Corporations - Statutory demand for judgment sum - Offsetting claim for costs awarded to appellant on counterclaim - Statutory demand reduced by nominal amount - Whether sufficient evidence before master to enable estimate to be made of amount of appellant's taxed costs of counterclaim

20*20 Pty Ltd v D&G Developments Pty Ltd [2009] WASC 343

Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277

Bernhard v Ellis [2016] WADC 10

Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601

Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263

Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91

Durkan v Sandbank Holdings Pty Ltd [2008] WASCA 249

Edge Technology Pty Ltd v Lite-On Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181

Eiros Pty Ltd v St George Bank Ltd [2008] FCA 1475; (2008) 68 ACSR 202

Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560

EMI Records Ltd v Ian Cameron Wallace Ltd [1983] Ch 59

Fleur de Lys Pty Ltd v Jarrett [2004] FCA 1357; (2004) 51 ACSR 238

G S Technology Pty Ltd v GSA Industries (Aust) Pty Ltd [2007] FCA 1895

Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455

Macleay Nominees v Belle Property East [2001] NSWSC 743

Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2010] NSWSC 1017

No 96 Factory Bargains v Kershel Pty Ltd [2003] NSWSC 146

Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91; (2006) 94 SASR 269

Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 3] [2014] WASCA 132; (2014) 46 WAR 483

Re Bond Corporation Holdings Ltd (1990) 1 WAR 465

Re Douglas Aerospace Pty Ltd [2015] NSWSC 167; (2015) 294 FLR 186

Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601

Royal Premier Pty Ltd v Taleski [2001] WASCA 48

Stobbart v Mocnaj [1999] WASC 252

Wheatley v Bower [2001] WASCA 293

1 NEWNES & MURPHY JJA: This appeal arises out of a statutory demand in the sum of $187,505.10 served on the appellant by the respondents under s 459E of the Corporations Act 2001 (Cth) (the Act). The statutory demand was for a judgment debt arising from proceedings in the District Court. The appellant applied for an order varying the demand on the basis of an offsetting claim, being an order for costs made in its favour in the District Court proceedings.

2 Master Sanderson found that the offsetting claim had not been quantified and varied the statutory demand by reducing it by the nominal sum of $1.00. The appellant contends that the master erred in so finding and in varying the statutory demand by only a nominal sum.

3 For the reasons that follow, we would allow the appeal.

4 From late 2002 until August 2012, the respondents operated a real estate business through Dream Team Investments Pty Ltd (DTI). The business traded initially as Warnbro Realty and then as Elders Rockingham. The substantial asset of the business was its rent roll. In 2010, Mr Paul Ellis became a director and shareholder of DTI.

5 In July 2012, the appellant, a company controlled by Mr Ellis and interests associated with him, agreed to purchase the rent roll from DTI for the sum of $650,000. In order to finance the purchase, the appellant borrowed the sum of $250,000 from the respondents pursuant to a vendor finance agreement. Under that agreement, the appellant was required to make repayments of $4,200 per month over five years. Mr Ellis and an associate, Mr Graham Files, personally guaranteed the loan.

6 The appellant subsequently defaulted on the repayments and the respondents commenced proceedings in the District Court against Mr Ellis, Mr Files and the appellant, claiming the sum of $245,800 by way of outstanding principal sum, interest and indemnity costs. The claim for indemnity costs was based on a provision in the agreement which provided for indemnity costs in the event of default.

7 Mr Files did not appear at trial and, based on admissions in his defence, judgment was entered against him in the sum of $254,399.10, plus interest at 6% per annum from 3 February 2016 until payment pursuant to s 32 of the Supreme Court Act 1935 (WA).

8 Mr Ellis and the appellant did not dispute their liability under the vendor finance agreement, but asserted that two payments of $4,200 had been made, not one as alleged by the respondents, and the appellant counterclaimed damages in the sum of $116,652 for misleading or deceptive conduct in relation to representations by the respondents as to the value of the rent roll. Accordingly, the substantive issue at trial was the appellant's counterclaim. Consistently with that, at trial the appellant went first.

1. gave judgment for the respondents in their claim in debt in the sum of $254,399.10;
2. gave judgment for the appellant on the counterclaim in the sum of $66,894, to be set off against the sum awarded to the respondents;
3. ordered that the appellant pay interest at the rate of 6% per annum on the sum of $187,505.10 from 3 February 2016;
4. ordered Mr Ellis and the appellant to pay the respondents' costs of their claim on an indemnity basis, to be taxed if not agreed;
5. ordered the respondents to pay 85% of Mr Ellis' and the appellant's costs of the counterclaim, to be taxed if not agreed; and
6. ordered that 'the taxing officer is to set off the costs allowed on taxation to each party'.

10 See Bernhard v Ellis [2016] WADC 10.

11 On 14 May 2016, the respondents served a statutory demand on the appellant demanding payment of the sum of $187,505.10 plus interest at 6% per annum. The sum of $187,505.10 was the judgment sum of $254,399.10, less the amount of $66,894 allowed on the counterclaim.

12 On 3 June 2016, the appellant applied to have the statutory demand set aside or varied on a number of bases, including that the statutory demand was an abuse of process and that the appellant had an offsetting claim against the respondents, being the costs awarded to the appellant in the District Court proceedings.

13 The master gave brief ex tempore reasons. He found there was nothing in the contention that the service of the statutory demand was an abuse of process. The master accepted that there was an offsetting claim arising from the costs order in favour of the appellant but found that there was no evidence upon which an assessment could be made of the amount of it.

14 The master noted that the appellant's costs had not been taxed and observed that there was no bill of costs in taxable form in the evidence before him. The master referred to the affidavit of Mr Ellis filed in support of the application in which Mr Ellis had stated that the appellant's counsel's fees were more than $81,000 and that the appellant's solicitor had informed him that he estimated his fees to be 'at least $100,000 and could be as high as $150,000 depending on what is ultimately allowed on taxation ...'. The master found that that was not sufficient to enable an estimate to be made of the appellant's likely costs on taxation. The master went on to say that a bill of costs in taxable form 'may take the matter some way forward' but he considered that even then there might be considerable doubt as to what amount would be allowed on taxation and accordingly it would be very difficult to adjust the amount of the statutory demand.

15 In the absence of evidence of the amount that might be allowed on taxation, the master concluded that the appellant's offsetting claim should be valued at the nominal sum of $1.00. He varied the statutory demand accordingly and gave the appellant a further 14 days to pay that amount.

16 The appellant relied on five, lengthy, grounds of appeal. There were, however, only two substantive contentions on the appeal. They were that:

1. the master erred in finding there was no evidence from which the offsetting amount could be quantified (grounds 1 - 4); and
2. the master erred in refusing to admit into evidence an affidavit of the appellant's solicitor, to which was annexed the appellant's proposed bill of costs in taxable form in the District Court proceedings (ground 5).

17 Before turning to the issues raised by the grounds of appeal, it is necessary to deal with a preliminary point raised by the respondents. Counsel for the respondents argued that the appellant's contention that the master had erred in finding there was no evidence from which the offsetting amount could be quantified raised a new issue that the appellant was not entitled to raise on the appeal. It was submitted that the appellant's position before the master had simply been that the amount of the offsetting claim could not be ascertained until the costs were taxed and that the hearing of the application to set aside the statutory demand should be adjourned until that was done.

18 We do not accept that submission. While the way in which the appellant's case was put orally before the master could have been articulated more clearly, we accept the appellant's submission that its case was advanced on the basis that the actual amount of the costs of the counterclaim could not be determined until after taxation but there was sufficient in the affidavit evidence to enable an assessment to be made for the purposes of s 459H of the Act. That also appears from the appellant's written outline of submissions below and it is clear from his reasons that the master understood the appellant's case to be that such an assessment could be made. The respondents' objection that the appeal raised a new point must be rejected.

19 Turning to the first issue, the relevant principles can, for present purposes, be shortly stated.

20 A company served with a statutory demand under s 459E of the Act may, within 21 days of service, apply for an order setting it aside: s 459G. The application may be made on various grounds, including that the company has an offsetting claim: s 459H(1).

21 An 'offsetting claim' is defined in s 459H(5) as 'a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).'

22 If, on an application under s 459G, the court is satisfied that there is an offsetting claim but no dispute as to the existence or amount of the debt, the court must calculate the substantiated amount of the demand by subtracting the amount of the offsetting claim from the amount stated in the demand. If the substantiated amount is less than the statutory minimum of $2,000, the court must set aside the demand. If the substantiated amount is at least as great as the statutory minimum, the court may make an order varying the demand to give effect to the offsetting claim.

23 An offsetting claim is not confined to debts that are due and payable; a claim for an unliquidated sum can be an offsetting claim: Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91; (2006) 94 SASR 269 [41]; Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 [78]. But an offsetting claim must be an amount that is capable of being quantified in monetary terms: Diploma Construction [78].

24 In evaluating whether a genuine offsetting claim exists, the court must consider both whether the evidence is sufficient to satisfy the court that there is an offsetting claim and whether the evidence is sufficient to establish the amount of the claim: Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 [57]. Precise quantification of the claim is not necessary, but evidence must be provided from which a court can make an estimate of the amount of the claim: Royal Premier Pty Ltd v Taleski [2001] WASCA 48 [57]; Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 3] [2014] WASCA 132; (2014) 46 WAR 483 [81].

25 An order for costs can constitute an offsetting claim although the costs have not been taxed. Thus, in G S Technology Pty Ltd v GSA Industries (Aust) Pty Ltd [2007] FCA 1895, it was found that the plaintiff had an offsetting claim as the defendant had become liable both pursuant to an order for costs and by reason of the defendant's discontinuance of its action, and that the amount of the offsetting claim was sufficiently established by a cost assessor's letter as to the amount they calculated would be allowed on taxation. In Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2010] NSWSC 1017, the plaintiff applied to set aside a statutory demand on the basis that it had offsetting claims, including a claim in the form of an order that the defendant pay 80% of its costs of certain proceedings. A bill of costs had not been prepared. Barrett J found that the plaintiff had an offsetting claim, and calculated the amount of the claim on the basis of memoranda of costs and disbursements from the plaintiff's solicitors. The amount of the offsetting claim was calculated as 80% of two-thirds of the profit costs billed and 80% of the whole of the disbursements billed.

26 In our view, there was sufficient evidence before the master to enable him to estimate the amount that the appellant would be allowed on the taxation of its costs of the counterclaim. In making that estimate, the court was entitled to bring to bear its own knowledge and experience of the assessment of costs in light of the evidence as to the nature, scope and complexity of the proceedings.

27 In finding there was no evidence of the quantum of the offsetting claim, the master appears to have overlooked the affidavit of a solicitor for the respondents, Ms Thurston-Moon, of 30 June 2016. While that affidavit was filed in opposition to the application, the appellant was not limited to material contained in its own affidavits; in determining whether there was a genuine offsetting claim the court had to have regard to all of the evidence, including the respondents' affidavits: see 20*20 Pty Ltd v D&G Developments Pty Ltd [2009] WASC 343 [13].

28 In her affidavit, Ms Thurston-Moon said she had prepared a spreadsheet outlining the maximum amount that would be allowed on taxation for the appellant's costs of the counterclaim, which she calculated at $97,845. That had been calculated on the basis that the appellant's counterclaim had occupied three days of the four-day trial and one day had been spent resolving the respondents' claim. As the appellant was entitled to recover 85% of its costs, the maximum amount that it would be entitled to recover from the respondents was therefore $83,168.25.

29 The spreadsheet, prepared by Ms Thurston-Moon by reference to the relevant court scale, was annexed to the affidavit. The major items were 'preparation of case' in the sum of $56,760; counsel's fees for the trial (excluding closing written submissions) of $25,000 (approximately); and instructing solicitor's fees for instructing at the trial of $9,933. In our view, those itemised amounts were not unreasonable estimates in the circumstances, having regard to the nature and scope of the proceedings, the issues in dispute and in light of the evidence that the appellant had, in fact, paid solicitor's costs of over $58,000 (with further costs as yet unbilled), and that the appellant's counsel's fees exceeded $81,000. Also, although Ms Thurston-Moon referred to the respondents having given discovery, there is no allowance for inspection of documents by the appellant in the schedule. In all the circumstances, although the sum of $97,845 was described by Ms Thurston-Moon as the maximum amount claimable, it appears to us that this amount, on the evidence as a whole, provides a sufficient estimation in the context of these proceedings of the amount of costs to which the reduction of 85% should be applied in accordance with the orders of Bowden DCJ. The resulting sum is $83,168.25.

30 Counsel for the respondents submitted, however, that in calculating the quantum of the offsetting claim it was necessary to take into account not only the amount of the appellant's taxed costs of its counterclaim but also the taxed costs to which the respondents were entitled in respect of their claim. It was submitted that the order for the respondents to recover the costs of their claim and the order for the appellant to recover its costs of the counterclaim had to be read together and in light of the order that 'the taxing officer is to set off the costs allowed on taxation to each party'. On the proper construction of the orders, the appellant was not entitled to recover from the respondents its costs of the counterclaim, but only any amount by which those costs exceeded the costs to which the respondents were entitled in respect of their claim.

31 It was further argued that on the evidence the costs which the respondents are entitled to recover from the appellant in respect of their claim significantly exceed the costs that the appellant is entitled to recover in respect of its counterclaim. Reference was made to Ms Thurston-Moon's evidence in her affidavit that even if the actual costs of the proceedings charged to the respondents (an amount said to be approximately $250,000) were not recoverable as indemnity costs, the respondents' party and party costs on taxation would be in the sum of $106,524. A copy of a draft bill of costs in that amount prepared by Ms Thurston-Moon was annexed to the affidavit. Although the respondents' claim in the District Court was a simple claim in debt, the only substantive defence to which was the appellant's counterclaim, Ms Thurston-Moon's schedule included 'preparation of case' of 120 hours in the sum of $56,760 and counsel's fees for, in effect, 4½ days, including 3½ days' preparation, in the sum of $17,325. It included a fee of $4,730 for drafting the statement of claim, whereas elsewhere in the respondents' evidence it appears that counsel drafted the statement of claim for a fee of, at most, $1,900.

32 We accept that the amount of the appellant's offsetting claim is to be determined by setting off the costs allowed on the respondents' claim against those allowed on the appellant's counterclaim. That is evident from par 12 of the orders of Bowden DCJ. No doubt in making that order his Honour had in mind O 66 r 59(a) of the Rules of the Supreme Court 1971 (WA), which (so far as relevant) is as follows:

Where a party who is entitled to be paid costs is also liable to pay costs, the taxing officer may, subject to any direction of the Court -

1. tax the costs which that party is liable to pay and set off the amount allowed against the amount he is entitled to be paid and direct payment of any balance ...

33 The effect of his Honour's order was to remove the taxing officer's discretion to set off the amounts payable by each party and to require that they be set off. For present purposes, the amount that the appellant is entitled to recover from the respondents is the amount of any excess in its favour after the costs have been set off. In our opinion, that amount is the 'genuine claim' the appellant has against the respondents. See also Eiros Pty Ltd v St George Bank Ltd [2008] FCA 1475; (2008) 68 ACSR 202 [20].

34 There remains, however, the question of the outcome of such a set off. We do not accept that the costs to which the respondents are entitled would exceed the appellant's costs of the counterclaim.

35 Where costs are payable on an indemnity basis by a party, that party is liable to pay all costs that the other party has incurred except insofar as the costs are of an unreasonable amount or have been unreasonably incurred: Wheatley v Bower [2001] WASCA 293 [106]. As the basis of such an order is indemnity, the party entitled to costs cannot recover more than they are legally liable to pay their solicitors. In the absence of a valid costs agreement pursuant to s 282 of the Legal Profession Act 2008 (WA), that liability will generally be limited to costs under the relevant scale of costs and therefore ordinarily the right of recovery from the other party under an order for indemnity costs will be limited to costs under the scale: see Stobbart v Mocnaj [1999] WASC 252; Wheatley v Bower [106]; Rules of the Supreme Court O 66 r 11(3). There was no evidence of a costs agreement between the respondents and their solicitors. That is a matter likely to be within the peculiar knowledge of the respondents. In estimating the respondents' costs it is therefore appropriate to have regard to the costs that would be payable under the relevant costs scale.

36 In circumstances where (a) the respondents' claim was a straightforward and simple claim in debt set out in a statement of claim four pages long and consisting of 13 paragraphs; (b) following service of the appellant's defence, it was apparent that the only substantive issue in dispute in the action was the appellant's counterclaim; and (c) at least three quarters of the trial was devoted to the appellant's counterclaim alone, it is inconceivable that costs in the sum of $106,524, or anything like that amount, would be allowed on taxation in respect of the respondents' claim, even on an indemnity basis. That sum is, of course, almost $9,000 more than the total costs that Ms Thurston-Moon has estimated to be the maximum amount the appellant would be allowed on taxation in respect of its counterclaim, in circumstances where the counterclaim was, from a very early stage of the proceedings, the only substantive issue.

37 On the hearing of the appeal, counsel for the respondents conceded that the amounts set out in Ms Thurston-Moon's affidavit 'may be excessive' (ts 68). That, with respect, seems to be something of an understatement. On the evidence as a whole and having considered the schedule in Ms Thurston-Moon's affidavit in respect of the items claimable under the scale by the respondents, we would estimate the costs allowable on taxation in respect of the respondents' claim, even on an indemnity basis, to be in the sum of $15,000.

38 As we have said, in the circumstances it is appropriate for present purposes to take as the costs of the appellant's counterclaim the figure of $83,168.25 calculated by Ms Thurston-Moon. The appellant's offsetting claim would therefore be an amount of $68,168.25.

39 We would set aside the order of the master varying the statutory demand by $1.00. For the purposes of s 459H of the Act, we would calculate the amount of the appellant's offsetting claim to be the sum of $68,168.25 and vary the amount of the statutory demand to the sum of $119,336.85 plus interest at the rate of 6% per annum from 3 February 2016. We would declare the demand to have effect in that amount from the date upon which the demand was served on the appellant.

40 In light of that, it is unnecessary to determine the second issue on the appeal (ground 5). It is appropriate, however, to deal briefly with it.

41 By consent orders made by the master on 22 June 2016, the appellant was ordered to file any affidavits in response to any affidavits filed by the respondents by 8 July 2016. The application was subsequently set down for hearing on 2 August 2016. On 1 August 2016, the appellant's solicitor swore and filed an affidavit annexing a bill of costs in taxable form in respect of the appellant's costs of the counterclaim. In the affidavit, he noted that the bill of costs had not been filed in the District Court because there was a filing fee of $4,229.58 payable and that no bill of costs had been served by the respondents in respect of their costs.

42 The appellant's solicitor sought to tender the affidavit at the hearing. That was opposed by the respondents. The master refused to admit it into evidence on the grounds that it would be manifestly unfair to the respondents to do so at that late stage and there was no explanation for the delay in filing it.

43 In his submissions on the appeal, counsel for the appellant had some difficulty in identifying the error it was alleged the master had made in the exercise of his discretion in refusing to admit the affidavit. Eventually, counsel appeared to settle on a failure by the master to take into account the probative value of the evidence contained in the affidavit. That, however, is without substance. The essential contents of the affidavit were explained to the master. There is nothing to suggest that he failed to take the probative value of that evidence into account.

44 In our view, the master was entitled to reject the affidavit. The proper administration of justice and fairness to the other party ordinarily require that a party seeking an indulgence in relation to a time limit provide a satisfactory explanation, on affidavit, for the delay. In circumstances such as the present, where it was sought to adduce substantive evidence at the eleventh hour contrary to programming orders previously made by the court, a very cogent explanation was required. The appellant failed to provide any explanation.

46 Finally, it is unnecessary to determine whether the appellant requires leave to appeal. The appeal was conducted on both sides on the basis that leave was not required. In any event, if leave was required we would grant leave.

1. allow the appeal;
2. set aside the order of the master varying the statutory demand by reducing it to the sum of $187,504.10;
3. vary the amount of the statutory demand by reducing it to the sum of $119,336.85, plus interest at the rate of 6% per annum from 3 February 2016;

1. declare the statutory demand to have effect in the amount of $119,336.85 plus interest at the rate of 6% per annum from 3 February 2016 from the date upon which it was served on the appellant;
2. hear the parties on the time within which the appellant is required to comply with the demand as so varied.

48 MITCHELL JA: The factual and statutory background to this appeal is set out in the reasons of Newnes and Murphy JJA. For the following reasons, I would dismiss the appeal.

49 Section 459G of the Act allows a company, within 21 days of service of a statutory demand on the company, to apply to the court for an order setting aside the statutory demand. Section 459H provides for the court to make an order setting aside or varying the statutory demand on the basis of a genuine dispute about the existence or amount of the debt to which the demand relates and/or an offsetting claim. Section 459J provides for the court to set aside the statutory demand because of a defect in the demand which will cause substantial injustice if the demand is not set aside, or there is some other reason why the demand should be set aside. Unless the court makes an order under s 459H or s 459J, it must dismiss the company's application.[1]

50 Failure to comply with a statutory demand which has not been set aside gives rise to a presumption that the company is insolvent for purposes which include an application that the company be wound up in insolvency.[2] Failure to pay an undisputed debt on formal demand suggests that the company is unable to pay all its debts as and when they become due and payable.[3] The onus of proving insolvency is cast on the company, rather than the person seeking to wind it up in insolvency, in circumstances where a rational inference is that insolvency is the reason for failure to pay a formally demanded debt which is due and payable. The evident object of s 459H is to confine the effect of a statutory demand to amounts which are undisputedly due and payable (having regard to offsetting claims). The existence of a dispute as to the claim or an offsetting claim provides a reason, other than insolvency, why a company may refuse to pay the amount which is demanded.

51 In this case, Dream Money relevantly sought an order under s 459H of the Act. Section 459H provides for the following stages in the court's assessment of the application.

52 The court must firstly consider whether it is satisfied that there is a genuine dispute about the existence or amount of a debt to which the demand relates or the company has an offsetting claim.[4] If not satisfied as to either or both of those matters, s 459H does not apply and, unless an order is made under s 459J, the court must dismiss the company's application.

53 The second stage arises if the court is satisfied that there is a genuine dispute or an offsetting claim of the kind referred to in s 459H(1) of the Act. In that event, the court must calculate the 'substantiated amount' of the statutory demand in accordance with the formula:[5]

54 The admitted total is, in effect, the undisputed amount of the debt.[6] The offsetting total is, in effect, the amount of any offsetting claim(s); ie, the amount of the genuine claim(s) which the company has against the respondent by way of counterclaim, set-off or cross-demand.[7]

55 The third stage arises once the court has calculated the substantiated amount of the statutory demand. The step which the court must or may take depends on whether the substantiated amount is, or is not, less than the statutory minimum of $2,000. If the substantiated amount is less than $2,000, then the court must, by order under s 459H(3), set aside the statutory demand. If the substantiated amount is at least $2000, the court 'may make an order', under s 459H(4), 'varying the demand as specified in the order' and declaring the demand to have effect as varied. If no such order is made, the court must dismiss the company's application unless it makes an order under s 459J of the Act.

56 The express terms of s 459H(4) do not oblige the court to vary the statutory demand by reference to the substantiated amount. The court may make an order varying the demand 'as specified in the order'. However, in specifying a variation of the statutory demand the court will have regard to the evident purpose of the provision, which is to confine the statutory demand to amounts which are undisputed (non-payment of which is evidence of insolvency). Ordinarily, the discretion will be exercised by varying the statutory demand by reducing the amount specified in the statutory demand to the substantiated amount. Given the purpose of the provision, it is difficult to see how reducing the debt specified in the statutory demand by more than the company has established to be genuinely in dispute (having regard to offsetting claims) could be justified.

57 On an application to set aside a statutory demand, the court does not attempt to resolve the offsetting claim or predict its outcome.[8] Rather than deciding the merits of the claim, the court examines whether there is a genuine claim sufficiently quantified to give rise to an offsetting amount.[9] On an application to set aside a statutory demand, the court must identify the claim which must 'be bona fide and truly exist in fact',[10] and assess whether it is a genuine claim.

58 To be used as an offsetting total, the counterclaim, set-off or cross-demand must be for an amount capable of being quantified in money terms.[11] It is necessary for the person applying to set aside a statutory demand to take steps to quantify the counterclaim, set-off or cross claim.[12]

59 In a claim for unliquidated damages for economic loss, the court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated.[13] As this court noted in Diploma Construction, an affidavit in support will be insufficient if it does not contain material from which a court can make an estimate of the amount of an offsetting claim.[14]

60 A company seeking to set aside or reduce a statutory demand on the basis of an offsetting claim does not need to set out evidence supporting the claim in meticulous detail. It is enough that the company provides evidence of a plausible and coherent basis for quantifying the claim which it genuinely asserts, or showing that it exceeds the amount the debt demanded.[15] Precise quantification is unnecessary.[16]

61 In conducting this exercise, the court must keep in mind that the task which it is performing is the determination of the amount of a genuine claim, which must exist in fact, rather than resolving the claim or attempting to predict its outcome.

62 The court may assign a nominal value where damage is an element of the claim and there is no evidence of damage.[17] The court may also assign a nominal value to the offsetting total if it cannot estimate the amount of the offsetting claim.[18] As Brereton J recently noted in Re Douglas Aerospace Pty Ltd:[19]

If the offsetting claim must plainly exceed the amount of the demand, it is unnecessary that it be precisely quantified. But where that is not clear, the court must be able to quantify an offsetting claim, and if the evidence does not permit it to do so, will attribute to it only a nominal value.

63 The evidence before the master established the existence of an offsetting claim.

64 The effect of orders 4 and 6 of the judgment of the District Court of Western Australia dated 3 February 2016 (Judgment) was to require Dream Money to pay $187,505.10 to the Bernhards.

65 The effect of orders 8, 10 and 12 of the Judgment was to require the Bernhards to pay to Dream Money the amount by which 85% of Dream Money's taxed costs of the counterclaim would exceed the costs of the Bernhards' claim taxed on a full indemnity basis. As Newnes and Murphy JJA have noted, the order that the taxing officer set off the costs allowed to each party required the taxing officer to exercise the power conferred by O 66 r 59(a) of the Rules of the Supreme Court 1971 (WA), and direct payment only of the balance. Dream Money's right was only to payment of the balance of the costs of its counterclaim after setting off any amount allowed on taxation of the costs of the Bernhards' claim.

66 Dream Money's claim under orders 8, 10 and 12 of the Judgment is a genuine claim by way of counterclaim, set-off or cross-demand for the purposes of s 459H of the Act. As Dream Money's claim is based on court orders, it will be a genuine claim so long as there is some plausible basis for contending that 85% of Dream Money's taxed costs of the counterclaim will exceed the costs of the Bernhards' claim taxed on a full indemnity basis.

67 On the evidence before the master, there was a reasonable basis for Dream Money's contention that 85% of its taxed costs of the counterclaim would exceed the costs of the Bernhards' claim taxed on an indemnity basis.

68 The Bernhards' claim was relatively simple and mostly uncontentious. They pleaded the advance of $250,000 under a vendor finance agreement. The terms of that agreement were admitted, although the advance of the funds was not admitted.[20] The Bernhards contended that only one instalment of $4,200 was repaid, while Dream Money contended that it had paid two instalments of that amount.[21] It was pleaded, but not admitted, that Dream Money defaulted in repayment of its $4,200 monthly instalments.[22] It was pleaded and admitted that the Bernhards had demanded repayment of the balance which they claimed to be $245,800 and that Dream Money had not complied with that demand.[23] The only substantive defence which Dream Money advanced was by way of set-off of its counter-claim for damages for misleading and deceptive conduct.[24]

69 Given the respective issues in contention, it is difficult to understand how the costs of dealing with the Bernhards' claim at trial could be assessed in an amount exceeding the taxed costs of dealing with Dream Money's much more complicated and contentious counterclaim. That is so even allowing for the fact that the Bernhards' costs were to be assessed on a 'full indemnity basis'. The limited issues in dispute in relation to the Bernhards' claim provide at least a plausible basis for Dream Money to claim that 85% of its assessed costs will exceed those of the Bernhards.

70 Mr Bernhard gave evidence that he had been charged a total of $247,509.45 in the District Court proceedings.[25] However, the evidence does not indicate what proportion of these costs was incurred in the Bernhards' claim and what proportion related to Dream Money's counterclaim. That evidence does not contradict Dream Money's claim that the assessed costs of its counterclaim will exceed those of the Bernhards' claim.

71 Ms Thurston-Moon gave evidence that 85% of the maximum amount claimable by Dream Money for the costs of its counterclaim was $83,168.25. That calculation was based on her estimate that 3 days of the 4-day hearing were spent resolving Dream Money's claim and 1 day was spent resolving the Bernhards' claim. She also prepared an 'analysis of the costs claimable on a party basis under the scale' for the Bernhards' claim, and attached a spreadsheet 'outlining the maximum amount claimable' by the Bernhards of $106,524. This calculation included the 'maximum scale item' for various steps. Her affidavit also indicated that 'the documents discovered were largely only relevant to' the Bernhards' claim, and that there were chambers hearings that 'were largely only relevant to' the Bernhards' claim.

72 Ms Thurston-Moon's estimate of the maximum amount claimable by Dream Money for the costs of its counterclaim was not contradicted by any evidence before the master. It may be accepted for the purpose of this analysis. However, the calculation of the Bernhards' costs based on the 'maximum scale item' was not apposite. Having regard to the matters in dispute on the Bernhards' claim, a claim for the maximum amount allowed for in the costs scales in the present case was unsupportable. Ms Thurston-Moon's conclusion that the maximum amount claimable by the Bernhards exceeds the maximum amount claimable by Dream Money cannot be accepted.

73 For these reasons the evidence established a reasonable basis for Dream Money's claim that its costs of the counterclaim would be assessed in an amount which would exceed the costs of the Bernhards' claim taxed on an indemnity basis. On that basis, Dream Money had an 'offsetting claim', being the amount of that excess, for the purposes of s 459H of the Act.

74 It was implicit in the master's reasons, and the order varying the statutory demand by a nominal amount, that he was satisfied that Dream Money's claim for costs was an 'offsetting claim'. That is, the master must have been satisfied that Dream Money's claim for costs was a genuine claim that it had against the Bernhards by way of counter-claim, set-off or cross-demand.

The substantiated amount was greater than the statutory minimum of $2,000

75 As noted above, once satisfied that there was an offsetting claim, the master was required to calculate the substantiated amount of the statutory demand in accordance with the formula:

76 In this case it was uncontentious that the admitted total was the judgment sum of $187,505.10.

77 As noted above, the uncontradicted evidence before the master was that the maximum amount claimable by Dream Money for the costs of its counterclaim was $83,168.25. That figure does not take account of the amount of the Bernhards' costs, taxed on an indemnity basis, which must be deducted from the assessed costs of Dream Money's counterclaim. However, it is unnecessary to do so in order to conclude that the substantiated amount of the statutory demand must exceed $2,000. Even without taking account of the Bernhards' costs in determining the offsetting total, the difference between the admitted total and offsetting total would not be less than $104,336.85 ($187,505.10 - $83,168.25).

78 As the substantiated total must be greater than the statutory minimum of $2,000, the court could not have set aside the statutory demand. The only orders which could be made were an order varying the statutory demand or an order dismissing Dream Money's application.

79 The issue is then whether the master erred in attributing only a nominal value of $1 to the offsetting total, and varying the amount demanded only by that amount.

80 Dream Money's claim was not presented to the court as a claim for any particular amount.

81 The application to set aside the statutory demand did not identify any grounds on which the statutory demand should be set aside.

82 Dream Money's written outline of submissions before the master, dated 1 August 2016, did not assert a quantified claim. Rather, par 21 of the outline asserted that its claim was 'capable of quantification and will be quantified unless the parties reach an agreement as to costs'.

83 In his oral submissions before the master, counsel for Dream Money invited the court to find that 'there is a set-off that can't be determined until those costs have been taxed' and which 'at this point in time can't be quantified'.[26] He did not suggest that the master determine a quantified amount, but sought an adjournment until after the taxation of costs in the District Court proceedings.

Evidence did not enable the court to quantify the amount of Dream Money's claim

84 For the following reasons, in my view the evidence before the master did not enable the court to make any reasonable estimate of the amount of the offsetting claim.

85 The affidavit of Paul Ellis sworn 3 June 2016 deposed to the costs of Dream Money's District Court counsel being $81,000, and annexed counsel's tax invoices. He deposed to being informed by Dream Money's solicitor, Mr Galic, that 'his costs will be at least $100,000, and could be as high as $150,000 depending on what is ultimately allowed on taxation'. Mr Ellis' affidavit invited the court to 'calculate any substantiated amount of' the statutory demand once Dream Money's costs had been taxed. In his affidavit of 3 June 2016, Mr Galic deposed to having been paid $58,729 and estimated that he had 'at least another $75,000 in work in progress that hasn't been billed'.

86 Before this court, Mr Galic submitted that the amount of the claim could be determined to be two thirds, alternatively one half, of the sum of the amounts referred to in the previous paragraph. I do not accept that the claim can be quantified in this manner. The costs referred to in these affidavits appear to be charged on a solicitor-client, rather than a party-party, basis. Counsel's charge out rate was $475 per hour, compared to $385 per hour allowable on a taxation of costs under the judgment.[27] Mr Galic's charge out rate was not disclosed. The evidence did not indicate what proportion of work charged for was attributable to Dream Money's counterclaim. Mr Galic's submission that almost the whole of the District Court trial concerned itself with the counterclaim was inconsistent with the evidence that one day of trial was spent resolving the claim and three days spent resolving the counterclaim.[28] Nor did the evidence of Mr Galic or Mr Ellis make any attempt at quantifying the amount of the indemnity costs payable to the Bernhards, which were to be set off against the costs payable to Dream Money, or indicate that Dream Money had done so. In combination, these deficiencies mean that their evidence did not disclose the existence of any quantified claim made by Dream Money, or any basis on which the court might estimate the amount of the offsetting claim.[29]

87 As an alternative, Dream Money relies on the calculation of costs contained in Ms Thurston-Moon's affidavit sworn 30 June 2016. That affidavit does not contain a quantification of Dream Money's claim. Rather, Ms Thurston-Moon's affidavit analyses 'the maximum amount that might be claimable by' Dream Money under relevant costs scales. The affidavit makes an assessment of the maximum amount of its costs which Dream Money might genuinely claim, but does not show what amount Dream Money is in fact claiming or how that claim is quantified.

88 Further, Ms Thurston-Moon's affidavit does not provide a proper basis for estimating the amount by which 85% of Dream Money's taxed costs of the counterclaim would exceed the costs of the Bernhards' claim taxed on a full indemnity basis. She analyses the costs claimable by the Bernhards to be an amount of $106,000, based on 'maximum scale items'. For reasons explained above, that is not a reasonable analysis. Once that analysis is rejected, the evidence does not provide a sufficient basis for the court to estimate the amount of Dream Money's claim for the difference between its costs and the Bernhards'.

89 The District Court action was on foot from 2012. The earliest pleading in evidence before the master was the Amended Writ and Amended Statement of Claim filed on 29 April 2014. The earliest version of the defence by Dream Money and Mr Ellis is a Further Amended Substituted Defence and Counterclaim dated 20 November 2015. It is not apparent what matters were in issue on earlier versions of the defence.

90 The evidence does not indicate, in a manner that would allow assessment of the amount of work involved, what interlocutory and other procedural steps were taken in the proceedings that related to the Bernhards' claim. Ms Thurston-Moon's schedule of the Bernhards' costs refers to a request for particulars of a pleading, discovery and a contested chambers application being made in the proceedings. Her evidence refers to the discovery of documents and attending chambers hearings which were 'largely only relevant' to the Bernhards' claim.[30] Ms Thurston-Moon's uncontradicted estimate was that one quarter of the trial was spent dealing with the Bernhards' claim. That suggests that some not insignificant preparation would be required by counsel and the instructing solicitor in relation to the Bernhards' claim.

91 The imperative for some evidence as to the work done, or which Dream Money contends would have been required in its claim, is increased by the circumstance that the Bernhards were awarded costs on a 'full indemnity basis'. The award of costs on a 'full indemnity basis' encompasses at least all costs actually incurred which were not of an unreasonable amount or had been unreasonably incurred.[31] Subject to that limited qualification, the Bernhards' costs will be assessed by reference to the work actually done, and rates in any costs agreement, rather than items and rates in costs scales. There was no evidence indicating whether or not the Bernhards entered into a costs agreement with their solicitors and counsel.

92 In my view, the evidence before the master did not enable the court to make any reasonable assessment of the amount of the offsetting claim. The evidence did not enable the court to make any reasonable estimate of the amount by which 85% of Dream Money's taxed costs of the counterclaim would exceed the costs of Mrs and Mrs Bernhard's claim taxed on a full indemnity basis.

93 It was incumbent on Dream Money, in seeking to have the court set aside or vary the statutory demand on the basis of that offsetting claim, to produce or identify evidence of the amount of its genuine claim. Dream Money was not entitled to defer payment of the whole of the larger judgment sum until its claim for costs had been resolved at taxation. However, in the present case there is no evidence that Dream Money has ever advanced a claim for any identifiable amount at all. Before the master, it sought to defer the statutory demand proceedings until a taxation of costs was completed. The evidence did not enable the court to make any reasonable estimate of the amount of the offsetting claim. Having regard to the position adopted by Dream Money before the master and the state of the evidence, I am not satisfied that the master erred in assigning only a nominal value to the offsetting total.

94 I agree with Newnes and Murphy JJA that the master did not err in refusing to admit the affidavit of Mr Galic filed the day before the hearing of the application.

95 It was common ground between the parties that leave to appeal was not required. Given the above conclusions, I would dismiss the appeal.

[2] Section 459C(1)(a) and s 459C(2)(a) of the Act.

[3] See the definition of solvency and insolvency in s 95A of the Act.

[6] Section 492H(2) (definition of 'admitted total') and s 492H(5) (definition of 'admitted amount') of the Act.

[7] Section 459H(2) (definition of 'offsetting total') and s 492H(5) (definition of 'offsetting amount') of the Act.

[8] Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, 605, cited with approval in 20*20 Pty Ltd v D&G Developments Pty Ltd [2009] WASC 343 [15]; Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263, 269 - 70; Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91; (2006) 94 SASR 269 [49]; Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 [38].

[9] Ozone Manufacturing [49]. As to the meaning of the terms 'counterclaim, set-off or cross-demand' see Ozone Manufacturing [43] - [44].

[11] No 96 Factory Bargains v Kershel Pty Ltd [2003] NSWSC 146 [27], cited with approval in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 [78].

[12] Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560 [18]; Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277 [38] - [39].

[13] Macleay Nominees [18], cited in 20*20 [16].

[14] Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 [90].

[15] See Diploma Construction [90]; Royal Premier Pty Ltd v Taleski [2001] WASCA 48 [57]; Elm Financial Services [19]; Edge Technology Pty Ltd v Lite-On Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181 [45]; Durkan v Sandbank Holdings Pty Ltd [2008] WASCA 249 [8].

[16] Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 3] [2014] WASCA 132; (2014) 46 WAR 483 [81].

[17] Macleay Nominees v Belle Property East [2001] NSWSC 743 [18], Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455, 462.

[18] Edge Technology [48]; Fleur de Lys Pty Ltd v Jarrett [2004] FCA 1357; (2004) 51 ACSR 238 [29]; Re Douglas Aerospace Pty Ltd [2015] NSWSC 167; (2015) 294 FLR 186 [40].

[19] Re Douglas Aerospace [40].

[20] Paragraphs 1, 2 and 2A of the Amended Statement of Claim and Further Amended Defence.

[21] Paragraph 2B of the Amended Statement of Claim and Further Amended Defence.

[22] Paragraph 3 of the Amended Statement of Claim; par 3.1 of the Further Amended Defence.

[23] Paragraphs 4 and 5 of the Amended Statement of Claim; par 4 and 5 of the Further Amended Defence.

[24] Paragraphs 3.3, 4.1, 5.2, 8 and 9.2 of the Further Amended Defence.

[25] Paragraph 10 of the affidavit of Mr Bernhard sworn 30 June 2016 and annexures LB5, LB6 and LB7.

[27] Paragraph 8 of the Legal Profession (Supreme Court) (Contentious Business) Determination 2014 (WA). That Determination applies to the District Court proceedings: see paragraph 3(a)(2) of the Determination.

[28] Paragraph 5 of the affidavit of Laura Thurston-Moon sworn 30 June 2016.

[29] This is in contrast to the position in Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2010] NSWSC 1017 where there was a quantified claim [17] and the court was able to determine the amount for which a genuine claim could be shown to be maintainable [33] - [34].

[30] Paragraph 12(c) and 12(d) of Ms Thurston-Moon's affidavit.

[31] It would have been preferable to have indicated the 'indemnity' costs payable with greater precision, as in Re Bond Corporation Holdings Ltd (1990) 1 WAR 465, 479. As to the effect of an indemnity costs order in the usual form, see EMI Records Ltd v Ian Cameron Wallace Ltd [1983] Ch 59, 71.