Sebastian Builders and Developers Pty Ltd v Floruit Holdings Pty Ltd & Currency Corporation Pty Limited

Supreme Court of NSW|2011-06-06

Judgment 1HIS HONOUR : This is the hearing of the plaintiff's application to set aside a statutory demand served by the defendants on the plaintiff dated 14 October 2010. The application is made under s 459J(1)(b) of the Corporations Act 2001 (Cth) on the basis that, in the circumstances that exist between the parties, the use of the statutory demand procedure is not within the proper scope or purpose of the statutory provisions.

Background to the proceedings. 2This is conveniently set out in the parties' submissions, which I will adopt with some modification. 3The defendants were, respectively, the owner and the owner's agent involved in a development of four townhouses in Kiama, New South Wales. 4Sebastian was contracted by the owner (Floruit Holdings Pty Ltd) to construct the townhouses under a contract dated 5 April 2006. 5A dispute subsequently arose between the parties concerning variations and defects. This led to proceedings being brought in the District Court by the present plaintiff 6Sebastian obtained a plumbing certificate on 20 December 2006. However, Sebastian did not give that plumbing certificate to the defendants. The defendants required the certificate so they could obtain a release from the council of a subdivision plan in respect of the properties. This, in turn, prevented the sale of one of the townhouses from proceeding to completion, at least until that plumbing certificate was supplied, which occurred on 14 July 2008. The defendants were also unable to sell the other 3 townhouses while the subdivision remained incomplete. 7The defendants have brought a cross-claim in the District Court for damages arising from the delay in receipt of the plumbing certificate. 8By consent orders made on 19 December 2008, the plaintiff's proceedings against the defendants were settled. This leaves only the cross claim on foot. On the same day, the District Court made an order by consent that a separate question arising out of the cross claim would be heard separately from other issues in the cross claim. 9The District Court determined the separate question in favour of the plaintiff. The defendant appealed to the Court of Appeal and its appeal was upheld ( Floruit Holdings Pty Ltd and Anor v Sebastian - Builders and Developers Pty Ltd [ 2009] NSWCA 303) . The plaintiff was ordered to pay the defendant's costs in the Court of Appeal. The defendant had those costs assessed in the sum of $63,289.62 and on 12 October 2010, this Court gave judgment in favour of the defendant for that sum. The statutory demand that the plaintiff seeks to have set aside is for the amount of that judgment. 10The plaintiff does not dispute that it owes the defendant the sum demanded. The defendant's cross claim is for an amount of $643,920. The hearing of the cross claim has been set down by the District Court for 10 days commencing 5 September 2011. 11There has been no application by the plaintiff to stay the costs order the subject of the demand.

The basis of the plaintiff's claim. 12The plaintiff says that the defendant's cross claim is hopeless in the sense that it is doomed to fail. This will mean that the plaintiff faces the prospect of incurring costs considerably in excess of the amount of the demand, which might be awarded in its favour against the defendant if it wins the 10-day District Court case. 13The plaintiff submits the defendant's position is such that, on the one hand, the defendant seeks to have the plaintiff wound up for a debt of $63,000 and on the other hand, the defendant is pursing proceedings to recover $650,000 in the District Court. It is suggested this admits of two scenarios: "(i) The statutory demand was a stalking horse and the defendant does not intend to wind up the plaintiff even if the statutory demand is not set aside: Williams v Spautz 174 CLR 509. This scenario is supported by the continuing prosecution of the District Court proceedings after the statutory demand was served and taking a hearing date in September; or (ii) The other scenario is that the penny has dropped with the defendant that its case is hopeless and the defendant is trying to get out of it by way of winding up the plaintiff as opposed to discontinuing the cross claim proceedings with costs or prosecuting the cross claim leading to a costs order against it. In this scenario the progressing of the District Court proceedings to a hearing date is just a charade or a keeping up of appearances to avoid it being obvious that it does not want to run the cross claim and incur its own costs in so doing and also risking an order that it pay the plaintiff's costs. " 14The defendants' evidence is that if it is successful in the present proceedings and it is not paid, it does intend to wind up the defendant. The defendant would then prove in the liquidation for the amount of its cross claim. It points out that the plaintiff has not suggested in evidence that it cannot pay the amount of the demand and that this is a case of the plaintiff simply refusing to pay the demand. It is thus said that it is not a case where the defendants are exerting "unfair commercial pressure" on the plaintiff.

The nature of the power in s 459J(1)(b). 15There are many examples of where there has been an abuse of process both in the context of a winding up and in the context of the statutory demand procedure. In TS Recoveries Pty Ltd v Sea-Slip Marinas (Australia) Pty Ltd [2007] NSWSC 1074 , Barrett J, emphasised this distinction: "[17] Abuse of process is concerned predominantly with propriety of purpose. That issue must be judged according to the legitimate objectives of the particular process. A challenge under s 459J(1)(b) on the grounds of abuse of process would pay attention to the objectives properly pursued by service of a statutory demand, whereas an abuse of process allegation in relation to the pressing of winding up proceedings would pay attention to the objectives for which winding up proceedings are properly pursued. [18] It seems to me that, even apart from the different timing factors I have mentioned, the two purposes do not coincide. A creditor serving a statutory demand aims, first and foremost, to obtain payment of the creditor's debt. The word "demand" means what it says: the creditor is demanding payment of what is due. The creditor may have a second or subsidiary purpose, which is to obtain the benefit of a presumption of insolvency if the primary purpose of eliciting payment is not achieved and no successful application to have the demand set aside is made. But the principal purpose is to obtain payment. ... [20] These differences in purpose, it seems to me, emphasise the separateness of application of abuse of process principles in relation to a creditor's service of a statutory demand and application of the same principles in relation to the creditor's pursuit of winding up proceedings where insolvency is conceded, at least where, at the later stage, the alleged abuse is not really a collateral allegation of dispute about the existence of the debt grounding the statutory demand: see Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962 and cases there discussed." 16When considering these cases, this distinction must be borne in mind. 17After some reference to general principles, the plaintiff referred to the policy of the section in these terms: "The subsection appears in Div 3 of Pt 5.4 (ss.459G-459M) of the Act. The sections were inserted as a result of the Law Reform Commission Report No. 45, General Insolvency Inquiry (the "Harmer Report"). Speaking of Div 3 the Explanatory Memorandum stated: "The provisions in relation to the setting aside of statutory demand are intended to be a complete code for the resolution of disputes involved in statutory demands, and to do so on the basis of the commercial justice of the matter , rather than on the basis of technical deficiencies." See David Grant & Co Pty Ltd v Westpac Banking Corporation 184 CLR 265, where this part of the Explanatory Memorandum is set out. It is submitted that the explanatory memorandum shows that subparagraph (b) is not to be confined to any of the traditional legal bases for excluding the use of the power but is to be approached on the basis of what the commercial justice between the parties requires. As previously submitted, the use of the term - abuse of process - would be taken to mean whether the defendant's use of the statutory demand procedure was appropriate having regard to notions of the interest of commercial justice between the parties. Content of commercial justice in the subparagraph. What the interests of justice is in any particular case has been considered by the High Court in the context of the cross-vesting legislation. BHP Billiton v Schultz 211 ALR at 527 [para 15]. Applying the reasoning in that paragraph the plaintiff submits that in the circumstances of this case the interests of commercial justice between the parties is that the statutory demand be set aside so as the plaintiff can defend the cross claim in the District Court without the threat of winding up proceedings against it. That justice does not prejudice the defendant which has other ways of recovering the debt from the plaintiff e.g. by way of writ of execution, garnishee order and the like. The setting aside of the statutory demand would, however, prevent the defendant from misusing the statutory demand procedure which it is doing for its own collateral purpose. " 18The relevant part of the paragraph in BHP Billiton v Schultz (2004) 221 CLR 400 that the plaintiff referred to is as follows: " [15] ... The interests of justice are not the same as the interests of one party, and there may be interests wider than those of either party to be considered. Even so, the interests of the respective parties, which might in some respects be common (as, for example, cost and efficiency), and in other respects conflicting, will arise for consideration. ..." 19The plaintiff also referred to Eumina Investments Pty Ltd v Westpac Banking Corporation [1998] FCA 824; (1998) 84 FCR 454; (1998) 16 ACLC 1440, in which case there was a judgment debt for costs owing to Westpac. Westpac issued a statutory demand for the amount owing and Eumina applied to the Court for an order under s459G(1) setting aside that demand. Eumina contended that it has a genuine claim against Westpac that far exceeded the amount of the debt owing and it had lodged an application for special leave to appeal to the High Court of Australia. The appeal was from the Court of Appeal decision that had included an order for costs - the subject of the statutory demand. His Honourset aside the demand relying on s459J(1)(b). 20Emmet J stated: "The only other possible basis for setting the demand aside is s459J(1). There is no suggestion that s459J(1)(a) has any relevance. However, s459J(1)(b) appears to me to have relevance in the present context. It may be that "some other reason" within the meaning of s459J(1)(b) is something other than defect in a demand, the existence of a genuine dispute or the existence of an offsetting claim. The language of s459J(1)(a) indicates that s459J is concerned with the possibility of injustice if a statutory demand is permitted to stand with the consequence of the presumption of insolvency which is then compelled by s459C(2). However, the discretion under s459J(1) may be exercised in favour of a company even without showing that substantial injustice would otherwise be caused (see the observations in Hoare Bros Pty Ltd v DCT (1996) 135 ALR 677 at 691). One circumstance where it may be unjust for a demand to stand, in my opinion, is where there is a judgment or order which precludes a contention that there is a genuine dispute or an offsetting claim but there is on foot a bona fide appeal from that judgment or order. In those circumstances, the Court may, if justice requires, and subject to the possibility of imposing conditions as contemplated by s459M, set aside a demand which is based on the judgment or order which is subject to appeal or in respect of which, if an appeal succeeds, there would be an offsetting claim. ... It is, in my opinion, appropriate for a Court to exercise the discretion conferred by s459J(1)(b) where the Court is satisfied that there is an appeal based on reasonable and arguable grounds which, if successful, would result in the existence of an offsetting claim. The expression "reasonable and arguable grounds" is suggested by the decision of the Full Court in Ahern v DCT (1987) 76 ALR 137 at 148. In Barclays Australia v Mike Gaffikin Marine Pty Ltd McLelland CJ in Eq expressed the view that dependency of the appeal in that case would not of itself provide any sufficient reason for setting aside the demand under s459J(1)(b). His Honour cited Hoare Brothers Pty Ltd v DCT (1995) 16 ACSR 213 and Wilden Pty Ltd v Greenco Pty Ltd (1995) 13 ACLC 1039 as support for that conclusion. His Honour, however, did not give any detailed reasons for that view. In Hoare Bros , Olney J of this Court observed (at p219) that the general flavour of s459J is one of a section which gives the Court a discretion to set aside a statutory demand when the justice of the case demands that a company which is otherwise likely to become deemed to be insolvent should be relieved of that possibility. ... ... In the present case, the proceedings in the Commercial Division were commenced prior to the making of the order by Beaumont J. Further, the application for special leave was lodged on 15 April 1998, some two weeks before the service of the statutory demand. I have been asked to draw an inference that the purpose of the service of the demand some six months after Beaumont J's order was to frustrate the prosecution of the application for leave to appeal. I do not consider that such an inference should be drawn on the evidence presently available to me. Nevertheless, there is, in that sequence of events, a basis for concluding that the circumstances of this case are to be distinguished from those which arose before Olney J. ... In accordance with the Rules and practice directions of the High Court, the Company and Westpac have filed summaries of argument. I have in evidence before me the Company's summary of argument in support of its application for special leave and Westpac's summary of argument in opposition to that application. Clearly, I should not presume to predict the outcome of the application for special leave or the outcome of any appeal if leave were granted. However, it is appropriate for me to give consideration to whether or not those summaries demonstrate that the application is and any appeal would be based on reasonable and arguable grounds. ... As I have said, it is not for this Court to presume to predict the outcome of the application for special leave. Nevertheless, having considered the competing summaries of argument, I consider that the application is based on reasonable and arguable grounds. Thus, the basis on which the Court of Appeal reached its conclusion was different from that upon which Rolfe J at first instance reached his conclusion. Further there is the possible difficulty that arises from the application of the principle in Spargo's Case in circumstances where that was not contended for before Rolfe J. In those circumstances I would be disposed to conclude that there is "some other reason" within the meaning of s459J why the demand should be set aside. Of course, it would still be open to a liquidator to pursue the Company's application for special leave and to prosecute any appeal, if leave were given, if the liquidator was so advised. That is not, in my opinion, a consideration which would preclude a conclusion that there is "some other reason" within s459J(1) for setting the statute demand aside." 21The plaintiff pointed out that Eumina had to succeed in two matters, a special leave application and the appeal. In the plaintiff's submission, their case is simpler in that it only has to go through one matter, namely the hearing in September. It submitted that I should follow the approach of Emmett J. 22Before considering the cases any further it is useful to turn to the factual question of whether the cross claim is "doomed to fail".

Doomed to fail argument. 23There are three bases for the plaintiff's claim which are as follows: (a) The cross claim is fatally defective on its face because the defendant must allege and prove that it would have been able to sell the townhouses if it had the plumbing certificate as at January 2007. (b) Similarly in respect of the claim for holding charges and interest for the town house that was sold, there is no allegation in the cross claim that the completion of lot 14 could have taken place on 14 January 2007 but for the missing plumbing certificate. (c) The plaintiff has failed to mitigate its loss. 24In relation to the first issue (a), the defendants suggested that if the plaintiff genuinely thought the pleadings were defective it should strike them out in the District Court, which it has not done. In oral submissions Counsel for the defendant, Mr Katekar, stated that the pleadings in their present form are perfectly adequate. Paragraph 33 states that by reason of the matters alleged at paragraph 23 and 26, the claimants have been unable to obtain the subdivision certificate and as a result have suffered and continue to suffer loss and damage. The loss is then particularised in a way that can generally be described as loss of interest, loss of opportunity to sell the other three townhouses before 14 July 2008, interest paid on borrowed funds and diminution in value of the townhouses. Paragraph 23 refers to the plaintiff's refusal to deliver the plumbing certificate. Paragraph 26 refers to the defendant's inability to obtain Certificate of Subdivision. 25Counsel for the plaintiff, Mr McVay had indicated that that the defendant's needed to plead that there was a market slump and that slump should have been part of their knowledge or reasonably foreseeable in order for it to be included in the losses claimed. 26The defendants point out that they have amended their statement of cross claim to include a loss of opportunity claim. However that claim appears in the particulars to paragraph 33 and is not pleaded properly in the statement of claim. If it were pleaded properly, the defect would not exist. One might expect that it would be properly repleaded before the hearing because at the moment it is not. 27The second issue could also be cured by amendment before the hearing and the defendant would be foolish not to do so. 28The mitigation argument arises because of certain offers made by the plaintiff to the defendant through their solicitors 31 August 2007 and 19 December 2007. The relevant parts of the letters are as follows: "Your client is in breach of its agreement with our client in that it has refused to pay the sum of $135,599.08 for variations. Until your clients fulfil their obligation under the Contract, it cannot demand further performance by our client under the Contract. That includes the provision of any compliance certificates. Our client is concerned that at least one of the defendants has no assets and that any judgment against it would be unlikely to be satisfied. Our client is prepared to hand over the compliance certificate on the condition that your client agrees to pay the sum of $135,599.08 plus interest into a secured account to be held pending the outcome of these proceedings. Our client will accept the proceeds of the sale of the townhouses at 81 Shoalhaven Street, Kiama, provided the proceeds are paid into a secured account up to the amount referred to herein. Kindly advise your client's response." and "Further, we note that previously you have sought from the plumber the certificate of compliance in respect to the plumbing works at the site. We confirm that our client holds the compliance certificate although you have not requested that our client deliver up the certificate to your client. If your client requests the plumbing certificate, then our client will produce it provided your client agrees to pay the sum of $135,599.08 which is the amount of our client's claim into a bank account the signatories to which will be a solicitor from each of our respective firms. Our client continues to maintain that while you[r] client is in substantial breach of the contract by refusing to pay for variations, it will, however, deliver up the plumbing compliance certificate if security for the amount of the variations can be provided as set out above. Please let us have your response in this regard." 29It was suggested by the plaintiff that the proper construction of the letters was to the effect that the payment had to be out of the proceeds of the first sale. On first impression this is certainly not the case. It also was not the case for the defendants' solicitors, because on 18 January they put a counter offer, which in effect suggested that the sum should be paid into their trust account after the first sale and consequential provisions. In fact this is what eventually happened when the matter was resolved on 14 July 2008, with the adoption of a procedure the same as that suggested in the counter offer on 18 January 2008. 30In my view the mitigation argument certainly does not mean that the cross claim is bound to fail. It is quite an arguable point and it may even indeed go against the plaintiff. 31I have not been taken to the evidence on the cross claim to otherwise demonstrate that it is doomed to fail. Having regard to my comments above, I do not think that I would describe the cross claim as doomed to fail. Thus there is no likelihood of the plaintiff obtaining a costs order, which is a necessary foundation of its claim for an abuse of process. 32I dismiss the proceedings with costs.

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: 11 July 2011

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