By Originating Process filed on 23 January 2020 the Plaintiff, Telegraph Point Sports & Recreation Club Ltd ("Club") sought an order setting aside a creditor's statutory demand dated 6 January 2020 ("Demand") issued by the Defendant, Mr Jeffrey Reed. On 30 March 2020, I made orders by consent that the Demand be set aside and for the parties to exchange written submissions on the question of costs with that question to be determined in Chambers.
The Club now seeks indemnity costs for its application to set aside the Demand. Mr Reed in turn submits that each party should bear their own costs of the set aside application but that the Club should bear the costs of the costs application under the principle in Calderbank v Calderbank. Before turning to the parties' submissions in support of their respective positions, I should first refer to several cases that 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position as to whether costs should be ordered against a party which issues a creditor's statutory demand which is then withdrawn or set aside by consent. I have here drawn on my summary of the case law in Re Pierotti & Fanani Pty Ltd as trustee for the Caesars Properties Unit Trust; Re Etruscan Properties Ltd as trustees for the Etruscan Properties Unit Trust [2018] NSWSC 457 at 20[ff].
I should first refer to the often cited observations of McHugh J in Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin (1997) 186 CLR 622 at 624-625 that:
"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 … [b]ut 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.)
In the particular context of applications to set aside a creditor's statutory demand, 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 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 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 Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602 at [7], Barrett J observed 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."
In Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 at [3]-[4], White J referred to the principles set out in Re The Minister for Immigration and Ethnic Affairs; Ex Parte Lai Qin above and observed that these principles apply to proceedings to set aside a statutory demand, but that special features of such proceedings also need to be taken into account in judging the reasonableness of the parties' conduct. His Honour observed that:
"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 )."
In Dynamics Co Pty Ltd v G and M Nicholas Pty Ltd [2012] NSWSC 206 at [26], 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."
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The parties' submissions and determination
Mr Adair, who made written submissions for the Club in the costs application, submits that the setting aside of the Demand was the relevant "event" for the purposes of the exercise of the discretion to award costs under s 459N and/or s 1335(2) of the Corporations Act 2001 (Cth) and that the Club seeks indemnity costs because its application to set aside the Demand was bound to succeed; the Demand was issued inappropriately; and Mr Reed acted unreasonably in his conduct of the case including by failing to withdraw the Demand.
Mr Adair referred to aspects of the commencement and conduct of the proceedings, none of which are established by evidence where affidavits referenced to were not read either in the costs application, which did not go to hearing or in this application. Mr Adair referred, in particular, to a dispute as to custody of the Club's books and records including minutes and financial accounts, which it is impossible for the Court to determine where there has been no evidence led about it and where there has been no hearing in which it could reach a determination on the merits. Mr Adair also referred to the conduct of a security for costs application which, he contends, had no proper basis. That matter has also not been the subject of any previous determination on the merits and cannot now be determined.
Mr Adair also submits that the Club has succeeded and Mr Reed had capitulated, and that the Club was bound to succeed on the basis that there was genuine dispute as to the existence of the alleged debt, an offsetting claim or some other reason to set aside the Demand for the purposes of s 459J of the Act. None of the matters referred to to support that contention are self-evident and several of them depend on evidence which has not been led and assertions as to what it would have proved, had it been led. Mr Adair also submits that Mr Reed inappropriately issued the Demand as a "debt recovery" device. It is, of course, not inappropriate to seek to issue a creditor's statutory demand so as to give rise to a presumption of insolvency, although no doubt most parties which issue such a demand would also welcome the payment of the debt that is the subject of the Demand. Mr Adair in turn refers to correspondence prior to the commencement of the proceedings raising matters that would be put in opposition to the Demand and submits that Mr Reed's failure to return books and records until after these proceedings were commenced was a "relevant delinquency" within the scope of the proceedings. Again, that matter was not addressed by evidence or determined on the merits, and is not proved by the voluminous correspondence between the parties that has been put before me.
Mr Oriti in turn relied, by way of submission, on a letter dated 25 March 2020 from his solicitors to the Club's solicitors. That letter proposed that the Demand be set aside; that each party was to bear its own costs of the proceedings; and that the proceedings be dismissed. That letter contended that an affidavit dated 22 January 2020 of Mr Jackson, on which the Club relied to set aside the Demand, did not establish either a genuine dispute or an offsetting claim. The Court can also reach no assessment of that matter, where that affidavit was neither read nor tendered in the costs application. That letter also refers to a range of other evidence on which the Club apparently proposed to rely in its application to set aside the Demand, none of which is before the Court in respect of this costs application.
It seems to me that, in this case, the Court is not in a position to assess the likely outcome of the application to set aside the Demand, had it proceeded to a hearing, or the cogency of evidence that was to be relied on in the application to set aside the Demand but has not been read or tendered in the application for costs. I am not able to find whether the debt was genuinely disputed, or whether there was an offsetting claim or some other reason to set aside the Demand, and this is not one of the rare cases where I can be satisfied that one party was almost certain to have succeeded if the matter had been fully tried. It is also not possible to determine whether either party acted unreasonably so as to warrant an order for costs against it.
For these reasons, I make no order as to the costs of the application to set aside the Demand. The Club must pay the costs of this unsuccessful costs application, as agreed or as assessed.
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Decision last updated: 26 May 2020