Fitness First (Australia) Pty Ltd v Dubow
[2011] NSWSC 605
•21 June 2011
Supreme Court
New South Wales
Medium Neutral Citation: Fitness First (Australia) Pty Ltd v Dubow [2011] NSWSC 605 Hearing dates: On written submissions Decision date: 21 June 2011 Jurisdiction: Equity Division - Corporations List Before: Ward J Decision: Indemnity costs order made against a defendant
Catchwords: COSTS - HELD - indemnity costs order made against defendant Legislation Cited: Corporations Act 2001 (Cth)
Supreme Court (Corporations) Rules 1999 (NSW)
Uniform Civil Procedure Rules 2005 (NSW)Cases Cited: Buddies Liquor Pty Ltd v Wah Lai Investment (Aust) Pty Ltd [2001] NSWSC 337
Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586
Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790
Commonwealth of Australia v Gretton [2008] NSWCA 117
Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34 ACSR 301
Evans Shire Council v Richardson (No 2) [2006] NSWCA 61
Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; (1994) 12 ACLC 669
First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939
Growth Equities Corporation Ltd v Genesis Growth Investments Pty Ltd [2010] NSWSC 1302
Jones v Bradley (No 2) [2003] NSWCA 258
Laws v GWS Machinery Pty Ltd (No 4) [2008] NSWSC 453
Leichhardt Municipal Council v Green [2004] NSWCA 341
Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411
Multicon Engineering Pty Limited v Federal Airports Corporation (1996) 138 ALR 425
Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896
Polstar Pty Ltd v Agnew [2007] NSWSC 114; (2007) 25 ACLC 293
Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2002) 20 ACLC 304
Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1317
SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323
Williams v Spautz (1992) 174 CLR 509Category: Procedural and other rulings Parties: Fitness First (Australia) Pty Ltd (Plaintiff)
Yolande Victoria Frances Dubow (Defendant)Representation: Kent Attorneys (Plaintiff)
Defendant self-represented
File Number(s): 10/421992
Judgment
HER HONOUR : In this matter I handed down judgment on 3 June 2011 setting aside a statutory demand served on Fitness First Australia Pty Ltd by Ms Yolande Dubow by letter dated 10 December 2010. The demand was in the sum of $31,603.64 and was comprised of moneys the subject of, or related to, two costs assessment certificates issued in November 2010 in respect of a costs order made in favour of Ms Dubow in other proceedings in this Court in 2007. The application to set aside the statutory demand was made pursuant to s 459G of the Corporations Act 2001 (Cth) on various grounds, including the ground that there was a genuine dispute as to the existence of the claimed debt(s) on the basis of a Deed of Release that had been entered into by Ms Dubow in November 2005 in relation to numerous disputes then between the respective parties.
I set aside the statutory demand and ordered costs against Ms Dubow. I did so on the basis that I considered it appropriate that costs follow the event in accordance with Part 42 of the Uniform Civil Procedure Rules 2005 (NSW). The solicitor appearing for Fitness First (Mr Orlizki) then made an application for the costs order to be on an indemnity basis, handing up written submissions and filing in court an affidavit sworn 30 May 2011. Ms Dubow, who is a solicitor not resident in Sydney, had appeared for herself on the hearing of the Fitness First application but was not in attendance in court when I handed down my reasons for judgment. Accordingly, it was appropriate for her to be given an opportunity to respond to the plaintiff's application for costs on the indemnity basis and I made directions for Ms Dubow to be so notified.
Ms Dubow has since forwarded written submissions in relation to the indemnity costs application. Having considered both parties' submissions in chambers, I have concluded that the costs should be assessed on the indemnity basis for the reasons set out below.
Fitness First bases its claim for indemnity costs on four propositions: first, that there was an obvious dispute as to the existence of the debt (and Ms Dubow's defence of the application was manifestly hopeless); second, that the lack of an accompanying affidavit by Ms Dubow at the time the statutory demand was served (and her apparent acknowledgment as to the likelihood that the debt would be disputed) enables an inference to be made that the demand was being used for a purpose not contemplated by the legislative provisions; third, in reliance on an offer said to be made in accordance with the Calderbank principles; and, fourth, that the use of the statutory demand procedure had been for the purpose of applying commercial pressure and using this Court as a "debt collecting court", not a "company court".
Ms Dubow, in her submissions resisting such an order, contends that the balance of convenience and interests of justice are against the award of costs, having regard to the relative positions of the parties. She has indicated an intention to seek leave to appeal from the decision made on 3 June 2011 and has also indicated an intention to apply for payment of the costs order by way of instalments. (Any such applications will of course fall to be dealt with in the ordinary course and are not the subject of the present application.) Ms Dubow's primary position seems to be the contention (put forward to dispute the existence of a bona fide dispute in relation to the demand and to justify her actions generally) that "based on the legislative dictates ... the Costs Certificates are final and binding" and to assert her straitened financial circumstances compared to those of Fitness First (in circumstances where she maintains that the costs orders made in her favour in 2005 remain outstanding).
I consider in turn the various bases on which Fitness First presses its claim.
(i) Obvious bona fide dispute/manifestly hopeless defence
As adverted to above, there were a number of grounds (to some extent overlapping) on which Fitness First sought to have the statutory demand set aside (first, that the demand was not verified by affidavit, which was a requirement pursuant to s 459E of the Act unless all of the debts claimed in the demand were judgment debts, or was defective for failing to state that the debts were judgment debts; second, there being a genuine dispute as to the existence of the claimed debt for the purposes of s 459H(1)(a) of the Act (and/or an offsetting claim pursuant to s 459H(1)(b) of the Act); and, third, that there was "some other reason" for the purposes of s 459J(1)(b) of the Act that the demand should be set aside - by reference to Ms Dubow's conduct in registering the costs certificates as judgments in breach of an order staying their execution and/or contrary to the Deed of Release).
Fitness First submits that (even leaving aside the arguments based on the continuation of the stay on execution of the relevant costs order and the service of a statutory demand unaccompanied by a verifying affidavit and without asserting the existence of a judgment debt) Ms Dubow's defence of the application, on the basis that there could not be a bona fide dispute on Fitness First's part, was manifestly hopeless because of the entry by the parties into the Deed of Release in November 2005.
Fitness First contends that the Deed of Release clearly identified the release of Ms Dubow's costs claim (noting that the Deed contained an obligation on Ms Dubow's part to write to the Costs Assessor in order to withdraw the claim and that she pay the costs of the assessment process). Ms Dubow argues to the contrary and, on the hearing of the main application before me, raised various matters in relation to the Deed and its construction. I have outlined those arguments in my earlier reasons for judgment and do not repeat them here. However, whether or not Ms Dubow's construction of the Deed, or her argument that until receipt of the executed counterpart deed it was open to her to pursue the costs assessments (and then to act upon them once they were issued), might ultimately be upheld, the obvious relevance of the Deed for the purposes of the application to set aside the statutory demand was that it was clearly arguable on the face of the Deed that it operated to release the claim on which the costs assessment certificates were based and to preclude reliance by Ms Dubow on those certificates. Such an argument made the setting aside of the statutory demand well nigh inevitable.
Fitness First contends that it is inconceivable that a solicitor would not recognise the existence of a bona fide dispute in these circumstances (and would not recognise that to pursue a claim in reliance on the statutory demand in those circumstances would put Fitness First to wasteful expense on a futile matter). It seems to me that there is much force to that submission.
It is clear (and Ms Dubow appeared, during the course of submissions, to concede that she was aware that this is the case) that there is a very low threshold to be met in order to satisfy the requirement of a bona fide dispute as to the existence of a debt for the purposes of s 459H(1)(a).
As I noted in my earlier reasons, Barrett J in Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34 ACSR 301 made it clear (at [45]) that the threshold presented by the test to set aside a statutory demand does not require a rigorous and in-depth examination of the evidence relating to the plaintiff's claim, dispute or offsetting claim. Both McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; (1994) 12 ACLC 669 and Barrett J in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 made it clear that the task is not by any means a difficult or demanding one. A company will fail in its task only if the contentions upon which it seeks to rely in mounting the challenge are so devoid of substance that no further investigation is warranted. The court does not engage in any form of balancing exercise between the strengths of competing contention. Thus it is said that if there is any factor that on reasonable grounds indicates an arguable case it must find a genuine dispute exists even where the case available to be argued against the company seems stronger.
In the light of the low threshold in this regard, it seems to me that a legal practitioner, looking objectively at the evidence relied upon by Fitness First for the assertion that there was a genuine dispute, would necessarily have come to the view that the application by Fitness First to set aside the statutory demand was bound to succeed and that it would be unreasonable to resist the application.
In this regard, Fitness First relies upon what was said in Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1317 by Barrett J at [14]:
In S.459G cases, the court must be careful not to seem to stifle, by indemnity costs orders, proper attempts by a defendant to put the plaintiff to proof of its claim of genuine dispute, offsetting claim, defect or other matter said to warrant setting aside of the statutory demand. At the same time, however, defendants must bow to the inevitable before trial when the convincing merits of the claim can clearly be seen. These matters are discussed in cases such as Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529, Austral Rail Pty Ltd v Hunter Premium Funding Pty Ltd [2001] NSWSC 654, CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd (2003) 47 ACSR 100, Professional Advantage Pty Ltd v Australian Broadcasting Corporation [2007] NSWSC 607 and Alliance Accounting & Business Consultants Pty Ltd v Australian Property Investment Development Pty Ltd [2007] NSWSC 775.
In her written submissions on this costs application, Ms Dubow says that the interpretation of the Deed of Release is not without difficulty. The very fact that Ms Dubow concedes that there may be different interpretations placed on the Deed means that the opposing contentions of Fitness First in this regard could not reasonably have been dismissed as being without any basis - and hence supports the existence of a bona fide dispute as to whether the debt, or the underlying claim on which the costs assessment certificate was based, was released by the Deed (that being one of the bases on which the statutory demand was ultimately set aside). Ms Dubow's (albeit belated) acknowledgment of this seems to me to bring the case within the class of case being considered by Barrett J in Saferack .
Fitness First maintains that Ms Dubow should have "bowed to the inevitable before trial" when faced with the merits of its claim. I agree. On this basis the discretion to award indemnity costs is clearly enlivened.
(ii) Lack of accompanying affidavit
As noted above, one of the grounds on which Fitness First argued that the statutory demand should be set aside was that it was not accompanied by a verifying affidavit. This gave rise to the question whether the debts claimed were judgment debts (so as not to require such an affidavit) and whether, to the extent that some were judgment debts, the demand was defective by failing to identify them as judgment debts.
Ultimately, I held that the statutory demand should be set aside by reason of the lack of an accompanying verifying affidavit (in circumstances where one of the three components of the debt the subject of the demand was not a judgment debt at the time the demand was served).
The lack of a verifying affidavit is relied upon in the context of the present costs application as it is said that, by choosing not to swear an affidavit accompanying the statutory demand, Ms Dubow has avoided the requirement to swear an affidavit in accordance with Form 7 of Schedule 1 to the Supreme Court (Corporations) Rules 1999 (NSW) (to the effect that is there "is no genuine dispute about the existence or amount of the debt"). It is submitted that the final paragraph of Ms Dubow's covering letter with which the statutory demand was served (in which Ms Dubow writes "I look forward to the receipt of your cheque in the short term, however anticipate to hear from Mr Kent for the retaining of his legal services for another five years and an escalation of legal expenses") demonstrates that Ms Dubow knew that the claim would be vigorously opposed and would trigger substantial litigation on Fitness First's part.
Fitness First points to the adoption by Barrett J in Saferack (at [9]) of the statement that:
The legislation allows a creditor to adopt the statutory demand procedure in relation to a debt only if that debt is of a particular kind. If a creditor fails in the duty to provide sworn confirmation regarding qualities essential to the character of the debt as one capable of being the subject of a statutory demand, that creditor is seen to be attempting to use the procedure otherwise than in the way the legislature intends it to be used. The recipient of the demand is entitled to confirmation on affidavit that the creditor or, in the case of a corporate creditor, the person authorised by it has turned the person's mind to essential characteristics of the debt and has found them to be such that the debt is of a kind that ought to be paid upon pain of a presumption of insolvency. If the recipient is not given that assurance, the creditor can be seen to be using the demand for a purpose and in a way not contemplated by the provisions under which a creditor may obtain the benefit of such a presumption. Section 459J(1)(b), as an instrument for avoiding subversion of the statutory scheme then comes into play . (my emphasis)
In Saferack, his Honour considered that, because of the pendency of other proceedings in relation to the debt claimed, it might be inferred that the absence of the required statements from the s 459E(3) affidavit in that case was deliberate and that the deponent simply could not make those statements without departing from the truth.
Fitness First asks the Court to infer (bearing in mind that Ms Dubow is a solicitor) that the absence of attestation as to the lack of a genuine dispute as to the existence of a debt in the present case was deliberate and would warrant an indemnity costs order, because the statutory demand procedure was being used otherwise than in the way the legislature intended it to be used.
Having had the opportunity to read the affidavits subsequently sworn by Ms Dubow and having heard her oral submissions on the application before me, I would not infer that the lack of a verifying affidavit to accompany the statutory demand was due to a recognition on her part that she could not truthfully assert the matters that would be required for such an affidavit. My impression is that Ms Dubow has a firm belief in the merits of her position and the need to swear an affidavit attesting to those beliefs would not have deterred her. While it seems to me likely that Ms Dubow made a deliberate decision not to swear an accompanying affidavit, I would be inclined to think this was because she was of the view that she did not need to do so under the relevant rules as these were judgment debts (without turning her mind to the different status of the third amount claimed by way of a filing fee or to the potential need to identify the debts as judgment debts on the face of the demand).
Therefore, this factor would not have led me to order costs on an indemnity basis (though in some cases that may be appropriate).
(iii) Calderbank offer
The third basis on which the claim for indemnity costs was made is in reliance on a letter dated 31 January 2011 sent to Ms Dubow (expressly on a without prejudice except as to costs basis), offering to compromise Fitness First's claim on more favourable terms than have now been achieved in the court proceedings.
The letter was sent prior to the listing of the application for hearing on 8 February 2011 (although the hearing did not proceed on that day) and offered to compromise the proceedings on the basis that the statutory demand would be set aside and that Ms Dubow pay 80% of the costs of the plaintiff's proceedings as agreed or assessed. The letter stated, relevantly:
In the event that this offer is rejected this letter will be tendered in support of an application for the costs of the proceedings on an indemnity basis
That offer was not accepted.
Ms Dubow contends that this letter does not amount to a Calderbank letter (apparently by reference to the fact that the same letter of offer for costs at 80% to be paid to the plaintiff was "in triplicate" and attached what was said to be an irrelevant advice from the Law Society of New South Wales "regarding client to client contact") on the stated basis that "this letter does not amount to a Calderbank letter in proceedings where a compromise was possible is evident" referring to "Multicon etal".
Ms Dubow relies on what was said by Rolfe J in Multicon Engineering Pty Limited v Federal Airports Corporation ((1996) 138 ALR 425), Ms Dubow summarising the relevant propositions as being that:
(i) Before indemnity costs will be awarded for the period prior to the making of an offer of settlement the offeror must establish that the offeree has been guilty of some wrong-doing or relevant misconduct in the institution or prosecution of the proceedings.
(ii) After an offer of settlement has been made the prima face presumption should be that an order for costs on an indemnity basis will be made unless the party rejecting the offer can establish that it was reasonable for it not to accept the offer: each case depends on the exercise of the judicial discretion having regard to its particular circumstances.
(iii) In the face of a rejected offer, which is not bettered, the Court should not approach the award of indemnity costs on the basis that the case was one which had no prospect of success, or the rejection of the offer was "plainly unreasonable". Prima facie the unreasonableness is the failure to accept an offer of settlement, which is not bettered by judgment or order.
Reference was also made by Ms Dubow to what Rothman J said in Laws v GWS Machinery Pty Ltd (No 4) [2008] NSWSC 453:
The principles in relation to indemnity costs adnumbrated in the judgment of the Court of Appeal in Dunstan v Rickwood (No. 2) [2007] NSWCA 266, where at [43] and following, McColl JA, with whom Beazley and Ipp JJA agreed, said:
[43] The general rule is that costs payable to a person under an order of the court or the rules are to be assessed on the 'ordinary basis': UCPR 42.2.
[44] A court should only depart from the general rule and award indemnity costs where the conduct of the party against whom the order is sought is 'plainly unreasonable': Sydney City Council v Geftlick and Ors [2006] NSWCA 280 at [90] per Tobias JA, Mason P and Hodgson JA agreeing. Indemnity costs orders should be reserved for the most unreasonable actions by unsuccessful plaintiffs: Leichhardt Municipal Council v Green [2004] NSWCA 341 per Santow JA (at [57]).
...
There are two well-recognised routes by which a litigant may establish a prima facie entitlement to indemnity costs. The first is by equalling or bettering an offer of compromise made in accordance with Rules of Court. The second is by writing a letter in the form approved by Cairns LJ in Calderbank v Calderbank [1976] Fam 93 (at 106) as sufficient to attract costs awarded on the same basis as if formal offer of compromise procedures had been invoked. Such a letter is conventionally headed 'without prejudice save as to costs' and the recipient . . . ."
It is clear that the position in relation to offers expressed to be without prejudice except as to costs (and relied upon as being in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586) is that the party seeking to rely on the offer must establish both that the offer represents a genuine compromise of the dispute and that it was unreasonable for the offeree to reject it (see Commonwealth of Australia v Gretton [2008] NSWCA 117, per Beazley JA (from [38]); Jones v Bradley (No 2) [2003] NSWCA 258 at [8]).
In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA said at [14]:
... the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants . (my emphasis)
Her Honour in Gretton noted that the making of a Calderbank offer does not automatically result in a favourable costs order, notwithstanding that the judgment is more favourable to the party making the offer than the terms of the offer, the question being (as Giles JA stated in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]) "'whether the offeree's failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs ".
In Leichhardt Municipal Council the Court said at [21]:
There is little appreciable difference between saying that an offer should not in the court's discretion attract costs sanctions in the circumstances and saying that an offer is not a genuine offer of compromise in the circumstances. Both depend upon a value judgment of the offer and the conduct of the parties in the circumstances of the claim.
It is clear that the onus is on the party making a Calderbank offer (in this case Fitness First) to satisfy the court that it should exercise the costs discretion in its favour ( Evans Shire Council v Richardson (No 2) [2006] NSWCA 61).
In Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790, Bergin J (as her Honour then was) confirmed the relevant principles in relation to Calderbank offers by reference to Leichhardt Municipal Council stating those principles as follows (from [9]):
the cost consequences attendant under the general law upon an offer of compromise made in a Calderbank letter are in the Court's discretion, to be exercised having regard to all of the relevant circumstances of the case [19];
- there is not a prima facie presumption in favour of an award for indemnity costs if the Calderbank offer is not accepted and is not bettered [19];
- a Calderbank offer that has no real element of compromise in it, which is designed merely to trigger costs sanctions, will not be treated as a genuine offer of compromise [23]-[24];
- there is no rule that an optimistic offer is not a genuine offer. Whether or not it was reasonable to reject an offer is a question that may figure in the discretionary balance, but it is not a question which affects the genuineness of the offer [40];
- an applicant for an order for indemnity costs consequent upon an unaccepted Calderbank offer must show that the rejection of the offer was unreasonable [46].
Applying the tests noted above, was the offer in this case a genuine offer of compromise? Certainly, it required Ms Dubow to abandon her resistance to the application and to pay a large portion of the costs (as assessed or agreed) in relation to that application to that point. In that sense it might be said to be, in reality, no more than an invitation to capitulate. However, this must be seen in light of the strength of Fitness First's position on the application to set aside the demand.
Bryson JA in Leichhardt Municipal Council said at [59]:
The respondent's case did not succeed but it was not a case which could not reasonably be argued ... The only element of compromise in the offer was as to costs: otherwise it was a call on the respondent to capitulate and give up: the element of compromise was slight and the respondent's ultimate lack of success does not to my mind demonstrate that the reasonable course for the respondent was to capitulate, nor does anything show that the respondent was delinquent with going on with the trial or in resisting the appeal.
Here, the same could not in my view be said of Ms Dubow's position. The reasoning in Saferack is apt in this regard. The reasonable course for Ms Dubow was clearly for her to withdraw her opposition to the application for the setting aside of the statutory demand at the time the costs offer was made (if indeed not before, when it was clear that Fitness First was arguing that there was a bona fide dispute as to her entitlement to rely upon the costs certificates and to seek to enforce the costs judgment). If she then wished to pursue the debt the subject of the costs assessment certificates and the costs judgment obtained on registration of those certificates (which would entail setting aside the Local Court default order that had by then set that costs judgment aside as having been obtained not in good faith), then Ms Dubow should have proceeded to contest the merits of the argument over the effect of the stay order and, more particularly, the Deed of Release on the claimed debt in an appropriate proceeding.
In Cat Media , her Honour said (at [15]):
An offer to pay only a portion of the plaintiff's costs at such a late stage of the proceedings may well present as equivalent to a requirement that the plaintiff capitulate. I am of the view that it is a borderline case but on balance, the fact that the defendant was willing at that time to give up - or compromise - what it saw as its strong position and pay $100,000 to the plaintiff persuades me that the offer was a genuine offer of compromise.
In the present case, however, the offer was not made at a late stage in the proceedings; it was made not long after the time within which the application to set aside the statutory demand had been filed and a week before the matter had then been listed for hearing. The willingness of Fitness First to compromise what Fitness First no doubt regarded was a strong position (namely, to obtain the setting aside of the statutory demand and its costs of the application so to do) by accepting a reduced portion of the costs of that application, makes the offer of 31 January 2010, in my view, a genuine offer of compromise.
I turn then to whether Ms Dubow's rejection of the offer was unreasonable. In Leichhardt Municipal Council , Santow J noted that among the issues germane to the question of the reasonableness of the offeree's conduct would be whether the offeree had an "appropriate opportunity ... to consider and deal with the offer". Here, there is no suggestion that Ms Dubow was unable to consider and assess the offer.
True it is that, at that stage, Ms Dubow was not aware of the quantum of the costs likely to be comprised by that offer, but what she must have been aware of was that those costs would be much less than they would be after a contested hearing on the setting aside applicable.
In Gretton , Beazley JA (at [111]) considering the position where Calderbank offers were made on an "all inclusive" basis said:
The Smallacombe line of authority has been developed by experienced trial judges whose views, in my opinion, should be accorded great weight. The underlying premise of such cases rests in the proposition that an offeree cannot be said to have acted unreasonably in not accepting an offer expressed to be inclusive of costs, because of the offeree does not have an adequate opportunity to consider the offer and because of the difficulties posed when a court comes to consider the reasonableness of the offeree's conduct in rejecting/not accepting it. In other words such an offer presents practical difficulties . (my emphasis)
and at [115] - [116]:
... I agree with Allsop J that Smallacombe does not lay down a "definitive rule" that an "all-in" Calderbank offer can never be considered on the question of indemnity costs. The Court cannot fetter the s 98 discretion by legal rules: Oshlack (at [35]). Smallacombe does, however, afford guidance as to the exercise of the s 98(1) discretion. It informs the question of the reasonableness of an offeree's refusal to accept an "all-in" offer. In my view it has a sound practical basis. While I accept each case should be considered on its facts, Smallacombe provides sound reasons to discourage offerors from drafting Calderbank letters on an "all-in" basis. (my emphasis)
Further, Smallacombe reflects the policy considerations which, no doubt, led to the adoption of UCPR 20.26(2). Requiring Calderbank offers to be exclusive of costs prevents a court from becoming embroiled in collateral issues, such as the offeree's ability to assess the quantum of the costs component of an offer or the reasonableness of the opinion as to this issue an offeree formed at the time of rejection/non-acceptance. In this respect Calderbank offers which are exclusive of costs assist the Court in facilitating the just, quick and cheap resolution of the real issues in the proceedings: s 56(1) Civil Procedure Act.
The present offer was not an "inclusive of costs" offer, as such. It was, in effect, an offer to accept less than the full amount of the costs that would otherwise be payable if Fitness First's application to set aside the statutory demand were to succeed.
In my view, this was a genuine offer to compromise the present proceedings and was, having regard to the low threshold applicable in an application of the kind Fitness First was making, unreasonably refused.
Ms Dubow refers in her submissions to evidence that upon a genuine dispute being evidenced, she offered to withdraw the statutory demand (there was no evidence on the costs application of such an offer being made - in the evidence on the substantive application there was evidence of an offer by Ms Dubow to withdraw the statutory demand and not proceed with the winding up application but this offer of withdrawal required the payment of the disputed debt). Again, this submission seems to acknowledge (contrary to the position she maintained in the application that I determined on 3 June 2011) that there was evidence of a genuine dispute and supports the conclusion that it was unreasonable of Ms Dubow not to accept the offer that had been made to her by Fitness First.
(iv) Commercial pressure
Fitness First submits that the statutory demand was being used as a method of extracting payment of an amount which Ms Dubow knew would be opposed and was simply an instance of commercial pressure being applied. Ms Dubow's earlier application for a freezing order within these proceedings was said to provide further evidence of this "tactic".
Reliance in this regard was placed on what was said in Growth Equities Corporation Ltd v Genesis Growth Investments Pty Ltd [2010] NSWSC 1302 (at [11]) by Barrett J (when there ordering indemnity costs):
The forum in which the question of the existence of any such debt should be determined is a debt collecting court, not a company court.
I have, in my earlier reasons, noted various judicial statements recognising that the statutory demand procedure is not properly invoked where its purpose is that of debt collection or to exert improper pressure for payment of the claimed debt (see, for example, the dicta referred to in Polstar Pty Ltd v Agnew [2007] NSWSC 114; (2007) 25 ACLC 293, per Barrett J at [33]; and First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939 per Santow J (as his Honour then was); Buddies Liquor Pty Ltd v Wah Lai Investment (Aust) Pty Ltd [2001] NSWSC 337). In First State Computing, his Honour said (at p 951):
It has been said on numerous occasions that the Companies Court is not to be the court which deals with disputed debts. If there is an honest dispute between the parties as to the amount of the debt, they are expected to resolve their dispute through the normal channels such as litigation in the Common Law Division or the District Court, not by the means of winding up proceedings; for example, see John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 12 ACLC 716 at 717 per Young J.
That said, it has also been said that it is not an abuse of process to seek repayment of a debt (or even to put the debtor to proof as to the existence of a disputed debt) (see Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2002) 20 ACLC 304 per Palmer J; Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411 per Tamberlin J). What seems to be required for there to be a finding of abuse of process is more than the service of a statutory demand in order to put the debtor to proof of a dispute; rather it is necessary that there be, to use Tamberlin J's words, a "suggestion of threats of undue pressure, extortion, or commercial duress" or evidence "that the demand was a charade in that it was not intended to be pursued to its conclusion".
In Williams v Spautz (1992) 174 CLR 509, the majority said (at [529]) that a party alleging abuse of process bears a heavy onus of proof that the predominant purpose of the other party in commencing the legal process had been one other than that for which it had been designed. Palmer J in Redglove, considering the allegation of an abuse of process where a statutory demand was not set aside and the company resisted a winding up application on the basis of abuse of process said (at [29]):
Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by serving a notice of demand under s459E in order to invoke the procedures of Pt5.4. If the dispute is indeed genuine, the creditor will pay the penalty of a costs order when the debtor successfully applies to set aside the demand under s459G . That is the risk that the creditor takes in serving the notice of demand. .... Where the debtor company has failed to set aside a statutory demand, it would have to establish by very cogent evidence that, despite the existence of a debt which can no longer be disputed, the creditor's purpose in seeking the winding up is not to collect payment of its debt or, in default to have 'the company wound up, but is, rather, to achieve some entirely collateral end. Such a case is conceivable but would be extremely rare in reality. (my emphasis)
It seems to be clear (having regard to the evidence before me of Ms Dubow's attempt to garnishee Fitness First's National Australia Bank account and then to seek a freezing order in relation to the amount of the claimed debt) that the service of a statutory demand was being used as a step that might facilitate recovery of the debt (by putting pressure on an otherwise apparently solvent company to avoid a presumption of insolvency).
Ms Dubow, in her submissions, acknowledges that when the Local Court garnishee "cheque" was stopped, she attempted to list the matter for a freezing order (this was done at a time when Ms Dubow seems to have been aware that the financial position of the plaintiff was such that its assets greatly exceeded the claimed debt - and in the absence of anything of which I am aware to indicate a reasonable apprehension of dissipation of funds to meet any such debt).
However, although it seems to me that this comes very close to the line, I do not find that there has been an abuse of process by Ms Dubow in serving the statutory demand. What I do find (as referred to in (i) and (iii) above) is that it was unreasonable for her (and a subversion of the proper purposes of the statutory demand procedure) to resist the setting aside of the statutory demand once it became obvious that Fitness First was prepared to put to proof the existence of the dispute as to the claimed debts.
Ms Dubow's submissions
The balance of Ms Dubow's submissions in relation to the indemnity costs application largely turn on discretionary matters (relied upon by her as demonstrating that an indemnity costs order is not in the interests of justice). She submits, first, that the setting aside of the statutory demand "has denied the Costs Certificates of immediate enforcement in the short term" and that the costs certificates in question were "a 50 % amount of the possible Costs 'reasonably incurred.'" It is said that, having denied Ms Dubow (the judgment creditor) of those costs as incurred from 2005-2007 in 2011, an award of costs on an indemnity basis would be an award of costs on an "unreasonable basis" (and appellable).
Ms Dubow also refers to the significant expense incurred by her in relation to the two sets of Bankruptcy proceedings brought by Fitness First "in the denial of this debt prior to the Deed of Release or Costs Certificates being finalised". She refers to incurring significant expense in those proceedings (including that of Senior and Junior Counsel) and says that she spent 15 months on unemployment benefits throughout the period of the bankruptcy proceedings. Ms Dubow notes that the entry of the Deed of Release occurred in those circumstances (although it is not clear whether by this she is asserting some form of incapacity or economic pressure under which she was then labouring and, if that is what was meant by this submission it would suffer from the problem that, on the evidence before me, Ms Dubow was being advised at the time by both Senior and Junior Counsel in relation to the Deed).
Ms Dubow refers to there being "no possibility of creditor payment without the costs Certificate enforcement" (because "The plaintiff exhausted the defendants available funds to extract the Deed of Release"), by which I understand her to mean that if she is unable to enforce the claims that she had prior to the Deed of Release (and that she says are still enforceable) then she cannot pay any costs order now imposed. That, however, is a matter that will presumably be addressed in the context of the foreshadowed instalment application.
In effect, Ms Dubow places weight on the registration of the costs certificates as giving rise to a judgment debt and as to the certificates themselves evidencing a debt due and maintains that these remain valid "albeit stayed" by orders of Adams J and Grove J, noting that the continuing stay of execution of the costs orders by Hulme J does not "negative the existence of the Costs Certificates" evidence a debt by the Plaintiff to the Defendant.
At [7] of her submissions Ms Dubow says that;
In effect the Set aside of the Statutory Demand, delays the ultimate payment of a previous judgment, and that does not mean the Plaintiff is successful other than technical ability to manipulate the Corporations Act 2001 requirements. (Negativing the presumption of insolvency which was/may be evident from the material filed as to profitability).
Ms Dubow opines that the effect of the setting aside of the statutory demand and of a costs order against her is that the parties will be left in dispute for some time (something that the history of the matter to date appears to confirm) and says that "The position of the Defendant is that this Plaintiff has exploited their economic viability to avoid judgment and continues to do so" saying that "Res judicata would suggest that there is not likely to be a retreat of the argument previously run and won, and that the interpretation or Set aside of the Deed of Release will leave the parties in dispute for some time". I consider it to be regrettable that the saga of the costs disputes (over a sum that by now must surely have been well and truly exceeded by the costs of the successive proceedings) seems likely to continue. However, it must be remembered that one basis of the Fitness First application to set aside the statutory demand was that the sum claimed had been the subject of a release entered into in an endeavour to compromise all disputes between the parties and, if its construction of the Deed of Release is correct, it is Ms Dubow who has chosen to resile from that arrangement.
Ms Dubow also expresses the view that as these proceedings were of a technical nature and of limited compass, it is probable that costs on a party/party or solicitor/client or indemnity basis are unlikely to be at much variance at least in terms of value (the variance being seen as likely to arise on the assessment of what amount to reasonable costs). (Pausing there, if that be the case, then the arguments on which Ms Dubow relies as to the impact of such an order on her financial position would seem to have little weight and her opposition to an indemnity costs order is largely a complaint as to any costs order being made at all.)
Issue is raised as to matters (said to be attributable to the position adopted by Fitness First on 8 February 2011) that Ms Dubow says delayed the hearing on 8 February 2011. In that regard, it seems to me that if there is an argument that Fitness First unreasonably caused higher costs to be incurred in the conduct of its application then there would be matters that would appropriately be raised on a costs assessment process. As I understand it, the complaint is that the matter was adjourned on 8 February 2011 (though Ms Dubow had travelled to Sydney for that hearing date) in order to have the Local Court transcript of the occasion when the costs judgment was set aside made available on the final hearing of the application by Fitness First and that Fitness First did not then tender the transcript (though Ms Dubow did so). In that regard, I simply note that if a costs assessor forms the view that any of the Fitness First costs were unreasonably or unnecessarily incurred then those should be disallowed.
Ms Dubow contends that any order for costs should be made as an offset to the current costs certificates or stayed pending the result of the appeal on the costs certificates. It is said that any order for Costs will be subject to off-setting claims on the costs certificates "and given the past performance of this Plaintiff result in Bankruptcy proceedings". Ms Dubow suggests that set off of the costs of these proceedings with the amount of the costs certificates is "a possible resolution of the Costs issue". That, however, appears to presuppose that Ms Dubow's contentions as to the Deed of Release are correct - which is a matter clearly in issue between the parties. I do not consider it appropriate to make such an order.
Finally, or as an elaboration of the above submission, Ms Dubow requests a stay of any costs orders pursuant to the determination of the appeal on the costs certificates, the setting aside of the Local Court Registration and the stay of the Supreme Court Registration "to preserve the current arrangement between the parties". In circumstances where Ms Dubow has already indicated her intention to appeal from the order setting aside the statutory demand, it seems to me that any stay of the costs orders would appropriately be dealt with in that context particularly since any assessment of the costs orders will take some time in the ordinary course and by then the question of any appeal from my decision may well have been determined.
In summary, Ms Dubow says that the statutory demand was based on "final and binding Cost Certificates"; that the interpretation of the Deed of Release and "Stay" was not and is still not settled; and that the genuineness of a dispute does not make the claim for payment of the debt unreasonable. The first two of those points raise the issue presently in dispute between the parties; the last (which I accept) nevertheless does not address the point emphasised in Saferack , that continued resistance of an application to set aside a statutory demand (as here occurred) may be so unreasonable in the circumstances as to warrant an indemnity costs order.
Conclusion
I consider that an indemnity costs order is warranted in circumstances where it should have been abundantly clear to Ms Dubow that the application to set aside the statutory demand was bound to succeed (as seems, in effect, to be conceded by her subsequent acknowledgments as to the existence of a dispute as to the interpretation of the Deed of Release). Ms Dubow clearly anticipated a dispute at the time she served the statutory demand and persisted in resisting the application to set it aside, through to the conclusion of a contested hearing, even once it was clear that Fitness First was prepared to put the issue of the existence of a dispute to proof on the current application. Ms Dubow also unreasonably rejected what I find to have been a genuine offer to compromise the proceedings. In the words of Barrett J, Ms Dubow should have bowed to the inevitable. She did not and the price she pays for that is to bear the costs on an indemnity basis of the proceedings. (The fact that Ms Dubow's conduct in resisting the application falls within the category of case considered in Saferack means that it is appropriate for the indemnity costs order to cover the proceedings as a whole and not simply the time from the service of the Calderbank offer; but, in any event, there would be an indemnity costs order from the day after the making of that offer.) The fact that Ms Dubow is in a financially straitened position (whether or not that be because she has as yet been unable to enforce her 2005 costs order - that is, nevertheless, still the subject of a stay order) may be a basis of an application to the costs judgment to be paid by way of instalments (as is to be the subject of a foreshadowed application by her) but does not warrant forcing Fitness First to incur costs in applying to set aside a demand issued at a time when Ms Dubow was aware that the underlying debt was disputed.
I therefore order that Ms Dubow pay the costs of Fitness First of these proceedings on an indemnity basis.
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Decision last updated: 21 June 2011
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