New South Wales Supreme Court CITATION : Winning Appliances Pty Limited v St George Appliances Pty Limited [1999] NSWSC 1157 revised - 02/12/99 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 2709/1999 HEARING DATE(S) : 25 November 1999 JUDGMENT DATE : 30 November 1999 PARTIES : Winning Appliances Pty Limited (Plaintiff) St George Appliances Pty Limited (Receiver and Manager Appointed) (Defendant) JUDGMENT OF : Bergin J LOWER COURT JURISDICTION : Supreme Court (Master) LOWER COURT FILE NUMBER(S) : 2709/1999 LOWER COURT JUDICIAL OFFICER : Acting Master Berecry COUNSEL : B. Coles QC (Plaintiff) P. Dowdy (Defendant) SOLICITORS : Deacons Graham & James (Plaintiff) Henry Davis York (Defendant) CATCHWORDS : Proceedings to set aside or vary a Statutory Demand - Appeal - from an award of costs by Master in circumstances where the appellant/plaintiff had been ordered to pay costs of proceedings it had commenced to set aside or vary a Statutory Demand and the Demand had been withdrawn the day before the hearing. Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529; CASES CITED : Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523; Gronow v Gronow (1979) 144 CLR 513. DECISION : Appeal upheld. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BERGIN J DATE 30 NOVEMBER 1999 2709/99 - WINNING APPLIANCES PTY LTD v ST GEORGE APPLIANCES PTY LTD (RECEIVER & MANAGER APPOINTED) JUDGMENT 1 This is an appeal This matter was referred to me in the Duty List on 25 November 1999. It had no urgency and by reason of its lack of priority had an interrupted hearing as the Duty List became very busy. Having heard Mr Coles QC's submissions who appeared for the appellant, assisted by his written outline, and having only partly heard Mr Dowdy for the respondent I requested him to provide written submissions by 26 November 1999 to avoid the incursion of further costs. from the judgment of Acting Master Berecry (the Master) of 30 September 1999 in which he made an order that the plaintiff/appellant pay the defendant/respondent's costs of proceedings the plaintiff/appellant had commenced to set aside or alternatively vary a Statutory Demand served on the plaintiff on 21 May 1999. Background facts 2 The appellant is a wholesaler and retailer of white goods and since the early 1960's had purchased substantial quantities of white goods from the respondent which was a manufacturer of white goods. 3 In early April 1999 Mr Murphy, the general manager of the plaintiff, was contacted by an employee of the Receiver of the respondent and was requested to supply a reconciliation of the account between the appellant and the respondent. At that time the general manager informed the employee of the Receiver that he was unable to provide a reconciliation because of the large number of unreconciled claims, proof of delivery forms and copy invoices. However, he undertook to have the accounts department run a "payments due report" that would show him the invoices remaining unpaid. 4 On being requested to give an "indication" of what amount was owed by the appellant to the respondent, Mr Murphy said he believed the figure was "about $153,000 after claims and rebates". He was informed that the accounts indicated a "seriously larger sum of money owing" and after some further discussion about warranty provisions undertook to forward material to the Receiver's office. 5 Mr Murphy heard nothing further in respect of the resolution of "any account issues" until a Statutory Demand was served on the appellant on 21 May 1999 for an alleged debt of $4,330,382.59. An affidavit of 21 May 1999 of Mr Anthony Crawford, an accountant with the Receiver's firm, Messrs Ferrier Hodgson, was also served on the appellant. That affidavit contained a paragraph in which Mr Crawford stated that he had a belief that "there is no genuine dispute about the existence or amount" of the alleged debt. 6 On 24 May 1999 the appellant's solicitors, Messrs Deacons Graham and James wrote to the respondent's solicitors, Messrs Henry Davis York. Apart from claiming in colourful terms that such an amount was not owed by the appellant to the respondent the solicitors went on to say: "We put it to you that it is a serious issue to serve a Statutory Demand based on a specious set of figures. You are well aware that Statutory Demands are not to be used as mere tools of debt collection. Our client is solvent and well able to pay. It declines to pay it at this stage. If the Statutory Demand is not withdrawn and our client is forced to apply to the Court for an order setting the Demand aside you may be assured our client will be seeking costs on a full indemnity basis." 7 The appellant's solicitors informed the respondent's solicitors that the appellant conceded that it owed the respondent "some moneys" but requested particulars of the basis of the calculation of the alleged debt. 8 After further correspondence and by 2 June 1999 the appellant's solicitors repeated a request for a breakdown of the amount claimed to be owing by the appellant and then informed the solicitors for the respondent: We repeat our request for a meeting between your firm, this firm, the receiver and our client. Our client is not attempting to avoid any issues - it wishes to confront them, deal with them and get rid of this matter. 9 This meeting did not take place prior to the expiry of the twenty-one day period in the Statutory Demand. It appears that one of the reasons for this was that Mr Crawford was away at a "long planned seminar" at the Gold Coast. More importantly to the respondent was its claim that the appellant had not supplied documentary material to the respondent which it wanted so that it could "check it and properly respond". 10 On 11 June 1999 the appellant issued a summons to set aside the Statutory Demand or alternatively to vary it to $324,624.24. 11 Between the time of the issuing of the Summons and 6 August 1999 there was further correspondence between the appellant and the respondent and in a letter of 22 July 1999 the appellant's solicitors referred the respondent's solicitors to s 459H(1) of the Corporations Law and claimed: The Statutory Demand details three separate amounts claimed by St George from Winnings. In our opinion, there is a genuine dispute as to the existence or the amount of each of these claimed debts, and we are confident that the court would also reach that conclusion. Of course, that may not be the end of the matter. Assuming that St George does not wish this matter to become mired in lengthy litigation, our client proposes that all parties meet, together with such experts or advisers as may be required, in order to arrive at a resolution of the matter once and for all. 12 On 29 July 1999 the respondent's solicitors responded to the appellant's solicitors advising that they would "shortly be in a position to serve upon you our client's evidence in chief in these proceedings". The respondent's solicitors advised that the meeting would not take place until the appellant wrote to the respondent advising with some specificity why the appellant claimed that the calculations "of the current debt are wrong". 13 In response to this letter the appellant's solicitors wrote again on 6 August and noted that "the Summons issued in these proceedings and served upon you on 11 June 1999 asked for an order that the demand be varied to an amount of $324,624.24". The appellant's solicitors further stated "you may take it from us that this is the amount that our client concedes is owing". 14 The appellant's solicitors enclosed the appellant's cheque in the amount of $324,624.24 "as a gesture of goodwill" and on the basis of what had been previously conceded. The letter continued: "Our client contends that issuing a Statutory Demand in a situation where the amount of the debt was not known, and where there was a genuine dispute as to the amount and existence of the debt, constitutes an abuse of process. We note that the Statutory Demand procedure is not to be used as a debt-collecting agency: Australian Mid-Eastern Club Ltd v Elbakht (1988) 13 NSWLR 697. 15 Although the cheque was accepted by the respondent it was done so on a without prejudice basis as to the "amount truly owing". 16 On 18 August 1999 the respondent's solicitors suggested that the proceedings should be resolved on the basis that its client withdrew the Statutory Demand and that proceedings be dismissed with an order that the appellant pay the respondent's costs up to and including 6 August 1999. 17 The appellant's solicitors responded by letter of 19 August 1999 indicating that the disinclination of the appellant to pay the amount earlier than 6 August was the "direct result of receiving your client's Statutory Demand in which untenable claims were made". It went on to say: Our client always intended to pay your client all amounts that were owing in the ordinary course, but was forced to seek legal advice when served with a demand for outlandish sums of money. It seems incredible that, after launching an unsubstantiated and insupportable claim under the guise of a statutory demand, your client should seek an indemnity from our client for its costs simply to withdraw the ill-conceived demand. The appellant's solicitors suggested that it would be far more equitable that the appellant's costs be paid particularly because it had been forced to perform the respondent's work in quantifying the debt. However a counter offer of settlement was then made. 18 The proposal put forward by the appellant's solicitors was that the respondent withdraw the Statutory Demand; the appellant discontinue the proceedings to set aside the demand with the respondent's consent; the parties execute a deed whereby they release all claims that they may have against each other; and the appellant pay the respondent's costs in the matter "presumably less than but say $5000" such payment to be made at the time of the exchange of the deed and before the discontinuance. 19 On 25 August 1999 the respondent put a counter offer that it would accept $10,000 in payment of its costs, however it was not prepared to execute a deed of release but it was prepared to agree to the other terms. 20 Apparently nothing further happened until 29 September 1999 when the respondent withdrew the Statutory Demand. Court Directions 21 On 13 July 1999 the parties filed short minutes of order in which the respondent agreed to file and serve all its affidavits and material upon which it would rely by 27 July 1999. That did not happen. 22 On 10 August 1999 the parties once again filed short minutes of order in which the respondent agreed to file and serve all its affidavits and material upon which it intended to rely by 31 August. That did not happen. 23 On 21 September 1999 the parties once again agreed to short minutes of order in which the respondent agreed to file in Court and serve its affidavits on which it relied by 28 September 1999. Notwithstanding the fact that the appellant had served all its evidence upon the respondent and notwithstanding its agreement to file evidence it did not do so at any stage. 24 On 30 September 1999 as the Statutory Demand the subject of the relief sought had been withdrawn, the Summons was dismissed and the only matter before the Master was the issue of costs. Master's judgment 30 September 1999 25 The Master referred to the Statutory Demand and the supporting affidavit of Mr Crawford and said: Mr Crawford has not been challenged on his evidence. On that basis it seems to me that in the defendant's view the genuine amount due and owing by the plaintiff to the defendant was in fact the same set out in the Statutory Demand. 26 After referring to the fact that there was correspondence between the parties' solicitors the Master referred to the payment of the amount on 6 August 1999 and said : But for the payment of the money, of course the Statutory Demand would still be alive to the extent of the variation of the off-setting provisions of the Corporations Law. Therefore to the extent of the variation the defendant was justified in issuing his Statutory Demand. There has been no challenge today to Mr Crawford's evidence contained in his affidavit. To that extent the defendant has succeeded in the application. 27 After referring to the decision of Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529 and distinguishing the matter before him as one different from what Santow J was referring to as a "mini trial" the Master said: In any event, in my view, because the defendant has been successful, it should be entitled to an order for costs. 28 The Master then made an order that the plaintiff/appellant pay the defendant/respondent's costs on an ordinary basis. Grounds of Appeal 29 The appellant appeals on the following grounds: 1. The Master erred in not finding that the appellant was successful in the proceedings; 2 The Master erred in not finding that the respondent issued the Statutory Demand knowing that the appellant disputed the amount of the demand and without any attempt to identify the amount properly owing; 3. The Master erred in law in the exercise of his discretion in that heplaced excessive reliance on one relevant factor, namely the receiver/manager's beliefs as at the date of issuing the Statutory Demand; and 4. The Master erred in law in the exercise of his discretion in that he failed to take into account a relevant factor, namely, that the policy consideration that the Courts of Equity should not be used for collecting debts. Consideration of grounds of appeal 30 In his judgment the Master stated that the parties had reached agreement that the Summons should be dismissed. Mr Coles QC submitted that the Summons was dismissed because the respondent had unilaterally withdrawn its Statutory Demand on 29 September 1999. It seems to me that although there was no opposition in respect of the dismissal of the Summons the factor that precipitated it was the unilateral withdrawing of the Statutory Demand. 31 As referred to earlier in this judgment the Master stated that but for the payment of the money the Statutory Demand would still be alive and "to the extent of the variation" the respondent was justified in serving it on the appellant. 32 Mr Coles QC submitted that the withdrawal by the respondent of the Statutory Demand rendered the Statutory Demand ineffective rather than the payment of money by the appellant. This submission has force and I accept it as an accurate statement of the position. 33 Mr Coles QC submitted that the Master's statement seems to indicate that the respondent was justified in issuing the Statutory Demand because it resulted in the payment of $324,624.24. Alternatively Mr Coles QC submitted that the Master's statement could be interpreted to mean that on a hearing of the application to set aside or vary the Statutory Demand, the Statutory Demand would have been varied by the offsetting provisions of the Corporations Law to an amount of $324,624.24 and therefore the respondent was successful in the proceedings. 34 If that be the correct interpretation that the Master was intending to convey in his judgment, which I accept it was, Mr Coles QC submitted that such a finding would not be consistent with the proper interpretation of the Statutory Demand procedure. He submitted that it would render a creditor successful, regardless of the amount claimed in the Statutory Demand, if the creditor was paid some money by the debtor; even, if as was the case in these proceedings, the summons sought as alternative relief the reduction of the amount claimed in the Statutory Demand. 35 In those circumstances Mr Coles QC submitted that this would subvert the central purpose behind the Statutory Demand procedure, which is that it is part of the winding up procedure of insolvent companies. 36 Mr Coles QC relied upon Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523 an authority to which the Master was referred but did not mention in his judgment. In that case Heerey J found that an order for costs on a solicitor/client basis was justified and said at 526 - 527: …I note that there is no evidence whatsoever suggesting insolvency of the applicant or any other ground for winding up... …Winding up proceedings are to be used for the winding up of companies, that is, paying off creditors and distributing whatever surplus remains amongst the shareholders…Rather, I infer that it was issused for the improper purpose of exerting pressure on the applicant for the payment of what clearly was, as was known to be, a disputed debt. So the application is allowed. The statutory demand will be set aside. The respondents were given fair warning and could have withdrawn the statutory demand at one time without incurring any costs whatsoever. Nevertheless, the respondent did not withdraw and, of necessity, that provoked the present application which has been successful. So there will be costs on a solicitor/client basis. 37 In the light of the fact that the respondent at no time alleged that the appellant was an insolvent company Mr Coles QC submitted that it could not be said that the respondent intended the issue of the Statutory Demand to be part of winding up proceedings against the appellant. 38 Mr Coles QC submitted that I would be satisfied that this was a suitable case for the award of costs in the appellant's favour on a solicitor/client basis. In support of this submission he relied upon Polaroid Australia v Minicomp Pty Ltd (1998) 16 ACLC 529 in which Santow J said at 536: Sooner or later, courts will have to consider whether indemnity costs should be awarded against the unsuccessful user of a statutory notice to force payment of a genuinely contested debt, simply because those taking out such statutory demands are disregarding that basic principle. Mini trials of such disputes simply add to costs, more especially as the relevant tests do not ordinarily permit more than a relatively superficial probing" 39 An additional matter which Mr Coles QC submitted caused the Master to fall into error in exercising his discretion in favour of the respondent was his focus upon the fact that Anthony Crawford was not the subject of any cross examination. 40 There was some material tendered, objected to but not ruled upon, before the Master which included a Report as to Affairs in which the total amount listed as owing by the appellant was no more than $767,000. This material was relied upon by the appellant before me and was admitted over the objection of the respondent. 41 This material throws into stark contrast the amount of $4 million odd about which Mr Crawford claimed a belief that there was no genuine dispute. Although he was not cross examined this report was evidence upon which the Court would have been entitled to form a view that there was certainly a question about the accuracy of the $4 million amount. 42 Mr Coles QC submitted that regardless of the Receiver's belief at the date of the swearing of the affidavit it must have been the case that by 26 May 1999 when the respondent received the appellant's solicitor's 24 May letter it knew the debt was disputed. Indeed much of the evidence before the Master consisted of letters from the appellant's solicitor's contesting the alleged amount of the debt. 43 Mr Dowdy submitted that the appellant has not demonstrated that the Master adopted a wrong principle or allowed extraneous matters to guide or affect him Gronow v Gronow (1979) 144 CLR 513 at 534. 44 He submitted that the appellant "unreasonably persisted in seeking to have its costs paid on an indemnity basis" after the respondent had made an "eminently reasonable and sensible offer" A reference to the offer to withdraw the Statutory Demand and have its costs paid up to 6 August 1999 contained in its solicitor's letter of 18 August 1999. which it was submitted "ought to have been accepted". 45 Mr Dowdy submitted that the appellant "simply played games" with the respondent and emphasised that although it conceded that it owed money to the respondent it did not pay any amount until 6 August 1999. He submitted that unless the respondent had "persisted in this litigation to the extent which it did it would never have been paid the amount of $324,624.24 and that certainly would not have been a just result". 46 But the appellant sought two orders (1) to set the Statutory Demand aside or (2) to vary it. On either approach it was successful in the litigation as the Statutory Demand was withdrawn. 47 I am of the view that the Master fell into error in holding that the respondent had been "successful" because the appellant had conceded and paid $324,624.24. But even applying the Master's "success" approach I am of the view that it was the appellant that had the measure of "success" because it was challenging the totality of the $4 million debt and the respondent withdrew the Demand when the alternative figure for which the appellant was contending in its Summons was paid. 48 The relevant question was not whether the respondent had been successful because the money had been paid but whether the proceedings, the subject of the costs order, had been litigated in a manner to entitle one party or another to a costs order. In that regard the appellant was the party claiming that there was a genuine dispute about the alleged $4 million debt. The appellant was also the party claiming that the only amount owed was that identified in the alternative order in the Summons. 49 On any view of the state of the evidence as at 30 September 1999 it was overwhelmingly in the appellant's favour to obtain the orders in the Summons but for the withdrawal of the Demand the day before. It was the appellant that obtained the success - the withdrawal of the Demand. 50 I agree with the appellants submissions that the Master misdirected himself in focusing upon Mr Crawford's affidavit in deciding that the respondent was successful. This "belief" had been overtaken by many letters and telephone calls in which it must have been abundantly clear that the debt of $4 million odd was genuinely disputed. 51 Additionally there was never the slightest suggestion that the appellant was unable to pay its debts and the Demand should have been withdrawn without the need for the appellant to litigate. Far from playing games with the respondent as Mr Dowdy submitted, I am of the view that the appellant sought meeting after meeting with the respondent to "confront" and "deal" with the matter but was not given the early opportunity to resolve it. 52 The respondent waited until the day before the hearing to withdraw the Demand and although it agreed three times to file evidence in support of its entitlement to the alleged debt and maintenance of the demand it filed none. It does not seem to me that it was the appellant that was, as Mr Dowdy put it, "playing games". 53 I am of the opinion that the Master fell into error in the manner referred to above and the appeal should be upheld. The appeal is upheld and I make the orders sought in the Notice of Appeal. Order 1 in the Notice is restricted to costs on an ordinary basis as I am of the view that although this is a borderline case I am not persuaded that it is a case for solicitor/client costs. *********** Last Modified: 12/02/1999 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.