Solicitors:
Lane & Lane (Plaintiff)
Bechara & Co (Defendant)
File Number(s): 2015/62173
[2]
Judgment - ex tempore
By Originating Process filed on 27 February 2015, the Plaintiff, AAP Investments (Aust) Pty Ltd ("Company") seeks to set aside a creditor's statutory demand ("Demand") served by Maria Bechara trading as Bechara & Company, under s 459H(1)(a) of the Corporations Act 2001 (Cth), relating to the existence of a genuine dispute as to the debt claimed in the Demand, or alternatively under s 459J(1)(b) of the Corporations Act, on the basis that there is some other reason to set aside the Demand.
The Demand was served by letter dated 9 February 2015 from Bechara & Company. The Demand, in turn, identified the relevant debt as an amount of $104,083.57, being the debt described in the schedule. The debt was described in the schedule as "Judgment debt in the amount of $104,083.57 entered in the District Court of New South Wales on 3 February 2015."
It should be noted, at this point, that the description of the debt was significant in two respects. First, because the debt claimed was a judgment debt, it was not required to be verified by Ms Bechara and, so far as the evidence goes, it was not verified by Ms Bechara. Second, the description of the judgment debt did not give rise to any question as to how, for example, the judgment debt had arisen. What was claimed was not, for example, an amount due under some identified underlying contract, or by reason of legal services provided under that underlying contract. Had a claim been formulated in that manner, then a person who had received the Demand would have faced different questions, in any application to set aside the demand, which would have raised the question of the underlying merit of the claim, as distinct from the fact that a judgment existed in respect of the amount of the debt.
The debt arose in a complex factual setting, which has been summarised by Mr Armfield in opening, and is indicated in the evidence led by the parties before me. I will briefly refer to the context in which the debt arose, without my short summary of it fully reflecting its complexity. It appears that Bechara & Company acted, for a short period, for the defendants in Supreme Court proceedings, which both parties have described in this application as the "enforcement proceedings", being Ms Kazas-Rogaris and the Company, the Plaintiff in this application. The enforcement proceedings related to a question whether there had been compliance with a settlement reached in earlier family provision proceedings.
Interlocutory Orders were made in October 2014 in the enforcement proceedings restraining certain dealings by the Company and Ms Kazas-Rogaris with a bank account held by the Company, apparently in its capacity as trustee of a superannuation fund. In November 2014, Bechara & Company served a bill of costs upon the Company. That bill of costs is in evidence and Ms Bechara submits, correctly, that the bill of costs appears, on its face, to be very detailed. By letter dated 20 November 2014, the solicitor then acting for the Company indicated that Bechara & Company's claim for costs should be referred to cost assessment. There have been submissions before me, particularly by Ms Bechara, as to the question whether it was open to refer the matter to cost assessment, in circumstances that, Ms Bechara contends, Bechara & Company had previously issued a cost disclosure to the Company. The resolution of that issue is made more difficult by the fact that Ms Bechara referred to provisions in the Legal Profession Act 2004 (NSW) which were not the subject of detailed submissions before me. In any event, for reasons that I will indicate below, it does not seem to me that that issue arises.
On 29 December 2014, Bechara & Company commenced District Court proceedings to seek to recover professional fees against the Company, albeit there is some suggestion that those proceedings were commenced at a time the then solicitor for the Company was, not surprisingly, on leave.
On 2 February 2015, Bechara & Company obtained a default judgment against the Company in the District Court proceedings, although that appears to have occurred at a time that further correspondence was taking place between the solicitors, in which the Company's solicitor was pressing the claim for assessment, whether or not he was justified in doing so.
Intervening events then occurred, to which Mr Armfield referred in submissions, although they are of lesser relevance in determining the application before me. On 4 February 2015, Bechara & Company issued a garnishee order to the Company's bank in respect of the amounts claimed by way of costs. In February 2015, this Court granted an interlocutory injunction restraining the enforcement, by that garnishee order, of the judgment obtained by default in the District Court proceedings pending the determination of the enforcement proceedings. The judgment of McDougall J in that matter proceeded on the basis that, if the Plaintiff was successful in those proceedings, the Company would not be entitled to recover, out of the assets of the superannuation fund, any amount incurred in the proceedings because, on that basis, the assets of the Company in that respect would be trust assets.
Returning to the underlying chronology of events, the Demand was served on 9 February 2015. Shortly afterwards, a notice of motion was filed in the District Court seeking to set aside the default judgment. After delivery of the judgment of McDougall J in respect of the interlocutory injunction application, the Plaintiff's then solicitor wrote to Bechara & Company requesting that the Demand be withdrawn, which did not occur. The Company subsequently filed an originating process seeking to set aside the Demand. Finally, and importantly for relevant purposes, the default judgment was set aside by the District Court on 6 March 2015. Both Mr Armfield and Ms Bechara made submissions, to some extent, as to the circumstances in which that occurred. I indicated to both parties that, absent a copy of the District Court's judgment or evidence as to that matter, I do not consider it appropriate to proceed on the basis of submissions, as distinct from evidence, as to the basis of the District Court's approach. It is, in any event, sufficient for the purposes of this judgment to note that the default judgment has in fact been set aside so it has no continuing operation. The reason why that occurred ultimately does not matter.
Mr Armfield submits that, in broad terms, there is a genuine dispute as to the existence of the relevant debt because the bills issued by Bechara & Company have been referred for assessment and documents had been requested and not provided from Bechara & Company in the course of that process. Mr Armfield also refers to the intervention of the order made by McDougall J injuncting enforcement against trust assets. The effect of that order raises two complex questions, which were not fully addressed in submissions, first, whether the Demand could be characterised as an enforcement against trust assets, where it is directed to the Company, albeit that the only assets that are available to the Company to meet it may in fact be in the nature of trust assets and, second, whether the issue of the Demand can be properly characterised as "enforcement". It is not necessary to determine those matters for the purposes of this application. Mr Armfield also relied on the proposition that the Demand relied on a judgment debt which no longer existed. That issue arose, at least indirectly, from the decision in Chameleon Mining NL v Atanaskovic Hartnell [2009] NSWSC 602, to which I drew the parties' attention, which emphasised, in respect of a disputed claim for costs, that the question whether to set aside a creditor's statutory demand must be determined at the time the Court considers the relevant question. I will return to that proposition below.
Ms Bechara in turn advanced submissions directed to establishing that there was no genuine dispute as to the relevant debt, because the debt was the product of a claim in contract by her firm, in circumstances that, she contends, her firm had given disclosure as to the terms of their fees in a form in common usage, and had subsequently issued a detailed bill as to its costs. Ms Bechara submits that the effect of the District Court setting aside its judgment is merely to allow the Company an opportunity to have its proceedings determined on their merits in the District Court proceedings. While the proposition that the effect of setting aside the judgment is to allow the proceedings to go to a hearing on their merits is true, it seems to me that Ms Bechara's submission understated the effect of setting aside that judgment, because, so far as the debt claimed in the Demand was founded in the judgment, then that debt is plainly affected when the judgment is set aside. It seems to me that that is the case, notwithstanding that some other basis, not relied on in the Demand, for the existence of the debt might otherwise exist, and might ultimately be established in the District Court proceedings in a merits determination. Ms Bechara also advanced various other submissions directed to establishing that there was no genuine dispute as to the debt claimed, albeit those submissions seemed to me to be directed to the existence of a genuine dispute as to costs owing to her firm, rather than a genuine dispute as to the Debt claimed in the Demand, namely a judgment debt arising from a particular judgment of the District Court.
So far as the Company's application was brought under s 459J(1)(b) of the Corporations Act, on the basis that there was some other reason to set aside the Demand, Ms Bechara submitted that the proper course was to adjourn the proceedings pending the determination of the District Court proceedings. I am not inclined to take that course, for two reasons. The first is that, so far as the Demand relies on a particular judgment which has been set aside, no further clarity would be obtained by adjourning the proceedings. That judgment will be no less set aside, even if, at some point in the future, Ms Bechara's firm is successful in its claim against the Company in the District Court proceedings. Second, the Court has frequently recognised that a company should not be left subject to a disputed creditor's statutory demand over a substantial period, because of the effect of such a demand upon a company's ordinary day to day activities. For that reason, there is a public interest in the prompt determination of applications to set aside creditor's statutory demands.
Ms Bechara also developed an argument that the Company was not solvent, which depended upon the proposition that, first, it owed the debt to her firm and, second, the effect of the argument now being put by the Company was that it would not have the assets to meet that debt, so far as those assets were trust assets which it was claimed were not available to meet the debt. It seems to me that that proposition depends, upon the existence of the debt owed, which can only be established once the proceedings in the District Court are established, upon its quantum, and potentially also upon the manner in which the Company responds to any judgment against it in the District Court proceedings in respect of the debt. In any event, even more fundamentally, the Court does not determine applications to set aside creditors' statutory demands by reference to a determination of a Company's underlying solvency, which is a matter which would arise only in a subsequent winding up application. There is good reason for that approach, because the application to set aside a creditor's statutory demand is intended to be a summary application, determined by reference to the criteria in the Corporations Act. Second, if Bechara & Company wish to seek to establish that the Company is insolvent, without the aid of the presumption arising from a creditor's statutory demand, and if they can establish that they are a creditor or (with leave) a contingent creditor of the Company, then it is open to that firm to bring a winding up application, without relying on the presumption of insolvency arising from the creditor's statutory demand. There is no reason to leave a creditor's statutory demand, which is otherwise not properly founded, in place simply because the creditor which has issued it contends that the recipient of it is insolvent on some other basis.
Returning now to the substance of the application, it seems to me that it can be determined on a narrow basis. It is not necessary for me to determine whether there is a genuine dispute for the purposes of s 459H(1)(a) of the Corporations Act. The case law makes clear that there is a low threshold for such a determination, and it would be sufficient that, to put it broadly, there were a serious question to be tried as to that matter. It is certainly arguable, it seems to me, that there is a genuine dispute as to the existence of a judgment debt in a particular amount, once the judgment which founded that debt is set aside. In putting the proposition in that way, I emphasise that the debt which was the subject of the Demand was the judgment debt, and not the product of any other wider claim that may be available to Bechara & Company against the Company. However, as I have noted, it seems to me that it is not necessary to express a final view as to that matter in this application.
It seems to me that in this case there is a clear case for setting aside the Demand under s 459J(1)(b) of the Corporations Act. That section relevantly provides that a statutory demand may be set aside when the Court is satisfied that there is some other reason why the creditor's statutory demand should be set aside. The scope and purpose of that section was summarised in On Time Nurses Agency Pty Ltd v Deputy Commissioner of Taxation [2010] VSC 573 at [7] [8], in a judgment which has subsequently been applied by Barrett J in Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 at [16]. As I noted above, in Chameleon Mining NL v Atanaskovic Hartnell at [63], Austin J referred to the judgment in Tatlers.com.au Pty Ltd v Davis [2006] NSWSC 1055 as indicating that that question is to be determined in an application of this kind as at the time that a Court heard the application, namely today. That approach has been followed by Ward J in Fitness First Australia Pty Ltd v Dubow [2011] NSWSC 531 at [159]ff, where her Honour undertook a detailed review of the circumstances in which a creditor's statutory demand should be set aside under s 459J(1)(b) of the Corporations Act and expressed the preliminary view, although not finding it necessary to decide that matter in that case, that there would be sufficient reason to set aside the creditor's statutory demand in that case, where it was founded on the registration of a cost judgment in the Local Court, and disputes as to the circumstances which gave rise to those certificates had been established.
In the present case, it seems to me that the position is clearer. There are many occasions on which courts have set aside creditor's statutory demands under s 459J(1)(b) of the Corporations Act where an appeal is pending against a judgment which is the subject of the demand. Those include, for example, Midas Management Pty Ltd v Equator Communications Pty Ltd [2007] NSWSC 759 and Cranney Farm Pty Ltd v Cowora Fertilisers Pty Ltd [2011] NSWSC 9. In those cases, that Court will often require, as a condition of setting aside the demand, that money be paid into court to secure the amount which is the subject of the judgment. In this case, the position is stronger still. The Court might well have set aside the demand, for some other reason, if the District Court's judgment was subject to appeal, subject to a payment into Court. Here, it has already been set aside. It seems to me to be wholly inconsistent with the purpose of the creditor's statutory demand regime that a party could rely on that regime, to seek to obtain payment of a debt arising from a judgment of a court, after that judgment no longer has effect. I would add that no reason for payment into court to secure a judgment debt can arise, where the judgment debt no longer exists. This proposition seems almost self-evident, in that it is scarcely conceivable that the creditor's statutory demand regime could be used to enforce a judgment debt, where other avenues, such as the garnishee procedure would not be available once a judgment was set aside.
For all of these reasons, I am satisfied that the creditor's statutory demand issued by the Defendant to the Plaintiff dated 9 February 2015 should be set aside pursuant to s 459J(1)(b) of the Corporations Act, and I so order.
[3]
Costs
I have now heard the parties in respect of the costs of the application to set aside the Demand. Mr Armfield points to the general principle that costs follow the event and also draws attention to the discussion in Mr Assaf's text, Statutory Demands, Law and Practice, as to the circumstances in which indemnity costs orders are made in applications to set aside creditors' statutory demands, often where a creditor knew, or ought to have known, that a creditor's statutory demand was susceptible to being set aside. Mr Armfield identifies various dates as to which he contends an order for indemnity costs should be made, commencing at the earliest at 20 November 2014 when it is suggested that the relevant bills were referred to assessment, although it should be noted that these proceedings were not commenced until after that date, then later dates including a letter dated 24 February 2015, requesting the withdrawal of the Demand, following which the proceedings were brought to set it aside, and 6 March 2015 when the District Court set aside the judgment which underpinned the Demand, a matter which had critical importance for the outcome of the application, as I noted in my judgment this morning. Ms Bechara's primary contention was that the Court should not make an order that costs follow the event and that the Court should order that the Plaintiff pay the Defendant's costs up to 6 March 2015, the date on which the default judgment was set aside, and thereafter each party should pay their own costs.
The principles applicable to an order for costs are well established. Section 98 of the Civil Procedure Act 2005 (NSW) relevantly provides that, subject to the rules of Court and to the Civil Procedure Act, and any other Act, costs are in the discretion of the Court and the Court has full power to determine by whom, to whom and to what extent costs are to be paid, and may order that costs are to be awarded on the ordinary basis or an indemnity basis. Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") provides that, if an order is made as to costs, the Court is to order that costs follow the event unless it appears to the Court that some other order should be made as to the whole or any other part of the costs. Rule 42.2 of the UCPR states the general rule that costs payable to a person under an order of the Court or these rules are to be assessed on an ordinary basis.
The circumstances in which the Court may order indemnity costs are also well established, with many authorities referring to the judgment of Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 at 233, where the Court noted that some special or unusual feature is needed to justify the Court in departing from the ordinary practice of costs on a party to party basis. In Hamod v State of New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20], the Full Court of the Federal Court in turn referred to the principle that an order for indemnity costs may be made where the Court takes the view it is unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs. In Liverpool City Council v Estephan [2009] NSWCA 161 at [100], Giles JA (with whom McColl JA agreed) observed that s 56 of the Civil Procedure Act emphasised the occasion to depart from costs on an ordinary basis where a failure to properly conduct the proceedings caused costs to be incurred unnecessarily, but did not override the need for a rational connection between the reason for that departure and the extent of that departure.
In the present case, it does not seem to me that sufficient basis has been shown to depart from the usual position that costs should follow the event, subject to one matter to which I will refer below. The service of a creditor's statutory demand is a serious step, and a party which takes that step bears the risk of costs, if the application is ultimately successful. Ms Bechara points to the fact that default judgment was entered without fault on her firm's part, and that the Demand was based on that default judgment. I accept that proposition, but a default judgment has inherent in it the possibility that it may be set aside. In determining to proceed on the basis of a judgment debt that arose from a default judgment, Ms Bechara's firm therefore took upon itself the risk that, if that default judgment were later set aside, then the basis of the Demand would be undermined. It does not seem to me that that warrants any order for costs against her firm on a special basis, or an indemnity basis, prior to that event arising, but it does seem to me to undermine any case that Ms Bechara's firm should not be required to pay the Plaintiff's costs of the application, from its commencement, where an order for costs is ordinarily compensatory of the costs to which the successful party is exposed.
It does seem to me however, that, from the date on which the default judgment was set aside on 6 March 2015, it should have been apparent to Ms Bechara's firm that a creditor's statutory demand based on that judgment (now set aside) would likely also be set aside. The contrary would have required the extraordinary result that, when a judgment has been set aside and is no longer enforceable by ordinary processes, it could nonetheless give rise to a presumption of insolvency, and support a winding up of a company, notwithstanding that the Court which had issued it had considered that it ought to be set aside. In these circumstances, I am satisfied that an order for indemnity costs is warranted, on and from 6 March 2015.
Accordingly, I order that the Defendant pay the Plaintiff's costs of this application on an ordinary basis up to and including 6 March 2015 and on an indemnity basis on and from 7 March 2015, as agreed or as assessed.
I also order that the exhibits may be returned forthwith. Any exhibits returned must be retained intact by the party or person that produced the material until the expiry of the time to file an appeal or until any appeal has been determined.
[4]
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: 03 August 2015