- Ayrton Investments Pty Ltd v Andrlik

Supreme Court of NSW|2021-09-29|Before: Black J, McHugh J

Solicitors: Fortis Law (Plaintiff) One Group Legal Pty Ltd (Defendant) File Number(s): 2021/189120

Background

By Originating Process filed on 1 July 2021 the Plaintiff, Kaloriziko Pty Ltd ("Kaloriziko") applied to set aside a creditor's statutory demand ("Demand") issued by Calibre Construction Group Pty Ltd ("Calibre") under ss 459H and 459J of the Corporations Act 2001 (Cth). That application relied on an affidavit dated 1 July 2021 of Mr Tran, one of the directors of Kaloriziko, which sought to establish a genuine dispute as to the debt, an offsetting claim arising in respect of proceedings for damage to a neighbouring property, a claim in respect of building defects and a claim that the Demand was not verified by the supporting affidavit. That affidavit also contended that the Demand had been used to put "commercial pressure" on Kaloriziko where Calibre had not used the processes available under the Building and Construction Industry Security of Payment Act 1999 (NSW) ("SOPA"). The matter was referred to the Corporations List by the Registrar on 6 September 2021, and the Court was then advised that the legal representative for Calibre was ill, and the time for Calibre to file and serve the evidence on which it relied was extended to 16 September 2021 and the matter was relisted on 20 September 2021. When the matter was mentioned on that date, Calibre consented to the Demand being set aside by consent, and I made orders for written submissions as to costs, to allow the question of costs to be determined in Chambers.

The applicable principles

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position as to whether costs should be ordered against a party which issues a creditor's statutory demand which is then withdrawn or set aside by consent.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 [2018] NSWSC 457 at 20[ff] and in Re Ming Tian Real Property Pty Ltd [2021] NSWSC 386.
In Re The Minister for Immigration and Ethic Affairs; Ex Parte Lai Qin (1997) 186 CLR 622 at 624-625 ("Lai Qin"), McHugh J observed 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 context of applications to set aside a creditor's statutory demand, in Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607; [1993] FCA 455 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) 34 ACSR 643; [2000] ACTSC 55 at [26], 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 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 & M Nicholas Pty Ltd [2012] NSWSC 206 at [26], I noted several of these authorities 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."
In Re Telegraph Point Sports & Recreation Club Ltd [2020] NSWSC 616, I made no order as to the costs of an application to set aside a creditor's statutory demand where I found (at [13]) that: "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."
I similarly made no order as to costs in Re Ming Tian Real Property Pty Ltd above, where genuine issues had been raised but were not determined when the demand was not pressed.

The parties' submissions and determination

Mr Fernandes, who appears for Kaloriziko, submits that an order should be made that Calibre pay Kaloriziko's costs of the proceedings, and relies on Mr Tran's affidavit. He submits that Calibre served the Demand in respect of the amounts claimed in progress claims rather than making an adjudication application under SOPA, and refers to the content of the Demand and the content of the affidavit supporting it. It is not possible to determine the merits of that submission where Mr Tran's affidavit annexed neither the Demand nor the affidavit supporting it and they are not in evidence.
Mr Fernandes relies on the fact that an order was made setting aside the Demand by consent, to support a contention that costs follow the event. I am not persuaded that an order by consent amounts to an "event" which gives rise to the application of the presumption as to costs under r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW). Mr Fernandes submits that this is a case where a party, after litigating for some time, effectively surrendered to the other party, within the language of One.Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548; [2000] FCA 270. I accept that proposition, where Calibre served the Demand; Kaloriziko was forced to commence proceedings to set it aside to avoid a presumption of solvency arising; and Calibre abandoned the Demand and consented to it being set aside, when it would otherwise have been required to file its evidence in accordance with the orders made by the Court. The position is distinct from that in Re Ming Tian Real Property Pty Ltd [2021] NSWSC 386, on which Calibre relies, where Calibre here led no evidence to answer the claim that the Demand be set aside or to give rise to any dispute as to whether that should occur that remains to be determined on the merits. Third, Mr Fernandes submits there was unreasonable conduct in the manner in which Calibre conducted the proceedings but it is not necessary to determine that submission. Fourth, Mr Fernandes submits that the Demand would have been set aside because there was no verifying affidavit, but it is not possible to determine that submission where neither the Demand nor any affidavit in respect of it are in evidence.
Mr Walker, who appears for Calibre, responds that the Plaintiff was not put to the expense of considering any evidence served by Calibre or adducing evidence beyond Mr Tran's affidavit filed with its Originating Process. That proposition neglects the continuing costs of involvement in the proceedings and, in any event, would only affect the amount of the costs that Kaloriziko would be entitled to recover, rather than the question whether a costs order should be made in its favour. Mr Walker also refers to the principle in Lai Qin above and its application in Re Ming Tian Real Property Pty Ltd above. I do not accept those principles support not making a costs order here, given the absence of evidence led by Calibre and the element of capitulation by Calibre supports the costs order sought by Kaloriziko.
I am satisfied that an order for costs should be made in favour of Kaloriziko, on the second of the bases put by Mr Fernandes, namely that Calibre, after litigating for some time although it led no substantive evidence, effectively surrendered to Kaloriziko's claim to set aside the Demand. For these reasons, I order that:
The Defendant pay the Plaintiff's costs of the proceedings, as agreed or as assessed.

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