Solicitors:
Speed and Stracey Lawyers - Plaintiff
The Legal Costs Consultants - Defendant
File Number(s): 2022/268089
[2]
Ex Tempore JUDGMENT
HIS HONOUR: The plaintiff (Hebbel) applies under s 459G(1) of the Corporations Act 2001 (Cth) (the Act) to set aside a statutory demand (the demand) served on it by the defendant (Bitar) on 16 August 2022 which claims a total of $564,373.19. The demand describes the debt as follows:
Description of the debt Amount of the debt
Judgment debt as entered in District Court of $518,203.64
NSW proceedings No 2022/230772 on
5 August 2022
Judgment debt as entered in Local Court of $46,169.55
NSW proceedings No. 2022/230761 on
5 August 2022
Total $564,373.19
References below to sections are to sections of the Act.
Section 459H(1) empowers the Court to set aside the demand, relevantly, if it is satisfied of either or both of the following:
(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b) that the company has an offsetting claim.
Section 459J(1) empowers the Court to set aside the demand, relevantly, if it is satisfied that:
(a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or
(b) there is some other reason why the demand should be set aside.
Section 459J(2) provides:
(2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.
These parties have been in dispute for years. Their fight arises out of a partnership for the development of a building.
On 4 July 2017, Rein J, after a five-day hearing, made orders that the partnership be dissolved. His Honour appointed a receiver to wind up the affairs and business of the partnership, including by the sale of five residences and five shops within the development, which at that time remained unsold. His Honour appointed a referee to report on a series of questions aimed at resolving financial matters to enable an accounting to be done: see Hebbel Constructions Pty Ltd v Bitar Pty Ltd [2017] NSWSC 917.
On 27 March 2020, Rein J made orders as to costs. This occurred after the referee had given two reports which had been unsuccessfully challenged by Bitar.
Hebbel was ordered to pay Bitar's costs, excluding part of the costs of the referee (which the parties were ordered to pay jointly), the costs of the cross-claim brought by Hebbel, and Hebbel's costs in relation to the appointments of the receiver and referee and in relation to the adoption of the referee's reports. Hebbel was also ordered to pay 80% of Bitar's costs of its application for costs.
Pursuant to the provisions of the Legal Profession Act 2004 (NSW) (LPA), the costs of the proceedings as a whole and the costs of Bitar's application for costs of the application for costs were assessed by a Mr Stern.
He issued two certificates with respect to the substantive proceedings and two certificates with respect to the costs application (although the costs certificates were issued first).
I shall refer to the two certificates concerning costs collectively as "the application certificate" and to the two certificates concerning the proceedings as a whole collectively as "the proceedings certificate".
Bitar claimed in excess of $285,000 as costs of the costs application but was awarded $46,159 under the application certificate (issued on 5 May 2022). With respect to the proceedings, other than the application for costs, Bitar claimed costs in excess of $1.4 million, but its costs were determined under the proceedings certificate at $518,203.64 (apparently issued on about 2 August 2022).
Section 377(1) LPA provides for the suspension of the operation of a costs determination upon a review of it being referred to a panel. On 9 June 2022, Bitar made an application to review the application certificate, which application was referred to a review panel under the LPA on 22 July 2022.
On 26 August 2022, Bitar's solicitors advised Hebbel's solicitors that they would be seeking a review of the proceedings certificate. On 2 September 2022, Bitar sought a review.
Despite the fact that by 5 August 2022, the operation of the application certificate was suspended under the LPA, Bitar applied for and obtained judgment in the Local Court for the amount of $46,169.65.
On 5 August 2022, Bitar obtained judgment in the District Court for the amount of the proceedings certificate.
Bitar served the demand by express post. It was received by Hebbel on 18 August 2022.
Hebbel then moved the Local Court and the District Court respectively for stays of the judgments which Bitar had obtained.
The judgment of the Local Court was stayed by that Court on 7 October 2022 "until further order of the Court and after finalisation of the costs assessment review and Supreme Court statutory demand proceedings".
The judgment of the District Court was stayed by that Court on 10 October 2022, until further order of the Court. On 11 October 2022, the Court made the stay conditional upon Hebbel paying $400,000 into Court, which Hebbel did on 31 October 2022. There was disagreement at the bar table as to whether the condition of payment was imposed by the Court mero motu or on Bitar's application. Nothing turns on the answer.
It is not in issue that the receiver holds funds of the partnership of about $260,000.
After a three-day hearing, on 25 June 2021, Black J made a series of orders dealing with disputed items in the accounting process. Order 9A made by his Honour (order 9A) is in the following terms:
"Without limiting the receiver's right to indemnity for remuneration and disbursements, the first defendant pay the receiver's and first plaintiff's costs of this application on an indemnity basis up to and including 26 April 2021 excluding the receiver's costs of the preparation of evidence as to his remuneration as agreed or as assessed."
During the course of receivership, a dispute arose between the receiver and the contestants here about the level of legal costs and disbursements said to have been incurred by him to his lawyers, Yates Beaggi Lawyers.
In 2019, the Receiver moved the Court for orders in relation to his accounts and remuneration. The receiver and his lawyers sought orders that the receiver would be justified in paying legal fees determined upon an assessment of the disputed costs. They gave undertakings that, if the assessment proved less than the amount that had been paid, the difference would be paid into Court. The receiver claimed $549,636 in legal costs. A cost assessor issued a certificate on 8 August 2022 which, if it stands, will have the effect, it seems, that the receiver or his lawyers will have been overpaid by $275,934.
On 26 October 2022, that is about two weeks before the hearing, the receiver's lawyers applied to review the assessment.
There is, thus, still a live issue between the parties about the apportionment between them of the legal costs and disbursements in their partnership.
Hebbel gave unchallenged evidence that it has offsetting claims against Bitar, including for assessed costs which Bitar must pay it and an agreed amount in respect of an unassessed costs order. The non-disputed costs items in Hebbel's favour total $87,123. Added to this, there is $56,482 which Hebbel, in its unchallenged evidence, contends is Bitar's 50% share of costs paid to the receiver which is to be treated as a liability of Bitar to the partnership, pursuant to earlier orders.
Hebbel also says that it is entitled to $196,889, which it says Bitar is liable to it, being 50% of the receiver's costs, the subject of order 9A. Bitar's response is that it is but one of a number of items which will properly be determined or deducted from monies which are presently in Court in due course. It puts that it is premature for Hebbel to have these paid for or for them to be set off against the amount of the demand. Bitar also argues that a number of items on both sides of the ledger are estimates only. In relation to this last amount, Hebbel concedes that the amount has not yet finally been fixed.
Although the receivership has not yet been finalised, significant progress has been made towards bringing about its conclusion.
Hebbel argues that:
1. there is no amount due and payable as claimed in the demand because both judgments upon which Bitar relies have been stayed and the certificates upon which those judgments were based have been suspended by operation of law;
2. a consequence of the suspension is that the demand now suffers from a "gross defect" (not a mere defect as contemplated by s 459J(2));
3. another consequence is that the debt can be, and is, "genuinely disputed";
4. it has offsetting claims; and
5. there is some other reason (within the meaning of s 459J(2)(b)) why the demand should be set aside.
I uphold Hebbel's last submission, which renders it unnecessary to deal separately with Hebbel's other submissions, although some of them have a bearing on my final conclusion.
In [14] of CP York Holdings Pty Ltd v The Food Improvers Pty Ltd [2009] NSWSC 409 (CP York), Barrett J (as his Honour then was) described s 459J(1)(b) as conferring a remedial jurisdiction.
The circumstances which might amount to "some other reason" why the demand should be set aside are not a closed category, and the discretion which the section gives is wide.
Barrett J observed at [21] that the power exists to maintain the integrity of the Part 5.4 process and should be used as necessary and appropriate to counter attempted subversion of the statutory scheme. The power is appropriately used where there is conduct on the part of the creditor which is unconscionable, an abuse of process, or gives rise to a substantial injustice; see Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3 at [27]; Hall Brothers Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302, 317-8; KW & KM Quinn Investments Pty Ltd and Deputy Commissioner of Taxation [2004] QCA 91; cited by Barrett J in CP York at [15] and [17] .
The overall objective of Part 5.4 is to ensure that the result of a creditor's attempt to obtain the benefit a presumption of insolvency through service of a statutory demand is known - and definitively known - before the hearing of any winding up application; CP York at [11].
The low threshold for setting aside a statutory demand is consistent with the philosophy of the Part that it is not properly to be used as a vehicle to create a presumption of insolvency where the debt relied on by the creditor is genuinely disputed or by ignoring genuine offsetting claims.
I turn now to this case.
At the outset, it is apt to observe that the Local Court judgment was obtained at a time at which the certificates on which it was based were suspended. There is no suggestion that this was disclosed to the Court, as it obviously ought to have been. Counsel for Bitar described this as unfortunate, which I think is something on an understatement. But he properly did not put that the application for judgment was warranted. Rather, he focused on a submission that there was an underlying liability for costs which Bitar had, but Hebbel had not, challenged. The difficulty with this approach is that it does not grapple with the fact that the debt described in the demand is the judgment debt.
With respect to the District Court judgment, there was no review on foot at the time the judgment was obtained, albeit Hebbel has an entitlement itself to challenge the assessments restricted to the review grounds raised by Bitar. It is possible that Hebbel's own review may result in a reduction of the costs assessed.
Thus, the circumstances now prevailing are:
1. the long-running dispute between these parties concerning the dissolution of the partnership is not yet over and Black J's orders have not yet run their course;
2. there are claims and cross-claims between these parties which are yet to be resolved as part of the partnership accounting (which includes the amounts claimed in the demand);
3. Bitar itself submits that the amount claimed for receiver's costs (the subject of order 9A) should be dealt with in the accounting of the partnership between the parties (which I consider has substance, but which applies with equal force to the other disputes between the parties including those concerning the claims and cross-claims for amounts for costs);
4. the operation of all the certificates which founded the demand have been suspended by consequence of action taken by Bitar and both judgments are stayed;
5. Hebbel has paid $400,000 into Court in respect of the District Court judgment, leaving Bitar owed a maximum of $118,203 and not secured (which amount may, and I stress may, reduce);
6. at least $87,123 of offsetting claims in favour of Hebbel is not disputed and there is a further potential for Bitar to have to account to Hebbel for at least $226,371;
7. the receiver is holding about $260,000 of partnership assets;
8. there is, as Hebbel correctly points out, enough money to pay Bitar the maximum $164,363 (the amount remaining after $400,000 is deducted from the total amount of the certificates), although this should be seen, of course, in the light that Bitar may be entitled itself to part or all of the $260,000 in any event; and
9. there is potential that the receivers' lawyers may have to refund, under their undertaking, at least part and perhaps all of the $275,934 found by the assessor to have been in excess of the amount paid.
A number of these considerations are sufficient in themselves to make reliance on the demand by Bitar unconscionable, an abuse of process or, if the demand were to stand, to wreak a substantial injustice. But their cumulative effect is overwhelming as a reason why the demand should be set aside under s 459J(1)(b). The parties are in the midst of a mutual accounting process of which the demanded amounts form part; both judgments relied on by Bitar are stayed; Hebbel has admitted offsetting amounts; and there are more than enough partnership assets to satisfy the balance of any legitimate claims Bitar might have.
To allow the demand procedure to be used in these circumstances would defeat the ends of justice, subvert the legislative intent, and undermine the integrity of Part 5.4.
The statutory demand served by the defendant on 16 August 2022 is set aside.
Hebbel sought an order for indemnity costs. In my opinion, from at least 1 November 2022 when Hebbel paid $400,000 into Court to obtain a stay of the District Court judgment, it was obvious that Bitar could not properly maintain these proceedings.
Bitar is to pay Hebbel's costs of the proceedings, such costs to be assessed on the indemnity basis from 1 November 2022.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 22 November 2022