Plaintiffs v Defendant

1 In this proceeding, in their capacities as liquidators of the first plaintiff, Specialist Australian Security Group Pty Ltd (in liquidation) ("Specialist Security"), the second plaintiff, Matthew Jess, and the third plaintiff, Nathan Deppeler, (together "the Liquidators") sought a direction under s 479(3) of the Corporations Act 2001 (Cth). The direction sought was that the Liquidators are justified in treating the amount of $194,301.17 ("the Amount"), presently held in a trust account of Specialist Security's solicitors ("the Trust Account"), as an asset of Specialist Security. Alternatively, the plaintiffs sought a declaration to the effect that Specialist Security was the beneficial owner of the Amount.

2 The Amount was received from the defendant, Onwatch Pty Ltd ("Onwatch"), on 28 September 2016, and paid into the Trust Account.

3 Although there was no originating process filed by Onwatch, Onwatch also sought declaratory relief. Onwatch submitted that the Amount was payable pursuant to a contract. Onwatch further submitted it was entitled to a declaration to that effect to prevent Specialist Security or the Liquidators from making "a later challenge to the validity or enforceability of" the contract in question.

4 During the course of the hearing today, after issues were raised about the appropriateness of declaratory relief with respect to the matters sought to be agitated by Onwatch, and after it was acknowledged by Onwatch that, on no basis did Onwatch itself have any claim to the Amount, Onwatch indicated to the court that it would not oppose a direction substantially in the form sought by the Liquidators. As a result, the only issue remaining is the question of costs.

5 For the reasons that follow, an order will be made that Onwatch pay the plaintiffs' costs of and incidental to the proceeding, including reserved costs, on an indemnity basis.

6 In order to properly consider the appropriate scale upon which costs should be ordered, it is necessary to say something about the underlying dispute.

7 The events leading up to the Amount being paid into the Trust Account are not in issue.

8 An agreement was entered into in May 2014 (in the form of a put and call option) between, amongst others, Specialist Security, its shareholders and Onwatch ("the Management Agreement"). The purpose of the Management Agreement was to facilitate Onwatch conducting a due diligence in order to consider whether or not to purchase the business of Specialist Security.

9 The Management Agreement included a term to the effect that Specialist Security's shareholders agreed "on or before Completion[1] to procure from the SAS Group the transfer of all the business and Assets held by SAS Group to NewCo".[2] Pursuant to the Management Agreement, NewCo was to be incorporated for the purpose of acquiring the "business and Assets" for $1. In fact, "NewCo" already existed. The company that was ultimately used as a vehicle for the transaction, Specialist Group Pty Ltd (now known as Onwatch (Vic) Pty Ltd) ("Specialist Group") was incorporated on 23 April 2014.

10 It was further agreed that Specialist Security's shareholders would procure NewCo's agreement for Onwatch to have exclusive access to and use of the assets of the business.[3] It was the intention that, pursuant to that agreement, Onwatch would operate the business as an "exclusive subcontractor" and would be entitled to retain some of the fees it collected from customers of the business. The balance of those fees was to be paid by Onwatch to Specialist Security.[4]

11 Further, Onwatch was required to account to Specialist Security for various amounts, including all expenses it incurred in running the business, such as lease payments, staff costs and utility bills.[5]

12 The Management Agreement also contemplated the parties negotiating in good faith and agreeing on the form of a share sale agreement, which was to include the terms set out in the "Commercial Term Sheet" annexed to the Management Agreement.[6] That term sheet made the proposed transaction subject to a restructuring of Specialist Security's business in a manner satisfactory to Onwatch. It was envisaged this would involve the business and assets of Specialist Security being transferred to NewCo on the understanding that the shares in NewCo would be available for sale to Onwatch. The term sheet also set out the basis upon which the proposed purchase price for those shares was to be ascertained.

13 Onwatch conducted its due diligence and took over the management of some aspects of Specialist Security's business as contemplated by the Management Agreement. This included assuming the invoicing and debt collection functions of Specialist Security until the completion of any sale, which resulted in Specialist Security's debts being collected by Onwatch prior to the completion of the purchase.

14 The due diligence was not completed until April 2015.

15 On 22 April 2015, a "Master Share Sale Agreement" was entered into between various parties, including Specialist Security, its shareholders (described as the "Sellers"), and Onwatch (described as the "Buyer"), for the sale of all the shares in Specialist Group ("the Master Agreement"). Upon the execution of the Master Agreement, Onwatch paid a deposit of $200,000.[7]

16 As contemplated by the Management Agreement and the Master Agreement, the business and assets of Specialist Security were ultimately transferred to Specialist Group for $1. This transfer took place pursuant to an "Asset Transfer Agreement" between Specialist Security and Specialist Group dated 23 June 2015 ("the Transfer Agreement"). Onwatch was not a party to the Transfer Agreement.

17 The shares in Specialist Group were then sold to Onwatch for $1.87 million.

18 On or around 23 June 2015, Onwatch was required to pay the first instalment under the Master Agreement of $660,406. Onwatch paid only $245,591. The balance was withheld on the claimed basis that the funds could be applied by Onwatch to pay outstanding legal fees and commission owed by Specialist Security, in addition to an alleged set-off asserted by Onwatch of approximately $194,000.

19 On 25 June 2015, the sole director of Specialist Security appointed administrators to Specialist Security under Part 5.3A of the Corporations Act.[8]

20 On 20 July 2015, an email was sent on behalf of Onwatch. Relevantly, this email listed debtors of Specialist Security as at 31 May 2015, $194,301.17 of which (being the Amount) was collected on or after 31 May 2015 by Onwatch or Specialist Group. There was no direct evidence before the court as to which of these 2 entities in fact collected the debts in question, or whether they were collected (in part or in whole) before or after 23 June 2015,[9] when the Transfer Agreement was entered into.

21 On 30 October 2015, the Liquidators were appointed joint and several liquidators of Specialist Security pursuant to a resolution passed by creditors at the reconvened second meeting of creditors held pursuant to Part 5.3A of the Corporations Act.[10]

22 After their appointment, the Liquidators had various discussions with representatives of Onwatch. It is unnecessary to provide all the detail of each of these communications. Relevantly, the discussions included reference to amounts that had been received by Onwatch from debtors of Specialist Security and the manner in which those funds were to be dealt with.

23 The exchanges included a letter from Specialist Security's solicitors, dated 28 April 2016, which clearly identified the basis upon which the Amount was calculated. There has never been any real issue about the quantity of the claim.

24 In response, on 4 May 2016, Onwatch's solicitors stated that Onwatch was prepared to remit the Amount "subject to any necessary adjustments", provided the Liquidators provided an indemnity in Onwatch's favour in respect of certain persons Onwatch suggested may also have claims with respect to the Amount. To be clear, it was not suggested that Onwatch itself, or Security Group, had any claim to the Amount.

25 On 22 June 2016, the Liquidators addressed the concern that had been raised. Under cover of a letter again demanding payment of the Amount, the persons previously identified provided written acknowledgments that they made no claim with respect to the Amount.

26 Despite the issue raised by Onwatch having been addressed, the discussions did not result in any agreement for the payment of the Amount.

27 Accordingly, on 7 July 2016, the Liquidators caused a statutory demand to be served upon Onwatch, pursuant to s 459E(2)(e) of the Corporations Act. The statutory demand sought payment of the Amount, which was described as being derived from the "[p]re-appointment debtors of [Specialist Security], collected by [Onwatch] but not remitted to [Specialist Security]".

28 On 22 July 2016, a letter was sent on behalf of Onwatch in response to the statutory demand which, for the first time, disputed the indebtedness of Onwatch to Specialist Security with respect to the Amount. It was stated that the claim was misconceived. It was asserted that, upon the execution of the Transfer Agreement, the book debts underlying the Amount, being "Assets" for the purpose of the Transfer Agreement, were transferred to Specialist Group. It was contended that, in the face of the Transfer Agreement, Specialist Security had no basis to assert any entitlement.

29 On 20 September 2016, the plaintiffs responded to Onwatch's new allegation. The letter, apparently correctly,[11] stated that the book debts in question were expressly excluded from the definition of "Assets" and were accordingly not transferred. The letter then suggested that Onwatch pay the Amount into court so it would "cease to have any risk of liability in respect of those funds". On that basis, a commitment was given that no costs would be sought against Onwatch in any application to have the funds paid out of court to Specialist Security. However, it was further stated that if the moneys were not paid into court and it were necessary to commence a proceeding to recover the Amount, "all" of the plaintiffs' costs of the proceeding would be sought from Onwatch.

30 As a result of further communications between representatives of the Liquidators and Onwatch, on or about 27 July 2016, it had been agreed that the Amount would be paid into court in return for the statutory demand being withdrawn. Despite this agreement and the resultant withdrawal in the statutory demand, the Amount was never paid into court. Rather, further correspondence, including the letters referred to above, ensued. Eventually, the parties reached an alternate agreement. The Amount was to be paid into the Trust Account which, as stated above, occurred on 28 September 2016.

31 Since the payment of the Amount into the Trust Account, the Liquidators have inquired as to the basis upon which it was contended by Onwatch that the Amount was not owing to Specialist Security. No substantive response has ever been received.

32 In an appropriate case, a court may grant declaratory relief without granting any consequential relief.[12] Although the court's jurisdiction is clear,[13] that jurisdiction should only be enlivened if there is a real, and not merely hypothetical, legal controversy between the parties.[14] Further, a party seeking the declaration must have a "real interest" in seeking that relief.[15] In addition, there must be a "proper contradictor", in that the person opposing the declaration must have a "true interest" to do so.[16]

33 Notwithstanding some of the correspondence, there has never been any real issue that the Amount ought to be paid to Specialist Security. Ordinarily, if there is no dispute between the parties as to an amount owing, it would be inappropriate to grant declaratory relief. So much was conceded during argument today.

34 More particularly, with respect to the declaratory relief sought by Onwatch, the issues raised by Onwatch could only be described as abstract or hypothetical. There is no issue in this proceeding as to the validity of the Transfer Agreement. There is also no basis for determining whether the plaintiffs, or any of them, will or are likely to disavow the Transfer Agreement in the future. Further, there was simply no direct evidence before the court (which plainly could have been adduced by Onwatch) as to when, by whom, or on what basis the debts underlying the Amount were collected.

35 Furthermore, although the question of whether Onwatch (or Specialist Group)[17] was contractually bound to pay the Amount might be determinative of whether or not the plaintiffs could make a restitutionary claim,[18] that issue simply does not arise in this proceeding. As already noted, there is no controversy with respect to the question of whether the Amount is owing. In these circumstances, it ought to have been clear that there would be no proper basis for the court to grant declaratory relief in the form sort, particularly given the state of the evidence.

36 The proceeding was commenced on 16 December 2016. An affidavit sworn by the plaintiffs' solicitor was filed at the same time. That affidavit, based on hearsay evidence, set out the background to the dispute on the instructions from the Liquidators. Although the evidence of the history of the dispute was extensive, the affidavit did not set out the basis on which the claim was made; such as whether it was contractual, restitutionary or otherwise.

37 The proceeding was listed for directions on 24 February 2017. At that hearing, counsel for Onwatch suggested it was incumbent upon the plaintiffs to specifically identify the basis on which the claim was made. No pleadings were ordered. Sifris J made provision for the filing of affidavits for the hearing of the plaintiffs' application.

38 On 8 March 2017, Onwatch's solicitors wrote to the plaintiffs' solicitors. In the letter, they referred to the Transfer Agreement, stating that was the only contract that referred to payment of book debts. They then stated that, by the plaintiffs asserting a claim to the book debts underlying the Amount, it necessarily followed that Specialist Security was seeking to enforce the Transfer Agreement. Confirmation was sought, by the following day, that the position as asserted was correct. It was further stated that, unless the confirmation sought was forthcoming, then Onwatch would seek a declaration in this proceeding to the effect contended for, together with costs.

39 Specialist Security's solicitors responded the same day. They declined to give the confirmation sought. They referred to the earlier correspondence and stated that the plaintiffs reserved their rights "to seek indemnity costs in respect of [Onwatch's] foreshadowed application, which is bound to fail".

40 In seeking costs on an indemnity basis, the plaintiffs are asking the court to depart from its usual course of awarding standard costs to the successful party.[19] In the oft cited case of Ugly Tribe Co Pty Ltd v Sikola,[20] Harper J noted that, ordinarily, special circumstances must be present to justify such a departure, which circumstances relevantly include:[21]

(1) The commencement or continuation of proceedings for an ulterior motive.[22]

(2) The commencement or continuation of proceedings in wilful disregard of known facts or clearly established law.[23]

41 In my view, both of these special circumstances are applicable. Of course, Onwatch did not commence the proceeding, but its conduct after commencement required the proceeding to remain on foot and to proceed to a final hearing. This was in circumstances where Onwatch knew all the material facts with respect to the Amount, and did not need to see how the case was going to be put in order to form a view on the merits of the plaintiffs' claim. It should have been apparent from the outset that any defence to the claim was bound to fail. Thus, Onwatch should pay the costs of the proceeding on an indemnity basis.

42 To summarise the relevant matters set out above, before the commencement of the proceeding, Onwatch sought to raise obstacles to the payment of the Amount to Specialist Security, none of which were pursued once the proceeding was commenced. Yet, it was this conduct that forced the plaintiffs' hand and required them to issue the proceeding.

43 Then, once the proceeding had commenced, Onwatch raised issues that could not succeed in establishing a defence. This should have been apparent from the very outset of the proceeding given the detail contained in the affidavit filed with the originating process. Moreover, the issues sought to be raised by Onwatch did not go to whether the plaintiffs were entitled to treat the Amount as property of Specialist Security, but only to issues that may never arise.

44 Further, Onwatch was warned before the proceeding commenced that the plaintiffs would be seeking "all" their costs.[24] Although indemnity costs were not expressly referred to in the letter stating this position, in the context in which it was stated, that is the manner in which it would have been understood by a reasonable reader. Furthermore, by 8 March 2017,[25] there was express reference to the possibility of the plaintiffs seeking indemnity costs with respect to the issue sought to be raised by Onwatch. Onwatch pressed on regardless, in an attempt to gain an advantage with respect to the payment of the Amount in circumstances where, on no view, could Onwatch have any claim to the Amount.

45 In short, the proceeding was entirely unnecessary. Onwatch was perfectly able to state its position in correspondence to the Liquidators concerning the Amount, and then it could have waited to see whether any real issue arose in the future with respect to the validity of the contract.

46 For completeness, in a suitable case, it might be appropriate for a party to seek declaratory relief with respect to the basis of a payment, or a proposed payment, when there are real and live issues as to other circumstances or consequences that may flow. But even if that were the position in this case (which it was not), Onwatch put no evidence before the court upon which such relief might be properly considered.

47 For the reasons set out above, the only appropriate order is that the costs of the proceeding be paid by Onwatch on an indemnity basis.

[1] Completion was defined to mean completion under the Master Agreement: see par 15 below.

[7] This deposit was paid to an independent accountant, whose appointment arose out of an oppression proceeding brought in this court by a shareholder of Specialist Security.

[8] See s 436A.

[9] Such evidence was plainly within Onwatch's knowledge, but Onwatch chose to lead no evidence.

[10] See s 439C. See also ss 446A and 499.

[11] No case was put at the final hearing based on the assertion contained in the letter dated 22 July 2016.

[12] Supreme Court Act 1986 (Vic), s 36.

[13] See, for example, CE Heath Casualty & General Insurance Ltd v Pyramid Building Society (in liquidation) [1997] 2 VR 256, 283.9-285.5 (Phillips JA) and the cases there cited.

[14] Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564, 582.2 (Mason CJ, Dawson, Toohey and Gaudron JJ).

[15] Forster v Jododex Australia Pty Ltd [1972] HCA 61; (1972) 127 CLR 421, 437.10 (Gibbs J), citing Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438, 448 (Lord Dunedin).

[17] For completeness, Onwatch sought to join Specialist Group as an additional defendant during the course of argument, but ultimately did not press this application.

[18] See, for example, Steele v Tardiani [1946] HCA 21; (1946) 72 CLR 386, 402.2 (Dixon J, with whom McTiernan J agreed).

[19] Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 63.31. See, for example, Spencer v Dowling [1996] VSC 51; [1997] 2 VR 127, 147.4 (Winneke P).

[20] [2001] VSC 189.

[22] Ragata Developments Pty Ltd v Westpac Banking Corporation (1993) 217 ALR 175, 177.2 (Davies J).

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

[24] See par 29 above.

[25] See par 39 above.