Plaintiff v Defendant

1 On 1 February 2022, the Court delivered its substantive judgment in the proceeding[1] with the result that the plaintiff's application to wind up the defendant in insolvency was dismissed.[2] However, the parties remain in dispute on the question of costs. The defendant seeks its costs of the application on a standard basis up to a certain point in time, and thereafter on an indemnity basis, in light of settlement offers made by the defendant at various stages of the proceeding, two of which were expressed to be Calderbank offers. In the alternative, the defendant seeks its costs on a standard basis. It is the plaintiff's position that there should be no order as to costs or, alternatively, that it should only be obliged to pay a modest proportion of the defendant's costs, suggested at 20 per cent, on a standard basis.

2 The background and procedural history of the matter are set out in the substantive judgment and need not be repeated here. I note, however, that whilst the matter was commenced by originating process filed on 11 April 2021, there were delays and adjournments occasioned by both parties, with the result that the final hearing of the matter took place on 9 September 2021.

3 The delays and adjournments resulted in two previous costs orders being made in the proceeding. On 7 July 2021, consent orders were made which, among other things, required the plaintiff to pay the defendant's costs thrown away by reason of an adjournment of the hearing originally scheduled that day ('the first costs order'). When the matter came on for further hearing on 27 July 2021, it was adjourned at the request of the defendant to enable it to put on supplementary material on the question of solvency, including the preparation of audited accounts for the 2019/2020 and 2020/2021 financial years. As a result of the adjournment, I ordered that the plaintiff's costs of the hearing be reserved ('the second costs order').

4 The defendant opposed the winding up application on the following alternative bases:

(a) service of the plaintiff's statutory demand dated 3 February 2021 ('the statutory demand' or 'the demand') was defective;

(b) the defendant was solvent and could displace the statutory presumption of insolvency;

(c) the defendant should be given leave pursuant to s 459S of the Corporations Act 2001 (Cth) ('the Corporations Act') to oppose the winding up application on a ground or grounds it could have relied on for the purpose of an application to set the demand aside. The grounds sought to be raised were: (i) there was a genuine dispute about the amount of the debt claimed in the statutory demand in accordance with s 459H(1)(a); (ii) the defendant had an offsetting claim for the purpose of s 459H(1)(b) of the Corporations Act; and (iii) the demand was defective and a substantial injustice would be caused to the defendant if the demand was not set aside pursuant to s 459J(1)(a) of the Corporations Act; and

(d) pursuant to s 467(1)(a) of the Corporations Act, the Court should dismiss the plaintiff's application as a matter of discretion.

5 In the substantive judgment I held that the defendant had failed to rebut the presumption of service of the statutory demand under s 29(1) of the Acts Interpretation Act 1901 (Cth).[3] As a consequence, the plaintiff was entitled to rely upon the statutory presumption of insolvency found in s 459C(2)(a) of the Corporations Act by virtue of the defendant's non-compliance with the demand. Critically, the defendant succeeded in displacing the statutory presumption of insolvency on the basis that it was cash flow positive and balance sheet solvent.[4] The proceeding was dismissed on this basis. Consequently, the defendant's application under s 459S of the Corporations Act was not granted because the grounds sought to be raised in respect of the plaintiff's debt were not material to proving solvency.[5] However, I also held that had the defendant failed to establish solvency, I would ultimately have granted it leave under s 459S.[6] Lastly, I declined to allow the defendant to pursue its argument that the Court should dismiss the plaintiff's application in accordance with the Court's discretion under s 467(1)(a) of the Corporations Act because of a lack of proper notice to the plaintiff.[7]

6 In support of its application for costs, including indemnity costs, the defendant relies on the affidavit of Mr James Anglicas sworn 10 February 2022, together with its exhibits, along with written submissions of even date. In resisting the defendant's costs application, the plaintiff relies on its written submissions dated 10 February 2022 and 16 February 2022.

7 Section 466(1) of the Corporations Act essentially provides that an applicant in a winding up proceeding must, at its own expense, prosecute all proceedings in the winding up until a liquidator has been appointed. In other words, an applicant commences a winding up proceeding and prosecutes it at its own risk on costs should a winding up order be declined.[8]

8 Section 467(1) of the Corporations Act permits the Court to, among other things, dismiss an application for winding up with or without costs, even if the ground has been proved on which the Court may order the company to be wound up, or to make any other order that 'it thinks fit'. In addition, s 24 of the Supreme Court Act 1986 (Vic) relevantly provides that 'the costs of and incidental to all matters in the Court ... is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.' Further, r 63.04 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) allows the Court to make an order for costs in relation to a particular question or a particular part of the proceeding. Accordingly, the Court is entitled to examine the realities of the case and will attempt to do 'substantial justice' as between the parties on matters of costs.[9]

9 The Court therefore has a wide discretion in relation to costs.[10] That discretion is unconfined and unfettered but must still be exercised judicially upon facts connected with the litigation and not by reference to irrelevant or extraneous considerations.[11] Although not designed to control the exercise of the Court's discretion, there is a general rule that, in the absence of good reason to the contrary, a successful litigant should recover his / her costs.[12] Where a winding up application is dismissed, the Court will usually order the applicant to pay the respondent company's costs in accordance with the principle that costs follow the event,[13] however, each case will turn upon its own facts.

10 Where a multiplicity of issues is raised in a case and the parties achieve mixed success on those issues, the Court is entitled to adopt a pragmatic approach, taking into consideration the success (or lack of success) of the parties on an issues basis and award the successful party a proportion of its costs.[14] Such an apportionment is done by way of impression and evaluation rather than arithmetical precision.[15]

11 An award of costs is usually on a standard basis unless there are special or unusual features warranting an order for costs on an indemnity basis.[16] Such circumstances include where:

(a) proceedings are commenced or continued for an ulterior motive;[17]

(b) proceedings are commenced or continued in disregard of known facts or clearly established law;[18]

(c) a defendant raises issues that could not succeed in establishing a defence and the proceeding was entirely unnecessary;[19] or

(d) there is an imprudent refusal of an offer to compromise.[20]

12 The existence of a Calderbank offer made in accordance with the principles of Calderbank v Calderbank[21] is often relied upon as a basis for an award of indemnity costs where the party who rejected the offer receives a less favourable result at trial. However, the mere sending of a Calderbank offer does not automatically justify an indemnity costs order.[22] Instead, the authorities are clear that the Court can take into consideration a Calderbank offer in determining whether, in the exercise of its discretion as to costs, the party who made the offer should be awarded costs on a more generous basis.[23] Where a recipient of an offer does not achieve an outcome at trial more favourable than that contained in the offer, there is a basis to award indemnity costs if the refusal of the offer was unreasonable in all the circumstances.[24] The fact that a party ultimately failed to make good their case does not mean they acted unreasonably in rejecting the Calderbank offer.[25] Nor does the reasonableness of a Calderbank offer mean it was unreasonable to reject it.[26] Factors relevant to assessing whether the rejection of a Calderbank offer was unreasonable include: [27]

(a) the stage of the proceeding at which the offer was received;

(b) the time allowed for consideration of the offer;

(c) the extent of the compromise allowed;

(d) the recipient's prospects of success, assessed as at the date of the offer;

(e) the clarity with which the terms of the offer were expressed; and

(f) whether the offer foreshadowed an application for indemnity costs in the event of its rejection.

13 Against this backdrop, I now consider the parties' respective contentions regarding the formulation of an appropriate order as to costs.

14 Whilst I accept the defendant's contention that it has ultimately succeeded in resisting the winding up application, having regard to the substantive judgment and the full extent of the issues agitated before the Court at the final hearing, it is apparent that the parties have each enjoyed a measure of success.

15 Notably, the defendant failed in its argument that the statutory demand had not been served at the address of its current registered office. A not insignificant portion of the parties' material and the hearing itself was devoted to this question. The plaintiff submits the defendant should be ordered to pay its costs of and incidental to this issue or, at the very least, that the plaintiff should not be required to pay the defendant's costs associated with that question.

16 Substantial time and resources were also directed to addressing the defendant's application for leave under s 459S of the Corporations Act. As already explained, in light of the Court's findings on the question of solvency, leave under s 459S was declined because the grounds sought to be raised in respect of the plaintiff's debt were not material to proving solvency. However, in contesting the winding up application both on the ground of solvency and also in respect of other grounds which necessitated leave under s 459S, the defendant was essentially advancing two potentially inconsistent positions. On the one hand, the defendant submitted that the evidence demonstrated it was 'plainly solvent'[28] on a cash flow and balance sheet test, whilst, on the other hand, it argued that the grounds sought to be raised against the plaintiff's statutory demand in the sum of $36,091.77 were material to proving solvency. In practical terms, the arguments raised by the defendant under s 459S would have had greater importance had the Court determined the defendant was hopelessly insolvent or where the existence or non-existence of the plaintiff's debt was determinative of, or at least relevant to, the question of solvency.

17 An inevitable consequence of the defendant relying on multiple and alternative grounds in opposition to the winding up application was the incurring of substantial costs by each party.

18 Insofar as the previous costs orders are concerned, I agree with the plaintiff's submission that the costs thrown away by reason of the adjournment on 7 July 2021 and the subject of the first cost order are likely to be minimal. There is nothing before the Court to suggest otherwise.

19 As previously explained, as a consequence of the adjournment of the hearing on 27 July 2021, the plaintiff's costs of the adjournment were reserved (as reflected in the second costs order). At the same time, orders were made permitting the defendant to file more fulsome material on the question of solvency. I accept the plaintiff's contention that the indulgence granted to the defendant resulted in the parties ultimately having to engage with two sets of material on the question of the defendant's solvency which occasioned significant further costs as a result of the inevitable duplication of work. Given the need for supplementary material, it is appropriate to proceed on the basis that the initial material relied upon on the question of solvency was not the fullest and best evidence of solvency available. It is also clear that the focus of the inquiry on solvency at the final hearing was directed to the supplementary evidence given by Mr Glen Klein which was filed and served on 24 August 2021. For example, whilst Mr Klein was cross-examined in relation to his solvency analysis and the audited financial reports, the defendant's other witness, Ms Juanita Allen, was not called for cross-examination in relation to her initial solvency report dated 6 May 2021 or her amended solvency report dated 18 May 2021.

20 The defendant relies upon three settlement offers made by it at various stages of the proceeding, each of which are said to justify an order for indemnity costs against the plaintiff. On 29 April 2021, the defendant made an offer in writing to settle all claims between the parties by payment to the plaintiff of the sum of $5,000 ('the April settlement offer'). This was preceded by a verbal offer of settlement to the same effect. By letter dated 14 May 2021, the defendant made a Calderbank offer that the parties release each other from the 'dispute' (which was said to include the genuine dispute and offsetting claim grounds the defendant had sought to raise under s 459S of the Corporations Act) with each party bearing their own costs ('the May Calderbank offer'). Then, on 19 July 2021, the defendant made a further Calderbank offer by which it offered to pay the plaintiff the sum of $5,140.60, with the plaintiff, in turn, paying the defendant's costs fixed in the sum of $22,000 (approximately 80% of its actual costs at that time) and all other disputes between the parties concerning the relevant underlying agreements being compromised ('the July Calderbank offer').

21 The defendant submits it was unreasonable in the circumstances for the plaintiff to have rejected each of these three offers because:

(a) they were clear in their terms and were capable of being accepted by the plaintiff;

(b) they were made at an early stage in the proceeding, with the April settlement offer being less than two weeks after the proceeding was commenced;

(c) the plaintiff was aware there was a genuine dispute between the parties and an offsetting claim by the defendant which were raised prior to the commencement of the proceeding in a video sent by the director of the defendant to the director of the plaintiff on 24 August 2020;[29] and

(d) the plaintiff was on notice as to the defendant's solvency by 7 May 2021 when it received Ms Allen's expert report as to solvency (and prior to the plaintiff filing and serving an affidavit on 20 July 2021 concerning the question of service of the demand). The audited financials and the solvency opinion expressed by Mr Klein in the annexures to his affidavit affirmed on 24 August 2021 only served to confirm Ms Allen's opinion that the defendant was solvent.

22 Accordingly, the defendant seeks its costs on a standard basis up to 30 April 2021 (the day after the April settlement offer was made) and thereafter on an indemnity basis.

23 It is apparent that the April settlement offer was made prior to the defendant adducing any evidence to support its contention that it was solvent. The May Calderbank offer was made a week after the filing of the defendant's initial evidence on solvency which included Ms Allen's solvency report and unaudited financial reports. However, like the July Calderbank offer, it was made prior to the provision of Mr Klein's affidavit and the audited financial reports. Further, and more critically, each of the three offers relied upon by the defendant were made before the transfer of the sum of $200,000 into the defendant's business transaction account on 16 August 2021, five days prior to the finalisation of audited accounts by Mr Klein. The provenance and ownership of the $200,000 became a critical issue in the proceeding. The defendant did not lead any evidence to confirm the Company owned these funds and the Court ultimately drew an inference, permitted by the available evidence, that the Company was entitled to use the $200,000 as its own asset.[30]

24 Each of the offers were clear in their terms and were capable of being accepted by the plaintiff. While the May Calderbank offer allowed the plaintiff 14 days to respond, the other two offers unlikely afforded the plaintiff sufficient time to properly consider the merits of the proposals. Both the April settlement offer and the July Calderbank offer expired within one business day. The May Calderbank offer and the July Calderbank offer foreshadowed an application for indemnity costs, however, the April settlement offer did not.

25 Whilst the April settlement offer and the May Calderbank offer involved some measure of compromise, these offers were made before the defendant had laid out its fullest and best evidence of solvency. In the case of the July Calderbank offer, in addition to being made before the fullest and best evidence of solvency was provided, I do not consider it represented a genuine compromise of the proceeding. Although it offered payment of a portion of the plaintiff's claim, this was countervailed by a requirement for the plaintiff to pay a large portion of the defendant's costs (effectively on an indemnity basis). In other words, the July Calderbank offer called for a capitulation by the plaintiff.

26 In my view, the plaintiff's prospects of success as at the date of each of the defendant's three offers were reasonable given the plaintiff had the benefit of the statutory presumption of insolvency conferred by s 459C(2)(a) of the Corporations Act and because the offers were all made well prior to the filing of the defendant's fullest and best evidence of solvency and the transfer of the $200,000 into the defendant's bank account.

27 I am unconvinced that evidence about a genuine dispute concerning the plaintiff's debt and the defendant's offsetting claim which was known prior to the commencement of the proceeding has any real bearing on the reasonableness of the plaintiff's refusal to accept the settlement offers. It should be remembered that the defendant took no steps to set aside the statutory demand within the 21 day statutory period. I do not consider the plaintiff acted unreasonably in bringing the winding up application following the defendant's non-compliance with the statutory demand. I also note the defendant's application for leave under s 459S of the Corporations Act to raise a genuine dispute and offsetting claim was not granted in any event.

28 By reason of the foregoing matters, I am ultimately unpersuaded that the plaintiff acted unreasonably in refusing each of the three offers of settlement put forward by the defendant. The plaintiff's refusal to accept the offers does not justify an award of indemnity costs.

29 Although the defendant succeeded in having the winding up application dismissed on the basis that it was solvent, it did not succeed on all of the grounds advanced in opposition. The plaintiff has been put to real expense in addressing each of these grounds and in dealing with two sets of material on the question of solvency. Despite the fact the defendant made a number of settlement offers throughout the proceeding, an award of indemnity costs in its favour is not appropriate in this case.

30 In the exercise of the Court's discretion, and balancing all of the considerations referred to above, it is appropriate that the defendant be awarded 20 per cent of its costs of the proceeding on a standard basis. Those costs will be taxed in default of agreement between the parties.

[1] Re Slodyczka & Farren Pty Ltd [2022] VSC 19 ('the substantive judgment').

[2] See orders made on 4 February 2022, together with amending orders on 7 February 2022.

[3] Substantive judgment [18] - [25].

[8] Farid Assaf, Assaf's Winding Up in Insolvency (3rd ed, Lexis Nexis, 2021) ('Assaf's Winding Up in Insolvency') [10.101]. It is further noted that s 466(2) of the Corporations Act stipulates that a liquidator must, unless the Court orders otherwise, reimburse the applicant, out of the property of the company, the taxed costs of the applicant in the winding up proceedings.

[9] Chen & Ors v Chan & Ors [2009] VSCA 233 [10] (Maxwell P, Redlich JA and Forrest AJA) ('Chen v Chan') citing Spotless Group Ltd v Premier Building and Consulting Pty Ltd [2008] VSCA 115, [14] (Redlich JA).

[10] See also s 65C of the Civil Procedure Act 2010 (Vic); Assaf's Winding Up in Insolvency [10.101] citing Re Mailrite Pty Ltd (1985) 9 ACLR 863, 867-8 (Master Lee); Re Great Barrier Reef Flying Boats Pty Ltd (1982) 6 ACLR 820, 822 (Thomas J) and Morepine Pty Ltd v Crush Pacific Industries Pty Ltd (1996) 20 ACSR 41, 44 (Young J).

[11] See Innes-Irons v Forrest [2017] VSC 10, [5] (Derham AsJ); Towercom Pty Ltd v Fahour (No 4) [2013] VSC 585, [6] (Derham AsJ) ('Towercom'); Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534, 537; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, 86 (Gaudron and Gummow JJ) ('Oshlack').

[12] Towercom [2013] VSC 585; Ritter v Godfrey [1920] 2 KB 47, 5; Donald Campbell & Co Ltd v Pollak [1927] AC 732, 809; Milne v Attorney-General (Tas) [1956] HCA 48; (1956) 95 CLR 460, 477; Oshlack.

[13] Assaf's Winding Up in Insolvency [10.107]. See also Equity Australia Corporation Pty Ltd v Falgat Constructions Pty Ltd [2005] NSWSC 918; (2005) 54 ACSR 813 (where the winding up application was dismissed on the ground of solvency and because of an abuse of process); WRL Pty Ltd v Veritical Telecoms Pty Ltd [2008] NSWSC 1089; Rural Security Holdings Pty Ltd v Equititrust Ltd [2011] FCA 512 (where the winding up application was summarily dismissed on the basis there was no reasonable prospect that it could succeed).

[14] Chen v Chan [10]. This approach was recently followed in Lendlease Engineering Pty Ltd v Owners Corporation No 1 & Ors (Costs) [2021] VSC 471 at [21] (Forbes J).

[15] Chen v Chan [10] citing Major Engineering Pty Ltd v Helios Electroheat Pty Ltd (No 2) [2006] VSCA 114, [5] (Chernov and Ashley JJA and Mandie AJA).

[16] See Colgate Palmolive Company v Cussens Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 ('Colgate v Cussens'); Ugly Tribe Co Pty Ltd v Sikola & Ors [2001] VSC 189; Yap v Lee [2019] VSC 743.

[17] Ragata Developments Pty Ltd v Westpac Banking Corporation (1993) 217 ALR 175.

[18] J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2) [1993] FCA 70; (1993) 46 IR 301.

[19] Specialist Australian Security Group Pty Ltd (in liq) v Onwatch Pty Ltd [2017] VSC 184.

[20] Colgate v Cussens, 223 (Sheppard J).

[21] [1975] 3 All ER 333.

[22] Aljade and MKIC v OCBC [2004] VSC 351 (Redlich J) approved by the Court of Appeal in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298, 440 [19] (Warren CJ, Maxwell P and Harper AJA) ('Hazeldene's Chicken Farm'); Foster v Galea (No 2) [2008] VSC 331; John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201.

[23] Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425; Hazeldene's Chicken Farm, 441 [20]; Re Mandie [2015] VSC 55; Casey v Pel-Air Aviation Pty Ltd; Helm v Pel-Air Aviation Pty Ltd (No 3) [2015] NSWSC 857.

[24] Alpine Hardwood (Aust) Pty Ltd v Hardys Pty Ltd (No 2) [2002] FCA 224; (2002) 190 ALR 121, 127 [28] (Weinberg J, as his honour then was) ('Alpine Hardwood'); Hazeldene's Chicken Farm, 441 [23]; United Petroleum Australia Pty Ltd v Herbert Smith Freehills (No 2) [2018] VSC 501 [19]-[22] (Elliott J), upheld on appeal in United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15 [125] (Whelan, McLeish and Niall JJA).

[27] Hazeldene's Chicken Farm, 442 [25]; Orwin v Rickards (Ruling No 3) [2019] VSC 388 (Osborn JA).

[28] See the defendant's written submissions dated 30 June 2021 at [7], [36].