CGU Workers Compensation (NSW) v Rockwall Interiors Pty Ltd [2007] NSWSC 1393 | Case summary

6341/06 CGU WORKERS COMPENSATION (NSW) LTD - AGENT FOR THE NSW WORKCOVER SCHEME (ACN 003 181 002) JUDGMENT 1 HIS HONOUR: By an originating process filed on 18 December 2006, the plaintiff seeks an order under s 601AH(2) of the Corporations Act 2001 (Cth) directing the Australian Securities and Investments Commission to reinstate Northbridge Bricklaying Pty Ltd ("the Company"), and orders under s 461(1)(k) winding the Company up and appointing a liquidator. 2 The plaintiff seeks the reinstatement of the Company so that it can serve a premium adjustment notice on the Company arising out of a wage audit, and thereby make the Company liable for a substantial additional workers compensation premium. After the debt for the additional premium has crystallised, the plaintiff will seek an order winding up the Company and appointing a liquidator, who will investigate whether the Company has recourse to any assets to meet that debt. 3 The reinstatement of the Company will put it back in the hands of its directors. The directors oppose the making of the reinstatement and winding up orders, but they have indicated that if (contrary to their contention) the Company is reinstated, they will consent to be appointed as directors and they will not cause the Company to trade in the period between reinstatement and winding up. 4 On 30 January 2007 ASIC wrote to the solicitors for the plaintiff, in response to their request, indicating that it would not oppose the application for reinstatement if certain standard conditions were satisfied, including the condition that the company be wound up and a liquidator appointed. Subsequently the plaintiff's solicitor wrote to ASIC explaining the purpose of the application and stating that the former directors had no intention to trade in the interim period, and ASIC revised its attitude by letter dated 13 November 2007, in the following way: "ASIC does not oppose the reinstatement application even if condition 2 that 'the company is wound up and a liquidator appointed' is not met to the extent that the winding up application is adjourned so that proper notice of any outstanding debts can be provided to the company." 5 I heard the proceedings in the Corporations List on 26 November 2007, so far as they relate to the question of reinstatement, on the basis (accepted by the parties) that the application for a winding up order would be considered later, obviously only if the reinstatement application succeeded. Facts 6 The Company was formed on 26 June 2001 and carried on business as a bricklayer in Sydney, in residential home projects and unit construction. It had two directors, namely Kim and Richard Petherick, each of whom beneficially owned one of the Company's two issued ordinary shares. 7 The Company was deregistered on about 17 March 2006 under s 601AA of the Corporations Act. That section allows ASIC to deregister a company on the application of the company itself, or a director or member of the company, or the company's liquidator, only if: (a) all members of the company agree to the deregistration; and (b) the company is not carrying on business; and (c) the company's assets are worth less than $1000; and (d) the company has paid all fees and penalties payable under the Act; and (e) the company has no outstanding liabilities; and (f) the company is not a party to any legal proceedings (s 601AA(2)). The evidence does not indicate who made the application for deregistration (although the company was not in liquidation), nor am I aware of the evidence placed before ASIC when it made its decision to deregister. There is no evidence that Mr or Mrs Petherick was aware of the plaintiff's claim for additional premium, or the contents of the wage audit report that was the basis for it, at or prior to the date of deregistration. 8 The plaintiff was the workers compensation insurer of the Company during the policy years ending 21 February 2003, 21 February 2004 and 21 February 2005, and the Company paid policy premiums on the basis of declared wages in each of those years. There is some evidence to indicate that the Company ceased trading in December 2004 (that is, not long before the end of the third of those three policy years), although Mrs Petherick has given evidence that it did not cease to trade until the date of deregistration. I need not resolve that question. 9 On about 2 November 2005 the WorkCover Authority initiated a wage audit for the Company. The audit was carried out by AEA & Associates in the period from 30 November 2005 to 5 December 2005, and it related principally to the three policy years I have mentioned. The audit report was transmitted to the plaintiff on 9 March 2006. As it happens, that was just a few days before the deregistration of the Company. 10 The wage auditor found that the records provided by the Company were insufficient for him to determine wages by policy period in an economical and efficient manner, and therefore he based his calculation of audited wages on a pro-rata of wages disclosed in the Company's financial statements. Apparently he identified payments made to subcontractors by inspecting the Company's financial statements and records, and he formed the view that some of the subcontractors (those recorded in the Company's ledger as "subcontractors no GST") were "deemed workers", because they were not operating an enterprise at arms' length from the Company. That led him to vary the amount of wages declared by the Company in each of the three years by a very substantial amount. 11 The auditor's reference to "deemed workers" was evidently a reference to Schedule 1 - Deemed employment of workers, to the Workplace Injury Management and Workers Compensation Act 1998 (NSW). Under clause 2 of the Schedule, where a contract is made with a contractor who neither sublets the contract nor employs any worker, for the performance of work exceeding $10 in value (not being work incidental to a trade or business regularly carried on by the contractor in the contractor's own name, or under a business or firm name), the contractor is taken for the purposes of the Act to be a worker employed by the person who made the contract with the contractor. 12 The auditor also found that in the 2001/02 period Mr and Mrs Petherick, who (he said) operated a partnership at that time, engaged subcontractors who appeared to be deemed workers, and during that period the partnership did not hold a policy. Mr and Mrs Petherick's accountant has given evidence disputing the claim that the partnership did not hold a workers compensation policy in 2001/02. It is not necessary for me to resolve that question, since the plaintiff's claim for additional premium does not, on its face, extend back to the 2001/02 period. 13 The plaintiff processed the wage audit and calculated a revised premium in respect of each of the three policy years that I have mentioned. A premium adjustment notice was purportedly issued to the Company (deregistered by that time) either on 21 March 2006 or on 20 April 2006 (it is unnecessary to decide which date is correct). According to the plaintiff's covering letter, the total amount payable by the Company resulting from the wage audit was $105,675.49. The letter required payment of that amount in full within one month, purportedly pursuant to s 172 of the Workers Compensation Act 1987 (NSW). It drew attention to an employer's right to seek review by the WorkCover Authority under s 170 of the Workers Compensation Act within one month of the notification. 14 Mr and Mrs Petherick denied having received that letter. Mrs Petherick said that she heard nothing about the claim arising out of the wage audit until receiving the originating process in the present matter, in January 2007. But it is unnecessary for me to resolve that question, since at all relevant times the company was deregistered and it is not asserted by the plaintiff that the letter constituted an effective notice under s 172. 15 Mr and Mrs Petherick dispute some of the factual assertions in the wage audit report. They claim that all of the contractors and subcontractors engaged by the Company had their own Australian Business Numbers and provided the Company with valid tax invoices for work done. They contend that the auditor was in error in relying on the fact that some subcontractors had no ABN, for three reasons. One is that according to their evidence, the subcontractors with whom the Company dealt all had ABNs, in fact. The second reason is that, for the detailed reasons given by Mrs Petherick in her affidavit, the contractors and subcontractors with whom the Company dealt were all legitimate contractors. The third reason is their contention that the absence of an ABN merely means, under the ABN and GST registration legislation, that the annual turnover of the subcontractor concerned is less than $50,000 (see A New Tax System (Australian Business Number) Act 1999 (Cth), s 8(1); A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 9.20, 23.1, 23.5). 16 On 14 May 2007 the solicitor for Mr and Mrs Petherick lodged with the Appeals Branch of WorkCover New South Wales an application for review of the plaintiff's determination of an additional premium claim. They challenged the auditor's finding that the subcontractors were "deemed workers". On 27 September 2007 WorkCover New South Wales responded, stating that according to legal advice it had received, it was unable to consider the application to review because the Company had been deregistered. The letter said: "if the company is re-registered, then we will be in a position to further action the matter." 17 Mrs Petherick has given evidence that, though she opposes reinstatement, if the Company is reinstated and she and Mr Petherick resume their positions as directors, the Company will wish to take advantage of its statutory right to apply for review of the plaintiff's decision, on the ground the Company's subcontractors were not "deemed workers". Consequently the Company will oppose the application for winding up, if the Company is reinstated. The Court's power to make an order for reinstatement 18 The plaintiff's application for an order for reinstatement is made under s 601AH(2), which provides as follows: "The Court may make an order that ASIC reinstate the registration of a company if: (a) an application for reinstatement is made to the Court by: (i) a person aggrieved by the deregistration; or (ii) a formal liquidator of the company; and (b) the Court is satisfied that it is just that the company's registration be reinstated." 19 This provision presents two questions for consideration, namely whether the plaintiff is a person aggrieved by the deregistration, and whether the court should be satisfied in this case that it is just that the company's registration be reinstated. "Person aggrieved by the deregistration" 20 The plaintiff alleges that it is "a person aggrieved by the deregistration", because the deregistration of the Company has prevented it from exercising its statutory right to give a notice demanding payment of additional premium arising out of facts and circumstances that occurred before the deregistration. 21 In WorkCover Authority of New South Wales v Picton Truck & Trailer Repairs Pty Ltd (De-registered) [2004] NSWCA 371, WorkCover made a payment under the Uninsured Liability & Indemnity Scheme to an injured worker employed by an uninsured company. WorkCover had a statutory entitlement to recover that payment from a "culpable director" of the employer company, provided that the employer company was liable to reimburse it, and that in turn depended upon WorkCover having served a notice on the company. By the time the company in question was identified as the employer of the injured worker, it had been deregistered, and so WorkCover sought to reinstate the company so that it could give the company a notice and then proceed against the director. 22 The Court of Appeal of New South Wales unanimously held that WorkCover was a person aggrieved for the purposes of s 601AH(2). Sheller JA (with whom Mason P and Ipp JA agreed) pointed out (at [13]) that a legal right or interest of WorkCover, namely its right as at the time of deregistration to obtain reimbursement for the payment it had made, had been affected, indeed wholly frustrated, by the fact that the company was deregistered. He also drew attention to the obvious public interest in WorkCover making such recovery. 23 In the present case the plaintiff's claim for payment is a claim for payment of an adjustment of premium, for the purposes of s 172(1)(c) of the Workers Compensation Act. Under s 172(1), the amount of the adjustment, together with any late payment fee (not claimed here), may be recovered as a debt in a court of competent jurisdiction, but only if the employer has failed to pay the adjustment of premium within one month after service on it of a notice that payment of the amount of the adjustment is due. If the requirements of s 172(1) are satisfied, the premium adjustment is recoverable as a debt even if the employer makes an application to the WorkCover Authority for review under s 170, except to the extent that the Authority otherwise directs or the regulations otherwise provide. 24 The deregistration of the Company has frustrated the plaintiff's legal right and interest in pursuing the procedure laid down by s 172 for recovery of its premium adjustment by giving notice to the employer company, just as the legal right and interest of WorkCover in giving a notice to the employer company as a first step towards reimbursement was frustrated in the Picton Truck & Trailer case. There is also, in this case, as in the Picton Truck & Trailer case, an element of public interest involved. Here the public interest lies in an insurer being able to recover a premium adjustment that arises as the result of a wage audit. Assuming the plaintiff's claim is valid, the Company has failed to declare the wages of all of its "deemed workers", and so the plaintiff as the Company's insurer should have available to it an appropriate statutory mechanism for recovery of the premium adjustment consequent upon its discovery, through audit, of the inadequate declaration. That public policy is frustrated because the Company's deregistration has prevented the plaintiff from taking the first step towards recovery. 25 My conclusion, therefore, is that the plaintiff is a "person aggrieved by the deregistration" for the purposes of s 601AH(2)(a)(i). Whether it is just that the company's registration be reinstated 26 If the Company is reinstated, the plaintiff will be able to give it a notice under s 172 that payment of the premium adjustment is due. Then, under s 170(1) of the Workers Compensation Act, the Company has the statutory entitlement to apply to the WorkCover Authority for a review, if it contends that any aspect of the plaintiff's determination of the premium adjustment is not in accordance with the relevant insurance premiums order, provided the application is made within one month after the date of the demand for the premium adjustment (s 170(2)). 27 The evidence indicates that the plaintiff and Mr and Mrs Petherick are involved in a dispute as to whether the Company's subcontractors in the relevant years were "deemed workers". In my view that dispute is a "genuine dispute" as to the existence of the debt asserted by the plaintiff, applying by analogy the test enunciated in another context in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785. 28 The statutory review process provides an occasion for a review of the auditor's contested decision to treat the Company's subcontractors as "deemed workers". The court's decision to make an order for reinstatement under s 601AH(2) will initiate a process that will, if Mr and Mrs Petherick choose to pursue their claim, lead to a determination by WorkCover of that matter. The court is not in a position to decide, at this stage, that their claim is so strong that WorkCover would be bound to accept their submissions, and therefore that the reinstatement of the Company would be pointless. This is because the application for reinstatement did not and could not involve a full exploration of the factual issues going to the resolution of that question. 29 In those circumstances, it seems to me just for the court to make an order for reinstatement, so that a tribunal equipped to make a determination of the issues in dispute between the parties will be able to do so in a proper manner. In my opinion there is no unfair prejudice to Mr and Mrs Petherick in proceeding in this manner, because they have demonstrated by their evidence before me that they are in a position to advance the claim that they wish to have determined, and my order will ensure that they are given the opportunity to have the matter resolved in an appropriate way. 30 In CGU Workers Compensation (NSW) v Rockwall Interiors Pty Ltd [2006] NSWSC 690, Barrett J, dealing with an application for an order for the reinstatement of employer company made by the present plaintiff as workers compensation insurer, said (at [8]): "There is then the question whether it is 'just' that the deregistration should be reinstated. In a narrow and immediate sense, the answer must be in the affirmative, since reinstatement will alleviate the plaintiff's grievance by permitting it to pursue its claim. But the matter may need to be looked at more broadly. An aspect which contributes towards a positive answer is the operation of the workers compensation system. Discussion in the Picton Truck & Trailer case … shows that the presumed continuity of existence of a corporate employer is of central importance to the operation of that system." 31 I referred earlier to the public policy underlying the insurer's statutory entitlement to recover a premium adjustment after a wage audit. That is one of the aspects of the workers compensation system that operates upon the presumed continuity of existence of the corporate employer. Subject to any countervailing considerations that might arise in a particular case, it seems to me likely to be just to make an order for the reinstatement of an employer company in circumstances such as those of the present case, so as to make good the presumption of corporate continuity and allow the public policy underlying the workers compensation system to be carried into effect. 32 I therefore conclude that, for the purposes of s 601AH(2)(b), it is just that the Company's registration be reinstated. Conclusions 33 For the reasons I have given, I shall make an order under s 601AH(2) that ASIC reinstate the registration of the Company. 34 It is necessary to consider what arrangements should be put in place to deal with the application for winding up. I assume that, shortly after reinstatement, the plaintiff will serve a notice on the Company for the premium adjustment under s 172. It appears that the Company, upon reinstatement, will have no assets to meet the plaintiff's claim, and will probably not pay the amount claimed. Therefore, the premium adjustment will be recoverable as a debt under s 172 one month after the giving of the notice. This will be so, even if the Company has made an application for review under s 170. 35 It seems to me that there would be an element of unfairness to Mr and Mrs Petherick if, the company having been reinstated so that the plaintiff's notice could be given, it were then to be wound up in insolvency because of the premium adjustment debt, in circumstances where there was an unresolved challenge to that debt in proceedings before the WorkCover Authority. If the application for review were to be successful, there would be no debt, and probably no foundation for a winding up order and for the appointment of a liquidator. 36 I am therefore disposed to adjourn the proceedings, so far as they relate to the winding up of the Company, not only until one month or more after the plaintiff has given notice under s 172, but until the determination by the WorkCover Authority of any application for review under s 170 in respect of the subject matter of that notice. Obviously a corollary of any such adjournment would be the making of an order under s 459R, granting a sufficient extension of the time within which the application for winding up in insolvency is to be determined. 37 However, the court needs to take care to ensure, in circumstances where the reinstated company will be returned into the hands of its directors, that the interests of all creditors are protected. Mr and Mrs Petherick have indicated that they will not allow the company to trade. In my view, that should be formalised by an appropriate undertaking to the court. Additionally, the company may incur debts in the course of the application for review, which may dilute any distribution by its liquidator (if a winding up order is made) of assets that the liquidator might be able to recover for the Company's creditors. Therefore Mr and Mrs Petherick should also undertake to indemnify the Company in respect of the costs of any application for review, except in the event that the application is successful. If they are not prepared to give such undertakings, then the appropriate course may be to allow the winding up application to proceed one month after the plaintiff's notice has been given. 38 I shall direct the plaintiff to bring in short minutes of orders to reflect these reasons for judgment, and hear argument as to costs. **********

CGU Workers Compensation (NSW) v Rockwall Interiors Pty Ltd

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