Federal Court sets aside statutory demand in respect of unpaid legal costs issued during the period in which costs may be assessed
The recent Federal Court of Australia decision of Rusca Bros Services Pty Ltd v Dlaw Pty Ltd, in the matter of Rusca Bros Services Pty Ltd (No 2) [2019] FCA 1865 serves as a timely reminder that a statutory demand may be at risk of being set aside when issued in circumstances where a statutory period for assessment of costs comprising the debt claimed has not yet expired.
Background
Rucsa Bros Services Pty Ltd (Rusca) engaged Dlaw Pty Ltd trading as Doyles Construction Lawyers (Doyles) to act on their behalf in a dispute with Lendlease Building Pty Ltd (Lendlease) connected with construction works at RAAF Tindal in the Northern Territory in about September or October 2017.
Throughout the course of the retainer, Doyles rendered invoices to Rusca totalling $500,529.79. Rusca paid a total of approximately $300,000 to Doyles between about October 2017 and about March 2018.
In April 2018 a director of Rusca sent an email to Mr Doyle of Doyles expressing surprise at the size of the recent invoice given the significant fees already paid to that point and stating that Rusca would need to go through each of the bills to ensure that they were reasonable.
On 8 May 2018, Rusca requested that Doyles provide it with an itemised invoice for all of the bills rendered by Doyles to Rusca. By section 187(3) of the Legal Profession Uniform Law (NSW) (LPUL) Doyles were required to provide the itemised bill within 21 days of the request. The equivalent provision in Queensland, secion 332 of the Legal Profession Act 2007, provides that a firm must provide an itemised bill within 30 days of such a request.
Also on 8 May 2018, Rusca received a statutory demand from Doyles dated 7 May 2018 seeking payment of a total sum of $191,022.15 being the unpaid balances of 3 invoices issued in February, March and April 2018 less funds held in trust.
On 25 May 2018, Rusca filed an application to assess the costs charged to it by Doyles over the course of the retainer.
As at the date of the hearing, whilst the costs assessor had completed his assessment of the costs, his fees had not been paid and neither Rusca nor Doyles had taken steps to obtain the costs assessor’s Costs Determination (the equivalent of a certificate of assessment in Queensland).
Statutory Demand
Rusca applied under sections 459H and 459J of the Corporations Act 2001 (the CA) to set the statutory demand aside.
The grounds relied upon included, relevantly:
- as the legal costs comprising the debt the subject of the Demand were the subject of an assessment application, there was a statutory prohibition on proceedings to recover the costs and the debt the subject of the Demand was not presently due and payable; and
- Doyles had failed to give an adequate estimate of total legal costs at the commencement of the retainer and as a result, was not permitted to commence or maintain proceedings for recovery of its costs until the costs had first been assessed. This also constituted a statutory prohibition on proceedings to recover the costs and for this reason as well, the debt the subject of the Demand was not presently due and payable
In ordering that the Demand be dismissed, Markovic J referred to section 198(7) of the LPUL. That section provides that once an application for costs assessment has been made:
the law practice must not commence any proceedings to recover legal costs until the costs assessment has been completed.
There are similar provisions in other jurisdictions in Australia. The Queensland equivalent is section 338 of the Legal Profession Act 2007 (LPA), which is identical to section 198(7) of the LPUL save that a law practice may commence proceedings with the leave of the court.
Her Honour cited authority to the effect that:
if a statute prohibits commencement of proceedings to recover a debt, then so long as the statutory prohibition remains in place the debt is not “due and payable” and consequently cannot found a statutory demand.[8]
Her Honour held that:
the statutory prohibition in s 198(7) means that the debt the subject of the Demand can no longer be said to be immediately “due and payable” as required by s 459E of the Act. This is because the debt the subject of the Demand cannot presently be enforced by action by the commencement of any proceeding for recovery. That is so even if the Demand was served prior to the commencement of the Assessment Application. While the debt might have been due and payable at the time of service of the Demand because there was no prohibition on the commencement of a proceeding for recovery at that time, that status changed as soon as the Assessment Application was filed.[9]
After determining that the costs assessment application was not complete because the Costs Determination had not been obtained, in the result her Honour held that:
the Assessment Application is not complete. As that is the case, it follows that Doyles is precluded by s 198 of the LPUL from taking steps to recover its costs and, in those circumstances, the debt the subject of the Demand is not due and payable and the Demand should be set aside pursuant to s 459J(1)(b) of the Act.
Other grounds relied upon
Her Honour also dealt briefly with other grounds relied upon by Rusca in order to set aside the Demand, including, relevantly, the contention that Doyles had failed to provide a proper estimate of legal costs at the commencement of the retainer.
Her Honour held that Doyles had failed to give sufficient costs disclosure (noting that the estimate given at the outset ultimately comprised 2% of the total costs billed) and that by operation of section 178 of the LPUL, Doyles could not commence or maintain proceedings to recover the legal costs until they had been assessed, with the result that the costs the subject of the Demand would not be payable until they had been assessed.
There are also equivalents to section 178 of the LPUL in other Australian jurisdictions. The equivalent provision in Queensland is section 316 of the LPA, which provides that a client “need not pay the legal costs unless they have been assessed” in circumstances where adequate disclosure has not been made.
Conclusion
The key takeaways for practitioners from the decision are:
- If a client files a competent application for costs assessment after a statutory demand has been issued in respect of unpaid legal costs, the statutory demand is liable to be set aside pursuant to section 459J(1)(a) of the CA on the basis that the costs the subject of the statutory demand are not “due and payable” until the costs assessment process is complete.In Queensland, a client may apply for assessment of costs without leave within 12 months of receiving the final bill or request for payment, so the period of risk extends for at least that length of time; and
- A court may be prepared to in effect ‘look behind’ a statutory demand issued in respect of unpaid legal costs to determine whether adequate disclosure has been made for the purposes of the applicable statutory regime and if it determines that it has not, the statutory demand may be set aside as a result.
When is a Release a release?
Deeds are a very common legal instrument that are used for almost infinite purposes. Deeds are a special kind of binding promise or commitment to do something made under seal. Accordingly, deeds are seen as particularly solemn promises and may attract special legal consideration if breached.
Commonly, deeds will be used when settling disputes or ending relationships such as partnerships or employment. Often a deed will contain a clause that acts as a bar to bringing future or further legal proceedings. As a result, there is a perception that action will be prevented even when unscrupulous conduct of a party later comes to light. However, a recent Queensland Court of Appeal decision demonstrates that this may not always be the case.
The decision of Wichmann v Dormway Pty Ltd [2019] QCA 31 concerned a former office manager who had diverted the employer’s money into her own accounts. Upon discovering that an amount of $2,809.42 had been diverted, the employer terminated the employee despite her offer to repay the money. As part of the termination procedure, the parties entered into a deed of release containing the following clauses purporting to bar future action:
Recital E stated:
The parties have agreed to settle all matters effective from the 30 April 2018, relating to the employment and the cessation of the employment of WICHMANN, and any matters arising therefrom, save as to any statutory rights concerning superannuation or worker’s compensation, or the subsequent enforcement by either party of the terms of this deed; and without any admissions of liability by either Party; as set out herein.
Clause 4.2 stated:
In consideration for the agreements herein, DORMWAY hereby releases and discharges WICHMANN from all causes of action, actions, suits, arbitrations, claims, demands, costs, debts, damages, expenses and legal proceedings whatsoever arising out of or in any way connected with:
- The Employment or its termination or any circumstance relating to its termination; or
- Any matter, act or circumstances occurring between the date of termination of the Employment and the date of this agreement; save as to any unlawful act; and
- Whether arising under statute, common law or equity,
Or any of these which DORMWAY now has or had the right to bring against WICHMANN at any time hereafter, but for the execution of this agreement; save as to any matter relating to the enforcement of this deed.
Shortly after executing the deed, the employer discovered that the former employee had actually diverted a total amount of $321,593.85 to her own accounts. The employer sued the former employee for recovery of this money and successfully obtained judgment in their favour. The employee appealed this decision asserting that the judgment was based in an error of law on the basis that the clauses must be taken to have the effect of barring action in regard to her misappropriation, regardless of whether disclosed or not.
The Court of Appeal rejected this argument noting that as the above clauses were in general terms and did not identify specific conduct, it was the responsibility of the employee to demonstrate the release applied to the specific claims against her; it was not for the employer to demonstrate that they would not have entered into the deed had they known of the true extent of misappropriation. As the employee had knowingly not disclosed the extent of her misappropriation to her employer, her duty of good faith was breached. This gave rise to an entitlement to avoid the deed and recover any money paid under it.
Additionally, it was arguable that the employee had committed common law fraud, which would allow the entire deed to be set aside, a relevant argument but not one that the employer had made.
With these conclusions, the Court dismissed the appeal ordering costs against the employee.
From this case several principles in relation to deeds become apparent:
- When entering into a deed both parties should take steps to disclose all relevant information;
- A deed will not protect against unconscionable behaviour simply because it has been executed;
- Non-disclosure of information may give rise to allegations of fraud or inducement which may result in the setting aside of a deed;
- A party relying on a deed must establish that the terms apply to the situation facing them, it is not enough to simply rely on broad general terms.
High Court of Australia abolishes ‘Chorley Exception’
In 2018 we provided an update in respect of the matter of Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150.
In that decision, the New South Wales Court of Appeal held that the ‘Chorley exception’ applied to barristers as well as to solicitors.
The Chorley exception is an exception to the well-established rule that a self-represented litigant is not entitled to professional costs for acting for him or herself in legal proceedings and provides that self-represented litigants who are solicitors are entitled to recover professional costs for work they have undertaken in legal proceedings.
In December 2018, the High Court of Australia granted special leave to appeal that decision and on 4 September 2019, allowed the appeal and overturned the decision of the New South Wales Court of Appeal.
Significantly, in doing so the High Court effectively abolished the Chorley exception in Australia.
Background and proceedings below
The case involved Janet Pentelow, a barrister who brought proceedings in both the Local Court and Supreme Court of New South Wales, seeking to recover unpaid fees following a dispute with her client (who had been her instructing solicitors). Although the Supreme Court awarded costs in Ms Pentelow’s favour in respect of both proceedings, the costs assessor later rejected in its entirety that part of the costs claimed by Ms Pentelow for preliminary work that she had undertaken herself prior to engaging legal representation, such as drafting the originating process and her affidavit of evidence.
During a subsequent review by the Costs Review Panel, Ms Pentelow’s claim for costs relating to work that she had undertaken was again disallowed on the on the basis that, relevantly, the Chorley exception did not extend to barristers. Ms Pentelow subsequently appealed to the District Court of New South Wales, however was unsuccessful on the same basis and thus sought judicial review of the decision pursuant to s69 of the Supreme Court Act 1970 (NSW).
In the New South Wales Court of Appeal, Beazley ACJ (with whom Macfarlan JA agreed) held that the Chorley exception extended to the work undertaken by a self-represented barrister, so long as that work was not expressly proscribed by the Bar Rules. Significant in Beazley ACJ’s reasoning was the fact that there was now significant overlap in the work undertaken by both solicitors and barristers and the costs of each may be assessed under the same costs assessment processes.
The decision in the High Court of Australia
On appeal, Keifel CJ, Bell, Keane and Gordon JJ commenced their analysis by noting that:
the Chorley exception is not only anomalous, it is an affront to the fundamental value of equality of all persons before the law. It cannot be justified by the considerations of policy said to support it.
Their Honours considered the rationale expressed to underlie the Chorley exception, which is that the professional skill and labour exercised by a solicitor litigant may be measured by the law, whereas the “private expenditure of labour and trouble by a layman cannot be measured”.
After noting that there was no reason in principle why the reasonable value of the time of any litigant could not be measured (citing the example of valuing the provision of labour in a quantum meruit claim), their Honours went on to note that:
there is an air of unreality in the view that the Chorley exception does not confer a privilege on solicitors in relation to the conduct of litigation… A privilege of that kind is inconsistent with the equality of all persons before the law.
There were only two previous decisions of the High Court of Australia in which the Chorley exception is referred to: Guss v Veenhuizen [No 2] and Cachia v Hanes (Cachia Decision).
The majority noted that because the existence of the Chorley exception in Australian common law was not in question in either decision, those decisions did not bind a later court to accept the application of the Chorley exception.
Furthermore, the majority in the Cachia Decision was critical of the decision in Chorley, describing it as “somewhat anomalous” and stating that the justification for the exception was “somewhat dubious”.The majority in Bell Lawyers noted that those criticisms “substantially undermine[d] the authority of the decision in Chorley” and that the possibility of a solicitor profiting from their participation as a litigant “is unacceptable in point of principle.”
Their Honours also cited the following statement of the majority in the Cachia Decision:
If the explanation for allowing the costs of a solicitor acting for himself are unconvincing, the logical answer may be to abandon the exception in favour of the general principle rather than the other way round.
Their Honours concluded that:
There is no compelling reason for this Court to refrain from taking the “logical step” identified in Cachia. The Chorley exception is not part of the common law of Australia.
The remaining judges agreed that the appeal should be dismissed. Both Gageler J and Edelman J agreed with the majority that the Chorley exception did not form a part of the common law of Australia. Nettle J, however, found only that the Chorley exception did not extend beyond solicitors to barristers.
Practical consequences
It is unclear how common it is for legal practitioners to undertake legal work in litigation on their own behalf.
The most likely example may be circumstances in which a sole practitioner or firm undertakes debt recovery proceedings on its own behalf. The apparent consequence of the decision is that a sole practitioner cannot recover legal costs from its opponent for work of this type. Whilst that may lead to an increase in firms outsourcing their own debt recovery, that outcome is consistent with the majority’s view that as a matter of policy, it is better that legal work be undertaken with sufficient professional detachment.
Where an incorporated legal practice (ILP) undertakes legal work such as debt recovery proceedings on its own behalf, it appears that the firm remains capable of recovering legal costs from its opponent, due to the legal detachment between the litigant (the ILP) and the practitioner undertaking the work (an employee of the ILP). Comments made by the majority, however, suggest that this position may be subject to review in future, in particular in respect of ILPs with a sole shareholder and director.
Brisbane man cops jail time for $1.2M tax fraud
A 51-year-old Brisbane man has been sentenced to 7 years in prison and ordered to pay $1.2 million in reparations after he was convicted of fraudulently obtaining and attempting to obtain more than $1.2 million from the ATO.
On 22 March 2019, Stephen Mungomery appeared in the Brisbane District Court which heard that between March 2009 and October 2012, he lodged 46 Business Activity Statements (BAS) on behalf of his wife’s business, Gourmet Providores. In doing so, Mr Mungomery included expenses incurred by his sole trader entity Epicure Consulting and Training Solutions.
In attempting to substantiate his claims, Mr Montgomery produced 24 invoices issued by Epicure Consulting. The invoices accounted for 92% of all expenditure and totalled $13,767,466 in sales - including $5 million for website development and $2.6 million for franchise development.
However, those invoices bore no commercial reality and were never actually paid. In fact, the court heard that the initial Gourmet Providores website was actually created by another company for $7,885. The franchise development claims were also held to be fraudulent.
Mr Mungomery was subsequently jailed for 7 years and ordered to repay the money to the ATO.
ATO Assistant Commissioner Peter Vujanic asserted that this case signals a warning to all Australian’s that those caught breaking the law will be held accountable, even if it means pursuing an action in the criminal justice system.
Progressive Reforms – Recent developments in Australian directors’ liability
Until recently, Australia had some of the strictest insolvent trading laws in the world. Those laws were designed to lift the corporate veil, so that those in control of a corporation could be held liable for debts incurred while the corporation is unable to pay its debts as and when they are due. Section 588G of the Corporations Act 2001 imposes a duty on a director to prevent insolvent trading. It is designed to act as a deterrence on directors incurring debts when the corporation is insolvent. It imposes personal liability and, in severe cases, there are criminal sanctions.
While this act still applies, in 2015 the Australian Productivity Commission recommended reforms to Australia’s corporate insolvency regime, designed to enable restructuring of economically viable companies with less emphasis on punishing for financial failure.
The recommendations of the commission were to restrict formal company restructuring procedures to those businesses that were capable of being economically viable in the future. They also recommended the introduction of a safe harbour defence to allow directors to explore early restructuring options without liability for insolvent trading, and a restriction on the enforcement of Ipso facto rights in certain circumstances.
These changes have now been legislated and have commenced operation. One of the main reasons for their recommendation and implementation was empirical data suggesting that insolvent trading cases were not so extensive, with those cases that do proceed to trial, often weighted heavily in favour of the liquidator plaintiff as against the defendant director.
Following corporate failure, directors are often penniless and pursuing them is not economic. It is therefore not unsurprising to find that reported cases of insolvent trading are not extensive in the more than 40 years since Australia has had insolvent trading laws, in one form or another.
The commission sought to address the tension between the desirability for strong insolvent trading protection on the one hand and encouraging a business restructure while the corporation is in financial distress on the other.
Safe harbour reforms
One of the ways they have achieved this is via the implementation of safe harbour reforms. The object of the reforms is to encourage directors to pursue restructuring opportunities that will deliver a better outcome to key stakeholders.
A safe harbour applies from the time the directors, who suspect insolvency, start to develop and implement a course of action that is reasonably likely to lead to a better outcome for the corporation than immediate administration or liquidation. It also operates as an exception to the insolvent trading provisions of the Corporations Act 2001, providing directors protection from any personal liability for debts that are incurred directly or indirectly in connection with the course of action.
Directors can still be liable for insolvent trading if they continue to incur debts while the corporation is insolvent, but safe harbour, if implemented correctly, can provide a defence to insolvent trading, thereby encouraging restructure and turnaround solutions as opposed to liquidation and personal liability.
Safe harbour rules require directors to take an active role in the restructure, while acting honestly and genuinely. They must also use up-to-date financial information to assess the likely outcome of restructure and comply with obligations to pay employee entitlements when they fall due. Meeting all of the company’s taxation reporting obligations, while properly maintaining books and records is also a requirement.
Under safe harbour rules, directors must engage with key stakeholders to develop and implement the restructuring plan. Once it becomes clear that a corporation is not viable, the protection of safe harbour will cease. Protections are not absolute and will require extensive advice and planning as well as consultation with key stakeholders. Their object is to encourage a restructure if it is reasonably likely to lead to a better outcome for the corporation.
Safe harbour does not appear to protect against other breaches of the Corporations Act 2001 and a liquidator may well still be entitled to pursue a creditor for an unfair preference, i.e. where the creditor is paid when the corporation is insolvent and the creditor receives more than they would if the corporation was wound up.
Ipso facto reforms
These reforms introduce a stay on parties being able to enforce rights against a corporation which goes into administration, has a receiver appointed or enters into a scheme of arrangement. The aim of these reforms is to preserve the going concern value of a corporation by creating a moratorium on enforcement of certain clauses in commercial contracts.
Without these reforms, a restructure may be jeopardised because the going concern value of a corporation can be destroyed by enforcement action. The new provisions introduce a stay on enforcing contractual rights including termination rights where the corporation goes into administration, has a receiver appointed or enters into a scheme of arrangement.
The stay is expressed to be a restriction on the ability to enforce a right that arises by reason of an express provision of a contract, agreement or understanding. The court maintains an overriding discretion to lift a stay, if that is appropriate in the interests of justice.
Conclusion
The Safe Harbour and Ipso facto reforms are significant changes to the corporate insolvency and restructuring landscape in Australia. They promote or seek to promote maximising the opportunity for preserving a going concern to assist with a corporate restructure in appropriate circumstances. The reforms present a useful step towards dispelling the long-held view that insolvent trading in Australia is focused on punitive outcomes rather than promoting entrepreneurship.
This article is an excerpt from the IR Global Australasian Guide. A full copy of the publication can be accessed here.
UK case reignites debate on the correct extent of judicial intervention
A recent decision in the United Kingdom has shed light on the topical issue surrounding the proper extent of judicial intervention. The case of Serafin v Malkiewicz & Ors [2019] EWCA Civ 852 ensued after Mr Serafin appealed an earlier decision on a number of grounds, including that the trial judge had exercised unfair judicial treatment against him.
Mr Serafin was a Polish immigrant who relocated to London where he subsequently engaged in a number of small business ventures, including a food business, which he launched in 2008. In 2011, a bankruptcy order was issued in relation to that business, with the Official Receiver finding Mr Serafin had engaged in misconduct by disposing of £123,743 whilst insolvent. As a result, Mr Serafin was made subject to a five-year Bankruptcy Restrictions Undertaking (BRU) in 2012.
In October 2014, Mr Serafin was the subject of an article published in Nowy Czas, a magazine popular among London’s Polish community. The article was entitled ‘Bankruptcy Need Not Be Painful’ and Mr Serafin contended that it contained serious defamatory allegations about him that amounted to a character assassination. He subsequently brought an action against the magazine’s editor and co-publishers, complaining of 14 different defamatory allegations.
The matter was heard over a 7-day period, after which Justice Jay found that many of the allegations were in fact ‘seriously defamatory’. Despite this, his Honour dismissed the claim in its entirety after finding some of the allegations to be untrue. Mr Serafin subsequently appealed the decision on five grounds, including that the trial judge had shown him ‘unfair judicial treatment’.
On appeal, counsel for Mr Serafin asserted that the judge’s interventions were accusatory, with the judge acting as an advocate for the defendant’s case rather than a neutral umpire. Mr Serafin also argued that the judge ought to have considered that there was an inherent risk of unfairness on the basis that he was an unrepresented litigant who was not legally qualified and did not have English as a first language, whilst his opponent was a very experienced silk.
In doing so, Mr Serafin tendered evidence that Justice Jay had formed a prejudicially adverse view of his evidence and character. The evidence included comments made by his Honour that Mr Serafin was “fundamentally untrustworthy” and warning Mr Serafin that “you will lose” and “I will hold things against you.” His Honour also told Mr Serafin “your reputation is already starting to fall apart, because you are a liar and you do treat women in a frankly disgraceful way.”
Furthermore, when counsel for the defendants suggested that the judge ask Mr Serafin which parts of the article he maintained were false, Justice Jay quipped, “I would not even bother, Mr Metzer, I think we have got to assume every point is lies.”.
On appeal, the court held that it was wrong for Justice Jay to “descend into the arena and give the impression of acting as an advocate”. In doing so, it concluded that it was “immediately apparent…that the Judge’s interventions during the Claimant’s evidence were highly unusual and troubling” and that his Honour “used language which was threatening, overbearing, and frankly, bullying”.
In deliberating this ground, the court considered Michel, which notes that not all departures from good practice render a trial unfair. However, having regard to the ‘nature, tenor and frequency of the Judge’s interventions’, the court concluded that an appeal was warranted.
In allowing the appeal, the court declared that Justice Jay “not only seriously transgressed the core principle that a judge remains neutral during the evidence, but he also acted in a manner which was, at times, manifestly unfair and hostile to the Claimant”.
Ultimately, this case reinforces that the role of a judge is to determine the dispute of the parties impartially and that one should not engage in bullying or unnecessary intervention. Although a UK case, it reflects trends in the Australian legal system, with almost two thirds of Victorian barristers reported to have been bullied from the bench. The rising number of instances such as this certainly begs the question of whether Queensland ought to create a Judicial Commission as has been done in New South Wales.
The scope of judicial intervention is a complex topic, which requires an open debate.
Failure to Disclose Debt May Jeopardise Consent Order
A recent finding of the Full Court of the Family Court of Australia serves as a timely reminder that a failure to disclose an asset or debt in a consent order may result in orders being set aside, regardless of whether that asset or debt is in the name of an individual, or the name of an ex-partner.
In the matter of Trustee of the Bankrupt Estate of Hicks & Hicks and Anor [2018] FamCAFC 37, the court was required to determine whether an appeal should be allowed on the basis that the primary judge erred in dismissing an application to set aside consent orders.
Specifically, the case involved Mr and Mrs Hicks, a husband and wife who, during their marriage, had acquired a number of properties between them. Mr Hicks also engaged in a number of business ventures, including a commercial deal to secure a $560,000 investment by Mr S in an enterprise known as U Pty Ltd.
Following their divorce, the couple filed an Application for Consent Orders for property settlement, in which neither party disclosed any liability to Mr S or identified him as a person who may be entitled to become a party to the case - something the application required.
Consequently, the Trustee of the Bankrupt Estate sought to have the final consent orders set aside.
At first instance, Mrs Hicks asserted that although there was a miscarriage of justice, the consent orders should not be set aside. The primary judge found in favour of Mrs Hicks, concluding that the debt was not incurred for a matrimonial objective and thus ruling that she had no involvement in Mr Hicks debt to Mr S. His Honour also contended that the trustee of bankruptcy would find itself in no better position if the order were set aside.
At trial, the Trustee subsequently argued that the consent orders should be set aside. In doing so, the Trustee asserted that the parties to the consent orders had sought to defeat a creditor by not disclosing that Mr S was suing Mr Hicks for $606,000 or notifying Mr S of the orders they proposed.
Thus, the court concluded that the Trial Judge had not taken into account the likely outcome of the property settlement proceedings in the event that the orders were set aside. Ultimately, the court held that the debt of $606,000 was incurred during the marriage and the projects which were linked to the loan were intended to benefit the marriage. On these grounds, the court allowed the appeal, ordering the proceeding be partially remitted for rehearing on the basis that there was a miscarriage of justice pursuant to s79A(1)(a) of the Family Law Act 1975 (Cth).
Expert determination – does ‘according to law’ mean free from legal error?
A common form of alternative dispute resolution is to have a dispute decided by an expert. The advantages of this method are that it is usually faster and less expensive than taking your dispute to court. Another advantage is you can appoint an expert with specialist knowledge of the industry that a judge may not have.
One important question regarding this process is how accurate the expert has to be in applying. The general consensus is that unless the expert has legal training, their determination may not be a truly accurate representation of the law. A recent case in the New South Wales Supreme Court does however provide guidance on this issue.
The case of Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576 concerned a challenge to an expert determination of a building contract dispute. A clause in the contract provided that before proceeding to court or arbitration:
(i) Any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to an expert in accordance with, and subject to, The Institute of Arbitrators & Mediators Australia Expert Determination Rules.
A dispute arose and was duly referred to an expert who found in favour of the builder. This determination was then challenged by the landowner on the basis that the expert had made an error of law when making their determination. The landowner argued that under Rule 5.1 of Arbitrators & Mediators Australia Expert Determination Rules, the expert was obliged to reach a decision free from legal error.
Hammerschlag J rejected this argument. His Honour found that in the context of the Expert Determination Rules “… the words ‘according to law’ mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated”.
His Honour further commented that the landowners interpretation place an immense burden on experts and would be commercially inconvenient as “[i]ts acceptance would have the consequence that the Determination is, in effect, subject to appeal on any and every question of law determined or legal precept relied on by the Expert, which, if determined or seen differently, would lead to a different result”.
His Honour concluded by stating that the expert determination process is “… no more than a private contractual mechanism to which parties agree and which, as is dealt with above, does no more than create binding contractual obligations. It has no statutory backing as a process. It is not a process which resolves any dispute by the exercise of judicial, quasi-judicial, administrative, statutory or other power or jurisdiction.”
Ultimately, this decision highlights that the expert determination process is not judicial in nature and will therefore be unlikely to be held to the same standards as a Court or Tribunal. As the process is not deemed to be judicial, participants will generally not have any form of appeal from a determination unless this is provided for in their contract.
VSCA highlights the importance of distinguishing between debt and damages in debt recovery claims
In the matter of Yang v Finder Earth Pty Ltd [2019] VSCA 22, the Victorian Supreme Court of Appeal set aside a default judgement for recovery of an unpaid debt on the basis that the underlying claim was better characterised as one for damages. Ultimately, the case illustrates the importance of properly and clearly pleading a claim when seeking to recover a debt through litigation.
The case ensued after the parties entered into two agreements where the second respondent, Ms Luo, loaned Mr Yang two sums of money totalling $700,000. The terms of the agreements noted that the money was to be applied solely for the purpose of establishing a business. Relevantly, the business was established for the purpose of obtaining an investment-based migrant visa for Ms Luo and her family.
Pursuant to the terms of the agreement, Mr Yang guaranteed and indemnified Ms Luo for the money she lent and for ‘any further loss and damage she sustained’ in connection with the agreement. If the agreement was breached by Mr Yang, all funds lent to the company in advance were to be returned to Ms Luo.
Mr Yang was alleged to have misapplied both the loan money and business revenue for his own benefit, constituting a breach of the agreement. Proceedings were initiated in the County Court where Ms Luo pleaded on the following basis:
By reason of the conduct alleged, Luo has suffered loss and damage being:
(a) a loss of the $700,000; and
(b) exposure to creditors of Finder Earth for which she has provided personal guarantees and has or will need to compensate.
The relief sought by Luo was particularised in the following terms:
$700,000 owing to [Luo] under the Finder Earth Loan Agreement and LL Loan Agreement.
…
A declaration as to the validity of the Yang/Luo Guarantee and Indemnity and an order for such loss and damage owing pursuant to the Yang/Luo Guarantee and Indemnity.
Damages.
Mr Yang’s defence was struck out pursuant to rule 21.02 of the County Court Civil Procedure Rules 2008 (Vic). In the absence of a defence, Ms Luo entered default judgment for $700,000 plus interest and costs. Mr Yang applied to set aside the default judgment, arguing the claim was not for recovery of debt under the guarantee and indemnity but rather a claim for damages arising from Mr Yang’s alleged misapplication of the loan. The application was refused on the basis that Ms Luo’s pleading made it sufficiently clear the claim was for a fixed monetary sum. Mr Yang appealed.
The Court of Appeal allowed Mr Yang’s appeal agreeing that while the foundation of Ms Luo’s claim was the guarantee and indemnity, the money sought was the ‘loss and damage’ suffered as a result of misapplication of the loan. On this basis, Ms Luo was not entitled to enter judgment in the manner she did. The Court noted that had the pleadings mentioned a debt arising under the guarantee by reason of default under the loan agreement, their conclusion would have been different. However, this was not the case as ‘loss and damage’ had been sought instead.
Ultimately this case serves as a reminder to creditors that when seeking to recover a debt through the courts, it is crucial that the relief sought is properly and clearly expressed as a fixed sum owing and not as a recovery of damages suffered by reason of non-payment. If the claim is not properly pleaded, a judgement obtained will be open to scrutiny from higher courts.
Perth accountant sentenced to 4 years imprisonment for $250k tax fraud
A Perth accountant has been sentenced to 4 years imprisonment for tax fraud after he was convicted of both obtaining and attempting to obtain over $250,000 from his clients and the ATO.
On 21 February 2019, the Perth District Court heard that during his time as an accountant at Finkelstein Hickmott between May 2016 and July 2017, Shane Read lodged 21 of his client’s tax returns without authorisation and accessed four client’s Activity Statements.
Moreover, Mr Read sought to obtain further funds from the ATO via an unauthorised BAS lodgement containing false information, following which an ATO audit revealed that he had obtained financial advantage committing fraud in the name of unwitting clients. Relevantly, Mr Read was found to have altered bank account details to divert ATO refunds to his personal bank account without his client’s knowledge.
ATO Assistant Commissioner Tim Roach has welcomed the sentence, asserting that the ATO “…will continue to work with tax professionals to ensure the integrity of the system and to protect honest tax professionals and the community from these types of crimes.”
