Bitannia Pty Ltd v Parkline Constructions Pty Ltd

CHRONOLOGY OF RELEVANT EVENTS

1. J. Rettenmaier USA LP (Rettenmaier USA) and Rettenmaier Germany manufactured and sold fibre and cellulose products which were supplied to Nutrimonde and then on-sold by Nutrimonde to Australian food manufacturers.
2. Rettenmaier Germany and Rettenmaier USA are companies within the same corporate group.
3. From about 2001 until the termination of their relationship on 31 December 2022, Nutrimonde was a distributor in Australia of the products supplied by Rettenmaier USA and Rettenmaier Germany.
4. At all relevant times, the sole director of Nutrimonde was Anthony Blackley.
5. On 31 August 2023, the proceedings were commenced by originating process filed by the then plaintiff, Rettenmaier USA, after Nutrimonde had failed to comply with a statutory demand issued on 6 June 2023 by Rettenmaier USA in the amount of US$198,601.25 (USA debt), and served by post on 8 June 2023.
6. Nutrimonde did not pay the USA debt by 30 June 2023, which was the date of the expiry of the statutory period for payment of the USA debt in the statutory demand. Accordingly, from that date Nutrimonde was presumed to be insolvent pursuant to s 459C(2)(a) of the Corporations Act. The consequence was that in the proceedings, Nutrimonde then had the onus to rebut the presumption to prove that it was solvent.
7. On 8 September 2023, Nutrimonde's solicitors (Hancock Alldis & Roskov) wrote to Rettenmaier USA's solicitors (Swaab) stating that Nutrimonde had "no solvency issues whatsoever" and would pay the USA debt by close of business on 12 September 2023. This did not happen.
8. On 26 September 2023, Nutrimonde paid the full amount of the USA debt of US$198,601.25.
9. On 27 September 2023, Nutrimonde's solicitors sent a letter to Rettenmaier USA's solicitors serving its notice of appearance and attaching the affidavit of Anthony John Blackley sworn 26 September 2023 (Blackley affidavit 1, which asserted the payment of the USA debt and the solvency of Nutrimonde), as well as copies of Nutrimonde's financial statements and tax returns for the financial years ended 30 June 2020, 30 June 2021 and 30 June 2022. The letter confirmed that the debt the subject of the statutory demand was paid on 26 September 2023. The letter also stated: The financial documents and the payment of the subject debt provide clear evidence that the Defendant is solvent. We reiterate our client's instruction that the non-payment of the subject debt arose from our client misunderstanding the legal significance of a Creditors Statutory Demand, in a context where there were ongoing negotiations between our client, the subject creditor, JRS-Rettenmaier Germany … and the Australian subsidiary of JRS-Germany, in relation to the delivery of the subject goods which were ordered by Nestle. In light of the above, our client requests that at the hearing on 5 October 2023 your client consent to the proceedings being dismissed on the basis that there be no order as to costs (with the intent that each party bear their own costs of the proceedings). Would you please let us know by 5pm on Friday, 29 September 2023 whether your client consents to this proposal or, if not, let us know of the alternative orders that your client will be seeking. This correspondence will be relied upon on the question of costs if your client rejects the above offer and proceeds to prosecute its claim that our client should be wound up on the ground of insolvency. Our client reserves all its rights.
10. As regards the financial statements provided with that letter, the financial statement for the year ended 30 June 2022 (a date 15 months earlier than the letter) showed that Nutrimonde at that earlier time had: 1. total assets of $2,379,296 comprising: 1. total current assets of $2,360,532, of which $633,725 was in cash and cash equivalents, $855,634 was receivables and $871,172 was inventory; 2. total non-current assets of $18,764, all of which was property, plant and equipment; 1. total liabilities of $1,712,047 comprising: 1. total current liabilities of $863,159, of which $569,487 were payables for PAYG, superannuation and trade accounts; 2. non-current liabilities of $848,889, all of which were owing to related parties, of which $800,000 was secured loan facility owing to a related entity, Cash Box Pty Ltd (a company of which Mr Blackley is the sole director).
11. It was clear from these financial statements that as at 30 June 2022 the current liabilities of Nutrimonde exceeded the amount it held in cash, so that payment of those liabilities and the non-current liabilities depended on the collection of receivables and the sale of inventory. There was no financial information attached to the letter which disclosed the financial position of Nutrimonde as at 27 September 2023.
12. On 5 October 2023, the solicitors for Rettenmaier Germany (also Swaab) sent a letter to the solicitors for Nutrimonde demanding payment of €843,756.53 by 11 October 2023 from Nutrimonde for outstanding invoices in relation to products supplied by Rettenmaier Germany. In the letter, the rights of Rettenmaier Germany were reserved, including in relation to the making of a substitution application in these proceedings.
13. On 30 October 2023, the solicitors for Nutrimonde wrote to the solicitors for Rettenmaier USA alleging offsetting claims. The solicitors for Nutrimonde had previously written to Rettenmaier's Australian subsidiary, Rettenmaier Australia and New Zealand Pty Ltd (Rettenmaier ANZ), on 12 October 2022, raising the substance of these claims, being misappropriation of Nutrimonde's confidential information by a former employee of Nutrimonde who had been appointed as managing director of Rettenmaier ANZ. Nothing ever came of those alleged offsetting claims.
14. On 24 November 2023, Rettenmaier Germany filed the interlocutory process seeking an order pursuant to s 465B of the Corporations Act that it be substituted as plaintiff in the proceedings.
15. On 4 December 2023, Black J made consent orders substituting Rettenmaier Germany as plaintiff in the proceedings and setting a timetable for the service of Nutrimonde's evidence on or by 31 January 2024 and Rettenmaier Germany's evidence in reply on or by 14 February 2024.
16. On 24 January 2024, the solicitors for Nutrimonde instructed Roderick Thyer (a chartered accountant and company auditor) to prepare an expert report on the solvency of Nutrimonde for the purposes of the proceedings.
17. On 31 January 2024, Nutrimonde filed and served the affidavit of Mr Blackley sworn that day (Blackley affidavit 2). In Blackley affidavit 2 at [18], Mr Blackley denied that Nutrimonde was indebted to Rettenmaier Germany in the sum of €843,756.53, and in Blackley affidavit 2 at 24 Mr Blackley asserted that the amount owing to Rettenmaier Germany by Nutrimonde was €799,492, which when converted equated to A$1,332,488. Blackley affidavit 2 at [20] and 24 also asserted that Nutrimonde had an offsetting claim for damages against Rettenmaier Germany.
18. Exhibited to Blackley affidavit 2 were a number of documents, including: 1. the financial statements of Nutrimonde for the financial years ended 30 June 2020, 30 June 2021, 30 June 2022 and 30 June 2023 and for the period from 1 July 2023 to 20 January 2024; 2. tax returns of Nutrimonde for the financial years ended 30 June 2020, 30 June 2021, 30 June 2022 and 30 June 2023; 3. the Westpac bank statements of Nutrimonde for the periods 30 November 2023 to 29 December 2023 and 1 January 2024 to 20 January 2024; and 4. Westpac bank statements for Cash Box as at 31 December 2023 and 20 January 2024; and 5. the financial statements of Cash Box for the financial year ended 30 June 2022.
19. In Blackley affidavit 2 at 24 Mr Blackley also asserted that the amount in Nutrimonde's bank account more than covered the amount of the invoices issued by Rettenmaier Germany to Nutrimonde and the other liabilities of Nutrimonde.
20. In Blackley affidavit 2 at 25, Mr Blackley stated that on about 4 September 2019, he executed a loan agreement on behalf of Cash Box which provided a loan facility to Nutrimonde in the maximum sum of $1.2 million, and that Cash Box had provided $800,000 to Nutrimonde under this loan facility which had been repaid in full with interest. This loan agreement was exhibited to Blackley affidavit 2.
21. The Westpac bank statements for Cash Box show that as at 29 December 2023, Cash Box held the sum of €1,000,100 in a Euro currency account (which Mr Blackley asserted continued to be held as at 31 January 2024) and as at 20 January 2024 a further account with the sum of $1,245,850.32.
22. The Westpac bank statement of Nutrimonde for the period from 30 November 2023 to 29 December 2023 exhibited to Blackley affidavit 2 showed an opening balance as at 30 November 2023 of $1,071,531.62 and a closing balance as at 29 December 2023 of $1,460,761.38. They revealed that two substantial deposits had been made in that period, being: 1. a deposit on 20 December 2023 in the amount of $158,400 by Blackley Family Investments Pty Ltd, which was recorded as a "refund of incorrect payment"; and 2. a deposit on 29 December 2023 in the amount of $240,000 by Monaco Securities Pty Ltd without any narration.
23. The Westpac bank statement for the period from 1 to 20 January 2024 showed a further deposit on 18 January 2024 by Monaco Securities in the amount of $238,750, which was recorded as a "repayment" and as at 20 January 2024 a current balance of $1,688,333.26.
24. These three deposits total $637,150. Without those deposits, in the period from 30 November 2023 to 20 January 2024, the opening balance of $1,071,531.62 was insufficient to repay the debt owing by Nutrimonde to Rettenmaier Germany of A$1,332,488 (as calculated by Mr Blackley) and there were debit transactions totalling $15,890.24 exceeding the only credit transaction of $6,720 on 11 December 2023. Without the three deposits, the closing bank balance on 20 January 2024 would have been $1,051,183.26, which would also have been insufficient to pay the debt owing by Nutrimonde to Rettenmaier Germany of $1,332,488 (as calculated by Mr Blackley).
25. Mr Blackley said in Blackley affidavit 2 at [25] that: 1. he is the sole shareholder and director of Monaco Securities, which is the trustee of Mr Blackley's family trust; 2. he is the sole director of Cash Box; and 3. all the shares in Cash Box are owned by Monaco Securities and Cash Box is a beneficiary of Mr Blackley's family trust and receives distributions from it.
26. None of the three deposits were explained in Blackley affidavit 2 to indicate the circumstances in which they arose. Mr Blackley said nothing in Blackley affidavit 2 about his own financial circumstances, or those of his family trust, or the ownership or control of Blackley Family Investments Pty Ltd.
27. The financial statements of Nutrimonde for the financial years ended 30 June 2020, 30 June 2021 and 30 June 2022 revealed the loan facility of $800,000 owing by Nutrimonde to Cash Box apparently repaid in 2023 and unsecured loans totalling $200,000 (in 2020), $28,000 (in 2021), $28,000 (in 2022) and $478,750 (in 2023) owing by Nutrimonde to the Blackley Family Trust.
28. The financial statements of Nutrimonde for the period from 1 July 2023 to 20 January 2024 demonstrate that there was a significant collapse in sales by Nutrimonde, falling to $203,304 across those 7 months compared to $4,713,874 (in 2020), $6,202,680 (in 2021), $6,033,110 (in 2022) and $5,707,491 (in 2023), with a commensurate decline in receivables to $65,556 at the end of those 7 months compared to $653,810 (in 2020), $1,282,973 (in 2021), $855,634 (in 2022) and $715,418 (in 2023).
29. The financial statements of Cash Box for the financial year ended 30 June 2022 (18 months earlier) showed that: 1. it had income of $562,047, nearly all of which was from distributions from trusts; 2. minimal expenses of $5; 3. total current assets of $1,589,511, nearly all of which was cash and cash equivalents; and 4. total non-current assets of $3,751,698, comprising receivables in the form of a loan made to Mr Blackley of $2,240,000, a loan to the Blackley Family Trust of $711,698 and loan to Nutrimonde of $800,000.
30. On 2 February 2024, the solicitors for Nutrimonde sent a letter to the solicitors for Rettenmaier Germany referring to their letter of 31 January 2024 enclosing and serving Blackley affidavit 2 and stating: The evidence set out in our client's affidavit is consistent with the contents of our letters to you dated 8 September 2023 and 27 September 2023 (September correspondence) concerning the solvency of our client. We respectfully maintain that the evidence discloses no doubt about the solvency of [Nutrimonde] in these proceedings. If [Rettenmaier Germany] continues to prosecute the proceedings against [Nutrimonde] in light of the clear evidence of solvency served on [Rettenmaier Germany], and the September correspondence, [Nutrimonde] reserves its rights to refer to this letter on the question of costs, including without limitation, costs on the indemnity basis. We also refer to the requirements of section 459R of the Corporations Act 2001 and note that our client reserves all his rights in this regard.
31. The reference to section 459R at the end of the letter is to the statutory provision stipulating that an application for a company to be wound up in insolvency is to be determined within 6 months after it is made, subject to any extension by order of the court.
32. On 7 February 2024, the solicitors for Rettenmaier Germany sent an email to the solicitors for Nutrimonde referring to Nutrimonde's statement that its evidence was incomplete and that it intended to serve an expert report and noting that the then current orders of the court required Rettenmaier Germany's evidence to be served by 14 February 2024. The email stated that Rettenmaier Germany would require more time to respond to Nutrimonde's evidence, including any expert report it may prepare, and proposed consent short minutes seeking an amendment to the timetable and also an extension of time for the determination of the winding up application under s 459R(2) of the Corporations Act.
33. On 7 February 2024, Nutrimonde filed and served the affidavit of Mr Blackley sworn that day (Blackley affidavit 3). Exhibited to Blackley affidavit 3 were the Westpac bank statements of Nutrimonde for the period 30 June 2021 to 19 January 2024 as part of a confidential exhibit. In Blackley affidavit 3, Mr Blackley said that these bank statements had been furnished to Mr Thyer as part of the brief of documents for his consideration in preparing an expert report in these proceedings.
34. On 9 February 2024, Nutrimonde's solicitors sent an email to Rettenmaier Germany's solicitors indicating that Nutrimonde consented in principle to an extension of time for the determination of the proceedings under s 459R of the Corporations Act, stating that a slightly amended timetable for evidence could be agreed and requesting that the matter be given a hearing date prior to 30 April 2024 given that Mr Blackley would be overseas in May 2024.
35. On 9 February 2024, Black J made orders by consent requiring Nutrimonde to serve its expert evidence by 16 February 2024, Rettenmaier Germany to serve its lay and expert evidence in reply by 8 March 2024, listing the matter for directions to take a hearing date on 18 March 2024 and pursuant to s 459R(2) of the Corporations Act extending the period within which the winding up application must be determined to 30 April 2024.
36. On 16 February 2024, Nutrimonde filed and served the affidavit of Mr Thyer sworn that day, to which was annexed Mr Thyer's expert report. In Mr Thyer's expert report, he expressed the opinion that Nutrimonde was solvent as of 20 January 2024, taking into account the cash flow, balance sheet test and the ability to raise funds from external sources.
37. On 18 March 2024, Black J made orders, including: 1. extending the time for Rettenmaier Germany to file and serve its lay and any expert evidence in reply to 12 April 2024, no evidence in reply to be relied on if not filed and served by that date without leave; 2. directing Nutrimonde to serve updating expert evidence, limited to confirmation of the currency of its expert's earlier opinion, by 4pm on 26 April 2024, no evidence extending beyond that scope or filed and served after that date to be relied on without leave; 3. tentatively listing the proceedings for hearing on 1-2 May 2024, reserving liberty to Rettenmaier Germany to provide alternative dates agreed between the parties to the Associate to Black J by 4pm on 20 March 2024; 4. directing the parties to provide a Court Book containing all pleadings, affidavits, and other evidence, exhibits and documents relied on, submissions and objections to evidence to the Associate to McGrath J by 4pm on 26 April 2024; and 5. pursuant to s 459R(2) of the Corporations Act, that the period within which the winding up application must be determined be extended to 15 June 2024.
38. On 22 March 2024, the solicitors for Rettenmaier Germany sent a letter to the solicitors for Nutrimonde referring to the contents of Blackley affidavit 2 and the Westpac bank statements of Nutrimonde which revealed cash held as at 20 January 2024 of $1,691,013 and numerous transactions involving entities associated with Mr Blackley. The email then stated (my emphasis): The Company's evidence provides no comfort to our client that the Company will continue to hold $1,691,013.00 pending the outcome of the winding up proceedings. We will shortly serve you with a Notice to Produce, returnable at the hearing, for all of the account statements from 20 January 2024 to the date of the hearing. In order for our client to have some comfort regarding the cash in the Westpac Account, it would be appropriate for Mr Blackley to undertake the balance of the Westpac Account will not fall below $1,691,013.00 prior to the date of the hearing or at least, to identify any Company transactions between now and the hearing date that will be paid from that account (Undertaking). Please provide your response by no later than 5pm, 29 March 2024, so that we may consider what steps to take in the absence of the Undertaking. Our client's position The Company's evidence falls well short of establishing that there is a genuine dispute of any magnitude about the debt owed by the Company to the plaintiff. In our view, particularly when the objective evidence is taken into account, the Company will fail to displace the presumption of insolvency which applies. In our view, your client will not defeat the application. A liquidator will be appointed when a winding up order is made. The liquidator would take control of the Company's assets and arrange for its creditors to be paid. Even if the Company's asset and liquidity position is as Mr Blackley suggests there will be nothing remaining after a liquidator has withdrawn their own fees and paid creditors. That being the case, the position at the end of a winding up would be similar to the Company's position if it were to pay €843,756.53 to our client and avoid being wound up. Of course a liquidator appointed by the Court may choose to spend some of the cash at bank to investigate the Company's affairs including perhaps the transactions between the Company and Mr Blackley's other entities and/or the Company's dealings and tax affairs. Given the availability of funds with which to do so, that is a strong possibility. However, if the Company pays our client the Company would avoid having its transactions and affairs investigated by a liquidator appointed by the Court at the end of these proceedings and Mr Blackley would not need to provide the Undertaking. Freezing order Even if your client is successful in the winding up proceedings (which we consider unlikely), we expect to receive instructions to approach the Court for orders requiring your client to preserve funds sufficient to cover the debt the Company owes to our client, until the conclusion of the proceedings to recover that debt from the Company. Our client reserves all of its rights, including to make an application to the Court if Mr Blackley does not provide the Undertaking. We will rely on this letter on the question of costs in any such application.
39. This was the first time that Rettenmaier Germany made its position clear on what it considered to be the lack of merits of Nutrimonde's evidence on solvency, being Blackley affidavit 2 and its exhibit, Blackley affidavit 3 and its exhibit and Mr Thyer's expert report.
40. Nutrimonde did not provide the Undertaking.
41. On 12 April 2024, Rettenmaier Germany filed and served the affidavit of Dr Niclas Witton affirmed 11 April 2024 and the affidavit of Gregor Woitier affirmed 12 April 2024. No expert evidence was filed and served by Rettenmaier Germany.
42. On 24 April 2024, Nutrimonde filed and served the affidavit of Mr Blackley sworn that day (Blackley affidavit 4) to address the requirement that Nutrimonde establish its solvency as at the date of the hearing. In Blackley affidavit 4 at [2]-[3], Mr Blackley corrected the statements he made in Blackley affidavit 2 at 24 regarding the amount of the debt owing to Rettenmaier Germany by Nutrimonde, now conceding it to be €843,756.53 as stated in the demand by Rettenmaier Germany. Blackley affidavit 4 also exhibited financial statements of Nutrimonde for the period from 1 July 2023 to 23 April 2024 and Westpac bank statements of Nutrimonde showing transactions for the period from 29 December 2024 to 18 April 2024. In Blackley affidavit 4 at 8, Mr Blackley asserted: The amount in the bank account of [Nutrimonde] more than covers the amount of the invoices issued by [Rettenmaier Germany] to [Nutrimonde] and the other liabilities of [Nutrimonde].
43. On 24 April 2024, Nutrimonde filed and served the affidavit of Mr Thyer affirmed that day (Mr Thyer's updating affidavit) in which Mr Thyer corrected errors in Mr Thyer's expert report and stated that he remained of the view that Nutrimonde was solvent as of 23 April 2024.
44. On 26 April 2024, the parties served their outline submissions and objections to evidence.
45. The outline submissions of Rettenmaier Germany ran to 23 pages, but only 1.5 pages of those submissions dealt with the question of the solvency of Nutrimonde, including by saying (footnotes and citations omitted): 93. The Company's evidence on solvency is remarkably weak. Properly analysed it rests almost entirely on the unsubstantiated evidence of the Company's controller, Mr Blackley. Other than balances in bank accounts there has simply been no verification of the Company's assets and liabilities. Having already engaged an expert accountant, it would have been a straightforward matter to describe the current position in detail and have the accountant conduct a verification exercise to identify the proper liabilities of the Company. 94. Instead, there has been a material failure on the part of the Company to present the fullest and best evidence. It is clear that the Company's business has declined substantially since late July 2022. Revenue is negligible. It has lost its major supplier. It does not seem to have any employees. Its activities are confined to selling stock on hand and searching for a new source of supply. The best Mr Blackley can say is: "I am hopeful that the defendant may be able to arrange for another supplier to provide stock for on sale by the defendant to its customers." For those reasons, the historical financial performance of the Company is of little assistance in determining the question of solvency. 95. Yet there is no proper evidence of the nature and quantum of ongoing expenses, the business has been incurring. Mr Blackley seemingly accepts that at least in so far as the debt to the Plaintiff is concerned it was understated in the books of the Plaintiff by more than €30,000. That amount is well overdue. 96. With only old stock to sell and no new supply at the moment to promise to customers the prospect of future revenue is speculative at best. The purchase of new stock inevitably raises the question of the Company's capacity to pay for that stock whether that be from its depleted reserves or from borrowings. At present with little or no guaranteed income it is unlikely that any lender acting in the best interests of its shareholders would advance monies to a Company with no capacity to repay. 97. Mr Thayer's report does little more than collate a few details from documents provided to him and perform some simple calculations. He specifically states that he has not conducted an audit and has assumed that the information provided to him is accurate. Arguably there is nothing in his report that is a "wholly or substantially based on his specialised knowledge based on relevant training, study and experience." … 100. The Plaintiff submits that the Company has failed to rebut the presumption of insolvency arising from its failure to satisfy the statutory demand and should be wound up.
46. In its objections to evidence, Rettenmaier Germany objected to the various financial documents annexed to Blackley affidavit 2 and Blackley affidavit 4 which had been provided to Mr Thyer for the purposes of Mr Thyer's expert report and Mr Thyer's updating affidavit. The financial documents to which objection was taken were as follows: 1. the financial statements of Nutrimonde for the financial year ended 30 June 2023; 2. the 2023 tax return of Nutrimonde; 3. the financial statements of Nutrimonde for the period from 1 July 2023 to 20 January 2024; 4. the financial statements of Cash Box for the financial year ended 30 2022; 5. the profit and loss, balance sheet, receivables summary and payables reconciliation statements of Nutrimonde as at 23 April 2024; and 6. the profit and loss and balance sheet of Nutrimonde for the period ending December 2023.
47. Rettenmaier Germany provided separate outline submissions of seven pages on the admissibility of those documents. The objections were put on the basis that, inter alia, Mr Blackley had not established personal knowledge of the financial affairs of Nutrimonde such that it could not rely on the business record exception to the hearsay rule in s 69(3) of the Evidence Act 1995 (NSW) in respect of any of the financial documents which had been prepared for the purpose of conducting, or for or in contemplation of or in connection with an Australian proceeding.
48. The outline submissions of Nutrimonde were also short on the subject of solvency, relevantly saying: 25. The defendant contends that is clearly solvent and able to pay its debts as and when they become due in circumstances where the monies in the Westpac Account exceed the defendant's total liabilities. Further, if necessary, the defendant will receive further funds from the sale of its existing inventory and the receipt of receivables. Moreover, if necessary, the defendant could avail itself of the funds which are available pursuant to the facility with Cash Box to meet its debts as and when they fall due. 26. The defendant can require Cash Box Pty Ltd to advance the funds up to $1.2 million pursuant to a loan agreement … In any event, even if this was not the case, Cash Box Pty Ltd would make the funds in its Euro account and its main account referred to above available to the defendant, if so required, to meet any liability which the defendant may be found to owe the plaintiff or any other creditor. 27. Accordingly, in these circumstances, the defendant contends that the proceedings should be dismissed on the basis that the defendant has established its solvency. Further, if necessary, the Court should exercise its discretion to decline to order the winding up of the defendant in these circumstances, consistent with the principle that a winding up proceedings should not be used as a debt collecting procedure to attain an object other than the securing of a winding up order.
49. On 30 April 2024 by email at 1:14pm, without prior notice, Nutrimonde filed and served the affidavit of Mr Blackley sworn 30 April 2024 (Blackley affidavit 5). In summary, in Blackley affidavit 5, Mr Blackley stated: 1. his personal knowledge of the financial affairs of Nutrimonde and Cash Box; 2. the manner in which the financial transactions of Nutrimonde and Cash Box were recorded and Mr Blackley's role in that process; and 3. that the financial statements of Nutrimonde for the financial year ended 30 June 2023, the tax return of Nutrimonde for the financial year ended 30 June 2023, and the financial statements of Nutrimonde for the period from 1 July 2023 to 20 January 2024 were prepared for the purpose of these proceedings.
50. On 1 May 2024, which was the first day of the hearing before me, counsel for Rettenmaier Germany sought leave to discontinue the proceedings.

Costs on discontinuance

1. Section 98(1) of the Civil Procedure Act 2005 (NSW) (CPA) states: Subject to rules of court and to this or any other Act - (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
2. The discretion to award costs under s 98 of the CPA is broad and the section itself is to be construed liberally: Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11, Gaudron and Gummow JJ at [21]. The discretion is, however, subject to the rules of court, being the UCPR. It is therefore necessary to consider whether there are any rules which would impact on the exercise of that discretion.
3. Rule 42.1 of the UCPR states: Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.
4. There was "no event" in the present case because there was no hearing on the merits, such that r 42.1 of the UCPR has no bearing on the exercise of the discretion to award costs. In such circumstances, the court must be careful not to engage in a hypothetical hearing.
5. This point is emphasised in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6, McHugh J at 624-625 saying (footnotes omitted): 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 extra-curial 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. … 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. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission where his Honour ordered the respondent to pay 80 per cent of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. 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.
6. There are particular provisions in the UCPR regarding the way in which costs are to be dealt with in the case of a discontinuance.
7. Rule 12.1(1) of the UCPR states: The plaintiff in any proceedings may, by filing a notice of discontinuance, discontinue the proceedings, either as to all claims for relief or as to all claims for relief so far as they concern a particular defendant: (a) with the consent of each other active party in the proceedings, or (b) with the leave of the court.
8. In the present case there was an application for a discontinuance by Rettenmaier Germany with leave of the court on 1 May 2024.
9. Rule 42.19(1) and (2) of the UCPR have particular application to the determination of costs in relations to a discontinuance, relevantly stating: (1) This rule applies to proceedings that are discontinued by the plaintiff, as referred to in rule 12.1. (2) Unless the court orders otherwise …, the plaintiff must pay such of the defendant's costs as, at the date on which the notice of discontinuance was filed, had been incurred by the defendant in relation to each claim in respect of which the proceedings have been discontinued.
10. Rule 42.20(1) of the UCPR contains a similar "unless the court orders otherwise, the plaintiff must pay the defendant's costs" approach in relation to the dismissal of proceedings.
11. It is necessary to consider the way in which the authorities have dealt with the question of costs in such circumstances, some of which involve the discontinuance or dismissal of proceedings in the context of a winding up application. I have done so at length below.
12. In Lavercombe v Auscott (2006) 58 ACSR 586; [2006] NSWSC 867, Barrett J considered, among others, the question of the costs of the winding-up proceedings in circumstances where those proceedings were dismissed by consent. It was not a case involving the application of r 42.19 of the UCPR.
13. The plaintiff issued a statutory demand on the defendant company, which was not paid within the period prescribed by s 459F of the Corporations Act. The plaintiff applied to have the defendant company wound up in insolvency. There was no dispute as to the existence of the debt or that it was due and payable. The defendant company then paid the debt. The plaintiff consented to the dismissal of his application but reserved his position on costs.
14. At [43], Barrett J stated that there was no "event" for the purposes of r 42.1 of the UCPR, the proceedings were disposed of by consent and there had been no determination on the merits. Barrett J at [43] also quoted those parts of the judgment of McHugh J in Lai Qin quoted above and said at [44]: 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.
15. At [45], Barrett J considered that in the area of company winding up, an aspect of what is unreasonable is identified in a passage from the judgment of Brightman J in Re Lanaghan Bros Ltd [1977] 1 All ER 265 at 266: The petitioning creditor has proceeded without any fault whatever on his part. He obtained a judgment in circumstances which the company did not seek to dispute. After a generous lapse of time the petition was presented. The company then woke up and succeeded in having the judgment set aside on the terms that it paid the costs of the plaintiff in any event. Now that the petition must be dismissed it seems to me only just that the petitioning creditor, if he be a creditor, should be given his costs of the petition, which he presented with complete propriety. I propose therefore to make an order not only that the petition be dismissed but also that the company should pay the costs of the petitioner.
16. Relying on the principle stated in Lanaghan Bros, Barrett J at [47]-[48] found that the plaintiff had initiated and pursued his application "with complete propriety", the debt should have been paid before the expiry of the period for complying with the statutory demand and the plaintiff should never have been put to the trouble and expense of bringing the proceedings. Barrett J at [49] ordered that the defendant company pay the plaintiff's costs of the proceedings.
17. Two months after the decision in Lavercombe, in Fordyce v Fordham (2006) 67 NSWLR 497; [2006] NSWCA 274, the Court of Appeal of this court considered the operation of r 42.19 of the UCPR. The case involved two neighbours feuding over the access to land of one neighbour to enable the other neighbour to remove trees on that land to stabilise and replace a retaining wall. At first instance the primary judge granted an interlocutory injunction ex parte to the plaintiff to restrain the defendant's access to the land to remove the trees. When the proceedings did not go to final hearing, the primary judge dismissed the proceedings and ordered the defendant to pay the plaintiff's costs.
18. The following propositions emerge from the judgment of McColl JA (with whom Beazley and Santow JJA agreed) at [84]-[87]: 1. Rules 42.19 and 42.20 do not create a presumption that on a discontinuance the plaintiff must pay the defendant's costs. 2. Rules 42.19 and 42.20 contain a relevant but not a determinative consideration. 3. The costs discretion conferred by rr 42.19 and 42.20 is unconfined. 4. Other relevant considerations are those contained in Lai Qin which are plainly pertinent, although not necessarily determinative.
19. In Fordyce, Santow JA at [3] also added: … the fact of the discontinuance is likely to be a factor of some weight in exercising the discretion to determine whether the discontinuing party should be ordered to pay the other party's costs. While it is true the Court may otherwise order, the onus remains on the discontinuing party to justify such an order by reference to the circumstances said to justify exception to the normal cost outcome in such event. That the Court retains a discretion to accommodate such circumstances does not alter their character as being by way of exception nor the consequence in terms of onus. …
20. Cockatoo Ridge Wines Ltd v Naked Wines Direct Pty Ltd [2006] NSWSC 1074 was also decided by Barrett J, two months after his Honour's decision in Lavercombe, and one week after the Court of Appeal handed down its decision in Fordyce.
21. In Cockatoo Ridge Wines the plaintiff sought a winding up order in respect of the defendant company. On the date the originating process came before the Registrar, the debt owing to the plaintiff had been paid and it did not seek to proceed with the winding up application. However, WorkCover Queensland had filed a notice of appearance to support the winding up application as a creditor of the defendant company. WorkCover Queensland was granted leave to apply for an order substituting it as the applicant for the winding up order.
22. The proceedings were stood over and during that time, the defendant company gave WorkCover Queensland a cheque for its debt. By consent, the originating process was dismissed and an argument ensued as to costs.
23. At [6] Barrett J said that because there had been no determination on the merits, the general expectation was that there should be no order as to costs, citing Lai Qin.
24. At [7] Barrett J cited Fordyce only for the proposition that the Lai Qin approach is pertinent but not necessarily determinative in cases of this kind. Fordyce was not relied on for any broader proposition.
25. Cockatoo Ridge Wines was not a case involving the application of rr 42.19 or 42.20 of the UPCR. Barrett J held at [10] that the case was within r 42.20 of the UCPR because the court made an order for the dismissal of the proceedings but since there was no application by the defendant company for an order against the plaintiff, there was no occasion to apply the rule. Barrett J also observed at [10] that the court may depart from the costs position stated in r 42.20 and would have done so in the circumstances of the case.
26. The defendant company submitted that WorkCover Queensland should not have its costs because, if it had gone to trial with WorkCover Queensland as substituted plaintiff, the defendant company would have won because the proceedings were doomed to fail based on invalid service of the statutory demand and there being no presumption of insolvency. At [14], Barrett J rejected this submission.
27. In Cockatoo Ridge Wines, Barrett J at [15] came to the same conclusion as that reached by his Honour in Lavercombe, relying on the principle in Lanaghan Bros and saying: … the case is of the kind I described in Lavercombe v Auscott Ltd (2006) 58 ACSR 586 by reference to the decision of Brightman J in Re Lanaghan Bros Ltd [1977] 1 All ER 265, that is, a case in which a creditor whose debt is not disputed resorts in a responsible and acceptable way to the means provided by law to seek to vindicate the right … being the right of a creditor who cannot obtain payment to have a winding up order. When the debt is not disputed and the debtor company pays the debt at a late stage, the situation is seen to be one in which the creditor has been put to trouble and expense to which it should not have been subjected. …
28. Barrett J ordered the defendant company to pay WorkCover Queensland's costs.
29. Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 was decided by Finkelstein J six months after Fordyce was handed down. The Deputy Commissioner of Taxation withdrew its application to wind up the defendant company based on its failure to comply with a statutory demand after a director of it produced in court a suitcase containing several hundred thousand dollars in cash (more than enough to satisfy the debt) which it asserted was evidence of its solvency. Shortly after, the director served a lengthy affidavit deposing to the company's solvency. In the following week, the defendant company paid the debt.
30. At [6] Finkelstein J stated that for the purposes of deciding who should bear the costs his Honour did not intend to enquire into the merits of the company's claim that it was not indebted to the Deputy Commissioner of Taxation. At [8]-[15], Finkelstein J rejected the notion that a company can only prove its solvency by producing audited accounts and observed that the nature of the evidence as to solvency in the end will depend upon each particular fact of a case (at [14]).
31. The following reasoning of Finkelstein J at [15]-[17] is particularly apt (my emphasis): [15] Returning to Mr De Simone's affidavit, if the evidence were unchallenged it does make out a prima facie case of solvency. What Mr De Simone said was not the "fullest and best" evidence of the company's financial position. Nor did he produce the audited accounts of the company. But he did explain in some detail the nature of the assets and liabilities of the company. He listed the current assets and liabilities, and provided details of the non-current assets and liabilities. It is apparent that much of the information came from the company's records, although the records were not produced. The thrust of Mr De Simone's evidence was that, after allowing for the debt due to the Deputy Commissioner, the company had surplus assets exceeding $1.4 million, a good proportion of which comprised debts that were due and payable and short-term loans that were either due and payable or payable at short notice. [16] Mr Agardy said that Mr De Simone's evidence would have been subjected to careful scrutiny if the case had gone to trial. No doubt this is true. That only demonstrates that it is impossible to predict what the outcome of the case would have been. [17] In the event, neither side can make a just claim that it be paid the costs of the proceeding. …
32. Finkelstein J ordered that the defendant company pay the Deputy Commissioner of Taxation's costs up to the date on which the Deputy Commissioner of Taxation received the affidavit deposing to the company's solvency.
33. Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 involved the granting of leave to a plaintiff to discontinue proceedings in the District Court and the making of costs orders in favour of the plaintiff against the defendant. Hodgson JA (with whom Tobias JA agreed) at [53]-[54] said: [53] It has been said that UCPR 42.19 does not give rise to a presumption that costs will be ordered against the discontinuing party: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Ltd [2006] NSWCA 335 at [65]. [54] However, like UCPR 42.20, UCPR 42.19 states what the order for costs is to be unless there is a discretionary decision to order otherwise: Australiawide Airlines Limited v Aspirion Pty Limited [2006] NSWCA 365 at [53]. This means there is an onus on the discontinuing party to make an application in respect of costs if it does not propose to pay the costs of the other parties: Foukkare at [65]. In my opinion, it also means that there must be "some sound positive ground or good reason for departing from the ordinary course": Australiawide Airlines at [54].
34. These principles from Bitannia have been regularly cited and applied since: see for example, Walton v Commonwealth Bank of Australia [2020] NSWCA 191, Basten JA (with whom Macfarlan and White JJA agreed) at [26] and Nadilo v Eagleton [2021] NSWCA 232, Brereton JA (with whom Meagher JA agreed) at [7].
35. Deputy Commissioner of Taxation v Rhodium Australia Pty Ltd [2011] FCA 988 concerned the issue of costs in the proceedings after the Deputy Commissioner of Taxation as the applicant for an order winding up the defendant company in insolvency sought leave to discontinue at the outset of the hearing. At [3] and [4] Bromberg J cited and applied the principles stated in Lai Qin and Lavercombe, stating at [5]: The principles to which I have referred have application in this case. There has been no hearing on the merits but Rhodium can claim to be the successful party as the application against it was withdrawn. For Rhodium to be denied its costs I will need to be satisfied that there is good reason for departing from the ordinary rule. In my view there is good reason as this is a case in which the reasonableness of the conduct of the parties provides the controlling basis for the exercise of the Court's discretion.
36. The "good reason" to which Bromberg J refers at [20]-[23] was that the application for the winding up rested on the defendant company's failure to comply with a statutory demand, which justified the making and pursuing of the winding up application "with complete propriety", the presumption of insolvency which operated against the defendant company and the fact that the evidence provided by the defendant company consisted of unaudited financial statements with no valuation for the intangible asset comprising 95% of the total assets of the company.
37. Bromberg J held at [25] that there came a point when the defendant company did provide sufficient evidence which should have caused the Deputy Commissioner of Taxation to have immediately moved to discontinue the proceedings. As a result, the defendant company was ordered to pay the costs of the Deputy Commissioner of Taxation up to that point.
38. The decision of Bromberg J in Rhodium Australia was affirmed on appeal: Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation [2012] FCAFC 17.
39. In Nicolai v Indochina Medical Co Pty Ltd, in the matter of Indochina Medical Co Pty Ltd (No 2) [2013] FCA 180, Yates J dealt with the issue of costs following the discontinuance of the plaintiff's application that the defendant company be wound up in insolvency after it had failed to comply with a statutory demand for an undisputed debt giving rise to the presumption of insolvency. At [11]-[12], Yates J referred to the Federal Court's counterparts to rr 12.1 and 42.19. At [13]-[15], Yates J cited Lavercombe at length, including its reliance on the principles contained in Lai Qin. Yates J also referred at [16] to the approach taken in Rhodium Australia. Yates J said at [18]-[19] that the approach his Honour proposed to take was that which was described in Bell v Macquarie Bank Ltd [2000] FCA 1521 by Lehane J at [5] as follows: the ordinary result of the applicants' discontinuance would be that they would be required to pay the respondents' costs of the proceeding. The question is whether the applicants have established that, in the particular circumstances of this case, there is any particular matter which should, as a matter of discretion, displace that ordinary consequence.
40. Yates J at [19] did not see this approach as being inconsistent with that taken in Rhodium Australia.
41. Re Nutek Constructions Pty Ltd [2017] NSWSC 451 is a decision by Gleeson JA concerning costs following the dismissal of a winding up application by consent. The winding up application was brought by Sydney Elite Concrete Pumping Services against Nutek Constructions in reliance on the presumption of insolvency arising from Nutek Construction's failure to comply with a statutory demand. A few days before the proceedings were first returnable, Nutek Constructions paid the debt. The only issue between the parties after the date of that payment was costs.
42. Despite the debt being paid, the plaintiff continued to prosecute its winding up application and the defendant brought an application against the plaintiff under s 459S of the Corporations Act (which Gleeson JA describes as misconceived: at [9]). At [24], Gleeson JA said that the procedural steps which were taken after that time unnecessarily incurred further costs as they continued to wrangle about the question of costs and the disposition of the proceedings. Finally, the parties reached an agreement and the court made orders by consent dismissing the winding up application and listed the hearing before Gleeson JA to deal with the issue of costs.
43. Gleeson JA, relying on Lai Qin, Lanaghan Bros and Lavercombe, held at [37]-[39]: [37] No submission was advanced on the present application to the effect that no order for costs should be made against the defendant where the winding-up proceedings have been dismissed and there has been no hearing on the merits. Ordinarily, the court will not determine the merits of an application which has not been heard in order to deal with a question of costs. That principle and its rationale are explained by 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; [1997] HCA 6 at [6]-[9]. [38] His Honour noted that there are exceptions to that proposition. One well-known exception is where one party has acted unreasonably. Another is where the court can be confident that, although the parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully determined. The present case falls into the former category and so much was, in effect, fairly acknowledged by the defendant in its concession that there should be an order for costs against the defendant on the ordinary basis up until 20 February 2017. [39] Why that is so can be expressed in simple terms. The defendant failed to comply with an adjudication under the Security of Payment Act; failed to pay the judgment debt based on that adjudication; failed to comply with the creditor's statutory demand served on it by the plaintiff; and took no steps within the 21-day time limit to seek to set aside that statutory demand. In the circumstances the plaintiff was entitled, "with complete propriety", to use the words of Brightman J in Re Lanaghan Bros Ltd [1977] 1 All ER 265 at 266, to initiate and pursue its winding-up application, at least up to the point where it was able to ascertain that the judgment debt had been paid into court by the defendant: see the remarks of Barrett J in Lavercombe v Auscott Ltd (2006) 58 ACSR 586; [2006] NSWSC 867 at [42]-[48].
44. His Honour ordered that the defendant pay the plaintiff's costs on an ordinary basis up to the time at which the winding up application was first returnable and the defendant had proposed to file consent orders discontinuing the proceedings as the debt had been paid.
45. Distilling these various principles in respect of an award of costs arising from a discontinuance of proceedings, I propose to apply the following approach: 1. In accordance with r 42.19(2), unless I order otherwise, the discontinuing plaintiff must pay the defendant's costs (Fordyce, Bitannia and Nadilo). 2. This rule does not give rise to a presumption: it is a relevant but not determinative consideration (Fordyce, Bitannia and Nadilo). 3. There must be some sound or good reason for departing from the position that the plaintiff must pay the defendant's costs (Bitannia, Walton and Nadilo). 4. Other relevant considerations in cases where there is no hearing on the merits are that: 1. the court does not engage in a hypothetical trial; 2. if the court is able to conclude that one of the parties has acted so unreasonably, then the other party should obtain the costs of the proceedings; 3. in rare cases, the court may be confident that, although both parties acted reasonably, one party was almost certain to have succeeded if the proceedings were fully tried in which case an award of costs can be made in favour of that party; and 4. where both parties acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable, the proper exercise of the cost discretion will usually mean the court will make no order as to costs of the proceedings (Lai Qin applied in Lavercombe, Cockatoo Ridge Wines, Rhodium Australia, Nicolai and Nutek Constructions)

Indemnity costs based on conduct

1. A summary of the relevant principles relating to the discretion to award costs on an indemnity basis based on the conduct of a party can be found in Cappello v HomeBuilding Pty Ltd [2023] NSWCA 109, a recent decision of the Court of Appeal of this court, in which Mitchelmore JA (with whom Simpson AJA and Meagher JA agreed) at [46]-[48] stated: [46] The Court has a discretion to award costs on an ordinary or indemnity basis. Usually costs will follow the event, unless the Court considers that some other order ought to be made: Civil Procedure Act 2005 (NSW), s 98; Uniform Civil Procedure Rules 2005 (NSW), r 42.1; Collier v Country Women's Association of New South Wales [2018] NSWCA 36 at [116] ("Collier"). [47] For an order of indemnity costs to be made, the conduct of the party against whom such costs are sought must usually exhibit some special or unusual feature: Collier at [117]. The focus is on the way the litigation was conducted: Mead v Watson [2005] NSWCA 133 at [8]-[9]. For example, the discretion may be enlivened where a party persists in what should have been seen to be a hopeless case, such as where the case was unduly prolonged by groundless contentions: Ferella at [36]; Liverpool City Council v Estephan (Executor and Administrator of the Estate of the late Jocelyn Estephan and Ors) [2009] NSWCA 161 at [93] ("Liverpool City Council"). It has also been said that indemnity costs may be awarded where the unsuccessful party's conduct was unreasonable or delinquent: Amirbeaggi v Matrix Group Co Pty Ltd [2021] NSWCA 21 at [18]. [48] The categories of circumstances in which the discretion may be exercised are not closed: Liverpool City Council at [93]. Ultimately, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on the ordinary basis: Liverpool City Council at [93].

Indemnity costs based on a Calderbank letter

1. The principle concerning the awarding of indemnity costs based on the failure of a party to accept an offer of compromise contained in a Calderbank letter was stated in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323, Giles JA at [37] saying: The making of an offer of compromise in the form of a Calderbank letter (from Calderbank v Calderbank (1976) Fam 93), where the offeree does not accept the offer but ends up worse off than if the offer had been accepted, is a matter to which the court may have regard when deciding whether to otherwise order, but it does not automatically bring a different order as to costs. All the circumstances must be considered, and while the policy informing the regard had to a Calderbank letter is promotion of settlement of disputes an offeree can reasonably fail to accept an offer without suffering in costs. In the end the question is whether the offeree's failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs, and that the offeree ends up worse off than if the offer had been accepted does not of itself warrant departure …

Submissions of Rettenmaier Germany

1. In summary, Rettenmaier Germany made the following submissions: 1. Prior to the order for substitution on 4 December 2023, Rettenmaier Germany had reasonable cause to suspect that Nutrimonde was not solvent because it owed over $1.3 million for invoices dating from July to November 2022, it had failed to comply with the statutory demand for debts dating back to August 2022 and it had promised to pay the USA debt but had missed its own deadline of 12 September 2023. 2. Nutrimonde was slow to do so but finally accepted in Blackley affidavit 4 that since December 2022 it has been indebted to Rettenmaier Germany in the sum of €836,221.03. 3. The provision of the financial statements with the letter dated 27 September 2023 from Nutrimonde's solicitors predating the termination of the distribution arrangements was incapable of informing the solvency enquiry because they were inadmissible unverified conclusory statements made by Mr Blackley as sole director or inadmissible financial statements prepared on the instructions of Mr Blackley. 4. After the termination of the distribution arrangements between Rettenmaier Germany, Rettenmaier USA and Nutrimonde in December 2022, there was a real likelihood that Nutrimonde's business had changed and perhaps declined but there was no evidence of Nutrimonde's current circumstances to enable the court or Rettenmaier Germany to know the magnitude of any such decline. 5. The capacity of Nutrimonde to pay the debt owing to Rettenmaier Germany was only brought about by the infusion of funds from related parties, Blackley Family Investments Pty Ltd and Monaco Securities, in December 2023 and January 2024 but the earlier financial statements in 2020-2022 did not reflect any history of large loan account transactions between Nutrimonde and those entities. 6. The decision to retain Mr Thyer, without ensuring that he provided independent verification of Nutrimonde's financial position, left open the inference that any such verification might expose inconvenient facts. Mr Thyer said nothing about how the termination of the distribution arrangements in December 2022 had affected Nutrimonde's trading position. Mr Thyer made no attempt to verify Nutrimonde's liabilities. Mr Thyer's expert report was "just a series of simplistic mathematical calculations without any application of any expertise". 7. Nutrimonde refused without reason to provide the Undertaking to maintain its bank balance until the hearing or to inform Rettenmaier Germany about Nutrimonde's prospective liabilities. 8. At all times Nutrimonde bore the onus and the evidence remained unremedied until the afternoon before the hearing on 1 May 2024 when Nutrimonde implicitly conceded that its earlier evidence was inadequate. Up to that point Rettenmaier Germany was entitled to think that on the hearing of the winding up application a judge would require better evidence from Nutrimonde to rebut the presumption of insolvency than had been provided. 9. Rettenmaier Germany was in no position to deal with the new evidence as it would have required Rettenmaier Germany to seek production of Nutrimonde's ledgers as well as documents obtained on subpoena from Blackley Family Investments Pty Ltd and Monaco Securities. The most likely position would have been that, subject to a costs order, the court would grant leave if the alternative prospect was to wind up what might be a solvent company. Nutrimonde put the court and Rettenmaier Germany in the unenviable position of deciding whether proceedings that had already been on foot since August 2023 would need to be further adjourned, the deadline under s 459R of the Corporations Act further extended with subpoenas and notices to produce served, or determined on evidence served late which could not be properly tested. 10. Rettenmaier Germany's maintenance of the proceedings up to the discontinuance was reasonable and Nutrimonde's conduct was not. 11. The ordinary position in relation to costs on a discontinuance should not prevail. Rettenmaier Germany is entitled to have its costs of the proceedings up until Nutrimonde filed evidence capable of discharging the onus. 12. In response to Nutrimonde's submission that it should be paid its costs, including on an indemnity basis from 27 September 2023, the facts on which Nutrimonde relies come nowhere near demonstrating that there was any aspect of Rettenmaier Germany's conduct to justify any order for indemnity costs. The offer contained in the letter of 27 September 2023 was made at a time when Rettenmaier Germany was not a party to the proceedings and therefore cannot affect Rettenmaier Germany in relation to the proceedings. At the time when the letter was written Nutrimonde had not provided any indication of its then financial position and still owed at least €836,221.03 to Rettenmaier Germany which had been outstanding for many months. 13. The post 2022 financial statements of Nutrimonde were inadmissible and no further substantial evidence was foreshadowed and a guillotine order had become effective to foreclose further evidence other than updating evidence. Nutrimonde had the onus and there was no need for Nutrimonde to require further documents whether by way of discovery or otherwise. The mere fact that Nutrimonde had sufficient money in its bank account, absent some insight into its present financial circumstances and activities or how the accounts had been prepared and by whom, would not have been sufficient. The circumstances in Re Megaward Pty Ltd [2018] NSWSC 444 (see below) do not make it a comparable case.

Submissions of Nutrimonde

1. In summary, Nutrimonde made the following submissions: 1. Since the commencement of the proceedings, Nutrimonde repeatedly communicated to Rettenmaier Germany, with supporting documents and evidence, that it was clearly solvent. In the period from 31 January 2024 when Nutrimonde served its substantive evidence in the proceedings, Nutrimonde communicated that it was clearly solvent in circumstances where the amount in Nutrimonde's bank account more than covered the amount of Rettenmaier Germany's invoices and the other liabilities of Nutrimonde. 2. In Megaward, Brereton J at [7] demonstrated what is required for a company to rebut the presumption of insolvency, with the company's assets being more important than its liabilities, as a company cannot be expected to undertake the impossible task of proving the negative (that it has no other liabilities) and observed that it is open to the creditor to test the company's balance sheet by procedures of discovery, subpoenas and notices to produce. Rettenmaier Germany refused to engage with Nutrimonde in relation to the issue of Nutrimonde's solvency and served no evidence and made no substantive enquiries of Nutrimonde in relation to that issue. Rettenmaier Germany did not test Nutrimonde's evidence by way of discovery, subpoenas and notices to produce in the manner referred to in Megaward. 3. Rettenmaier Germany capitulated and abandoned its claim and sought leave to discontinue on the first morning of the hearing and now seeks to avoid the costs liability which would ordinarily follow from the discontinuance by erroneously suggesting that Nutrimonde has acted unreasonably in the proceedings. 4. Nutrimonde took an approach consistent with s 56 of the CPA and did not seek to rely on technical points, making it clear at all times that it was defending the proceedings on the ground of solvency. 5. The only substantive response of Rettenmaier Germany to Nutrimonde's incontrovertible evidence as to solvency was to object to Nutrimonde's evidence on the ground that Mr Blackley did not have personal knowledge of Nutrimonde's financial affairs, but this criticism was addressed in Blackley affidavit 5. 6. Even in the absence of Blackley affidavit 5, Rettenmaier Germany knew that Mr Blackley had detailed personal knowledge of Nutrimonde's financial affairs. Mr Blackley was the sole director of Nutrimonde, Nutrimonde was the exclusive supplier in Australia of products supplied by Rettenmaier Germany for approximately 22 years, the affidavit of Mr Woitier exhibited multiple emails in which Mr Blackley was copied to nearly all, and Mr Blackley gave evidence in Blackley affidavit 2 and in the documents exhibited to it which demonstrated his close personal knowledge of all aspects of Nutrimonde's operations. 7. The matters contained in Blackley affidavit 5 were simply further evidence of Mr Blackley's personal knowledge of Nutrimonde's financial affairs and those matters were already known by Rettenmaier Germany. 8. It was reasonable for Nutrimonde not to give the Undertaking in response to the letter of 22 March 2024 from the solicitors for Rettenmaier Germany as it may have impeded its future business operations. 9. The fact that certain of the financial statements prepared by Nutrimonde were not within the business record exception to the hearsay rule, as relied on by Rettenmaier Germany, is only relevant if the business record in question is adduced by a person who does not have personal knowledge of the financial affairs of Nutrimonde, which is not the case in relation to Mr Blackley. In circumstances where Nutrimonde was required to establish solvency at as at the date of the hearing, it will nearly always be the case that Nutrimonde would have to rely on documents prepared for the purposes of conducting, or for or in contemplation of or in connection with the proceedings. The business record exception will only be relevant if those documents are adduced by a person who does not have personal knowledge of Nutrimonde's financial affairs. 10. Mr Thyer's expert report contained his opinion that Nutrimonde was solvent and relied on the fact that the amount in Nutrimonde's bank account more than covered the amount of Rettenmaier Germany's invoices and the other liabilities of Nutrimonde. Rettenmaier Germany did not adduce any expert evidence of its own challenging Mr Thyer's expert report. 11. The three deposits in Nutrimonde's bank account from Blackley Family Investments ($158,400 on 20 December 2023) and Monaco Securities ($240,000 on 29 December 2023 and $238,750 on 18 January 2024) are not suspicious or untoward. Rettenmaier Germany knew about them from 31 January 2024 onwards when the relevant bank statements were attached to Blackley affidavit 2, but did not make any issue of them. A comparison of the financial statements of Nutrimonde as at 30 June 2023 and the financial statements of Nutrimonde as at 20 January 2024 demonstrates the following matters: 1. The financial statements of Nutrimonde as at 30 June 2023 record a negative liability of $457,861 (a net asset) in the "financial liabilities", which is explained in note 7 of the notes to those financial statements as comprising a loan amount of $20,889 repayable by Nutrimonde to Mr Blackley and a loan amount of $478,750 repayable by the Blackley Family Trust to Nutrimonde. Monaco Securities is the trustee of the Blackley Family Trust. The two deposits from Monaco Securities total $478,450, which together comprise the repayment of the loan amount owed to Nutrimonde. This repayment explains why the financial statements of Nutrimonde as at 20 January 2024 show that "financial liabilities" only comprise the loan amount of $20,889 repayable by Nutrimonde to Mr Blackley. 2. The financial statements of Nutrimonde as at 30 June 2023 record receivables of $715,418 in the "current assets", which are explained in note 3 to include a prepayment of $192,000. The deposit of $158,400 by Blackley Family Investments Pty Ltd was a partial refund of one of those prepayments, which is reflected in the financial statements of Nutrimonde as at 20 January 2024 showing that the prepayments in note 3 had declined to $39,100. 1. Nutrimonde seeks an order that Rettenmaier Germany pay its costs on the ordinary basis until 27 September 2023 and then on the indemnity basis thereafter because Nutrimonde has achieved a result no less favourable to it than the offer contained in the letter of 27 September 2023 from the solicitors for Nutrimonde.

CONSIDERATION

1. I start my consideration with the relevant, but neither presumptive nor determinative, factor that r 42.19(2) of the UCPR provides that unless I otherwise order, Rettenmaier Germany is to pay Nutrimonde's costs of the proceedings. I then turn to other relevant considerations.
2. In my view, through their submissions the parties have approached the issue of determining the appropriate costs order that should be made in this case with the misconceived notion that I should consider the merits of the position they each took on the substantive issue of solvency at different points in the proceedings. The overwhelming majority of their submissions are directed to that approach, particularly the arguments about the admissibility of evidence going to the issue of solvency and the resort to the decision of Megaward in relation to how either party can address or test the issue of solvency, as the case may be. Rettenmaier Germany invites me to forensically examine the evidence of Nutrimonde and conclude that it was inadequate to prove its solvency and Nutrimonde invites me to do the same but reach the opposite conclusion.
3. But, to paraphrase Lai Qin, this is not a case in which I feel confident that I can determine that one party was almost certain to have succeeded if the matter had been fully tried. The evidence remained untested. The parties made forensic decisions for their own reasons as to the manner in which they conducted the proceedings. I will not engage in a hypothetical trial or make hypothetical rulings on what was or was not admissible evidence on the issue of solvency. I find myself in the same position as Finkelstein J in De Simone - it is impossible to predict what the outcome of the case would have been.
4. In my view, both parties behaved reasonably during the proceedings.
5. Rettenmaier Germany behaved reasonably because it was owed a significant sum of money for unpaid invoices which had been outstanding for some time and by becoming substituted as the plaintiff it was able to take advantage of the statutory presumption that Nutrimonde was insolvent which Nutrimonde had the onus to displace. That presumption of insolvency operated throughout the proceedings. Assertions by Nutrimonde that it was solvent are no substitute for admissible evidence on that issue. It was not a matter for Rettenmaier Germany to put on any lay or expert evidence going to that issue or seek production of documents by discovery, subpoenas or notices to produce unless it took the view that Nutrimonde was likely to meet its onus with admissible evidence. Rettenmaier Germany clearly considered that the admissible evidence did not meet the onus until it received Blackley affidavit 5 in the afternoon before the hearing. When Rettenmaier Germany saw that Nutrimonde had addressed what it considered to be evidentiary deficiencies, it took the sensible course of applying for leave to discontinue the proceedings.
6. Nutrimonde behaved reasonably because it sought to address the onus it had to prove that it was solvent by successive rounds of lay evidence from Mr Blackley as the sole controller of Nutrimonde with knowledge of its financial affairs and expert evidence from Mr Thyer seeking to provide an opinion on solvency. Nutrimonde had its own reasons for refusing to provide the Undertaking. While Nutrimonde admitted the amount of the debt owing to Rettenmaier Germany (ultimately agreeing with the amount claimed by Rettenmaier Germany) at all times Nutrimonde maintained that it had an offsetting claim. When it became clear in the submissions and objections provided by Rettenmaier Germany on 26 April 2024 that objection was being taken to the admissibility of significant parts of Nutrimonde's evidence, Nutrimonde naturally sought to address those alleged deficiencies in the form of Blackley affidavit 5 provided on 30 April 2024.
7. This is not a case like those of Lavercombe, Cockatoo Ridge Wines and Nutek Constructions where the debt owing by the defendant to the plaintiff creditor was obviously owing and paid during the course of the proceedings. In this case Nutrimonde contested the debt on the basis that it had an offsetting claim.
8. This is also not a case which provides any basis for an award of indemnity costs in favour of Nutrimonde. There are no circumstances concerning Rettenmaier Germany maintaining the proceedings (such as a hopeless case or unreasonable conduct) in the sense described in Cappello which would justify such an award. Further, the alleged Calderbank offer made on 27 September 2023 in the letter sent by Nutrimonde's solicitors to Rettenmaier USA's solicitors was made at a time when Rettenmaier Germany was not a party to the proceedings and no such offer was made to it at any subsequent time. In addition, the letter was not sent when any recipient would be able to make any informed assessment of the solvency of Nutrimonde at that time because the financial statements accompanying that letter were already 15 months old by then. To use the words in SMEC Testing, a recipient of the letter could reasonably fail to accept the offer without suffering in costs.
9. In my assessment, Rettenmaier Germany conducted itself with complete propriety in prosecuting the proceedings with an operative presumption of insolvency against Nutrimonde and Nutrimonde conducted itself with complete propriety in defending the proceedings by seeking to displace that presumption through the provision of lay and expert evidence. The position of each party was not analysed and determined on the merits. In the circumstances, I consider that this is a case where in the exercise of my discretion the costs of the parties in the proceedings should lay where they fall and neither party should pay the costs of the other.

ORDERS

1. For these reasons, I propose to make the following orders: 1. Grant leave to the plaintiff to discontinue the proceedings. 2. Make no order as to costs, with the intent that each party should bear its own costs of the proceedings.

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: 28 June 2024