In the matter of Zarzar Pty Ltd

BARRETT AJA: These proceedings were commenced on 6 July 2016 when the plaintiff (“Zarzar”) filed an originating process under s 459G of the Corporations Act 2001 (Cth) seeking an order setting aside a statutory demand dated 17 June 2016 served on it by the defendant (“Evton”) on or about 28 June 2016.

An order setting aside the demand was made by consent on 14 November 2016.

When the proceedings came before me for hearing on 13 February 2016, Zarzar applied for an order that Evton pay Zarzar’s costs, with such costs being assessed on an indemnity basis from 30 June 2016, 7 July 2016, 6 September 2016 or 10 October 2016.

Implicit in Zarzar’s application are two propositions: first, that, even though there has been no hearing on the merits, the court should make a costs order against Evton and, second, that Evton’s conduct exhibited such delinquency that costs awarded against it should be assessed on an indemnity basis.

Evton opposes the making of any order as sought by Zarzar. Evton’s position is that each party should bear its own costs from 6 July 2016 to 30 September 2016 and that Zarzar should pay Evton’s costs from 30 September 2016 on the ordinary basis; alternatively, that Evton should pay Zarzar’s costs for the period 6 July 2016 to 30 September 2016 on the ordinary basis and Zarzar should pay Evton’s costs on the ordinary basis from 30 September 2016; alternatively, that each party should bear its own costs in their entirety.

Some matters of chronology must be noted.

On 21 January 2016, Zarzar sued Evton in the Local Court at Blacktown. Zarzar alleged a contract under which Evton was permitted to dispose of fill on a site controlled by Zarzar, with Evton paying certain fees to Zarzar accordingly, which fees Evton had failed to pay. An amended statement of claim was filed on 15 July 2016.

On or about 28 June 2016, Evton served the statutory demand to which these proceedings relate. The demand relates to six debts said to be owing, due and payable by Zarzar to Evton. Each debt was described by reference to a particular invoice. The invoices were said to bear dates in February, March, August, September, October and November 2015.

On 30 June 2016 (two days after service of the statutory demand), Zarzar’s solicitors wrote to Evton’s solicitors saying that, on their instructions, Zarzar had never received any of the invoices attached to the statutory demand except as annexures to the demand itself. The letter also stated that none of the invoices arose from any agreement with Evton for work to be done. The contention of Zarzar that there was a genuine dispute as to the existence of the debts the subject of the statutory demand was thus notified to Evton promptly after service of the demand.

On 6 July 2016, as already noted, Zarzar commenced these proceedings.

On 7 July 2016, the originating process in these proceedings and the supporting affidavit were served by Zarzar on Evton.

On 5 August 2016, Zarzar’s solicitor wrote to Evton’s solicitor repeating the allegations in the letter of 30 June 2016 and adding allegations that the invoices were false instruments “fudged up” by Evton.

On 16 August 2016, Evton filed a defence in the Local Court proceedings by which it pleaded by way of set-off the six debts the subject of the statutory demand debts said to be owing due and payable to it by Zarzar, which debts Zarzar had failed to pay.

On 6 September 2016, Evton filed a cross-claim in the Local Court proceedings alleging that moneys were due and owing by Zarzar to Evton under an agreement under which Evton had performed certain building and construction services to Zarzar. The claims advanced by Evton in the cross-claim included the six alleged debts the subject of the statutory demand.

By a defence to cross-claim filed on 12 September 2016, Zarzar denied the indebtedness alleged in the cross claim.

On 30 September 2016, the parties reached an in principle agreement that there should be an order setting aside the statutory demand. Notice of that agreement was conveyed to the court on 26 October 2016 and the consent order was made by Black J on 14 November 2016.

It is thus clear that:

Because Zarzar’s claim for an order setting aside the statutory demand never became the subject of an order made after a hearing on the merits, the guiding principles with respect to costs are those stated by McHugh J in Re Minister for Immigration & Ethnic Affairs; Ex Parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 (at 624 – 635), as follows (citations omitted):

For the reason stated by McHugh J, the court cannot and will not try the case of alleged genuine dispute that the consent order has made hypothetical. That course would be burdensome to the parties in the way to which McHugh J referred. The question is therefore whether the court is able to conclude that one of the parties has acted so unreasonably that the other party should have an order for costs.

It follows from what I have said about not trying a case that has become moot that I put entirely to one side Zarzar’s contention that the six invoices were fabricated in order to create a false impression that indebtedness existed when, as Exton well knew, it did not. The present context is one in which there have been no pleadings and the allegations of falsification have not been directly put to those said to have acted dishonestly. There have been merely allegations in letters and affidavits. Any issue of fraud cannot be determined.

Remaining, therefore, are the matters of chronology to which reference has already been made. As to those, my conclusion is that, notwithstanding what was said in the solicitors’ letters of 30 June 2016 and 5 August 2017, it cannot be said to have been unreasonable for Evton to continue to press the statutory demand up to 16 August 2016. On the last-mentioned date, however, Evton caused the debts the subject of the statutory demand to become part of the subject matter of the Local Court proceedings – a step that was confirmed and emphasised on 6 September 2016 when Evton introduced into those proceedings a positive claim to recover those debts. The existence of a clear dispute regarding the debts was established when Zarzar filed the defence to cross claim on 12 September 2016.

While there is no explicit rule precluding parallel resort by a creditor to both the statutory demand procedure and debt recovery proceedings, the reality is that it is an abuse of the statutory demand process to continue to press and rely on a demand while at the same time suing for the relevant debt or debts. This is because the two procedures have different objectives. The aim in serving a statutory demand is not to recover the debt (although eliciting payment may become a welcome by-product) but to obtain the benefit of a presumption of insolvency through non-compliance with the demand. The aim of recovery proceedings, by contrast, is to compel payment and obtain monetary satisfaction. The same reasoning holds good, in my view, when the alleged indebtedness is asserted by the putative creditor by way of set-off defence in proceedings commenced by the alleged debtor. Again, the putative creditor abandons its stance of waiting for the expiration of a statutory period in order to obtain a presumption of insolvency (or, as an alternative, to obtain voluntary payment by the debtor in the meantime) in favour of positive assertion of the right to be paid as a means of obtaining recovery by way of reduction of a liability.

On this basis, it was, in my opinion, unreasonable of Evton to seek to maintain the statutory demand after 16 August 2016. It should, at that point, have notified Zarzar that the demand was no longer pressed and was withdrawn. It should also have consented to an order setting aside the statutory demand. The date 16 August 2016 (being the point at which Evton should have ceased to press the statutory demand) is, to my mind, more significant for present purposes than 30 September 2016 (the point at which the parties apparently agreed that the statutory demand should be set aside).

In those circumstances, I am of the opinion that, in line with the principles outlined by McHugh J, each party should bear its own costs up to 16 August 2016 and Evton should pay Zarzar’s costs thereafter. However, I do not regard Evton’s conduct as egregious conduct involving “relevant delinquency” in the sense referred to by Gaudron and Gummow JJ in Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11, with the result that there will be no order that costs be assessed on an indemnity basis.

The orders are: