Future Invented Pty Ltd v Gebaut Environment Pty Ltd, in the matter of Gebaut Environment Pty Ltd

Background 3 Before dealing with substantive issue in dispute, it is helpful to briefly set out the procedural history of this matter. These proceedings came before the Court on four occasions: 31 March, 28 April, 9 June and 16 June 2021. 4 On 16 June 2021, the Registrar dismissed the winding up proceedings on the plaintiff's application, including the interlocutory process by which the defendant sought leave pursuant to s 459S of the Corporations Act 2001 (Cth) to rely on the ground that it could have, but did not, apply to set aside the statutory demand. 5 The plaintiff applied for an order that the defendant pay the plaintiff's costs, alternatively that the defendant pay the plaintiff's costs at least up until 9 June 2021. The plaintiff enjoyed partial success before the Registrar. In an ex tempore judgment, the Registrar ordered that the defendant pay the plaintiff's costs up to and including 28 April 2021 in the fixed sum of $8,000. The significance of the dates of 28 April 2021 and 9 June 2021 is apparent from the following. 6 The relevant statutory demand was dated 23 June 2020. It was served by registered post on 23 June 2020 on the then registered address of the defendant. The plaintiff relied on the defendant's failure to comply with the statutory demand to institute the present proceedings on 2 February 2021. 7 On 31 March 2021, the defendant's solicitor, Mr Bilic, appeared. On that occasion Mr Bilic sought an adjournment on the basis that Mr Caldow, the sole director of the defendant, was medically unfit and was not speaking to his brother-in-law, the defendant's accountant who, at the relevant time, maintained the registered office of the defendant. The Registrar granted the defendant leave to file an application for an adjournment by 21 April 2021 and reserved costs. The proceedings were adjourned until 28 April 2021. The defendant did not file an application for an adjournment. Instead on 27 April 2021, a notice of appearance was filed and served. 8 At the next listing, on 28 April 2021, the defendant sought, and obtained over the plaintiff's objection, an adjournment for the purpose of filing an application under s 459S of the Corporations Act, such application to be filed by 2 June 2021. On this occasion the defendant relied on a further affidavit of Mr Bilic filed on 28 April 2021. Mr Bilic deposed that: I am instructed by Gebaut that it never received the Demand. As a matter of candour, and in urgent circumstances in which I have prepared this affidavit, I confirm my investigations into that matter are ongoing. However, if the Demand was not properly served, then my understanding is that Gebaut could not have committed the act of insolvency upon which the plaintiff's winding up application is based. 9 Mr Bilic annexed to his affidavit a psychologist's report in which it was said that Mr Caldow's psychological test scores were indicative of acute symptoms of stress. 10 On 2 June 2021, the defendant filed and served the s 459S application and an accompanying affidavit of Mr Caldow. This was the first direct evidence from Mr Caldow. He deposed that the defendant did not become aware of the statutory demand until January 2021 due to the breakdown in the relationship with his brother-in-law. Mr Caldow also gave evidence of temporary technical issues experienced in the period during which the statutory demand was sent to him by email and that those issues persisted until just before the service of the winding up application. 11 On 9 June 2021, approximately an hour before the defendant's s 459S application was to be heard, the defendant served a further affidavit of Mr Caldow comprising some 134 pages which provided some direct evidence of the circumstances relied on to contend that the statutory demand did not come to the defendant's attention, as well as evidence of solvency and the dispute as to the underlying debt. As a result, the hearing of the proceedings was adjourned to 16 June 2021. 12 The plaintiff's solicitor deposes in his affidavit filed in opposition to the present application that upon review of the further Caldow affidavit, he concluded, inter alia, that there was evidence in support of the defendant's assertion that it had not received the statutory demand. Further, that the defendant had failed to provide such evidence until 9 June 2021, shortly before the matter was due to be heard. The plaintiff's assessment of the further Caldow affidavit informed its approach in moving the Registrar to dismiss the proceedings and award costs in the plaintiff's favour. 13 On 15 June 2021, the defendant offered to resolve the proceedings on the basis that the plaintiff's application be dismissed and each party bear its own costs. On the same day the plaintiff counter-offered with an offer to dismiss the proceedings on the condition that the defendant paid the plaintiff's costs in the short form totalling $7,230 ($4,230 and $3,000 disbursements including counsel's fees). The defendant rejected this offer. 14 In the present application, the plaintiff has filed evidence that its actual costs in the proceedings are $12,188.95, a sum which reflects a discount in the invoices rendered by the plaintiff's solicitors and counsel, such discounts having been made in response to the fixed costs award of $8,000. The plaintiff's costs before the discounts were in the total sum of $16,908.95.

The Decision of the Registrar 15 As noted above, on 16 June 2021, when the proceedings came before the Registrar for the final time, the plaintiff moved for a dismissal with costs and the Registrar made an order dismissing the proceedings. In the context of the present application I note that the plaintiff did not seek to discontinue the proceedings with the leave of the Court under Rule 26.12(5) of the Federal Court Rules 2011 (Cth). 16 The Registrar noted that where proceedings are terminated without a hearing on the merits it is relevant to consider the conduct of the parties to the litigation. In this case the Registrar regarded the evidence before the Court, taken at face value, established that the statutory demand did not come to the attention of the defendant but that was not through any fault of the plaintiff. The Registrar accepted that if the statutory demand had come to the defendant's attention, an application to set aside the statutory demand could have been made which would likely have limited the costs incurred. I infer that based on Mr Caldow's affidavits which, inter alia, addressed the dispute as to the underlying debt, that the Registrar was satisfied that it was likely that had a timely application to set aside the statutory demand been brought it was likely to have been successful. The Registrar was satisfied that the plaintiff was on notice of the defendant's position in relation to its lack of awareness of the statutory demand from 28 April 2021 (the date on which Mr Bilic's affidavit was served). On that basis the Registrar ordered that the originating process and the interlocutory process be dismissed and that the defendant pay the plaintiff's costs in the fixed sum of $8,000. That fixed sum was rounded up to cover $4,230 (the short form amount allowed for a dismissal of an originating process), counsel's fees in the amount of $2,000 for the appearances on 31 March and 28 April 2021 and an allowance for filing fees and small associated costs.

Nature of Review 17 Section 35A of the FCA Act relevantly provides: (1) Subject to subsection (2), the following powers of the Court may, if the Court or a Judge so directs, be exercised by a Registrar: … (f) the power to make an order as to costs; … (2) A Registrar shall not exercise the powers referred to in paragraph (1)(f) except in relation to costs of or in connection with an application heard by a Registrar. … (5) A party to proceedings in which a Registrar has exercised any of the powers of the Court under subsection (1) may, within the time prescribed by the Rules of Court, or within any further time allowed in accordance with the Rules of Court, apply to the Court to review that exercise of power. (6) The Court may, on application under subsection (5) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised. … 18 A review of a registrar's decision under s 35A(6) extends to reviewing both questions of fact and law and must be by way of a hearing de novo, that is, a hearing at which the parties may adduce fresh evidence as of right: Mazukov v University of Tasmania [2004] FCAFC 159 at [24] (Kiefel, Weinberg and Stone JJ). 19 The plaintiff opposed the defendant's application and submitted that there was no demonstrable error or miscarriage in the exercise of discretion by the Registrar. As this is a review in the nature of a hearing de novo, I am not constrained by finding error. Rather, I am required to review the exercise of the discretion to award costs based on the evidence before me.

Grounds of Application 20 The defendant advances six grounds in support of its review application, which may be summarised as follows: (1) At the hearing before the Registrar there was "undisputed evidence" that there was no debt that supported the statutory demand and winding up application, and accordingly the defendant should be awarded its costs on an indemnity basis or the plaintiff's "abuse of process" should be taken into account in the exercise of the Court's discretion to award costs; (2) there were no sufficient factors to displace the default position under rule 26.12(7) that upon the discontinuance of the winding up proceeding, the plaintiff should be held liable to pay the costs of the defendant; (3) in the alternative, if the winding up proceeding was dismissed instead of discontinued, there were no sufficient factors to displace the default position that costs should follow the event; (4) in the alternative to grounds 1 to 3, that the plaintiff filed the winding up application without knowledge that the defendant had not received the statutory demand was not sufficient to justify an order that the defendant should pay part of the plaintiff's costs rather than that the parties should bear their own costs; (5) the plaintiff's submission that it was not aware that the defendant's director had not received the statutory demand until 9 June 2021 was misleading because the defendant's solicitor had notified the plaintiff's solicitor on 23 March 2021 that the defendant's director had not had any communication with his accountants (who it was evident from a company search maintained the registered office) during the relevant period when the statutory demand was served; and (6) the defendant was not given sufficient opportunity to make submissions in relation to the Registrar's finding that the plaintiff was not aware that the defendant had not received the statutory demand on or before 28 April 2021. 21 The defendant relies on the rule 26.12 in grounds 2 and 3 above. Rule 26.12 relevantly provides: (1) A party claiming relief may discontinue a proceeding in whole or in part by filing a notice of discontinuance, in accordance with Form 48. (2) The party may file the notice of discontinuance: (a) without the leave of the Court or the other party's consent: (i) at any time before the return date fixed in the originating application; or (ii) if the proceeding is continuing on pleadings - at any time before the pleadings have closed; or (b) with the opposing party's consent - before judgment has been entered in the proceeding; or (c) with the leave of the Court - at any time. … (5) An application for a winding up order under section 459P or 461(1)(a) of the Corporations Act 2001 may be discontinued only with the leave of the Court. … (7) Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued.

Consideration 22 For the purpose of this review, the defendant relies on the affidavit of Mr Bilic, solicitor for the defendant, sworn 30 June 2021 and the plaintiff relies on the affidavit of Mr Williamson sworn on 30 July 2021. 23 The Court has an unfettered discretion in relation to an order for costs. 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: Immigration and Ethnic Affairs, Re Minister for; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624 (McHugh J). The court may order costs against a successful party "for some reason connected with the case": Ruddock v Vadarlis (No 2) [2001] FCA 1865; (2001) 115 FCR 229 at 234 [9] (Black CJ and French J). One such circumstance is where the plaintiff has reasonably commenced a winding up application based on a failure to comply with a demand and the application is ultimately withdrawn in the light of new circumstances brought about by the defendant: see e.g. Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation [2012] FCAFC 17. 24 I am satisfied that in this case it is appropriate to make an order for costs in favour of the plaintiff even though there has been no hearing on the merits and the proceedings were dismissed at the instigation of the plaintiff. In this regard I note that the plaintiff did not seek leave to discontinue the proceedings under rule 26.12(5). Instead, the plaintiff moved to have the proceedings dismissed and applied for costs, relying on the procedural history as justifying a costs order in its favour. Dismissal is the act of the court whereas discontinuance is the act of the moving party. The defendant's reliance in the present application on rule 26.12(5) and (7) is misplaced. 25 I am satisfied that the plaintiff acted reasonably in commencing the winding up application based on the defendant's failure to comply with the statutory demand. The plaintiff took reasonable steps to serve the statutory demand in a way which should have ensured that it came to the attention of the defendant. That the demand did not come to the defendant's notice is not a matter for which the plaintiff bears any responsibility. The various contributing causes to which the defendant points including the breakdown of the relationship between Mr Caldow and his brother-in-law and the alleged difficulties with receipt of email, were not the fault of the plaintiff. They were matters which were within the control of the defendant and which the defendant should have addressed in a timely way. The defendant's failure to do so exposed it to the risk that materialised in this matter. I accept the plaintiff's submission that the plaintiff ought not to have to pay the costs occasioned by the defendant persisting to use accountants with whom it had a dysfunctional relationship. I reject the defendant's submission that the winding up proceedings constituted an abuse of process. When the defendant did not respond to the statutory demand, the plaintiff was entitled to commence the winding up proceedings relying on the presumption of insolvency that arises pursuant to ss 459C(2)(a) and 459E of the Corporations Act: Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Recs and Mgrs Apptd) [2011] HCA 18; (2011) 244 CLR 1 at 13 [25] (Gummow, Heydon, Crennan, Kiefel and Bell JJ). The nature of the underlying debt suggests that if an application to set aside the statutory demand was made, it would likely have succeeded. However, that does not render the plaintiff's conduct in commencing proceedings based upon the defendant's inaction in response to the demand an abuse of process. 26 Next, I note that the proceedings were ultimately dismissed on 16 June 2021 on the plaintiff's application, after the plaintiff had reviewed the Caldow affidavit of 9 June 2021. On the 15 June 2021, the parties made settlement offers, neither of which was accepted. In the result, the plaintiff marginally bettered the offer that it had made. 27 In the proceedings before the Registrar the plaintiff contended that it should have its costs up until at least 9 June 2021. One of the bases on which the defendant opposed a costs order was that it contended that the plaintiff was on notice of the breakdown of the relationship between Mr Caldow and the accountant from about 23 March 2021, the date of a letter sent from the defendant's solicitors to the plaintiff's solicitors, in which Mr Bilic hypothesised that the defendant's accountant had not drawn details pertaining to the financial position of the defendant to Mr Caldow's attention. However, in his affidavit of 27 April 2021, while Mr Bilic said that he was expressly instructed that the defendant had not received the statutory demand he also said, as a matter of candour, that the affidavit had been prepared in urgent circumstances and that his investigation into receipt of the demand was ongoing. The first direct evidence from Mr Caldow on the point was in his affidavit of 2 June 2021, which was supplemented by his affidavit of 9 June 2021. On 9 June 2021, the matter could not proceed due to the late service of the further Caldow affidavit. The defendant's counsel acknowledged that the defendant "may have some responsibility for any costs thrown away" on 9 June 2021. The Registrar ordered that the costs of 9 June 2021 be the plaintiff's costs in the cause. 28 Based on my review of the transcripts of the listings before the Registrar, the affidavits of Mr Bilac and Mr Caldow and the solicitors' affidavits in the present application, I am satisfied that the appropriate order is for the defendant to pay the plaintiff's costs of the proceedings. 29 Finally, I turn to the question of whether I should make a lump sum costs order. The procedure for determining the quantum of costs for a party successful at a final hearing should not be delayed and should be as inexpensive and efficient as possible. The Court's preference is to avoid, where possible, the making of costs orders that lead to potentially expensive and lengthy taxation of costs hearings through the use, inter alia, of lump-sum costs orders: GPN-Costs, 3.1 - 3.3. 30 In this case, I am satisfied that a lump sum costs order is appropriate. Applying the same methodology as the Registrar, which appears to me to be appropriate, I will increase the amount payable by the defendant to the plaintiff from $8,000 to $12,000 to allow for an additional $2,000 for the appearance of counsel on the 2 and 9 June 2021 and $2,000 for the plaintiff's costs incurred on this review application. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.