DISPOSITION
34 It is undoubtedly the case that when the trial judge made his decision to set aside the claimants' statutory demand pursuant to s459J(1)(b) of the Corporations Act, he was exercising a discretion conferred by that provision. It is well settled that where the question in issue involves the exercise of such judicial discretion it must be shown that there has been a wrongful exercise of it, by reason of the judge having:
(a) acted on an incorrect principle of law;
(b) failed to take into account relevant considerations or took into account irrelevant ones;
(c) made some relevant error of fact;
(d) reached a result that is plainly unreasonable or unjust, or
(e) the result in (d) was such as to bespeak error of the former kind, even if the error could not be precisely identified.
(see, inter alia, Gronow v Gronow (1979) 144 CLR 513; House v the King (1936) 55 CLR 467 at 504-5.)
35 There being no defect in the demand, reliance was placed upon whether there be "some other reason" as would satisfy s459J(1)(b). The claimants contend that such reason cannot be based simply on some need to bring to the relationship between the parties some broad form of perceived fairness or reasonableness. Rather there must be "sound or positive ground or good reason" to set aside the statutory demand for "some other reason", which was consistent with the legislative intent of Pt 5.4 of the Act: Portrait Express (Sales) Pty Limited v Kodak (Australasia) Pty Limited (supra) at 757 per Bryson J; Kezarne Pty Limited v Sydney Asbestos Removal Services Pty Limited (1998) 29 ACSR 11 at 18 per Austin J. It is the claimants' contention that the reasons given by the trial judge do not satisfy the latter requirements but are indeed based upon some broad form of perceived fairness or reasonableness.
36 The claimed justification of the order is described (Judgment, [19]) as the avoidance of a benefit to the claimants at "an intermediate stage of the overall proceedings", so that such avoidance would be "conformable with the legislative intent of Pt 5.4" of the Act. That intent is said to be that the "demand mechanism should not be available where there are outstanding genuine disputes between the parties".
37 It is necessary here to look more closely at the reasoning of the trial judge in the context of the conclusions he had earlier reached; in particular at what he described as "claims within the rubric of offsetting claim as used in s459H" (at [11]).
38 This reasoning proceeded on the basis that there was indeed an "offsetting claim" but not one which fell within the rubric of a claim "that the company has against the respondent" (at [13]). Rather, it was a claim which depended upon the following steps:
(i) first the new trustee of the unit trust had to complete an accounting in order for any claim by the trust against the claimants to be determined;
(ii) depending on the result of that accounting, the claimants had then to pay the sums so determined to the new trustee for the benefit of the trust fund (it is inaccurate to state that "the respondents will be obliged to pay the sums claimed to the new trustee for the benefit of the trust fund" (at [13]) unless the sums claimed turn out to be identical with the amount properly so determined by the new trustee);
(iii) the unsecured creditors, however, have prior claim to Glazier against any sums thus ascertained and recovered by the new trustee, such liabilities being estimated at $1.25 million (WF, 97-9);
(iv) the trustee likewise has prior claim for its administration costs and these have yet to be ascertained;
(v) the amount asserted by Glazier to be payable by the claimants to the trustee totals $1,378,689 (Exhibit F para 10 at WF, 177-8);
(vi) the net assets of the unit trust available for distribution to Glazier are therefore to be determined after first allowing for prior ranking liabilities of $1,254,311 and so far unascertained administration costs of the trustee; of the net assets so derived, only 18% are potentially available for distribution to Glazier as that is its unit entitlement.
39 The end result of these steps, and on the most favourable assumption to Glazier (namely that the amount asserted by Glazier to be payable to the trust by the claimants would be ascertained at $1,378,689 and recovered by the trustee) leaves Glazier with its 18% unit entitlement recovering only $22,388. That is a sum substantially less than the claimants' costs already assessed at $115,384.17 which ground the claimants' statutory demand. There is no basis for accepting Glaziers contention that "the evidence indicates that, if those claims be vindicated, the plaintiff's share of them to come from the trust fund will be greater than the amount demanded in the Notice of Demand" (at [11[).
40 It follows that, as the claimants demonstrate in their reply, there was no factual foundation for the opponent's asserted entitlement to amounts of $80,621, $203,346.41 and $184,341.36 (Exhibit F, para 9 at WF, 176-7). In thus lacking evidentiary foundation, the trial judge's conclusion at [19] could not, with respect, be sustained. There he concludes "nonetheless, if the claims be established, there will come to the plaintiff from the defendants through the intermediacy of the trust fund sums greater in total than that demanded in the Notice". What the above analysis demonstrates is that even if trust claims be established against the claimants totalling $1,378,689, and even if that amount were recovered by the unit trust, the opponent's asserted entitlement, consistent with its 18% interest, is substantially less than the amount of the claimants' costs as assessed.
41 There is a further difficulty which the earlier analysis brings out. Concededly the threshold for genuineness for an offsetting claim is relatively undemanding "…to identify the genuine level of an offsetting claim (not the likely result of it)" (Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605). But here the claim is not an offsetting claim between the parties. Rather it is a claim which is prospective, contingent and at best indirect. It is asserted by the trustee of the unit trust in which Glazier has but an 18% interest. It is prospective in the sense that the trustee has yet to complete its accounting, and that accounting has yet to crystallise in a quantified amount. Moreover, the trustee has yet to ascertain its fees which rank ahead of Glazier. It is indirect since it is asserted not by Glazier but by the trust against the claimants. Because the trust is a distinct legal entity from the party taking out the statutory demand, that renders irrelevant the conventional assessment of offsetting claim by the undemanding standard of genuineness.
42 To reason that such claims are "within the rubric of offsetting claim" (as referred to in the judgment at [11] and [12]), is to elide an essential distinction. That distinction is between an offsetting claim against the party issuing the statutory demand, and a claim, as here, which cannot yet properly be described as an offsetting claim in any crystallised sense, let alone one between the parties. Rather it is a claim exerted through a third party against the proponent of the statutory demand, and which depends upon fulfilment of a number of contingencies. Those contingencies go first to the recoverability of the claim itself, for we do not yet know the result of the accounting. Then they go to the quantum of any ultimate recovery by Glazier, for we do not yet know with any certainty a number of essential matters such as the trustee's administration fees.
43 That leads to the point of legal principle wherein the claimants identify legal error. That error is said to lie in the finding of "substantial injustice" sufficient to constitute "some other reason why the demand should be set aside" for purposes of s459J(1)(b). This is in circumstances where the so-called "offsetting claim" is prospective, indirect in the sense I have identified and likely to be only around 20% of the undisputed debt the subject of the statutory demand.
44 The trial judge sought to justify setting aside the statutory demand also on another basis. It was to avoid a benefit to the claimants at "an intermediate stage of the overall proceedings", and "conformable with the legislative intent of Pt 5.4 of the Act. That intent was said to be that the "notice of demand mechanism should not be available where there are outstanding genuine disputes between the parties" (Judgment at [19]).
45 Taking each of these elements in turn, there is a clear conflict between two conclusions of the trial judge. First there is the trial judge's earlier conclusion that the Court of Appeal proceedings generating the cost order were separate from the proceedings below (at [7]). Second is the proposition he adopts (at [19]) that the benefit (of recovery of a debt through the statutory demand) is to be avoided when one is at "an intermediate stage of the overall proceedings". No authority is given for that proposition. At [7] the trial judge then said he easily concluded "that the defendants' submission is correct and that the proceedings in the Court of Appeal on an appeal from a judgment in a Division are proceedings separate from the proceedings below. On this basis it is clear that the proceedings in which the costs order was made are proceedings which have been concluded".
46 I would readily agree with the trial judge's opening observation that the cost order represents an "episode" within the "long course of litigation between the parties" at [1]. But it nonetheless represented the outcome of a discrete and self-standing process for recovering costs on a successful appeal against the earlier decision by Austin J that the taking of accounts should be on the basis of wilful default. That is essentially what the trial judge concluded at [7]. The trial judge however goes on to say, (at [19]), that setting aside the statutory demand is justified, as "conformable with the legislative intent of Pt 5.4" of the Act whereby the "demand mechanism should not be available where there are outstanding genuine disputes between the parties".
47 With respect this is to state the legislative intent of Pt 5.4 rather too broadly. The legislative intent of Pt 5.4 was explained succinctly in Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACLC 1062, 11 ACSR 362 at 366. Its essence is to be found in the proposition that a winding-up application is not to be used for the improper purpose of compelling a solvent company to pay a disputed debt. That proposition is certainly not to be construed as precluding statutory demands being used where there are ongoing disputes between the parties. That is especially so when those disputes do not relate to the debt the subject of the statutory demand nor to any offsetting claim between the parties but rather depend upon the interposition of a third party, as here, in asserting a claim for account. That suffices to discount that basis for setting aside the statutory demand. I do not need to consider issues such as that there was no evidence of solvency of Glazier. Nor whether, as the claimants allege, there has been excessive delay on Glazier's part in pressing for an accounting. What is however clear is that when costs are not reserved, and no application has successfully been made for a stay, the possibility of delay in the overall proceedings can be good reason for not deferring their recovery until the overall proceedings are concluded.
48 Some analogy to the present case is to be found in Renato Evangelisti Nominees Pty Ltd v EEC (1990) Pty Ltd (1995) 13 ACLC 1,378. In that case the court declined to conclude that there was "some other reason" why the statutory demand should be set aside in circumstances where Mr Evangelisti was a director of the company. According to Mr Evangelisti, the company's primary asset was a right of indemnity from the Renato Evangelisti Family Trust. The principal asset of that family trust was a loan by the family trust to Mr Evangelisti. Mr Evangelisti was a secured creditor of EEC (1990) Pty Ltd (in liq). EEC served an undated statutory demand on Renato Evangelisti Nominees Pty Ltd. That company applied to set aside the demand under s459G of the Law. Mr Evangelisti proposed to offset the debt owed to EEC to himself against the debt owed by the company to EEC. The company argued that this arrangement could constitute "some other reason" to set aside the demand under s459J(1)(b).
49 Master Ng dismissed that application. He concluded that it was impermissible under the Corporations Law for a director in Mr Evangelisti's circumstances even if he were the alter ego of the company to offset a debt owed to himself against the debt owed by the company. It was not for the company to set up an arrangement with a third party like Mr Evangelisti in order to provide "some other reason" why the statutory demand should be set aside under s459J.
50 At [20] in the judgment, the trial judge appears first to point to a consideration which prima facie should have led him not to set aside the statutory demand. But he then concludes that it should be set aside. I quote:
"[20] The only consideration that makes me hesitate in setting aside the notice of demand is the fact that the plaintiff could have, but has not, sought relief in the situation by application to the Court of Appeal for a stay of its costs order: see what was said by Emmett J in Eumina Investments above. This consideration is strengthened rather than detracted from by the plaintiff's conduct in not raising any objection to, and participation in, the process of the immediate assessment of the Court of Appeal costs. These matters would justify my refusing relief. But to do so may well only prolong conflict, since the refusal may merely send the plaintiff back to the Court of Appeal to apply for a stay, and then to engage in further litigation as to what flows from the stay if obtained. In all the circumstances, it seems to me that the course best designed to save the court's time and the parties' financial resources and to further the ends of justice is for the court to intervene at this stage and set the demand aside on the ground of the substantial injustice which I perceive."
51 In the first part of the quoted passage the trial judge correctly refers to a factor pointing strongly against setting aside the statutory demand. The trial judge then, however, refers to a consequence of refusing to set aside the demand, namely that "the refusal may merely send the plaintiff back to the Court of Appeal to apply for a stay, and then to engage in further litigation as to what flows from the stay if obtained". That latter consideration appears to my mind an irrelevant one. Glazier has to date held back from seeking any stay of the costs order. It instead participated in the costs assessment. Even if it might now belatedly engage in yet further litigation by seeking to persuade the Court of Appeal to grant a stay, that consideration carries little weight. There is of course no certainty that the Court of Appeal would grant any such stay. The position is analogous to the case where a judgment (the basis of the demand) was being appealed. That fact was held not to constitute "some other reason" within s459J(1)(b) whereby the statutory demand should be set aside, unless the Court of Appeal were actually to stay enforcement of the judgment; Barclays (Aust) Finance Ltd v Mike Gaffikin Marine Pty Ltd (1996) 14 ACLC 1,367, 21 ACSR 235; Sajepe Pty Ltd v Lawler (2000) 18 ACLC 457.
52 I would agree with the claimants' submission that if the opponent were minded to engage in such further litigation, there being no such evidence that it is so minded, that consideration provides no proper basis to remove the claimants from their entitlement under the Act to rely on the demand. Certainly there is no substantial injustice in allowing the claimants to maintain the statutory demand in the present circumstances whereas there is considerable injustice in denying them that entitlement. Indeed, it is an error of principle to invoke as a test "substantial injustice to the party seeking to set aside the statutory demand" for the purpose of subparagraph (b) of s459J(1) when this is solely based on the position of the party subject to the statutory demand. Rather one must look at the relative position of both parties against the objectives of Pt 5.4. That is why the more general formulation of Bryson J in Portrait Express is to be preferred as an approach; that is, setting aside a statutory demand under s459J(1)(b) where there is proper reason viewed in the circumstances of the parties taking into account the purposes of Pt 5.4. The claimants have an undisputed order for costs arising out of what the Court of Appeal characterised as futile proceedings brought by Glazier.