Sebastian Fabrication Services Pty Limited v Elmasry Holdings Pty Limited

Judgment 1In this matter, the Plaintiff, Sebastian Fabrication Services Pty Ltd ("Sebastian") seeks the costs of its application brought under s 459G of the Corporations Act to set aside a statutory demand ("Demand") served on 14 November 2011 by the Defendant, Elmasry Holdings Pty Ltd ("Elmasry"). Conversely, Elmasry seeks an order that Sebastian should pay its costs of the application. Chronology of events 2I should first set out a short chronology of events. As noted above, Elmasry served the Demand on 14 November 2011, supported by an affidavit sworn 11 November 2011. The Demand related to a debt of $63,050.93 that Elmasry claimed to be owed by Sebastian which was identified as the undisputed part of a judgment debt of $152,209.53 in proceedings brought by Elmasry against Sebastian in the District Court of New South Wales. The amount relied upon in the demand deducted an amount claimed by Sebastian by a Cross-Claim against Elmasry in the District Court proceedings, then $89,158.33 plus interest and costs. 3On 22 November 2011, Sebastian served a Further Amended Statement of Cross-Claim in the District Court proceedings that increased the amount claimed to $114,216.66 plus interest and costs. 4A letter dated 28 November 2011 from Sebastian's solicitors to Elmasry's solicitors identified a number of alleged deficiencies in the Demand and accompanying affidavit. By that letter, Sebastian offered to pay Elmasry the amount of $33,097.46, being the difference between the amount of the judgment entered in the District Court (corrected for an overstatement of that amount in the Demand) and the amount of $114,216.66 claimed in the Further Amended Statement of Cross-Claim, on the basis that Elmasry undertook to withdraw the Demand on receipt of the payment on 5 September 2011. That date of 5 September 2011 was the last date on which Sebastian could file an application to set aside the Demand under s 459G of the Corporations Act so as to avoid a presumption of insolvency arising. 5By letter dated 30 November 2011, Sebastian's solicitors sought confirmation from Elmasry's solicitors of bank account details to permit an electronic transfer of funds to be made to Elmasry. It appears there was no response to that request. 6In a telephone conversation on 1 December 2011, Elmasry's solicitors advised Sebastian's solicitors that their letter dated 28 November 2011 did not afford Elmasry a reasonable time to obtain advice from Counsel and provide a written reply and that further time was required to respond to the offer contained in that letter. 7On 2 December 2011, Sebastian tendered a bank cheque in payment of the undisputed amount (as it was then calculated) of $33,097.46. A letter from Sebastian's solicitors of the same date stated that: "As we have not received a response to our proposal of a resolution of this matter in our letter dated 28 November 2011, our client will file proceedings seeking to set aside the demand in its entirety. We reserve the right to rely on this letter in seeking indemnity costs." 8By letter dated 5 December 2011, Elmasry's solicitors advised Sebastian's solicitors that they were instructed to accept Sebastian's offer on terms that: "[o]nce payment is secured (cleared funds) we will agree to withdraw the Creditors Statutory Demand immediately". That response had the difficulty that, as I noted above, 5 December 2011 was the last day on which Sebastian could file an application to set aside the Demand to avoid a presumption of insolvency arising, and a withdrawal of the Demand after that date would not affect a presumption of insolvency which had already arisen. 9Sebastian served proceedings seeking orders setting aside the Demand and supporting affidavits on 5 December 2011. It appears, in preparing those affidavits, that Sebastian discovered an error in the calculation of the amount claimed in its Further Amended Statement of Cross-Claim in the District Court proceedings, which reduced the amount which could be off-set against the judgment in favour of Elmasry in the District Court proceedings, and forwarded a further bank cheque in the sum of $9,700 to Elmasry. It follows that the amount conceded by Sebastian as due to Elmasry was not tendered in full until that date and was not available to Elmasry in cleared funds until a later date, and Sebastian arguably would not have succeeded in its application to set aside the Demand until the date on which cleared funds were available to Elmasry, several days after that application was filed. 10By letter dated 5 December 2011, Elmasry's solicitors wrote to Sebastian's solicitors, referring to the telephone conversation on 1 December 2011 and protesting that the application to set aside the statutory demand was premature. I do not consider that complaint was justified, since Sebastian had no alternative to the filing of that application in order to protect its position: Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772. 11On 30 January 2011, the Demand was set aside by consent and costs were reserved. Further correspondence occurred between the parties after that date in which each asserted their respective positions as to costs. Applicable principles 12Section 98(1) of the Civil Procedure Act 2005 (NSW) provides that, subject to the Rules of the Court, the Civil Procedure Act and any other Act, costs are in the Court's discretion. Uniform Civil Procedure Rules 2005 (NSW) r 42.1 provides that costs generally follow the event unless it appears to the Court that some other order should be made as to the whole or any other part of the costs. However, that rule does not apply where there has been no adjudication on the merits: Lake Burrendong State Park Trust v Thompson [2011] NSWSC 1554 at [71]. 13The principles applicable to the award of costs in respect of applications to set aside a statutory demand have been considered in several decisions: Gem No 4 Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital above; Bamburgh Holdings Pty Ltd v Kennedy [2011] NSWSC 792. The Court's power to award costs is discretionary and, in an appropriate case, the Court will make such an order even where there has been no hearing on the merits, although it is less likely to do so where this would involve the trial of a hypothetical action between the parties and deprive them of the cost saving which they would have achieved by settlement. In particular, costs may be awarded where the Court is confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried: Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624-625. 14The merits of the parties' respective positions were the subject of vigorous dispute before me. Each party advanced criticisms of the other's conduct. On the one hand, Elmasry contended that Sebastian had acted unreasonably in delaying its proposal for payment until 28 November and the tender of the relevant amount until 2 December, and that Elmasry was entitled to take the position that it would withdraw the Demand only when the relevant funds had been cleared. On the other hand, Sebastian contended that it would have succeeded if the claim had been fully determined and argued that Elmasry's position amounted to a surrender or capitulation and that Elmasry acted unreasonably in failing to withdraw the Demand. I do not consider that Sebastian's contention that it would have succeeded if the claim had been fully determined has significant weight, where that success would have reflected the payment of the undisputed amount. I also do not accept that Elmasry either surrendered or capitulated when it received substantial payments late in the 21 day period permitted for payment in response to the Demand. 15There are, in my view, some matters that might support a costs order in favour of Elmasry and against Sebastian. It was not until 14 days after service of the Demand, and after the filing of its Further Amended Statement of Cross-Claim in the District Court proceedings, that Sebastian offered to pay what it understood to be the undisputed amount of the claim. By error, its offer was less than the amount then due. On the other hand, I do not consider that Sebastian acted unreasonably in filing the application to set aside the Demand on 5 December, since it was necessary for it to do so in order to avoid the presumption of insolvency arising where Elmasry had not unequivocally communicated the withdrawal of the demand before the expiry of the 21 day period specified in s 459G: Cempro Pty Ltd v Dennis M Brown Pty Ltd (1994) 13 ACSR 628; Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital above; Chameleon Mining NL v Atanaskovic Hartnell [2009] NSWSC 602 at [11]-[13]. 16Nonetheless, Elmasry's claim for costs is weaker than the defendant's claim in Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602, where a Plaintiff which sought orders setting aside the statutory demand had paid the amount claimed late on the day before the hearing. The defendant there contended that it was required to defend the proceedings up to that day and that the Plaintiff could have paid that amount earlier in order to spare the defendant the costs to which it had been put by reason of the proceedings. Barrett J there ordered the Plaintiff to pay the defendant's costs, on the basis that the Plaintiff had eventually paid as demanded. Similarly, the Plaintiff was ordered to pay the defendant's costs of the proceedings where the order to set aside the statutory demand was made only after payment of the relevant amount in Gee Ha Pty Ltd v Dera Developments Pty Ltd [2007] NSWSC 95. However, in this case, Sebastian put a proposal for payment of the amount then understood to be due several days before the end of the 21 day period specified in s 459G of the Corporations Act and well before the hearing of the application to set aside the statutory demand; had sought details to permit an electronic transfer of cleared funds, which had not been provided, and had also tendered the additional amount identified as due (albeit with the error noted above) prior to the end of the 21 day period. 17Conversely, I do not think there is a strong case for an order for costs in favour of Sebastian and against Elmasry. By contrast with Buddies Liquor Pty Ltd v Wah Lai Investment (Australia) Pty Ltd [2001] NSWSC 337 and Soudan Lane , I do not think that Elmasry acted unreasonably in either serving the Demand or not agreeing to its withdrawal prior to 5 December 2011. At the time the Demand was served, an undisputed amount was owing to Elmasry, the large part of which was not tendered until 2 December 2011 and the balance of which was tendered on 5 December 2011. Elmasry could reasonably take some time to consider the filing of its Further Amended Statement of Cross-Claim in the District Court proceedings, and I therefore do not think it can be criticised for not responding immediately to the request for details of its bank account to permit a transfer of the specified amount to it. Even on 5 December 2011, the cheque for the balance of the amount which had been tendered on that day would not have cleared and, had Elmasry withdrawn the Demand on that day, it would have been exposed to the (albeit somewhat limited) risk that the bank cheque which had been tendered to it would not be honoured. 18In some circumstances, it may be appropriate for a Court to make an order for costs in favour of the Plaintiff who sought an order to set aside the statutory demand from the date on which the undisputed component was paid: Bamburgh Holdings Pty Ltd v Kennedy [2011] NSWSC 792. However, I do not consider such an order is appropriate in this case. 19On balance, I consider the proper course is not to make any order as to the costs of the application to set aside the Demand, with the intent that each party should bear its own costs in respect of the application. Each party has liberty to restore the matter before me on 7 days notice if either of them seeks to pursue the costs of and incidental to the hearing before me on 13 February 2012, although I note that each party might be well served by seeking to reach agreement as to that matter rather than incurring the costs of a further contested argument.