Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2012] NSWSC 764 | Case summary

Judgment 1By Originating Process filed on 18 November 2011, Homeward Bound Export Cherry Project Pty Limited ("Homeward Bound") seeks orders under ss 459G and 459H(1)(b) of the Corporations Act 2001 (Cth) that a statutory demand dated 26 October 2011 ("Demand") issued by Farm Working Hands Pty Limited ("FWH") be set aside. The Demand claims the amount of $109,586.26 and is verified by an affidavit of Mr Lawrence Cocerhan dated 26 October 2011. Mr Cocerhan is a director of FWH and his affidavit indicates that he has knowledge of the debt in that capacity and, given his access to the accounting records of FWH, he affirms that the relevant amount is due. 2Homeward Bound appears by its director, Mr Andrew Gartrell. Homeward Bound's application to set aside the Demand is supported by affidavits of Mr Gartrell and Ms Angeline Gartrell dated 18 November 2011. Homeward Bound also relies upon further affidavits of Mr Gartrell dated 28 May 2012, Mr Lex Smith dated 25 May 2012 and Mr Ray Ewins dated 25 May 2012. 3The matter was listed for hearing on 31 May 2012. I granted leave to Homeward Bound, in the course of the hearing, to amend its Originating Process also to rely on s 459H(1)(a) and s 459J of the Corporations Act, on the basis that that leave would not expand the factual matters on which it could rely having regard to the principle in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund [1996] FCA 822; (1996) 70 FCR 452; 21 ACSR 521 (to which I will refer further below). I deferred judgment in the matter to 9 July 2012 to allow the parties conveniently to attend for judgment. Whether a genuine dispute is established - legal principles 4The principles applicable to whether a statutory demand should be set aside under s 459H(1)(a) of the Corporations Act by reason of a genuine dispute as to the existence or amount of a debt are well established. Something more than assertion is required to establish a dispute sufficient to set aside a statutory demand, since otherwise any company could simply contend that it did not owe the relevant debt: John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250 at 253. The onus is on Homeward Bound as the recipient of the Demand to establish a genuine dispute: Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 at [15]. 5The test for a "genuine dispute" used in s 459H of the Corporations Act has been variously formulated as that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation" and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290; (1993) 11 ACSR 362; Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787. In Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39, Lockhart J observed that: "The notion of a 'genuine dispute' ... suggests to me that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous. It must be satisfied that there is a claim that may have some substance. On the other hand the court must be careful, because if all an applicant has to do is to assert both a claim and some basis for it, without more, it would mean in almost every case that the court would set aside statutory demands where application is made to that effect. Plainly that is not what the legislature intended by introducing this new regime." 6In Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [17], Barrett J noted that the test for a genuine dispute involved a "plausible contention requiring investigation" which was "real and not spurious, hypothetical, illusory or misconceived". His Honour also noted that the test for a genuine dispute, applied in the context of a summary procedure where it is not expected that the Court will embark on any extended enquiry, mean that the task faced by a company challenging a statutory demand on the "genuine dispute" ground is by no means at all a difficult or demanding one, and that the company will fail in that test only if it is found, upon the hearing of its application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. His Honour noted that, once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow; and the Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger. 7In Central City Pty Ltd v Montevento Holdings Pty Ltd above at [9], Murphy JA (with whom Buss JA agreed) observed that: "The expression 'genuine dispute' within the meaning of s 459H(1)(a) of the [Corporations] Act, connotes a plausible contention requiring investigation: Createc Pty Ltd v Design Signs Pty Ltd [2009] WASCA 85 at [44]. The demand will be set aside if there is a bona fide disputed issue of fact or law, which is not based on spurious, hypothetical, illusory or misconceived grounds: Createc v Design Signs; Asian Century Holdings Inc v Fleuris Pty Ltd [2000] WASCA 59 at [35]. Once such a dispute is raised, it is not necessary for a company to satisfy the court as to where the merits of the dispute lie: Turner Corporation (WA) Pty Ltd v Blackburne & Dixon Pty Ltd [1999] WASCA 294 at [30]. The court will not attempt to weigh or examine the merits of any dispute: Createc v Design Signs; Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 at 295." That decision was in turn followed in Beauty Health Group Ltd v Sholl [2011] NSWSC 77 at [4] and in V & M Davidovic Pty Ltd v Professional Services Group Pty Ltd [2012] NSWSC 134. Whether Homeward Bound incurred the debt 8The amount claimed in the Demand includes charges referable to invoices between 10 December 2009 and 15 April 2010, less credits for invoices which had been paid or part paid, totalling $72,004.38. The first basis on which Homeward Bound seeks to establish a genuine dispute is that another entity, Tablelands Cherry Management Pty Ltd ("TCM"), not Homeward Bound, was liable to pay the relevant amounts. 9A Management Agreement dated 25 November 2002 between Homeward Bound and TCM provides for the management and operation of orchards including the harvest of fruit and pruning of trees and provides for TCM to employ sub-contractors. The existence of that agreement does not in itself establish that Homeward Bound does not incur debts in its own right. Mr Gartrell's evidence is that, in about November 2009, FWH was engaged as subcontractor to carry out harvest, pruning and other services on the Homeward Bound property and several other orchard properties operated by several entities. Mr Gartrell sought to give evidence that TCM rather than Homeward Bound was the entity that incurred any debt to FWH but that evidence was not given in an admissible form and was not admitted. 10Mr Gartrell refers to a conversation on 18 July 2011 with the director of FWH, Mr Cocerhan, where he claims to have told Mr Cocerhan that Homeward Bound was not party to the agreement between FWH and TCM and that payments would not be made until after the 2011 harvest and Mr Gartrell's evidence is that Mr Cocerhan accepted that proposition. Homeward Bound also relies on an affidavit of Ms Angeline Gartrell sworn 18 November 2011. Ms Gartrell's evidence is that she and the other director of Homeward Bound have not discussed the provisions of services to the Homeward Bound orchard and, to the best of her knowledge, Homeward Bound has not entered any contract or agreement with FWH for the provision of goods or services as a result of which it is indebted to FWH. 11FWH relies on affidavits of Lawrence Cocerhan dated 28 March 2012 and 31 May 2012 and on documents produced from its electronic invoicing system. Mr Cocerhan's evidence is that he was initially advised to invoice work performed by FWH to another entity, Great Southern Fresh Produce Pty Limited, and did so. His evidence is that, when FWH undertook work about a month later at another orchard, it was instructed to invoice Homeward Bound, he indicated that payment would be required within 7 days and Mr Gartrell indicated that "I will do the best I can". Mr Cocerhan gives evidence that he was not advised by Mr Gartrell or anyone else that FWH was dealing with TCM and was not asked to amend the invoices that FWH issued to Homeward Bound in respect of the work that it performed. 12If there was no objective evidence, the dispute as to the content of the conversations between Mr Gartrell and Mr Cocerhan may have been sufficient to raise a genuine dispute as to whether Homeward Bound or another entity was liable to FWH in respect of the relevant services. However, invoices were issued by FWH to Homeward Bound between 10 December 2009 and 13 April 2010, often on a weekly basis. Several of these invoices were paid in whole or in part and the account records maintained by FWH's bank records those payments with a notation "Homeward Bound E", which I infer relates to payment by or on account of Homeward Bound E[xport Cherry Project Pty Limited]. I am also unable to accept that, where numerous invoices had been issued to the wrong entity over an extended period, as Homeward Bound now contends, there would not be a single letter, email or other contemporaneous document identifying that error. 13In the absence of any evidence of contemporaneous protest, and given the evidence of payment of several of the invoices by or at least on behalf of Homeward Bound, I am not satisfied that the dispute raised by Homeward Bound, so far as it concerns the identity of the party by which the debt is owed, has substance or raises a plausible contention requiring investigation so as to establish a genuine dispute as to the debt claimed by FWH. Complaints as to rates charged by FWH and quality of work 14Mr Gartrell's affidavit filed in support of the application to set aside the Demand stated, without further elaboration, that the works requested to be completed by FWH "have not been completed in a satisfactory manner nor at the agreed rate" and that the accounts submitted by FWH were "in dispute". That statement did not identify any specific basis for dispute as to the rates which had been charged by FWH or the manner in which the work was completed. 15Homeward Bound now seeks to dispute the invoices issued by FWH by reference to, inter alia, a lack of employee declarations produced by FWH; a challenge to FWH's pay reports, on the basis that employees were working on piecework rates; a challenge to the amount of fruit harvested by FWH and its workers; an allegation of "phantom" employees of FWH, which may refer to non-existent employees or employees who had not provided accurate information in respect of their identity; and also contends that it had always been agreed that credit would be issued for unremitted superannuation for employees who did not meet the threshold for the superannuation guarantee charge. 16It is well established that the only grounds of opposition which may be relied on in an application to set aside a statutory demand are those identified in the affidavit supporting that application filed within the 21 day period under s 459G of the Corporations Act or which may necessarily or reasonably be drawn from documents relied on in those affidavits: Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund above at ACSR 581; see also Energy Equity Corporation Ltd v Sinedie Pty Ltd [2001] WASCA 419; (2001) 166 FLR 179; POS Media Online Ltd v B Family Pty Ltd [2003] NSWSC 147; (2003) 21 ACLC 533; Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103; (2007) 61 ACSR 321; 25 ACLC 282; Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1317; King Furniture Australia Pty Ltd v Higgs [2011] NSWSC 234; Kay Investment Holdings Pty Ltd v North East Developments Pty Ltd (in liq) [2011] NSWSC 1121; (2011) 85 ASCR 610; V & M Davidovic Pty Ltd v Professional Services Group Pty Ltd above. I do not consider that the generalised assertions in Mr Gartrell's initial affidavit that work had not been completed in a satisfactory manner or at the agreed rate or that the accounts were in dispute sufficiently identify the grounds of dispute on which Homeward Bound now seeks to rely, for the purposes of the Graywinter principle. In my view, these challenges are therefore not open to Homeward Bound. 17Even if these challenges were open to Homeward Bound, I do not consider that a genuine dispute has been established by reference to them. FWH's invoices disclose an hourly and "per lug" charge, without any additional charge for workers' compensation and superannuation, and there was no evidence to indicate that such an additional charge was contained within that hourly charge. Mr Cocerhan gives evidence of a conversation with Mr Gartrell in October 2009 in which he indicated the labour rate to be charged by FWH, which was FWH's standard rate, and Mr Gartrell and another person, Mr Bannister, indicated their agreement to that rate. There is no evidence of any agreement by FWH to rebate any savings in respect of the superannuation guarantee charge to Homeward Bound or of any industry practice in that regard, although Mr Gartrell referred to such a practice in submissions from the bar table. There was no material before me that would quantify such a rebate, even on an approximate basis, for the purpose of establishing any offsetting claim by Homeward Bound on this basis. 18Mr Gartrell does not give evidence of having disputed the amount of any particular invoice and there is no correspondence or other contemporaneous document disputing any such invoice in evidence. I am unable to accept that, where numerous invoices had been issued on an incorrect basis over an extended period, as Homeward Bound now contends, there would not be a single letter, email or other contemporaneous document raising that issue. As I noted above, there is evidence that several of those invoices were paid in whole or in part. Notwithstanding the concerns as to FWH's employment and invoicing practices which Mr Gartrell now identifies as arising in mid 2009, Homeward Bound engaged FWH again in 2010 and 2011. In my view, this is not merely a matter where the merits favour FWH, but a matter where Homeward Bound's contentions do not have sufficient substance to warrant further investigation. Charge for pruning work 19The amount claimed in the Demand also includes amounts billed in invoices due 28 August, 1 September, 8 September and 15 September 2011 totalling $17,943.20 which appear to relate to tree pruning. Mr Gartrell's evidence is that pruning work undertaken by FWH from July 2011 was on a per tree rate, with the proper charge being $9,300 plus GST. Mr Gartrell's evidence as to the proper basis of pruning charges after July 2011 is supported by Mr Smith's evidence and to some extent by Mr Ewin's evidence of usual practice, and I am satisfied that evidence raises a plausible contention requiring further investigation. 20However, as Mr Stephenson (who appears for FWH) pointed out, Mr Gartrell's evidence as to an agreement as to the charge for pruning work relates to the period after July 2011, the three invoices relating to pruning work in that period totalled $11,563.20 and Homeward Bound conceded that a charge of $9,300 plus GST, for a total of $10,230, would be proper for that period. The difference between the amount claimed by FWH and the amount conceded by Homeward Bound was therefore $1,333.20. The substantiated amount in respect of this component of the Demand would therefore be $16,610 for the purposes of s 459H of the Corporations Act. Finance charge 21The amount claimed in the Demand also includes invoices dated 2 May 2011, 26 May 2011, 30 June 2011, 31 July 2011, 31 August 2011 and 7 October 2011 described as "finance charge" totalling $19,638.68. 22A difficulty arose in the course of the hearing with the documents on which FWH relies in support of this charge. Although the finance charge for interest at the rate of 15% per annum calculated daily after the due date was not introduced until May 2011, the copy invoices on which FWH initially relied in the proceedings included a reference to that finance charge in earlier invoices. The copy invoices produced by FWH for the earlier period and original invoices produced by Homeward Bound were identical other than for the notation relating to the financing charge. That matter was explained by a further affidavit of Mr Cocerhan dated 31 May 2012 as reflecting a modification to the templates for invoicing made by FWH in May 2011, so that copies of old invoices printed after that date included the additional notation relating to the finance charge. It was unfortunate that the earlier copy invoices on which FWH relied contained this additional notation, without that explanation being offered in Mr Cocerhan's first affidavit. However, I do not accept Homeward Bound's submission that this involved an attempt to deliberately mislead the Court or that it has any wider implications for the outcome of the proceedings. 23Had this matter been raised in the initial affidavits filed in support of the application to set aside the Demand, I would have held that a genuine dispute as to these charges was established, on at least two bases. First, Mr Gartrell's and Mr Cocerhan's evidence are in conflict as to whether Homeward Bound had accepted such a financing charge. Second, issues would have arisen as to whether consideration was established for any agreement by Homeward Bound to pay such a charge in respect of earlier charges, and as to whether a conversation in which, on Mr Cocerhan's evidence, Homeward Bound agreed to the financing charge before FWH undertook further pruning work was sufficient to give rise to an estoppel preventing Homeward Bound denying that charge. 24However, no dispute is identified in respect of the financing charges in the affidavits filed by Homeward Bound in support of the application to set aside the Demand within the 21 day period under s 459G of the Corporations Act. On that basis, an application to set aside that part of the amount claimed is not open to Homeward Bound by reason of the Graywinter principle. Offsetting claims 25Homeward Bound also seeks to set aside the Demand relying on an offsetting claim under s 459H(1)(b) of the Corporations Act. An "offsetting claim" for the purposes of that section is the amount of a claim, or claims, that a company has against the person who served the statutory demand by way of counter-claim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the Demand relates: s 459H(5). A company can establish an "off-setting claim" if there is a "serious question to be tried" or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451;12 ACSR 341. 26In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18], Palmer J observed that: "A genuine off-setting claim ... means a claim or cause of action advanced in good faith for an amount claimed in good faith. 'Good faith' means arguable on the basis of facts asserted with sufficient particularity to determine the claim is not fanciful." In Beauty Health Group Ltd v Sholl above at [23], Barrett J observed that s 459H(1)(b), read in conjunction with the definition of "offsetting claim" in s 459H(5): "... requires the court to consider whether the plaintiff has a 'genuine' claim against the defendant in respect of the matter raised. It is also necessary to ascribe an 'amount' to any 'genuine' claim in order to determine, under s 459H(2), the 'offsetting total' which plays a central part in determining whether the 'substantiated amount' is less than the statutory minimum of $2,000. The court's task is not to make any final choice between the competing contentions about the relevant matter. It need only see that the plaintiff has asserted a claim and that the claim rises to the level of a serious question to be tried (Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341), is based on a cause of action advanced in good faith for an amount claimed in good faith (Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743) and is not frivolous or vexatious (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37)." 27In Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57], Ipp J observed that it is not necessary, on an application to set aside a statutory demand for an offsetting claim, for evidence as to damages to be given in "meticulous detail." However, his Honour also observed that: "There must be at least some material upon which the court can conclude that some damage has been sustained and which will enable the court to make a reasonable assessment as to the amount thereof." His Honour held that the absence of evidentiary material from which damage suffered by the appellant could be calculated in that case was fatal to its claim to set aside the statutory demand. 28Mr Gartrell's affidavit in support of the application to set aside the Demand identified a claim for damage suffered by TCM and Homeward Bound in respect of a motor vehicle engine, damage to a tractor and to cherries which were being picked and to a house occupied by workers. He "estimate[d]" those losses as in excess of $30,000 but no evidence was led in that affidavit to prove that they occurred or to quantify them. 29Mr Smith's evidence provides some support for damage to the motor vehicle and refers to a statement by Mr Gartrell that the cost of replacing the motor of the vehicle was $3,000. Mr Cocerhan denies the allegation of damage to machinery, plant or other damage and notes that FWH has received no letters of claim or demand in respect of any such damage. Homeward Bound also tendered no evidence of contemporaneous correspondence recording the fact of any such damage. FWH relied on Mr Gartrell's original affidavit which asserted that the motor vehicle was owned by TCM rather than Homeward Bound and there is no evidence before me in documentary form as to the ownership of the vehicle. In these circumstances, I do not consider that the claim for damage to a motor vehicle owned by Homeward Bound is arguable where Mr Gartrell's evidence was that the vehicle was owned by another entity. 30Mr Gartrell conceded in submissions that there was no evidence as to the quantity or weight of damaged cherries to permit a calculation of the amount of loss suffered by Homeward Bound as a result; that a further claim in respect picking straps and picking ladders had also not been quantified; and that the claim in respect of damage to the house occupied by pickers had not been quantified. 31Accordingly, even if Homeward Bound had established that a cause of action was advanced in good faith in respect of these matters, it has not established that an amount is claimed in good faith in that regard so as to establish an offsetting claim. Substantiated amount of the Demand 32The substantiated amount of the Demand, for the purposes of s 459H of the Corporations Act, is therefore $108,253.06, being the sum of $72,004.38 referable to invoices issued between December 2009 and 15 April 2010, $16,610 (as varied) referable to pruning invoices and financing charges rendered from May 2011 in the amount of $19,638.68. I will make an order as specified by s 459H(4) of the Corporations Act varying the Demand to that amount and declaring the Demand to have had effect, as varied, as from when the Demand was served on Homeward Bound. The substantiated amount is substantially greater than $2,000 and I therefore may not set aside the Demand under s 459H(3) of the Corporations Act. Claim to set aside the Demand under s 459J of the Corporations Act 33The Court may set aside a statutory demand under s 459J(1)(b) of the Corporations Act if it is satisfied that there is some other reason that the demand should be set aside. The Court's power under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Corporations Act and is to be used to counter an attempted subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746; Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229; CP York Holdings Pty Ltd v Food Improvers Pty Ltd [2009] NSWSC 409. A statutory demand may be set aside under that section where it involves conduct which is unconscionable or an abuse of process: Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3; (2005) 157 ACTR 22. 34The matters which I have set out above do not establish any other reason to set aside the Demand under s 459J of the Corporations Act, since there is nothing to suggest that the use of the statutory demand procedure by FWH in this case was an abuse of process or otherwise inconsistent with the statutory scheme under Pt 5.4 of the Corporations Act. Extension of time for compliance 35Homeward Bound sought, and I will grant, an order extending the period for compliance with the Demand, as varied, to 21 days after the date of this judgment for the purposes of s 459F of the Corporations Act. Costs 36Section 98 of the Civil Procedure Act 2005 (NSW) relevantly provides that: "Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis." Uniform Civil Procedure Rules 2005 (NSW) r 42.1 ("UCPR") provides that, if an order is made as to costs, the Court is to order that costs follow the event unless it appears to the Court that some other order should be made as to the whole or any part of the costs. UCPR r 42.2 states the general rule that costs payable to a person under an order of the Court or these rules are to be assessed on the ordinary basis. In the ordinary course, costs should follow the event and an order for costs would be made against Homeward Bound, on the basis that FWH has been substantially successful in the proceedings. 37FWH also seeks orders for the costs of the proceedings against Mr Gartrell personally, and relies on evidence as to the conduct of the proceedings in support of that application. The question whether the Court should make a costs order against a director who carries on proceedings on behalf of a company is to be determined by reference to the factors identified by the High Court in Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 where Mason CJ and Deane J (with whom Gaudron J concurred) noted that an order for costs could be made against a non-party to proceedings where: "The party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party ... has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against any non-party if the interests of justice require that it be made." 38In Yates v Boland [2000] FCA 1895, the Full Court of the Federal Court upheld a non-party costs order where the applicant company was "a man of straw", the non-party had played an active role in the litigation, and he and his family were the beneficial shareholders in the applicant. 39In FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [210], Basten JA (with whom Beazley and Giles JJA agreed) noted that the exceptions to the general rule that an order for costs is only made against a party to the litigation should not be allowed to expand so as to undermine the rule itself, and that relevant criteria included that the unsuccessful party was the moving party; the source of funds for the litigation was the non-party or its principal; the conduct of the litigation was unreasonable or improper; the non-party or its principal had an interest which was equal to or greater than that of the party or, if financial, was a substantial interest; and the unsuccessful party was insolvent. His Honour also observed that: "The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. In many cases involving individuals in the superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non-party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success. The fact that it is entirely proper for legal practitioners to runs cases on a speculative basis, so long as satisfied that they have reasonable prospects of success, demonstrates that care must be taken not to apply the criteria mechanically. Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the "interest" in its outcome or subject-matter." 40In May v Christodoulou [2011] NSWCA 75, the majority in the Court of Appeal held that the fact that a director represents the company is not enough to justify the exercise of the power to award costs against the director personally. Sackville AJA observed at [102]-[103], in respect of the relevance of the manner in which a director conducts proceedings on a company's behalf, that: "Although a non-legally qualified director does not owe the same duties to the court as a legal practitioner, it is no doubt correct that the manner in which the director conducts legal proceedings on behalf of a company could justify a costs order against him or her personally. If, to take an example already given, the director repeatedly and flagrantly ignores court directions, thereby prolonging the proceedings and causing the other party to incur substantial and irrecoverable costs, a non-party costs order may well be appropriate. In this case, however, the primary Judge did not find that the appellant engaged in conduct that was so reprehensible or inappropriate that a non-party costs order should be made against him. The criticisms made of the appellant's conduct of the proceedings, if made in relation to a legal representative, would have fallen well short of the sort of conduct that justifies a costs order against a legal practitioner personally ... If every legal practitioner who attempted to adduce inadmissible evidence or who asked irrelevant questions was made the subject of adverse costs orders, the courts would do little but adjudicate costs applications." Handley AJA, in the minority, regarded the fact that a director's involvement had prolonged the proceedings as relevant to the exercise of the discretion to make an order for costs against the director. 41In the present case, Homeward Bound is the moving party, although the force of that matter is qualified by the fact that its application was brought in response to the Demand served by FWH. Mr Gartrell has pointed to Homeward Bound's inability to retain solicitors and this raises the possibility or probability that it does not have the funds necessary to meet an adverse costs order. It appears that Mr Gartrell is the sole shareholder in Homeward Bound and has an interest in the outcome of the proceedings. 42I do not consider that it could be said that the conduct of the litigation was unreasonable or improper, although I think it likely that, had Homeward Bound retained legal representation, it would not have pressed a number of the matters on which Mr Gartrell relied and the proceedings would have been completed more quickly. I should say something further as to the history of the proceedings in that regard. Until early March 2012, Homeward Bound was represented by solicitors in the proceedings. On 11 March 2012, Mr Gartrell wrote to the Registrar referring to a Notice of Ceasing to Act filed by Homeward Bound's solicitors and indicating that Homeward Bound could not afford to retain those solicitors and wished to defend the proceedings as an unrepresented party. The Court made further directions in respect of the conduct of the proceedings including directions that the Plaintiff cause a director to file an affidavit as to his or her authority to carry on the proceedings which complies with UCPR 7.2 unless it had retained a solicitor to act for it in the proceedings prior to that time. That did not occur, and on 2 April 2012, Ward J made a further direction as to the service of such an affidavit. 43On 7 April 2012, a directors' meeting of Homeward Bound authorised Mr Gartrell to conduct the proceedings on behalf of Homeward Bound. By his affidavit sworn 11 April 2012, Mr Gartrell referred to that authority and acknowledged that he may be personally liable for some or all of the costs of the proceedings. As Sackville AJA observed in May v Cristodoulou at [98], the effect of that acknowledgement is that a director: "... records only his acknowledgment that he may be liable to pay some or all of the costs of the proceedings. It does not say, for example, that he will be liable if [Homeward Bound] loses the case or if he is found to not to have complied with the professional standards expected of a legal practitioner." 44The matter was listed by the Court for hearing on 17 May 2012. As a result of a misunderstanding on the part of Homeward Bound, as to which FWH made no contribution, Homeward Bound was not ready to proceed on that date and the matter had to be further adjourned. FWH contends that Homeward Bound and Mr Gartrell should pay its costs of the hearing on that date because, first, FWH did not contribute to that misunderstanding; second, Homeward Bound should have checked whether a hearing date had been allocated, where orders made by Ward J on 2 April 2012 contemplated that would occur; third, a significant part of the hearing on that date concerned Homeward Bound's unsuccessful application for further disclosure by FWH; and, fourth, one of the grounds for Homeward Bound's adjournment application was that it wished to file and serve further affidavits, notwithstanding that there had been several previous directions hearings on which orders for service of further evidence by Homeward Bound could have been made. 45On balance, I do not consider that the manner in which the proceedings were generally conducted by Mr Gartrell after that date, or the other factors to which the High Court referred in Knight v FP Special Assets or the Court of Appeal referred to in FPM Constructions and May v Christodoulou, warrant an order for the costs of the proceedings generally against Mr Gartrell. However, I consider that such an order for costs should be made against Mr Gartrell personally in respect of the hearing before me on 17 May 2012, where Mr Gartrell's misunderstanding as to the nature of that hearing resulted in significant wasted costs without fault on the part of FWH. 46Accordingly, I order that:

The statutory demand dated 26 October 2011 issued by the Defendant ("Demand") be varied by amending the amount of $109,586.26 stated in the Schedule to $108,253.06.
The period for compliance with the Demand, as varied, be extended to 30 July 2012.
The Plaintiff and Mr Gartrell be jointly and severally liable for the costs of the hearing before me on 17 May 2012 and the Plaintiff otherwise pay the costs of the proceedings, as agreed or as assessed.

(2001) 166 FLR 179

Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation

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