Gillion Pty Limited (Trustee) v Wet Fix Holdings Pty Limited

Federal Court of Australia|2016-12-09|Before: Gleeson J

The application to vary order 2 made on 29 November 2016 be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

GLEESON J: 1 On 29 November 2016, I granted leave to the defendant ("WFH"), pursuant to s 459S(1)(b) of the Corporations Act 2001 (Cth) ("Act"), to oppose the winding up application filed by the plaintiff ("Gillion") on the ground that WFH disputes the debt in the statutory demand attached to the originating process. I ordered that the costs of the application for leave be costs in the cause: Gillion Pty Limited (Trustee) v Wet Fix Holdings Pty Limited [2016] FCA 1424 ("the first judgment"). 2 Also on 29 November 2016, I granted leave to Gillion to apply to vary the costs order made on that day. 3 Gillion now seeks an order vacating the 29 November 2016 costs order and, instead, an order that WFH pay Gillion's costs of the leave application or, alternatively, an order that the costs of the leave application be Gillion's costs in the cause. In the further alternative, Gillion seeks an order that: [C]osts of the application be costs in the cause, but that in the event [WFH] is successful and obtains an order for costs in its favour, it shall not be entitled to recover: i) any costs attributable to the work done by BDO Chartered Accountants in reconstructing the financial records of [WFH] and its subsidiaries, Wet Fix Pty Ltd (Wet Fix) and Wet Fix Equipment Pty Ltd (Equipment); ii) 50% of the costs of the preparation of the expert report of Helen Newman dated 12 July 2016 as to the solvency of [WFH] [CB 645] (BDO Report), and of the costs of the preparation of the affidavit of Darren Starling dated 18 July 2016 [CB 838B] (Second Starling Affidavit); and iii) 50% of the costs attributable to the cross-examination of Mr Starling, and of Ms Newman.

Legal principles and case law 4 The general rule that a successful party should have its costs is directed to a consideration of the litigation as a whole and does not necessarily apply to every interlocutory step in a proceeding: cf. O'Keeffe Nominees Pty Ltd v BP Australia Ltd (No 2) (1995) 55 FCR 591 at 598. In His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand & Anor v The Macedonian Orthodox Community Church St Petka Incorporated & Anor (No 2) [2007] NSWCA 142 at [21], the New South Wales Court of Appeal explained the rationale for making an order that costs be costs in the cause, in the context of granting an interlocutory injunction, as follows: The rationale for making an order that costs be costs in the cause is that, at the stage of granting an interlocutory injunction, the court is not in a position to adjudicate on the ultimate outcome of the proceedings. Rather, provided there is a reasonable case to be tried, the Court's focus in deciding whether to grant the application for interlocutory relief is on other considerations and, in particular, on determining whether, on the balance of convenience, an injunction ought to be granted. Accordingly, if a plaintiff who applies for an interlocutory injunction is not ultimately successful in the proceedings, that plaintiff should not receive the costs of the application for an injunction which, when the matter is considered in overview cannot be sustained. However, as already explained, each case must depend upon its own facts. 5 The grant of leave pursuant to s 459S has been described as a "statutory indulgence": Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC 1,025 ("Master Paving") at 1,033; Bank of Western Australia Ltd v Scotia Downs Pty Ltd [2011] FCA 1302 ("Bank of Western Australia"). 6 Where a party is seeking an indulgence, that party usually pays the costs of the application even if granted: Nardell Coal Corporation (in liq) v Hunter Valley Coal Processing [2003] NSWSC 642; (2003) 178 FLR 400 at [144] and [145]; Stanley v Layne Christensen Company [2006] WASCA 56 ("Stanley") at [52]; The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd (No 2) [2007] NSWSC 797 ("The Presbyterian Church") at [6]. 7 In Stanley at [52], Wheeler JA said (Steytler P and Pullin JA agreeing): The general rule is, and should remain, that where a party is seeking the indulgence of the Court, that party will be required to pay the costs of the application, including costs thrown away, and will not normally receive the costs of the application. However, it is also a normal rule that the Court will have regard to the extent to which it might be said that costs were unnecessarily incurred by a party, and will have regard to the reasonableness of the party's conduct in determining how costs should be awarded. In particular, where a contested application, even for an indulgence, is unnecessary because a party acting reasonably would have consented to appropriate orders, the party who has caused the costs to be unnecessarily incurred will not obtain its costs of such a proceeding merely because the application is for some indulgence. 8 In The Presbyterian Church case, the plaintiff was ordered to pay the liquidator's costs where the plaintiff obtained the orders it sought but, according to Young J, "[t]he basal reason why this case came to court at all was because the plaintiff omitted to protect its interest in the Church Lot by lodging a caveat". 9 There has been a variety of costs orders made in connection with the grant of leave to proceed under s 459S. 10 In Master Paving and Bank of Western Australia, leave was granted without any order as to costs. 11 In National Hire Trading v Dynabuilt [2006] NSWSC 499 at [18], Austin J granted leave under s 459S and reserved the question of costs, where a statutory demand had not come to the attention of the defendant's director in circumstances which his Honour described as involving "unsatisfactory attention to the proper administration of the defendant company". Costs were also reserved after leave was granted under s 459S in In the matter of Pioneer Cryogenics Pty Ltd [2015] NSWSC 1202; (2015) 108 ACSR 461. 12 In Radiancy (Sales) Pty Ltd v Bimat Pty Limited [2007] NSWSC 962; (2007) 25 ACLC 1,216, White J granted leave pursuant to s 459S and dismissed the winding up application, ordering that the plaintiff pay the defendant's costs of the proceedings. 13 In Topcide Pty Ltd v Deputy Dog Pty Ltd [2008] NSWSC 1323, Barrett J granted leave under s 459S and ordered the plaintiff to pay the defendant's costs of the interlocutory process. 14 In Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Limited [2008] FCA 1777 ("Grant Thornton"), Perram J granted leave under s 459S and ordered the defendant to pay the plaintiff's costs of the application. On the question of costs, his Honour referred to debate about test of materiality and a concession by the defendant that the existence or otherwise of the debt was pivotal to its solvency. His Honour said (at [27]) that, had this concession been made earlier, the plaintiff would have consented to a grant of leave and that the hearing had therefore been "an escapade which has taken place as a result of the defendant not proffering the concession at an earlier time". 15 In Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) [2011] NSWSC 113, White J granted leave under s 459S and ordered that the costs of the interlocutory process be the defendant's costs in the proceedings. 16 In SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421, the court granted leave pursuant to s 459S, dismissed the winding up application and ordered the plaintiff to pay the defendant's costs, including the costs of the s 459S application. 17 On behalf of Gillion, Mr Aspinall noted that Gillion, as a creditor who had duly served a statutory demand which remains unsatisfied for the relevant period, had a right to seek to wind up WFH: cf State Bank v Tela (No 2) [2002] NSWSC 20; (2002) 188 ALR 702 at [11]. Thus, even though WFH may seek to argue that the winding up proceeding is an abuse of process on any final winding up application, it could not have been an abuse at the commencement of the proceeding or at any time immediately prior to the grant of leave under s 459S: cf Grant Thornton at [13].

Gillion's submissions 18 On behalf of Gillion, Mr Aspinall identified the following matters demonstrating that Gillion had not acted unreasonably in opposing the grant of leave: (1) the statutory demand was properly served on the registered office of WFH and WFH did not comply with it or seek to have it set aside; (2) Gillion had reason to believe that Mr Starling was aware of the statutory demand because Mrs Gill was copied into the email by which Mr Chapman sent it to Mr Starling; (3) the accounts of WFH did not disclose stamp duty liabilities arising from the purchase of the Wet Fix business and the purchase of the shares in Wet Fix; (4) the accounts of WFH did not disclose that one its subsidiaries was in default, and WFH was the guarantor of that company's liabilities; (5) most importantly, Mr Starling said that the debt did not make a difference to the solvency of WFH. In this regard, Mr Aspinall noted that WFH could have chosen not to apply for leave under s 459S; (6) there is a divergence in the authorities about what amounts to a sufficient explanation for a failure to make an application under s 459G. In particular, in what circumstances is it relevant that the statutory demand is not received by the director if it was properly served at the company's registered office? If it does make it to the director what attention do they have to pay to it? Is intention required?

WFH's submissions 19 On behalf of WFH, Mr Marshall SC did not suggest that Gillion had acted unreasonably in opposing the grant of leave. 20 Mr Marshall SC put the following arguments: (1) the application is analogous to an application for an extension of time where the party seeking leave was not necessarily at fault but the opposition to the application is not unreasonable; (2) on the facts found, WFH was not at fault in failing to bring a s 459G application; (3) the Court found (at [60] of the first judgment) that there is a strong case that the statutory demand debt is the subject of a genuine dispute; (4) Gillion persisted in a weak argument that the statutory demand itself amounted to a notice of termination under the relevant loan agreement; (5) Gillion eventually conceded that WFH may be able to establish solvency if the statutory demand debt is not due.

Consideration 21 The case law to date does not support Gillion's argument that it should have its costs of the leave application, although it does not appear that attention has been given to the significance of the fact that the application is in the nature of a statutory indulgence. 22 In my view, the costs of the leave application should be treated as part of the costs of the whole litigation. The application for leave arose because Gillion has applied to wind up WFH in insolvency based upon WFH's non-compliance with the statutory demand. That is, the application for leave has been necessitated by Gillion's winding up application. 23 WFH has been granted leave to dispute the debt that provides the foundation for the statutory demand. 24 Although WFH was successful in its application for leave pursuant to s 459S, it should not have a costs order in its favour because it has sought an indulgence. On the other hand, it should not be required to pay Gillion's costs because the application was made in the course of defending winding up proceedings where the reasonableness and propriety of commencing the substantive proceeding, based upon non-compliance with the statutory demand, are in dispute and have not yet been established. 25 While I accept Gillion had reason to believe that Mr Starling was aware of the statutory demand, there is no evidence that any person on behalf of Gillion attempted to discuss the statutory demand with Mr Starling and there was no evidence of any attempt to foreshadow the winding up application once the time for compliance with the statutory demand had expired. There was also no direct communication with Mr Starling about whether or not he accepted that the debt in the statutory demand had become due and payable. Without communications of this kind, it was open to accept Mr Starling's sworn evidence as to his state of knowledge and that matter was relevant to Gillion's decision to oppose the grant of leave.

Proposed alternative costs 26 Gillion contended that the court should make an order to ensure that it is not required to pay costs incurred by WFH in reconstructing financial records that WFH was required to keep by law, or the costs associated with WFH's preparation of evidence concerning that reconstruction. 27 Gillion referred to WFH's obligation to keep financial records under s 286 of the Act and submitted that WFH should have been in a position to produce audited accounts because, in May 2016, Mr Chapman made a shareholder direction pursuant to s 293 of the Act requiring the production of such accounts. 28 WFH does not suggest that Gillion should be ordered to pay WFH's costs of complying with its statutory obligations under the Corporations Act. In those circumstances, there is no apparent justification to vary the existing order in the manner proposed. 29 Gillion also made submissions which criticised the accounting evidence tendered by the WFH in several respects, but did not suggest that it had incurred any significant additional cost by reason of that evidence. 30 I am not satisfied that the circumstances warrant a variation of the costs order previously made. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson

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