The perils of issuing a statutory demand for fees
In this first of what is likely to be an ongoing series of articles, we look at the matter of Rusca Bros Services Pty Ltd v DLaw Pty Ltd, in the matter of Rusca Bros Services Pty Ltd  FCA 562 determined by Markovic J on 24 April 2019.
This matter in particular addresses issues of security for costs and a solicitors “fruits of the action” lien.
DLaw (Doyles Lawyers) appeared to assist Rusca on a dispute relating to Lendlease on a claim for additional excavation works.
At some stage, a deed of settlement was entered into between Lendlease and Rusca which provided that Lendlease would pay a settlement sum to Rusca in the amount of $1.3million.
DLaw served a statutory demand upon Rusca demanding payment of an amount of $383,573.66 alleged to be owing for legal costs. Rusca filed an originating application on 29 May 2018 seeking to set aside the statutory demand relying on s 459H or s 459J(1)(a) of the Corporations Act 2001 (Cth) (Act) or alternatively reduce the quantum of the Demand on the basis that, inter alia:
- DLaw did not provide it with an estimate of its total legal costs as required by s 174 of the Legal Profession Uniform Law (Uniform Law) relying on s 178(1)(c) of the Uniform Law which provides that where there has been non-compliance with disclosure obligations, such as those set out in s 174, a law practice must not commence or maintain proceedings for recovery of any or all of its legal costs until those costs have been assessed.
- there was a genuine dispute in relation to the existence or the amount of the debt claimed in the Demand within the meaning of s 459H of the Act, evidenced by the application for assessment of costs filed in the Supreme Court of New South Wales.
- there was an offsetting claim arising from DLaw’s failure to lodge an adjudication application on time; and
- there was “some other reason” to set aside the Demand within the meaning of s 459J of the Act, including that the Demand is said to be an abuse of process.
DLaw ultimately filed an amended interlocutory process seeking various orders including orders for discovery from Rusca (which were refused) together with orders:
- That the Plaintiff pay $383,573.66 into Court to secure the fees owed to the Defendant pursuant to section 1335 of the Corporations Act 2001.
- That the Plaintiff pay $25,000 into Court as security for the costs of proceedings pursuant to section 1335(1) of the Corporations Act 2001.
Fruits of the Action Lien
DLaw relied on the principles in Ex parte Patience; Makinson v The Minister (1940) 40 SR (NSW) 96 (Patience) in support of its claim citing Jordon CJ at pp100-101 who found
“A solicitor has no lien for his costs over any property which has not come into his possession. If, however, as the result of legal proceedings in which the solicitor has acted for the client, the client obtains a judgment or award or compromise for the payment of money, although the solicitor acquires no common law title to his client’s right to receive the money or to any part of that right, he acquires a right to have his costs paid out of the money.”
The nature of a solicitor’s “fruits of the action” lien, as referred to in the authorities, was considered in Firth v Centrelink (2002) 55 NSWLR 451;  NSWSC 564.
At  of Firth Campbell J observed therein that “[a] solicitor whose efforts result in the recovery of money for his client has an equitable right to have his proper costs and disbursements paid from the money so recovered”.
This matter helpfully details the propositions set out by Campbell J in Firth concerning the solicitors “fruits of the action” lien which are reproduced in an abridged form here:
- The solicitor’s right exists over money recovered through obtaining judgment in litigation, and also over money recovered through the settlement of litigation.
- It exists over money which is in the possession of the solicitor, and also over money which is in court and money which is owed to the client but not paid into court.
- The solicitor need not be still acting for the client at the time that the money was recovered.
- For the right to arise it must be shown that there is a sufficient causal link between solicitor’s exertions and the recovery of the fund.
- The quantum of money for which the solicitor has the equitable right is the amount which is properly owing to the solicitor by the client, whether that amount be ascertained by taxation of a bill of costs, or assessment, or pursuant to a costs agreement.
- The solicitor’s equitable right exists before the court is asked to intervene to protect it; it “arises immediately upon the recovery of monies through the exertions of the solicitor”.
- The right of the solicitor is one which the solicitor can enforce against the client, entitling the solicitor to an injunction to prevent the payment of the fund to the client without notice to the solicitor until such time as the quantum of the solicitor’s entitlement to be paid from the fund is ascertained:
Markovic J found in the current matter that DLaw had not established its right to the asserted lien as:
- The authorities suggest that the right to the lien exists over money recovered through the settlement of litigation. Here, there are no proceedings involving Rusca and Lendlease, no judgment and no settlement of a proceeding. The only evidence available is a deed of settlement and a letter from Lendlease. Taken at their highest those documents establish, at least in the case of the deed, that an amount described as a “Settlement Sum” was to be paid to Rusca within two business days of the signing of the deed. Thus, even accepting that DLaw could establish that Rusca’s settlement with Lendlease came about as a result of its efforts, that would not be enough. The right that DLaw seeks to enforce is not one which is connected with the proceeds of settlement of litigation.
- On the other hand, even if the lien extends to the proceeds of settlement of a dispute, without the precondition of a proceeding, there are other obstacles to DLaw establishing its asserted entitlements. In particular, there is no evidence that the “Settlement Sum” has been paid. However, even if it has, it is no longer in the possession of a third party, usually the judgment debtor (but in this case Lendlease), nor is it in the possession of the solicitors, that is, DLaw. If the “Settlement Sum” has been paid then it is with Rusca. The solicitor’s right exists over money owed to the client, paid into court or in the possession of the solicitor. None of these circumstances exist here.
Security for costs
After consideration of the financial circumstances of Rusca and finding that DLaw failed to show by “credible testimony” that there was reason to believe that Rusca would be unable to pay its costs if it is was unsuccessful, Markovic J went on to consider the status of Rusca in the proceedings and, following the matters of Aurora Networks Pty Ltd v Halbedl; In the matter of Aurora Networks Pty Ltd  FCA 632 and Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 622, found that Rusca was not in substance a plaintiff but was in the position of a defendant and was forced to commence the proceeding. As such, security should not be provided.
It should always be remembered that the issuing of a statutory demand should only be undertaken in relation to an undisputed debt and that the winding up process should not be used as a means of debt collection, following the approach of Sir George Jessel MR in Niger Merchants Co v Capper (1877) 18 Ch D 557 at 559 that:
[w]hen a company is solvent, the right course is to bring an action for the debt …[s]o, to pursue a winding-up petition in such circumstances is an abuse of the process of the court.
Whilst the stat demand process can seem attractive, quick and create an act of insolvency in 21 days, as can be seen here matters can rapidly “go south“ and result in complex litigation.
It should also be noted that the above matter is also only in “round 1” and the actual set aside application is yet to be heard, notwithstanding that it was filed almost exactly a year ago, the debt appears to currently remain outstanding and costs are no doubt escalating rapidly.
The hearing of the set aside application is now due to be heard in June or July this year. It will be interesting to see how the failure to disclose in relation to the estimate argument pursuant to the Uniform Law and the Assessment application plays out.
It also appears, from the details of the profit and loss and balance sheets exhibited in the matter [para19] that questions may be asked as to whether Rusca meets the tests of a large proprietary company as defined by 45A(3) of the Corporations Law 2001 and the implications that may have to the application.
Should you wish to discuss your options in recovering outstanding fees from your clients, or cost issues in general, please feel free to give the Cost consultant team at Pattison Hardman a call. We have over 30 years’ experience in achieving timely and cost effective results for the legal profession.