Specialty Fashion Group Limited v Global Red Australia Pty Limited

Judgment 1In this matter, Specialty Fashion Group Limited ("SFG") seeks the costs of an application brought under s 459J of the Corporations Act 2001 (Cth) to set aside a statutory demand dated 24 October 2011 ("Demand") served by the Defendant, Global Red Australia Pty Limited ("Global Red"). Global Red resists that application. Chronology of events 2I should first set out a short chronology of events. 3SFG and Global Red entered a letter of intent in relation to the provision of certain services. However, various issues with the adequacy of the services provided by Global Red arose and were discussed between the parties and no contract between the parties was entered into. In May 2001 and through to 2 June 2001 SFG, inter alia, denied liability for an invoice issued by Global Red. By 20 June 2011, a representative of SFG advised a representative of Global Red that "the brands have lost confidence that Global Red can deliver the services" and that SFG was most likely to dispense with Global Red's services. At a further meeting on 21 June 2011, representatives of SFG met with representatives of Global Red and advised them that SFG did not wish to pursue an arrangement with Global Red and lacked confidence in Global Red's ability to provide the services that SFG required. Formal written notice was given by SFG to Global Red on 25 August 2011 that its services were no longer required by SFG and Global Red ceased supplying any services to SFG after that date. 4Without prejudice discussions continued in respect of these matters between June 2011 and October 2011 and SFG made without prejudice offers in respect of an agreed termination of Global Red's services. 5Global Red served the Demand claiming an alleged debt of $479,096.33 on 11 November 2011. 6SFG brought an application under s 459G of the Corporations Act to set aside the Demand on 1 December 2011. It was accepted before me that the Originating Process and supporting affidavits were served on that date, although a dispute as to service at that time meant that they were again served at the offices of Global Red's solicitors and served by a process server upon Global Red on 2 December 2011. 7On 11 January 2012 Global Red's solicitors wrote to SFG's solicitors and advised that Global Red would withdraw the Demand and consent to the discontinuance of the proceedings "on the basis that each party bears its own costs". The letter also stated that: "If this offer is not accepted, our client will defend the proceedings vigorously including pressing the defence that the proceedings are fatally defective in that they were not filed and served within the twenty-one day period afforded by the Act." It was accepted before me that the proceedings had in fact been served within that period. 8By letter dated 12 January 2012, SFG's solicitors advised Global Red's solicitors that SFG accepted that the Demand should be withdrawn and the proceedings should be discontinued but that: "It is unreasonable for SFG to bear its own costs of this proceeding. Your client was (or should have been) aware that there was a genuine dispute concerning its claimed debts. SFG made this clear to your client on a number of occasions prior to service of the Statutory Demand (including during the without prejudice meetings referred to in the Affidavit of Mr Rob Kain). Your client nevertheless chose to serve the Statutory Demand and should therefore pay SFG's costs of and incidental to this proceeding." 9SFG's solicitors made a further, without prejudice except as to costs, offer to accept a proportion of its costs of the proceedings by letter dated 27 January 2012 which was not accepted by Global Red. 10Orders were made by the Court on 30 January 2012, by consent, to the effect that Global Red withdrew the Demand, for the service of evidence in relation to the dispute as to costs, and that the proceedings were otherwise discontinued. Applicable legal principles 11Uniform 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 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. The Court may also make an order for costs under s 459N of the Corporations Act although the substantive issue between the parties had not been determined in an application before the Court: Hornet Aviation Pty Ltd v Ansett International Air Freight (unreported, Federal Court of Australia, Northrop J, 6 December 1994). 12The principles applicable to the award of costs in respect of applications to set aside a statutory demand have been considered in several decisions: Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772. 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. 13In Felkro Nominees Pty Ltd v Austissue Pty Ltd [1993] FCA 455; (1993) 11 ACSR 607, the applicant sought costs where a statutory demand was set aside by consent. Heerey J noted that: "... creditors have to realise that if they invoke winding up provisions by issuing a statutory demand they run the risk that if a debtor establishes that the amount claimed is subject to a genuine dispute, the debtor will get an order for costs, as s 459N expressly contemplates." 14In Ayrton Investments Pty Ltd v Andrlik [2000] ACTSC 55 at [19] Higgins J expressed the view, which seems to me to have substantial force, that: "... the focus is on the reasonableness of the decision to issue [the statutory demand]. Whether on the material known to the creditor before the notice issued, it should have been apparent that there was a dispute which, viewed objectively, was 'genuine', that is, warranting further inquiry. If so, the creditor must expect to pay costs in any event once the notice is set aside." 15In CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 at [19], Barrett J referred to the warning given by Santow J in several judgments that: "with the hurdle to be cleared by companies seeking to have statutory demands set aside being so low, creditors persisting with the defence of such applications need to consider carefully, against the possibility of an order for indemnity costs, whether there are valid grounds for their taking up court time and putting the company to expense by doing so". His Honour also referred to the fact that "it is important to remember that the party by whom a statutory demand is served is entitled not only to test the recipient company's claim that the alleged debt is genuinely disputed but also to see the evidence the plaintiff is able to marshal in support of the claim of genuine dispute". His Honour went on to note that that principle has a limit to it, and that: "[T]here are cases in which attempts to resist the setting aside of the demand are, even on the interpretation of the facts most favourable to the defendant, so devoid of prospects of success as to be perverse. The opportunity to put the company to proof of the asserted genuine dispute is something to which the defendant should not be regarded as entitled in such obvious cases. A defendant, on having an obvious and irremediable weakness in its position pointed out, ought to withdraw the statutory demand. If, in such circumstances, such a defendant does not do so, it may well be appropriate for the court to award costs to the plaintiff on the indemnity basis." 16In Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772, White J noted that: "[4] These principles [set out in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin] 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 Ltd v Hanave Pty Ltd (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])." 17In Re Chameleon Mining NL; Chameleon Mining NL v Atanaskovic Hartnell [2009] NSWSC 602 at [72], Austin J held that the defendant should pay the costs of the proceedings to set aside a statutory demand, although the demand was issued in circumstances that it was not aware of any dispute having been previously raised as to the amount in issue, where it "adopted the unreasonable position that it would consent to the setting aside of the statutory demand only if each party paid their own costs" after being advised of that dispute. SFG's contentions 18SFG contends that, at the date the Demand was served, Global Red knew that there was a genuine dispute within the meaning of s 459H of the Corporations Act in relation to the amount claimed in the Demand. SFG also contends that a substantial proportion of the amount claimed in the Demand constituted a claim for contractual damages, which could not properly form the basis of a Demand. SFG contends that the application to set aside the Demand under s 459G of the Corporations Act would have succeeded. SFG also contends that, in the present circumstances, it had no option other than to bring the proceedings to set aside the Demand. 19It is well established that the threshold for establishing a genuine dispute and an offsetting claim is not a particularly demanding one. Whether the issues raised by SFG prior to service of the Demand would have established a "genuine dispute" as to the entirety of the debt claimed by Global Red depends on whether they amount to a total failure of consideration which would impeach any right of Global Red to payment of the invoices for the services rendered. There is authority that, while defective work may sound in damages for breach of warranty or for negligence, it generally provides no basis for a suggestion that there has been a total failure of consideration; in that case, the contract price is payable and there is no genuine dispute in respect of the debt, at least prior to termination of the contract; and the real question is whether there is an offsetting claim for damages for breach of warranty or negligence: Construction Management Services Pty Ltd v Bidnia Group Pty Ltd [2008] NSWSC 1152 at [5]. On the other hand, there may be circumstances where the defective work is such that it is arguable that a party has not done the work it was contracted to perform so as to give rise to a total failure of consideration: Independent Portable Buildings Pty Ltd v Modular Building Systems Pty Ltd [2011] FCA 511. 20Although this issue was not fully addressed in submissions before me, it seems to me that there was at least a plausible contention warranting further investigation that the deficiencies in the services provided by Global Red amounted to a total failure of consideration so as to impeach Global Red's right to payment, and therefore gave rise to a genuine dispute as to whether the invoiced amounts were payable. In any event, those matters indicate that SFG was likely to be able to establish an offsetting claim in respect of the amount claimed prior to 21 June 2011. Mr Kain's affidavit gives evidence of the loss and damage which SFG claims to have suffered, which substantially exceeded the amount claimed in the Demand. 21The Demand also claimed amounts said to be due after 21 June 2011, when SFG had advised Global Red that it no longer wished to pursue an arrangement with Global Red. The proper characterisation of that advice was as a termination of the relevant arrangement. By letter dated 16 January 2012, Global Red's solicitors themselves contended that the true position was that: "From at least 30 June 2011, SFG has evidenced its intention to avoid its obligations under the Service Agreement constituting a total repudiation thereof, which is accepted by Global Red." A substantial part of the amount claimed in the Demand was attributable to invoices relating to services in that period and would only have been recoverable as a claim for damages for breach of contract rather than as a debt for services. In my view, the Demand would also have been set aside under s 459J of the Corporations Act on that basis, since the use of the statutory demand procedure to claim an amount which is not properly a debt involves an abuse of that procedure, and an order for costs against Global Red would be warranted in that situation: CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100. 22Global Red relies on the affidavit of Mr Mark McCormick dated 17 February 2012. Mr McCormick's evidence is that SFG raised "certain issues" about Global Red's services in conversations during the relevant period, but did not dispute the invoices which ultimately formed the basis of the Demand. It is, nonetheless, plain that SFG had disputed the adequacy of the services provided in a manner which seems to me to have put Global Red on notice of the issues which gave rise to the genuine dispute as to the invoices and the existence of the offsetting claims on which SFG relies. Other matters 23SFG also contends that Global Red's conduct in threatening to "defend the proceedings vigorously including pressing the defence that the proceedings are fatally defective in that they were not filed and served within the twenty-one day period" required under s 459G(2) of the Corporations Act was inappropriate. As noted above, it was accepted in the proceedings before me, and should have been apparent to Global Red's advisers, that the Demand had in fact been served within that time. 24SFG also contends that it was unreasonable for Global Red to proceed with the Demand after SFG had made a substantial without prejudice offer in respect of the dispute between the parties and to serve the Demand without responding to that offer, giving rise to the inference that Global Red "was attempting to lever a better offer" from SFG. I do not consider that this matter should affect the exercise of the discretion as to costs. If Global Red had a proper basis for serving the Demand, then it was entitled to do so irrespective of whether SFG had made a without prejudice offer in respect of the same or a wider dispute between the parties and was not under any obligation to respond to that offer. On the other hand, if it was unreasonable for Global Red to serve the Demand, then the fact that SFG had made a without prejudice offer in respect of the wider dispute does not take the matter further. 25Global Red also relies on the evidence of its solicitor, Mr Ryckmans, that SFG's solicitors did not contact it between service of the Demand and filing its application to set aside the Demand under s 459G of the Corporations Act to advise that SFG's position was that there was a genuine dispute in relation to the underlying debt. Mr Ryckmans' evidence is that, if SFG's solicitors had contacted him, he would have advised Global Red that there were sufficient or reasonable grounds for a Court to determine that a 'genuine dispute' existed in regard to the debt such that the creditor might wish to consider to voluntarily withdraw the statutory demand. Global Red contends that an order for costs should not be made against it for that reason. 26There are, it seems to me, several difficulties with this submission. The first is that there was no obligation on SFG or its solicitors to contact Global Red's solicitors in this manner. As Newnes M observed in BGC Contracting Pty Ltd v Whitsunday Crushers Pty Ltd [2004] WASC 209 at [6]-[7]: "[6] ... The quite stringent obligations that the Act imposes on a debtor which seeks to resist a statutory demand - particularly bearing in mind the severe consequences of any failure to comply strictly with the requirements of the Act - may mean there is little time for discussion or negotiation about the debt which is the subject of the demand. It to be expected that the debtor and the debtor's solicitors will turn their attention foremost to ensuring that they comply with the statutory requirements. A creditor who serves a statutory demand cannot therefore necessarily expect from the debtor communications or courtesies that might be expected in more leisurely circumstances." [7] In my view, in circumstances such as the present it will rarely be the case that a creditor will be entitled to complain, as the defendant seeks to complain in this case, that the debtor did not put it on notice of the nature and quantum of any offsetting claims, or the nature of any dispute, after service of the statutory demand but before the debtor went to the cost of putting on the application and supporting affidavit. The second difficulty with this submission is that it appears that the matters which gave rise to the genuine dispute or offsetting claim had already been raised by SFG with Global Red, so they were known to Global Red whether or not they were known to its solicitors. The third is that, although Mr McCormick gave affidavit evidence in the proceedings, he does not say that Global Red would have withdrawn the Demand even if Mr Ryckmans had given the advice to which he refers. 27Global Red subsequently maintained the position that it would only consent to the setting aside of the Demand if each party paid its own costs in its letter dated 11 January 2012. I do not consider that SFG can be criticised for not accepting that offer, because that course would not have compensated SFG for the costs which it had incurred in bringing the proceedings to set aside the Demand. Conclusion 28In these circumstances, I consider that, as in Soudan Lane, it is almost certain that SFG would have succeeded in setting aside the Demand had the matter proceeded to a contested hearing, and that Global Red acted unreasonably in serving the Demand when it did and not unconditionally agreeing to its withdrawal at an earlier date. Global Red should therefore be ordered to pay SFG's costs of setting aside the Demand. I am not, however, satisfied that this is a case which warrants an award of indemnity costs, as distinct from costs on the ordinary basis, where Global Red did consent to the orders recording the withdrawal of the demand on 30 January 2012. 29Accordingly, I order that the Defendant pay the Plaintiff's costs of and incidental to the application to set aside the statutory demand dated 24 October 2011, including the costs of the hearing before me on 5 March 2012.