FEDERAL COURT OF AUSTRALIA

Eiros Pty Ltd v St George Bank Ltd [2008] FCA 1475

CORPORATIONS – statutory demand – application to vary or set aside – off-setting claim constituted by a costs order – whether other costs orders should be set-off against the offsetting claim

Aussie Vic Plant Hire Ltd v Esanda Finance Corporation Limited (2008) 232 CLR 314

Barker v Hemming (1880) 5 QBD 609

David v Rees [1904] 2 KB 435

Edwards v Hope (1885) 14 QBD 922

Hassell v Sanely [1896] 1 Ch 607

Lockley v National Blood Transfusion Service [1992] 1 WLR 492

Midas v Equator [2007] 25 ACLC 1038

Pringle v Gloag (1879) 10 Ch D 676

Reid v Cupper [1915] 2 KB 147

Wentworth v Wentworth (unreported, Supreme Court of New South Wales, Young J, 12 December 1994)

Williams, Civil Procedure Victoria

EIROS PTY LTD, THIRTEENTH CORP PTY LTD, APADANA PTY LTD, SHALRIDGE PTY LTD, BOMAN IRANI PTY LTD and COMBULK PTY LTD v ST GEORGE BANK LIMITED

VID 505 of 2008

FINKELSTEIN J

3 OCTOBER 2008

MELBOURNE

THE COURT ORDERS THAT:

1.                  The debt claimed in the statutory demands dated 12 June 2008, served by the defendant on Eiros Pty Ltd, Thirteenth Corp Pty Ltd, Apadana Pty Ltd, Shalridge Pty Ltd, Boman Irani Pty Ltd and Combulk Pty Ltd, be reduced by $14,075.98 to $290,068.90.

2.                  The period for compliance with the statutory demands shall end on 17 October 2008.

3.                  The plaintiffs’ application is otherwise dismissed.

4.                  The plaintiffs pay the defendant’s costs to be taxed in default of agreement.

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

REASONS FOR JUDGMENT

1                     During the last five years Dr Boman Irani, his wife Homai Irani and corporate entities associated with them (the plaintiffs) have been engaged in a battle with St George Bank which is being waged in State and Federal courts.  To this point the Iranis and the plaintiffs have had only a small measure of success.  The plaintiffs want to improve the score.  They bring this application to set aside statutory demands that were served by the Bank in respect of a debt for $304,144.88.  Applications to set aside demands are generally dealt with by a registrar or master.  This particular application raises an interesting point and that is why it has been referred to a judge.

2                     It is necessary to give a potted history of the dispute.  In 2000 the Bank granted several secured loan facilities to Pinnacle Investments Pty Ltd (Pinnacle).  By a deed of guarantee and indemnity dated 16 June 2000 a number of persons, including the plaintiffs, indemnified the Bank in respect of the non-performance by Pinnacle of its obligations under the facilities.  The deed obliged the guarantors to pay any legal costs incurred by the Bank in enforcing its security, such costs to be paid on an indemnity basis.

3                     In 2002 Pinnacle defaulted under the facilities.  On 26 November 2002 the Bank appointed receivers and managers over the charged assets.  Pinnacle unsuccessfully challenged the enforceability of the securities in the Supreme Court of Victoria.  Thereafter, the Bank sold the charged assets.  The proceeds of sale were not sufficient to discharge the debt due to the Bank.  In particular the proceeds were not sufficient to cover the costs that the Bank had incurred in realising the securities and prosecuting the action in the Supreme Court.  Accordingly, the Bank took proceedings in the Supreme Court to recover those costs from the plaintiffs.  The legal costs for which it sued were calculated in accordance with a costs agreement between the Bank and its solicitor.  As part of the arrangement between the Bank and its solicitors, the solicitors were required to pay the Bank a rebate of the total legal fees paid by the Bank each year, calculated by reference to a sliding scale. 

4                     On 12 May 2006, on an application for summary judgment, the judge (Dodds-Streeton J) held that Dr Boman Irani and the plaintiffs were liable to pay the costs incurred by the Bank.  There was an order that the matter be referred to another judge, Whelan J, to assess the quantum of the debt.  A costs order was made in favour of the Bank.

5                     The assessment came on for hearing before Whelan J.  At the hearing the Bank based its case on a conclusive evidence certificate.  Whelan J held that the certificate contained a manifest error as it did not make any allowance for the rebate.  As there was no other evidence to establish the quantum of the debt, Whelan J ordered that accounts be taken before a Master.  He also ordered the Bank pay the plaintiffs’ costs.  The costs have not been taxed.  There is an affidavit deposing that the quantum of the costs, calculated on a party and party basis, is $157,219.64. 

6                     The plaintiffs appealed the order of Whelan J.  On 14 November 2007 the Court of Appeal held that the order was interlocutory and dismissed the appeal with costs. 

7                     On 10 December 2007 a Master took the accounts and found that the quantum of the debt due to the Bank was $304,144.88.  The plaintiffs were ordered to pay the Bank’s costs of taking the account.   

8                     The plaintiffs appealed the decision of the Master.  The appeal was heard de novo by Whelan J.  On 27 March 2008 he made orders in the same terms as the Master.  He also awarded costs against the plaintiffs.   

9                     On 6 August 2008 the plaintiffs sought a stay of the orders of Whelan J.  The Court of Appeal refused to grant a stay on the basis that the plaintiffs were unable to establish exceptional or special circumstances.  The Court of Appeal said it was unnecessary to explore the merits of the appeal.  The Bank was awarded costs of the stay application on an indemnity basis.   

10                  The plaintiffs then filed an appeal against the orders made by both Dodds-Streeton J and Whelan J.  The appeal is set down for 21 October 2008.  On 22 May 2008, during a directions hearing in the pending appeal, a further costs order was made against the plaintiffs.  

11                  None of the six costs orders in favour of the defendant to which I have referred have been taxed.  There is evidence that on a taxation $143,143.66 would be allowed.   

12                  On 12 June 2008 the Bank served the demands in suit.  The plaintiffs now seek to have the demands varied or set aside:  see Corporations Act ss 459H, 459J.  For purposes of the variation order, the plaintiffs contend that they have an offsetting claim within the meaning of s 459H (5).  The plaintiffs submit that the offsetting claim is the costs order in their favour.  Accordingly, the plaintiffs submit that the demands should be varied to the sum of $146,925.24.

13                  The matter is not as simple as the plaintiffs would have it.  The problem for them is that the costs order in their favour is liable to have set-off against it the costs orders that have been made in favour of the Bank.  It matters not that some of the costs orders were made in different proceedings:  an appeal is a different proceeding from the action from which the appeal is brought. 

14                  In the Supreme Court the set-off of costs is governed by r 63.55 (1) of the Court’s Rules.  That rule provides that where a party entitled to be paid costs is also liable to pay costs, the Taxing Master may –

(a)        tax the costs which that party is liable to pay and set off the amount allowed against the amount he is entitled to be paid and by order state the amount of the balance and the parties by whom and to whom the balance is payable; or

(b)       decline to make an order as to the costs which the party is entitled to be paid until that party has paid or tendered the amount he is liable to pay.

Under the rule it is in the taxing master’s discretion whether or not to set-off costs that have been incurred on both sides and make one final order for the balance. 

15                  While the taxing master’s discretion is in its terms unconfined, where costs orders are made in one proceeding the usual practice is for them to be set-off:  Pringle v Gloag (1879) 10 Ch D 676, 679.  In Lockley v National Blood Transfusion Service [1992] 1 WLR 492, 497 Scott LJ said that:

A set-off of costs against costs, when all are incurred in the prosecution or defence of the same action, seems so natural and equitable as not to need any special justification.  I would expect a party objecting to the set-off to give some special reason for the objection.

In Wentworth v Wentworth (unreported, Supreme Court of New South Wales, Young J, 12 December 1994) at 9 Young J said that:

The whole tone of the authorities on set-off as to costs is that ordinarily it is appropriate in the one piece of litigation where each party has been in receipt of a favourable order for costs and each party has been ordered to pay some costs, that there should be a set-off and that only the ultimate balance should be paid one way or the other.

16                  The same practice is adopted in relation to the set-off of costs orders made in different proceedings.  The court has an inherent power to set-off costs orders made in different proceedings.  In Edwards v Hope (1885) 14 QBD 922, 926 Brett MR said that:

Courts … always had an equitable jurisdiction, for the purposes of preventing absurdity or injustice in cases where there had been judgments for damages between the same parties in distinct actions, to set-off one judgment against the other and to allow execution to issue in respect of the balance only.   (emphasis added)

This statement was cited with approval by Buckley L.J in Reid v Cupper [1915] 2 KB 147, 149 which affirmed the court’s inherent power to set-off costs orders made in separate proceedings. 

17                  It may be that r 63.55(1) is also a source of power to deal with costs orders made in separate proceedings.  Following the passing of the Judicature Act in 1873 the first rule dealing with the set-off of costs (Reg. Gen. Hillary Term 2 Will. 4 (1832), r 93 which was reproduced in identical terms in 1853) was replaced by order LXV rr 14 and 27 of the Rules of the Supreme Court 1883.  Relevantly rule 14 provided that “[a] set-off for damages or costs between parties may be allowed notwithstanding the solicitor’s lien for costs in the particular cause or matter in which the set-off is sought.”  Rule 27 provided that “[i]n any case in which … a party entitled to receive costs is liable to pay costs to any other party, the taxing officer may tax the costs such party is so liable to pay, and may adjust the same by way of deduction or set-off.”  In David v Rees [1904] 2 KB 435 it was held that the set-off of costs under order LXV was confined to cases in which the orders were made in the same proceeding.  This position is consistent with earlier cases such as Barker v Hemming (1880) 5 QBD 609 and Hassell v Sanely [1896] 1 Ch 607. 

18                  The Rules adopted in 1985 by the Supreme Court did not follow the English model.  Rather, r 65.14 provided that:

A set-off for damages or costs between parties may be allowed notwithstanding the solicitor’s lien for costs in the particular cause or matter in which the set-off is sought.  This rule shall include cases where the set-off arises in independent actions or in different Courts (emphasis added).

19                  Rule 65.14 was replaced by the current r 63.55.  There are two important differences between r 63.55 and r 65.14.  First, r 63.55 does not expressly state that it applies to costs orders in independent actions.  Second, r 63.55 is not limited by the words “between parties”.  According to the practice book, Williams, Civil Procedure Victoria at I 63.55.0, the current r 63.55:

[S]hould not be construed so as to limit its operation to parties to the same proceeding in the court.  The former O 65 r 14, as drafted originally, allowed a set-off for costs “between parties”, which implied that a set-off could only be allowed if the parties were parties to the same proceeding.  Rule 63.55 does not contain the expression “between parties”, but refers simply to a party entitled to costs and a party liable to pay costs, and without words to indicate that the entitlement of a party to be paid costs and the liability of the party to pay costs must both arise in the same proceeding.

This view is likely to be correct.  Even if it is not correct, the Supreme Court’s inherent jurisdiction would permit the setting-off of costs orders in separate proceedings.

20                  I cannot think of any plausible reason why the setting-off of the various costs orders would not occur.  The result is that the amount which the plaintiffs contend is their off-setting claim ($157,219.64), which is the amount by which they say the debt claimed in the demands should be reduced, is not truly “a genuine claim” that the plaintiffs have against the Bank.  It is not a genuine claim because the purported off-setting claim is itself subject to set-off by the costs orders made in favour of the Bank.  Their aggregate value is $143,143.66.  Following a set-off, the plaintiffs will have a genuine claim for $14,075.98 which they will be entitled to set-off against the debt claimed in the demands.  Accordingly I propose to reduce the debt claimed in the demands by $14,075.98 to $290,068.90.

21                  The next question is whether there are “other grounds” which justify setting aside the demands.  Under s 459J(1)(b) a statutory demand may be set aside if the court is satisfied that there is some reason why it should be set aside.  The only reason that has been put forward is the pending appeal.  The plaintiffs contend that is a sufficient basis for making the order.

22                  In support of this argument reliance was placed on Midas v Equator [2007] 25 ACLC 1038.  There judgment had been obtained against a company.  The company appealed against the judgment and then unsuccessfully applied for a stay from the judgment pending the appeal.  Thereafter the judgment creditor served a statutory demand on the company.  The company applied to set the demand aside.  Hammerschlag J made the order sought.  He said at [31] that:

In my view, the Court being satisfied that an appeal which has been lodged has a sufficient degree of merit that to allow the creditor to proceed to a winding up on the basis of an unsatisfied statutory demand whilst that appeal is on foot, but relying on the judgment appealed from, can be sufficient "other reason" why the demand should be set aside.

23                  I am not sure this approach can apply in all cases.  Aussie Vic Plant Hire Ltd v Esanda Finance Corporation Limited (2008) 232 CLR 314 considered whether an order may be made under s 459F extending the period for compliance with a statutory demand after the period for compliance has expired.  The decision is presently important because it explains how a provision in Pt 5.4 of the Act should be construed.  In the course of their reasons Gleeson CJ, Hayne, Crennan and Kiefel JJ said at [14] that “the evident purposes of Pt 5.4 of the [Corporations] Act include speedy resolution of applications to wind up companies in insolvency”.  They went on to say at [26] that “contrary to much of the argument advanced in this case on the appellant’s behalf, denying the power to extend time after its expiry does not cut down the utility, or impede the exercise, of rights of appeal.  The principles governing orders preserving the utility of the exercise of rights of appeal [i.e. a stay of proceedings] are well established.  If there is a right of appeal and those principles are engaged, orders will be made to preserve the subject matter of the appeal.”  This reasoning may be an impediment to the use of s 459J as a back door method of obtaining a stay of a judgment pending appeal or as a means of undermining the refusal by an appeal court to grant a stay of a judgment. 

24                  In any event I am not persuaded that the plaintiffs’ appeal has a “sufficient degree of merit” (see Midas at [31]) to justify the order sought.  The plaintiffs’ primary argument on appeal will be that the costs agreement was tainted by illegality because it involved paying rebates of fees contrary to the prohibition on solicitors sharing income under s 317 of the Legal Practice Act 1996 (repealed on 12 December 2005) and s 2.2.9 of the Legal Profession Act 2004.  Those sections each provide that a legal practitioner may not enter into an arrangement with a non-practitioner under which that person is entitled to share in the income of the practitioner.  In rejecting the plaintiffs illegality submission Whelan J held that there was not:

[A]ny relevant “sharing” of income provided for by the relevant arrangements. The arrangements provide for a rebate of fees paid.  In other words, they are arrangements for a return to the client of a portion of the fees paid by the client.  The rebate is calculated on a sliding scale based upon the annual total of fees.  This is not sharing income.  It is returning a portion of the client’s payment as a volume discount.

It is difficult to fault Whelan J’s reasoning.  I do not mean to suggest that I am of opinion the plaintiffs’ pending appeal is hopeless.  I have not had the opportunity to hear detailed submissions on all the grounds of appeal.  However my impression is that none of the grounds are immediately attractive. 

25                  Finally it is important to note that if the plaintiffs are required to pay the amount specified in the demands, they are likely to have the means to do so.  The plaintiffs’ were unable to obtain a stay of the order of Whelan J because they could not establish exceptional or special circumstances.  It appears not to have been submitted to the Court of Appeal that the plaintiffs could not meet the judgment debt and would be wound up if a stay were not granted.  That has certainly not been suggested in this proceeding.  In any event, to this point the plaintiffs have spent hundreds of thousands, if not millions, of dollars in costs fighting the Bank and they are unlikely to stop now.

26                  In view of the foregoing the debt claimed in the statutory demands should be reduced by $14,075.98.  The period for compliance will be extended by 14 days.  The plaintiffs’ application should otherwise be dismissed with costs.

Associate:

Dated:         3 October 2008