Ayrton Investments Pty Limited v Robert Andrlik [2000] ACTSC 55

* No new lease had, by then, been signed in respect of Unit 3 Grimwade Street;

* In February 1997, Ayrton had agreed with the respondent to pay commissions then due by instalments of $1,000.00 per month.

4. The second statutory demand dated and served on 25 June 1997 related to a sum allegedly due for commission in respect of Unit 2 at 7-11 Grimwade Street, Mitchell, being $3,210.30. Ayrton's solicitor, on 1 July 1997, disputed that demand on the basis that the lease for Unit 2 had not been executed, due to a dispute between the directors of the tenant company. That demand overlapped in part the substance of the first demand.

5. On 2 July 1997, the solicitors for the respondent sent what they asserted to be a copy of the executed lease to Ayrton's solicitors. They acknowledged part-tender for commissions not otherwise disputed but asserted that they were entitled to full payment immediately, not by instalments.

6. On 10 July 1997, the solicitors for Ayrton protested that the execution was incomplete bearing the signature of one director only as guarantor.

7. The hearing of the application to set aside the demand notices took place on 25 July 1997.

8. As Mr Everson (then counsel for the respondent) conceded, Hayne J had held that, in determining whether there is a genuine dispute, the Court is not confined to the affidavit accompanying the application to set aside the statutory demand (see Mibor Investments Pty Ltd & Ors v Commonwealth Bank of Australia, 290, 296]. Nevertheless, Mr Everson submitted, the Court should disregard the additional affidavit filed in support of the application.

9. I do not consider that the additional affidavit material should be disregarded. I take the same view as did Hayne J.

10. As to the second demand, the affidavit material in support of the application alleged that the lease in question had not been duly executed as Ayrton required both directors of the tenant company as guarantors, and that there was, even if it was properly executed, an agreement for payment by instalments so that the amount claimed had yet to become due.

11. The latter issue, common to both demands, turned on the content of disputed conversations between the respondent and Mr Hugh MacRae, a director of Ayrton.

12. On 25 July 1997 I set aside the demand notices, reserving costs, on the basis that subsequent litigation might shed light on the bona fides of Ayrton's claim that there had been a "genuine dispute" as appeared established on the face of the supporting material.

13. Part of the dispute was the subject of a claim filed by the respondent in the Small Claims Court seeking recovery of $3,210.30 from Ayrton. The claim was confined to the liability for commission in respect of the letting of Unit 2. That had been the subject of the second demand notice. The defence admitted the agreement to pay commission but denied that the new lease had yet been properly executed. It did not rely on the "instalment agreement".

14. Special Magistrate Symons heard the claim on 29 April 1999. Judgment was given for the respondent against Ayrton on 22 November 1999. In large part, that decision was based upon her Worship's rejection of Mr MacRae, the controlling shareholder and director of Ayrton, as a witness of truth. There was no appeal from that decision.

15. Nevertheless, Ayrton submits that even though, with hindsight, it now appears that the setting aside of the second demand notice was procured by evidence that was found unworthy of credit, nevertheless, it is entitled to its costs. That was put on two bases. First, that costs must follow the event, irrespective of the merits of the dispute raised as "genuine". Second, that, in any event, the respondent pressed the demand notices, even though it was apparent that there was a conflict of evidence as to whether any debt was due which could only be resolved by a full hearing. In any event, it was submitted, only the claim made in the second demand notice was pressed by way of legal action. The first demand was not fully litigated because amounts otherwise claimed had been paid by then, albeit by instalments. Thus the issue as to whether there had been an agreement permitting payment by instalments had become moot. Mr MacRae was not tested on that credit related issue.

THAT COSTS WILL FOLLOW THE EVENT, IRRESPECTIVE OF THE OUTCOME OF THE "GENUINE DISPUTE"

16. In Mibor Investments Pty Ltd and Others v Commonwealth Bank of Australia [1994] VicRp 61; (1993) 11 ACSR 362, the bank had commenced debt recovery proceedings against the plaintiffs. Eleven days later the bank issued statutory demand notices. The plaintiffs sought to set them aside. The issue was not whether the plaintiffs had shown a prima facie defence, nor whether, if the matter was contested, the respondent bank would have had a strong case. It was whether there was, in fact, a genuine dispute "based on some substantial grounds" (365). The resolution of that issue does not require an extended inquiry into the claim or the merits of any dispute concerning it. It is enough that it appears genuine. The bank did expect that there would be a dispute. Defences and cross-claims had been filed. Yet there was no application by the bank for summary judgment. That served to suggest that the bank recognized that there was a triable issue. His Honour was also of the view that the application, though finally determining the fate of the demand notices, was interlocutory. Costs were not addressed.

17. The issue as to costs was considered in Felkro Nominees Pty Ltd v Austissue Pty Ltd [1993] FCA 455; (1993) 11 ACSR 607. A demand notice was set aside by consent. The applicant sought costs. Heerey J noted that:

"... creditors have to realise that if they invoke winding up provisions by issuing a statutory demand they run the risk that if a debtor establishes that the amount claimed is subject to a genuine dispute, the debtor will get an order for costs, as s 459N expressly contemplates."(608)

18. His Honour ordered the unsuccessful respondent to pay costs.

19. Two observations emerge. The first is that the issue on an application to set aside a demand notice is not whether the "genuine dispute" is resolved in favour of the applicant. It is enough to justify an applicant seeking to set aside a demand notice that the applicant genuinely believes, albeit wrongly, that there is a valid dispute. The second is that persons issuing demand notices take a risk that there is, unbeknown to them, a genuine dispute. But it is a risk as to costs, not an inevitability.

20. In Ranford Gold Mines Pty Ltd v P and H Earthmoving Pty Ltd [1994] NTSC 49 (24 May 1994), the alleged debtor had, before the demand was made, claimed that not all ore invoiced had been delivered. Kearney J accepted that the threshold test to be met by the debtor was to demonstrate an "arguable case", a "serious question to be tried", "a plausible contention requiring investigation" (see pars 29 and 30). Investigation of the dispute is limited to that necessary to conclude that the dispute is "genuine". That did not require cross-examination of the debtor to demonstrate lack of credit in making the relevant assertion. Cross-examination would be allowed only if there was a reasonable prospect that the whole case would readily be resolved thereby.

21. As to costs, the debtor had not "concealed its hand" until after the demand notice issued. Thomas J had referred to that consideration in re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, 605-6. There was, Kearney J concluded, no reason why the general rule as to costs should not apply, that is that costs follow the event. But, given that the applicant had been late in notifying its case (par 82):

" ... The position as to costs would have been quite different had the respondent chosen not to contest the application ..."

22. Kearney J noted that in Felkro (supra), Heerey J ordered costs to be paid by a consenting respondent but, clearly, did not regard this as illustrating some inflexible rule. His Honour, observed, at par 84:

"... the costs outcome depends on the circumstances of each case."

23. In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, it had been ordered that each party bear its own costs.

24. Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services (1996) 19 ACSR 523 was cited by Mr Erskine, counsel for Ayrton, as supporting his case for an automatic costs order. That was a case in which Heerey J considered whether an unsuccessful respondent should pay indemnity costs. In that case, the demand notice had, apparently, been used to "fast track" a debt claim. It was used as an alternative to an application for summary judgment. The creditor was never in doubt about the existence of a genuine dispute. Timely warning was given that to issue a demand notice would lead to a request for indemnity costs when the application to set aside was granted. That was, clearly, a case where the application to set aside the demand notice could be expected to succeed when the notice was issued.

25. To my mind, the principle governing the exercise of the costs discretion conferred by s 459N is no different from that enunciated by Blackburn CJ in Harry Smith Car Sales Pty Ltd v Claycom Vegetable Supply Co Pty Ltd (1978) 29 ACTR 21, 23-4:

"In a case where the application [for summary judgment] fails because the defendant shows a genuine possibility of defence to the claim, the costs are normally ordered to be costs in the cause, the principle being that should the defendant ultimately fail he will probably be ordered to pay the plaintiff's costs of the action which will then include the costs of the application; a corresponding result will occur if the plaintiff ultimately fails. In the exceptional case, however, where the application fails because it should not have been made, the defendant should have his taxed costs of the application ... I think the same rule must apply where the reason why the application should not have been taken out is that it is wrong in principle. I see no reason for limiting the rule to the case where the application is `a mere experiment'."

26. Applying the underlying principle thus enunciated to an application to set aside a statutory demand, the focus is on the reasonableness of the decision to issue it. Whether on the material known to the creditor before the notice issued, it should have been apparent that there was a dispute which, viewed objectively, was "genuine", that is, warranting further inquiry. If so, the creditor must expect to pay costs in any event once the notice is set aside. If it was reasonable to issue the notice, but thereafter it appears that there is a genuine dispute then, as soon as that appears, the creditor must withdraw or cease to oppose the setting aside of the notice. Otherwise, the creditor risks an adverse costs order.

27. It must also be borne in mind that, although the proceedings to set aside a demand notice are interlocutory, they relate to winding up proceedings, not debt recovery proceedings. Thus, even if it appeared to a creditor that there was no genuine dispute as to the existence of the debt, an adverse costs order might also be made if the creditor had no genuine belief that the debtor was insolvent. It is not appropriate to invoke winding-up proceedings merely as pressure upon a reluctant debtor to pay sooner rather than later.

28. In the present case it was, or should have been, apparent to the respondent that Ayrton's claim, if it was found credible, of an oral arrangement postponing the due dates for payment, raised a genuine dispute, once the respondent was aware of that contention.

29. As to the "due execution" issue, there was nothing, from the respondent's viewpoint, to enliven a realisation that there might be a genuine dispute until it was expressly raised. There was a commission agreement if tenants were found or renewed. They were and they did. The rate of commission was known to all parties. The response to the claim on 29 April 1997, asked for particulars of the claim. It also said "Please note that your client's claim for commission is disputed". However, no basis for that dispute was suggested. It does not seem to me that, at that stage, the respondent should have concluded that there was a "genuine" dispute.

30. A basis for dispute was suggested only after the demand notice of 6 May 1997 was served. The suggestion was then made by letter dated (and faxed) on 23 May 1997. This letter did, in my view, suggest a genuine dispute, at least as to the instalments issue, if Mr MacRae, the person who alleged that he had agreed with the respondent to postpone payments, was to be believed. Nevertheless, a further demand notice was served on 25 June 1997. It repeated the first demand in part. As to that part, there was an allegation of lack of due execution of the subject lease. That did not emerge until 1 July 1997.

31. The respondent, on 25 June 1997, deposed that Mr MacRae had told him when he first demanded prompt payment of commission then due (before 28 April 1997),

"We haven't got enough money. We are experiencing difficulties. The bank manager is watching me like a hawk. I'm absolutely strapped."

32. If true, that statement would warrant a concern that the applicant might be insolvent.

33. The respondent, opposing the costs order sought, contends that, as it now appears that Mr MacRae was rejected as a truthful witness by Special Magistrate Symons, the dispute based on his assertion of an oral agreement should not now be regarded as having been genuine. It was not a case of misinterpretation or of honest belief in the existence of facts which, if true, amounted to an arguable defence. It was, if that finding is accepted, a false statement which deceived this Court into granting the application to set aside the demand notices, forcing the respondent to sue in the Small Claims Court, thus de facto granting to the applicant the extension of time for payment it alleged had been agreed to in relation to the majority of the sums claimed. There was also a dispute as to whether the task to be performed on the remaining claim had been completed by due execution of the subject lease. Her Worship found it had been. The solicitor for the applicant was the same solicitor that acted for one of the directors of the remaining tenant and for the landlord. They had accepted the lease as sufficiently executed. It thus did not appear that the allegation of lack of due execution was a genuine concern for the applicant.

34. At the small claims hearing, the non-completion of documentation sufficient to enforce the relevant lease was not relied on, though it had been pleaded. A lack of an agent's license was relied on. That had not been pleaded. It was rejected. The parties had dealt with each other many times before without the issue of an Agent's license being raised.

35. As to the due execution of sufficient documentation, given that the only deficiency was the signature and guarantee of a retiring Director of the tenant company, accepted, apparently, by the applicant's solicitor, her Worship found no bona fide defence. Indeed, her view was that the solicitor for Aryton had merely been engaging in delaying tactics with the respondent in raising it.

36. Of course, that was her Worship's view, it is not necessarily mine. However, she saw and heard the relevant witnesses. I accept the possibility that if I had seen and heard the witnesses I might have been less dismissive of Mr MacRae's evidence. Perhaps. But he had his opportunity. It was not suggested that it had not been lawfully open to her Worship to have disbelieved him.

37. I do not see why I should approach costs on any basis so far as the "genuineness" of the opposition to the demand notices was concerned, different from that found by her Worship. A lack of genuine belief in the applicant of entitlement to oppose the demands taints both aspects of the claimed debts. The fact that the "instalments agreement" was not ruled upon specifically by Special Magistrate Symons is not to the point.

38. There are two competing considerations. On the one hand, creditors should not issue demand notices as a more convenient alternative to suing for recovery of their debts in a court of competent jurisdiction. They should be positively satisfied that there is no genuine dispute concerning the debt and that the debtor was insolvent so that recovery of the debt otherwise than by winding up was unlikely. In the present case, I am satisfied that the respondent did not at any time believe the dispute was genuine. The appearance of a genuine dispute was a product of false testimony. The respondent also had reasonable grounds to conclude that the applicant was probably then at least, temporarily insolvent.

39. On the other hand, at least after the first demand notice was served, the respondent was aware of the contentions raised by the applicant in disputing the debts. He was, or should have been, aware that the dispute so raised could only be resolved by an oral hearing before a judicial officer. That is not to deny that, in respect of the matter which went to hearing, unlike the others, there was also a construction question as to the terms of the commission agreement to which it related. That question also depended on the truth of assertions made by Mr MacRae that no executed documents for the lease of Unit 2, 7-11 Grimwade Street, Mitchell had been received by the applicant's solicitors. That was, at best, sophistry. It had been executed, not as originally intended but, at least, sufficiently. Mr MacRae's solicitors acted for both landlord and one of the directors of the tenant company. They knew the latter was retiring from the tenant company.

40. Further, though it had provided grounds to believe it was then apparently insolvent (not paying its debts as they fell due), the remedy of winding up the applicant was or should have been seen to be somewhat disproportionate. There was no reason to suppose, given the very success that the respondent's efforts had wrought, that the debts due would not be paid out within a reasonable time following exposure of the lack of any viable defence. The applicant was, by means of Mr MacRae, simply delaying payment to suit its cash flow requirements. It was able to pay (as it did) by instalments.

41. It seems to me that the entire dispute was unnecessary. If any legal proceeding was necessary to bring Aryton to its senses, a small claims proceeding, as ultimately taken, would have sufficed.

42. In my view, there should be no order as to costs.

I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Higgins.

Solicitor for the Respondent: pappas, j. - attorney