’s conduct or property. 

Additionally, rule 30.34 of the Federal Court Rules 2011 (Cth) grants the court broad authority to order the attendance of a person for examination and to produce documents at any hearing. This power is crucial for uncovering the financial intricacies of a bankrupt or corporate but must be balanced against the burden imposed on those required to comply, avoiding oppressive demands.

In this case the Applicants argued that the categories for document production were “extensive, uncertain and imprecise,” asserting that compliance would impose an unreasonable burden. They highlighted the oppressive nature of the request, noting that reviewing the vast number of documents requested would require significant time and resources – including the use of solicitors to undertake a critical review of each document which would incur costs recoverable from the Trustees. The Applicants’ submissions indicated that it would take approximately 56 days for a team of two law graduates and two paralegals to review 80,000 documents.

Scope of Orders for Production

The court critically examined the scope of the orders, particularly focusing on the defined terms and categories within them. Yates J noted that terms such as “or relating to” and “and/or dealings” created ambiguity and potentially expanded the scope excessively. The Trustees themselves conceded to the deletion of these phrases, acknowledging their potential for undue breadth. Therefore, the court ordered these terms to be amended to provide clarity and limit the potential burden on the Applicants. Furthermore, as proposed by the Trustees, the court mandated that the definition of the “Relevant Period” be narrowed to “1 January 2021 to 31 March 2023” to further refine the scope, reflecting a more targeted approach to the investigation of the Bankrupt’s recent financial activities.

In evaluating the specific categories, the court found that certain categories were justified despite their breadth, given the apparent relationship between the relevant entities and the Bankrupt. For example, categories involving transactions between GA and the Bankrupt were permitted as long as they were related to the Bankrupt’s examinable affairs. This decision underscores the court’s recognition that while broad categories might be necessary to uncover relevant information, they must still be specific enough to avoid capturing irrelevant documents. The court’s amendment to these categories by requiring the insertion of “that relate to the Bankrupt or the Examinable Affairs of the Bankrupt” aimed to limit the scope to pertinent documents only, reducing the risk of an unreasonable compliance burden.

Costs of Compliance 

The court also addressed the substantial compliance costs associated with the summonses. The Applicants provided detailed estimates of approximately $767,000 in legal costs, arguing that the review process would require significant time and resources, potentially leading to substantial expenses. Despite the Trustees’ proposal to limit the Relevant Period and delete certain phrases, which mitigated some of the burden, the extensive scope of the summonses still posed a significant challenge.

Acknowledging the Applicants’ contention that the compliance process would be both time-consuming and costly, the court deemed it necessary to consider the provision of security for costs to ensure fairness. Typically, costs are not awarded for compliance with summonses in bankruptcy and insolvency proceedings, reflecting the general expectation that entities subject to legal orders will bear their own compliance costs as part of their civic duty. However, the court’s decision in this case to consider security for costs underscores an important departure from this norm, driven by the significant financial burden and extensive review process involved. 

By requiring security for costs, the court acknowledged the significant burden that compliance could impose, aligning with the principles of fairness and equity to ensure that the Applicants are not left to bear unreasonable expenses without the possibility of recovery.

Security for Costs in Cases Involving Overseas Trustees

The issue of security for costs was particularly pertinent, especially considering the Trustees did not have any presence or meaningful assets in the Australian jurisdiction. Under section 56(1) of the Federal Court Act, the court has the discretion to order security for costs, a provision crucial when the party seeking the order for production is not a resident in Australia and lacks assets in the jurisdiction where the notice is issued. 

In this case, the Trustees were based outside Australia without any known assets in Australia, presenting a substantial risk to the Applicants regarding the recovery of compliance costs. Given these circumstances, the Applicants estimated significant compliance costs and argued that, without security for costs, they might be left uncompensated.

The court, recognising the financial risks associated with compliance under such conditions, accepted the Applicants’ concerns. Notwithstanding the policy considerations that typically weigh against an order for security against bankruptcy trustees (or liquidators) in public examination proceedings, the court considered it appropriate to order the Trustees to provide security for the costs of compliance, setting the security amount at AU$50,000, payable into the court within 14 days. This measure provides that the Applicants would have some financial protection if they are awarded costs at a later stage. The court’s decision to require security for costs underscores a critical protective measure within the legal framework, particularly in cross-border insolvency and litigation cases. It ensures that local recipients of production orders are not unfairly disadvantaged by the financial risks posed by overseas’ petitions. 

Key Takeaways

1. Precision in Drafting Summonses: The judgment emphasised the need for precision and clarity in drafting legal summonses to prevent undue extensiveness or vagueness. Practitioners should ensure that summonses are narrowly tailored and specific to avoid capturing irrelevant documents and imposing unnecessary burdens of compliance, which could result in a costs order against the practitioner. 
2. Costs of Compliance: The court’s decision underscores the significant financial burden that compliance with broadly drafted summonses can impose. Insolvency and bankruptcy practitioners should be mindful of the practical implications and costs involved in complying with legal orders. By recognising the Applicants’ detailed cost estimates and the extensive review process required, the court highlighted the necessity for fair compensation for compliance efforts. This ruling serves as a reminder to carefully assess the scope and cost implications of compliance with production orders, and the need to be aware that the practitioner or insolvent estate might have to pay the compliance costs.
3. Security for Costs: The court’s order for the Trustees to provide security for costs reflects a critical protective measure in cross-border insolvency and, more broadly, litigation proceedings. Litigants in Australia, whether an insolvency practitioner or otherwise, should consider the financial risks and potential protective measures a court might impose when using Australian court processes.
4. Balancing Investigatory Needs and Respondent Protections: The court’s approach in balancing the Trustees’ need to gather comprehensive information with the Applicants’ need to avoid undue burdens highlights the importance of fairness and equity in legal proceedings. 

Conclusion

The judgment in Arab v Pan, in the matter of Pan (No 3) [2024] FCA 563 serves as a pivotal precedent for insolvency and bankruptcy practitioners, as well as for litigants more generally, emphasising the need for precision in legal documentation and the importance of protective measures like security for costs. By addressing both substantial compliance costs and the financial risks posed by overseas trustees, the court safeguarded the interests of all parties involved. Lawyers and insolvency practitioners should take heed of these insights to navigate cross-border insolvency and litigation effectively.