FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE – costs – whether a successful respondent should have a costs order against the applicant – whether there were grounds to deny such an order – principles on which costs are awarded – whether indemnity costs should be ordered having regard to a Calderbank letter.

Federal Court of Australia Act 1976, s 43

David Grant & Co Pty Limited (Receiver Appointed) v Westpac Banking Corporation (1995) 184 CLR 265 referred to

Cummings v Lewis (1993) 41 FCR 559 referred to

Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 referred to

Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 referred to

Gladstone Park Shopping Centre Pty Ltd v Ross Wills (1984) 6 FCR 496 referred to

Ritter v Godfrey [1920] 2 KB 47 applied

Calderbank v Calderbank [1975] 3 All ER 333 referred to

Verna Trading Pty Ltd v New India Assurance Co Ltd [1991] 1 VR 129 followed

Austen v Ansett Transport Industries (Operations) Pty Limited (Burchett J, unreported, 26 August 1993) followed

Instant Colour Pty Ltd v Canon Australia Pty Ltd (R D Nicholson J, unreported, 13 December 1996) followed

Donald Campbell & Co Ltd v Pollak [1927] AC 732 applied

Ottway v Jones [1955] 1 WLR 706 referred to

Re Elgindata Ltd (No 2) [1992] 1 WLR 1207 referred to

Jones v North Australian Aboriginal Legal Aid Service Inc (1986) 82 FLR 264 referred to

Flemington Properties Pty Limited v Raine & Horne Commercial Pty Limited (Lehane J, unreported, 11 February 1998)referred to

John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 referred to

MGICA (1992) Ltd v Kenny & Good Pty Ltd (No 4) (1996) 140 ALR 707 referred to

Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 referred to

HIFU ELECTRONICS PTY LIMITED v FUJIAN PACIFIC PTY LIMITED

NG 3011 of 1998

Burchett J

Sydney

1 December 1998

THE COURT ORDERS THAT:

The applicant pay the respondent’s costs, to be assessed or taxed on a party and party basis.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

This application to wind up the respondent company under s 459P of the Corporations Law was dismissed by consent on 9 June 1998, the issue of costs being reserved.  On that issue, the parties were directed to file written submissions.  Each party maintains that  its costs of the application should be paid by the other – the respondent claiming a costs order on an indemnity basis.  In order to understand the respective contentions, it is necessary to set out the history of the matter.

On 2 October 1997, the applicant obtained a default judgment in the District Court of New South Wales against the respondent for the sum of $231,606.060.  Subsequently, on 30 October 1997, the applicant posted to the respondent a statutory demand under s 459E of the Corporations Law for payment of the judgment debt.  In accordance with the scheme under Part 5.4 of Chapter 5, the time for compliance with the demand was21 days after its service (s 459F(2)(b)).  A company on which such a demand is served may, within 21 days, apply to the court for an order setting it aside (s 459G). The court may set aside a statutory demand (inter alia) if satisfied that “there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates” (s 459H(1)(a)). Where an application is made under s 459G, the time for compliance with the demand may be extended by the court (s 459F(2)(a)).  If, at the end of the period for compliance, the demand is still in effect and the company has not complied with it, the company “is taken to fail to comply with the demand” (s 459F(1)).  In proceedings seeking the winding up of a company in insolvency, such a failure gives rise to a presumption that the company is insolvent, provided that the failure occurs “during or after the 3 months ending on the day when the application [to wind up the company] was made” (s 459C(2)(a)).  The presumption thus created applies “except so far as the contrary is proved” (s 459C(3)). 

Where a company opposes the making of a winding up order, but did not apply to have thea statutory demand set aside, that company requires the leave of the court to raise a ground on which it could have placed reliance had it so applied (s459S).  Under subs 459S(2), the court “is not to grant leave … unless it is satisfied that the ground is material to proving that the company is solvent.”  The effect of the statutory scheme, therefore, is that in such an application under s 459P the key issue is the solvency of the company sought to be wound up; any dispute as to the existence of the debt will not be heard unless it goes to the question of solvency.  As Gummow J (with whom the rest of the High Court agreed) stated in David Grant & Co Pty Limited (rReceiver aAppointed) v Westpac Banking Corporation (1995) 184 CLR 265 at 270:

“The provisions of the new Pt 5.4 constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts, unless they are raised promptly.”

The respondent did not make an application under s 459G; nor did it comply with the statutory demand within the period specified in the Corporations Law.  That period expired on 21 November 1997.  Two months later, on 21 January 1998, the applicant filed, but did not serve, the present application to wind up the respondent company.  The application was in fact not served on the respondent until 27 January.  In the meantime, however, on 22 January, the respondent had filed a notice of motion to set aside the District Court judgment.  There is no evidence to indicate what, if any, communication occurred between the parties following the service of the statutory demand, or as to what efforts were made to obtain payment of the judgment debt prior to that demand being served, as it was served, within less than one month of after the entry of the default judgment.

On 5 February 1998, the respondent filed its notice of intention to appear in the Federal Court, asserting one ground of opposition to the application to wind the company up, namely, that “the company is solvent”.  An affidavit filed simultaneously in support of that notice, sworn by a director of the company, stated simply:  “I believe the statements of fact in the notice are true”.  The next day, 6 February 1998, the default judgment which had been the basis for the statutory demand was set aside in the District Court;.  On the and same day, the respondent’s solicitor sent to the solicitor for the applicant a facsimile “Wwithout pPrejudice (Ssave as to cCosts)”.  That facsimile contained the following:

“We are instructed that the respondent is solvent and it will be defending the Application on this basis.  In the circumstances, where the subject matter of the alleged debt is, and remains, disputed in the District Court of New South Wales, it is an abuse of process for your client to continue with its Application for the winding up of the respondent where it is a clearly solvent company.

In order to save further unnecessary legal costs and to litigate the real issues between the parties in the District Court of New South Wales, we are instructed to make the following “Without Prejudice” offer in full and final settlement of the Federal Court proceedings:

1.         An order that the Application filed 21 January, 1998 be dismissed,

2.         An order that each party pay their own costs of and incidental to the proceedings.”

The facsimile stated that the offer was open until 4.00pm on 19 February 1998, and included the statement: “Please consider this to be a Calderbank letterr…”.  This offer was not accepted by the applicant.

The first return date of the Federal Court proceedings was 26 February 1998.  On that day, the Deputy Registrar made orders for the filing of affidavits.  On 26 March 1998, the respondent served on the applicant affidavits in support of its claim to solvency, including a report by a Mr John Murphy, a chartered accountant and company liquidator of Arthur Andersen Accountants. Mr Murphy’s conclusion was that “the respondent could pay all its debts as and when they fell due as at 28 February, 1998”, and that its ability to do so this position would not change, “provided that there was no material change in the financial position of the respondent.”

On 27 March 1998, the matter was again mentioned before a Deputy Registrar, who made orders for the filing of affidavits by the creditor, and gave leave to seek a hearing date.  On Friday 5 June 1998, the respondent’s solicitors sent a facsimile to the applicant’s solicitor, stating that the respondent had instructed them -

“to agree to the following Orders to dispose of [the application] on Tuesday:

1.         The Application be dismissed.

2.         The Applicant pay the Respondent’s costs as agreed or assessed.”

When the matter came before me on Tuesday 9June, the consent orders were made which are set out at the beginning of these reasons.

The starting point for the determination of the question who should bear the costs in this matter is the wide discretion conferred on the court to award costs under s 43 of the Federal Court of Australia Act 1976.  This discretion, of course, must be exercised judicially: Cummings v Lewis (1993) 41 FCR 559 at 602.  As Lindgren J said in MGICA (1992) Ltd v Kenny & Good Pty Ltd (No 4) (1996) 140 ALR 707 at 709:

“However, this [the requirement that the discretion be exercised judicially] does not mean, and it is wrong to think, that the law requires that the discretion be exercised in a certain way in a particular case because of the presence or absence of factors which may have been persuasive in an earlier case.  How the discretion is to be exercised in a particular case depends on all relevant circumstances of that case.”  (Emphasis original.)

Although, in the present case, there has been no contested hearing, the result such a hearing would probably have produced is not in doubt.  The applicants have not disputed that the application would have been dismissed:  cf Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194; Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284.  That suggests the respondent should be entitled to its costs in accordance with the “usual rule” that costs follow the event: Gladstone Park Shopping Centre Pty Ltd v Ross Wills (1984) 6 FCR 496; Ritter v Godfrey [1920] 2 KB 47.

The submissions of the parties may be briefly summarised.  The respondent contends it has taken no action to prolong the proceeding unnecessarily, or which could otherwise disentitle it to the usual order.  The respondent also says that it is entitled to costs on an indemnity basis from 6 February 1998, that being the day on which the applicant was served with the Calderbank letter (Calderbank v Calderbank [1975] 3 All ER 333).  It submits that, at least from 5 February 1998, when the notice of intention to appear and supporting affidavit were filed, the applicant was put on notice of its solvency.  All costs incurred thereafter, including in particular the cost of the expert’s report in support of the solvency of the company, were the result, the respondent says, of the applicant’s unreasonable persistence in its application.

The applicant, on the other hand, while acknowledging that costs generally follow the event, submits that the respondent has brought the litigation on itself by failing to comply with the “statutory timetable” under Chapter 5 Part 5.4 of the Corporations Law.  In this respect, the applicant cites the principles stated by Atkin LJ in Ritter v Godfrey [1920] 2 KB 47 at 60 in support of its argument that the respondent should pay the applicant’s costs:

“In the case of a wholly successful defendant, in my opinion the judge must give the defendant his costs unless there is evidence that the defendant (1) brought about the litigation, or (2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains.”

But Atkin LJ was asserting a rule in favour of the respondent, as “a wholly successful defendant”, while emphasizing flexible principles enabling the Court to withhold its remedy from the respondent where justice required it to do so.  The width of the discretion is illustrated by Verna Trading Pty Ltd v New India Assurance Co Ltd [1991] 1 VR 129 at 153, per Kaye J; Austen v Ansett Transport Industries (Operations) Pty Limited (Burchett J, unreported, 26 August 1993); and Instant Colour Pty Ltd v Canon Australia Pty Ltd (R D Nicholson J, unreported, 13 December 1996).  The situations set out by Atkin LJ provide instances where a departure from the usual rule might be justified, so as to deprive a successful party of costs, or, more exceptionally, even to require a successful party to pay the costs of the unsuccessful party.  As R D Nicholson J noted in Instant Colour, it may be that “considerations sufficient to justify a refusal of costs to a plaintiff are not necessarily sufficient in the case of a defendant, for the former initiates the litigation while the latter is brought into it against his will”: Ritter v Godfrey [1920] 2 KB 47 at 52-3; Donald Campbell & Co Ltd v Pollak [1927] AC 732 at 811-812, per Viscount Cave LC. 

In the present case, the applicant points to the failure of the respondent to make an application under s 459G, and to its failure to take any step to set aside the District Court judgment until after the filing of the present application, as factors indicating that the respondent brought the proceedings upon itself and hence should be required to bear the consequential costs.  But I do not think Atkin LJ was referring to a party’s mere failure to be alert in his own defence as justifying an adverse order in respect of costs, although the party had been wholly successful.  Certainly, an order to pay the applicant’s costs would be most exceptional, as Lord Evershed MR made clear in Ottway v Jones [1955] 1 WLR 706 at 711:

“I should like to say (what is indeed obvious) that, where a plaintiff in the end fails, it must be a very unusual thing to order the successful defendant to pay the costs; and it would only be in exceptional cases that a judge would think it right to make such an order”.

Such an order was referred to as an “extreme sanction” in In Re Elgindata Ltd (No 2) [1992] 1 WLR 1207 at 1215.  See also Instant Colour Pty Ltd v Canon Australia Pty Ltd; Verna Trading at 154.  The respondent in the present case engaged in no improper or wrongful conduct of the kind exemplified by Jones v North Australian Aboriginal Legal Aid Service Inc (1986) 82 FLR 264; nor could it be said that the respondent by its conduct unreasonably or deliberately prolonged the proceedings.  The respondent was certainly not bound to initiate an application to set aside the statutory demand which the applicant had chosen to give.  As for the delay in having the District Court judgment set aside, doubtless the respondent has already paid the appropriate penalty in that Court as the price of being let in to defend, or alternatively it has shown that it was not at serious fault.

The applicant suggested the failure of the respondent to seek to have the statutory demand set aside on the basis that there was a genuine dispute as to the existence of the debt led to the application under s 459P being made.  But, in addition to the considerations already mentioned, it must be said that the applicant pressed the application even after the notice of motion was filed in the District Court to set aside the relevant default judgment (which occurred, as noted earlier, one day after the filing of the s 459P application and several days before that application was served on the respondent), and continued to press the application even after the relevant judgment was set aside on 6 February 1998.  The argument raised by the applicant that once the s 459P application was before the court the creditor did not “have standing to waive the grounds of [the requirement to prove solvency]” is not to the point, as it does not detract from the fact that the applicant did, at all times, have the power to seek dismissal of the proceeding by consent or to discontinue the proceeding of its own motion.

The respondent complains that the applicant should have sought to discontinue the application after delivery of the purported Calderbank letter on 6 February 1998, and argues that the respondent is therefore entitled to indemnity costs from that date, including most importantly the costs incurred in proving solvency.  It has been accepted that the weight to be given to a Calderbank letter depends on such factors as its terms, and the course of the litigation as a whole, including the relative strength of each party’s case as apparent at the time of the letter: Flemington Properties Pty Limited v Raine & Horne Commercial Pty Limited (unreported, Lehane J, unreported, 11 February 1998); John S. Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 205-207; MGICA (1992) Ltd v Kenny & Good Pty Ltd (No. 4) (1996) 140 ALR 707 at 711 – 713.  The question then is whether the applicant’s refusal of the offer contained in the facsimile of 6 February 1998 was so unreasonable or “imprudent” as to ground the order sought: Colgate-Palmolive Co. v Cussons Pty Ltd (1993) 46 FCR 225 at 233.  It is difficult to evaluate the reasonableness or otherwise of the refusal in the absence of detailed evidence of prior communications between the parties.  In particular, the respondent contends that the applicant was “on notice” of the solvency of the respondent from 5 February.  At that time, the evidence establishes, solvency had been asserted through the Notice of Appearance and supporting affidavit, both of which contained only a bare assertion in a single sentence, and this assertion was had been repeated in the Calderbank letter.  Furthermore, on 6 February, it will be recalled, the default judgment was set aside, so that the debt on which the statutory demand was based was once more the subject of dispute in the District Court.  What the applicant has not shown is that it had any reason other than the disputed debt sufficient to justify a belief that the company was insolvent.

Proof of solvency was supplied on 276 March 1998.  At no point after that date did the respondent attempt to rebut the evidence provided by the respondent’s expert accountant.  At the same time, it did nothing to resolve the matter, so presumably costs continued to be incurred.

On balance, I do not consider that indemnity costs are justified.  Such an order would be exceptional.  Neither party has, in this case, provided sufficient justification for my departing from the usual order as to costs, and, in my opinion, the appropriate order in all the circumstances is that the applicant, as the unsuccessful party, pay the respondent’s costs, on a party and party basis. 

Associate:

Dated:              1 December 1998