Arrogante & Ors v AOS Group Aust Pty Ltd

APPLICANT M F Holmes QC and D P Robinson of counsel SOLICITORS Paul Bard Lawyers LEGAL REPRESENTATIVES: RESPONDENTS A F Fernon of counsel SOLICITORS Truman Hoyle Lawyers

INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: MARKS J Thursday 11 September 2003 Matter No IRC 4249 of 2001

JOEL ARROGANTE & ORS v AOS GROUP AUSTRALIA PTY LTD (in liquidation) and AOS GROUP STAFF PTY LTD (in liquidation) Application under s 106 of the Industrial Relations Act 1996

1 In these proceedings 22 persons seek certain relief under s 106 of the Industrial Relations Act 1996 ("the Act") against two respondents. The first respondent is AOS Group Australia Pty Ltd (in liquidation) ("New AOS") and the second respondent is AOS Group Staff Pty Ltd (in liquidation) ("AOS Staff").

2 Sections 105 and 106 of the Act are in the following terms: 105 Definitions In this Part: contract means any contract or arrangement, or any related condition or collateral arrangement, but does not include an industrial instrument. unfair contract means a contract: (a) that is unfair, harsh or unconscionable, or (b) that is against the public interest, or (c) that provides a total remuneration that is less than a person performing the work would receive as an employee performing the work, or (d) that is designed to, or does, avoid the provisions of an industrial instrument.

106 Power of the Commission to declare contracts void or varied (1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract. (2) The Commission may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason. (3) A contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time. (4) In considering whether a contract is unfair because it is against the public interest, the matters to which the Commission is to have regard must include the effect that the contract, or a series of such contracts, has had, or may have, on any system of apprenticeship and other methods of providing a sufficient and trained labour force. (5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case.

3 I shall describe the nature of the relief sought later in these reasons for judgment. It is first necessary to set out the factual background against which the proceedings are brought. I should state that the Court had previously ordered that the proceedings might go forward as currently constituted and that Santow J in the Supreme Court of New South Wales granted leave to the applicant to institute these proceedings against the respondents pursuant to s 500(2) of the Corporations Act by order made on 30 April 2001.

4 Each of the 22 applicants had been employed for varying periods by AOS Group Pty Ltd which carried on a business of digital and offset printing and binding. That company first commenced business operations in the early 1970's. It experienced severe financial difficulties between late 1997 and early 1998 when a substantial customer, IBM Australia Ltd changed the basis upon which it was prepared to contract with that company. The company was placed into administration. The administrator tried to sell the business without success. He then approached Mr Peter John Iliffe who had been the General Manager of the company to see whether Mr Iliffe would be interested in acquiring the assets of the company. Mr Iliffe approached Mr Andrew Pierce a chartered accountant who had been the auditor of the company. Mr Pierce in turn approached a number of persons, some of whom agreed to participate in a consortium to acquire the business. Ultimately the consortium negotiated to acquire the business of the company for $375,000 provided that the purchaser assumed liability to pay outstanding employee entitlements which, on the evidence, appear to have been assessed at between $120,000 and $180,000.

5 It was the evidence of Mr Iliffe that the consortium of purchasers decided at a meeting in about late September 1998 to establish two separate companies, one to acquire the assets and manage the financial operations of the business and the other to employ and manage the staff. This was said to have been justified on the basis that the investors wanted nothing to do with the employment and management of staff and the day-to-day operations of the business. The evidence of Mr Pierce confirmed this. He deposed to a conversation with Mr Iliffe to the following effect: "….we don't want to be involved in the day-to-day operations of the business. We are only interested in the business from a financial point of view. We don't know anything about the business. You have been involved in the business for years, and we would like you to remain in control of its day-to-day operations. You know what you need to do, what sort of staff to employ, about the stock, suppliers and all those things." The intention was that the investors would provide the business "….with management advice. We have to keep the two areas separate so that we can see how much work is being put into the business." It was proposed by Mr Pierce, according to his evidence, that one company managed by Mr Iliffe could look after the day-to-day operations and the other company could financially manage the business. He said: "This way, we can have each company valued separately, and if later any of us want to sell, we will be able to sell our share without confusion."

6 It was the evidence of Messrs Iliffe and Pierce that as a result of these conversations and discussions generally between investors that two companies were formed. The first, New AOS was to acquire the business from the administrator. There were five separate shareholders representing different investor interests, including interests representing the Iliffe and Pierce families. New AOS was registered on 1 October 1998 and on 9 October 1998 a number of directors were appointed including Messrs Pierce and Iliffe. Mr Pierce was appointed secretary.

7 AOS Staff was registered on 12 October 1998. Its sole director and secretary and sole shareholder was Mr Iliffe.

8 In the course of cross-examination Mr Pierce was referred to a document entitled "AOS Staff Structure" which he said represented part of notes that he had made concerning discussions held on 26 September 1998 with investors in New AOS. Under the heading "Shareholders of AOS Staff" were these comments: "Same as "AUST" or is this detrimental? Under new corporate law if shareholders are the same as "AUST" would this be seen as a subsidiary of "AUST" and therefore "AUST" would be liable for any debts incurred and therefore defeat the purpose for it? If Peter Iliffe is the only shareholder would this get around the problem?"

9 The minutes document then refers to a number of positions and contains the name of a person or entity with respect to each of those positions. Under the positions of directors, secretary and chairman the name Peter John Iliffe was inserted.

10 Mr Pierce said in cross-examination that he had raised the question of shareholders as an issue. He denied vehemently however that AOS Staff was structured in this way in order to quarantine any entitlement that employees might have for payment of remuneration and other benefits either by AOS Staff or their former employer so as to ensure that New AOS would avoid any liability for any such entitlement.

11 For my part, I cannot accept the explanation given by Messrs Pierce and Iliffe for the structure adopted as being consistent with ordinary business practice. If the intention was, as Mr Pierce said, to have one company managed by Mr Iliffe to "look after the day-to-day running of the business" and another to "manage the finances" this was not achieved by the structure which the consortium agreed to put in place. AOS Staff could not under any circumstances be said to be one which looked after the day-to-day running of the business. Indeed, it was envisaged that all it would do would make its employees available for the purpose of the operation of the business. New AOS could not under any circumstances be described as a company whose sole purpose was to manage the finances of the business because presumably, it was to be involved in all aspects of sales and production. There was never, on this basis, any question of having "each company valued separately" because AOS Staff would obviously have no value in the sense that its only assets were its contracts of employment with each of the employees, and its relationship with New AOS.

12 I infer that it is more likely than not that AOS Staff was established with a structure which was designed to ensure that it would not be seen as a subsidiary of New AOS and that employee benefits would be quarantined. As will be seen later in these reasons for judgment this inference is significant for the outcome of these proceedings on one basis, but is not conclusive of the outcome of these proceedings.

13 A meeting of creditors of AOS Group Pty Ltd was held on Friday 25 September 1999 at the offices of the administrator. The meeting was advised that a consortium had offered to acquire the business of the company for the sum of $375,000 and that the "price includes the unencumbered assets, the assignment of the leased assets, the assumption of all staff entitlements, the assignment of the premises lease, goodwill and any intellectual property." The Minutes of the meeting state that "the chairman explained that the purchaser would assume employee entitlements which currently total approximately $180,000 and stock on hand at settlement will be paid for at cost. The total offer will yield creditors approximately $600,000." The meeting agreed to accept the offer for the purchase of the business provided that an agreement for the sale was entered into by October 1998.

14 A business sale agreement was entered into between AOS Group Pty Ltd (deed administrator appointed) and New AOS as purchaser of the business. Amongst the provisions of the agreement the purchaser was required to offer each existing employee employment in the business. The purchaser was also said to be solely responsible for outstanding entitlements owed to those employees who transferred across to New AOS including all outstanding annual holiday pay, long service leave pay and the like.

15 By letter dated 30 September 1998 Mr Iliffe as Managing Director of AOS Staff wrote to each of the employees to whom offers of employment would be made. The letter said as follows: "Offer of Employment. AOS Group Australia Pty Limited is acquiring the business of AOS Group Pty. Limited (Administrator Appointed) Conditional upon completion of the purchase, AOS Group Staff Pty. Limited offers you employment in the new business with AOS Group Staff Pty. Limited with effect from the completion date, expected to be Friday 2 October 1998. If you accept this offer, your employment terms and conditions will be the same as those applying to your employment with AOS Group Pty. Limited (Administrator Appointed). You will have continuity of all your entitlements, accrued and continuing, including annual holiday pay and long service leave pay, just as if each entitlement had been accrued by you while in the employment of AOS Group Australia Pty. Limited. Your base hours of employment will be 9.00am to 5.00pm from Monday to Friday with a fifteen minute tea break and a thirty minute lunch break. Overtime will be by prior negotiation. If you accept this offer, AOS Group Staff Pty. Limited will procure your unconditional release from your employment by AOS Group Pty. Limited (Administrator Appointed) from the time of completion of the sale. If you wish to accept this offer, could you please let AOS Group Staff Pty. Limited know as soon as possible, preferably within 24 hours, by signing and returning the attached copy of this letter."

16 Mr Iliffe also spoke to some or all of the employees concerned. In the course of these proceedings, some of the employees said in their affidavit evidence that it was not made clear to them that they were being employed by AOS Staff and that they thought and assumed that they were being employed by New AOS. However those employees who were cross-examined conceded in the main that they did not recollect exactly the terms of their conversation with Mr Illiffe. Mr Illiffe under cross-examination also said that he had no independent recollection now of the precise or even general terms of his conversations with the employees concerned.

17 For my part on the basis of the evidence I conclude that each of the employees concerned was made aware through the letter of 30 September 1998 that he or she was to be employed by AOS Group Staff Pty Limited and not by New AOS.

18 Each of the employees concerned was asked to sign a contract of employment with AOS Staff and most signed that document.

19 After the completion of the contract for purchase on 14 October 1998 New AOS entered into a form of agreement with AOS Staff. The agreement provided that New AOS appointed AOS Staff as "an independent consultant for the purposes of providing management advice, assistance and services in connection with the operation of (New AOS) business and staff accept such appointment." Of particular significance is clause 3 of the agreement, which is in the following terms: "In consideration of the provision of Staff's services (New AOS) agrees to pay to Staff an annual management fee of such amount as may be agreed from time to time and which represents the cost to Staff by way of wages of employees and other expenses of Staff in and about providing the services to the business. This fee shall be paid weekly in arrears with the first payment to be made on the 21 day of October 1998."

20 Unfortunately, the business conducted by New AOS eventually failed. An Administrator was appointed to New AOS. Eventually, a liquidator was appointed to New AOS and to AOS Staff.

21 There are no assets in AOS Staff and the liquidator of that company did not participate in the proceedings, submitting to any order that this court may make. However the proceedings were defended by the liquidator of New AOS for reasons which it is now necessary to discuss. They are related to the relief sought by the applicants in these proceedings.

22 In the summons, the applicants seek the making of a number of orders as follows; "1. An order that: (a) the Consultancy Agreement made between the First and Second Respondents in or about October 1998; and (b) the Employment Contracts between each of the applicants and the Second Respondent made in or about October 1998, are unfair contracts within the meaning of s 105 of the Industrial Relations Act 1996 . 2. An order varying the terms of the Consultancy Agreement between the First and Second Respondents, from the commencement of such agreement on 14 October 1998, by: (a) deleting the words "independent consultant" in clause 1, and inserting the word "agent" in their place; (b) deleting clause 5 and inserting the following: "The relationship between Staff and Group is that of agent and principal." 3. Further, an order varying the terms of the Employment Contracts between each of the applicants and the Second Respondents, as from the commencement of each such contract, by adding the following provision: '15.1 This contract is made by AOS Group Staff Pty Limited (ACN 084 708 633) as agent for an on behalf of AOS Group Australia Pty Limited (ACN 084 580 496), and for the purposes of this contract the expression "Employer" shall mean AOS Group Australia Pty Limited.' 4. An order that the First Respondent pay to each of the Applicants respectively, the amount specified against each Applicant's name in Schedule B. 5. An order for costs."

23 The effect of what is sought by way of orders under s 106 of the Act, is to create the relationship of employer and employee between New AOS and each of the applicants who were employees of AOS Staff. The applicants seek to achieve this by asking the Court to make a finding that the totality of the circumstances which I have outlined create relevant unfairness for the purpose of s 106 and this will enable and entitle the applicants to have the agreement made between New AOS and AOS Staff varied. The variation would have the effect of making AOS Staff the agent for New AOS as principal in entering into each of the contracts of employment with the applicants. Therefore, the result would be that there were in effect contracts of employment between each applicant and New AOS. On this basis, each of the entitlements owing to each of the employees would take priority over unsecured creditors in the liquidation of New AOS. A report of the liquidator of New AOS dated 3 January 2003 indicates that a priority claim for employee entitlements totalled $322,766.00. If the applicants are totally successful in these proceedings and other employee entitlement benefits are payable as set out in the report the possible distribution to unsecured creditors will be 12.54 cents in the dollar. This would increase to 32.29 cents in the event that these claims fail. It is for this reason that the applicants have formulated their claims in this way.

24 It is first necessary to identify the contract with respect to which a finding of unfairness is sought and which is to be varied in these proceedings. The applicants identified the contract as defined in s 105 of the Act (previously extracted) as being the arrangement constituted by the two contracts namely the contract between New AOS and AOS Staff and the individual contracts of employment between AOS Staff and each employee. It was this arrangement by which AOS Staff employed the persons who were to perform work for and within the operations of New AOS. Such an arrangement is one coming within s 106(1), because it is one whereby work was performed by persons in the printing industry. I accept this submission and proceed on this basis. In doing so it is clear, also, that each contract between AOS Staff and each employee was a contract within s 106(1) and it is arguable that each of these contracts of employment was collateral to the contract between AOS Staff and New AOS and in addition, a "related condition" to the contract between AOS Staff and New AOS. However, because of the view which I have taken with respect to the disposition of these proceedings it is not necessary that I pursue this aspect further.

25 It is then necessary to deal with the question of alleged unfairness.

26 The relevant principles which apply to the proper approach to the application of s 106 are well established. A convenient starting point is contained within the joint judgment of Fisher CJ and Hungerford J in the Full Court of the Industrial Court of New South Wales in Baker v National Distribution Services Ltd (1993) 50 IR 254. At 271 their Honours said: "The test of unfairness within the meaning of s 88F of the Industrial Arbitration Act, and hence s 275 of the present Act, has received much attention by the Court and by the previous Industrial Commission over very many years, but, in our review of the cases, the approach stated by Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 over 26 years ago has endured; his Honour commented (at 374) that unfairness of a contract or arrangement was to be determined according to "the common sense approach characteristic of the ordinary juryman ….It is a plain matter of morals not law." His Honour cautioned, however, (at 374,375) that the section's "massive power makes it imperative that it should be exercised with proper restraint … it should not permit itself to become a refuge for those who are merely disgruntled with a bargain entered into on even terms. … the discretion should be exercised to protect victims of wrong dealing not to prescribe anodynes." Those words by his Honour echoed what had been said earlier by Beattie J in Agius v Arrow Freightways Pty Ltd [1965] AR (NSW) 77 at 89 that it was a matter of deciding "in each particular case by the application of the tribunal's common sense and sense of justice whether a particular transaction is unfair, harsh and unconscionable". The nature of the unfairness attracted by s 88F was considered later by the Industrial Commission in Court Session (Perrignon and Dey JJ, Cahill J dissenting) in A & M Thompson Pty Ltd v Total Australia Limited [1980] 2 NSWLR 1 at 13 as follows: "It has been said that fairness is determined by the commonsense approach of a juryman and that it is a moral and not a legal issue ( Davies' case). Whether this be so or not, it does seem that in distinguishing between what is fair and what is not fair the Judge must apply standards which appear to him to provide a proper balance or division of advantage and disadvantage between the parties who have made the contract or arrangement. In doing so he would always have to bear in mind the conduct of the parties, their capability to appreciate the bargain they had made and their comparative bargaining positions when entering into the contract or arrangement." (at 271-2).

27 In determining whether there is an unfair contract for the purpose of proceedings brought under s 106 and especially taking into account subs (2), the Court is required to exercise a value judgment reflecting contemporary community values derived from the commonsense approach characteristic of the ordinary, reasonable, hypothetical "standard" member of the community. The value judgment must obviously take into account the totality of the circumstances of the relationship between the parties and the totality of the interests of each of the parties.

28 In submitting that the relevant unfairness existed Mr Holmes QC who together with Mr D Robinson appeared as counsel for the applicants relied on the fact that outstanding entitlements of employees of the former business were always significant matters in connection with the sale of the business to New AOS. That sale and purchase was negotiated on the basis that New AOS would take over all outstanding entitlements. Indeed, this was emphasized to employees in the letter of 30 September 1998. As the operating company, New AOS held the assets of the business and was in receipt of the earnings of the business. Not only did it agree to meet outstanding entitlements of the former employees of the vendor company but it had the resources to meet those entitlements. Representations concerning the protection of their entitlements were made to employees at the time that they entered into their contracts of employment with AOS Staff. There is evidence that employees who did not transfer across to AOS Staff were paid out their full entitlements as was the case of employees who left the employment of AOS Staff prior to liquidation of that company. This is compounded by the fact that the purchase price of the business comprehended within it as consideration the assumption of responsibilities to pay out employee entitlements. In utilising a two company structure those persons who were involved in the negotiation of the acquisition of the business were able to quarantine employee benefits with the result that there were no assets against which any long-standing or more recent employee entitlements might be enforced. The artificial nature of AOS Staff was emphasized in that it owned no assets, it did not charge any management fee nor make any profit and was a mere conduit for the receipt of moneys from New AOS against obligations to pay moneys to employees, those employees providing the necessary labour to enable New AOS to function.

29 In my opinion it is a contemporary community value held generally, if not substantially, by the citizens of the State of New South Wales that employees are fundamentally entitled to receive outstanding entitlements derived from legal rights. It was unfair according to these values that those persons responsible for the implementation of the purchase of the business on the basis that existing employee entitlements would be protected would be able to utilise a structure that would have the effect of depriving employees of the ability to gain the priority which the law attaches to outstanding employee benefits as embraced in the Corporations Act.

30 I agree with the submissions made on behalf of the applicants that the relevant unfairness exists in the manner in which I have described and I find accordingly.

31 It is now necessary to consider what consequential orders should be made by way of variation, no order for avoidance being sought by the applicants.

32 I have previously described the variations sought by the applicants and the effect of those variations in para 22 and 23 above. It is appropriate that I make reference here to one additional piece of evidence. In the course of his affidavit evidence Mr Pierce said that it was "always the intention of the promoters of (New AOS) that the accrued entitlements of the Applicants in (the former company) would be paid by (New AOS) to (AOS Staff) as and when they fell due. From the best of my recollection, accrued entitlements of all employees who left the New AOS business (prior to its liquidation) were paid in full." Mr Pierce also said: "(New AOS) had initially made, in its financial statements, provision for employee entitlements as at 14 October 1998, as all employees were employed by (AOS Staff) and had entered into contracts of employment with (AOS Staff). The allowance made in the (New AOS) statements was incorrectly entered, and later excised, and entered into the accounts of (AOS Staff)." Mr Pierce conceded in cross examination that thereafter there was no accounting entry to reflect the ongoing obligation of New AOS to pay outstanding entitlements to employees of AOS Staff under paragraph 3 of the agreement entered into between the two entities, which I have previously referred to. Whilst this is not necessarily significant for the purpose of these proceedings, it would appear that the reference to any outstanding contractual obligation, particularly of an accrued kind with respect to the obligation to the employees of AOS Staff resulted in a misrepresentation of the contingent indebtedness of New AOS as reflected in its accounts.

33 The totality of the evidence is to the effect that the sole function of AOS Staff was to employ persons who would be utilised for the purpose of the business of New AOS. I infer that when carrying out their duties in and about the New AOS business and when reporting ultimately to Mr Illiffe, employees were under the general control and direction of officers and employees of New AOS. On this basis it is not, in pragmatic terms, a large step to regard these persons as being, in effect, employees of New AOS. Indeed, such a result would ameliorate the effects of the unfairness which I have previously found to exist. If this can be achieved by varying the contract between New AOS and AOS Staff in the manner suggested, then, consistent with the finding of unfairness and acting "according to equity, good conscience and the substantial merits of the case" as required by s 163(1)(c) of the Act, such a result should be achieved.

34 As I have earlier said, the applicants submitted that the consequences of making the variations sought namely by providing that the contract was made by AOS Staff as agent for and on behalf of New AOS would have the effect at law of rendering the employees of AOS Staff as employees of New AOS. This is because the contracts between each of the applicants as employees and AOS Staff would have been entered into by AOS Staff as agent for a disclosed principle namely New AOS. It was submitted by Mr A Fernon of Counsel who appeared for the liquidator of New AOS that this was impermissible because it involved the making of a new contract which this court was not empowered to do under s 106 of the Act, that power being limited to the avoidance and variation of existing contracts. In making this submission Mr Fernon emphasised that the consequences of the variations would be to create contracts of employment between New AOS and each of the applicants where none previously existed. I agree that if the variations sought were directed solely to each of the contracts of employment between each of the applicants and AOS Staff, then it would be arguable that this would be beyond the jurisdiction and power of this Court, which is limited to variation or avoidance of contracts as defined. However, the fact that an order otherwise within jurisdiction and power will have the effect of creating contracts where none previously existed does not in my opinion taint the making of such an order. Accordingly, if the arrangement previously identified is varied so that the individuals contracts made by AOS Staff with each of the applicants are made as agent for New AOS then, such an order is permissible notwithstanding the effect contended for by Mr Fernon. I should add, for completeness, that Mr Holmes did not concede that the effect contended for constituted the making of new contracts of employment and submitted that in all the circumstances the consequences might be characterised as a variation.

35 I am fortified in the conclusion to which I have come because in the circumstances of these proceedings New AOS is clearly a party to the arrangement which has been identified, and which I hold should be varied as sought by the applicants.

36 It is then necessary to consider whether any consequential relief by way of monetary order should be made. Orders were sought on behalf of each of the applicants for the payment of moneys by the liquidator of New AOS for monetary sums identified in the summons. I do not understand that the quantum of the moneys claimed was in dispute for the purpose of these proceedings. Accordingly I propose to make orders in terms of the monetary amounts sought.

37 Finally, the applicants sought a global order for costs and this was not opposed in the event that the applicants were successful in the proceedings. I should note for completeness that the applicants did not seek any order for interest.

38 I make the following orders consequent upon the finding that the arrangement constituted in the manner set out earlier in these reasons for judgment was unfair for the reasons given. 1. The arrangement is varied by varying the terms of the consultancy agreement between AOS Group Australia Pty Ltd (in liquidation) and AOS Group Staff Pty Ltd (in liquidation) from the commencement of such agreement on 14 October 1998 by deleting the words "independent consultant" in clause 1, and inserting the word "agent" in their place, and by deleting clause 5 and inserting the following: "The relationship between Staff and Group is that of agent and principal." 2. I also vary the arrangement by varying the terms of the employment contract between each of the applicants and AOS Group Staff Pty Ltd (in liquidation) from the commencement of each such contract by adding the following provisions: 15.1 This contract is made by AOS Group Staff Pty Limited (ACN 084 708 633) as agent for an on behalf of AOS Group Australia Pty Limited (ACN 084 580 496), and for the purposes of this contract the expression "Employer" shall mean AOS Group Australia Pty Limited.' 3. AOS Group Australia Pty Ltd (in liquidation) shall pay to each of the applicants respectively the amount specified against the name of each applicant in schedule B to the summons. 4. AOS Group Australia Pty Ltd (in liquidation) is to pay the costs of the applicants as assessed in default of agreement. 5. I grant liberty to apply with respect to the quantum of the amounts claimed and with respect to costs. ___________________________

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