Supreme Court New South Wales Medium Neutral Citation: In the matter of Aussie Strength Pty Ltd [2021] NSWSC 1594 Hearing dates: On papers Date of orders: 9 December 2021 Decision date: 09 December 2021 Jurisdiction: Equity - Corporations List Before: Black J Decision: No order as to costs. Catchwords: COSTS — Party/Party — General rule that costs follow the event — Where application to set aside statutory demand did not proceed – Where no determination of proceedings on the merits. Legislation Cited: - Civil Procedure Act 2005 (NSW), s 98 - Corporations Act 2001 (Cth), s 459N Cases Cited: Ayrton Investments Pty Ltd v Andrlik (2000) 34 ACSR 643; [2000] ACTSC 55 Dynamics Co Pty Ltd v G & M Nicholas Pty Ltd [2012] NSWSC 206 Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607; [1993] FCA 455 Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602 Re Ming Tian Real Property Pty Ltd [2021] NSWSC 386 Re Telegraph Point Sports & Recreation Club Ltd [2020] NSWSC 616 Re The Minister for Immigration and Ethic Affairs; Ex Parte Lai Qin (1997) 186 CLR 622 Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 Category: Costs Parties: Aussie Strength Pty Ltd (Plaintiff) Pro Arc International Pty Ltd (Defendant) Representation: Counsel: L Coates (Plaintiff) No appearance (Defendant) Solicitors: HWL Ebsworth Lawyers (Plaintiff) No appearance (Defendant) File Number(s): 2021/277923 Judgment 1. By Originating Process filed on 29 September 2021 the Plaintiff, Aussie Strength Pty Ltd ("ASPL"), applied to set aside a creditor's statutory demand dated 6 September 2021 ("Demand") served by the Defendant, Pro Arc International Pty Ltd ("PAI"). On 8 November 2021, I made orders, by consent, setting aside the Demand and, at the parties' request, setting a timetable for submissions as to costs, on the basis that the Court would determine the question of costs on the papers based on the parties' submissions. ASPL filed submissions in support of its claim to costs on 19 November 2021 and PAI did not file submissions in response in accordance with that timetable or prior to the delivery of this judgment. 2. ASPL relied on the affidavit dated 2 November 2021 of its solicitor, Mr Alistair Little, in respect of the question of costs. Mr Little referred to a default judgment issued in the Local Court in favour of PAI and against ASPL in the amount of $37,200.71 inclusive of costs, on which PAI relied in the Demand, and to consent orders subsequently made on 21 October 2021 by which that default judgment was set aside and further orders were made for the conduct of the proceedings in the Local Court. I note that, at the time the Demand was served on 6 September 2021, that default judgment remained in effect, and it appears that ASPL did not seek orders to set it aside until 20 October 2021, not only after service of the Demand but also after the commencement of the proceedings. 3. Mr Pokoney, who appears for ASPL, refers to the principles applicable to an order for costs under s 98 of the Civil Procedure Act 2005 (NSW). He refers, in particular, to the circumstances in which an order may be made in favour of a successful party in proceedings, but those principles assume a determination of the proceedings in favour of that party on its merits. He recognises that there is case law considering the position in respect of an application to set aside a creditor's statutory demand, where that demand is withdrawn or set aside by consent. 4. I reviewed the relevant case law in my judgment in Re Kaloriziko Pty Ltd [2021] NSWSC 1276, to which Mr Pokoney refers, and have drawn on that review below. In Re The Minister for Immigration and Ethic Affairs; Ex Parte Lai Qin (1997) 186 CLR 622 at 624–625 ("Lai Qin"), McHugh J observed that: "In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extracurial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried … [b]ut such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases." (Citation of authorities omitted.) 1. In the context of applications to set aside a creditor's statutory demand, in Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607; [1993] FCA 455 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." 1. In Ayrton Investments Pty Ltd v Andrlik (2000) 34 ACSR 643; [2000] ACTSC 55 at [26], Higgins J observed that a person who issued such a demand faces "a risk as to costs, not an inevitability". His Honour there expressed the view 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. If it was reasonable to issue the notice, but thereafter it appears that there is a genuine dispute then, as soon as that appears, the creditor must withdraw or cease to oppose the setting aside of the notice. Otherwise, the creditor risks an adverse costs order." 1. In Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602 at [7], Barrett J observed that: "The expectation that costs should lie where they fall may be displaced if the court can see, with ease, that one party has acted unreasonably in a way which should be compensated by costs." 1. In Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 at [3]-[4], White J referred to the principles set out in Lai Qin above and observed that these principles apply to proceedings to set aside a statutory demand, but that special features of such proceedings also need to be taken into account in judging the reasonableness of the parties' conduct. His Honour observed that: "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 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]). On the other hand, a company which capitulates to the creditor's demand after commencing proceedings to have the demand set aside by paying the sum demanded, or a company which puts the creditor to unnecessary expense in defending an application to set aside the demand before recovering what is unquestionably due, is likely to have to pay the creditor's costs even though the demand is set aside upon the creditor being paid (Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Gee Ha Pty Ltd v Dera Developments Pty Ltd [2007] NSWSC 95)." 1. In Dynamics Co Pty Ltd v G & M Nicholas Pty Ltd [2012] NSWSC 206 at [26], I noted several of these authorities and expressed the view that: "… consistent with the approach adopted by Higgins J in Ayrton Investments, the reasonableness of a party serving a statutory demand must be determined by reference to what that party knew as to the nature of any dispute as to the debt; conversely, a debtor which fails to pay a debt which is apparently due and undisputed, and also fails to disclose the basis of any dispute, can scarcely complain when the statutory demand procedure is invoked by a creditor who is acting reasonably on the basis of the information which is then known to it." 1. In Re Telegraph Point Sports & Recreation Club Ltd [2020] NSWSC 616, I made no order as to the costs of an application to set aside a creditor's statutory demand where I found (at [13]) that: "It seems to me that, in this case, the Court is not in a position to assess the likely outcome of the application to set aside the Demand, had it proceeded to a hearing, or the cogency of evidence that was to be relied on in the application to set aside the Demand but has not been read or tendered in the application for costs. I am not able to find whether the debt was genuinely disputed, or whether there was an offsetting claim or some other reason to set aside the Demand, and this is not one of the rare cases where I can be satisfied that one party was almost certain to have succeeded if the matter had been fully tried. It is also not possible to determine whether either party acted unreasonably so as to warrant an order for costs against it." 1. I similarly made no order as to costs in Re Ming Tian Real Property Pty Ltd [2021] NSWSC 386 where genuine issues had been raised but were not determined when the demand was not pressed. On the other hand, in Re Kaloriziko Pty Ltd above, I made an order for costs in favour of the plaintiff which obtained an order to set aside a creditor's statutory demand, where the other party, after litigating for some time although it led no substantive evidence, effectively surrendered to the plaintiff's claim to set aside that demand. Mr Pokoney submits that the position in this case reflects that considered in Re Kaloriziko Pty Ltd above as distinct from that considered in Re Ming Tian Real Property Pty Ltd above. 2. Mr Pokoney submits that ASPL was compelled to commence the proceedings by PAI's conduct in serving the Demand, in order to avoid the statutory presumption of insolvency arising under the Corporations Act 2001 (Cth). I accept the commencement of the proceedings was one way of seeking to avoid a presumption of insolvency, another being to pay the debt claimed, and I note that a default judgment of the Local Court requiring payment of that amount remained in effect at the time the Demand was served and the proceedings to set aside the Demand were commenced. Second, ASPL submits that PAI has "substantially capitulated" in the proceedings, consenting to set aside the judgment on which the Demand relied and to orders setting aside the Demand. Each of those developments took place after service of the Demand and after the commencement of the proceedings. Third, ASPL notes that PAI did not file or serve evidence in opposition to its application to set aside the Demand. Fourth, ASPL submits that it has obtained the relief sought in the Originating Process and should be considered the "successful litigant in the proceedings". While the demand was set aside by consent, there has been no determination on the merits in ASPL's favour. 3. I am not persuaded that an order for costs should be made in favour of ASPL in respect of the application to set aside the Demand. There has been no determination of the proceedings to set aside the Demand on their merits. The Demand was issued and the proceedings were commenced when a default judgment against ASPL had full legal effect, which was sufficient to support the issue of the Demand. The order setting aside that default judgment, by consent, was made only after the commencement of these proceedings. After that order was made, it was a reasonable step for PAI to agree to set aside the Demand, consequential upon setting aside of the default judgment on which it was founded, but it is not apparent that that step reflected a capitulation by PAI as distinct from a recognition of developments subsequent to the commencement of the proceedings. 4. For these reasons, I make no order as to the costs of the proceedings. ********** 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: 21 December 2021