[2008] FCA 1777
Holt v Wynter (2000) 49 NSWLR 128[2000] NSWCA 143
Nardell Coal Corp (in liq) v Hunter Valley Coal Processing (2003) 178 FLR 400[2003] NSWSC 642
Radiancy (Sales) Pty Ltd v Bimat Pty Ltd (2007) 25 ACLC 1,216
Judgment (2 paragraphs)
[1]
Judgment
On 26 October I granted leave to the defendant in these winding up proceedings to rely for its defence on the ground that the debt the subject of the plaintiff's statutory demand is disputed: Wang v ABC Homes (NSW) Pty Ltd [2018] NSWSC 1624. The order was made under the Corporations Act 2001 (Cth), s 459S. I adjourned the proceedings to allow the parties to bring in proposed orders for the further conduct of the proceedings and dealing with the costs. The defendant, ABC, now moves for the proceedings to be dismissed and the plaintiff, Ms Wang, does not oppose that course. The dispute between the parties concerns the costs of the proceedings.
Wang v ABC Homes [2018] NSWSC 1736 | Case summary | Zoe
Counsel for ABC submitted that the dismissal of the proceedings meant that ABC had succeeded and that Ms Wang should therefore pay ABC's costs. Counsel for Ms Wang contended that ABC should pay the costs of the s 459S application, but accepted that there might be some small off-set for any general costs of the proceedings incurred after the hearing of that application.
Counsel for Ms Wang relied on the general principle that an applicant seeking the indulgence of the Court is usually required to pay the respondent's costs of doing so, unless the respondent's conduct was unreasonable. Counsel submitted that an order granting leaving under s 459S is an indulgence in this sense. Counsel further observed that, by s 459S(2), leave cannot be granted by consent: the Court must be affirmatively satisfied by the applicant that the ground in question is material to solvency. It follows that some hearing is necessary even if the application is not opposed.
The s 459S application which was the subject of my judgment in this case was a hard fought one which occupied most of a day. But although the resistance on behalf of Ms Wang was ultimately unsuccessful, it was at no point unreasonable. As noted at various points in my judgment, the evidence of Mr Fathabadi on behalf of ABC had its difficulties and deficiencies, which were properly exposed in cross-examination.
The general principle that an applicant seeking an indulgence must pay the costs is well established: Nardell Coal Corp (in liq) v Hunter Valley Coal Processing (2003) 178 FLR 400; [2003] NSWSC 642 at [143]-[146]. Where a plaintiff allows the limitation period for his or her cause of action to expire and then seeks an extension of time, the plaintiff will generally be required to pay the defendant's costs of the leave application: see Holt v Wynter (2000) 49 NSWLR 128; [2000] NSWCA 143 at [121]. Frequently a party applying for leave to amend that party's pleading is required to pay the costs of the amendment application and the costs thrown away, even if successful. The Western Australian Court of Appeal has expressly adopted a general rule to that effect for litigation in that State: Stanley v Layne Christensen Company [2006] WASCA 56.
A similar principle applies in proceedings for the approval of a scheme of arrangement. Although the order approving the scheme is not, strictly speaking, an indulgence, the Court proceeds on the basis that the scheme companies had to come to Court and subject the scheme to scrutiny in any event. In such cases, the scheme companies usually have to pay the objectors' costs so long as the objectors have not behaved unreasonably: Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349; [2000] NSWSC 82 at [43]-[45].
The application of the principle in a s 459S application was considered by Gleeson J in Gillion Pty Ltd v Wet Fix Holdings Pty Ltd (No 2) [2016] FCA 1483. At [10]-[16], her Honour referred to a number of previous decisions on the question.
In none of the decisions to which her Honour referred was the question debated at any length or was there any reference to a s 459S application being an indulgence. The only case in which an order was made in favour of the plaintiff was Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd (2008) 26 ACLC 1,462; [2008] FCA 1777, a decision of Perram J. His Honour ordered the successful defendant to pay the unsuccessful plaintiff's costs of the application, but his decision was based on his view that the defendant had failed to make an appropriate concession on the legal test to be applied. His Honour said that had the concession been made earlier, the plaintiff would have consented to it and the hearing would have been avoided. As I have already noted, strictly speaking, consent is not a sufficient basis for the making of a s 459S order, but it is clear that in substance his Honour regarded the hearing as having been occasioned by the defendant's unreasonable conduct in failing to make the concession which it should have made.
On the other hand, there are two decisions in favour of defendants. In Topcide Pty Ltd v Deputy Dog Pty Ltd [2008] NSWSC 1323, Barrett J (as his Honour then was) granted leave under s 459S and ordered the plaintiff to pay the successful defendant's costs of the application. In Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) (2011) 29 ACLC 11-006; [2011] NSWSC 113, White J (as his Honour then was) granted leave under s 459S and ordered that the costs of the application be the defendant's costs in the proceedings.
In Radiancy (Sales) Pty Ltd v Bimat Pty Ltd (2007) 25 ACLC 1,216; [2007] NSWSC 962 White J granted leave under s 459S and at the same time dismissed the winding up application. He ordered that the plaintiff pay the defendant's costs of the whole of the proceedings. In SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421, the leave application was dealt with at the same time as the winding up application itself. Randall AsJ granted leave under s 459S, and dismissed the proceedings ordering the plaintiff to pay the defendant's costs including the costs of the s 459S application.
Gleeson J concluded, in the case before her, that the costs of the s 459S application be costs in the cause. She said (at [24]):
Although [the defendant] was successful in its application for leave pursuant to s 459S, it should not have a costs order in its favour because it has sought an indulgence. On the other hand, it should not be required to pay [the plaintiff's] costs because the application was made in the course of defending winding up proceedings where the reasonableness and propriety of commencing the substantive proceeding, based upon non-compliance with the statutory demand, are in dispute and have not yet been established.
The decision of Gleeson J in Gillion is a reasoned decision which is contrary to the argument by counsel for Ms Wang. Nevertheless, in deference to that argument, I propose to consider the matter briefly from the point of the view of principle.
An order under s 459S is an order which allows a defendant to present a wider case at the hearing of the winding up application than would otherwise have been permissible. In this sense it is an application for an indulgence; it was described as a "statutory indulgence" by Gleeson J in Gillion at [5].
In my view, when that is taken into account, there would rarely, if ever, be circumstances in which an order would be made on a s 459S application which would have the result that a plaintiff who ultimately succeeded in winding up the defendant would still have to pay the defendant's costs of the s 459S application. That was the order made by Barrett J in Topcide, but the reasons for the order cannot be identified from the judgment; there may not have been any debate about it at all.
Similarly, I think it must be rare that an order would be made that the costs of a s 459S application be the defendant's costs in the cause (thus having the result that a plaintiff who ultimately obtained a winding up order would still be deprived of his or her costs of the s 459S application). While such an order was made by White J in Ewen Stewart, that was a very unusual case. The company failed to apply to set the statutory demand aside because, as White J found on the facts, the plaintiff was aware of a misunderstanding on the company's behalf which it should have, but did not, correct. In these circumstances, his Honour's order in favour of the defendant was, with respect, quite understandable.
This still leaves the question whether, in the ordinary course, the costs of a successful s 459S application should be costs in the cause; or, alternatively, that the costs of the application should be the plaintiff's costs in the cause (which would deprive the defendant of any costs of the application, even if ultimately successful in the proceedings).
In my view, it is essential to consider the question in its statutory context. The Court only comes to exercise its power under s 459S in proceedings by a creditor to wind up the company in question, relying on failure to comply with the statutory demand under s 459Q. It is a creditor's choice to serve a statutory demand; and if the statutory demand is not complied with or set aside, it is the creditor's choice to commence winding up proceedings. In my view, this distinguishes the case from an application to extend a limitation period, where the plaintiff must go to court to obtain an extension before mounting his or her claim. An applicant under s 459S has already been brought to Court as a defendant.
A plaintiff who commences proceedings for the winding up of a company in insolvency under s 459Q is not guaranteed of success. Such a plaintiff must accept the risk that the defendant will be able to rebut the presumption which arises from failure to comply with the statutory demand and establish its solvency. In such a case, the plaintiff must expect that costs will follow the event and be awarded in favour of the defendant. And if the solvency issue gives rise to extensive factual disputes requiring evidence, and the costs turn out to be heavy, an unsuccessful plaintiff cannot complain: that is the sort of forensic risk which all plaintiffs must accept.
In the present case, an application, albeit inept, was made on behalf of ABC to set the statutory demand aside on the grounds that it was disputed. That application failed only because it was not served in time. Those advising Ms Wang would have appreciated at the time they commenced the winding up proceedings on her behalf that the debt was in fact disputed. Indeed, as I noted in my first judgment at [15], on the very same day that the winding up proceedings were commenced, District Court proceedings were commenced on Ms Wang's behalf against ABC to recover a sum which included the amount the subject of the statutory demand. In my view, in these circumstances, ABC's s 459S application should be seen as an ordinary and expected forensic consequence of the launching of winding up proceedings against it.
I think there is no real analogy between this application and an amendment application. The onus always lay on ABC to demonstrate its solvency. The only effect of the successful s 459S application was to allow ABC to do so on a wider basis. The success of the application did not result in any of the costs incurred by Ms Wang to that point being wasted.
It is true that the Court's leave under s 459S could not have been obtained by consent and required the Court itself to be satisfied that the grounds put forward by ABC were material to solvency. But the opposition on behalf of Ms Wang, while always reasonable, involved extensive evidentiary disputes, cross-examination and submissions on the applicable legal principles. It went far beyond merely requiring ABC to make out its case.
It is also true that the legislative purpose behind Part 5.4 is to require objections to statutory demands to be made promptly and at an early stage, rather than being brought at the hearing of the winding up application itself. But, in my view, it is not open to Ms Wang to complain about this. Had the set-aside application been made promptly, and served in time, there never would have been a winding up application in the first place. The statutory demand would have been set aside and Ms Wang would have been ordered to pay the costs of the set-aside proceedings.
For these reasons, if there was to be a final hearing on the winding up application, I would have ordered that the costs of the s 459S application be costs in the cause. The question is whether the dismissal of the proceedings should then have the result that Ms Wang must pay ABC's costs, including the costs of the s 459S application.
In this case, the s 459S application was made by way of Interlocutory Process filed on 1 June. But the application did not proceed to hearing in advance of the main hearing, as would usually happen. Instead, both the Interlocutory Process and the final hearing on the winding up application itself were listed before me. It was my decision at the hearing to deal with the s 459S application first and to defer (as it turned out, beyond the delivery of judgment on the s 459S application) the hearing of the winding up application itself.
As I have noted, on the s 459S application ABC presented a strong case that the debt claimed by Ms Wang was disputed. But that would not have been enough, on its own, to defeat the winding up application. It would have been necessary to prove affirmatively that ABC was solvent: s 459C(3); see also Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 at 239.
As I observed in my judgment, granting leave under s 459S is a much less demanding task for a defendant to obtain leave under s 459S than it is to establish solvency on the final hearing of the winding up application itself. The evidence of Mr Fathabadi concerning solvency was very weak. It was, as I concluded, sufficient to satisfy the test of materiality under s 459S, but only barely. Had the application for winding up proceeded immediately after the s 459S application, as it might have, ABC's evidence would probably have been inadequate to demonstrate solvency. If that had happened Ms Wang would have received a full costs order for the proceedings, including the s 459S application, on a "costs in the cause" approach.
It is clear from the submissions which I received that the parties prepared to deal with both the s 459S application and the winding up hearing itself concurrently. As matters have turned out, it was ABC's good fortune that the Court was only able to deal with the s 459S application in the time available. The effect of separate determination of the s 459S application was to give ABC an opportunity to put on further and better evidence on the solvency issue for any final hearing. In the face of that, it has sensibly been decided on Ms Wang's behalf not to pursue the proceedings. In my view, to award ABC the whole of its costs of the proceedings would not reflect the merits of the case as it was prepared for final hearing. In these unusual circumstances, I think that there should be no order as to costs.
The orders of the Court are:
Order that the proceedings be dismissed.
No order as to costs.
[2]
Amendments
13 November 2018 - Added the last paragraph noting the Court's orders
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Decision last updated: 13 November 2018