- Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation

Supreme Court of NSW|2022-11-25|Before: Black J

Solicitors: Whitfields (Plaintiff) Mahony Law (Defendant) File Number(s): 2022/111539

Nature of the application

By Amended Originating Process filed on 25 November 2022, Tetbury Pty Limited ("Tetbury") seeks to set aside a creditor's statutory demand dated 28 March 2022 ("Demand") which claims the amount of $85,211.32 referable to a judgment debt arising from a costs assessment. I will refer to the process which led to that costs assessment below. The application is brought under s 459H(1)(a) of the Corporations Act 2001 (Cth) ("Act") on the basis of a genuine dispute as to the claimed debt, and under s 459J(1)(b) of the Act on the basis that there is some other reason to set aside the Demand. Tetbury rightly did not press a further claim that the judgment dated 1 February 2022, arising in respect of a costs assessment, should be set aside, where the Court would not consider a claim of that nature in a summary application to set aside a creditor's statutory demand: Gujarat NRE Australia Pty Limited v Gibbs [2006] NSWSC 211; Re Passion Projects Pty Ltd [2014] NSWSC 345; F Assaf, Winding Up in Insolvency (LexisNexis, 3rd ed, 2021) [5.13].

Factual background and affidavit evidence

By way of background, Tetbury was the parent company of another company, Tresdar Pty Limited ("Tresdar"), which was a property developer. Mahony Law acted for Tresdar and possibly for other parties, including Tetbury, in proceedings against a third party and in other matters.
Now over five years ago, Mahony Law issued a creditor's statutory demand to Tetbury which I varied in my judgment in Re Tetbury Pty Ltd [2017] NSWSC 237 ("Earlier Judgment"). In doing so, I observed (at [28]) that it seemed to me at least arguable that Tresdar and not Tetbury was given several invoices for solicitors' fees issued by Mahony Law which were the subject of that earlier demand; that s 331 of the Legal Profession Act 2004 (NSW) (which then applied) did not permit recovery of the amounts claimed in those invoices against Tetbury in court proceedings before they were invoiced to Tetbury; and that there was a sufficient basis to establish a genuine dispute in respect of the part of the debt claimed by Mahony Law which related to those invoices. It appears that the amount now claimed by Tetbury in the Demand is part of the debt that I then found was genuinely disputed, in respect of Mahony Law's solicitors' fees and, so far as I can see, the genuine dispute that was then identified has not been determined in subsequent litigation between the parties. It is not easy to see how a genuine dispute that then existed as to that debt could since have disappeared, without being determined. However, Mr Gracie, who appears for Tetbury, does not take that point and I will not address it further.
The parties read affidavit evidence and tendered voluminous exhibits in the application which outlined the complex factual background to the application to set aside the Demand. Tetbury relies on the affidavit dated 16 May 2022 of its solicitor, Mr John Whitfield, and a bulky exhibit to that affidavit (Ex A1), which comprises the court book in proceedings before Russell DCJ in the District Court of New South Wales ("First District Court Proceedings"), subsequent to the Earlier Judgment.
Mr Whitfield's evidence is that, after I found in the Earlier Judgment that there was a genuine dispute in respect of the solicitors' fees claimed by Mahony Law, and that there was no genuine dispute in respect of the amount of counsel fees claimed by Mahony Law (and after, I interpolate, Mahony Law brought a winding up application), a "settlement" was reached on the basis that Tetbury would pay Mahony Law the amount of $180,000, which Mr Whitfield contends comprised $170,000 in full payment of outstanding counsel fees (rounded down from $174,000) and $10,000 in respect of the costs of the previous proceedings. Following that "settlement", separate proceedings that had been brought by Mahony Law in this Court to recover the amount of its solicitors' fees were transferred to the District Court, and it appears the winding up application was dismissed.
The circumstances in which that "settlement" took place were in issue in the First District Court Proceedings, but that issue was not determined by reason of subsequent events. Mr Gracie drew attention to correspondence, at about the time of the "settlement", from Mahony Law to counsel concerning their fees, which I had found were undisputed, and which Tetbury contends should have been paid to Mahony Law by reason of the "settlement". On 12 September 2017, Mr Mahony wrote to the senior counsel whose fees had not been paid by Mahony Law, indicating that the amounts claimed by Mahony Law against Tetbury had not been paid; that Mahony Law had served a creditor's demand for payment on Tetbury; and that the Court had varied the amount of that demand to the figure of $178,748 which Mr Mahony rightly noted "represented outstanding counsel fees of which your fees are part". Mr Mahony then referred to the fact that Mahony Law had brought an application to wind up Tetbury and that Tetbury had defended the winding up application on the basis that moneys were not owing and that it was solvent and had filed a solvency report from a registered liquidator. Mr Mahony also referred to the separate Supreme Court proceedings which had been brought by Mahony Law against Tetbury, seeking payment of the disputed solicitors costs claimed by Mahony Law. He noted that, if the winding up application was unsuccessful, those other proceedings would be the way in which those fees would be collected.
Mr Mahony then went on to say: "In the meantime a creditor of Mahony Law which has secured moneys owing by Mahony Law to it by way of a charge over the assets of Mahony Law including debts owing to Mahony Law, in the same manner as any bank providing a bank overdraft to a legal firm takes a charge over the firm's assets including debts owing to it, has made contact with Tetbury which, coincidentally, may be involved in a commercial relationship with a creditor, totally separate from Mahony Law. The creditor has negotiated an agreement with Tetbury, that Tetbury pays to that creditor of Mahony Law in part payment of Mahony Law's debt to that creditor, the amount certified by the court under the creditors statutory demand in the sum of $178,748.00 in consideration for which Mahony Law then agrees to discontinue the winding up proceedings due to be heard on 24 October 2017. Tetbury would, apparently, only pay those moneys to the creditor of Mahony Law and will not pay those moneys direct to Mahony Law. The creditor, in turn, has agreed to the payment to Mahony Law for part payment to counsel, the total sum of $50,000, whilst retaining the balance as part payment of the moneys owed by Mahony Law to it."
The letter then referred to amounts that would be paid to counsel in pro rata reduction of the debts owed by Mahony Law to counsel. It is not possible in a summary application of this kind to determine whether that letter was correct when it was written. It plainly did not accurately describe what ultimately occurred, where the settlement amount, whether funded by that creditor or not, was paid by Tetbury's solicitor to Mahony Law rather than to that creditor, and a significant part of that amount was then applied by Mahony Law to its disputed debt in respect of solicitor's fees; another part was applied to the amount claimed by that creditor of Mahony Law; and much less than the previously indicated $50,000 was applied to payment of undisputed counsel fees.
It is not surprising that senior counsel responded to Mahony Law's letter, apparently assuming that the account of what would occur in that letter was accurate, by an email dated 13 September 2017 which objected to Mahony Law's approach. That objection could fairly have been put in stronger terms if he had been told what would in fact occur.
Subsequent correspondence followed between Mr Mahony and the solicitors then acting for Tetbury, where the solicitors for Tetbury maintained that the "settlement" related to counsel fees referred to in the winding up application only and sought Mr Mahony's agreement that the amount of $180,000 to be paid to his firm would satisfy the debts and obligations referred to in the statutory demand determined by the Earlier Judgment, being the "principle [sic] debt claims which are the barristers' bills". It is not apparent whether any agreement was ultimately reached between the solicitors for Tetbury and Mahony Law in that respect.
Mr Whitfield in turn refers to the payment of $180,000 by Tetbury, which he contends was made under an instruction to Mahony Law by Tetbury's then solicitors that the settlement would be applied to counsel fees that were the subject of the winding up application. As I noted above, it appears that the amount then paid by Tetbury was applied by Mahony Law, in substantial part, to payment of the disputed solicitors' costs and the third party debt and, as I noted above, only in small part to payment of undisputed counsel fees. There is a dispute, which was not resolved in the subsequent litigation between the parties and cannot be resolved in a summary application of this kind, as to the circumstances in which that occurred. There can, however, be no dispute that the effect of what occurred was to pay a disputed amount of solicitors' fees to Mahony Law; not to pay an undisputed amount of counsel fees to counsel; and to prefer the interests of Mahony Law to its obligations to counsel and the interests of its former client, Tetbury, in seeing the amount due to counsel paid.
In the course of the hearing of the First District Court Proceedings, after their transfer from this Court to the District Court, Mr Mahony gave evidence on cross-examination that his disputed solicitors' fees could not now be the subject of a costs assessment because they had been paid in the manner noted above. The First District Court Proceedings settled in the course of the hearing, after Russell DCJ suggested that counsel then appearing for Mahony Law give "some frank and fearless advice" to Mr Mahony, on terms that Tetbury would pay a further $20,000 to Mahony Law. That settlement was recorded in brief terms of settlement, which provided for the consequences of payment or non-payment of that amount, and did not expressly provide any further release to Tetbury. Mr Whitfield's evidence is that he relied on Mr Mahony's status as a solicitor, represented by counsel in the First District Court proceedings, in not seeking a further release of claims by Mr Mahony. It is not possible to determine the truth of that position where Mr Whitfield was not cross-examined, and this is a summary application rather than a determination of contested litigation between the parties on the merits.
By an affidavit dated 10 June 2022, with an equally bulky exhibit (Ex R1), Mr Mahony denies that settlement moneys were received by his firm on account of counsel fees and contends they amounted to a part payment for costs and disbursements claimed by his firm. Again, that dispute has not been determined in the subsequent litigation between the parties, nor can it be determined in this summary application. Mr Mahony denies making statements referred to in Mr Whitfield's affidavit, raising a dispute which also cannot be determined in an application of this kind. He gives evidence of negotiations with his firm's creditor in respect of the settlement of the winding up proceedings, although it is not entirely apparent how an agreement between Mr Mahony and that creditor could override any obligation of Mr Mahony, as a legal practitioner, in respect of payment of the undisputed counsel fees. Mr Mahony also contends that comments made by Russell DCJ in the course of the First District Court Proceedings reflected his Honour's "misunderstanding" of the "actual situation", although the account of events set out above provides little support for that contention.
In any event, once the First District Court Proceedings were settled, without an express release of Tetbury from further claims by Mahony Law, Mahony Law commenced an assessment of its disputed solicitors' costs in the Costs Assessment Division of the Supreme Court of New South Wales, contrary to Mr Mahony's evidence in the District Court that that could not occur, where Mahony Law sought to agitate the issues that would have been determined in the First District Court Proceedings but for the settlement of those proceedings. Mahony Law's application for assessment is in evidence and did not draw the history which I have set out above to the attention of the Manager, Costs Assessment. That history was, however, drawn to the costs assessor's attention in an extended submission process, in which both Mahony Law and Tetbury made disputed factual claims, which the costs assessor plainly could not resolve, or at least could not adequately resolve, without cross-examination or a contested hearing.
By a preliminary ruling made in February 2020, the costs assessor dealt with several issues raised by Tetbury in opposition to the assessment, some of which were addressed in submissions and evidence before me at this hearing, namely contentions that the invoices which were the subject of the application had been paid; a suggested res judicata arising from the dismissal of the First District Court Proceedings; a claim for Anshun estoppel arising from the First District Court Proceedings; and a suggested estoppel arising from the Earlier Judgment, a proposition which may have misunderstood the nature of the earlier application to set aside a creditor's statutory demand in this Court. The costs assessor determined that he was entitled to proceed with the assessment and then addressed further issues as to procedural fairness in a decision in June 2020.
By a further determination in July 2020, the costs assessor addressed disputed solicitors' costs and undisputed counsel fees, where the costs assessment had been expanded, at his suggestion, to extend to counsel' fees. He did not determine the substance of the disputes as to a number of the issues raised by Tetbury, in particular as to the impact of the settlement of the First District Court Proceedings, beyond what had been said in his preliminary ruling and, in particular, he paid no attention to any question of the extent to which Mr Mahony's conduct might be impacted by the fact that he was a legal practitioner, who was subject to professional obligations that would not be imposed on other persons who did not have that role. He ultimately assessed the amount of costs payable to Mahony Law, less the costs already paid, as $85,211.32, which was then registered as a judgment in this Court so as to found the Demand.
Subsequently, Tetbury brought an appeal to the District Court of New South Wales ("Second District Court Proceedings"). By the time the Second District Court Proceedings were heard, it was common ground that that appeal was brought under s 384 of the Legal Profession Act and was limited to a question of law only. That appeal was dismissed by Gibson DCJ in Tetbury Limited v Mahony Law [2021] NSWDC 691. Her Honour there noted (at [13]) that she was not determining an appeal on issues of fact, which could not be heard in the District Court where the proceedings which were the subject of the costs assessment were not heard in that Court.
Returning now to the affidavit evidence, by his further affidavit in reply dated 12 July 2020, Mr Whitfield took issue with a significant amount of Mr Mahony's evidence-in-chief, although by that time much of the dispute between the solicitors was directed to matters of submission and inference to be drawn from the facts which I have set out above.

Whether a genuine dispute is established

I now turn to the bases on which Tetbury seeks to set aside the Demand. First, Tetbury applies to set aside the Demand under s 459H(1)(a) of the Act, which applies where there is a genuine dispute between a company and the issuer of the demand about the existence or amount of the debt to which the demand relates. A genuine dispute must be bona fide and truly exist in fact, and the grounds for the dispute must be real and not spurious, hypothetical, illusory or misconceived, and the threshold to establish a genuine dispute is not high: Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 76 FCR 452 at 464; [1997] FCA 681; Re Wollongong Coal Ltd (2015) 110 ACSR 134; [2015] NSWSC 1680 at [9]ff; Ligon 158 Pty Ltd v Huber (2016) 117 ACSR 495; [2016] NSWCA 330 at [8]; and see my summary of the relevant authorities in Re Savemore Wholesale Pty Ltd [2021] NSWSC 307 at [22]ff.
In written submissions, Mr Gracie, does not address the question of the existence of a genuine dispute in detail, although he refers to several of the matters which I have set out above. He submits that the amount which was the subject of the Demand has been disputed since before the hearing of the earlier proceedings before me in December 2016. I recognise that, at least so far as the solicitors' fees were concerned, that dispute was found to be a genuine dispute by the Earlier Judgment. He appears to rely on the settlement of the First District Court Proceedings, presumably on the basis that it limited the amount that could be recovered by Mahony Law to the amount which was to be paid by the settlement, notwithstanding that it did not expressly include a release, presumably having regard to Mr Whitfield's evidence as to his reliance on Mr Mahony's status as a lawyer in that regard. Mr Grace also submits that there has been no curial determination of issues surrounding the validity and legality of the costs certificate issued by the costs assessor, although that should obviously be qualified by recognition of Gibson DCJ's judgment in the Second District Court Proceedings so far as a challenge was brought in respect of that costs certificate on a question of law. Mr Grace also contends that Tetbury has or will apply to challenge the costs certificate under Uniform Civil Procedure Rules 2005 (NSW) r 6.15 as obtained by Mahony Law irregularly or in bad faith.
Mr Maroya, who appears for Mahony Law, in turn refers to Gibson DCJ's judgment in the Second District Court Proceedings and contends that Tetbury should not be permitted to embark on a collateral attack on the registration of the costs assessment as a judgment of the Court. Plainly, that attack cannot be brought in this application, which is a summary determination of whether the Demand should be set aside; whether it can be brought in separate proceedings, in another list in this Court, can be left to the judge determining that matter, if it arises.
Given the conclusions that I reach below on other grounds, it is not necessary to determine the question whether a genuine dispute is established. I bear in mind that the costs assessment has been registered and takes effect as a judgment of this Court, which has not been set aside.

Some other reason

Alternatively, Tetbury seeks to set aside the Demand under s 459J(1)(b) of the Act. That section confers on the Court a discretion to set aside a creditor's statutory demand, which is available at least where the issue of that demand would be unconscionable or amount to an abuse of process or where the issue of the demand would undermine the statutory scheme: Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation (2005) 157 ACTR 22; [2005] ACTCA 3 at [27]; Saferack Pty Ltd v Marketing Heads Australia Pty Ltd (2007) 214 FLR 393; [2007] NSWSC 1143 at [33]. In CP York Holdings Pty Ltd v The Food Improvers Pty Ltd [2009] NSWSC 409 at [14], to which Hammerschlag CJ in Eq has recently referred, with approval, in Hebbel Constructions Pty Ltd v Bitar Pty Ltd [2022] NSWSC 1594 ("Hebbel") at [33], Barrett J (as his Honour then was) observed that that section conferred a remedial jurisdiction, and that the power exists to maintain the integrity of the regime in Pt 5.4 of the Act and should be used as necessary and appropriate to counter attempted subversion of the statutory scheme. In Hebbel, Hammerschlag CJ in Eq in turn noted that: "The overall objective of [Pt] 5.4 is to ensure that the result of a creditor's attempt to obtain the benefits [of] a presumption of insolvency through service of a statutory demand is known - and definitively known - before the hearing of any winding up application... The low threshold for setting aside a statutory demand is consistent with the philosophy of the Part that it is not properly to be used as a vehicle to create a presumption of insolvency where the debt relied on by the creditor is genuinely disputed or by ignoring genuine offsetting claims."
Mr Gracie here puts the application to set aside the Demand on this ground by reference to an abuse of process on the part of Mahony Law, although it is not necessary to go so far as that in order to determine the application. Mr Maroya responds that there has been no abuse of process, and contends that Mahony Law was entitled to invoke the costs assessment process, despite the settlement of the First District Court Proceedings, and that Mahony Law has been paid only half of its fees and counsel fees. The latter proposition assumes, of course, that the settlement of the First District Court Proceedings did not operate to further confine Mahony Law's attempt to recover further disputed solicitors' fees, where Mr Mahony, a legal practitioner, had entered into that settlement without disclosing any intent to seek to recover those fees by a further costs assessment, and where (as I noted above) he had given evidence in the course of the proceedings that eschewed any ability to seek a further costs assessment of the solicitors' fees that had by then been paid from the earlier settlement. Mr Maroya also submits that Tetbury's submission would have the effect that Mahony Law is only entitled to half of its fees. I reject that submission. All that I am determining here is whether Mahony Law can properly issue the Demand in respect of the debt arising from the costs assessment, and that determination has no impact on Mahony Law's ability to utilise any other form of recovery or enforcement process in respect of that debt, if it is not now out of time to do so.
It is here not necessary to determine, in the abstract, whether, as Mr Maroya contends, the costs assessment regime is an alternative to a contractual claim by a solicitor and, in the abstract, both can be invoked successively. I am comfortably satisfied that, on the particular facts of this case, which are not facts that one would expect to see repeated in proceedings involving a solicitor and officer of the court, there is some other reason to set aside the Demand. Here, there is a real question whether Mahony Law's manoeuvring in respect of the payment of the amount received under the settlement, and in particular the application of that payment to disputed fees of the firm rather than undisputed counsel fees, operated to the disadvantage of its former client, Tetbury, in the First District Court Proceedings and frustrated the just, quick and cheap determination of those proceedings. There is also a real question as to whether the settlement that provided for the payment of a further $20,000 to his firm, in the context that Mr Mahony had given evidence in those proceedings that a further costs assessment could not occur in respect of the disputed solicitors' fees because they had been paid, prevented Mr Mahony from subsequently undertaking such an assessment.
The disputes as to these matters have not been determined by the several years of proceedings between the parties. They were not determined in the First District Court Proceedings, because those proceedings were settled; they were not and could not be determined in the costs assessment, because the costs assessor did not have access to the procedures, including cross-examination and an oral hearing, that would have provided a reliable basis for their determination; and they were not determined in the Second District Court Proceedings, because those proceedings were an appeal on a question of law and Gibson DCJ rightly did not seek to determine matters that were not germane to that question of law. Mr Maroya responds that Tetbury has itself taken no steps to, for example, enforce the settlement in the First District Court Proceedings under s 73 of the Civil Procedure Act 2005 (NSW). That, however, is not to the point, because it is not Tetbury that is seeking to rely on a procedure which is available in respect of an undisputed debt, where these disputes exist and have not been determined.
The factual position as between the parties is also such that, whether or not any genuine dispute under s 459J(1)(a) of the Act can be established where the costs certificates have been registered as a judgment, no inference could rationally follow from the non-payment by Tetbury of the balance claimed by Mahony Law that Tetbury is unable to pay its debts as and when they fall due. The non-payment of that amount is equally consistent with a belief, likely justifiable, that Tetbury should not be required to pay a disputed debt in respect of solicitors' fees, where it claims that amounts it had previously paid in settlement of the winding up proceedings were wrongly applied and also claims that it can hold Mr Mahony as an officer of the court to a settlement of the District Court proceedings, and those claims have not been determined. It seems to me that it would subvert the creditor's statutory demand procedure if it could be applied in respect of a claim where those disputes have not been determined, and this Court cannot determine them in a summary application in respect of the Demand. To adopt the language of Hammerschlag CJ in Eq in Hebbel at [42]: "A number of these considerations are sufficient in themselves to make reliance on the demand by [Mahony Law] unconscionable, an abuse of process or, if the demand was to stand, to wreak a substantial injustice... To allow the demand procedure to be used in these circumstances would defeat the ends of justice, subvert the legislative intent, and undermine the integrity of Pt 5.4 [of the Act]."
For these reasons, I make orders that:
The creditor's statutory demand dated 28 March 2022 issued by John Francis Mahony t/as Mahony Law to Tetbury Pty Ltd be set aside.
Mr Mahony pay the costs of Tetbury Pty Ltd of these proceedings, as agreed or as assessed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 December 2022

Legal Profession Act 2004(NSW)

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