Davies v Chicago Boot Co Pty Ltd (No 2)

[2011] SASC 197

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

DAVIES & NICOL AS JOINT &  SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD v CHICAGO BOOT CO PTY LTD (No 2)

[2011] SASC 197

Judgment of The Honourable Justice Sulan

11 November 2011

CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES

PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - CONDUCT OF PARTIES - DEMAND, OFFER AND CONSENT

Application by plaintiffs for costs to be ordered on a solicitor/client basis - whether judgment award more favourable for plaintiffs than offers made to defendant - whether interest should be calculated at time of offer or time of judgment award - whether Judge could have regard to offers made in respect of separate proceedings.

Held:  Application refused - costs awarded on party/party basis.

Corporations Act 2001 (Cth) s 588FA, s 588FG; Supreme Court Rules 1987 (SA) r 6A, r 41; Supreme Court Civil Rules 2006 (SA) r 8, r 33, referred to.
Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Co Pty Ltd [2011] SASC 27; Chicago Boot Co Pty Ltd v Davies & Nicol as Joint and Several Liquidators of Harris Scarfe Ltd [2011] SASCFC 92; Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721; Whitehead v Maas (1991) 56 SASR 362; Pirrotta v Citibank Ltd (1998) 72 SASR 259, considered.

DAVIES & NICOL AS JOINT &  SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD v CHICAGO BOOT CO PTY LTD (No 2)
[2011] SASC 197

Civil

1. SULAN J: In my judgment dated 1 March 2011,[1] I found that the defendant, Chicago Boot Company Pty Ltd (“Chicago Boot”), had received unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth). Chicago Boot was ordered to pay to the plaintiffs the whole of their claim in the sum of $316,801.33 plus interest in the amount of $201,047.33. This decision was appealed to the Full Court of this Court. Prior to the Full Court hearing, an application for costs was made by the plaintiffs. The application was heard by me on 28 April 2011.

   [1]    Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Co Pty Ltd [2011] SASC 27.

2. On 23 August 2011 the Full Court set aside the judgment of 1 March 2011 in respect of two transactions only.[2] The Full Court ordered that of the amount of $517,848 ordered to be paid to the plaintiff, $78,566 was to be returned to Chicago Boot. Further, an order was made that the defendant pay 80% of the plaintiffs’ costs of the trial to be taxed or agreed, reserving to me, the basis upon which the costs are to be paid.

   [2]    Chicago Boot Co Pty Ltd v Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd [2011] SASCFC 92.

3. Following this decision I heard further argument on the issue of costs. The plaintiffs reaffirmed their application based upon offers made to Chicago Boot prior to trial. They submit that the defendant should pay costs on a solicitor-client basis. Though the terms ‘indemnity costs’, and ‘solicitor-client costs’ have been used interchangeably throughout the course of submissions, the plaintiffs confirmed that they are seeking costs on a solicitor-client basis. The plaintiffs’ submissions are founded on a claim that the defendant’s failure to comply with pre-action procedure, pursuant to the Supreme Court Rules,[3] entitles them to costs on this basis.

   [3]    Supreme Court Rules 1987 (SA).

   Background

4. The plaintiffs were the Joint and Several Liquidators of Harris Scarfe Wholesale Ltd (“HSW”) and Harris Scarfe Limited (“HSL”). An order was sought requiring Chicago Boot to pay the sum of $316,801.33, being the total of various payments made by HSW and HSL to Chicago Boot between 2 January 2001 and 22 February 2001, which the plaintiffs contended were unfair preferences.

5. Three issues arose before me at trial. First, whether the plaintiffs had proved that the Harris Scarfe Group was insolvent at the time the payments were made. Second, whether Chicago Boot acted in good faith when it received the payments, and whether it had no reasonable grounds for suspecting that either HSL or HSW was or would become insolvent. Third, whether the payments did not result in a decrease in the net value of the assets of Harris Scarfe by reason of a retention of title clause on each invoice tendered to HSL and HSW.

6. I found for the plaintiffs in relation to each of the above issues. First, I was satisfied that the Harris Scarfe Group was insolvent during the relevant period. Second, I was not satisfied that Chicago Boot could rely on the good faith defence. Third, I found that the circumstances surrounding the trading relationship between the parties was such that they did not act in accordance with the retention of title terms. I concluded that they conducted their business on the basis of a creditor and debtor relationship. An order was made for Chicago Boot to repay the payments with interest.

7. This decision was partially overturned by the Full Court. The Full Court scrutinised the circumstances surrounding each individual transaction separately at the time of each payment. It was held that, in respect of the payments made on 4 October 2000 and 2 January 2001, it could not be concluded that Chicago Boot had reasonable grounds for suspecting Harris Scarfe to be insolvent and it was thereby erroneous to find that Chicago Boot had not discharged the onuses under s 588FG(2).[4] These payments were made prior to the issue of the statutory demand on 16 January 2001.

   [4]    Corporations Act 2001 (Cth).

   The applicable rules

8. Although the action was commenced before 2006, the transitional provision[5] of the Supreme Court Civil Rules 2006 (SA) allows for Chapter 12 (Costs) of the 2006 Rules to apply to this application. Nevertheless, the plaintiffs have relied on r 6A of the Supreme Court Rules 1987 (SA), which has as its equivalent, r 33.[6] It is submitted that the terms of r 6A,[7] as operative when the liquidator’s pre-action offers were made, are applicable.

   [5]    Supreme Court Civil Rules 2006 (SA) r 8.

   [6]    Supreme Court Civil Rules 2006 (SA).

   [7]    Supreme Court Rules 1987 (SA).

9. Rule 6A.02, 90 day notice by plaintiff, states:[8]

   6A.02 (1) At least 90 days before commencing an action the plaintiff is to post or send to the defendants at their last known address a notice of the proposed claim with sufficient detail so that the defendants have a reasonable opportunity to make an offer to settle the claim before it is commenced.

   (2) Where the claim is for any unliquidated amount the notice is to state the sum which the plaintiff will accept in satisfaction of such unliquidated claim or why, with brief reasons, the sum cannot be stated.

   [8]    Supreme Court Rules 1987 (SA).

10. Pursuant to R 6A.06 the defendant is to respond:

    6A.06 (1) Within 60 days of receipt of any notice under Rule 6A.02 the defendants or their insurers are to post or send to its sender a response to it and copies of any relevant reports from any expert on which they intend to rely unless such reports have already been supplied.

    (2) The response under (1) is to include whether liability for the claim is denied, and, if so, briefly state the grounds of such denial.

11. Rule 6A.07 follows:

    6A.07 In any order for the costs of the action the Court is to have regard to any failure of a defendant or insurer to make any, or a reasonable, response under Rule 6A.06 and it may as a result of it order costs as between solicitor and client to the plaintiff for the whole or part of the action.

    (My emphasis)

    The offers

12. Four offers were made to Chicago Boot. The first offer was made on 13 August 2002. This offer constituted two r 6A offers, the first in the sum of $43,540.10 in relation to HSW, and the second in the sum of $273,261.23 in relation to HSL. This offer sought a total amount of $316,801.33 to be paid by Chicago Boot, with a claim for interest being forgone by the plaintiffs subject to the amount being paid within 14 days. 

13. The second offer relied upon by the plaintiffs was made on 14 April 2003. This was a combined offer to both Chicago Boot and Windsor Smith, to resolve the matter for $390,000. This was broken down on the basis that the claim against Chicago Boot could be settled for an amount of $285,000 and the claim against Windsor Smith for $105,000. 

14. Windsor Smith and Chicago Boot are related companies with common employees and directors and a common place of business. Windsor Smith also supplied footwear to Harris Scarfe. Payments made to Windsor Smith were not in issue in the proceedings before me. They continue to be the subject of a separate action currently being pursued in the District Court.

15. The final two offers were made on 22 September 2003 and 1 March 2004 for the amounts of $310,000 and $418,000 respectively. Neither of these offers distinguished between an amount relating to Chicago Boot and an amount relating to Windsor Smith.

    The appeal

16. Prior to the decision of the Full Court, it was the primary submission of the plaintiffs, that the refusal of Chicago Boot to accept the offers of compromise by the liquidators was unreasonable, mandating a costs order on a higher scale. This was founded on the judgment of 1 March 2011 in which the plaintiffs received a more favourable outcome upon judgment, than the amounts offered to Chicago Boot in satisfaction of their claim. That is, the principal amount and interest in the sum of $517,848.66 was greater than the amounts stipulated in the various offers of compromise letters. The plaintiffs submitted that the common law result would be the same if the letters made, pursuant to the Supreme Court Rules,[9] were treated as a Calderbank offer. It was contended that these offers afforded Chicago Boot an opportunity to accept the plaintiffs’ compromise, rather than pursuing defences which were ultimately unsuccessful.

    [9] Supreme Court Rules 1987 (SA).

17. Following the decision of the Full Court, Counsel contends that the effect of the Full Court judgment on the plaintiffs’ submissions in respect of costs is de minimis. It is put that only one of Chicago Boot’s defences was partially successful, that is the defence of good faith, and only in respect of those transactions made prior to the issue of the statutory demand. Further, it is submitted that the offers made to Chicago Boot were still a better result for them than that determined by this Court. This submission is put in the context of both the claim against Chicago Boot, and the claim against Windsor Smith.

18. The latter three offers made to Chicago Boot included offers in respect of both Chicago Boot and Windsor Smith. Counsel for the plaintiffs submit that Chicago Boot could, and should have, accepted these offers in satisfaction of both actions. He says to do so would have allowed them to settle both actions for a more favourable result than that which was already received in the action against Chicago Boot, and what will be received in the action against Windsor Smith.

19. Counsel further contends that interest should not be calculated as at the time of the offer, as submitted by the defendant. He says that the consequence of not accepting an offer is that not only does one compromise on the principal amount but the amount of interest is allowed to continue to run. That is, one must compare the offer made with the final judgment award, including a component for interest as at the date of the judgment, rather than at the date of the offer. 

20. Following submissions an agreed table of calculations reflecting scenarios addressed in argument before me was provided. I reproduce the contents of this table.

Date	Offer	Chicago Boot judgment and interest award calculated consistent with interest award ultimately made	Windsor Smith judgment and interest award in accordance with Chicago Boot outcome
13/08/2002	Chicago Boot: $316,801.33	Judgment: $268,737.30 Interest: Nil Total: $268,737.30	Not relevant
14/04/2003	Chicago Boot: $285,000.00 Windsor Smith: 105,000.00 Combined offer: $390,000.00	Judgment: $268,737.30 Interest: $10,778.94 Total: $279,516.24	Claim: $115,640.78 Interest: $4,638.29 Total: $120,279.07
22/09/2003	Combined offer: $310,000.00	Judgment: $268,737.30 Interest: $17,847.10 Total: $286,584.40	Claim: $115,640.78 Interest: $7,679.80 Total: $123,320.58
01/03/2004	Combined offer: $418,000.00	Judgment: $268,737.30 Interest: $24,915.26 Total: 293,652.56	Claim: $115,640.78 Interest: $10,721.30 Total: $126,362.08

1. It must be noted at the outset that the fourth column reflects a postulated amount that would be received by the plaintiffs only if their claim against Windsor Smith in the District Court is wholly successful. Importantly, all but $41,209 of the claim relates to payments made prior to the date of the statutory demand.

2. Counsel for the defendant submits that the consequence of the Full Court decision is that none of the four offers made to Chicago Boot were improved upon in the judgment of the Full Court, leaving no basis for an application for costs on a higher than usual scale. He says that the first offer, on 13 August 2002, could not form such a basis with the judgment award of $268,737.30 falling well below the offer of $316,801.33 made to Chicago Boot. Moreover, he contends that this offer could not constitute a letter of compromise based on interest forgone, for the reason that the interest at trial was only calculated from the date of the letter, and not from the relation-back day as contended in the letter. Therefore, Counsel contends that there is no such compromise proffered by the letter, and any interest forgone for the 14-day-period constituting the period within which the letter was open to be accepted, is de minimis.

3. Counsel submits that the second offer in respect of Chicago Boot of $285,000 is also greater than the judgment award and interest totalling $279,516.24 and would not, therefore, trigger a higher scale of costs. He argues that the combined offers made to the defendant, that is the offers made to both Chicago Boot and Windsor Smith, should not be relied upon. First, it is submitted that these offers can only be accepted by both parties accepting liability. Second, it is contended that without a breakdown of the offer in relation to Chicago Boot and Windsor Smith separately, it could not be unreasonable to refuse such a joint offer, without particularising each amount. Third, the basis upon which the amounts are calculated in respect of Windsor Smith is flawed in that the plaintiffs’ submission is predicated on the plaintiffs’ action against Windsor Smith in the District Court succeeding on all counts, based upon their success at trial in relation to Chicago Boot. Counsel notes that there exist two separate corporate entities. He suggests that though it is not appropriate for me to determine how any such action in the District Court might result, the outcome of the Full Court decision is relevant insofar as the good faith defence was not available after the issuing of the statutory demand. Using the logic from the Full Court decision, it is submitted that Windsor Smith may have a valid defence to the action for all but $41,209 of the claim, which falls in the period after the statutory demand was issued.

4. Further, in respect of the final offer on 1 March 2004, it was put in submissions that the offer was against the spirit and intent of the Rules. Counsel says that this offer was only open for 11 days, and was premature, depriving the defendant of the benefit of pre-trial steps such as exchanging pleadings, discovery and the provision of expert reports, particularly, the insolvency report of Mr Davies.

   Legal principles

5. The issue that arises before me is whether there has been a failure by the defendant to make a reasonable response to the offers put forth by the plaintiffs pursuant to r 6A.07.

6. The starting position is that the general award for a successful litigant is an award for party/party costs. Generally speaking, the making of an offer of compromise by a plaintiff who obtains a more favourable ultimate verdict will entitle the plaintiff to an order against the defendant for the plaintiff’s costs on an indemnity basis unless there is good reason to so otherwise order. In Multicon Engineering Pty Ltd v Federal Airports Corporation, Rolfe J remarked:[10]

   In my opinion the proper approach to take to an offer of compromise, whether made under the rules or pursuant to a Calderbank letter is that there should be a prima facie presumption in the event of the offer not being accepted and in the event of the recipient of the offer not receiving a result more favourable than the offer, that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer.

   [10] (1996) 138 ALR 425, 451.

7. The rule encourages the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers, amounting to realistic assessments of the plaintiff’s claim. It saves public costs necessarily incurred in litigation, and indemnifies the plaintiff who has later been found to have made a reasonable offer of compromise against the costs thereafter incurred.[11] Similar observations were made in this Court in Whitehead v Maas[12] when considering the operation of r 41 of the Supreme Court Rules 1987 (SA). The court said:

   Any order for the payment of the costs of the whole action must be penal to some degree. The purpose is to encourage plaintiffs to make offers and to deter defendants from non-acceptance of offers which are commensurate with the defendant’s just liability. It is an incentive to the settlement of litigation. (Citations omitted).

   [11]   Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721, 724.

   [12] (1991) 56 SASR 362, 367.

8. There have been two schools of thought as to the effect of such an offer. The first is that the letter can be taken into account for the purpose of determining whether a special order should be made displacing the ordinary rule that costs will follow the event and will be taxed on a party/party basis. The second is that there should be a prima facie presumption that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer. It is not, however, necessary for me to determine this issue in the matter before me.

9. The Court’s discretion to award costs is very wide. The writing of a Calderbank letter, or letter pursuant to the Rules, is one of many factors, albeit a significant factor, to be weighed by a court when considering whether to order indemnity costs.[13]

   [13]   Pirrotta v Citibank Ltd (1998) 72 SASR 259.

   Conclusion

10. The plaintiffs’ submissions are predicated upon Chicago Boot accepting the offered amounts in satisfaction of both the Chicago Boot and Windsor Smith claims. It is founded upon postulated amounts in respect of an award made in accordance with the Chicago Boot action. It is further premised on the notion that interest would ordinarily continue to run up until the date of judgment delivery. That proposition is correct. Nevertheless, when considering the offer and its rejection, it is my view that one should consider the interest as calculated at the date of the offer and not, at the date of the judgment. If calculated at the date of judgment, a defendant would be required to make an assessment about the rate of interest to be used, and the length of time that would elapse between the offer and the date of judgment. Such an assessment would be subject to great uncertainty, varying according to factors such as the ability of the Court to list a matter and the period of time before delivery of judgment. 

1. Furthermore, I find that it is not appropriate to compare the offered amounts made to Chicago Boot, to the judgment award received in the Chicago Boot claim in addition to an estimated amount to be received in the Windsor Smith claim. To do so would be to hypothesise as to how the proceedings in the Windsor Smith action might result. As already noted, this is an entirely separate action from the Chicago Boot action. Chicago Boot and Windsor Smith have separate corporate identities. One cannot assume that the plaintiffs will be wholly successful in the action against Windsor Smith. Each case turns upon its own facts and circumstances.

2. I find that the first offer of 13 August 2002 could not form a basis for which costs should be awarded on a higher scale. The judgment award of $268,737.30 falls well short of the offer made to Chicago Boot of $316,801.33. Further there is force in the submission that it may not be appropriate to characterise the first offer as a genuine offer of compromise. When one considers the substance of the offer, the interest forgone calculated consistently with the interest award ultimately made by this Court is negligible.

3. It follows that the second offer of 14 April 2003 in the amount of $285,000 relating to Chicago Boot must also be compared with the final award. This amount again falls above the final award and interest.

4. The third and fourth offers were combined offers in respect of Chicago Boot and Windsor Smith. It is a futile exercise to seek to compare these offers to the final judgment awards without a basis for apportioning the amount in relation to each entity.

5. In my opinion the plaintiffs’ application must fail. It was not an unreasonable response for the defendant to refuse the offers at each stage of the proceedings. I can find no sound basis for departing from the usual course of ordering costs on a party/party basis. I would refuse the application.