FEDERAL COURT OF AUSTRALIA Fleur De Lys Pty Limited v Jarrett [2004] FCA 1357 CORPORATIONS – statutory demand – setting aside – untaxed costs capable of establishing existence of offsetting claim – demand set aside subject to condition that costs be assessed Corporations Act 2001 (Cth) s 459G, 459H(1)(a) 459H, 459M Federal Court of Australia Act 1976 (Cth) s 25(1A) Federal Court Rules Order 35 rule 7(2)(b), Order 52 rule 15 Federal Magistrates Court Rules Rule 16.05(2)(b) Legal Profession Act 1987 (NSW) Part 11 Division 6 Federal Court (Corporations) Rules 2000 Reg 2.4A The Tubby Trout Pty Ltd v Sailbay Pty Ltd (1996) 63 FCR 530 cited Re Elgar Heights Pty Ltd (1985) 9 ACLR 896 cited Ford's Principles of Corporations Law FLEUR DE LYS PTY LIMITED v KEVIN JARRETT N 1199 OF 2004 HELY J 22 OCTOBER 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1199 OF 2004 BETWEEN: FLEUR DE LYS PTY LIMITED PLAINTIFF AND: KEVIN JARRETT DEFENDANT JUDGE: HELY J DATE OF ORDER: 22 OCTOBER 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The statutory demand served by the defendant on the plaintiff on 19 July 2004 be set aside on condition that the plaintiff makes application for an assessment under Division 6 of Part 11 of the Legal Profession Act 1987 (NSW) of the costs which it is entitled to receive from the defendant pursuant to the order made by Dillon SM on 5 September 2003 within 28 days of the making of this order. 2. The defendant pay 75 per cent of the plaintiff's costs of these proceedings. 3. Liberty be given to apply on 3 days notice. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1199 OF 2004 BETWEEN: FLEUR DE LYS PTY LIMITED PLAINTIFF AND: KEVIN JARRETT DEFENDANT JUDGE: HELY J DATE: 22 OCTOBER 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 19 July 2004 the defendant served a document styled 'Creditor's Statutory Demand for Payment of Debt' upon the plaintiff. The document purported to require the plaintiff to pay to the defendant the sum of $20,894.56. That sum was made up of two debts being: (a) the sum of $17,492.62 plus interest of $1,375.92 (giving a total of $18,868.54) pursuant to a certificate of taxation issued in the Federal Magistrates Court of Australia in Sydney on 2 September 2003; and (b) the sum of $1,900 plus interest of $126.02 (giving a total of $2,026.02) pursuant to an order of the Federal Court of Australia on 22 October 2003. 2 On 5 August 2004 the plaintiff filed an originating process in this Court under s 459G of the Corporations Act 2001 (Cth) ('the Act') in which it sought an order setting aside the statutory demand. The application was supported by an affidavit of Mark Vine, the plaintiff's solicitor, sworn on 5 August 2004. 3 Paragraph 1 of the originating process seeks an order that the statutory demand issued to the plaintiff on 19 July 2004 be set aside on the following grounds: '(a) The Defendant is seeking to enforce a costs order that was fundamentally infected by fraud and perjury on the part of the Defendant in his application to the Local Court, Downing Centre, Sydney in file number 1936 of 1993 on 28 November, 2002. (b) The Plaintiff would suffer substantial injustice if the costs were allowed to stand or be enforced. (c) Within the meaning of s 459H(1)(a) there is a genuine and long running dispute that any debt is owing to the defendant by the Plaintiff. (d) The plaintiff has an offsetting claim against the defendant that exceeds the quantum of the statutory demand within the meaning of s 459H(1)(b). (e) That, within the ambit of s 459J(1)(b), the defendant's actions constitute an unconscionable and inappropriate attempt to exercise coercion through financial oppression.' 4 Paragraph 2 of the originating process seeks an order setting aside a number of decisions allegedly infected by the defendant's fraud and perjury. During the course of argument, the plaintiff's solicitor withdrew the claims made in pars 2(b) and (c), hence the only extant claim is that referred to in par 2(a) as follows: '2 An order setting aside the following decisions infected by the defendant's fraud and perjury: (a) SZ860/02 on 1 April 2003 by Raphael FM (Bankruptcy Notice).' 5 Paragraph 3 of the originating process seeks, in the alternative, the following relief: '3 That the Court grant the plaintiff leave under FCR Order 52, rule 15(2) to appeal following decisions infected by the Defendant's fraud and perjury:- (a) SZ860/02 on 1 April by Raphael FM (bankruptcy notice).' The relief sought in par 3(b) and (c) was withdrawn during the course of submissions. 6 In addition, the plaintiff seeks costs on an indemnity basis as well as an order that the defendant's solicitors, Proctor Phair, Lawyers, be ordered to indemnify the plaintiff in relation to those costs. A decade of litigation 7 This matter has a long history. The appropriate starting point for present purposes is 21 September 1993, when the plaintiff obtained a consent judgment against the defendant for $23,000 in the Downing Centre Local Court in proceedings number 1936 of 1993. On 9 February 1996 consent orders were made in the Local Court proceedings that the judgment obtained on 21 September 1993 be permanently stayed if the sum of $2,950 was paid by the defendant to the plaintiff by 19 February 1996. Whether payment was in fact made was to become a matter of some controversy between the plaintiff and defendant. In any event, nothing relevant to these proceedings occurred for the next six years. 8 On 14 August 2002 the plaintiff issued a bankruptcy notice against the defendant claiming a debt of $17,540.12 said to be the balance of a judgment obtained against the defendant in the Local Court on 23 September 1993. That bankruptcy notice was served on 28 August 2002 and on 17 September 2002 an application was made to the Federal Magistrates Court to set aside the bankruptcy notice (proceedings SZ 860 of 2002). Also on 17 September 2002 a Notice of Motion was taken out by the defendant in the Local Court seeking to set aside the judgment which had been entered against him on 21 September 1993. The defendant swore an affidavit in the Local Court proceedings on 17 October 2002 which annexed a letter dated 9 February 1996 sent by the defendant to the plaintiff care of its solicitors. The letter purported to forward a cheque in the sum of $2,950 being the sum which was required to be paid by 19 February 1996 if the judgment of 21 September 1993 was to be permanently stayed. 9 On 28 November 2002 Dillon SM made an order permanently staying the judgment entered on 21 September 1993 because the defendant had made a genuine attempt to comply with the consent agreement by tendering the sum of $2,950 to the plaintiff's solicitors on 9 February 1996. In coming to his conclusion, Dillon SM alluded to the possibility that the plaintiff's solicitors may have simply chosen not to present the cheque. 10 The application to set aside the bankruptcy notice which had been filed in the Federal Magistrates Court on 17 September 2002 was dismissed by Registrar Hedge on 3 December 2002 with each party ordered to pay its own costs. On 18 December 2002 the defendant sought a review of that decision, and on 1 April 2003 Raphael FM made an order setting aside the bankruptcy notice, and ordered the plaintiff in these proceedings to pay the defendant's costs as taxed or agreed. Those costs were taxed and on 2 September 2003 a certificate was issued certifying the taxed costs to be $17,492.62. That is the first of the debts claimed in the statutory demand the subject of these proceedings. 11 On 22 April 2003 application was made by the plaintiff in these proceedings to set aside the orders made by Dillon SM on 28 November 2002 on the ground that those orders had been obtained by perjury on the part of the defendant. That application and associated applications were heard at the Downing Centre Local Court on 8 August 2003 when judgment was apparently reserved. 12 On 2 September 2003 a statutory demand was served by the defendant in these proceedings on the plaintiff claiming the sum of $17,492.62 in relation to the costs order made by Raphael FM on 1 April 2003. 13 On 5 September 2003 Dillon SM gave his decision, in which he made the following finding (at [56]): 'In my opinion, it is overwhelmingly demonstrated that the order I made on 28 November 2002 was procured as a result of false evidence given by Mr Jarrett and accepted at that time by me. The order was obtained irregularly, illegally and against good faith by fraud.' Accordingly, Dillon SM set aside the orders made on 28 November 2002, directed that the papers be referred to the Director of Public Prosecutions for consideration, and ordered the defendant in these proceedings to pay the plaintiff's costs of the proceedings before Dillon SM on an indemnity basis. The order provided: 'Those costs are to be in a sum agreed by the parties within 28 days or as assessed.' 14 The defendant in these proceedings lodged an appeal against the decision of Dillon SM given on 5 September 2003, but the appeal was discontinued as a result of 'an agreement' between the plaintiff and the defendant which was 'frustrated because of disagreement between the parties': affidavit of the defendant of 19 August 2004 at [12]. 15 On 23 September 2003 the plaintiff filed an application for an extension of time to appeal to this Court from the judgment of Raphael FM on 1 April 2003. On 24 September 2003 the plaintiff filed an originating process in this Court seeking to set aside the creditor's statutory demand of 2 September 2003. In both the application for an extension of time and the originating process to set aside the creditor's statutory demand, the plaintiff placed reliance upon the decision of Dillon SM given on 5 September 2003. 16 On 10 October 2003 Registrar Segal made an order dismissing the originating process to set aside the statutory demand and ordered that the plaintiff in these proceedings pay the defendant's costs of the originating process up to and including 8 October 2003 as agreed or taxed. 17 On 20 October 2003 the plaintiff lodged a Notice of Discontinuance of the proceedings which it had instituted on 23 September 2003 seeking an extension of time within which to appeal from the decision of Raphael FM on 1 April 2003. On 21 October 2003 Lindgren J ordered, by consent, that those proceedings be dismissed and ordered the plaintiff in these proceedings to pay the defendant's costs. On 22 October 2003 Lindgren J ordered, by consent, that the plaintiff pay the defendant's costs in the sum of $1,900. That is the second of the debts claimed in the statutory demand the subject of these proceedings. 18 It appears that in late November 2003 the plaintiff and the defendant entered into a Deed of Release in an attempt to finalise all the issues between the parties. As a result, the plaintiff's solicitor, Mr Vine, did not pursue the Bill of Costs in relation to the Local Court matter. The uncontradicted evidence of Mr Vine is, however, that the defendant failed to comply with a condition precedent contained in the Deed of Release, and the Deed of Release is now of no effect. 19 Paragraph 24 of Mr Vine's affidavit of 5 August asserts that as at 2 August 2004 the balance of the judgment originally obtained in the Local Court on 21 September 1993 was $16,714.32. The solicitor for the defendant, Mr Phair, originally objected to that part of the affidavit but later withdrew his objection, instead requesting that it be noted that he did not concede that this sum was correct. The sum does, however, approximate the amount claimed by the defendant in the bankruptcy notice issued on 14 August 2002 ($17,540.12) less the $700 referred to as a part payment in par 24 of Mr Vine's affidavit of 5 August 2004. 20 In November 2003 Mr Vine prepared a Bill of Costs on behalf of the plaintiff claiming costs as ordered by the Local Court on 5 September 2003 in the sum of $16,316.55. There is no evidence that this assessment of the plaintiff's costs was ever conveyed to the defendant, let alone agreed to by the defendant. It is common ground that there has not been any taxation of these costs. Decision on the application 21 It is convenient first to consider the relief sought in pars 2 and 3 of the originating process. Clearly enough, that relief is not sought under the Corporations Act and may not be appropriately included in an originating process filed under that Act, but no point was taken by the defendant on this account. 22 Paragraph 2(a) of the originating process is misconceived, as I do not have any power to set aside a decision made by a Federal Magistrate, except upon an appeal from a decision of the Federal Magistrate, and then only if the Chief Justice considers that it is appropriate that the appellate jurisdiction of the Court in that respect be exercised by a single judge: Federal Court of Australia Act 1976 (Cth) s 25(1A). The plaintiff relied upon Order 35 rule 7(2)(b) of the Federal Court Rules ('the Federal Court Rules')which enables the Federal Court to set aside a judgment or order after the order has been entered when the order was obtained by fraud. However, this rule applies to judgments and orders of the Federal Court; it does not extend to judgments and orders of the Federal Magistrates Court. Rule 16.05(2)(b) of the Federal Magistrates Court Rules 2001 contains a corresponding provision which would enable the Federal Magistrates Court to set aside a judgment or order of that Court after entry if the order is obtained by fraud. But the plaintiff has not made any application to the Federal Magistrates Court to set aside the orders made by Raphael FM on 1 April 2003. 23 As for par 3(a), an appeal lies to the Federal Court from a judgment of the Federal Magistrates Court, and under the Federal Court Rules (O 52 r 15) the notice of appeal is to be filed and served within 21 days after the date on which the judgment appealed from was pronounced. The time for appealing from the decision of Raphael FM expired more than a year ago, hence the plaintiff requires an extension of time within which to lodge an appeal. There are a number of problems associated with the granting of an extension of time, none of which were addressed by the plaintiff's solicitor in his oral submissions. First, the orders made by Raphael FM on 1 April 2003 were made by consent, hence an appeal may not be the appropriate method of challenging those orders which appear to have been regularly made. Second, the plaintiff made application to the Local Court on 22 April 2003 to set aside the orders made by Dillon SM on 28 November 2002 on the grounds that they had been obtained by the defendant's perjury. The plaintiff then knew of the fraud, but there is no explanation for the delay in seeking to impeach the orders made by Raphael FM on 1 April 2003 which has occurred since. Third, on 23 September 2003 the plaintiff applied for an extension of time to appeal from the decision of Raphael FM on 1 April 2003, but it lodged a Notice of Discontinuance of those proceedings on 20 October 2003, and the proceedings were dismissed by consent by Lindgren J on 21 October 2003. No reason has been shown as to why the plaintiff should now be permitted to resile from the course which it then chartered, and to reactivate the application which it then, with complete knowledge of the fraud, abandoned. 24 For these reasons, I decline to make an order under Order 52 r 15(2) granting leave to file the application out of time as special reasons have not been shown. 25 The applications made in pars 2 and 3 of the originating process therefore fail. Setting aside the statutory demand 26 The first of the debts claimed in the statutory demand ($18,868.54) is supported by a certificate of taxation issued by a Registrar of this Court, and the second of those debts ($2,026.02) is supported by the terms of the consent order made by Lindgren J. I am therefore not satisfied in terms of s 459H(1)(a) of the Act that there is a genuine dispute between the plaintiff and the defendant about the existence or amount of those debts. The bare possibility that at some stage in the future the plaintiff may make an application to the Federal Magistrates Court to set aside the orders of Raphael FM made on 1 April 2003, is insufficient to enliven the provisions of s 459H(1)(a) of the Act. If application were made to the Federal Magistrates Court to set aside that order, the Court might take the view that the order made by Raphael FM was part of the fruit of the defendant's perjury, but I should not anticipate or pre-empt the decision of the Federal Magistrates Court on that question. 27 The plaintiff also claims to have an offsetting claim in terms of s 459H(1)(b). An 'offsetting claim' is defined in s 459H(5) so as to mean a genuine claim that the company has against the defendant by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates). 28 There is evidence before me that the defendant is indebted to the plaintiff in the sum of $16,714.32 in respect of the balance of the debt owed by the defendant as a result of the judgment originally obtained in the Local Court proceedings. There is also evidence that on 5 September 2003 Dillon SM ordered the defendant to pay the costs of the proceedings before his Worship on an indemnity basis. The measure of that obligation has not been quantified, but there is evidence from Mr Vine that he has estimated the untaxed costs in a sum of $16,316.55. 29 The order made by Dillon SM on 5 September 2003 gives the plaintiff a genuine claim against the defendant. The authorities establish that a claim for unliquidated damages can be an offsetting claim, although the company must adduce some evidence to show the amount of the claim or claims, otherwise the offsetting total component of the formula for the calculation of the substantiated amount (see s 459H(2)) would be a nil amount. See, generally, Ford's Principles of Corporations Law at 27160-27162. 30 An 'offsetting claim' is not confined to a debt which is presently due and payable. Even if the section were so confined, there is some authority, albeit in a different statutory context, which suggests that the fact that costs have not as yet been taxed does not necessarily prevent the costs from constituting a debt: The Tubby Trout Pty Ltd v Sailbay Pty Ltd (1996) 63 FCR 530 (but see Re Elgar Heights Pty Ltd (1985) 9 ACLR 846). Whether this be so or not, the evidence of Mr Vine satisfies me that the plaintiff has two offsetting claims against the defendant, and that the total of the amounts of those claims exceeds the admitted amount of the debt due by the plaintiff to the defendant. As the substantiated amount is a negative number the Court is required by s 459H(3) to make an order setting aside the demand. 31 An order under s 459H that a demand be set aside may be made subject to conditions: s 459M. In the circumstances of the present case, it is appropriate to impose a condition that the plaintiff make application for an assessment under Division 6 of Part 11 of the Legal Profession Act 1987 (NSW) of the costs which it is entitled to receive from the defendant pursuant to the order made by Dillon SM on 5 September 2003 within 28 days of the date of the making of this order. Ancillary issues 32 The plaintiff has only partially succeeded in obtaining the relief which it seeks. On the other hand, the overall costs of these proceedings have been marginally increased by the inclusion in the proceedings of issues on which the plaintiff fails. The defendant should pay 75 per cent of the plaintiff's costs of the proceedings. No sufficient reason has been shown for those costs to be awarded on an indemnity basis. Nor has any sufficient reason been shown for visiting the costs order on the defendant's solicitors. 33 The plaintiff has failed to comply with Regulation 2.4A of the Federal Court (Corporations) Rules 2000 inasmuch as the originating process is not accompanied by a copy of the statutory demand, nor has the search for which that regulation provides been undertaken. No prejudice was suggested to flow from these non-compliances, hence I dispense with compliance with Regulation 2.4A in these respects. 34 After the conclusion of the hearing, the parties lodged written submissions in accordance with the liberty which I reserved in that respect. The written submissions are with the papers, and there is no utility in summarising them here. Nothing in the written submissions indicates or requires any different conclusion from that which I have reached. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely. Associate: Dated: 22 October 2004 Solicitor for the Applicant: Mark Vine Solicitor for the Respondent: Proctor Phair Lawyers Date of Hearing: 8 September 2004 Date of Judgment: 22 October 2004