The only issue remaining for determination in these two proceedings is the costs order that should be made.
In each case, the plaintiff is Entire Building Solutions Pty Ltd and the defendant is EDT Global Pty Ltd.
The underlying dispute between the parties arises out of services agreements between them dated 3 July 2013 and 16 September 2014. It should also be mentioned that the plaintiff entered into a services agreement with a company related to the defendant, EDT Networks Pty Ltd, on 1 March 2014.
The plaintiff engages in the business of undertaking telecommunications infrastructure projects throughout Australia. The defendant is a recruitment, labour hire and consultancy business that provides services to the information technology, sales and marketing, telecommunications, finance, construction and engineering industries.
Under one or more of the contracts, the defendant, and its related company, provided the services of telecommunication riggers and related workers to the plaintiff at various times.
The defendant served two statutory demands dated 23 March 2015 and 8 May 2015 on the plaintiff under s 459E of the Corporations Act 2001 (Cth). The amount claimed in the first statutory demand was $191,519.94; and the amount claimed in the second was $60,462.75.
The plaintiff commenced proceedings in this court on 13 April 2015 for an order under s 459G of the Corporations Act to set aside the first statutory demand. It commenced similar proceedings on 28 May 2015 for an order setting aside the second statutory demand.
On 6 August 2015, the defendant voluntarily withdrew both statutory demands.
Also on 6 August 2015, the plaintiff's solicitor sent a letter to the defendant's solicitor in which the plaintiff offered to settle each application on the basis that each statutory demand be set aside, and the defendant pay the plaintiff's costs on the usual basis, provided that the enforcement of the costs order would be deferred until the conclusion of proposed District Court proceedings, provided that if the proceedings were not commenced within 2 months, the costs would be payable immediately.
The defendant filed a statement of claim in the District Court of New South Wales on 18 September 2015, in which it claimed the amount of $251,982.69, being the total of the sums claimed in the two statutory demands.
The plaintiff's position is that the court should order the defendant to pay its costs of both proceedings on an indemnity basis, or alternatively on the ordinary basis up to 6 August 2015, and on the indemnity basis thereafter.
The defendant submits that the proper order for costs in the circumstances is that no order for costs should be made in either proceeding; with the intention that each party will pay its own costs. The defendant relies upon the well-known judgment of McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622.
The evidence satisfies me that it was reasonable for the defendant to serve both of the statutory demands on the plaintiff, in the sense that the conduct of the plaintiff in the period up to service of the demands provided a proper foundation for the defendant to form the view that the plaintiff was insolvent, and that the approach of serving statutory demands as a prelude to applying for the winding up of the plaintiff was consistent with principle.
By October 2014, the plaintiff owed the defendant and its related company over $350,000, of which $241,674.81 was overdue. The general manager of the defendant had a telephone conversation with the sole director of the plaintiff in which the plaintiff promised to make a payment of $20,000 immediately and then $100,000 on 31 October 2014 and another $100,000 on 7 November 2014. $20,000 was paid on 14 October 2014. Separate amounts of $50,000 were paid on 5 and 10 November 2014 and 5 and 12 December 2014. Separate amounts of $80,000 were paid on 16 January and 10 February 2015.
The defendant adopted the practice of appropriating each of these payments to the oldest outstanding debts owed by the plaintiff to either the defendant or its related company. On each occasion the defendant sent to the plaintiff an email to explain the apportionment. For example, on 11 November 2014 an email was sent to the plaintiff which showed that a payment of $100,000 had been appropriated to debts owed by the plaintiff to the defendant and its related company. On 12 November 2014, in relation to an amount of $20,000, the plaintiff asked the defendant: "Can you show where the $20,000 was applied please?". The defendant provided an explanation immediately. On 20 November 2014, the plaintiff provided to the defendant a schedule of repayments that it hoped to make in the period up to 30 January 2015. The defendant responded that, by 12 December 2014 the plaintiff's overdue figure needed to be under $100,000. The correspondence between the plaintiff and the defendant continued, with the plaintiff, on a number of occasions, promising lump-sum repayments of debt in the future. The defendant continued to appropriate lump-sum payments received to the oldest outstanding debts owed to the two companies, and to send to the plaintiff reconciliations to show how the payments had been apportioned. For example, on 22 January 2015, the defendant sent an email to the plaintiff which stated: "Please find attached statement for EDT Global and EDT Networks along with breakdown of allocation of $80K payment which was made on 16 January 2015".
The plaintiff did not, on the evidence, at any time complain about the procedure that the defendant had adopted in allocating the lump sum payments; including in respect of allocating some part of the money received by the defendant in repayment of long-outstanding debts owed by the plaintiff to the related company.
On 6 February 2015, the defendant sent a letter of demand to the plaintiff in respect of a total overdue amount of $239,013.03.
On 20 February 2015, the defendant's solicitor sent a letter of demand to the plaintiff in which the defendant demanded payment of an outstanding amount of $159,838.03 by 26 March 2015.
The plaintiff did not respond to this correspondence until after it had been served with the first statutory demand. In particular, the plaintiff did not take any step to contest the amount of the debt claimed, or to assert that it had any offsetting claim.
In support of its application under s 459G of the Corporations Act to set aside the first statutory demand, the plaintiff claims that, of the $191,519.94 that was claimed, the plaintiff had actually repaid an amount of $135,816.13. This claim formed the primary basis of the plaintiff's argument that the defendant should be ordered to pay its costs of the proceedings on the indemnity basis. The plaintiff submitted that the defendant ought to have known that it had already been repaid the $135,816.13, when it served a statutory demand. The plaintiff submitted that the defendant's conduct was entirely unreasonable.
The plaintiff supported this argument by a schedule of repayments that was supported by copies of the relevant invoices issued by the defendant, as well as remittance advices prepared by the plaintiff addressed to the defendant and the related Westpac electronic payment receipts.
The ultimate effect of the remittance advices is that they reflect an attempt by the plaintiff to appropriate the lump sum payments to the debts that the plaintiff owed to the defendant that were the subject of the defendant's statutory demand. If that appropriation was effective, then the debt claimed in the statutory demand would have been reduced by the $135,816.13.
The remittance advices appeared to be contemporaneous with the making of the payments to which they relate.
The defendant gave evidence that it did not receive any remittance advices from the plaintiff.
When the plaintiff's evidence is carefully considered, it is found that the plaintiff's sole director asserted that the remittance advices were sent to the defendant, but did not give specific evidence of the steps taken to cause that outcome.
The defendant submitted that the plaintiff has prepared the remittance advices after the event in order to create the false impression that it appropriated its payments to the debts claimed in the first statutory demand. As this issue was not fully contested, and the persons who prepared the remittance advices have not been cross-examined; and further, as issues of credibility may arise in the course of the proceedings before the District Court, I should not draw any conclusion about this issue. I should observe, however, that the existence of the remittance advices appears to be inconsistent with the objective evidence and the plaintiff's knowledge and conduct before the first statutory demand was served.
The plaintiff also claimed that it had an offsetting claim for breach of contract of at least $55,659.81 because the workers supplied by the defendant to the plaintiff did not have the required certification, so they could not be used by the plaintiff as expected. The plaintiff did not inform the defendant of the existence of this dispute before the first statutory demand was served.
It is to be noted that the defendant denies that this is a proper claim, because the contract made the plaintiff responsible for verifying that workers had the necessary certification, rather than the defendant. The defendant relied upon exclusions of warranties in clause 8 of the contract.
The second statutory demand was based upon further unpaid invoices served by the defendant on the plaintiff under the contracts.
The plaintiff responded to the service of the second statutory demand by commencing further proceedings under s 459G of the Corporations Act, and did so on the basis of alleged offsetting claims that are said to substantially succeed the amount claimed by the defendant.
The offsetting claims are made in respect of a period largely before the service of the first statutory demand, but the amounts claimed were not included in the offsetting claim that formed part of the basis of the plaintiff's case that the first statutory demand should be set aside. Accordingly, the defendant submitted that, when it served the second statutory demand, it had no reason for believing that the plaintiff would have a further offsetting claim based upon the alleged failure by the defendant to provide to the plaintiff employees with the required certification.
In all of these circumstances, I am satisfied that the conduct of the plaintiff, before both statutory demands were served, reasonably caused the defendant to believe that the plaintiff was insolvent; and that there was no impediment to the defendant proceeding to apply for the winding up of the plaintiff based upon the statutory demands.
The plaintiff applied to the court for orders setting aside the statutory demands, and notwithstanding the scepticism of the defendant as to the propriety of the plaintiff now challenging the statutory demands in the way that it has, the defendant has acted reasonably by withdrawing its statutory demands, and seeking to pursue relief in the District Court. The defendant's withdrawal was neither a capitulation by the defendant nor a "clear victory" for the plaintiff: Hampic Pty Ltd ACN 001 670 097 v Cyndan Properties Properties Pty Ltd ACN 072 824 429 [2013] NSWSC 1903 at [40]; Global Mortgage Equity Corporation Pty Ltd v Gbw Nominees Pty Ltd [2010] NSWSC 153 at [9].
As such, in these circumstances, the appropriate costs order is one that has the effect that each party should pay its own costs of both proceedings. In my view, this is a clear case in which the principle in Lai Qin should be applied.
The only order that I will make is that, in each proceeding, there will be no order as to costs, with the intent that each party will pay its own costs of the proceedings.
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Decision last updated: 01 October 2015