New South Wales Supreme Court CITATION : ET Petroleum Pty Ltd v Clarenden Pty Ltd [2008] NSWSC 590 HEARING DATE(S) : 14 May 2008 JUDGMENT OF : Rein J EX TEMPORE JUDGMENT DATE : 14 May 2008 CATCHWORDS : Costs following dismissal of proceedings by consent - Uniform Civil Procedure Rules, Pt 42, Rule 20 - Discretion to make different order to the normal order exercised LEGISLATION CITED : Corporations Act 2001 (Cth) Uniform Civil Procedure Rules CATEGORY : Consequential orders Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186 Lavercombe v Auscott Ltd [2006] NSWSC 867 CASES CITED : Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 Re Lanaghan Bros Ltd [1977] 1 All ER 265 Australia Wide Airlines v Aspirion Pty Ltd [2006] NSWCA 365 PARTIES : ET Petroleum Pty Ltd (Plaintiff) Clarenden Pty Ltd (Defendant) FILE NUMBER(S) : SC 4923/07 COUNSEL : S.A. Wells (Plaintiff) S. Golledge (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Rein J 14 May 2008 4923/07 ET Petroleum Holdings Pty Ltd v Clarenden Pty Ltd JUDGMENT HIS HONOUR: The plaintiff, for whom Mr Wells of counsel appears, in October 2006 issued a statutory demand to the defendant requiring payment of the amount of approximately $194,000. Mr Golledge of counsel appears for the defendant. The amount of $194,000 was a total of certificates of costs pursuant to orders obtained by the plaintiff against the defendant in the Supreme Court. The proceedings concerned the lease of premises by the plaintiff from the defendant which the plaintiff had claimed had been invalidly terminated and in respect of which the plaintiff sought relief against forfeiture. The second certificate related to the setting aside by the court of the statutory demand issued by the defendant to the plaintiff. Following receipt of the plaintiff's statutory demand the defendant sought to vary the amount of the demand, asserting that it had a claim against the plaintiff in relation to unpaid rent and damages in respect of the same lease to which I have referred, totalling $135,977.09. By consent, the statutory demand was varied to the amount of $57,995.06 to reflect the existence of the offsetting claim. The defendant, however, did not pay that amount of $57,995.06 and the plaintiff commenced proceedings to wind up the defendant, as it was entitled to do pursuant to div 2 s 459A, E, F, P and Q of the Corporations Act. George Maatouk, who was a director of the defendant company, put on an affidavit of 22 November 2007 asserting that the defendant company was solvent and providing material that, it is submitted by the defendant, supported that assertion, even if it was not in the form that would meet the requirements of a hearing in relation to which it has been said the debtor company is required, in order to discharge its onus of establishing solvency, to present the court with the " fullest and best" evidence of the financial position of the respondent" and that such evidence must be convincing: see [27] to [29] of Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186 BC - 200501193 per Palmer J. The defendant provided further evidence in relation to solvency on 25 February 2008 by which evidence it was made clear that the defendant had been able to obtain, on the security of real estate owned by it and to which proposed loan Mr Maatouk had made reference in his earlier affidavit, a loan of moneys well in excess of the amounts claimed by the plaintiff; that is to say, not only the amount of the statutory demand but the amount of the $194,000 the subject of the two costs certificates and registered in the court as judgments of the court to take effect on, respectively, 3 February 2006 and 22 September 2006. The plaintiff accepted that the evidence by 25 February indicated that the defendant company was solvent. The plaintiff proceeded to garnishee the account into which the proceeds of the loan had been placed and obtained full payment of the approximately $194,000 costs to which I have referred. The original proceedings in which the costs orders were made are still on foot as to matters the subject of claim by the plaintiff in those proceedings yet to be heard and on this Monday the defendant obtained leave to file a cross-claim for the amounts for unpaid rent and damages to which I have earlier referred. It is agreed that the plaintiff's proceedings must now be dismissed. There remains, however, the question of costs. The plaintiff seeks an order that its costs be paid by the defendant or, alternatively, these be paid up until 25 February 2008. The defendant submits that the appropriate order is that each party pay its own costs. The relevant rule is found in pt 42 r 20 dealing with dismissal of proceedings and it is in the following terms, relevantly: "(1) If the court makes an order for the dismissal of proceedings, either generally or in relation to a particular cause of action or in relation to the whole or part of any claim, then, unless the court orders otherwise, the plaintiff must pay the defendant's costs of the proceedings to the extent to which they have been dismissed." My attention was drawn to two cases on the issue of costs following dismissal of proceedings. The first is the decision of Barrett J in Lavercombe v Auscott Ltd [2006] NSWSC 867. His Honour considered the question of costs in some detail at [42] to [49] and ordered that the defendant debtor pay the plaintiff's costs. He made reference to the decision in the judgment of McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at pages 624-5. He also made reference to a decision of Brightman J in Re Lanaghan Bros Ltd [1977] 1 All ER 265 at page 266. He said that that case was one in which the plaintiff had initiated and pursued his application "with complete propriety". He said the debt was undisputed and indeed could not have been disputed. Noting that it was not a judgment debt but noting also that the simple act of filing the costs certificate in the court registry would have made it a judgment debt, that payment had not been forthcoming but the statutory demand had been served and still no payment was made, he said: "In those circumstances, the plaintiff understandably and properly saw himself as a 'creditor who cannot obtain payment', to use the words found in the decision of Gibbs J in IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417 at 427. He concluded that: "The plaintiff was therefore justified in making and pursuing the application for the winding up. The dismissal of that application came only after the defendant (or, in practical terms, the insurer) had paid the debt that was unquestionably owing, due and payable. The debt should have been paid, at the latest, when the statutory demand was served. Because of its nature, one would have expected payment at an earlier time. The plaintiff should never have been put to the trouble and expense of bringing the proceedings." In the second case, Australia Wide Airlines v Aspirion Pty Ltd [2006] NSWCA 365, the Court of Appeal unanimously overturned the decision at first instance in which the defendant debtor had been ordered to pay the plaintif's creditor's costs. Justice Bryson, JA, with whom McColl JA concurred, pointed out that pt 42 r 20, to which at first instance, it appeared, no attention had been given, provides a starting point for the court in relation to orders where proceedings have been dismissed. The starting point is that the unsuccessful plaintiff is required to pay the costs of the defendant. Of course, pt 42 r 20 does make provision for the court to order otherwise and it is, therefore, necessary for the court to consider whether or not a discretion to make an order other than that contemplated by that rule should be exercised, and, if so, what alternative orders should be made. Justice Bryson drew a distinction between the High Court rules and the rule with which the court is now concerned, noting that the passage often cited from Lai Qin was not readily applicable to a decision under Pt 42 r 20, and that that rule was "not entirely consistent with McHugh J's observation, that the proper exercise of the court's discretion will usually mean the court will make no order as to costs". The Court of Appeal, having decided that the discretion had miscarried then proceeded to exercise the discretion itself: see [55] of Bryson J's decision. His Honour noted that the evidence on which the creditor had launched the proceedings was "no more than a formal conclusion based on the absence of an appropriate response to its statutory demand that there was evidence of insolvency". His Honour noted that there had been communications between the creditor's director and the defendant even after the statutory demand indicating that the creditor regarded its debt and the amount of its debt as in dispute and subject to continuing communications directed to resolution. It was said that those communications appeared to show that the creditor recognised the sincerity of the defendant's position. His Honour said: " While it cannot be said that IAS had no basis for commencing winding up proceedings in insolvency, its basis for doing so was very slight. Non-compliance with the Statutory Demand provided only a shred of support for IAS's case, and there was nothing else to indicate that REX was unable to pay its debts. REX produced evidence of its solvency promptly and in overwhelming force early in the litigation and its appropriate victory was soon conceded. His Honour did point out that REX had not applied properly to set aside the statutory demand and that was a matter which he took into account. Mr Golledge submits that the plaintiff has only one basis for asserting that the normal rule should not apply; namely, that the basis for non-payment of the $57,000, although articulated by the director in his affidavit of 22 November, was not the subject of any cross-claim until this week. It is for this reason he said, the defendant conceded that an order different to the usual order under pt 42 r 20 was appropriate. I should note that Mr Maatouk in his affidavit dealt with the question of the cross-claim in paragraph 18 and said the following: " I am of the view that as a result of the matters relied upon by way of cross-claim in those proceedings that the plaintiff will eventually be shown to be a substantial debtor of the company. As well I believe that the company will become entitled to recover its costs of the balance of those proceedings from the plaintiff." Mr Wells pointed out that there were a number of paragraphs of Mr Maatouk's affidavit to which objection would be taken if this was a hearing of the application to wind up. Those objections included, but went well beyond, the passage to which I have just referred. It was accepted that for purposes of deciding this costs issue I could have regard to the affidavits that were read in support of today's application on costs including the paragraph to which I have just referred. In accordance with what has been said by the Court of Appeal in Aspirion, I proceed on the basis that: (1) the starting point for the court where the proceedings are dismissed, is an order that the plaintiff pay the defendant's costs; and (2) that the fact that the plaintiff was entitled to bring winding up proceedings is, of itself, insufficient. I must consider whether to exercise my discretion to make a different order from that contemplated by the rules and, if so, to determine what is appropriate, but Mr Golledge concedes, correctly in my view, that it is appropriate to make an order other than that which is contemplated by r 20 and the question is what order is appropriate. I have regard to Mr Maatouk's explanation as to why the statutory demand was not paid, but I do not think it is an answer to the statutory demand or really explains or provides an appropriate explanation of the non-payment of the debt. I take the following matters into account in relation to the exercise of discretion: (1) The statutory demand was reduced by the entire amount of the claims asserted by the defendant after the defendant had taken proceedings to vary the amount. (2) The amounts in question were not merely the subject of a statutory demand, they were a total of costs orders made against the defendant in proceedings in this Court and entered in this Court following assessment and certification. (3) The defendant did not obtain a stay of payment of the costs order on the basis of the existence of future proceedings or the continuation of the proceedings, actual or contemplated. (4) The explanation of the non-payment of the debt was based on a claim for costs which had not been formulated at that time and certainly not filed. Further, in that regard the cross-claim was only filed, I am told, this week. In my view, the plaintiff was entitled to regard the evidence of solvency which was originally presented with some caution. Mr Wells makes the point that no expert evidence in appropriate form was received in relation to the valuation of the property. There was evidence from an accountant to which some paragraphs were objected or would have been objected if at a final hearing but the view that I take it is that there was sufficient material in what was served on or about 22 November to establish that the defendant owned property of value, a matter known to the plaintiff because it had leased premises from the defendant, that although the valuation or the material in support or annexed to Mr Maatouk's affidavit was not in the form of an expert opinion it, nevertheless, pointed to a valuation and it would have been a relatively easy matter for the plaintiff to either form an assessment itself of what the value of the property was or to obtain some information in respect of it to gain an appreciation of whether or not the appraisal provided was within a reasonable realm or not and there was material supplied by Mr Maatouk which showed the state of encumbrances on the property. In my view, the appropriate order is that the defendant pay the plaintiff's costs up to a reasonable time after the service of 22 November to allow it to make some reasonable enquiries of the sort to which I have referred and to form an assessment of whether or not the fact of the ownership of the property and lack of encumbrance and the evidence of a conditional approval of the loan indicated the loan was likely to be forthcoming. This is not to say that that material would have been sufficient for a final hearing, but I agree with Mr Golledge, that the task with which I am concerned now is not to, as it were, hear the matter but rather to make an assessment of what is an appropriate costs order given the circumstances. I would regard the plaintiff as being able to make an informed assessment as to the solvency of the defendant and the likelihood of success in obtaining a winding up order which was dependent upon the defendant being unable to prove solvency, by the end of a period of two weeks following receipt of the affidavit of 22 November. I order that the defendant pay the plaintiff's costs up to and including 7 December but after that date there will be no order as to costs. ********** 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.