Dynamics Co Pty Limited v G and M Nicholas Pty Limited

Judgment 1In this matter, Dynamics Co Pty Limited ("Dynamics") seeks the costs of its application brought under s 459J of the Corporations Act 2001 (Cth) to set aside a statutory demand dated 8 August 2011 ("the Demand") served by the Defendant, G and M Nicholas Pty Ltd ("G and M"). G and M contends that each party should pay its own costs of the application. Chronology of events 2I should first set out a short chronology of events. The Demand, and the contest about it, both arise from the purchase of a pathology business by Dynamics from G and M that was agreed in about May or June 2009 and completed under a written agreement dated 10 November 2009. 3Dynamics contends that it made oral statements between November 2009 and March 2011 which made G and M aware that Dynamics claimed it was owed monies under an alleged consultancy agreement which offset G and M's claim for payment of the balance of the purchase price of the pathology business and had claims for misrepresentation as to the earnings of that business. It appears that these claims were not articulated in writing over this period, even after G and M and its solicitors had each written to Dynamics demanding payment of overdue instalments of the purchase price under the agreement for acquisition of the business. G and M denies that such complaints were communicated to it, either orally or at all prior to service of the Demand. 4It is not possible for me to resolve this dispute, without resolving the substance of the factual issues which would have been in contest between the parties had agreement not been reached to set aside the Demand. I do not consider that I could accept Dynamics' evidence that these matters had been raised orally, for the purposes of a costs application, where that evidence was contested by G and M and one would ordinarily expect that that complaints of this kind would be recorded in writing at least once over an extended period in response to the written demands for payment made by G and M. 5G and M wrote to Dynamics demanding outstanding monies claimed to be due under the contract for sale of the business on 5 November 2010. Dynamics did not respond, at least in writing, to the letter dated 5 November 2010. 6By letter dated 19 July 2011, G and M's solicitors sent a further letter to Dynamics demanding payment of the outstanding amount. Dynamics also did not respond to that letter. G and M's solicitors also wrote to each of the guarantors under the contract by letter dated 19 July 2011. The guarantors also did not respond, in writing, to the letters sent to them. 7As noted above, the Demand was dated 8 August 2011. The Demand claimed an amount of $83,384.90, being the balance of an amount claimed as due under the agreement to which I referred in paragraph 2 above. 8On 26 August 2011, Dynamics brought an application to set aside the Demand under s 459H(1)(a)-(b) and 459J(1)(a)-(b) of the Corporations Act . The application to set aside the Demand was supported by an affidavit of Mr Haysson Tabbah dated 25 August 2011. Mr Tabbah's affidavit set out the basis on which Dynamics contended that there was a genuine dispute about the existence of the claimed debt, by reference to an alleged breach of contract and misrepresentations by G and M, and identified an offsetting claim quantified as $315,730.16 (being amounts due under an alleged consultancy agreement and reimbursement for payments) or alternatively $272,659.46 (being reimbursement of expenses claimed to have been paid on behalf of G and M). 9On 6 September 2011, a discussion took place between the solicitor for Dynamics and the solicitor for G and M, and the solicitor for G and M declined to agree to the Demand being set aside. 10By letter dated 14 September 2011, Dynamics' solicitor advised G and M's solicitor of the scope of further evidence which would be served, including lay and expert evidence. 11By letter dated 20 September 2011, G and M's solicitor offered to withdraw the Demand, on the basis that the proceedings be dismissed with no order as to costs. It was not then possible to avoid the presumption of insolvency arising in respect of G and M by withdrawing the Demand, and that could only be achieved by setting aside that Demand by consent. 12By email dated 7 November 2011, G and M withdrew the Demand, although agreement was not reached as to costs or the form of final orders. 13By letter dated 8 November 2011, Dynamics' solicitor wrote to G and M's solicitor proposing that the Demand be set aside with G and M to pay Dynamics' costs of the application as agreed or assessed. G and M's solicitor made a counter-offer on that date that the Demand be set aside with each party paying its own costs. 14Orders were made by consent that the Demand be set aside on 9 November 2011. Basis of the claim for costs 15Dynamics contends that it was successful in its application for the Demand to be set aside (although that occurred by consent) and contends that an order for costs should be made in its favour under s 459N of the Corporations Act . Dynamics contends that, when the Demand was served, there was no evidence of insolvency; a genuine dispute existed in relation to the debt and G and M was on notice of the dispute and of an offsetting claim; and the Demand was defective in that it was not served with an affidavit of debt as required by s 459E(3). 16Dynamics contends that it is entitled to an order for costs under Uniform Civil Procedure Rules 2005 (NSW) r 42.1 which provides that costs generally 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. However, that rule does not apply where there has been no adjudication on the merits: Lake Burrendong State Park Trust v Thompson [2011] NSWSC 1554 at [71]. 17Dynamics also claims its costs on the basis of s 459N of the Corporations Act . There is authority that an order for costs may be made under s 459N of the Corporations Act although the substantive issue between the parties has not been determined in an application before the Court: Hornet Aviation Pty Ltd v Ansett International Air Freight (Unreported, Federal Court of Australia, Northrop J, 6 December 1994). 18The principles applicable to the award of costs in respect of applications to set aside a statutory demand have been considered in several decisions: Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772. The Court's power to award costs is discretionary and, in an appropriate case, the Court will make such an order even where there has been no hearing on the merits, although it is less likely to do so where this would involve the trial of a hypothetical action between the parties and deprive them of the cost saving which they would have achieved by settlement. In particular, costs may be awarded where the Court is confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried: Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624-625. 19In Felkro Nominees Pty Ltd v Austissue Pty Ltd [1993] FCA 455; (1993) 11 ACSR 607, the applicant sought costs where a statutory demand was set aside by consent. Heerey J noted that: "... creditors have to realise that if they invoke winding up provisions by issuing a statutory demand they run the risk that, if a debtor establishes that the amount claimed is subject to a genuine dispute, the debtor will get an order for costs, as s 459N expressly contemplates." 20In Ranford Gold Mines Pty Ltd v P & H Earth Moving Pty Ltd [1994] NTSC 49, Kearney J referred to Felkro Nominees but observed that "the costs outcome depends on the circumstances of each case" and also noted the relevance of when the defendant had been notified of the applicant's case. 21In Ayrton Investments Pty Ltd v Andrlik [2000] ASIC 55 at [19] Higgins J observed that a person who issued such a demand face "a risk as to costs, not on an inevitability". His Honour there expressed the view, which seems to me to have substantial force, that: ".. the focus is on the reasonableness of the decision to issue [the statutory demand]. Whether on the material known to the creditor before the notice issued, it should have been apparent that there was a dispute which, viewed objectively, was 'genuine', that is, warranting further inquiry. If so, the creditor must expect to pay costs in any event once the notice is set aside. If it was reasonable to issue the notice, but thereafter it appears that there is a genuine dispute then, as soon as that appears, the creditor must withdraw or cease to oppose the setting aside of the notice. Otherwise, the creditor risks an adverse costs order." 22In BGC Contracting Pty Ltd v Whitsunday Crushers Pty Ltd [2004] WASC 209, a defendant contended (as G and M contends in this case) that it first became aware of the nature and quantum of the plaintiff's offsetting claims when the affidavit was filed in support of the application to set aside the demand, and that it therefore acted reasonably in serving the demand. Master Newnes did not accept that argument and ordered that the defendant should pay the costs of setting aside the demand. The basis of Newnes M's reasoning was that the statutory demand procedure "is not intended to be simply a debt recovery process" and that a creditor who invokes this procedure takes the risk that the debtor did not put it on notice of the nature and quantum of offsetting claims or the nature of any dispute between the service of the statutory demand and before the debtor went to the cost of putting on the application to set aside the demand and supporting affidavit. 23Newnes M's observation that a statutory demand is not to be used as a debt recovery process is plainly correct so far as disputed debts are concerned, but requires qualification where a debt which is apparently not disputed is also not paid. As Palmer J observed in Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 165 FLR 72 at [29], the statutory demand procedure "is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding-up of insolvent companies unable to pay their just debts": see also F Assaf, Statutory Demands: Law and Practice [1.8]. Second, Newnes M's comments were directed to a failure to communicate the basis for an offsetting claim after service of the statutory demand, where the defendant was already aware of complaints by the plaintiff about its performance and of a dispute as to whether the full amount of the invoices was due before the demand was issued, and the defendant also did not believe the plaintiff was insolvent when the demand was issued. 24I also note that, in Yoogalu Pty Ltd v Intentia Australia Pty Ltd [2006] NSWSC 278, Barrett J observed that there is no rule or principle which requires that a plaintiff seeking to set aside a statutory demand under s 459G have communicated the nature of any dispute as to the underlying debt to the defendant before the application to set aside the demand is made. However, that observation was directed to the question whether a genuine dispute could be established where it had not been communicated prior to the application brought under s 459G to set aside the demand rather than to the question of costs. 25In Re Chameleon Mining NL; Chameleon Mining NL v Atanaskovic Hartnell [2009] NSWSC 602 at [72], Austin J held that the defendant should pay the costs of the proceedings to set aside the demand, although the demand was issued in circumstances that it was not aware of any dispute having been previously raised as to the amount in issue, where it "adopted the unreasonable position that it would consent to the setting aside of the statutory demand only if each party paid their own costs" after being advised of that dispute. Austin J there observed that the question as to costs was to be determined not by reference to whether the defendant was justified in issuing the demand, but whether it ought to have been withdrawn after it was advised of the basis of the genuine dispute. The approach adopted by Austin J would support an order for costs in favour of Dynamics, on the basis that G and M should have withdrawn the demand after it was advised of the grounds on which Dynamics disputed the debt by service of Mr Tabbah's affidavit dated 29 August 2011. 26However, in my view, consistent with the approach adopted by Higgins J in Ayrton Investments , the reasonableness of a party serving a statutory demand must be determined by reference to what that party knew as to the nature of any dispute as to the debt; conversely, a debtor which fails to pay a debt which is apparently due and undisputed, and also fails to disclose the basis of any dispute, can scarcely complain when the statutory demand procedure is invoked by a creditor who is acting reasonably on the basis of the information which is then known to it. 27In the present case, Dynamics has not established that G and M was on notice of any dispute as to the debt or any offsetting claim about it, prior to the service of the Demand and I do not find that service of the Demand was unreasonable. I therefore do not consider that Dynamics has established that G and M should pay its costs prior to the service of the originating process to set aside the Demand and supporting affidavit of Mr Tabbah which was served on 29 August 2011. 28However, in my view, it should have been apparent to G and M and its advisers after they received Mr Tabbah's affidavit on 29 August 2011 that Dynamics could establish a genuine dispute as to the debt claimed in the Demand and an offsetting claim having regard to the matters contained in that affidavit. It is well established that the threshold for establishing such a dispute and such a claim is not a particularly demanding one. (I should note, for completeness, that Dynamics also contends that the Demand was served without a verifying affidavit under s 459E(3) of the Corporations Act , and that alone is likely to have been sufficient to support an order that the Demand be set aside. However, I do not consider that this matter supports a substantial claim for costs by Dynamics relating to the costs of advancing much wider defences to the Demand.) 29I do not consider that Dynamics can be criticised for not accepting the offer to withdraw the Demand made on 20 September 2011 on the basis there would be no order as to costs, both because that course would not have avoided the presumption of insolvency arising and because it would not have compensated Dynamics for the further costs which it had incurred in the period since service of the Demand. 30I consider that the proper order is that the Defendant pay the Plaintiff's costs of and incidental to the application to set aside the Demand incurred between 29 August 2011 (when the basis for the application to set aside the Demand was disclosed by Mr Tabbah's affidavit) and 7 November 2011 (when the Defendant made an unconditional offer to set aside the Demand). Quantum of the claim for costs 31G and M also opposes the claim for costs on the basis that the costs incurred by Dynamics are disproportionate, since it appears that Dynamics had incurred costs of $38,000 (close to half of the amount of the Demand) within three weeks after the commencement of the proceedings and incurred a further $47,382 in costs between G and M's offer to withdraw the Demand in September 2011 and February 2012. I do not consider that I should decline to order costs on that basis, although I have found above that costs should only be awarded for a more limited period than that claimed by Dynamics. 32I do not consider that a conclusion that costs are disproportionate can be reached merely because they are a significant proportion of the amount claimed in the Demand, since that proposition takes no account of the very significant consequences for the recipient of a statutory demand of the presumption of insolvency which will arise if the demand is not set aside and the debt is not paid. A party which receives a statutory demand is entitled to take that demand seriously and this may on occasion involve incurring costs which are apparently disproportionate to the amount claimed in an unmeritorious demand in order to set aside that demand. That risk is assumed by a creditor which serves a statutory demand for a small debt where that debt is either genuinely disputed or the subject of an offsetting claim. 33The costs which will ultimately be payable by G and M are such costs as are agreed between the parties or assessed, and an assessor will only allow such costs as are reasonably incurred by Dynamics in respect of the application to set aside the Demand. I would expect that Dynamics' solicitors will not seek to advance a claim for costs before an assessor which seeks to attribute costs which were properly incurred in respect of the wider dispute between the parties to the application to set aside the Demand. Equally, I would expect a costs assessor would be alert to any costs which are not properly attributed to the application to set aside the Demand in the assessment process. Orders and costs 34Accordingly, I order that the Defendant pay the Plaintiff's costs of and incidental to the application to set aside the Demand incurred between 29 August 2011 and 7 November 2011 as agreed or as assessed. 35Since each party has had a measure of success, I will need to hear the parties as to the question of costs of this application, if that question cannot be agreed between them. 36I direct the parties to send to my Associate and serve draft orders to give effect to this judgment by 4pm on Friday, 16 March 2012, if agreement can be reached between them as to the form of these orders, including as to the costs of this application. If no such agreement is reached, I direct each party to send to my Associate and serve their respective draft orders and any submissions by 4pm on that date.