4WD Pty Ltd v McNamara - [2009] SASC 274

SUPREME COURT OF SOUTH AUSTRALIA
(Appeal from a Master)
4WD PTY LTD v MCNAMARA
[2009] SASC 274
Judgment of The Honourable Justice Anderson
3 September 2009
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY - STATUTORY DEMAND - APPLICATION TO SET ASIDE DEMAND - PROCEDURAL REQUIREMENTS
PROFESSIONS AND TRADES - LAWYERS - REMUNERATION - TAXATION AND ASSESSMENT OF COSTS - APPLICATIONS AND REFERENCES
Appellant was the client of the respondent who is a legal practitioner - respondent issued a statutory demand to the appellant for unpaid legal fees - appellant applied for a taxation of costs and sought to have the statutory demand set aside - this was refused by a master - appellant appealed decision - whether there was a genuine dispute as to the fees - whether statutory demand should be set aside - whether statutory demand under Corporations Act should be allowed to circumvent client's right to a taxation under the Legal Practitioners Act - whether master should have stayed or adjourned statutory demand proceedings until after taxation of costs.
Held: Unnecessary to determine whether genuine dispute as to legal fees existed - statutory demand under Corporations Act should not circumvent client's right to taxation of costs - statutory demand should be stayed until taxation of costs complete - appeal allowed.
Corporations Act 2001 (Cth) s 459E, s 459H and s 459J, referred to.
Jarena Pty Ltd v Sholl Nicholson Pty Ltd (1996) 19 ACSR 425; D A Starke Pty Ltd trading as Starke Lawyers v Yardoo Pty Ltd [2009] SASC 90, applied.

4WD PTY LTD v MCNAMARA
[2009] SASC 274
Magistrates Appeal: Civil
ANDERSON J.
Introduction

The appellant in this matter is a former client of the respondent Mr McNamara, who is a legal practitioner. Mr McNamara claims that he was owed in excess of $600,000 for legal fees rendered by him to the appellant in relation to 17 different matters in which he acted for the appellant.
When these amounts remained unpaid, Mr McNamara issued a statutory demand under s 459E of the Corporations Act 2001 (“the CA”). The demand was issued on 17 December 2008. On 7 January 2009 the appellant filed an application to set aside the statutory demand pursuant to s 459G of the CA.
On 15 January 2009 the appellant applied in the Supreme Court for an adjudication of costs pursuant to r 272 of the Supreme Court Civil Rules 2006 and s 42(1) of the Legal Practitioners Act 1981 (“the LPA”). Later the appellant sought to have the application to set aside the statutory demand adjourned until after the adjudication of costs was heard.
On 6 April 2009 a master refused that application and proceeded to hear the application to set aside the statutory demand. In reasons published on 15 June 2009 the master refused the appellant’s application to set aside the demand.
This appeal has two bases. First, it is an appeal which claims that the application to set aside the statutory demand should have been adjourned until after the adjudication of costs had been conducted. In other words, it is suggested that the master dealt with the two matters in the wrong sequence. Secondly, the appeal is from the decision of the master refusing to set aside the statutory demand on the basis that there was no genuine dispute as to the existence of the debt.
The issues
The appellant argues that there is authority supporting the view that the adjudication of costs should be attended to first. It is argued that the checks and balances created by s 41 and s 42 of the LPA, protecting clients from claims for costs made by solicitors, would be bypassed if the statutory demand procedure under the CA was used by solicitors as a means of debt collection for their outstanding fees. The authority relied on is a decision of Judge Withers in D.A. Starke Pty Ltd Trading As Starke Lawyers v Yardoo Pty Ltd [2009] SASC 90.
Mr Livesey QC for the appellant, although arguing that the master was wrong in finding that there was no genuine dispute within the meaning of s 459H(1)(a) of the CA, submitted that the master erred in any event in allowing the statutory demand procedure to proceed in advance of the adjudication of costs procedures. He argued that the master should have exercised his discretion to restrain, stay or adjourn the statutory demand proceedings until after the adjudication of costs under s 42 of the LPA was complete. The request for the adjudication of costs was made in writing by the appellant’s solicitors in a letter dated 15 January 2009.
Mr Livesey argued that the master bypassed or disregarded the public policy considerations inbuilt in s 41 and s 42 of the LPA and that as a result the exercise of his discretion in not restraining, staying or adjourning the statutory demand proceedings, pending the adjudication of costs, had miscarried.
In his argument Mr Hoile, counsel for the respondent, focused on supporting the master’s decision in finding that there was no genuine dispute as to the existence of the debt. He also sought to distinguish the Starke decision on the basis that the comments of Judge Withers in that matter were only dicta.
In the view I take, it is not necessary to analyse the reasoning used by the master in reaching his conclusion that there was no genuine dispute. He did this based on affidavit evidence and the lack of any response to an affidavit by the respondent which he regarded as important. I will deal with the matter on the basis of whether he should have embarked upon that exercise under the CA prior to dealing with the request for adjudication of costs by the appellant. If the master erred then it would follow that the statutory demands should be set aside, stayed or adjourned and that the adjudication of costs should then be expedited.
The decision of 6 April 2009
The 6 April 2009 decision was made in chambers and no reasons were published. However, the master in recording the formal order included in his remarks the following:
The issue before me is whether there should be an adjudication under R272 which will involve preliminary issues under S42(6), as sought by the pltf, or whether the 459G application should be resolved without prior adjudication. There is no clear cut best course of action but I consider that on balance the deft should be allowed to have the 459G proceedings argued out before any adjudication proceeds. However, if in the course of the 459G application it appears that the pltf is being subjected to an abuse of process that may be a reason for me to determine the 459G application in its favour. Accordingly I rule that the 459G application should proceed to full argument and the R272 application should be deferred while this occurs.
The master did not refer to any authority for taking the course he did. The appellants argue that he should have followed the reasoning in Starke in which Judge Withers applied the reasoning of Heerey J in the Federal Court decision of Jarena Pty Ltd v Sholl Nicholson Pty Ltd 19 ACSR 425. Judge Withers’ decision was delivered only three days prior to the master’s decision of 6 April 2009. The decision in Jarena, however, was delivered in 1996.
The authority of Jarena and Starke
Heerey J in Jarena dealt with a similar situation to the one faced by the master in this matter. That was again a statutory demand served on clients by solicitors in respect of outstanding legal fees. His Honour gave consideration to the procedure under the Victorian Supreme Court Act 1986 relating to the recovery of legal costs, and held that it would be wrong if the safeguards contained in that legislation could be bypassed by solicitors utilising winding up proceedings. Accordingly His Honour set aside the statutory demands utilising s 459J(1)(b) of the CA on the basis that there was “some other reason why the demand should be set aside”.
In Jarena His Honour was satisfied that there was a dispute as to the rate at which the solicitors were to perform the work. His Honour reasoned that the work to be performed was to be charged on a time basis but there was a dispute as to the rate. His Honour said at 427:
Now it is true that there is no “proceeding to recover the costs” in this court brought by the solicitor within the meaning of s 61(4). The only proceeding in this court is one brought by the applicants to set aside the demands. Nevertheless it seems to me that I can and should, for the purpose of exercising the discretion conferred by s 459J(1)(b) of the Law, take into account the policy behind s 61 of the Supreme Court Act, which seems to me that even if a client does not avail himself or herself of the right to request a bill, nevertheless the statute provides a second line of defence should the solicitor take any proceedings. That provision was obviously enacted by the Victorian Parliament with a view to providing protection for clients against solicitors. I think it would be wrong if that protection could be effectively bypassed by utilising winding up proceedings. I will therefore set aside the demands.
In Starke, after referring to a discussion regarding s 41 of the Legal Practitioners Act, Judge Withers said, in relation to the question of taxation of costs:
[24]That is so, but compliance with s 41 does not preclude either the person claiming to be entitled to the costs or the person said to be liable to pay them from applying to the Supreme Court to tax and settle the bill for those costs. All it does is create a set of conditions that must be satisfied (if sought) before a solicitor can institute and prosecute proceedings seeking to recover the costs. In my earlier reasons I found that the winding up application did not have the character of proceedings seeking to recover costs but were rather proceedings based on a failure to comply with a statutory demand creating a presumption of insolvency and thereby raising matters of public interest.
[25]In my view, it is almost inevitable that if a solicitor issues a statutory demand for failure to pay an untaxed bill of costs, then the statutory demand will be set aside if the company challenges same by bringing an application under s 459G of the CA. In a somewhat similar situation under the Victorian legislation in the matter of Jarena Pty Ltd v Sholl Nicholson Pty Ltd 19 ACSR 425, Heerey J, in considering somewhat similar costs provisions in the Supreme Court Act 1986 (Vic) on an application to set aside a statutory demand, said (at 427):
Judge Withers then set out the passage from Heerey J’s reasons that I have set out earlier in these reasons, and continued as follows:
[26]The difference in that matter from this is that that was an argument advanced on an application to set aside a statutory demand. This is an application to wind up the company based on a failure to respond to a statutory demand. However, in my view, it supports the proposition that where a solicitor issues a statutory demand based on an untaxed bill of costs to a client, and an application to set aside that demand is made, the provisions of s 41 and s 42 of the LPA are such that the demand would usually be set aside.
[27]The Court has an inherent power to control its officers and a specific statutory power and obligation to take steps to protect consumers of legal services from improper cost claims by solicitors. That involves a certain process, including taxation or adjudication and the practitioner proving any agreement between it and the particular client to provide legal services on a certain basis.
As I have indicated earlier, Mr Hoile sought to distinguish Judge Withers’ decision on the basis that it was only dicta and not necessary for his decision. Whilst that may be strictly correct, the reasoning employed by Judge Withers did directly derive from the reasoning of Heerey J in Jarena which, to all intents and purposes, is on all fours with the present case. I agree with that reasoning.
The Legal Practitioners Act
In his reasons for refusing to set aside the statutory demand, the master dealt with s 41 of the LPA. His Honour found that there had been compliance with s 41 of the LPA in that the invoices provided by Mr McNamara complied with the section and that there was no requirement for each individual item of work to be costed.
However, the fact that the respondent had complied with s 41 did not prevent the appellant from applying for taxation or adjudication, as it did. Judge Withers in Starke is clearly stating that where an application for taxation has been made, in the ordinary course it should prevail so that the statutory demand is set aside. Whilst the master in the decision under appeal distinguished s 41 on the basis that it was different from earlier provisions of the LPA (now repealed), it is not clear why the reasoning of Heerey J in Jarena and Judge Withers in Starke as to the significance of s 42 of the LPA was not applied in this case.
Conclusion
It is my view that it is important that the Supreme Court exercises its inherent power to control legal practitioners generally and more specifically as to costs. The LPA should be interpreted in such a way that the clients of legal practitioners have the means to contest what they consider to be improper cost claims by solicitors, regardless of whether there is any action for the recovery of costs, or, as here, in relation to a statutory demand under the CA.
Therefore, by virtue of s 42, when a request is made for taxation, that should not take second place to a statutory demand under the CA based on the non-payment of those claimed legal fees. As Heerey J put it in Jarena, the LPA provides “a second line of defence should the solicitor take any proceedings”.
In the view I take, the master erred in the exercise of his discretion by deferring the question of taxation indefinitely until he had heard and determined the statutory demand. I would therefore allow the appeal and order that the taxation take place as soon as possible. The appellants’ application to set aside the statutory demand should be adjourned until the outcome of the taxation is known. The statutory demand should be stayed until the application to set it aside is re-listed.