Soudan Lane Pty Limited v Glen Bradshaw trading as Pacific Coast Digital [2007] NSWSC 772 | Case summary

2 Section 459M of the Corporations Act 2001 (Cth) permits an order setting aside a statutory demand to be made subject to conditions. I will in due course make the orders sought by consent. 3 The parties have not agreed on costs. In Re The Minister for Immigration and Ethnic Affairs Ex Parte Lai Qin (1997) 186 CLR 622, McHugh J said at 624-625: "In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule, the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

4 These principles are applicable to proceedings to set aside a statutory demand, but special features of such proceedings need to be taken into account in judging the reasonableness of the parties' conduct. A company faced with a statutory demand in relation to a debt, disputed in whole or in part, has no option but to commence an action under s 459G to set aside the demand within 21 days even if the ultimate order sought will be an order under s 459H(4) varying the demand to the amount which is not genuinely in dispute. If a company were merely to pay the amount which was not genuinely in dispute, without securing or compromising the balance to the reasonable satisfaction of the creditor, it would face the prospect of winding up proceedings being brought against it, of its being presumed to be insolvent (s 459C(2)(a)), and of its being unable to oppose the winding-up application on a ground upon which it could have relied for the purposes of an application to have the demand set aside unless leave is given (s 459S). 5 A person claiming to being a creditor who uses the procedure for service of a statutory demand under s 459E to seek to force payment of a genuinely disputed debt risks an order for indemnity costs. For the purposes of s 459H a genuine dispute will exist about a debt if there is a plausible contention requiring investigation that the company is not indebted (Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785 at 787-788). Because the threshold for establishing a genuine dispute is low, creditors are often ill-advised to proceed with a statutory demand once plausible grounds for a dispute are asserted. They risk an order for indemnity costs if they do so (Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529 at 536; CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd (2003) 47 ACSR 100 at 104-105, [19]-[22]). 6 On the other hand, a company which capitulates to the creditor's demand after commencing proceedings to have the demand set aside by paying the sum demanded, or a company which puts the creditor to unnecessary expense in defending an application to set aside the demand before recovering what is unquestionably due, is likely to have to pay the creditor's costs even though the demand is set aside upon the creditor being paid (Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Gee Ha Pty Ltd v Dera Developments Pty Ltd [2007] NSWSC 95). 7 The demand in this case was served on 4 December 2006. The demand was for payment of a sum of $76,529.97. The debt was shown as the balance due on a running account of over 180 invoices for the period from 5 May 1999 to 16 November 2006. These were invoices for services provided by the defendant to the plaintiff in providing technical services for the production of television commercials. The plaintiff conducts an advertising agency. Up to December 2006 the defendant was a subtenant of the plaintiff. It seems that they shared offices. 8 The alleged debt of $76,529.97 was calculated by adding the invoices, deducting payments and in many cases deducting rent offsets, that is to say amounts for rent due by the defendant to the plaintiff which were unpaid but set off against the debts for services rendered by the defendant. No prior demand was made for the alleged debt. 9 On 18 December 2006, the plaintiff's solicitors wrote to the defendant's solicitor asserting that the debt was disputed. The defendant's solicitor replied, saying that the defendant had both invoiced and carried out the work, and had complete records in relation thereto. The defendant refused to withdraw the demand. 10 The originating process and supporting affidavit was filed on 22 December 2006. The defendant's schedule in support of the statutory demand identified for each invoice whether the invoice had been paid in whole or in part, or was unpaid, or whether it was covered by a rent offset. The plaintiff's supporting affidavit itemised each invoice referred to in the statutory demand which had not been shown as having been fully paid. In relation to these invoices the plaintiff asserted in some cases that the invoices had been paid by cheque. In some cases the plaintiff asserted that the invoice had been paid by an offsetting of rent. 11 The plaintiff denied receiving two invoices, one for $343.70 and the other for $39,250. A director of the plaintiff, Mr Bateman, said that he did not know what the invoices were for or whether they were "attributable" to a third party. The larger of those invoices, being invoice no 2410, figured prominently in subsequent communications between the parties. The plaintiff agreed that three invoices totalling $7,667 were outstanding, but it contended that it had an offsetting claim for unpaid rent of $7,920. 12 Over the following six months, the parties have taken an account. This process started by the defendant's solicitor sending to the plaintiff's solicitors a revised schedule of invoices, payments, rent offsets and balance claimed to be due to the defendant together with supporting documentation. This material was sent on 16 January 2007. There were 325 pages of supporting invoices and purchase orders. 13 In the defendant's solicitor's letter of 16 January 2007, it was claimed that the balance due by the plaintiff to the defendant was $85,551.33, not $76,529.97. The defendant's solicitor rejected as absurd the plaintiff's contentions in relation to the invoices allegedly not received. He said "There is an abundance of material supporting your client's knowledge of these invoices." Copies of the invoices and accompanying purchase orders were enclosed. 14 The invoice 2410 was in fact in the sum of $46,750 and not $39,250 as shown on the schedule accompanying the statutory demand. It was expressed to be an invoice for the production of a "Gourmet Garden Garlic television commercial". It covered various components including crew wages, camera unit hire, special effects, audio, editing, CAD approval and other matters. An accompanying purchase order was also enclosed, apparently signed by someone on behalf of the plaintiff. The defendant's solicitor also disputed the plaintiff's list of payments. 15 On 23 February 2007, the plaintiff served an affidavit of a Mr Watkins, another director of the plaintiff. Mr Watkins attached a reconciliation of the invoices, the payments and credits. He said that there were invoices totalling $23,841.57 which were admittedly outstanding, but there were five disputed invoices totalling $82,183.70 (this included invoice 2410) and that the defendant owed rent of $8,040 for the months from July 2006 to January 2007. 16 The plaintiff conceded owing $15,801.57. On 27 February 2007, it paid that sum to the defendant. 17 At about this time, the plaintiff also served a further affidavit of Mr Bateman. In relation to invoice 2410, Mr Bateman identified the signature on the purchase order as being that of an employee, Ms Press. He said that he was informed by her that the work described in the purchase order had not been completed. He deposed recalling that some animation work on a trial basis was carried out. He said he could not recall any audio trials or further production work being done. He deposed asking the defendant to do no further work on the advertisement. The invoice in question is dated 19 October 2004. That request was said to have been made in October 2004. 18 At the beginning of March 2007, the plaintiff proposed a meeting between account representatives of the parties to reconcile the invoices. The plaintiff's solicitor said Mr Watkins would be available. The defendant declined this proposal. 19 On 8 March 2007, the defendant's solicitor advised that the defendant had calculated the balance due to him as being $40,447.20 after allowance for the recent payment of $15,801.57. This was a reduction of about $20,282 from the amount claimed in the statutory demand. 20 On 14 March 2007, the plaintiff's solicitors said that documents which had been enclosed with the defendant's solicitor's correspondence were confidential internal documents of the plaintiff which were missing from the plaintiff's records. The defendant's solicitors replied by saying that the documents in question were documents the plaintiff had left behind when it had abandoned its Sydney premises. The plaintiff asked for return of all of its documents which it denied having abandoned. The documents were provided on or about 26 April 2007. 21 Meanwhile, on 5 April 2007, the defendant served an affidavit of a consultant, Mr Hollands, providing details of how the claimed debt had been recalculated in the sum of $40,447.20 (after allowance for the payment of $15,801.57). 22 Ms Press, whose signature was on the purchase order for invoice 2410, had left the plaintiff's employment in March, in other words before the plaintiff obtained the return of its documents. On 18 June 2007, she swore an affidavit referring to a number of documents relating to the purchase order for that invoice. I infer from the earlier evidence of Mr Bateman where he deposed that the plaintiff did not then have such documents that the documents referred to by Ms Press were amongst documents delivered on 26 April 2007. She deposed in substance to having been told by Mr Bateman that he and the defendant had agreed to a reduction of certain items on the invoice 2410 in respect of items, "edit to completion", "compositor" and "CAD approval". She identified calculations which she made in 2004 of a reduction in the amount of the invoice in an amount of $10,340 inclusive of GST. 23 The plaintiff now both asserts and accepts that there was an agreement to reduce invoice 2410 to $36,410. It admits liability in that sum and has provided a cheque for that sum to the defendant. 24 On 20 June 2007, that is, two days before the hearing, the plaintiff's solicitors advised the defendant's solicitors that the plaintiff would make that payment. They asserted that there was clearly a genuine dispute in relation to the balance of the debt claimed. They proposed the defendant consent to an order that the statutory demand be set aside with no order as to costs. That proposal was not accepted by the close of business on 21 June 2007, which was the period for which the plaintiff said the offer was open. 25 Today, both the plaintiff and the defendant seek their costs of the proceedings. Alternatively, the plaintiff says that if the Court were to determine that there should be no order as to costs, nevertheless the plaintiff should have its costs of today having regard to the offer made on 20 June 2007. 26 The questions of whether the court can be satisfied that either party has not acted reasonably, or whether it could be satisfied that one party was almost certain of success, have to be determined in the light of the issues which arise on an application to set aside a statutory demand. In particular, that a demand will be set aside if there is a genuine dispute about the claimed debt, and that such a dispute will exist if there is a plausible contention requiring investigation. 27 The evidence read on the application showed that, in this sense, there was at all relevant times a genuine dispute in relation to the debt claimed in the statutory demand. Indeed, the defendant accepts that the demand was overstated, hence the plaintiff had to institute the proceedings which it did, and would have been entitled to some relief on any view of the matter. 28 However, apart from that consideration, there was always a plausible contention requiring investigation. Such an investigation proceeded whilst these proceedings were pending. As the investigation proceeded both sides made concessions so that the area of dispute has now been narrowed to a few thousand dollars. 29 The defendant has been successful in receiving payment of $52,211.57. Had it always been clear that those moneys were owed, but the plaintiff put the defendant to the expense of defending the application to set aside the statutory demand without admitting an amount for which it was clearly liable, and so buying time for payment, then, in those circumstances, the defendant might well have been entitled to his costs, notwithstanding that some parts of the demand were properly disputed (see as an example Gee Ha Pty Ltd v Dera Developments Pty Ltd). But that is not the present case. The account was complicated. The major disputed debt for invoice 2410 went back to 2004. So far as appears in the evidence, there had been no prior demand for payment. The plaintiff's records were in the possession of the defendant. 30 I agree with the submission of counsel for the plaintiff that it was inappropriate and unreasonable for the defendant to have served the statutory demand before any attempt was made to reconcile accounts. The process of reconciling accounts was a lengthy one. It would have been the more expensive for being conducted against the background of pending proceedings, with the need for the parties to file affidavits as the investigation progressed. 31 In the present case it is easier than in most cases to form a view as to each party's prospects of success even though there has been no trial of the action. That is because the affidavits have been read, and in actions to set aside a statutory demand it is rare for cross-examination on affidavits to be allowed. This follows from the nature of the issues on such an application. 32 From perusal of the affidavits, I can be almost certain that at each stage of the investigation, had the matter then been heard, the plaintiff would have established the existence of a genuine dispute. Moreover, I am satisfied that the defendant acted unreasonably in serving the statutory demand when he did, and in not agreeing to its withdrawal. 33 For those reasons, and subject to the condition that the applicant's cheque paid today be met on presentation, I will order that the defendant pay the plaintiff's costs of the proceedings. 34 A disturbing feature of the conduct of these proceedings was that, with the exception of Mr Bateman's affidavit of 19 December 2006 filed with the originating process, the affidavits upon which the parties proposed to rely were not filed. There seems to be considerable confusion in the profession as to when affidavits should be filed. Rule 35.9 of the Uniform Civil Procedure Rules 2005 (NSW) provides that, except by leave of the Court, an affidavit must not be filed unless it is filed in accordance with the rules, or in accordance with other rules of court applicable to the court in which it is filed, or in accordance with a practice note applicable to the court in which it is filed. Practice Note SC Gen 4 provides in paragraph 8 that, "Subject to any orders or directions of the Court, an affidavit must always be filed before it can be relied upon" in specified types of proceedings. The specified proceedings include all proceedings in the Corporations List of the Equity Division. 35 It is unsatisfactory that all but one of the affidavits on which the parties proposed to rely on in these proceedings were not available to me prior to the hearing. Even in proceedings where affidavits may not be filed without leave of the Court, the parties are required to deliver a tender bundle to the chambers of the presiding judicial officer not later than 48 hours prior to the hearing date. That tender bundle is to include a copy of all the affidavits, whether filed or not, that the party intends to rely upon (Practice Note SC Gen 4 para 10). That requirement was not complied with. Moreover, in this case, on 27 April 2007, Windeyer J ordered that all affidavits to be relied on at the hearing were to be filed in the Registry. That order was ignored. 36 I regard the non-compliance with the rules as being serious, but the disobedience of the order of Windeyer J as being particularly so. Perhaps in response to the displeasure I expressed, counsel for both parties gave apologies, I take it on behalf of their instructing solicitors, for his Honour's order having been ignored. In this case, because no real harm has been done, I am prepared to accept those apologies and not refer the papers to the Legal Services Commissioner. 37 For these reasons I make the following orders:

Soudan Lane Pty Limited v Glen Bradshaw trading as Pacific Coast Digital

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Judgment (19 paragraphs)

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