Legal Costs and Statutory Demands

Introduction

Law firms can find themselves frustrated by the actions of a client (or more often a former client), in respect of payment for fees. As a result, firms can find that it is necessary to take legal action to recover fees from those former clients.

In the matter of Ausurv Operations Pty Ltd [2017] VSC 389 ("Ausurv"), Gardiner ASJ of the Victorian Supreme Court confirmed that great care should be taken by law firms in utilising a C reditor's Statutory Demand ("Statutory Demand") pursuant to section 459E of the Corporations Act, 2001 (“the Act”) to seek to recover those fees.

Facts

In Ausurv:

Swanston Joe Pty Ltd ("Swanston Joe") acted for Ausurv Operations Pty Ltd (“Ausurv Operations”) in 2015 - 2016;

In early February 2017, Swanston Joe advised Ausurv Operations that it would cease acting for that company due to a conflict;

On 6 February 2017, Swanston Joe issued a tax invoice to Ausurv Operations seeking approximately $8,500 for legal fees;

On 6 February 2017, a representative of Ausurv Operations requested an itemised bill in taxable form from Swanston Joe;

Between 6 & 13 February 2017, there were disputes between a representative of Ausurv Operations and a member of Swanston Joe, reg arding the form of the bill for legal fees, and whether itemisation was required;

On 14 February 2017, Swanston Joe served Ausurv Operations with a Statutory Demand;

On 16 February 2017, the solicitors for Ausurv Operations protested the use of a Statutory Demand in circumstances where there had been a request for an itemised account under the Legal Profession Uniform Law, which Act also provided that a law practice must not commence legal proceedings to recover legal costs until at least 30 days after the client received an itemised bill;

On 22 February 2017, Ausurv Operations lodged a complaint with the Legal Services Commissioner, regarding Swanston Joe’s conduct in seeking to recover the legal costs in that manner. Swanston Joe disputed the jurisdiction of the Legal Services Commissioner to determine the matter;

On 24 February 2017, Swanston Joe refused the request for an itemised account; and

On 7 March 2017, Ausurv Operations filed the proceedings necessary to set aside the Statutory Demand issued by Swanston Joe.

Statutory Demand

The Statutory Demand process is a highly litigated, and commonly used “tool” to recover outstanding debts due by corporate bodies. The Statutory Demand requires either an affidavit (or judgment) in support. In Ausurv, there was no judgment, and therefore an affidavit in support was required to be sworn by a representative of Swanston Joe in support of the Statutory Demand.

It is essential that the affidavit in support states that "there is no genuine dispute about the existence or the amount of the debt". Once again, that is a well litigated area. See Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262.

In Ausurv, the Statutory Demand was only served 8 days after the original invoice was issued. The deponent to the affidavit could not have clearly been able to depose that there was no genuine dispute on foot. Further, it was clear from the correspondence between 6 & 13 February 2017, that there were disputes being raised by Ausurv Operations regarding the amounts invoiced to that company.

Legal Costs Regime

In each State or Territory of Australia, there is a clearly delineated process for the recovery of legal fees by a legal practice. In most cases, a client has the right to request an itemised bill pursuant to the relevant Legal Practice Acts1. The legal practice is then prevented from taking any steps to recover costs whilst the client considers the itemised bill. In NSW, Victoria and SA, the period of time is 30 days. That period of time is designed to enable clients to carefully consider the costs incurred to determine whether they are liable for those costs. Further, it provides clients with an opportunity to take advice from an alternative practitioner regarding the costs claimed.

That 30 day period may see dis putes being raised by the client regarding the costs claimed by the legal practice.

Decision

The Statutory Demand was set aside and an order was made that Swanston Joe pay Ausurv Operations’ costs on an indemnity basis.

His Honour Gardiner ASJ was extremel y critical of the actions of Swanston Joe. He stated:

"I regard the conduct of [file principal] and Swanston Joe in these circumstances as quite high - handed and that it was completely inappropriate for [file principal], the former solicitor for Ausurv, to have served and maintained the statutory demand. The proper course would have been to provide a bill in itemised form and the other documentation sought by Ausurv. In my view, the demand, which was for only $8,520.40, should never have been served by Swans ton Joe and an order for indemnity costs in favour of Ausurv is warranted in this instance. The letter from Ausurv's solicitors of 16 th February 2017 informed Swanston Joe in clear terms of the relevant case law relating to service of statutory demands in that context and the provisions of the Legal Profession Uniform Law as to the right to be provided with a bill in itemised form".

In the Judgement, His Honour also referred with approval to decisions including Callite Pty Ltd v. Adams [2001] NSWSC 52 (“ Callite ”), wherein Statutory Demands issued by legal practices were set aside pursuant to section 459J(1)(b) of the Act, as against public policy.

That section of the Act provides the Court with discretion (on an application under section 459 G of the Act), t o set aside a demand if it is satisfied that there is ‘some other reason’ why the demand should be set aside.

Public policy considerations

In Callite and Jarena Pty Ltd v Scholl Nicholson Pty Ltd (1996) 19 ACSR 425 (“ Jarena ”), the Courts held that the Statutory Demands in those matters should be set aside on the basis that public policy should prevent the usurping of the relevant Legal Practice Acts that enabled the request and provision of itemised bills of costs.

Of course, there is no impediment to such a process if the costs had already been agreed through the Legal Practice Conduct Commissioner, or a judgment had been entered after the relevant time periods had expired.

Conclusion

Lawyers are often held to a somewhat higher account in respect of collec tion of their outstanding fees. That is because it is considered that some clients do not understand the nature of legal cost charging and the charges contained in their bills. Therefore, they ought to be entitled to question the appropriateness of any ite m claimed by their lawyer.

Therefore, lawyers ought to be extremely reticent in issuing Statutory Demands to recover their costs, without allowing the relevant time periods to expire. The significant nature of an ‘act of insolvency’ – being the presumptio n that arises following the expiration of the Statutory Demand period – means that great care should also be given to creating that presumption in a client. The other matter of concern is the costs that are incurred in setting aside a Statutory Demand.

It would be unusual to apply to set aside a Statutory Demand and not face costs in the order of $15,000 or $20,000 for that process. The failure to do so may lead to even graver outcomes.

It is respectfully suggested that law firms ought to avoid using Statut ory Demands to seek to collect their outstanding costs until a judgment or a determination by the Commissioner has been reached.

 

1 In NSW and Victoria – Legal Profession Uniform Law; In SA – Legal Practitioners Act, 1981 and Schedule 3 thereto. In each of ACT, NT, Qld, Tasmania and WA there are relevant Legal Profession Acts.

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Kym Ryder

Kym Ryder

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