By Interlocutory Process filed on 5 December 2018, the Plaintiff, Twigg Investments Pty Ltd ("Twigg Investments") as trustee for the Twigg Investments Trust ("Trust") seeks an order under r 49.19 of the Uniform Civil Procedure Rules 2005 (NSW) setting aside the decision and orders of a Registrar made on 20 November 2018 that each party should pay their own costs of proceedings which sought to set aside two creditors' statutory demands dated 22 August 2018 ("Demands"). Those orders were made for the reasons set out in the Registrar's decision delivered on that date, to which I refer below. Twigg Investments instead seeks an order that the Defendants in the two proceedings, Ms Flintoft and Ms Lambert, should pay the costs of the application to set aside the creditors' statutory demands on an indemnity or an ordinary basis.
The parties have led affidavit evidence in respect of the application. I now turn to the chronology of events, drawn from the affidavit evidence, to which I have been taken in the course of submissions. I first identify the terms of the relevant Demands, although it will be necessary to return to the position which existed prior to the issue of those Demands below. By the first of those Demands, Ms Elizabeth Flintoft claimed the amount of $2,577,295 being the amount of a debt described in the schedule as "Unpaid beneficiary entitlements". On the same date, Ms Frances Lambert claimed, by the second Demand, the amount of $2,475,410 also described as "Unpaid beneficiary entitlements". Those Demands were properly issued to Twigg Investments as the trustee of the Trust, so far as it is the legal entity that is responsible for what is often colloquially described as a "trust debt".
The Demands were issued in circumstances where, at least previously, the relevant debts were recognised in the accounts of the Trust. In particular, the financial report for the Trust for the year ended 30 June 2013 had recorded beneficiary entitlements in some trusts in each of the years 2012 and 2013, which were in turn recorded in a note as amounts owing to Ms Flintoft and Ms Lambert described as "BENEFICIARY ENTITLEMENTS (SUB TRUSTS)". Those accounts were supported by a director's declaration, signed by Mr Maxwell Twigg as director of Twigg Investments, which acknowledged his responsibility for the reliability, accuracy and completeness of the accounting records and all material and relevant information had been provided for the purposes of the compilation of the financial report, and confirmed the director's opinion that the financial statements and notes, including the note to which I have referred, fairly represented the Trust's financial position as at 30 June 2013.
Mr Kaufmann, who appears for Twigg Investments, draws attention to a qualification in the compilation report provided by the accountants in respect of those accounts, which recorded that the report was a special purpose financial report compiled exclusively for the benefit of the director of Twigg Investments. Mr Kaufmann submits that that should have put the beneficiaries on notice not to rely on those accounts. I am not persuaded by that submission, not least where that report is supported by a declaration by the director of Twigg Investments supporting the accounts as a fair statement of the Trust's financial position.
Subsequently, there was correspondence between Ms Flintoft and Ms Lambert and their representatives and Twigg Investments, by its accountants, by which Ms Lambert and Ms Flintoft requested payment of their unpaid beneficiary entitlements. For example, by letter dated 1 April 2014, Ms Lambert indicated she wished to draw on that amount. By letter dated 13 May 2014, the accountant for the Trust responded that "Twigg Investment [sic] Trust is unable to make any payment to Frances Lambert." I read that letter as indicating, not a challenge to any entitlement of Ms Lambert to such a payment, still less a challenge to the correctness of the Trust's financial accounts, but as a statement that Twigg Investments, as trustee of the Trust, lacked the financial capacity to make such a payment.
Similarly, by letter dated 20 October 2017, the accountant for Ms Lambert inquired whether Mr Twigg would fund the Trust to enable it to pay Ms Lambert her unpaid beneficiary entitlement. The accountant for the Trust responded on 21 December 2017 that the Trust did not have the financial capacity to pay Ms Lambert her unpaid beneficiary entitlement. That statement, was, of course, put in somewhat colloquial terms, because a trust is not a legal entity, and was presumably intended to convey that Twigg Investments, the trustee, lacked the financial capacity to pay that unpaid beneficiary entitlement, at least by exercising a right of exoneration or recoupment against the Trust's assets
Further correspondence followed and, by 5 July 2018, the solicitors acting for Ms Lambert and Ms Flintoft had identified the relevant question as whether the Trust or the sub-trusts were insolvent and could not pay the relevant distributions to Ms Lambert and Ms Flintoft. While reference is often made, also colloquially, to the insolvency of a trust, that concept refers to the position where the trustee is unable to meet the liabilities of the trust from the assets of the trust against which it has a right of indemnity.
On 10 July 2018, Ms Lambert and Ms Flintoft commenced proceedings which sought access to documents relating to the Trust, which it appears had been sought in earlier correspondence but not provided. Shortly after the proceedings were commenced, they were amended to also seek an interlocutory restraint on Twigg Investments, in its capacity as trustee of the Trust, from disposing of, encumbering or otherwise dealing with or diminishing the value of assets held as trustee. Mr Elliot, who appears for Ms Lambert and Ms Flintoft, submits, and I accept, that that relief was directed to seeking to secure the position of the Trust pending access to Trust documents which had been sought in the relevant proceedings.
Subsequent correspondence followed, including correspondence in respect of a subpoena issued to the accountants for Twigg Investments and the Trust, which had sought, it appears, documents relating to the unpaid beneficiary entitlements referred to in the Trust's earlier financial statements. The solicitors for the accountants in turn advised that:
"The Unpaid Beneficial Entitlements are, by definition, debts that have not been paid and cannot be invested, held or paid."
I do not assume, for present purposes, that that characterisation of the unpaid beneficiary entitlements was correct. However, that characterisation gave no indication to Ms Lambert and Ms Flintoft that the unpaid beneficiary entitlements did not exist, still less that they were not in the nature of debts that had not been paid, where that was how they were described by the accountant's solicitors.
By subsequent correspondence, on which Mr Kaufmann relied, the solicitors for Ms Lambert and Ms Flintoft noted that the unpaid beneficiary entitlements are not debts of the Trust, and referred to publications of the Australian Taxation Office in respect of the nature of unpaid beneficiary entitlements. It seems to me that that statement recognised, at least, the proposition that any debt that is colloquially referred to as a debt of the trust is in fact a debt of its trustee. Mr Kaufmann rightly accepted that proposition in submissions.
By letter dated 2 August 2018, the solicitors for Twigg Investments raised at least a limited qualification to the accounts for the Trust, as they stood at 30 June 2013, suggesting that the annotation "Sub Trusts" in those accounts was an "administrative error caused by the software used to prepare the financial statements". Those solicitors then contended that the unpaid beneficiary entitlements defined in the subpoena were not held in the "Sub Trusts". It is notable they did not then suggest that those unpaid beneficiary entitlements did not exist.
With that background, the Defendants issued the Demands to Twigg Investments, seeking to require payment of the amount of the unpaid beneficiary entitlements that had previously been described, in the documents to which I referred above, as debts that were unpaid.
Subsequently, in the proceedings relating to access for information concerning the Trust, there was a debate before Parker J on 4 September 2018, as to whether interlocutory relief could be sought restraining dealing with assets of the Trust, in the absence of final relief seeking monetary relief. In the course of that debate, the solicitor for Ms Lambert and Ms Flintoft appeared to have recognised the possibility that those proceedings could, or should, be amended to bring claims for financial relief. Such an amendment was subsequently made, after Twigg Investments had brought the application to set aside the Demands, and after the solicitors for Ms Lambert and Ms Flintoft made a proposal which would have resulted in the Demands being set aside.
Continuing the chronology, on 12 September 2018, Twigg Investments brought two separate proceedings to set aside the Demands. The application was supported by an affidavit of its solicitor, Mr O'Loughlin, dated 12 September 2018, which, in effect, denied the correctness of the previous financial statements of the Trust. In that affidavit, Mr O'Loughlin indicated that he was informed by Mr Twigg that the alleged debt was not due and payable for several reasons, including that:
"having seen the financial statements, and other documents included with the [Demands], and having taken advice, Mr Twigg now believes that the financial statements of the Trust contain errors, and will need to be amended."
Presumably, Mr Twigg must have formed that belief at some time after he previously held the belief, recorded in the Trust's financial statements, that they fairly represented the Trust's financial position as at 30 June 2013.
After the application to set aside the Demands was brought by Twigg Investments, a letter dated 14 September 2018 from the solicitors acting for Ms Lambert and Ms Flintoft to the solicitors for Twigg Investments noted that the matters raised in Mr Twigg's affidavit supporting the application to set aside the Demands had not previously been raised, and accepted that the proper forum to ventilate those issues was in the existing proceedings which had previously sought the production of documents and where, as I have noted, there had shortly before been a discussion of a potential amendment to raise financial issues. That letter rightly noted that Twigg Investments had not previously taken any step to inform Ms Lambert and Ms Flintoft of the matters which were now said to constitute a genuine dispute, and nonetheless put a proposal that the Demands be set aside and there be no order as to costs. It appears that proposal was not accepted.
Also on 14 September 2018, consistent both with the discussion that had previously occurred before Parker J, and with the course foreshadowed by the solicitors for Ms Lambert and Ms Flintoft in response to the application to set aside the Demands, the other proceedings were amended to bring monetary claims in respect of the unpaid beneficiary entitlements.
The Demands were then set aside by consent and the question of costs was addressed in a careful judgment of the Registrar delivered on 20 November 2018, which addressed some questions that are no longer raised before me, and others that were addressed before me. The Registrar concluded that there was no relevant delinquency of Ms Lambert and Ms Flintoft which might support an order for costs against them and made no order as to costs. That is the decision from which an appeal is now brought.
[3]
The applicable principles
Before I turn to the parties' submissions in respect of the appeal from the Registrar's decision, it is desirable to say something further as to the applicable principles in respect of the costs of a creditor's statutory demand that is not pressed.
In Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607, Heerey J noted that a costs order might be made against a party who issued a creditor's statutory demand which was then withdrawn or set aside without opposition. In Ayrton Investments Pty Ltd v Andrlik [2000] ACTSC 55 at [19], Higgins J noted that such a costs order was a risk, rather than an inevitability, and drew attention to the significance of the reasonableness of the decision to issue a creditor's statutory demand in determining whether such an order should be made.
In Yoogalu Pty Ltd v Intentia Australia Pty Ltd [2006] NSWSC 278, to which Mr Kaufmann referred in the course of submissions, Barrett J observed that there was no rule that required a plaintiff seeking to set aside a statutory demand under s 459G of the Corporations Act 2001 (Cth) to communicate the nature of any dispute as to the underlying debt to a defendant before an application to set aside the relevant creditor's statutory demand was made. However, that observation was directed, not to the question of costs, but to whether a genuine dispute could be established where it had not previously been communicated to a defendant. More recently, in Canon Australia Pty Ltd v Yong Bros Pty Ltd (Costs) [2009] NSWSC 1245 at [12], Brereton J observed that a company that wishes to take advantage of the cost 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 Kaufmann also drew attention to several earlier decisions in which I had considered that question, including Specialty Fashion Group Ltd v Global Red Australia Pty Ltd [2012] NSWSC 256; Re Long Tail Pty Ltd [2013] NSWSC 735; and Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236. I also addressed those issues in my recent decision in Re Pierotti and Fanani Pty Ltd as trustee for the Caesars Properties Unit Trust [2018] NSWSC 457, where I referred to several of the cases noted above and on which I have drawn in this summary of them.
[4]
The parties' submissions
Mr Kaufmann first criticises the Registrar's finding that the Demands were not issued at a time where there were "parallel proceedings" on foot. It seems to me that the Registrar rightly appreciated, first, that there were other proceedings on foot, in which information had been sought as to documents of the Trust, and in which no financial relief had then been sought. Mr Kaufmann has drawn attention to the discussion before Parker J of whether such relief might be sought in those proceedings, but that relief was only in fact sought after Ms Lambert and Ms Flintoft had foreshadowed that the Demands would not be pursued, given the matters raised in the affidavit setting it aside, most significantly the challenge to the status of the unpaid beneficiary entitlements. Mr Kaufmann submits that, from various points, the proceedings could have been amended to seek financial relief, or, he contends, should have been amended to seek financial relief. I do not accept that submission. At least on the information known to Ms Lambert and Ms Flintoft, having regard to the statements in the Trust's accounts and the correspondence from the Trust's accountants, up to the point at which an application was made to set aside the Demands and an affidavit was filed in support of it, there appeared to be a debt owed to them, and unpaid to them, which could properly support the Demands.
Mr Kaufmann also criticises a finding by the Registrar that the Demands were not issued inappropriately in circumstances where Twigg Investments was restrained from complying with the Demands. I note that Twigg Investments was not, in terms, restrained from complying with the Demands, but was restrained from deposing of, encumbering or otherwise dealing with certain assets in respect of the Trust. In any event, it seems to me that that proposition is wholly theoretical, since there is no suggestion that Twigg Investments sought the consent of the beneficiaries to make payment to them, or had any intention of making such payment to them, or that such consent would have been refused had it been sought. In these circumstances, there can be no realistic suggestion that Twigg Investments wished to, and was able to, pay the amounts due to the beneficiaries, but was restrained from doing so by reason of the restraint from which it could have, but did not, seek relief. It seems to me that the Registrar was correct in giving little or no weight to that matter.
Third, criticism is made of the Registrar's finding that the withdrawal of the Demands by the beneficiaries on the first return date was a strong factor against ordering costs. It seems to me that that proposition may better be put as a recognition that the prompt withdrawal of a creditor's statutory demand is a matter that may support the exercise of the Court's discretion not to award costs, and that the Court would more readily award costs against a party who issued a creditor's statutory demand and delayed withdrawing the creditor's statutory demand for a long period. Here, it seems to me that the more significant matter is that, having regard to the case law to which I have referred above, and the documents and position known to Ms Lambert and Ms Flintoft at the time the Demands were issued, it could not be said that they acted unreasonably in issuing those demands, having regard to the status of the unpaid beneficiary entitlements recorded in the Trust accounts. I also give weight to the fact that Twigg Investments could have, but did not, write to them immediately after the Demands were issued, disclosing the matters on which it would later rely to falsify the Trust's accounts, and those matters were not raised until the application to set aside the Demands was brought.
[5]
Determination
As I noted above, Twigg Investments brings this application under UCPR r 49.19 which provides that, if a registrar makes an order or decision, the court may, on application by any party, review that decision and make such order, by way of confirmation, variation, discharge or otherwise as it thinks fit. A review under this provision is not an appeal and is not subject to the restrictions that apply to an appeal, although something less than a complete hearing de novo is involved; nonetheless, the Court may intervene where a decision finally determines a party's rights or where error in the decision under review is demonstrated: Tomko v Palasty (No 2) [2007] NSWCA 369; (2007) 71 NSWLR 61 at [6], [10] and [50]-[52]. For the reasons that I have indicated above, I am not satisfied that error in the decision under review is demonstrated. It seems to me that, in fact, that decision is plainly correct. For these reasons, the application for review of the Registrar's decision is dismissed.
[6]
Costs
It was common ground between the parties that Twigg Investments should be ordered to pay the costs of this application, on the basis that costs follow the event. It was also common ground between the parties that the injunction that is presently in place, in respect of dealing with Trust assets, would prevent the exercise of any right of indemnity against the Trust assets for such costs. Where that is common ground, I will proceed on that basis. If that were not common ground, I would have needed to consider whether any further steps ought to have been taken to protect the Trust assets against the exercise of a right of indemnity for costs in the relevant circumstances. I do not deal with that issue, where it does not presently arise.
Ms Lambert and Ms Flintoft indicated that they sought costs of the hearing before the Registrar. There may be a real question whether the costs of the pursuit of that application are justified in the circumstances. However, if Ms Lambert and Ms Flintoft seek to pursue those costs, then it seems preferable that be dealt with by the Registrar, rather than by me.
[7]
Orders
Accordingly, I make the following orders:
Application for review of the Registrar's decision is dismissed.
The Plaintiff pay the Defendants' costs of and incidental to the application for review of the Registrar's decision, as agreed or as assessed.
The question of any costs of the application before the Registrar be remitted to the Registrar, with leave to the parties to seek to approach the Registrar to allocate any hearing date or otherwise deal with that question.
[8]
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: 29 March 2019