New South Wales Supreme Court CITATION : WKA Legal Pty Ltd v Capital City Group Pty Ltd [2009] NSWSC 1130 HEARING DATE(S) : 19/10/09 JUDGMENT DATE : 27 October 2009 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : No order as to costs. CATCHWORDS : PROCEDURE - costs - where no determination on the merits - whether any basis for ordering that defendant pay plaintiff's costs LEGISLATION CITED : Corporations Act 2001 (Cth), ss 109X(1)(a), (b), 459C(1)(a), 459G, 459S CATEGORY : Principal judgment Foukkare v Angreb Pty Ltd [2006] NSWCA 335 CASES CITED : Fresh Express Australia Pty Ltd v MP (NT) Pty Ltd [2009] NSWSC 277 Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 PARTIES : WKA Legal Pty Limited - Plaintiff Capital City Group Pty Limited - Defendant FILE NUMBER(S) : SC 3054/09 COUNSEL : Mr H W M Stitt - Plaintiff Mr S J Duggan - Defendant SOLICITORS : WKA Legal Pty Ltd - Plaintiff Breene & Breene - Defendant - 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 27 OCTOBER 2009 3054/09 WKA LEGAL PTY LTD v CAPITAL CITY GROUP PTY LTD JUDGMENT 1 By originating process filed on 2 June 2006, the plaintiff, an incorporated solicitors' practice, applied for an order that the defendant, a former client, be wound up in insolvency and an order that a liquidator be appointed. The plaintiff's case was that the defendant was insolvent. It relied on a presumption of insolvency created by s 459C(1)(a) of the Corporations Act 2001 (Cth) by reason of the defendant's failure to comply with a statutory demand dated 10 May 2009. 2 By interlocutory process filed on 1 September 2009, the defendant sought leave under s 459S to defend the proceedings on grounds that could have been advanced in support of an application under s 459G for an order setting aside the statutory demand. No s 459G application was in fact made. 3 On 19 October 2009, it was ordered by consent, first, that the defendant's interlocutory process be dismissed and, second, that the plaintiff's originating process be dismissed. The question of costs was then argued. The plaintiff contends that the defendant should be ordered to pay its costs of the proceedings. The defendant says that there should be no order as to costs. 4 Some matters of background should be mentioned. The plaintiff sued the defendant in the Local Court for unpaid fees. Judgment by default was ordered. The statutory demand was based on the judgment debt. After the deadline for compliance with the statutory demand had passed without any action by the defendant, the plaintiff filed and served the originating process. The defendant then applied to have the Local Court judgment set aside. That application was successful. The plaintiff then accepted that its winding up proceeding should not continue. 5 Mr Cheng, a director of the defendant, deposes that he received the originating process by post at his home address. There is no other evidence concerning service of the originating process, except evidence relating to an unsuccessful attempt to deliver personally to Mr Cheng or his co-director on 7 June 2009: see Corporations Act, s 109X(1)(b). At all events, the defendant filed an appearance, so that the question of service of the originating process is of no direct relevance. 6 Mr Cheng also deposes that, until receipt of the originating process (and, no doubt, inquiring into how it came to have been forwarded to him), he did not know the Local Court proceedings had been initiated or that judgment had been ordered against the defendant by default. Regarding service of the Local Court statement of claim and the statutory demand by delivery to the defendant's registered office at the premises of a firm of accountants, Mr Cheng says that those accountants did not have authority to accept service. Mr Cheng also says that he specifically instructed the plaintiff that mail for the defendant was to be sent only to a particular post office box at Double Bay. 7 The affidavit of the process server who served the statutory demand by delivering it to the defendant's registered office recounts a conversation he had with a person who appeared to be an employee of the accounting firm. The process server asked, "Is this the registered office of Capital City Group Pty Ltd?" The response was, "No, they are not a client". 8 When the Local Court statement of claim was earlier delivered to the same premises, the same question by the process server elicited the answer, "Yes". 9 There was an anomaly in the statutory demand in that the defendant was described as "the Creditor" and the company said to owe the debt was described by the same name and particulars as the defendant "Creditor" – the reference should have been to the plaintiff. This was certainly a "defect" but whether it would have been such as to warrant an order that the statutory demand be set aside one cannot know. 10 The present case is, of course, one in which there has been no determination on the merits. The principles as to costs to be applied in such a case were summarised by Beazley JA in Foukkare v Angreb Pty Ltd [2006] NSWCA 335 where reference was made to the leading authorities, including Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622. Her Honour said (at [66] to [68]: "In Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 Hill J summarised the principles that have emerged from the case law as to how the Court should approach the exercise of discretion in respect of costs when there has been no hearing on the merits. He said (at 201): '(1) Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order … (2) It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial … This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue. (3) In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them … (4) In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation … (5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted …' The same question was considered in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin (1997) 186 CLR 622. McHugh J said at 624 –625: '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 extra-curial 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. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd [1971] QWN 13, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent Council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.' (Footnotes omitted) The principles discussed in these cases apply where a court is asked to make an order under UCPR 42.19. This was recognised in Fordyce v Fordham , where McColl JA (Beazley and Santow JJA agreeing) said, after pointing out the default orders provided for under the rules governing discontinuance (see UCPR 42.19): '84 [ UCPR 42.19 is] a relevant, but not determinative, consideration. Other relevant considerations were, as the primary judge concluded, usefully gathered in Lai Qin and Australian Security Commission v Aust-Home Investments Ltd & Ors (1993) 44 FCR 194, notwithstanding, as the discussion below reveals, that they were decided in a different statutory context. … 87 Once it is recognised, however, that the costs discretion conferred by UCPR 42.19 … is unconfined, the matters referred to in the Lai Qin line of authority are plainly pertinent, although, again, not necessarily determinative.'" 11 With these principles in mind, I must consider mainly whether it has been shown that one party acted unreasonably in or about the proceedings and whether any unreasonable behaviour warrants a departure from the prima facie expectation that the parties should bear their own costs. 12 The court must not – indeed cannot – try what has become a hypothetical case. It should consider making a costs order only if there is some obvious basis for doing so. An example is where it is clear that the proceedings were, from the very outset, doomed to fail: see, for example, Fresh Express Australia Pty Ltd v MP (NT) Pty Ltd [2009] NSWSC 277. 13 These proceedings were not of that character. The service of the statutory demand and the Local Court statement of claim at the registered office was valid and regular service. It makes no difference that, on the later occasion, a representative of the accounting firm denied that the premises were the registered office. It is also irrelevant that the defendant had told the plaintiff that all correspondence should be directed to the Double Bay address. Where a requirement for formal service applied, the plaintiff was fully entitled to resort to and rely on s 109X(1)(a). Those controlling a company must keep the lodged particulars of registered office current and up to date or suffer the consequences. 14 The plaintiff appears to have obtained the benefit of a presumption of insolvency and acted responsibly in initiating the proceedings. Any problem arising from the manner of service of the originating process became irrelevant when the defendant entered an appearance. 15 The defendant, for its part, did not act otherwise than properly when it filed its application under s 459S. It responded appropriately to the predicament in which it found itself following non-receipt of the statutory demand and the Local Court statement of claim. 16 No one can know how the proceedings would have concluded if prosecuted to finality. The fate of the s 459S application would have depended on an assessment of the anomaly already mentioned, as well as evidence and findings related to solvency: see s 459S(2). The outcome of the winding up application would also have depended on findings about solvency. The court knows nothing about the matter of solvency except that a rebuttable presumption of insolvency apparently came to exist because of service of a statutory demand which, despite due and valid service, apparently did not come to the defendant's notice. 17 This is an important point. Whatever may be regarded as the rights and wrongs of the steps the parties actually took and the processes by which they were taken, those steps brought to centre stage questions about solvency. Neither the plaintiff's application nor that of the defendant could have been determined without an inquiry into solvency. Both of them caused that issue to arise. 18 There is not, in this case, any factor that should cause the court to make a costs order. 19 There will be no order as to costs, so that each party bears its own 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.