FEDERAL COURT OF AUSTRALIA

Tekno Autosports Pty Limited v Jenkins (No 2) [2014] FCA 809

THE COURT ORDERS THAT:

1.    Order 3 made on 25 July 2014 be varied to read: The defendant pay the plaintiff’s costs of the proceedings on an indemnity basis.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    On 25 July 2014 I ordered that two statutory demands issued by the defendant to the plaintiff (“the company”) be set aside, with an order that the defendant pay the company’s costs on a party-party basis: Tekno Autosports Pty Limited v Jenkins [2014] FCA 774 (“my earlier judgment”). The latter order was made on the basis that the company applied for indemnity costs and that application would be made on 29 July 2014.

2    In support of its application, the company relied on the affidavits of Kobe Webb made 25 February 2014 and Nicholas Stevens made on 24 July 2014.

3    The defendant did not tender any evidence.

Relevant principles

4    Section 43 of the Federal Court of Australia Act 1976 (Cth) (“the Act”) confers jurisdiction on the court to award costs. In DSE (Holdings )Pty Ltd v InterTAN [2004] FCA 1251, Allsop J said:

Section 43 of [the Act] is a broad and ample power not to be read down otherwise than by judicial principle conformable with the amplitude of the power.

5    In the particular circumstance of a case involving some “relevant delinquency” on the part of the unsuccessful party, an order may be made for costs on an indemnity basis: Oshlack v Richmond River Council (1998) 193 CLR 72 at [44] per Gaudron and Gummow JJ referring to Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354 and Re Smith; Ex parte Rundle (No 2) (1991) 6 WAR 299 at 301. See also Growth Equities Corporation Ltd v Genesis Growth Investments Pty Ltd [2010] NSWSC 1302 at [18].

6    In Professional Advantage Pty Ltd v Australian Broadcasting Commission [2007] NSWSC 607, White J made an order for indemnity costs in proceedings to set aside a statutory demand on two separate basis:

   a.    The improper use of the statutory demand procedure; and

   b.    The persistence in the claim even though it should have been apparent to the defendant that there was a genuine dispute (at least) as to the debts claimed.

7    Other cases in which indemnity costs orders have been made are R2M Ltd v Gourlay [2011] FCA 168 (“RM2 Ltd”) and In the matter of Suters Holdings Pty Ltd [2012] NSWSC 1051.

Factors supporting an order for indemnity costs

8    Mr Assaf, for the company, relied on the following matters:

   a.    The engagement of lawyers by both sides prior to the issue of the statutory demand, and the lengthy correspondence prior to the issue of the demands, which revealed that there was a fully blown employment law dispute between the parties involving several issues;

   b.    Within days of the issue of the first statutory demand, and before the receipt of the second statutory demand, by letter dated 10 February 2014, the company’s solicitors disputed the validity of the first statutory demand, explained the basis for their contention that there was a genuine dispute as to the debt specified in the demand and requested that the demand be withdrawn failing which an application to set aside the demand would be made. The solicitors suggested that the demand may be an abuse of process, and foreshadowed that the letter would be relied on in support of a claim for costs;

   c.    By letter dated 18 February 2014, the company’s solicitors repeated their contention that there was a genuine dispute regarding the defendant’s employment entitlements and said “The use of the Demand in this way is alien to the statutory process established under the Corporations Act 2001 (Cth) and is tantamount to an abuse of process”;

   d.    On about 17 March 2014, the company’s solicitors served a notice of offer of compromise, open to be accepted for 14 days after service, offering to consent to an order that the statutory demands be set aside on the basis that each party bear their own costs of the proceedings to date. That was evidently a genuine compromise having regard to the costs expended in commencing the proceedings in late February 2014 including the preparation of Ms Webb’s substantial affidavit. The offer of compromise was accompanied by a “Calderbank letter” containing an offer open for acceptance until 1 April 2014, which stated relevantly:

It is clear from our client’s application and affidavit in support that there are compelling reasons why the statutory demands served by your client are liable to be set aside, in particular:

      1.    Your client has resorted to the statutory demand procedure for a purpose for which the law does not allow namely, your client is seeking to recover an alleged debt that is not due and payable as stipulated by s 459C of the Corporations Act 2001 (Cth). You client’s claim is clearly one for damages for alleged wrongful dismissal of employment;

      2.    In any event, even if the debt alleged is due and payable (which is denied) there is as you client well knows, a genuine dispute in relation to the existence of the alleged debt; and

      3.    In all the circumstances, the issuing of the statutory demands is an abuse of process.

   e.    On 19 March 2014, the company’s lawyers wrote to the defendant’s lawyers referring to observations made by Registrar Wall in court that morning “that the dispute between the parties is in substance an employment law dispute and, accordingly, the Federal Court is not an appropriate forum for the resolution of this dispute” and asserting, yet again, that the statutory demands were an abuse of process and should never have been issued. The letter concluded:

In the event that our client is successful and obtains an order setting aside your client’s statutory demands, we will rely upon this and previous correspondence to support an application for indemnity costs against your client.

   f.    In my earlier judgment, I concluded that it should have been obvious to the defendant, from the detailed correspondence between the parties, including the extensive involvement of lawyers on both sides, that there was a significant dispute as to the company’s liability to pay him the wages that were unpaid for the relevant period. There is no evidence that the company was not acting in good faith in the position which it took. The debt was significantly overstated by the inclusion of amounts which had been paid. I inferred that, when the defendant issued the statutory demand, he knew that there was a genuine dispute as to the existence of the debt, and he issued the demand in order to apply pressure to the company to compel payment of the disputed debt.

9    Mr Assaf argued that the evidence demonstrated that the defendant had both:

   a.    improperly used the statutory demand procedure, because it was obvious that there was a genuine dispute as to the debt even before the demand was issued; and

   b.    persisted in the claim even though it should have been apparent, from the correspondence prior to the issue of the demands, the correspondence after the issue of the demands and the comments made by Registrar Wall, that there was a genuine dispute.

Defendant’s arguments

10    Mr Collinge, on behalf of the defendant, submitted that the corollary of the company’s argument was that indemnity costs would be awarded in every case where a company writes to the person who issued the statutory demand asserting the existence of a genuine dispute. It did not matter that there were multiple issues between the parties if there was a debt that was not genuinely disputed. The provisions for serving offers of compromise are not well suited in the context of a statutory demand. The defendant’s case as to the non-existence of any genuine dispute was “seriously put and properly arguable”, in contrast the authorities cited by Mr Assaf which were generally “truly hopeless” cases which were either withdrawn shortly prior to hearing or with which the courts had been able to dispose in a short hand way.

Consideration

11    I do not agree that the company’s argument necessarily entails that indemnity costs would be ordered whenever a genuine dispute is asserted (and the demand is subsequently set aside). In this case, I have concluded that when the defendant issued the statutory demand, he knew that there was a genuine dispute as to the existence of the debt, and he issued the demand in order to apply pressure to the company to compel payment of the disputed debt. He should not have issued the demands in those circumstances. The defendant was warned that the company would bring proceedings to set aside the demands if they were not withdrawn because the company disputed the debt. The defendant should have responded to that warning by withdrawing the demands because it should have been obvious that the demands would eventually be set aside on the basis that there was a genuine dispute about the debt (cf R2M Ltd at [42]). The defendant should not have put the company to the trouble of bringing proceedings to set aside the statutory demands, which should never have been issued.

12    While I accept that the statutory demand procedure may be properly invoked in the case of a debt due and payable that arises in the context of other disputed debts, that scenario is not applicable in this case.

13    As to whether the argument put was “properly arguable”, it is relevant to note that the debt specified in the demands was conceded to be overstated by approximately one-third. The overstatement was due to the inclusion of amounts that had been paid. As to the argument regarding the balance of the debt, it was not put in correspondence or written submissions prior to the hearing. In any event, the fact that an argument could be formulated does not detract from my conclusion that the defendant himself knew that there was a genuine dispute as to the existence of the debt.

14    Accordingly, I accept the company’s submissions that the defendant improperly used the statutory demand procedure and persisted in defending the demands even though it should have been apparent that there was a genuine dispute. This conduct warrants an order for indemnity costs.

Conclusion

15    The defendant should pay the plaintiff’s costs on an indemnity basis.

Associate:

Dated:    31 July 2014