The Supreme Court, per Randall AsJ, in Body Corporate Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSC 435 considered what was always going to be an ambitious application to set aside a statutory demand which relied on a judgment debt.

FACTS

The litigation between the parties was protracted and hard fought in multiple proceedings in the Supreme Court. The history of how things ended up with a statutory demand is necessarily long and involved.

In 2002, the plaintiff, Bodycorp Repairers Pty Ltd (‘Bodycorp’), commenced proceedings against Maisano, in the Federal Court alleging breach of a franchise agreement and inducing breach of contract (the ‘Bodycorp proceeding’) [9]. In 2005, the Bodycorp proceeding was transferred to the Supreme Court of Victoria. Oakley Thompson acted for Maisano in the Bodycorp proceeding between 2004 and 2010 and then from March 2012 until the completion of trial [11]. Bodycorp lost and Maisano obtained a cost order in his favour [11]. An appeal to the Court of Appeal was dismissed and an application for special leave to the High Court was refused. Pursuant to a cost orders made in the Bodycorp proceeding, Maisano commenced proceedings in the Costs Court [12]. Maisano terminated Oakley Thompson’s retainer following a dispute over outstanding legal fees.  Oakley Thompson responded by issuing proceedings against Maisano seeking a declaration that it had an equitable lien over the costs judgment held by Maisano and that Oakley Thompson was entitled to have those costs taxed [13]. The Court found in favour of Oakley Thompson and held that it was entitled to have those costs taxed and  prosecute the taxation in the Costs Court.

As part of the orders subsequently made was, at [16], an undertaking given by Oakley Thompson that:

[Oakley Thompson] undertakes that it agrees that any amount that [Bodycorp] is ordered to pay in this proceeding is to be paid into court and that it will not seek payment of any such amount to itself except by order of the court or with [Maisano’s] consent.

Bodycorp was unsuccessful in obtaining a stay of those orders [17].  Subsequently Bodycorp and Maisano unsuccessfully applied for review of a Judicial Registrar’s orders on a taxation [18].

On 23 November 2015, Oakley Thompson served a statutory demand based upon the two orders made by the Judicial Registrar (‘the First Demand’). Bodycorp made application and was successful in setting aside that statutory demand [19] on the basis that there was:

“..a sufficiently plausible contention, requiring investigation and final decision, that Oakley Thompson is not a creditor of Bodycorp under the Cost Court order and thus a genuine dispute as to the existence stated in the statutory demand.”

On 16 September 2016, the Court ordered in the lien proceedings that the respective entitlements of Oakley Thompson and Maisano under the costs judgment be referred to the Costs Court. It held that the entitlements of Oakley Thompson and Maisano to the amount of the costs judgment were $148,853.68 for Oakley Thompson and $84,735 for Mr Maisano respectively [22]. On 13 February 2017, Hargrave J released Oakley Thompson from the undertaking [23] and that  the costs judgment will be paid to Oakley Thompson directly and will be enforceable against Bodycorp as if it were the sole person entitled to the costs order of Mr Maisano [23]  with the following undertaking:

(a) …(b) any amount recovered from [Bodycorp] pursuant to any such enforcement process be paid into [Oakley Thompson’s] trust account on trust for itself and for [Maisano].

(c) any distributions from those trust moneys be applied first to [Oakley Thompson’s] reasonable and necessary costs of recovery proceedings, and then in pro rata proportions to [Maisano] and [Oakley Thompson] in accordance with the entitlements fixed by Associate Justice Wood on 1 December 2016 in proceeding S CI 2014 5814

DECISION

Statutory demand

The plaintiff submitted that:

• an affidavit accompanying the statutory demand was required by section 439E(3) of the Corporations Act and that omission constituted a defect in the demand.
• the order made by the Judicial Registrar was merely a reflection of the underlying order by Elliott J which required an assessment of what already had been received by Oakley Thompson.

The court noted that:

• there is no definition of ‘judgment debt’ provided for in the Corporations Act but  there is no need for a judgment to be formally entered or ‘taken out’ with the judgment  ordinarily taking effect on the date that the judge has pronounced the judgment [35].
• the Federal Court of Australia has held that the exemption from the requirement to accompany a statutory demand with a verifying affidavit is limited to circumstances where the statutory demand made an identical demand to the amount of the judgment debt[36]

The Court agreed with the defendant’s submission  that no genuine dispute can exist in respect of a judgment debt and the judgment as the source of a payment obligation cannot be disputed unless and until the judgment has been set aside [37] and held that:

• the order made by the Judicial Registrar was authenticated and filed in accordance with r 60. Upon that occurrence, the orders of the Judicial Registrar were of full force and effect [38].
• the statutory demand sought no more or less than what was set out in the orders made. Accordingly, an accompanying affidavit was not required [39].

as a result the statutory demand was not defective in accordance with s 439E(3) of the Corporations Act [40].

Cost orders constitute a debt owing

The plaintiff submitted that:

• the costs orders do not create a debt that is owing to the defendant as claimed in the statutory demand, referring to the defendant’s previous statutory demand served upon the plaintiff which was set aside by the Supreme Court  because ‘there was no debt due and owing to the defendant pursuant to the costs orders.’ [41]
• the effect of that order made by Wood AsJ as to the apportionment between Oakley Thompson and Maisano was that only the sum of $148,853.68 was recoverable by Oakley Thompson [42].
• the court was bound by or in any event ought to follow the earlier decision of Hargrave J in disposing of this statutory demand

The Court in not accepting this submission was critical of the plaintiff in stating that it failed to sufficiently draw its attention to what transpired after the 5 July 2016 judgment [43]  where Oakley Thompson was specifically authorised to recover the full sum set out in the Judicial Registrar’s order, subject to its obligations to account to Mr Maisano [45]. A lesson for practitioners. As such the Court found the cost orders do constitute a debt that is owing to the defendant as claimed in the statutory demand [46] .

The court also noted, in the alternative, that if the obligation to account imposes a trust obligation upon Oakley Thompson  then r 16.02 of Chapter 1 of the Supreme Court (Civil Procedure) Rules 2015 (Vic) specifically authorises a trustee to bring suit without the necessity to join a person having a beneficial interest…under the trust and  r 54.02  confers the court with very broad powers, enabling a trustee ‘to seek an order of the court either to approve a transaction or to direct that an act be done in the execution of the trust.’ [47] On that basis if Oakley Thompson has any trustee status is the appropriate party to make demand.

Off-setting claim?

The plaintiff submitted it had a genuine off-setting claim regarding:

(a)  arising from the costs orders paid by it in relation to County Court Proceedings in the sum of $102,000 and in relation to two costs orders of the Supreme Court in the sums of ‘approximately’ $25,000 (Offsetting Claim 1);

(b) two off-setting claims in relation to Hargrave J’s orders (Offsetting Claim 2);

(c) pending proceedings against defendant (Offsetting Claim 3);

(d) pending proceedings against defendant’s former client, Maisano (Offsetting Claim 4).

Offsetting Claim 1

The Court rejected the plaintiff’s submission that the amount of the offsetting claim be reduced by the amount/s previously paid to Oakley Thompson for costs in the County Court and Supreme Court proceedings because they were made with respect to separate obligations to meet cost orders [50 ] & [51].

Offsetting Claim 2

The Plaintiff relied on two costs orders made in its favour, being the order of Hargrave J dated 5 July 2016 and of Hargrave J which it stated be quantified the vicinity of $30,000 to $40,000 and  $20,000 to $30,000 respectively [53].

The Court stated that

• the practitioner for the plaintiff did not swear any affidavit which would assist  in calculating a range of quantum for each of the cost orders, such as a bill, even if it were not in taxable form [53]
• the offsetting claim has not been sufficiently quantified, as there has been no draft bill prepared, no costing and no costing estimate to assist in calculating the offsetting amount [54]
• while there is no need for meticulous detail to be presented, something at least evidence must be adduced to allow the court to make a reasonable assessment as to the amount [56] & [57] This evidence could be in the form of a costs assessment letter, or a memorandum of costs [60]
• although the courts encourage a ‘pragmatic approach’ to the quantification of the amount of an offsetting claim the court can not set an amount based solely on the judge’s years of experience in these types of matters [61]

The offsetting claim failed beyond a nominal $1 for each costs order [62].

Offsetting Claim 3

The Bodycorp filed proceedings in S CI 2016 02044 against Maisano and others including the Oakley Thompson parties was summarily dismissed against the Oakley Thompson was subject to an application for leave to appeal due to be heard soon.,  As such it was inappropriate that the court decide the issue so close to that hearing [69]

The Court stated that:

• it was not convinced that the judge in the summary judgment application was incorrect [69].
• as a general proposition, when a statutory demand is based on a judgment debt the fact that the judgment is under appeal when the s 459G application is heard cannot constitute a genuine dispute [71]
• the pendency of an appeal or action to set aside judgment would not of itself, without additional circumstances, provide ‘some other reason’ why the demand should be set aside under s 459J(1)(b)
• it is consistent with the purposes of Pt 5.4 for a court to set aside a statutory demand based upon a judgment debt if satisfied that there are arguable grounds of appeal  but typically in such cases the demand is set aside on the condition that the debt claimed is secured by payment into court or by other means [74]
• cited  Re John Farlow Pty Ltd  where the the relevant factors to be considered are:

(a) reasonable and arguable grounds for the application to set aside the judgment or for the appeal have been shown;

(b) a stay is available and, if so, has been sought or refused; and

(c) there has been an offer to pay into court the amount of the demand pending the outcome of the application or appeal.

• while an absence of a stay is not fatal to an application to set aside a creditor’s statutory demand where a stay has not been sought or where a stay has been refused will be a highly influential and often decisive consideration.

The court noted that while  Bodycorp applied for a stay to the Court of Appeal and that Court found there were no special circumstances justifying departure from the presumption that an appeal should not ordinarily deprive a successful litigant of the fruits of litigation [79].  The court regarded such further adjourning the application to set aside the statutory demand would constitute a defacto stay, which had previously been applied for and refused [80].

The court found that the plaintiff debtor should have placed before the court sufficient material to allow the court to formulate a view as to the prospects of success of the appeal [81] and it was not sufficient to say that an appeal has been lodged to set aside a statutory demand [82].

The court rejected the plaintiff’s submission that the Court had earlier erred in the application of the principles of setting aside a judgment on the basis of fraud finding that there were no obvious errors of law [83] – [85].  It also noted authority to the effect that even where there are arguable grounds for appeal this of itself is not sufficient to justify setting aside the demand where no stay has been sought and there has been no offer to pay the judgment amount into court [86].  There had been no payment of funds into court as security in this case [87].

Offsetting Claim 4

The Plaintiff submitted it had another offsetting claim in relation to the defendant’s former client, Maisano, in the Supreme Court of Victoria (S CI 2016 02044) to have the decision in Bodycorp Repairers Pty Ltd v Maisano [No 8 ] set aside and that if the original decision were set aside on the basis of fraud then the platform for the costs orders, and in particular, the order made by Judicial Registrar Gourlay, may fall away.

While this was conceded by the Defendant it submitted that whilst the original decision stands Bodycorp’s statement of claim alleging fraud lacked sufficient factual particularity to succeed and that it had already been subject to comprehensive judicial review when the Court had previously summarily dismissing Bodycorp’s claim against Oakley Thompson [89]

The court stated that:

• the pendency of an appeal or action to set aside judgment would not of itself without additional circumstances provide ‘some other reason’ why the demand should be set aside under s 459J(1)(b).
• the circumstances deemed to be relevant to this assessment are whether (a) an application for stay has been made (b) the prospects of success of the claim (c) whether there has been any payment of security into court for the judgment debt. As outlined above, a stay has not been sought.
• a creditor’s statutory demand will not generally be set aside without payment of the amount of the judgment debt into Court so that no need for a presumption of insolvency or earlier relation back date arising from the failure to comply with the Demand exists.
• a court is unlikely to set aside a creditor’s statutory demand, where a judgment remains in place and has not been stayed or set aside because even if a presumption of insolvency arises from non-compliance with the Demand, the Court will still have a discretion whether to proceed to a winding up application or to adjourn that application, pending the determination of the application to set aside the underlying judgment [97]
• the evidence here of the alleged fraud substantially includes reference to inter alia an amended statement of claim that lists the ‘fresh’ evidence sought to be relied upon which a court had previously before it in another hearing and rejected. This court did not come to a different conclusion [99].

Abuse of Process

The plaintiff submitted that issuing a statutory demand whilst the plaintiff has filed an application to appeal the summary judgments of the Supreme and County courts and the hearing of those statutory demand applications before the other proceedings are concluded is an abuse of process [100].

The court found that:

• the court retains a residual jurisdiction to restrain reliance on the statutory demand procedure on the ground of an abuse of process [101]
• it was not an abuse of process for a creditor to issue a demand in respect of a debt under a judgment that has not been stayed, notwithstanding that an appeal from the judgment was pending [103]
• here the statutory demands were issued pursuant to orders for costs in favour of the defendants, which they were entitled to execute after Bodycorp failed to satisfy them. There has been no evidence that the purpose of issuing the statutory demand was done for an ‘improper purpose’ or seeking a ‘collateral advantage’ beyond what the law offers. [104]
• the plaintiff’s submission that the statutory demands constitute an abuse of process was without foundation [105].

The Court upheld the statutory demand is upheld, subject to a variation of $2.00 [125] and made the following orders at [126]:

(a) The admitted total is $233,588.68.

(b) The offsetting total is $2.00.

(c) Substantiated amount of the demand is $233,586.68.

(d) The plaintiff pay the defendant’s costs of the proceeding including reserved costs on a standard basis.

ISSUE

Statutory demand applications of this length and factual complexity are not common.  Thankfully. This application was multifaceted and raised a range of bases to set aside the statutory demand.  The decision makes clear that offsetting claims in the form of costs orders should have at least some calculations as to value, even if that falls short of a bill of costs in taxable form.

The decision also made clear that there are inherent difficulties in setting aside a demand based on a judgement provided that the demand is for the same sum as the judgment.

The decision is a salient lesson in not relying on an appeal as grounds in and of itself to set aside a statutory demand.  A party should obtain a stay on judgment pending appeal or pay money into court.  Such steps would assist in the exercise of discretion.

The other clear lesson from this decision is that it is critical to provide ample and cogent evidence in support of claims for an offsetting claim.  Asserting a claim without sufficient foundation will not be well received. Similarly alleging abuse of process requires clearly enunciated arguments and, preferably, cogent evidence.  It is a serious claim and must be prosecuted carefully.