Fitness First (Australia) Pty Ltd v Dubow

Judgment 1HER HONOUR : In this matter I handed down judgment on 3 June 2011 setting aside a statutory demand served on Fitness First Australia Pty Ltd by Ms Yolande Dubow by letter dated 10 December 2010. The demand was in the sum of $31,603.64 and was comprised of moneys the subject of, or related to, two costs assessment certificates issued in November 2010 in respect of a costs order made in favour of Ms Dubow in other proceedings in this Court in 2007. The application to set aside the statutory demand was made pursuant to s 459G of the Corporations Act 2001 (Cth) on various grounds, including the ground that there was a genuine dispute as to the existence of the claimed debt(s) on the basis of a Deed of Release that had been entered into by Ms Dubow in November 2005 in relation to numerous disputes then between the respective parties. 2I set aside the statutory demand and ordered costs against Ms Dubow. I did so on the basis that I considered it appropriate that costs follow the event in accordance with Part 42 of the Uniform Civil Procedure Rules 2005 (NSW). The solicitor appearing for Fitness First (Mr Orlizki) then made an application for the costs order to be on an indemnity basis, handing up written submissions and filing in court an affidavit sworn 30 May 2011. Ms Dubow, who is a solicitor not resident in Sydney, had appeared for herself on the hearing of the Fitness First application but was not in attendance in court when I handed down my reasons for judgment. Accordingly, it was appropriate for her to be given an opportunity to respond to the plaintiff's application for costs on the indemnity basis and I made directions for Ms Dubow to be so notified. 3Ms Dubow has since forwarded written submissions in relation to the indemnity costs application. Having considered both parties' submissions in chambers, I have concluded that the costs should be assessed on the indemnity basis for the reasons set out below. 4Fitness First bases its claim for indemnity costs on four propositions: first, that there was an obvious dispute as to the existence of the debt (and Ms Dubow's defence of the application was manifestly hopeless); second, that the lack of an accompanying affidavit by Ms Dubow at the time the statutory demand was served (and her apparent acknowledgment as to the likelihood that the debt would be disputed) enables an inference to be made that the demand was being used for a purpose not contemplated by the legislative provisions; third, in reliance on an offer said to be made in accordance with the Calderbank principles; and, fourth, that the use of the statutory demand procedure had been for the purpose of applying commercial pressure and using this Court as a "debt collecting court", not a "company court". 5Ms Dubow, in her submissions resisting such an order, contends that the balance of convenience and interests of justice are against the award of costs, having regard to the relative positions of the parties. She has indicated an intention to seek leave to appeal from the decision made on 3 June 2011 and has also indicated an intention to apply for payment of the costs order by way of instalments. (Any such applications will of course fall to be dealt with in the ordinary course and are not the subject of the present application.) Ms Dubow's primary position seems to be the contention (put forward to dispute the existence of a bona fide dispute in relation to the demand and to justify her actions generally) that "based on the legislative dictates ... the Costs Certificates are final and binding" and to assert her straitened financial circumstances compared to those of Fitness First (in circumstances where she maintains that the costs orders made in her favour in 2005 remain outstanding). 6I consider in turn the various bases on which Fitness First presses its claim. (i) Obvious bona fide dispute/manifestly hopeless defence 7As adverted to above, there were a number of grounds (to some extent overlapping) on which Fitness First sought to have the statutory demand set aside (first, that the demand was not verified by affidavit, which was a requirement pursuant to s 459E of the Act unless all of the debts claimed in the demand were judgment debts, or was defective for failing to state that the debts were judgment debts; second, there being a genuine dispute as to the existence of the claimed debt for the purposes of s 459H(1)(a) of the Act (and/or an offsetting claim pursuant to s 459H(1)(b) of the Act); and, third, that there was "some other reason" for the purposes of s 459J(1)(b) of the Act that the demand should be set aside - by reference to Ms Dubow's conduct in registering the costs certificates as judgments in breach of an order staying their execution and/or contrary to the Deed of Release). 8Fitness First submits that (even leaving aside the arguments based on the continuation of the stay on execution of the relevant costs order and the service of a statutory demand unaccompanied by a verifying affidavit and without asserting the existence of a judgment debt) Ms Dubow's defence of the application, on the basis that there could not be a bona fide dispute on Fitness First's part, was manifestly hopeless because of the entry by the parties into the Deed of Release in November 2005. 9Fitness First contends that the Deed of Release clearly identified the release of Ms Dubow's costs claim (noting that the Deed contained an obligation on Ms Dubow's part to write to the Costs Assessor in order to withdraw the claim and that she pay the costs of the assessment process). Ms Dubow argues to the contrary and, on the hearing of the main application before me, raised various matters in relation to the Deed and its construction. I have outlined those arguments in my earlier reasons for judgment and do not repeat them here. However, whether or not Ms Dubow's construction of the Deed, or her argument that until receipt of the executed counterpart deed it was open to her to pursue the costs assessments (and then to act upon them once they were issued), might ultimately be upheld, the obvious relevance of the Deed for the purposes of the application to set aside the statutory demand was that it was clearly arguable on the face of the Deed that it operated to release the claim on which the costs assessment certificates were based and to preclude reliance by Ms Dubow on those certificates. Such an argument made the setting aside of the statutory demand well nigh inevitable. 10Fitness First contends that it is inconceivable that a solicitor would not recognise the existence of a bona fide dispute in these circumstances (and would not recognise that to pursue a claim in reliance on the statutory demand in those circumstances would put Fitness First to wasteful expense on a futile matter). It seems to me that there is much force to that submission. 11It is clear (and Ms Dubow appeared, during the course of submissions, to concede that she was aware that this is the case) that there is a very low threshold to be met in order to satisfy the requirement of a bona fide dispute as to the existence of a debt for the purposes of s 459H(1)(a). 12As I noted in my earlier reasons, Barrett J in Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34 ACSR 301 made it clear (at [45]) that the threshold presented by the test to set aside a statutory demand does not require a rigorous and in-depth examination of the evidence relating to the plaintiff's claim, dispute or offsetting claim. Both McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; (1994) 12 ACLC 669 and Barrett J in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 made it clear that the task is not by any means a difficult or demanding one. A company will fail in its task only if the contentions upon which it seeks to rely in mounting the challenge are so devoid of substance that no further investigation is warranted. The court does not engage in any form of balancing exercise between the strengths of competing contention. Thus it is said that if there is any factor that on reasonable grounds indicates an arguable case it must find a genuine dispute exists even where the case available to be argued against the company seems stronger. 13In the light of the low threshold in this regard, it seems to me that a legal practitioner, looking objectively at the evidence relied upon by Fitness First for the assertion that there was a genuine dispute, would necessarily have come to the view that the application by Fitness First to set aside the statutory demand was bound to succeed and that it would be unreasonable to resist the application. 14In this regard, Fitness First relies upon what was said in Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1317 by Barrett J at [14]: In S.459G cases, the court must be careful not to seem to stifle, by indemnity costs orders, proper attempts by a defendant to put the plaintiff to proof of its claim of genuine dispute, offsetting claim, defect or other matter said to warrant setting aside of the statutory demand. At the same time, however, defendants must bow to the inevitable before trial when the convincing merits of the claim can clearly be seen. These matters are discussed in cases such as Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529, Austral Rail Pty Ltd v Hunter Premium Funding Pty Ltd [2001] NSWSC 654, CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd (2003) 47 ACSR 100, Professional Advantage Pty Ltd v Australian Broadcasting Corporation [2007] NSWSC 607 and Alliance Accounting & Business Consultants Pty Ltd v Australian Property Investment Development Pty Ltd [2007] NSWSC 775. 15In her written submissions on this costs application, Ms Dubow says that the interpretation of the Deed of Release is not without difficulty. The very fact that Ms Dubow concedes that there may be different interpretations placed on the Deed means that the opposing contentions of Fitness First in this regard could not reasonably have been dismissed as being without any basis - and hence supports the existence of a bona fide dispute as to whether the debt, or the underlying claim on which the costs assessment certificate was based, was released by the Deed (that being one of the bases on which the statutory demand was ultimately set aside). Ms Dubow's (albeit belated) acknowledgment of this seems to me to bring the case within the class of case being considered by Barrett J in Saferack . 16Fitness First maintains that Ms Dubow should have "bowed to the inevitable before trial" when faced with the merits of its claim. I agree. On this basis the discretion to award indemnity costs is clearly enlivened. (ii) Lack of accompanying affidavit 17As noted above, one of the grounds on which Fitness First argued that the statutory demand should be set aside was that it was not accompanied by a verifying affidavit. This gave rise to the question whether the debts claimed were judgment debts (so as not to require such an affidavit) and whether, to the extent that some were judgment debts, the demand was defective by failing to identify them as judgment debts. 18Ultimately, I held that the statutory demand should be set aside by reason of the lack of an accompanying verifying affidavit (in circumstances where one of the three components of the debt the subject of the demand was not a judgment debt at the time the demand was served). 19The lack of a verifying affidavit is relied upon in the context of the present costs application as it is said that, by choosing not to swear an affidavit accompanying the statutory demand, Ms Dubow has avoided the requirement to swear an affidavit in accordance with Form 7 of Schedule 1 to the Supreme Court (Corporations) Rules 1999 (NSW) (to the effect that is there "is no genuine dispute about the existence or amount of the debt"). It is submitted that the final paragraph of Ms Dubow's covering letter with which the statutory demand was served (in which Ms Dubow writes "I look forward to the receipt of your cheque in the short term, however anticipate to hear from Mr Kent for the retaining of his legal services for another five years and an escalation of legal expenses") demonstrates that Ms Dubow knew that the claim would be vigorously opposed and would trigger substantial litigation on Fitness First's part. 20Fitness First points to the adoption by Barrett J in Saferack (at [9]) of the statement that: The legislation allows a creditor to adopt the statutory demand procedure in relation to a debt only if that debt is of a particular kind. If a creditor fails in the duty to provide sworn confirmation regarding qualities essential to the character of the debt as one capable of being the subject of a statutory demand, that creditor is seen to be attempting to use the procedure otherwise than in the way the legislature intends it to be used. The recipient of the demand is entitled to confirmation on affidavit that the creditor or, in the case of a corporate creditor, the person authorised by it has turned the person's mind to essential characteristics of the debt and has found them to be such that the debt is of a kind that ought to be paid upon pain of a presumption of insolvency. If the recipient is not given that assurance, the creditor can be seen to be using the demand for a purpose and in a way not contemplated by the provisions under which a creditor may obtain the benefit of such a presumption. Section 459J(1)(b), as an instrument for avoiding subversion of the statutory scheme then comes into play . (my emphasis) 21In Saferack, his Honour considered that, because of the pendency of other proceedings in relation to the debt claimed, it might be inferred that the absence of the required statements from the s 459E(3) affidavit in that case was deliberate and that the deponent simply could not make those statements without departing from the truth. 22Fitness First asks the Court to infer (bearing in mind that Ms Dubow is a solicitor) that the absence of attestation as to the lack of a genuine dispute as to the existence of a debt in the present case was deliberate and would warrant an indemnity costs order, because the statutory demand procedure was being used otherwise than in the way the legislature intended it to be used. 23Having had the opportunity to read the affidavits subsequently sworn by Ms Dubow and having heard her oral submissions on the application before me, I would not infer that the lack of a verifying affidavit to accompany the statutory demand was due to a recognition on her part that she could not truthfully assert the matters that would be required for such an affidavit. My impression is that Ms Dubow has a firm belief in the merits of her position and the need to swear an affidavit attesting to those beliefs would not have deterred her. While it seems to me likely that Ms Dubow made a deliberate decision not to swear an accompanying affidavit, I would be inclined to think this was because she was of the view that she did not need to do so under the relevant rules as these were judgment debts (without turning her mind to the different status of the third amount claimed by way of a filing fee or to the potential need to identify the debts as judgment debts on the face of the demand). 24Therefore, this factor would not have led me to order costs on an indemnity basis (though in some cases that may be appropriate). (iii) Calderbank offer 25The third basis on which the claim for indemnity costs was made is in reliance on a letter dated 31 January 2011 sent to Ms Dubow (expressly on a without prejudice except as to costs basis), offering to compromise Fitness First's claim on more favourable terms than have now been achieved in the court proceedings. 26The letter was sent prior to the listing of the application for hearing on 8 February 2011 (although the hearing did not proceed on that day) and offered to compromise the proceedings on the basis that the statutory demand would be set aside and that Ms Dubow pay 80% of the costs of the plaintiff's proceedings as agreed or assessed. The letter stated, relevantly: In the event that this offer is rejected this letter will be tendered in support of an application for the costs of the proceedings on an indemnity basis 27That offer was not accepted. 28Ms Dubow contends that this letter does not amount to a Calderbank letter (apparently by reference to the fact that the same letter of offer for costs at 80% to be paid to the plaintiff was "in triplicate" and attached what was said to be an irrelevant advice from the Law Society of New South Wales "regarding client to client contact") on the stated basis that "this letter does not amount to a Calderbank letter in proceedings where a compromise was possible is evident" referring to "Multicon etal". 29Ms Dubow relies on what was said by Rolfe J in Multicon Engineering Pty Limited v Federal Airports Corporation ((1996) 138 ALR 425), Ms Dubow summarising the relevant propositions as being that: (i) Before indemnity costs will be awarded for the period prior to the making of an offer of settlement the offeror must establish that the offeree has been guilty of some wrong-doing or relevant misconduct in the institution or prosecution of the proceedings. (ii) After an offer of settlement has been made the prima face presumption should be that an order for costs on an indemnity basis will be made unless the party rejecting the offer can establish that it was reasonable for it not to accept the offer: each case depends on the exercise of the judicial discretion having regard to its particular circumstances. (iii) In the face of a rejected offer, which is not bettered, the Court should not approach the award of indemnity costs on the basis that the case was one which had no prospect of success, or the rejection of the offer was "plainly unreasonable". Prima facie the unreasonableness is the failure to accept an offer of settlement, which is not bettered by judgment or order. 30Reference was also made by Ms Dubow to what Rothman J said in Laws v GWS Machinery Pty Ltd (No 4) [2008] NSWSC 453: The principles in relation to indemnity costs adnumbrated in the judgment of the Court of Appeal in Dunstan v Rickwood (No. 2) [2007] NSWCA 266, where at [43] and following, McColl JA, with whom Beazley and Ipp JJA agreed, said: [43] The general rule is that costs payable to a person under an order of the court or the rules are to be assessed on the 'ordinary basis': UCPR 42.2. [44] A court should only depart from the general rule and award indemnity costs where the conduct of the party against whom the order is sought is 'plainly unreasonable': Sydney City Council v Geftlick and Ors [2006] NSWCA 280 at [90] per Tobias JA, Mason P and Hodgson JA agreeing. Indemnity costs orders should be reserved for the most unreasonable actions by unsuccessful plaintiffs: Leichhardt Municipal Council v Green [2004] NSWCA 341 per Santow JA (at [57]). ... There are two well-recognised routes by which a litigant may establish a prima facie entitlement to indemnity costs. The first is by equalling or bettering an offer of compromise made in accordance with Rules of Court. The second is by writing a letter in the form approved by Cairns LJ in Calderbank v Calderbank [1976] Fam 93 (at 106) as sufficient to attract costs awarded on the same basis as if formal offer of compromise procedures had been invoked. Such a letter is conventionally headed 'without prejudice save as to costs' and the recipient . . . ." 31It is clear that the position in relation to offers expressed to be without prejudice except as to costs (and relied upon as being in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586) is that the party seeking to rely on the offer must establish both that the offer represents a genuine compromise of the dispute and that it was unreasonable for the offeree to reject it (see Commonwealth of Australia v Gretton [2008] NSWCA 117, per Beazley JA (from [38]); Jones v Bradley (No 2) [2003] NSWCA 258 at [8]). 32In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA said at [14]: ... the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants . (my emphasis) 33Her Honour in Gretton noted that the making of a Calderbank offer does not automatically result in a favourable costs order, notwithstanding that the judgment is more favourable to the party making the offer than the terms of the offer, the question being (as Giles JA stated in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]) "'whether the offeree's failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs ". 34In Leichhardt Municipal Council the Court said at [21]: There is little appreciable difference between saying that an offer should not in the court's discretion attract costs sanctions in the circumstances and saying that an offer is not a genuine offer of compromise in the circumstances. Both depend upon a value judgment of the offer and the conduct of the parties in the circumstances of the claim. 35It is clear that the onus is on the party making a Calderbank offer (in this case Fitness First) to satisfy the court that it should exercise the costs discretion in its favour ( Evans Shire Council v Richardson (No 2) [2006] NSWCA 61). 36In Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790, Bergin J (as her Honour then was) confirmed the relevant principles in relation to Calderbank offers by reference to Leichhardt Municipal Council stating those principles as follows (from [9]): the cost consequences attendant under the general law upon an offer of compromise made in a Calderbank letter are in the Court's discretion, to be exercised having regard to all of the relevant circumstances of the case [19];