FEDERAL COURT OF AUSTRALIA Australian Law Company Pty Ltd v Initiative Holdings Pty Ltd [2019] FCA 1561 File number: ACD 14 of 2019 Judge: GRIFFITHS J Date of judgment: 25 September 2019 Catchwords: COSTS – interlocutory application for indemnity costs against a corporate respondent and its director who is a non-party – where the applicant commenced proceedings to set aside a statutory demand issued by the respondent – where the respondent and its director in issuing the statutory demand acted unreasonably and for an improper purpose – indemnity costs awarded against the respondent and its director jointly and severally Legislation: Corporations Act 2001 (Cth) ss 459G Federal Court of Australia Act 1976 (Cth) s 43 Federal Court Rules 2011 (Cth) rr 25.02, 25.05 and 25.14 Cases cited: Calderbank v Calderbank [1975] 2 All ER 333 Chapman v Luminis Pty Ltd [2003] FCAFC 162 Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 801; 46 FCR 225 Hooke v Bux Global Limited (No 8) [2019] FCA 671 Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72 Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622 Silver Fox Co Pty Ltd (as trustee for the Baker Family Trust) v Lenard's Pty Ltd (No 3) [2004] FCA 1570; 214 ALR 621 Soudan Lane Pty Ltd v Glen Bradshaw trading as Pacific Coast Digital [2007] NSWSC 772 Vanguard 2017 Pty Ltd; in the matter of Modena Properties Pty Limited v Modena Properties Pty Ltd (No 2) [2018] FCA 1461 Date of hearing: 24 September 2019 Registry: Australian Capital Territory Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 39 Counsel for the Applicant: K Pattenden Solicitor for the Applicant: Aulich Civil Law Counsel for the Respondent: WDB Buckland Solicitor for the Respondent: Nelson & Hill Lawyers ORDERS ACD 14 of 2019 BETWEEN: THE AUSTRALIAN LAW COMPANY PTY LTD (ACN 606 972 196) Applicant AND: INITIATIVE HOLDINGS PTY LTD (ACN 008 560 521) Respondent JUDGE: GRIFFITHS J DATE OF ORDER: 25 SEPTEMBER 2019 THE COURT ORDERS THAT: 1. The respondent and Mr Alan Richard Hill are jointly and severally liable to pay the applicant's costs of the proceeding on an indemnity basis, including the costs of the interlocutory application dated 29 July 2019. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GRIFFITHS J: 1 These proceedings under s 459G of the Corporations Act 2001 (Cth) (the Act) were commenced by an originating application dated 28 February 2019. The primary relief sought was to set aside a statutory demand dated 8 February 2019. Various orders were made by the Court to have the matter ready for hearing. On 21 June 2019, and after several requests from the applicant, the respondent withdrew the statutory demand. 2 By an interlocutory application dated 29 July 2019, the applicant now seeks orders that its costs of the proceedings be paid by the respondent on an indemnity basis and that Mr Alan Richard Hill is jointly and severally liable to pay the costs. In support of its interlocutory application, the applicant relied upon several affidavits by Mr Kai Zhang (the sole director of the applicant) affirmed by him on 28 February 2019, 18 April 2019 and 29 July 2019, as well as affidavits affirmed on 18 April 2019 and 29 July 2019 by its instructing solicitor (Ms Erin Taylor). The respondent relied upon an affidavit affirmed 22 August 2019 by its instructing solicitor Mr Nathan Kuster. Large parts of that affidavit were said to be based in part upon the deponent's review of file notes by Mr James Colquhoun (a director of Nelson & Hill Lawyers, who act for the respondent) and discussions he had with both Mr Colquhoun and Mr Hill (who is described by Mr Kuster as an independent contractor for Nelson & Hill Lawyers but who otherwise does not have any rights, control or management over Nelson & Hill Lawyers, nor is he a shareholder or director of Nelson & Co Pty Ltd). Summary of background facts 3 On 23 July 2015, the applicant entered into a written agreement to purchase from the respondent a law practice known as Hill & Rummery Barristers and Solicitors (2015 Agreement). The purchase price was $520,000, to be paid in four instalments, the first two of which (in the amounts of $220,000 and $180,000) were to be paid on or before 1 August 2015 and 1 October 2015 respectively. The combined amount of those payments is $400,000. On 23 July 2015, a director of the applicant, Mr Kai Zhang, gave a bank cheque to Mr Hill in the amount of $400,000 in payment of the first two instalments. Mr Hill is the sole director, secretary and shareholder of the respondent. 4 On 11 May 2018, well after it was discovered the previous year that there was a common mistake in that the law practice was in fact owned by Mr Hill and not the respondent, the applicant entered into a separate agreement with Mr Hill to purchase the law practice for $520,000 (2018 Agreement). The 2018 Agreement acknowledged payment of the $400,000 in July 2015 and provided that the balance of the purchase price ($120,000) was to be considered paid by way of loan repayable by the applicant to Mr Hill on 25 May 2020. In an email dated 14 December 2018 from Mr Zhang to Mr Hill, Mr Zhang acknowledged that he still owed Mr Hill $120,000 under the 2015 Agreement. The email confirms in no uncertain terms that there had been a serious breakdown in the relationship between Mr Zhang and Mr Hill. 5 Relations between the applicant and Mr Hill fractured badly in late 2018. They fell into dispute concerning the operation of the law practice (where they both then worked) and the 2018 Agreement. Mr Zhang disputed the enforceability of both the 2015 and 2018 Agreements and also relied on an offsetting claim arising from the respondent's failure to pay the applicant its profit share under the 2015 Agreement. In addition, Mr Hill alleged that the applicant was not paying him for work done as an independent contractor for the law practice. 6 On 19 December 2018, Mr Colquhoun, the respondent's solicitor demanded payment of the second, third and fourth instalments (totalling $300,000) under the 2015 Agreement. The letter stated that the respondent believed that the 2015 Agreement "is still current and binding on the parties" and that it "remains willing and able to complete". Consequently, the applicant was asked to indicate when it was ready to settle. 7 Mr Zhang replied by a letter dated 20 December 2018. In response to Mr Colquhoun's claims of missed payment under the 2015 Agreement, Mr Zhang said that proper instructions and evidence should be obtained by the respondent's solicitor "in relation to the acknowledgement of payments made". He then added that "… given the unfriendliness of the approach adopted, such evidence will not be share (sic) unless in a court or tribunal setting…". Mr Zhang asked for clarification of the respondent's position concerning the validity of the two Agreements because "your interpretation seems to be changing on a weekly basis". 8 There were further lengthy exchanges of correspondence, including a letter dated 12 February 2019 from the applicant's then solicitor (Nelson & Co), signed by Mr Colquhoun, who maintained that the $400,000 payment to Mr Hill was not a payment under the 2015 Agreement because the cheque was not made out to the respondent and was not paid into the respondent's bank account. The letter distinguished between Mr Hill as a director and the respondent company itself. It is unnecessary to summarise the balance of the voluminous correspondence, some of which is unfortunately vitriolic and unprofessional in tone and is not excused by the fact that, when it was written, the parties' relationships were in a parlous state. 9 In his affidavit, Mr Kuster deposed, on information and belief, that Mr Hill verily believed that the matters raised in Mr Colquhoun's letter dated 19 December 2018 were true and correct. Relying on that belief and the applicant's failure to provide documents, he said that the statutory demand was issued, accompanied by Mr Hill's affidavit in support. 10 Correspondence was exchanged about the matter, which included reference to the payment of $400,000 in July 2015 and the termination of the 2015 Agreement by a letter dated 14 January 2019. The respondent nevertheless sought to enforce the 2015 Agreement. 11 On 8 February 2019, the respondent served the statutory demand on the applicant claiming $520,000 in respect of the 2015 Agreement. Mr Hill swore an affidavit dated 8 January 2019 in support of the statutory demand and expressly claimed that no instalments had been paid under the 2015 Agreement. Mr Hill deposed that the total debt (i.e. $520,000) was payable by the applicant to the respondent. He stated that it was his belief that there was no genuine dispute about the amount of the debt owing by the applicant. Having regard to the material now before the Court it is difficult to discern any proper basis for that stated belief. 12 Correspondence was then exchanged between the parties' solicitors, which included several demands from the applicant that the statutory demand be withdrawn, stating that the $400,000 had been paid and also stating that if proceedings had to be initiated to have the statutory demand set aside costs would be sought against both the respondent and Mr Hill. The respondent maintained its position that the 2015 Agreement was still in force, that the $520,000 purchase price was still payable and that the $400,000 paid on 23 July 2015 was unrelated to the 2015 Agreement. Why that is so is left unexplained. In correspondence sent by the respondent's solicitor during the period 12 February 2019 to 11 June 2019, the respondent refused to withdraw the statutory demand on seven separate occasions. 13 As noted above, the applicant commenced the proceeding to have the statutory demand set aside and, almost three months later, the respondent withdrew the statutory demand. 14 After the statutory demand was withdrawn, on 15 July 2019 the respondent and Mr Hill commenced separate proceedings in the Court (ACD 50 of 2019) claiming that: (a) on 23 July 2015, the 2015 Agreement was entered into; (b) around that time, $400,000 was paid as part of the purchase price under the 2015 Agreement (which is inconsistent with Mr Hill's affidavit in support of the statutory demand, as well as Mr Colquhoun's letter dated 19 December 2018); (c) around April 2017, the parties and Mr Hill became aware that Mr Hill, not the respondent, owned the legal practice; (d) accordingly, the parties negotiated the 2018 Agreement; and (e) the $400,000 paid in July 2015 formed part of the purchase price under the 2018 Agreement and the balance of the purchase price, being $120,000, was advanced by Mr Hill to the applicant as a loan to be repayable by 25 May 2020. 15 The applicant emphasised that the allegations in the latest proceedings are consistent with its position that the statutory demand should never have been issued and ought also to have been withdrawn much earlier than it was. Relevant legal principles and the parties' contentions summarised 16 The principles are relatively well settled. First, where a s 459G application is resolved without a hearing on the merits, costs normally are assessed having regard to the approach of McHugh J in Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622 (see Soudan Lane Pty Ltd v Glen Bradshaw trading as Pacific Coast Digital [2007] NSWSC 772 at [2]-[5] per White J). Justice McHugh said that in a case where it appears that both parties have acted reasonably in commencing and defending the proceeding and that conduct continues to be reasonable until the litigation is settled, the proper exercise of the Court's cost discretion usually means that there is no order as to costs. 17 As McKerracher J pointed out in Travaglini v Raccuia [2012] FCA 620 at [13], a distinction is drawn in cases where one party effectively surrenders, as opposed to a case in which a supervening event renders the matter futile or moot. In the former case, it is often appropriate to make an award of costs in favour of the party receiving the effective surrender. This distinction was recognised by the Full Court in Chapman v Luminis Pty Ltd [2003] FCAFC 162 at [7]. 18 Secondly, on the issue of whether costs should be ordered on an indemnity basis, the general position is that some special or unusual feature of the case is required to justify such an order, as opposed to the ordinary order involving party/party costs (see Silver Fox Co Pty Ltd (as trustee for the Baker Family Trust) v Lenard's Pty Ltd (No 3) [2004] FCA 1570; 214 ALR 621 at [26] per Mansfield J and Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 801; 46 FCR 225 at 230-233). In addition, it is necessary, of course, not to lose sight of the fact that the discretion to award costs under s 43 of the Federal Court of Australia Act 1976 (Cth) must be exercised judicially. 19 Thirdly, in Soudan Lane at [4]-[5], White J observed that there are special features of proceedings to set aside statutory demands that must be taken into account in application of the Lai Qin principles and judgment of the reasonableness of the parties' conduct. His Honour made the following relevant observations: 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). 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]). 20 In this case, the applicant emphasises that the respondent and Mr Hill were on full notice that the basis for the statutory demand was challenged and was weak. It contends that the refusal to withdraw the statutory demand was unreasonable and amounts to delinquency of the kind described in Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72. Thus it says that costs should be awarded on an indemnity basis. Properly advised, both the respondent and Mr Hill should have known that there was no chance of the statutory demand succeeding, so submitted the applicant. 21 Thirdly, it is indisputable that the Court may make a costs order against a non-party, including on an indemnity basis (see, for example, Vanguard 2017 Pty Ltd; in the matter of Modena Properties Pty Limited v Modena Properties Pty Ltd (No 2) [2018] FCA 1461 and Hooke v Bux Global Limited (No 8) [2019] FCA 671). 22 In support of its application that Mr Hill should be jointly and severally liable to pay the costs, the applicant points to the fact that Mr Hill was the only person who could have given instructions to issue and maintain the statutory demand. It also draws attention to the fact that Mr Hill personally received the $400,000 payment in July 2015 and it was he who executed the 2018 Agreement. Additionally, he swore the affidavit in support of the statutory demand. The applicant submitted that the Court should infer that the statutory demand was issued, on Mr Hill's instructions, for the "inappropriate purpose of attempting to secure a resolution of the dispute concerning the 2018 Agreement". 23 The respondent and Mr Hill resisted the applicant's case on grounds which may be summarised as follows. They submitted that there was no basis to award indemnity costs, nor any basis for making a non-party costs order against Mr Hill. They say that the appropriate costs order is that the respondent pay the applicant's costs on a party-party basis as agreed or taxed up to 21 June 2019, being the date on which the respondent withdrew the statutory demand. 24 The respondent and Mr Hill challenged the applicant's claim that the statutory demand was hopeless or doomed to fail. Even though the applicant disputed the validity of the 2015 Agreement, they claim that there remained a valid claim to the outstanding amount of $120,000 under the 2015 Agreement. 25 The respondent and Mr Hill contended that it is relevant that, on 30 May 2019, the respondent's solicitors wrote to the solicitors for the applicant and offered to discontinue all existing proceeding before consolidating all disputes into a single Federal Court proceeding, but this offer was not accepted. They say that the proceeding in ACD50/2019 is that foreshadowed consolidated proceeding. 26 As to the claim for indemnity costs, the respondent and Mr Hill emphasised that the only bases upon which indemnity costs are sought are those set out in the interlocutory application. They contended that the Court should not permit the applicant to rely upon new matters which are set out in its submissions but are not reflected in the terms of the interlocutory application. 27 As to proposed order 1(a) in the interlocutory application, the respondent and Mr Hill denied that Ms Taylor's letter dated 22 February 2019 was an offer of compromise for the purpose of r 25.14(3) of the Federal Court Rules 2011 (Cth) (2011 FCRs). They submit that the offer is not in the correct form and was only open until 25 February 2019, which is less than the 14 days required by r 25.05. They also submitted that there is no basis for making such an order under r 25.14 because Ms Taylor's letter does not comply with the 2011 FCRs and also because there is no judgment of the Court in circumstances where the statutory demand was withdrawn. Thus r 25.14(3) does not apply. 28 The respondent and Mr Hill contended that proposed order 1(b) is similarly flawed. There is no evidence of any offer which expired on 3 May 2019, rather offers were made on that day but they do not comply with the 2011 FCRs, including rr 25.02 and 25.05. 29 The respondent and Mr Hill also contended that the 3 May 2019 offers are not reasonable and do not support any order for indemnity costs being made on a Calderbank basis (Calderbank v Calderbank [1975] 2 All ER 333). That is because: (a) the offers were only open for seven days, which is too short; (b) the offers contain no element of compromise; (c) the proposed cap of $40,000 inclusive of GST for the applicant's costs was not a compromise in circumstances where Ms Taylor wrote in a letter dated 6 June 2019 that her client's costs, as of that date, were in excess of $50,000 and, on a taxation, the applicant could expect only to receive approximately two-thirds of that figure, which is well below the $40,000 cap; and (d) the offers were "derisory" because the compromise offered was "trivial or contemptuous", and lacked any commercial reality or appreciation of litigation risks. 30 As to the question whether a non-party costs order should be made against Mr Hill, the respondent and Mr Hill contended that the circumstances here are different from those in Vanguard. In particular, they contended that: (a) there was no impropriety by Mr Hill, or any of the other factors which supported the making of the non-party costs order in Vanguard in the present case; (b) there is no evidence that the respondent is insolvent and it has an off-setting claim which will be set-off against any costs order; (c) it is insufficient that Mr Hill gave instructions on behalf of the respondent or had a financial interest in the outcome of the statutory demand, particularly in circumstances where the statutory demand was not doomed to fail in respect of the $120,000 which was outstanding under the 2015 Agreement; and (d) there was insufficient evidence to support an inference that Mr Hill was using the statutory demand to secure a resolution of the dispute concerning the 2018 Agreement and the Court should find that the statutory demand was issued for a proper purpose. Consideration and determination 31 For the following reasons, I consider that the respondent and Mr Hill acted unreasonably in commencing and defending the proceeding up until the time the statutory demand was withdrawn. I also find that the statutory demand was issued for the improper or unauthorised purpose as alleged by the applicant. 32 On the basis of the material before the Court, both the respondent and Mr Hill must have known that there was no chance of the statutory demand succeeding, certainly not in the full amount claimed. As noted, the demand was in the amount of $520,000 and was said to be in respect of the 2015 Agreement. This ignores the fact that $400,000 was paid to Mr Hill personally on 23 July 2015, reflecting the total of the first two instalments due under the 2015 Agreement. It is difficult to understand how Mr Hill could, in those circumstances swear an affidavit in support of the statutory demand and claim that no instalments had in fact been paid under the 2015 Agreement. His position becomes all the more dubious when consideration is given to the fact that, at the time the statutory demand was issued, the 2018 Agreement had been executed. The parties to it expressly acknowledged that the payment of $400,000 had been made in July 2015 and that the balance of the purchase price ($120,000) had been paid by way of loan from Mr Hill to the applicant, and the loan was not repayable until 25 May 2020. The application drew these matters to the attention of the respondent and Mr Hill. They were asked to withdraw the statutory demand. Yet, in the exchange of correspondence, the respondent (presumably acting on Mr Hill's instructions) insisted that the 2015 Agreement was still in force, that the $520,000 purchase price under that Agreement was still payable and that the $400,000 paid on 23 July 2015 was unrelated to that Agreement. The second of those propositions was baseless and the third is unexplained. It was not until 21 June 2019 that the statutory demand was withdrawn belatedly. 33 In addition, it would appear that it was equally untenable for Mr Hill to state in his supporting affidavit to the statutory demand that he believed that there was no genuine dispute between the parties concerning the amount of the debt owing by the application in circumstances where he personally had received a payment in the sum of $400,000 in July 2015. Notwithstanding that Mr Kuster gave evidence on information and belief, including following discussions he had with Mr Hill, no convincing explanation is provided in his affidavit as to why Mr Hill held the stated belief. Mr Hill did not provide an affidavit in respect of the interlocutory application. 34 These circumstances are sufficient to demonstrate that the respondent and Mr Hill acted unreasonably in defending the proceeding, which the applicant was forced to bring, to have the statutory demand set aside. Indemnity costs should be ordered, applying to the circumstances here the general principles discussed in cases such as Vanguard at [50] to [52]. I consider that it is appropriate that indemnity costs be paid for the entirety of the proceeding, including the interlocutory application. 35 I accept the applicant's submission that, although he is a non-party to the proceeding, Mr Hill should be jointly and severally liable to pay the applicant's costs, including on an indemnity basis. Mr Hill is the sole director and shareholder of the respondent (see Vanguard at [39] to [48], [71] and [85]). He personally received the $400,000 payment in July 2015 from Mr Zhang. Mr Hill also executed the 2018 Agreement and, notably, swore the affidavit in support of the statutory demand. I accept the applicant's submission that the Court should find that the statutory demand was issued, on Mr Hill's instructions, for the inappropriate or improper purpose of attempting to secure a resolution of the dispute concerning the 2018 Agreement. 36 I reject the submission made by the respondent and Mr Hill that it is relevant to take into account the applicant's rejection of the offer made on 30 May 2019 to discontinue all existing proceedings before consolidating all disputes into ACD50/2019. The issue of the statutory demand was a separate act taken by the respondent and Mr Hill for an improper purpose. Moreover, and necessarily, their repeated refusals to withdraw the statutory demand prior to 21 June 2019 was unreasonable and served to underline the impropriety of the issue of the statutory demand in the first place. It was only shortly before the hearing of the interlocutory application that the respondent accepted that it should pay the costs of the proceedings up until 21 June 2019, but only on a party/party basis. It also resisted, even at that point, any order for costs against Mr Hill personally. Having regard to the conduct of the respondent and Mr Hill, I am satisfied that indemnity costs should be paid by the respondent and Mr Hill, jointly and severally, for the entirety of the proceeding, including the interlocutory application. 37 In the light of my reasons and findings above, it is unnecessary to determine whether the orders sought by the applicant should also be made on the basis of other matters set out in the interlocutory application relating to offers of compromise. 38 Finally, I do not accept the respondent's submission that the applicant was confined by the terms of its interlocutory application to seeking indemnity costs on only the two bases stated there, which relate to offers of compromise. The applicant made abundantly clear in its outline of submissions filed on 12 September 2019 that its application for indemnity costs was also based on the conduct of both the respondent and Mr Hill. The respondent and Mr Hill had ample notice of the way in which the case would be put against them. It was a matter for Mr Hill to decide whether or not he wished to adduce evidence in respect of his own personal position. He elected not to do so. Conclusion 39 Appropriate orders will be made which give effect to these reasons. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths. Associate: Dated: 25 September 2019