Re Pierotti & Fanani Pty Ltd as trustee for the Caesars Properties Unit Trust; Re Etruscan Properties Ltd

[2018] NSWSC 457

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Pierotti & Fanani Pty Ltd as trustee for the Caesars Properties Unit Trust; In the matter of Etruscan Properties Ltd as trustee for the Etruscan Properties Unit Trust; In the matter of Etruscan Properties Pty Ltd as trustee for the Etruscan Properties Unit Trust; In the matter of Lucca Enterprises Pty Ltd as trustee for the Lucca Unit Trust [2018] NSWSC 457
Hearing dates:	19 and 20 March 2018
Decision date:	13 April 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	In each matter, the Defendant pay the Plaintiff’s costs of the application to set aside the creditor’s statutory demand, as agreed or as assessed. The Defendant in each matter pay half of the Plaintiff’s costs of the costs application, as agreed or as assessed, with liberty to the parties to apply within 7 days to vary that order.
Catchwords:	COSTS – statutory demand – where creditor’s statutory demands were set aside by consent – where the creditor ought to have been aware of the likelihood of a genuine dispute as to whether the debts were payable on demand – where the debtor did not clearly articulate the basis on which the demands would be disputed in their correspondence prior to the issue of the demands – whether there was a reasonable basis for the issue of the statutory demands – abuse of process – whether creditor’s statutory demands were issued in order to exert improper commercial pressure in the context of ongoing negotiations.
Legislation Cited:	- Corporations Act 2001 (Cth) ss 459G, 459H
Cases Cited:	- Ayrton Investments Pty Ltd v Andrlik [2000] ACTSC 55 - BGC Contracting Pty Ltd v Whitsunday Crushers Pty Ltd [2004] WASC 209 - Canon Australia Pty Ltd v Yong Bros Pty Ltd [2009] NSWSC 1245 - Createc Pty Ltd v Design Signs Pty Ltd [2009] WASCA 85; (2009) 71 ACSR 602 - Dynamics Co Pty Ltd v G and M Nicholas Pty Ltd [2012] NSWSC 206 - Felkro Nominees Pty Ltd v Austissue Pty Ltd [1993] FCA 455; (1993) 11 ACSR 607 - Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602 - Ranford Gold Mines Pty Ltd v P & H Earth Moving Pty Ltd [1994] NTSC 49 - Re Halal Meats Pty Ltd [2015] NSWSC 2041 - Re Zarzar Pty Ltd [2017] NSWSC 9 - Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 - Specialty Fashion Group Ltd v Global Red Australia Pty Ltd [2012] NSWSC 256 - Yoogalu Pty Ltd v Intentia Australia Pty Ltd [2006] NSWSC 278
Category:	Procedural and other rulings
Parties:	Proceedings 2017/392791 Pierotti & Fanani Pty Ltd as trustee for the Caesars Property Unit Trust (Plaintiff) Ferruccino Pty Ltd as trustee for the Ferruccino Family Trust (Defendant) Proceedings 2017/392794 Etruscan Properties Pty Ltd as trustee for the Etruscan Properties Unit Trust (Plaintiff) Lisa Taliano (Defendant) Proceedings 2017/392797 Etruscan Properties Pty Ltd as trustee for the Etruscan Properties Unit Trust (Plaintiff) Ferruccino Pty Ltd as trustee for the Ferruccino Family Trust (Defendant) Proceedings 2017/392801 Lucca Enterprises Pty Ltd as trustee for the Lucca Unit Trust (Plaintiff) M&L Taliano Pty Ltd as trustee for the M&L Taliano Family Trust (defendant)
Representation:	Counsel: B F Katekar (Plaintiff – all proceedings) D R Stack (Defendant – all proceedings)   Solicitors: Creevey Russell Lawyers (Plaintiff – all proceedings) Bridges Lawyers (Defendant – all proceedings)
File Number(s):	2017/392791; 2017/392794; 2017/392797; 2017/392801

Judgment

Affidavit evidence and factual background

1. This is an application brought by Etruscan Properties Pty Ltd (“EPPL”) as trustee for the Etruscan Properties Unit Trust and several other parties for their costs of applications to set aside four creditor’s statutory demands which were set aside by consent.

2. The Plaintiffs relied on the affidavit of their solicitor, Ms Usha Praser, affirmed 23 February 2018 in respect of their application for the costs of setting aside the several demands. The Defendants relied on the affidavit of their solicitor, Mr Dominic Calabria, dated 28 February 2018 in respect of that matter. I have drawn from those affidavits for the account of the facts which follows.

3. By way of background, it appears that each of the Plaintiffs is one of a group of companies controlled by two families, the Pierotti Family and the Fanani Family. Two of those companies hold property upon which retail businesses are operated by another entity, Barga Pty Limited (“Barga”). The managing director of the Plaintiffs is Mr Paul Pierotti. The directors of the corporate Defendants are Ms Lisa Taliano and Mr Michael Taliano. Ms Lisa Taliano is Mr Pierotti’s sister and Mr Michael Taliano and his son Mr Joseph Taliano worked in businesses conducted by Barga and the Plaintiffs until mid to late 2015. Disputes arose between the parties in mid-2015, which appear to have been connected with the termination of Mr Joseph Taliano’s employment. In July 2016, Mr Michael Taliano and Ms Lisa Taliano were removed as directors of several of the companies.

4. By a letter dated 23 June 2017, the solicitors for Mr and Ms Taliano and their associated entities wrote to Mr Pierotti and others dealing with the question of the separation of Mr and Ms Taliano from the relevant business and identifying a complaint that the remaining members of the business had failed to make a reasonable offer to purchase the Taliano Group’s interests in that business. That letter set out the history of Mr and Ms Taliano’s involvement in that business, the suggested exclusion of Mr Taliano from that business and subsequent events and complained as to various aspects of the management of that business. That letter suggested a mediation within a specified period in respect of the wider arrangements for exit of Mr and Ms Taliano from the companies. That letter also demanded payment of amounts said to be recorded in the 2016 financial statements of the companies, by Pierotti & Fanani Pty Ltd (“PFPL”) as trustee for the Caesars Property Unit Trust to Ferruccino Pty Ltd (“FPL”) in an amount greater than that claimed in the subsequent creditor’s statutory demand issued to it; by Lucca Enterprises Pty Ltd (“LEPL”) to M & L Taliano Pty Ltd (“MLT”) in the same amount as was subsequently claimed in the statutory demand issued to it; by EPPL to FPL in a lesser amount than was claimed in the demand issued to it; and by EPPL to Ms Taliano in an amount which also differed from that later claimed in the demand issued to it. That letter also asserted that, whether the outstanding amounts were characterised as unpaid distributions or loans, they were “payable on demand”, although it did not disclose the factual basis for that assertion. That letter threatened, if payment of the demanded amounts was not made, the commencement of proceedings (I interpolate, as distinct from service of creditor’s statutory demands) to recover the relevant amounts.

5. Subsequent correspondence followed between the parties, to which my attention was drawn in submissions and to which I have had regard, although I do not consider that it is necessary to deal with that correspondence at length. By letter dated 30 June 2017, the Plaintiffs’ solicitors suggested that the Defendants had failed to provide adequate details substantiating the outstanding amounts and that their clients would require further and detailed particulars in that regard to “even consider such claims”, and also addressed the prospect of mediation. By letter dated 11 August 2017, the solicitors for the Defendants responded that the relevant amounts were recorded in the 2016 financial statements of the companies and had existed consistently in the financial statements of the companies since at least FY 2013 (a proposition which Mr Stack, who appears for the Defendants, significantly qualified in oral submissions); and that the financial statements had been prepared on the Defendants’ instructions. That letter in turn invited the Plaintiffs, if there was any challenge to the matters recorded in the companies’ financial statements, to articulate the items that were asserted to be incorrect, to provide information sufficient to support any such assertion and amendments, and to provide an explanation as to why such assertions were know being made. That letter did not seek to identify the basis on which it was suggested that the relevant amounts were then due and payable. In any event, it was ultimately a matter for the Defendants to satisfy themselves as to the correctness of the amounts claimed and that those amounts were properly due and payable, which they verified by affidavit in respect of the statutory demands.

6. Subsequent correspondence from the Plaintiffs’ solicitors engaged with the prospect of mediation, rather than with the status of the relevant demands, and the Defendants’ solicitors then asserted, by letter dated 29 August 2017, that earlier correspondence:

“… does not assert any position in respect of the [companies’] outstanding amounts inconsistent with that put by our clients, namely that the [companies’] outstanding amounts are presently due and payable by your clients to our clients. Accordingly, our clients are left to infer that there is nothing that would assist your clients to adopt any position other than that put by our clients.”

No doubt, it was open to the Defendants to draw such inferences as they wished from the Plaintiffs’ correspondence, subject to the risk that any such inference might ultimately be incorrect. Further correspondence addressed a range of issues as to the wider dispute between the parties, the approval of further financial statements and any acquisition of the Taliano Group’s interest in the relevant business as well as possible arrangements for a mediation.

7. A confrontation between Mr Pierotti and Mr Taliano then took place at the business premises in October 2017, which gave rise to other proceedings.

8. The four creditor’s statutory demands that are in issue are each dated 29 November 2017 but were served on 11 December 2017. The Plaintiffs complain that that occurred in the two weeks before Christmas, which was one of the busiest trading times for the companies’ retail furniture business. By the first of those demands, PFPL as trustee for the Caesars Property Unit Trust claimed payment in the amount of $143,409 which was described in the schedule to the demand as:

“Amount recorded as ‘Beneficiary Loan: Ferruccino Family Trust” in the financial statement of the Caesars Property Unit Trust for the financial year ended 30 June 2017.”

That demand was supported by an affidavit of Mr Michael Taliano which stated, relevantly, that he had had access to and inspected the books and records of both FPL and PFPL in relation to the amounts recorded as owing by PFPL to FPL and the debt was “due and payable” by PFPL and he believed there was no genuine dispute about the existence or amount of the debt.

9. MLT as trustee for the M&L Taliano Family Trust served a second creditor’s statutory demand also dated 29 November 2017, on LEPL as trustee for the Lucca Unit Trust claiming payment of the amount of $184,421, which was described in the schedule to the demand as:

“Amount recorded as ‘M&L Taliano Family Trust Loan’ in the financial statement of the Lucca Unit Trust for the financial year ended 30 June 2017.”

That demand was also verified by an affidavit of Mr Taliano in similar terms to his first affidavit.

10. FPL as trustee for the Ferruccino Family Trust also served a third creditor’s statutory demand on EPPL as trustee for the Etruscan Properties Unit Trust in the amount of $145,019, described in the schedule to the demand as:

“Amount recorded as ‘Beneficiary Loan: Ferruccino Family Trust” in the financial statement of the Etruscan Properties Unit Trust for the financial year ended 30 June 2017.”

That demand was also verified by an affidavit of Mr Taliano in similar terms.

11. Ms Lisa Taliano served a fourth creditor’s statutory demand to EPPL as trustee of the Etruscan Properties Unit Trust in the amount of $65,041, described in the schedule to the demand as:

“Amount recorded as ‘Lisa Taliano Loan’ in the financial statement of the Etruscan Properties Unit Trust for the financial year ended 30 June 2017.

That demand was verified by an affidavit of Ms Taliano dated 29 November 2017, which indicated that she had access to, and inspected, the books and records of EPPL in relation to the amounts recorded as owing by it to her, the debt was due and payable by EPPL and she believed there was no genuine dispute about the existence or amount of the debt.

12. By his affidavit dated 28 February 2018 in this application, the Defendants’ solicitor, Mr Calabria, explained the delay between execution of the creditor’s statutory demands on 29 November 2017 and service of the demands, by reason of delay in the receipt of the demands and supporting affidavit by his firm, after they were posted from Griffith to Sydney, and the fact that final instructions to serve the Demands were received on 8 December 2017.

13. By letter dated 22 December 2017, which was tendered in this application without a claim for legal professional privilege being asserted, the Plaintiffs’ solicitors advised the Plaintiffs as to the nature and consequences of failure to comply with a creditor’s statutory demand, including the risk that the companies would be wound up in insolvency, if the demands were not complied with. By email dated 22 December 2017, Mr Pierotti also wrote to other directors of the companies, and to Ms Lisa Taliano, referring to the demands as an “extremely serious and very aggressive threat to all of our businesses, assets and lively hood” [sic]. That email referred to the demand served by Ms Taliano in the amount of $65,041 which was stated to be “not due for payment yet”. Mr Pierotti also described the other amounts due as “book entries” and “accounting bullshit” and expressed the view that:

“[t]he other fundamental issue is that if anyone was to be paid any amount of money it would be an oppressive behaviour to the other family members unless we were all paid out accordingly. If this was to occur, the total to be paid out would be around $2.2 million”.

Mr Pierotti also set out his perception of dealings with Mr and Ms Taliano and expressed the view that “[t]his leaves us absolutely no choice but to vigorously defend”. It was plain, from at least 22 December 2017, that the Plaintiffs would dispute the relevant debts, and that at least the demand issued by Ms Taliano would be disputed on the basis that the amount claimed was not due for payment.

14. By letter dated 26 December 2017 to the Defendants’ solicitors, the Plaintiffs’ solicitors referred to the several demands and correspondence between the parties and observed that:

“A reading of the historical correspondence between our respective firms demonstrates that you have known, and presumably understood, that there is a substantial dispute between our clients about the nature, content and entitlement to make, the demands made in your 23 June letter, which have now culminated in the demands.”

That letter did not specifically address the nature of any dispute as to the amounts claimed, or whether they were due and payable, but contended that the demands were an abuse of process in the circumstances. That letter requested an immediate acknowledgement and agreement that the demands should be set aside.

15. By email dated 29 December 2017, rather than accepting that the demands should be set aside at that point, the Defendants’ solicitors requested an articulation:

“ –    exactly how your clients say that there is any genuine dispute in relation to the payment of the amounts demanded; and

–    precisely why you assert that the issuance of the statutory demands constitute an abuse of process.”

16. The Plaintiffs filed proceedings to set aside the creditor’s statutory demands on 29 December 2017, on the basis that the period to set aside the demands would expire on or about 2 January 2018. Four affidavits of Mr Pierotti affirmed 28 December 2017 were filed and served by the Plaintiffs, which exhibited copies of the financial statements of the Plaintiffs for the financial year ending 30 June 2017. Extracts from those financial statements are annexed to the affidavit of Mr Calabria filed in this application, although Mr Pierotti’s affidavits were not read or tendered in this application.

17. By his affidavit dated 28 February 2018 in this application, the Defendants’ solicitor, Mr Calabria also referred to steps which he and his staff had taken after receipt of the Originating Processes seeking to set aside the demands and the affidavits in support, from 2 January 2018. It appears that the Defendants subsequently obtained Counsel’s advice. The Defendants’ solicitors then wrote to the Plaintiffs’ solicitors contending that the matters raised in Mr Pierotti’s affidavits, on which the Plaintiffs relied to establish a genuine dispute within s 459H of the Corporations Act 2001 (Cth), had not been raised in earlier correspondence between the parties before the service of those affidavits, and that the Defendants did not accept the correctness of those assertions, but nonetheless proposing that the demands be withdrawn and that there be no order as to costs. Although Mr Stack referred to these matters in submissions, it is not possible to assess what was raised in those affidavits, where they were not tendered or read in this application. By letter dated 16 February 2018, the solicitors for the Plaintiffs responded that their clients were prepared to consent to orders that the demands be set aside and the Defendants pay the Plaintiffs’ costs on the indemnity basis. By letter dated 19 February 2018, the Defendants’ solicitors confirmed that the four demands were withdrawn, implicitly leaving the question of costs for determination by the Court.

18. On 20 February 2018, the Registrar made orders, by consent, that each of the demands, which had been withdrawn on 19 February 2018, be set aside to the extent that an order to that effect was required and providing for the determination of the costs in respect of the demands.

The applicable principles

19. The Plaintiffs seek their costs of the application to set aside the demands on an indemnity basis, or alternatively on an ordinary basis. Mr Stack, who appears for the Defendants, submits that there should be no order as to the costs of the proceedings, other than that the Plaintiffs should pay their costs of and incidental to the costs hearing. Mr Stack also submits, uncontroversially, that the Court’s power to award costs is discretionary. He submits, by reference to the observations of Barrett AJA in Re Zarzar Pty Ltd [2017] NSWSC 93 at [19], that the Court will not try the case of an alleged genuine dispute that the consent order has made hypothetical, and that costs are only payable where the Court is able to conclude that one of the parties had acted so unreasonably that the other party could have an order for costs.

20. Several cases have considered the position as to whether costs should be ordered against a party which issues a creditor’s statutory demand which is then withdrawn or set aside without opposition. In Felkro Nominees Pty Ltd v Austissue Pty Ltd [1993] FCA 455 ; (1993) 11 ACSR 607, the applicant sought costs where a statutory demand was set aside by consent. Heerey J noted that:

“… creditors have to realise that if they invoke winding up provisions by issuing a statutory demand they run the risk that, if a debtor establishes that the amount claimed is subject to a genuine dispute, the debtor will get an order for costs, as s 459N expressly contemplates.”

21. In Ranford Gold Mines Pty Ltd v P & H Earth Moving Pty Ltd [1994] NTSC 49, Kearney J referred to Felkro Nominees above but observed that “the costs outcome depends on the circumstances of each case” and also noted the relevance of when the defendant had been notified of the applicant’s case.

21. In Ayrton Investments Pty Ltd v Andrlik [2000] ACTSC 55 at [19], Higgins J observed that a person who issued such a demand faces “a risk as to costs, not an inevitability”. His Honour there expressed the view, which seems to me to have substantial force, that:

“… the focus is on the reasonableness of the decision to issue [the statutory demand]. Whether on the material known to the creditor before the notice issued, it should have been apparent that there was a dispute which, viewed objectively, was “genuine”, that is, warranting further inquiry. If so, the creditor must expect to pay costs in any event once the notice is set aside. If it was reasonable to issue the notice, but thereafter it appears that there is a genuine dispute then, as soon as that appears, the creditor must withdraw or cease to oppose the setting aside of the notice. Otherwise, the creditor risks an adverse costs order.”

23. In BGC Contracting Pty Ltd v Whitsunday Crushers Pty Ltd [2004] WASC 209, a defendant contended that it first became aware of the nature and quantum of the plaintiff’s offsetting claims when the affidavit was filed in support of the application to set aside the demand, and that it therefore acted reasonably in serving the demand. Master Newnes did not accept that argument and ordered that the defendant should pay the costs of setting aside the demand. The basis of Newnes M’s reasoning was that the statutory demand procedure “is not intended to be simply a debt recovery process” and that a creditor who invokes this procedure takes the risk that the debtor did not put it on notice of the nature and quantum of offsetting claims or the nature of any dispute, after the service of the statutory demand but before the debtor went to the cost of putting on the application to set aside the demand and supporting affidavit. Those comments were directed to a failure to communicate the basis for an offsetting claim after service of the statutory demand, where the defendant was already aware of complaints by the plaintiff about its performance and of a dispute as to whether the full amount of the invoices was due before the demand was issued.

24. In Yoogalu Pty Ltd v Intentia Australia Pty Ltd [2006] NSWSC 278, Barrett J observed that there is no rule or principle which requires that a plaintiff seeking to set aside a statutory demand under s 459G of the Corporations Act communicate the nature of any dispute as to the underlying debt to the defendant before the application to set aside the demand is made. However, that observation was directed to the question whether a genuine dispute could be established where it had not been communicated prior to the application brought under that section to set aside the demand rather than to the question of costs. Mr Katekar, who appears for the Plaintiffs, also refers to the observations of Barrett J in Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602 at [7] that:

“The expectation that costs should lie where they fall may be displaced if the Court can see, with ease, that one party has acted unreasonably in a way which should be compensated by costs.”

25. Mr Katekar also draws attention to the expression of the relevant principles in Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 at [3]ff, where White J observed that:

“The parties have not agreed on costs. In Re The Minister for Immigration and Ethnic Affairs Ex Parte Lai Qin (1997) 186 CLR 622, McHugh J said at 624–625:

In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule, the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

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 extracurial 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.

…

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried … but such cases are likely to be rare.

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.” (Citation of authorities omitted.)

These principles are applicable to proceedings to set aside a statutory demand, but special features of such proceedings need to be taken into account in judging the reasonableness of the parties' conduct. A company faced with a statutory demand in relation to a debt, disputed in whole or in part, has no option but to commence an action under s 459G to set aside the demand within 21 days even if the ultimate order sought will be an order under s 459H(4) varying the demand to the amount which is not genuinely in dispute. If a company were merely to pay the amount which was not genuinely in dispute, without securing or compromising the balance to the reasonable satisfaction of the creditor, it would face the prospect of winding up proceedings being brought against it, of its being presumed to be insolvent (s 459C(2)(a)), and of its being unable to oppose the winding-up application on a ground upon which it could have relied for the purposes of an application to have the demand set aside unless leave is given (s 459S).

A person claiming to being a creditor who uses the procedure for service of a statutory demand under s 459E to seek to force payment of a genuinely disputed debt risks an order for indemnity costs. For the purposes of s 459H a genuine dispute will exist about a debt if there is a plausible contention requiring investigation that the company is not indebted (Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787–788). Because the threshold for establishing a genuine dispute is low, creditors are often ill-advised to proceed with a statutory demand once plausible grounds for a dispute are asserted. They risk an order for indemnity costs if they do so (Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529 at 536; CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd (2003) 47 ACSR 100 at 104–105, [19]–[22]).

On the other hand, a company which capitulates to the creditor’s demand after commencing proceedings to have the demand set aside by paying the sum demanded, or a company which puts the creditor to unnecessary expense in defending an application to set aside the demand before recovering what is unquestionably due, is likely to have to pay the creditor's costs even though the demand is set aside upon the creditor being paid (Jem Number Four Pty Ltd v Southern Cross Construction (NSW) Pty Ltd [2006] NSWSC 602; Gee Ha Pty Ltd v Dera Developments Pty Ltd [2007] NSWSC 95).

26. Mr Stack in turn draws attention to the observation of Brereton J in Canon Australia Pty Ltd v Yong Bros Pty Ltd [2009] NSWSC 1245 at [12] that a company that wishes to take advantage of the costs consequences that might follow from the withdrawal of a creditor’s statutory demand cannot “keep its powder dry while at the same time leaving the creditor in the dark as to why the creditor is not being paid”. Mr Katekar distinguishes that decision on the basis that that case involved an offsetting claim, rather than a question of the character of the debt in issue. I nonetheless understand Brereton J to have been expressing a more general principle, to which I have had regard.

27. In Dynamics Co Pty Ltd v G and M Nicholas Pty Ltd [2012] NSWSC 206, I noted several of the authorities to which I have referred above and expressed the view that:

“… consistent with the approach adopted by Higgins J in Ayrton Investments, the reasonableness of a party serving a statutory demand must be determined by reference to what that party knew as to the nature of any dispute as to the debt; conversely, a debtor which fails to pay a debt which is apparently due and undisputed, and also fails to disclose the basis of any dispute, can scarcely complain when the statutory demand procedure is invoked by a creditor who is acting reasonably on the basis of the information which is then known to it.”

28. Mr Stack also draws attention to my observation, in Specialty Fashion Group Ltd v Global Red Australia Pty Ltd [2012] NSWSC 256 at [14], that the focus is on whether on the objective material known to the creditor, prior to the demand being issued, it was reasonable for the creditor to issue that demand.

Whether the Defendants had a reasonable basis for the issue of the demands

29. Mr Katekar submits, first, that the Defendants knew the relevant debts were disputed and the amounts claimed were not immediately due and payable. Mr Katekar characterised the several demands as relying on liabilities stated in the 2017 accounts of the various entities, although the letter dated 11 August 2017 from the Defendants’ solicitors addressed the amount shown in the 2016 accounts of those entities.

30. Neither party sought to tender the accounts for 30 June 2016 on which the demands relied but, so far as there is evidence of the accounts as at 30 June 2017, in the extracts attached to Mr Calabria’s affidavit, the amount for the beneficiary loan owed by the Caesars Property Unit Trust to the Ferruccino Family Trust (and other family trusts) is shown as a current liability as at 30 June 2016 and as at 30 June 2017. The amount of the loan owed by the Etruscan Properties Unit Trust to the Ferruccino Family Trust (and other family trusts) as at 30 June 2016 and 30 June 2017 is also shown as a current liability in the amount claimed in the relevant demand. The amount owed by the Lucca Unit Trust to the M&L Family Trust is shown as a non-current liability as at 30 June 2016 and 30 June 2017, in the amount claimed in the demand, and therefore as not due and payable within the next 12 months. The amount owed by the Etruscan Properties Unit Trust to Ms Taliano is also shown as a non-current liability in the same amount as the demand. To the extent there is evidence as to the position at the time the demands were served, it appears that the amounts claimed by MLT against LEPL and by Ms Taliano against EPPL were not current liabilities and were therefore not due and payable.

31. Mr Katekar submits that all of those amounts were longstanding items, having been in the Plaintiffs’ accounts since at least 2013. That proposition was also asserted by the Defendants’ solicitors in their letter dated 11 August 2017, although Mr Stack sought to qualify it in submissions in this application by pointing to alterations in some of the amounts owed over time. Mr Katekar submits that there was “always going to be a genuine dispute at least as to whether those amounts were payable on demand”. That appears to me to be clear as to those matters which were treated as non-current liabilities in those accounts, and it also seems to me that it would have been apparent that there would likely be a genuine dispute as to whether amounts that had been lent to the companies, a considerable time ago, were the subject of other arrangements between the parties which prevented their being called on demand.

32. In oral submissions, Mr Katekar also identified several aspects in which he contended that the conduct of the Defendants was unreasonable, namely that the basis for the alleged debt was not adequately articulated despite an invitation to do so; the claim was made in the context of the separation of interests from a family dispute in respect of which the alleged debts form part, despite attempts at mediation; and the demands were served directly on the Plaintiffs without notice at the busiest time of year for them, a matter that I will address below. Mr Katekar accepted that this was not a case where the Plaintiffs had made the nature of the relevant dispute absolutely plain and the Defendants had carried on regardless (T5). He relied, however, on the proposition that the record of a liability in the accounts did not indicate that it was due and payable, and that the fact that that liability had been in the accounts for some years indicated that it was not current, and two of the four liabilities were categorised as non-current liabilities (T8). Mr Katekar submitted that the accounts recorded loans by beneficiaries of the relevant trusts, which would be unwound on a separation of the relevant businesses, and it did not follow from the record of those loans in the accounts that a demand could be issued for payment forthwith (T9). Mr Katekar submitted that this was not a case where the Plaintiffs had kept their “powder dry”, using the phrase adopted by Brereton J in Canon Australia above, but that they had invited the Defendants to articulate the basis on which the debts were owing and why they were payable on demand, and that the Defendants had not done so, and that it was therefore the Defendants who had kept their “powder dry” (T11). Mr Katekar also confirmed that the Plaintiffs submitted that it ought to have been apparent to the Defendants that there was a dispute as to whether the relevant debts were due and payable, and that was part of the overall dispute (T16).

33. Mr Stack submits that the Defendants acted reasonably in issuing the demands, where the amounts claimed in them were identified in the Plaintiffs’ financial statements. He submits that the question becomes whether the Defendants were provided with evidence that, objectively, established that the financial statements were incorrect or the relevant amounts were otherwise not payable. An immediate difficulty with that submission is that, in respect of two of the amounts claimed, the financial statements themselves indicated that the debts were non-current. Mr Stack submits, with some force, that the Plaintiffs’ correspondence after the letter from the Defendants’ solicitors dated 23 June 2017 indicated that the Defendants were pressing for payment of the relevant amounts, and did not identify the matters which the Plaintiffs contended could constitute a genuine dispute, before the creditor’s statutory demands were issued. Mr Stack also submits that the Defendants, as they stated they would, inferred that the sum set out in the financial statements were due and payable. While I accept the Defendants may have drawn that inference, it does not seem to me that it was a reasonable one in the light of the companies’ accounts and the relevant circumstances.

34. In oral submissions, Mr Stack submitted, plausibly but without evidence in support, that the relevant loans were distributions that had been notionally paid to beneficiaries and then loaned back by them to the trustee companies in their capacities as trustees (T18), and that the Plaintiffs had contended that the true position was different in Mr Pierotti’s affidavit evidence which, as I noted above, was not tendered. Mr Stack accepted in oral submissions that there was no evidence which indicated the basis on which the Defendants believed that the relevant debts were payable on demand, other than a proposition which Mr Stack draws from the Defendants’ solicitor’s letter dated 23 June 2017, namely that the debts were payable at call because they were either distributions or loans. Mr Stack submits that there is no evidence that they were loans or distributions payable at a future time, and the ordinary inference in the absence of evidence is that they are payable at call (T20). There is, however, evidence in respect of two of the debts that they were payable at some future time, namely that the accounts treated them as non-current liabilities.

35. Mr Stack in turn summarised the Defendants’ position as that their conduct was not unreasonable given the exchange of correspondence between the parties, where the sums claimed in the demands were derived from the Plaintiffs’ financial statements; the demands were only issued after an exchange of correspondence where the Plaintiffs’ solicitors were invited to identify any difficulty with the demand for payment or any issue with the sums that had been demanded; and there was no articulation of the genuine dispute before the commencement of the proceedings, which would have saved costs in relation to the filing, processes and affidavits; and, had the matters been raised in correspondence, the Court should infer that the Defendants would have withdrawn the demands (T28).

36. Here, the Plaintiffs did not clearly articulate the basis on which the demands would be disputed in their correspondence, but it should have been apparent to the Defendants that there would at least be a dispute whether debts recorded as non-current were immediately due and payable and that there was also likely to be a dispute as to whether the other debts, although recorded as current with the implication that they were payable within 12 months, were immediately due and payable given the circumstances of the parties’ relationship.

Abuse of process

37. Mr Katekar also presses a claim for costs on the basis that the issue of the demands was an abuse of process, and submits that a statutory demand may be set aside as an abuse of process if it is issued in order to exert improper commercial pressure in the context of ongoing negotiations. Mr Katekar refers to the decision of the Court of Appeal of the Supreme Court of Western Australia in Createc Pty Ltd v Design Signs Pty Ltd [2009] WASCA 85; (2009) 71 ACSR 602 at [49], where the Court observed that it has generally been accepted that the Court retains a residual jurisdiction to restrain reliance on the statutory demand procedure on the ground of an abuse of process. Mr Stack in turn refers to my observation in Re Halal Meats Pty Ltd [2015] NSWSC 2041 at [22] that a creditor’s statutory demand can be set aside as an abuse of process where the creditor “knew that the debt was disputed, but issued the demand in order to exert improper commercial pressure in the context of ongoing negotiations”.

38. Mr Katekar submits that the demands were issued at Christmas in order to exert commercial pressure on the Plaintiffs in the context of the unsuccessful attempts to negotiate an exit from the family business over the previous two years. Mr Katekar also submits that:

“To serve the demands by post, out of the blue and without notice to the Plaintiffs’ solicitors, on substantial family retail businesses only 13 days before Christmas was vexatious in the extreme.”

39. Mr Stack responds by reference to the matters which explained the timing of the issue of the demands, to which I have referred above, including that the demands were served in the first part of December 2017, not immediately prior to Christmas. In oral submissions, Mr Stack submitted, and I accept, that the evidence does not establish, and I should not infer, that the Defendants issued the Demands with actual knowledge that the debts were disputed, or so as to exert improper pressure in the context of ongoing negotiations, and also addressed the issue of timing of service of the demands (T28–29).

39. While the Courts have expressed a distinct lack of enthusiasm for the service of creditor’s statutory demands which are calculated to arrive after parties or their legal representatives are on Christmas leave, there is no general principle that creditor’s statutory demands cannot be served in December, or cannot be served on retailers or furniture retailers during the Christmas trading period. In this case, the demands were issued in early December, and the timing of their issue appears to reflect both the earlier dealings between the parties, and the delay resulting from their having been posted from Griffith to Sydney, before they were issued. The evidence does not establish an actual intent of the Defendants to exert commercial pressure on the Plaintiffs, as distinct from issuing the demands for the legitimate purpose of giving rise to a presumption of insolvency, had the debts otherwise not been disputed and been due and payable. While it is unfortunate that the Defendants’ solicitors did not give notice of the issue of the demands to the Plaintiffs’ solicitors, it does not seem to me that that is sufficient to constitute an abuse of process. I do not accept the submission that the demands were issued at Christmas to exert commercial pressure on the Plaintiffs, at least in a manner that would amount to an abuse of process. The timing of service of the demands is nonetheless relevant, because the fact that the 21 day period in which they could be set aside ran into the Christmas and New Year period reduced the opportunity that would otherwise have been available to the Plaintiffs to explore the relevant issues in correspondence, before filing an application to set aside the demands.

Summary and orders

41. In summary, there was a clear issue in respect of two of the debts as to whether the debts were due and payable, by reference to the treatment of those debts as non-current liabilities in the companies’ accounts. The Defendants ought to have been aware of the likelihood of a genuine dispute as to the other debts, and whether they were payable on demand, in the relevant circumstances, although the basis for that dispute was not clearly articulated by the Plaintiffs in correspondence prior to service of the demands. This is not a case where that existence of that dispute can have caught the Plaintiffs by surprise. For these reasons, it seems to me that, in each matter, the Defendant should be ordered to pay the Plaintiff’s costs of the application to set aside the creditor’s statutory demand, as agreed or as assessed. No basis for an order for indemnity costs in favour of the Plaintiffs is shown, particularly where the Plaintiffs had not clearly articulated the dispute before the demands were served.

42. Although the Plaintiffs have succeeded in the costs application, they failed in establishing their claims for an abuse of process or indemnity costs, to which significant effort and time was devoted. The Defendant in each matter should pay half of the Plaintiff’s costs of the costs application, as agreed or as assessed, subject to liberty to both parties to apply within 7 days to vary that order if so advised.

43. Accordingly, I make the following orders:

1.   In each matter, the Defendant pay the Plaintiff’s costs of the application to set aside the creditor’s statutory demand, as agreed or as assessed.

2.   The Defendant in each matter pay half of the Plaintiff’s costs of the costs application, as agreed or as assessed.

3.   Liberty to the parties to apply within 7 days to vary order 2.

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Decision last updated: 17 April 2018