The recent case of Re Gowinta Farms Pty. Limited [2012] QSC 423 highlights the importance for insolvency practitioners to ensure that there is no dispute with respect to a debt claimed in a Creditor’s Statutory Demand for Payment of Debt (“Statutory Demand”) and clearly shows that failing to observe notice of such a dispute can lead to serious personal cost consequences.

Facts

Gowinta Farms Pty. Limited (in liquidation) (“Gowinta Farms”) served a Statutory Demand on Bluecove Pty. Limited (“Bluecove”) seeking payment of the sum of $289,205.36.  Bluecove sought to have the Statutory Demand set aside on the basis that there was a genuine dispute as to the nature and amount of the debt.

Bluecove claimed that the dispute arose on 2 bases: Firstly, that the quantum of the debt was incorrect and was based on a running account between the parties and secondly, that Bluecove had an offsetting claim of approximately $320,000 against Gowinta Farms.

Unfortunately, the liquidators of Gowinta Farms did not file any evidence in the proceedings to counter those assertions. As a result, the arguments raised with respect to the dispute as to the debt were accepted by the Court and the Statutory Demand was set aside.

Costs

The Court then turned its attention to the costs of the proceedings. The ordinary situation is, of course, that costs will follow the cause (that is, that the successful party will be awarded costs in its favour). The general position of the Court is that costs will be awarded on the “ordinary” basis (usually tantamount to a contribution of about 70% of the other party’s costs) unless there is some compelling or extraordinary reason award costs on the “indemnity” basis (in which 100% of the other party’s costs must be paid).  The practical difference is that an indemnity costs order will result in a much higher costs recovery.

The Court considered that in this case, there were such extraordinary circumstances as to warrant an indemnity costs order against Gowinta Farms.  In short, those circumstances involved the liquidators’ office being put on notice that there was a dispute as to the debt prior to the Statutory Demand being issued.

A further application was made by Bluecove’s solicitors that the costs order extend not only to Gowinta Farms, but also to its liquidators personally.

Relying on the observations by the Court of Appeal in Belar Pty. Limited (in liquidation) v Mahaffey [2000] 1 Qd R 477 at 491, His Honour held that the costs of the application be payable by both Gowinta Farms and the liquidators personally, on the indemnity basis.

Practical considerations for insolvency practitioners

This case raises significant warnings to liquidators seeking to recover debts on behalf of companies in liquidation.  In particular, there are three issues to which insolvency practitioners (and, in fact, any creditor) should turn their minds.

Firstly, many will no doubt be aware of recent amendments to the rules of the Federal Court of Australia whereby “genuine steps” must be taken prior to litigation to resolve issues in dispute. A recent decision has found that, notwithstanding that issuing a Statutory Demand is not in itself litigation, genuine steps should be taken to resolve a matter prior to the issuing of a Statutory Demand.

The liquidators in this case did take such steps. Worse, the dispute was in fact raised and subsequently ignored.

It follows then that the second issue to which insolvency practitioners should be alive is to not ignore or disregard the comments of debtors with respect to a dispute.

His Honour noted in his judgment: –

It seems highly unusual, in those circumstances, for the liquidator to have so peremptorily dismissed the concerns raised by [Bluecove] as the alleged level of indebtedness, and it was frankly an act of high handedness for the liquidators then to simply issue the Statutory Demand, which in turn necessitated the bringing of the present application.

Finally, a matter which must be deposed to in all affidavits accompanying a Statutory Demand is that the deponent has no knowledge of any genuine dispute with respect to the amount or nature of the debt. Insolvency practitioners in particular should be aware of the risks faced not only with respect to costs, but also with respect to the potential professional and legal consequences that may flow from swearing an affidavit containing such a statement.

It is difficult to see how the Court had any other option but to make such a costs order in these circumstances given that the liquidator or his staff must have known about the existence of the dispute.

Statutory demands should only be issued where there is no genuine dispute about the amount of existence of the debt. Gowinta Farms shows us that it is no defence to an application for costs that the creditor concerned is a company in liquidation. On the contrary, the court’s preparedness to order that the liquidators personally pay the other party’s costs, on the indemnity basis, suggests that liquidators ought to think very carefully before attempting to use a statutory demand to extract payment of a debt that may be in dispute.