- Ayrton Investments Pty Ltd v Andrlik

Supreme Court of NSW|2018-03-20|Before: Black J

Katekar (Plaintiff - all proceedings) D R Stack (Defendant - all proceedings)

Solicitors: Creevey Russell Lawyers (Plaintiff - all proceedings) Bridges Lawyers (Defendant - all proceedings) File Number(s): 2017/392791; 2017/392794; 2017/392797; 2017/392801

The applicable principles

The Plaintiffs seek their costs of the application to set aside the demands on an indemnity basis, or alternatively on an ordinary basis. Mr Stack, who appears for the Defendants, submits that there should be no order as to the costs of the proceedings, other than that the Plaintiffs should pay their costs of and incidental to the costs hearing. Mr Stack also submits, uncontroversially, that the Court's power to award costs is discretionary. He submits, by reference to the observations of Barrett AJA in Re Zarzar Pty Ltd [2017] NSWSC 93 at [19], that the Court will not try the case of an alleged genuine dispute that the consent order has made hypothetical, and that costs are only payable where the Court is able to conclude that one of the parties had acted so unreasonably that the other party could have an order for costs.
Several cases have considered the position as to whether costs should be ordered against a party which issues a creditor's statutory demand which is then withdrawn or set aside without opposition. In Felkro Nominees Pty Ltd v Austissue Pty Ltd [1993] FCA 455 ; (1993) 11 ACSR 607, the applicant sought costs where a statutory demand was set aside by consent. 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."
In Ranford Gold Mines Pty Ltd v P & H Earth Moving Pty Ltd [1994] NTSC 49, Kearney J referred to Felkro Nominees above but observed that "the costs outcome depends on the circumstances of each case" and also noted the relevance of when the defendant had been notified of the applicant's case.
In Ayrton Investments Pty Ltd v Andrlik [2000] ACTSC 55 at [19], Higgins J observed that a person who issued such a demand faces "a risk as to costs, not an inevitability". His Honour there expressed the view, which seems to me to have substantial force, that: "… the focus is on the reasonableness of the decision to issue [the statutory demand]. 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."
In BGC Contracting Pty Ltd v Whitsunday Crushers Pty Ltd [2004] WASC 209, a defendant contended that it first became aware of the nature and quantum of the plaintiff's offsetting claims when the affidavit was filed in support of the application to set aside the demand, and that it therefore acted reasonably in serving the demand. Master Newnes did not accept that argument and ordered that the defendant should pay the costs of setting aside the demand. The basis of Newnes M's reasoning was that the statutory demand procedure "is not intended to be simply a debt recovery process" and that a creditor who invokes this procedure takes the risk that the debtor did not put it on notice of the nature and quantum of offsetting claims or the nature of any dispute, after the service of the statutory demand but before the debtor went to the cost of putting on the application to set aside the demand and supporting affidavit. Those comments were directed to a failure to communicate the basis for an offsetting claim after service of the statutory demand, where the defendant was already aware of complaints by the plaintiff about its performance and of a dispute as to whether the full amount of the invoices was due before the demand was issued.
In Yoogalu Pty Ltd v Intentia Australia Pty Ltd [2006] NSWSC 278, Barrett J observed that there is no rule or principle which requires that a plaintiff seeking to set aside a statutory demand under s 459G of the Corporations Act communicate the nature of any dispute as to the underlying debt to the defendant before the application to set aside the demand is made. However, that observation was directed to the question whether a genuine dispute could be established where it had not been communicated prior to the application brought under that section to set aside the demand rather than to the question of costs. Mr Katekar, who appears for the Plaintiffs, also refers to the observations of Barrett J in Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602 at [7] that: "The expectation that costs should lie where they fall may be displaced if the Court can see, with ease, that one party has acted unreasonably in a way which should be compensated by costs."
Mr Katekar also draws attention to the expression of the relevant principles in Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 at [3]ff, where White J observed that: "The parties have not agreed on costs. In Re The Minister for Immigration and Ethnic Affairs Ex Parte Lai Qin (1997) 186 CLR 622, McHugh J said at 624-625: In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule, the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extracurial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried … but such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases." (Citation of authorities omitted.) These principles are applicable to proceedings to set aside a statutory demand, but special features of such proceedings need to be taken into account in judging the reasonableness of the parties' conduct. A company faced with a statutory demand in relation to a debt, disputed in whole or in part, has no option but to commence an action under s 459G to set aside the demand within 21 days even if the ultimate order sought will be an order under s 459H(4) varying the demand to the amount which is not genuinely in dispute. If a company were merely to pay the amount which was not genuinely in dispute, without securing or compromising the balance to the reasonable satisfaction of the creditor, it would face the prospect of winding up proceedings being brought against it, of its being presumed to be insolvent (s 459C(2)(a)), and of its being unable to oppose the winding-up application on a ground upon which it could have relied for the purposes of an application to have the demand set aside unless leave is given (s 459S). A person claiming to being a creditor who uses the procedure for service of a statutory demand under s 459E to seek to force payment of a genuinely disputed debt risks an order for indemnity costs. For the purposes of s 459H a genuine dispute will exist about a debt if there is a plausible contention requiring investigation that the company is not indebted (Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787-788). Because the threshold for establishing a genuine dispute is low, creditors are often ill-advised to proceed with a statutory demand once plausible grounds for a dispute are asserted. They risk an order for indemnity costs if they do so (Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529 at 536; CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd (2003) 47 ACSR 100 at 104-105, [19]-[22]). On the other hand, a company which capitulates to the creditor's demand after commencing proceedings to have the demand set aside by paying the sum demanded, or a company which puts the creditor to unnecessary expense in defending an application to set aside the demand before recovering what is unquestionably due, is likely to have to pay the creditor's costs even though the demand is set aside upon the creditor being paid (Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Gee Ha Pty Ltd v Dera Developments Pty Ltd [2007] NSWSC 95).
Mr Stack in turn draws attention to the observation of Brereton J in Canon Australia Pty Ltd v Yong Bros Pty Ltd [2009] NSWSC 1245 at [12] that a company that wishes to take advantage of the costs consequences that might follow from the withdrawal of a creditor's statutory demand cannot "keep its powder dry while at the same time leaving the creditor in the dark as to why the creditor is not being paid". Mr Katekar distinguishes that decision on the basis that that case involved an offsetting claim, rather than a question of the character of the debt in issue. I nonetheless understand Brereton J to have been expressing a more general principle, to which I have had regard.
In Dynamics Co Pty Ltd v G and M Nicholas Pty Ltd [2012] NSWSC 206, I noted several of the authorities to which I have referred above and expressed the view that: "… consistent with the approach adopted by Higgins J in Ayrton Investments, the reasonableness of a party serving a statutory demand must be determined by reference to what that party knew as to the nature of any dispute as to the debt; conversely, a debtor which fails to pay a debt which is apparently due and undisputed, and also fails to disclose the basis of any dispute, can scarcely complain when the statutory demand procedure is invoked by a creditor who is acting reasonably on the basis of the information which is then known to it."
Mr Stack also draws attention to my observation, in Specialty Fashion Group Ltd v Global Red Australia Pty Ltd [2012] NSWSC 256 at [14], that the focus is on whether on the objective material known to the creditor, prior to the demand being issued, it was reasonable for the creditor to issue that demand.

Whether the Defendants had a reasonable basis for the issue of the demands

Mr Katekar submits, first, that the Defendants knew the relevant debts were disputed and the amounts claimed were not immediately due and payable. Mr Katekar characterised the several demands as relying on liabilities stated in the 2017 accounts of the various entities, although the letter dated 11 August 2017 from the Defendants' solicitors addressed the amount shown in the 2016 accounts of those entities.
Neither party sought to tender the accounts for 30 June 2016 on which the demands relied but, so far as there is evidence of the accounts as at 30 June 2017, in the extracts attached to Mr Calabria's affidavit, the amount for the beneficiary loan owed by the Caesars Property Unit Trust to the Ferruccino Family Trust (and other family trusts) is shown as a current liability as at 30 June 2016 and as at 30 June 2017. The amount of the loan owed by the Etruscan Properties Unit Trust to the Ferruccino Family Trust (and other family trusts) as at 30 June 2016 and 30 June 2017 is also shown as a current liability in the amount claimed in the relevant demand. The amount owed by the Lucca Unit Trust to the M&L Family Trust is shown as a non-current liability as at 30 June 2016 and 30 June 2017, in the amount claimed in the demand, and therefore as not due and payable within the next 12 months. The amount owed by the Etruscan Properties Unit Trust to Ms Taliano is also shown as a non-current liability in the same amount as the demand. To the extent there is evidence as to the position at the time the demands were served, it appears that the amounts claimed by MLT against LEPL and by Ms Taliano against EPPL were not current liabilities and were therefore not due and payable.
Mr Katekar submits that all of those amounts were longstanding items, having been in the Plaintiffs' accounts since at least 2013. That proposition was also asserted by the Defendants' solicitors in their letter dated 11 August 2017, although Mr Stack sought to qualify it in submissions in this application by pointing to alterations in some of the amounts owed over time. Mr Katekar submits that there was "always going to be a genuine dispute at least as to whether those amounts were payable on demand". That appears to me to be clear as to those matters which were treated as non-current liabilities in those accounts, and it also seems to me that it would have been apparent that there would likely be a genuine dispute as to whether amounts that had been lent to the companies, a considerable time ago, were the subject of other arrangements between the parties which prevented their being called on demand.
In oral submissions, Mr Katekar also identified several aspects in which he contended that the conduct of the Defendants was unreasonable, namely that the basis for the alleged debt was not adequately articulated despite an invitation to do so; the claim was made in the context of the separation of interests from a family dispute in respect of which the alleged debts form part, despite attempts at mediation; and the demands were served directly on the Plaintiffs without notice at the busiest time of year for them, a matter that I will address below. Mr Katekar accepted that this was not a case where the Plaintiffs had made the nature of the relevant dispute absolutely plain and the Defendants had carried on regardless (T5). He relied, however, on the proposition that the record of a liability in the accounts did not indicate that it was due and payable, and that the fact that that liability had been in the accounts for some years indicated that it was not current, and two of the four liabilities were categorised as non-current liabilities (T8). Mr Katekar submitted that the accounts recorded loans by beneficiaries of the relevant trusts, which would be unwound on a separation of the relevant businesses, and it did not follow from the record of those loans in the accounts that a demand could be issued for payment forthwith (T9). Mr Katekar submitted that this was not a case where the Plaintiffs had kept their "powder dry", using the phrase adopted by Brereton J in Canon Australia above, but that they had invited the Defendants to articulate the basis on which the debts were owing and why they were payable on demand, and that the Defendants had not done so, and that it was therefore the Defendants who had kept their "powder dry" (T11). Mr Katekar also confirmed that the Plaintiffs submitted that it ought to have been apparent to the Defendants that there was a dispute as to whether the relevant debts were due and payable, and that was part of the overall dispute (T16).
Mr Stack submits that the Defendants acted reasonably in issuing the demands, where the amounts claimed in them were identified in the Plaintiffs' financial statements. He submits that the question becomes whether the Defendants were provided with evidence that, objectively, established that the financial statements were incorrect or the relevant amounts were otherwise not payable. An immediate difficulty with that submission is that, in respect of two of the amounts claimed, the financial statements themselves indicated that the debts were non-current. Mr Stack submits, with some force, that the Plaintiffs' correspondence after the letter from the Defendants' solicitors dated 23 June 2017 indicated that the Defendants were pressing for payment of the relevant amounts, and did not identify the matters which the Plaintiffs contended could constitute a genuine dispute, before the creditor's statutory demands were issued. Mr Stack also submits that the Defendants, as they stated they would, inferred that the sum set out in the financial statements were due and payable. While I accept the Defendants may have drawn that inference, it does not seem to me that it was a reasonable one in the light of the companies' accounts and the relevant circumstances.
In oral submissions, Mr Stack submitted, plausibly but without evidence in support, that the relevant loans were distributions that had been notionally paid to beneficiaries and then loaned back by them to the trustee companies in their capacities as trustees (T18), and that the Plaintiffs had contended that the true position was different in Mr Pierotti's affidavit evidence which, as I noted above, was not tendered. Mr Stack accepted in oral submissions that there was no evidence which indicated the basis on which the Defendants believed that the relevant debts were payable on demand, other than a proposition which Mr Stack draws from the Defendants' solicitor's letter dated 23 June 2017, namely that the debts were payable at call because they were either distributions or loans. Mr Stack submits that there is no evidence that they were loans or distributions payable at a future time, and the ordinary inference in the absence of evidence is that they are payable at call (T20). There is, however, evidence in respect of two of the debts that they were payable at some future time, namely that the accounts treated them as non-current liabilities.
Mr Stack in turn summarised the Defendants' position as that their conduct was not unreasonable given the exchange of correspondence between the parties, where the sums claimed in the demands were derived from the Plaintiffs' financial statements; the demands were only issued after an exchange of correspondence where the Plaintiffs' solicitors were invited to identify any difficulty with the demand for payment or any issue with the sums that had been demanded; and there was no articulation of the genuine dispute before the commencement of the proceedings, which would have saved costs in relation to the filing, processes and affidavits; and, had the matters been raised in correspondence, the Court should infer that the Defendants would have withdrawn the demands (T28).
Here, the Plaintiffs did not clearly articulate the basis on which the demands would be disputed in their correspondence, but it should have been apparent to the Defendants that there would at least be a dispute whether debts recorded as non-current were immediately due and payable and that there was also likely to be a dispute as to whether the other debts, although recorded as current with the implication that they were payable within 12 months, were immediately due and payable given the circumstances of the parties' relationship.

Abuse of process

Mr Katekar also presses a claim for costs on the basis that the issue of the demands was an abuse of process, and submits that a statutory demand may be set aside as an abuse of process if it is issued in order to exert improper commercial pressure in the context of ongoing negotiations. Mr Katekar refers to the decision of the Court of Appeal of the Supreme Court of Western Australia in Createc Pty Ltd v Design Signs Pty Ltd [2009] WASCA 85; (2009) 71 ACSR 602 at [49], where the Court observed that it has generally been accepted that the Court retains a residual jurisdiction to restrain reliance on the statutory demand procedure on the ground of an abuse of process. Mr Stack in turn refers to my observation in Re Halal Meats Pty Ltd [2015] NSWSC 2041 at [22] that a creditor's statutory demand can be set aside as an abuse of process where the creditor "knew that the debt was disputed, but issued the demand in order to exert improper commercial pressure in the context of ongoing negotiations".
Mr Katekar submits that the demands were issued at Christmas in order to exert commercial pressure on the Plaintiffs in the context of the unsuccessful attempts to negotiate an exit from the family business over the previous two years. Mr Katekar also submits that: "To serve the demands by post, out of the blue and without notice to the Plaintiffs' solicitors, on substantial family retail businesses only 13 days before Christmas was vexatious in the extreme."
Mr Stack responds by reference to the matters which explained the timing of the issue of the demands, to which I have referred above, including that the demands were served in the first part of December 2017, not immediately prior to Christmas. In oral submissions, Mr Stack submitted, and I accept, that the evidence does not establish, and I should not infer, that the Defendants issued the Demands with actual knowledge that the debts were disputed, or so as to exert improper pressure in the context of ongoing negotiations, and also addressed the issue of timing of service of the demands (T28-29).
While the Courts have expressed a distinct lack of enthusiasm for the service of creditor's statutory demands which are calculated to arrive after parties or their legal representatives are on Christmas leave, there is no general principle that creditor's statutory demands cannot be served in December, or cannot be served on retailers or furniture retailers during the Christmas trading period. In this case, the demands were issued in early December, and the timing of their issue appears to reflect both the earlier dealings between the parties, and the delay resulting from their having been posted from Griffith to Sydney, before they were issued. The evidence does not establish an actual intent of the Defendants to exert commercial pressure on the Plaintiffs, as distinct from issuing the demands for the legitimate purpose of giving rise to a presumption of insolvency, had the debts otherwise not been disputed and been due and payable. While it is unfortunate that the Defendants' solicitors did not give notice of the issue of the demands to the Plaintiffs' solicitors, it does not seem to me that that is sufficient to constitute an abuse of process. I do not accept the submission that the demands were issued at Christmas to exert commercial pressure on the Plaintiffs, at least in a manner that would amount to an abuse of process. The timing of service of the demands is nonetheless relevant, because the fact that the 21 day period in which they could be set aside ran into the Christmas and New Year period reduced the opportunity that would otherwise have been available to the Plaintiffs to explore the relevant issues in correspondence, before filing an application to set aside the demands.

Summary and orders

In summary, there was a clear issue in respect of two of the debts as to whether the debts were due and payable, by reference to the treatment of those debts as non-current liabilities in the companies' accounts. The Defendants ought to have been aware of the likelihood of a genuine dispute as to the other debts, and whether they were payable on demand, in the relevant circumstances, although the basis for that dispute was not clearly articulated by the Plaintiffs in correspondence prior to service of the demands. This is not a case where that existence of that dispute can have caught the Plaintiffs by surprise. For these reasons, it seems to me that, in each matter, the Defendant should be ordered to pay the Plaintiff's costs of the application to set aside the creditor's statutory demand, as agreed or as assessed. No basis for an order for indemnity costs in favour of the Plaintiffs is shown, particularly where the Plaintiffs had not clearly articulated the dispute before the demands were served.
Although the Plaintiffs have succeeded in the costs application, they failed in establishing their claims for an abuse of process or indemnity costs, to which significant effort and time was devoted. The Defendant in each matter should pay half of the Plaintiff's costs of the costs application, as agreed or as assessed, subject to liberty to both parties to apply within 7 days to vary that order if so advised.
Accordingly, I make the following orders:
In each matter, the Defendant pay the Plaintiff's costs of the application to set aside the creditor's statutory demand, as agreed or as assessed.
The Defendant in each matter pay half of the Plaintiff's costs of the costs application, as agreed or as assessed.
Liberty to the parties to apply within 7 days to vary order 2.

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: 17 April 2018

Corporations Act 2001(Cth)ss 459G, 459H

At a glance

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Cases Cited (16)

Cited By (7)