In the matter of Rajlaw Pty Ltd [2014] NSWSC 219

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Rajlaw Pty Ltd [2014] NSWSC 219 Hearing dates: 25 February 2014 Decision date: 25 February 2014 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Orders made for the defendant to pay the costs of the plaintiff on an indemnity basis when statutory demand set aside by consent. Catchwords: PROCEDURE - costs - general rule costs follow the event - exception to general rule that costs orders will not be made where no hearing on merits of case - where parties have consented that statutory demand should be set aside - where defendant accepts that costs should be paid on ordinary basis - where related proceedings had been commenced - whether order for costs should be stayed. PROCEDURE - costs - departing from the general rule - orders sought for further costs on indemnity basis - where defendant acted unreasonably in serving statutory demand in circumstances where there was a genuine dispute - where demand was withdrawn immediately before hearing - whether order for indemnity costs should be made. Legislation Cited: - Corporations Act 2001 (Cth) ss 459H, 459N Cases Cited: - CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 - Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 801; (1993) 46 FCR 225; 118 ALR 248 - Hamod v State of New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 - Lahoud v Lahoud [2006] NSWSC 126 - Ng v Chong [2010] NSWSC 127 - Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 - Soudan Lane Pty Ltd v Glen Bradshaw t/as as Pacific Coast Digital [2007] NSWSC 772 - White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 303 Category: Interlocutory applications Parties: Rajlaw Pty Ltd (Plaintiff) Rajlaw NSW Pty Ltd (Defendant) Representation: Counsel: M R Elliott (Plaintiff) D Low (Solicitor - Defendant) Solicitors: Horton Rhodes (Plaintiff) Veritas Legal (Defendant) File Number(s): 2013/299403

Judgment - ex tempore 1By Originating Process filed on 4 October 2013, the Plaintiff, Rajlaw Pty Ltd, moves to set aside a creditor's statutory demand dated 11 September 2013 issued by the Defendant, Rajlaw NSW Pty Ltd. The Defendant was the purchaser of a legal practice from the Plaintiff and the creditor's statutory demand identified the relevant debt as: "The amount due and payable by [the Plaintiff] to [the Defendant] for compensation pursuant to Special Conditions 38 and 39 of a Contract for Sale of Business dated 6 July 2012 between the [Plaintiff] and the [Defendant]. 2The Defendant now accepts that the creditor's statutory demand should be set aside, although it appears that it only communicated that position to the Plaintiff this morning, shortly before the hearing of the application to set aside the demand listed for today, having failed to comply with orders previously made by the Court for the filing of written submissions, and in circumstances that the Plaintiff had retained counsel to appear today. 3The Defendant accepts that it should be required to pay costs of the application to set aside the creditor's statutory demand on an ordinary basis, on the basis that costs follow the event, but seeks a stay of that order, in circumstances that it has commenced other proceedings in respect of the purchase of the relevant business in which it claims damages and other relief. The Plaintiff seeks costs on an indemnity basis from 3 October 2013, the date of the affidavit sworn by its director, Mr Raj, supporting the application to set aside the demand. Those costs are, in substance, the costs of the proceedings to set aside the demand, which were commenced on 4 October 2013. 4I should first indicate the scope of the parties' submissions before turning to the relevant legal principles. Mr Elliott, who appears for the Plaintiff, contends that it would at least have been apparent from the date of Mr Raj's affidavit in support of the application to set aside the statutory demand that the debt which was the subject of the demand was subject to a genuine dispute such that the demand should be set aside under s 459H of the Corporations Act 2001 (Cth). Mr Elliott points out that the provision in the contract for the sale of business relied upon to seek compensation, which was the amount claimed in the creditor's statutory demand, dealt with payment of the purchase price for the relevant business in three instalments. Payment of the second and third instalments was expressly subject to special conditions 38 and 39 of the contract. Special condition 38(b) provided for a second payment toward the purchase price if, among other things, a minimum level of turnover had been achieved by the purchaser by twelve months after completion and provided that, if that was not satisfied, the second instalment would be subject to a specified compensation formula. Special condition 38(c) similarly provided in respect of a third and final payment. The compensation formula found in special condition 39(c) in turn provided for the calculation of an amount of compensation. Special condition 39(d), it will be noted, did refer to the possibility that compensation might be "payable" by the vendor after expiration of twelve months from completion. Special condition 39(e) in turn provided for a joint calculation of the turnover which was relevant to the application of this provision. 5Mr Elliott points out, and it seems to me clear, that there are open questions of construction as to special conditions 38 and 39 of the sale contract. Possible constructions which might be advanced are, first, that the provisions for "compensation" are offsets against the second and third instalments of the purchase price, which are not payable if the relevant thresholds are not satisfied but do not affect the first instalment of the purchase price. Second, it might be contended that they are reductions against the total purchase price, but cannot result in anything beyond a reduction in the purchase price to nil. Third, with some support from the reference to payment of compensation in special condition 39(d), it might be suggested, as the Defendant implicitly contends, that an amount is capable of being payable by the purchaser to the vendor under these special conditions, although again that amount might be limited to amounts which have already been paid by way of the second and third payments. Each of these constructions is open. Because each of these constructions is open, it seems apparent that a genuine dispute as to whether the position which the Defendant advances, that an amount of compensation is payable to it, existed at all relevant times. 6That position is reinforced because, as Mr Elliott points out, Mr Raj's affidavit dated 3 October 2013 sets out the nature of the dispute as to construction for which the Plaintiff contended in clear terms. His affidavit also identified other disputes, which might also be capable of giving rise to a genuine dispute. The first of those other disputes, namely, the contention that the Plaintiff had not been consulted in respect of the calculation of the turnover figures, also seems to me plainly capable of giving rise to a genuine dispute as to the amount claimed, where special condition 39(e) of the contract for the sale of business provided for a calculation of that turnover jointly by the purchaser and the vendor. Mr Raj also points to uncertainties as to the period over which turnover is to be calculated, as to which there appear to be different periods specified in the relevant contractual provision; a debate as to whether a figure specified in the relevant formula constitutes a "penalty" so as to be unenforceable; and a separate dispute, involving questions of fact, as to whether the manner in which the practice had been operated was such as to deprive the Defendant of its entitlement to rely on the right to compensation, or alternatively, to establish an offsetting claim in the same amount as the compensation claimed. 7Again, each of these disputes were plainly identified in Mr Raj's affidavit dated 3 October 2013. Mr Elliott points out that the fact that those matters gave rise to a matter which might require resolution, by the commencement of proceedings rather than by the summary process for setting aside a creditor's statutory demand, is implicit in the fact that the Defendant subsequently commenced proceedings, some three weeks after the application to set aside the creditor's statutory demand had been made, in the Equity Division of this Court, at that time raising the relevant claim in those proceedings. It did not then withdraw the creditor's statutory demand or volunteer to consent to orders that it be set aside. 8Mr Low, who appears for the Defendant, draws attention to the existence of those other proceedings in this Court and contends that any order that the Defendant pay the Plaintiff's costs should be stayed until the determination of those other proceedings. Mr Low points to, although the Court has no detail about, the fact of other attempts by the parties to settle matters, which may or may not relate to the wider disputes between them. He contends that, where the Defendant seeks wider relief in its other proceedings, a stay is appropriate so that any costs ordered in favour of the Plaintiff may be set-off against any money orders made in those other proceedings. I do not accept that submission. As I noted in the course of argument, and I understand Mr Low to have accepted, the difficulty with that submission is that the Plaintiff has in fact been put to costs in seeking to set aside the creditor's statutory demand, which I infer that it has incurred as the matter has proceeded. It would not have been exposed to costs if the creditor's statutory demand had not been served and the Defendant had instead commenced the substantive proceedings claiming damages and other relief which it subsequently commenced. Those costs are in fact wasted, and they will be no less wasted if the Defendant is ultimately successful in its further proceedings against the Plaintiff. The difficulty with a stay of the order for costs is that the Plaintiff would be left out of pocket in respect of the costs which it has in fact incurred until a resolution of the other proceedings. I do not accept that that result is appropriate and, as Mr Elliott points out, no attempt has been made to establish that it is justified under orthodox principles in respect of the stay of a judgment. 9It is not necessary to deal at length with the principles in respect of which an order for costs may be made in an application to set aside a statutory demand, where the Court has not delivered judgment. The Court has power to make such an order, at least under s 459N of the Corporations Act although the substantive issue between the parties has not been determined, and the Defendant did not contend to the contrary. The Court may, in some cases, be reluctant to make such an order where there has been no hearing on the merits, but it may do so where it is confident that 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. Again, the Defendant did not contend to the contrary. 10There is a further issue as to whether, as the Plaintiff seeks, an order for indemnity costs should be made from 3 October 2013. This raises questions as to the principles applicable to such an order generally, and as to their particular application in the context of an application to set aside the statutory demand. The courts have frequently emphasised the need for creditors to take care in issuing creditors' statutory demands, on the basis that an application which is issued in respect of a genuinely disputed debt may well give rise to an order for indemnity costs. In 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 previously given by Santow J in several judgments that creditors which issued demands in respect of genuinely disputed debts were at risk of indemnity costs, where they had put the applicant to set aside the demand to expense by doing so. Barrett J there noted that the party which issued a demand might, in some circumstances, be entitled to test the other party's claim that the debt was genuinely disputed, but also noted that that principle had a limit to it and that there were cases which were "so devoid of prospects of success as to be perverse" and that, if a defendant which was put on notice of an "obvious and irremediable weakness in its position" does not withdraw a statutory demand, it may well be appropriate for the Court to award costs to the Plaintiff on an indemnity basis. In Soudan Lane Pty Ltd v Glen Bradshaw t/as as Pacific Coast Digital [2007] NSWSC 772 at [4]-[5], White J again observed that creditors are often ill-advised to proceed with a statutory demand once plausible grounds for a dispute are asserted, and they risk an order for indemnity costs if they do so. 11These principles are, of course, a specific application of the wider principles applicable to an order for indemnity costs, as summarised by Sheppard J in Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 801; (1993) 46 FCR 225; 118 ALR 248 at 256-257 and by McDougall J in White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 303 at [5]-[11] and applied in Lahoud v Lahoud [2006] NSWSC 126 at [11] and in Ng v Chong [2010] NSWSC 127 at [18]. As the Full Court of the Federal Court noted in Hamod v State of New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20], an order for indemnity costs is awarded not to punish a party for persisting with a case that turns out to fail, but to the compensate the other party fully for costs incurred, as a normal costs order would not, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs. 12In this case, I am satisfied that an order for indemnity costs is amply justified. First, it seems to me at least arguable, although Mr Elliott did not seek to advance this position, that it ought to have been apparent to the Defendant, which was after all under the control of a firm of solicitors, that the clause on which it relied was open to arguments of construction, such that a claim under that clause would necessarily involve a genuine dispute, before the demand was served. If that was not recognised before the demand was served, it was plain from the point of service of Mr Raj's affidavit dated 3 October 2013. 13In these circumstances, the Defendant had several months in which to indicate that it did not press the demand and would consent to an order setting it aside, so as to avoid putting the Plaintiff to the cost of proceeding to a hearing. Instead of taking that course, it deferred indicating its position until the last possible moment, immediately before the hearing on the merits, and put the Plaintiff to the costs of retaining counsel for such a hearing. It seems to me that these circumstances, in every respect, warrant an order for indemnity costs, both because the behaviour involved is unreasonable, the more so when undertaken by a solicitor, and because it warrants an order that would put the Plaintiff in the position it would have been, by fully compensating it for costs, had that conduct not been undertaken. 14For these reasons, I make the following orders: 1. The creditor's statutory demand dated 11 September 2013 issued by Rajlaw NSW Pty Limited to Rajlaw Pty Limited be set aside. 2. The Defendant pay the Plaintiff's costs of, and incidental to, the application to set aside the demand on an ordinary basis up to and including 3 October 2013 and on an indemnity basis on and from 4 October 2013.

********** 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: 01 April 2014