Chameleon Mining NL v Atanaskovic Hartnell

Judgment 1The plaintiff, Long Tail Pty Limited ("Long Tail") seeks its costs, on the indemnity basis, of an application to set aside a creditor's statutory demand ("Demand") served by the defendant, Osmal Holdings Pty Limited ("Osmal"). 2By way of background, the parties entered into a lease of premises at Crown Street, Surry Hills, for use as a restaurant in July 2008 and, in November 2009, the Commonwealth Bank issued a bank guarantee in favour of Osmal in connection with the lease in an amount of approximately $138,818. A dispute arose between the parties as to the adequacy of ventilation to the premises after work was done by Osmal to join the ventilation of adjoining restaurant premises to the exhaust system serving Long Tail's premises. By letter dated 13 October 2009, Long Tail's solicitors, albeit in general terms and without supporting evidence, put Osmal on notice that Long Tail was claiming substantial revenue losses by reason of limitation to its menu resulting in loss of menu and limitation on patronage from June 2009 as a result of the relevant issues. 3Long Tail brought proceedings in the District Court of New South Wales in January 2012 claiming damages for loss which it claimed to have suffered, as a result of changes to its business which it claims to have made in order to address difficulties arising from ventilation issues and loss of custom. Those damages were not quantified in the original Statement of Claim but were quantified in detailed evidence filed in November 2012 in the District Court proceedings. 4Long Tail also has an order for costs in its favour in respect of an unsuccessful motion for security for costs brought by Osmal in the proceedings. From the point of the first affidavit filed by Long Tail's director, Mr Nagao, in an application to set aside the Demand, Osmal had been made aware that Long Tail's solicitor costs in respect of that motion were $28,000, so that the costs likely to be recoverable in respect of that motion were not insubstantial. 5On 13 August 2012, Osmal issued the Demand claiming $53,849 in respect of unpaid rent. Long Tail's solicitors thereafter wrote to Osmal's solicitors inviting them to set aside the Demand; that was not done; and Long Tail filed an application to set aside the Demand. Osmal thereafter made an offer of settlement on terms which were plainly unfavourable to Long Tail of the winding up and the District Court proceedings. Long Tail subsequently filed substantial evidence in the District Court and in the winding up proceedings on 13 November 2012 to establish its claim to damages in the District Court proceedings. It would be fair to say that that claim to damages is ambitious, but the quantum which is properly recoverable is ultimately a matter for the District Court and not a matter for this Court in this application. 6Osmal subsequently called upon the bank guarantee provided by Long Tail in December 2012. On 21 December 2012, Osmal offered to withdraw the Demand, but only on the basis that each party pay their own costs; on 22 January 2013, Osmal, in effect, reiterated that position; and, on 1 February 2013, Osmal's solicitors advised that the Demand would be withdrawn, on the basis that, if no agreement was reached as to costs, that matter would be determined by the Court. On 7 February 2013, Long Tail's solicitors wrote to Osmal's solicitors offering to accept the amount of $10,000 in settlement of Long Tail's claim for costs in the winding up proceedings; Osmal did not accept that offer. 7I have reviewed the principles applicable to an order for costs in respect of an application to set aside a statutory demand which did not proceed to a hearing in Specialty Fashion Group Ltd v Global Red Australia Pty Ltd [2012] NSWSC 256, and it is not necessary to repeat that review here. In summary: (a) Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW), which provides that costs follow the event, has no application where there is no adjudication on the merits. (b) The court may order costs, although there has been no hearing on the merits, and in particular may do so where it is confident that, although both parties acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. (c) The courts have repeatedly emphasised that a party which issues a statutory demand is at risk of an order for costs under section 459N of the Corporations Act if it did so unreasonably, in that it should have been apparent that there was a genuine dispute or offsetting claim in respect of the amount claimed. 8Long Tail contends that it sought to set aside the Demand on the basis of an offsetting claim under section 459H(1)(b) of the Corporations Act or for some other reason under section 459J(1)(b) of the Corporations Act. Osmal rightly points out that the Originating Process did not refer to section 459H of the Corporations Act. While that is correct, there are several references to an offsetting claim exceeding the amount of the Demand in Mr Nagao's initial affidavit sworn 30 August 2012 in support of the application to set aside the Demand and those were, in my view, sufficient to place Osmal squarely on notice of the claim to do so. In my view, the Court would readily have permitted Long Tail to amend its originating process to the extent necessary to rely on an offsetting claim under section 459H of the Corporations Act to set aside the Demand, where that claim had been squarely raised in the affidavit in support of the application to set aside the Demand. Even if, contrary to my view, Long Tail would not have been permitted to make that amendment, Osmal's reliance on the Demand in the face of a substantial costs order and claim against it in the District Court proceedings could, in my view, have potentially been treated as inconsistent with the statutory purpose of Part 5.4 of the Corporations Act so as to support an application to set aside the demand under section 459J of the Corporations Act. 9It is plain that a cross-claim of the kind brought by Long Tail in the District Court can establish an offsetting claim in respect of rental payments or outgoings due under a lease: for example, Gabriel Hotels Pty Ltd v Corlita Pty Ltd [2010] NSWSC 826, dealing with outgoings under a lease. In order to establish an offsetting claim, Long Tail needed only to establish that its claim was advanced in good faith, in the sense that it was arguable on the basis of fact asserted with sufficient particularity to enable the court to determine the claim was not fanciful, and to show the basis on which the loss was said to arise and how it was calculated, or, in another formulation, to show a plausible and coherent basis for asserting the claim to a sum which, despite elements of uncertainty, could be seen to be greater than the amount of the debt the subject of the demand: Macleay Nominees Pty Ltd v Belle Property East Ltd [2001] NSWSC 743; Elm Financial Services v MacDougal [2004] NSWSC 560 at [19]; Gabriel Hotels Pty Ltd v Corlita Pty Ltd above at [26]-[28]. 10Osmal contends that it was not aware of the nature or extent of the evidence on which Long Tail relied to establish the offsetting claim until that evidence was filed on 13 November 2012. While that proposition is plainly correct, in its terms, the fact that Long Tail had brought District Court proceedings, and the indication in Mr Nagao's initial affidavit that it relied on an offsetting claim to set aside the Demand, made it inevitable that, if properly advised, Long Tail would lead evidence to support that claim to the necessary standard, which is what it in due course did on 13 November 2013 (although, on one view, the extent of the evidence that it filed may have been substantially more than was needed to meet that standard). 11In my view, Osmal took the risk that this would occur in pressing the Demand in the context of the District Court proceedings and after the application to set it aside had been filed and it can scarcely claim to be surprised when Long Tail filed the evidence that it would have to file in order to succeed in its application to set aside the Demand. Osmal's solicitor gives evidence that Osmal decided to withdraw the Demand, on 1 February 2013, by reason of the commonality of issues between the winding up proceedings, which emerged from the further affidavits filed on 13 November 2012. However, that commonality of issues was always likely to occur, from the moment that, in Mr Nagao's initial affidavit in support of the application to set aside the Demands, Long Tail predictably identified its reliance on its claim in the District Court proceedings as the basis of an offsetting claim. 12Even after the affidavits of 13 November were filed, Osmal did not unconditionally withdraw the Demand, but continued to maintain it until early February 2013, taking the position until then that it would only withdraw the Demand on the basis that there would be no order for costs of the proceedings. It seems to me that position has to be treated as unreasonable, where it had been aware that an offsetting claim was relied on from the time of Mr Nagao's initial affidavit, and was aware of the detail of that claim from mid-November 2012: compare Chameleon Mining NL v Atanaskovic Hartnell [2009] NSWSC 602 at [72]; Specialty Fashion Group v Global Red Australia Pty Ltd above at [11]-[17]. 13Long Tail seeks to establish its claim for costs on an indemnity basis, because it contends, the Demand would have been set aside for some other reason, because Osmal had a bank guarantee which could have been utilised to satisfy the claimed debt. Long Tail did not identify any legal principle, or other contractual obligation, which required Osmal to call upon the bank guarantee rather than issuing a Demand, had the issue of a statutory demand otherwise been properly available to it, and I am not satisfied that the court can say that Long Tail would very likely to have succeeded on that basis or that an order for indemnity costs is justified on that basis. 14Long Tail also contends that, by reason of a letter dated 10 October 2012 from Osmal's solicitors, referring to settlement of both the District Court proceedings and the proceedings to set aside the Demand, it should be inferred that the Demand was issued in order to place pressure upon Long Tail to settle the District Court proceedings. I would not draw that inference where, by October 2012, both the District Court proceedings and the application to set aside the Demand were on foot, and there was nothing unreasonable in Osmal putting a resolution proposal in respect of both proceedings. 15Long Tail also relies on its letter dated 24 August 2012 as a Calderbank letter warranting an order for indemnity costs. I do not consider that letter provides a basis for indemnity costs which would not otherwise be ordered, where the invitation in it to withdraw the demand does not involve any substantial element of compromise. 16On the other hand, I also do not accept Osmal's contention that there should be no order as to the costs of the proceedings, given the observations I have made above. I also do not accept Osmal's alternative contention that the costs should follow the result of the District Court proceedings. Even if Long Tail were to fail, and Osmal were to succeed in defending, the District Court proceedings, it would be nonetheless be the case that Long Tail was likely to have succeeded in setting aside the Demand and that result is not affected by the outcome of the District Court proceedings. 17For these reasons, I order that the Defendant pay the costs of an incidental to the application to set aside the Demand. Subject to hearing from Counsel, it seems to me that costs would follow the event, and the Defendant should also be ordered to pay the costs of and incidental to this application. 18Having heard from Counsel, I make orders in the form I have indicated as follows: