CSRP Apartments Pty Limited v Workcover Authority of NSW

COUNSEL : Appellant: B. Rayment QC/B DeBuse Respondent: J Griffiths SOLICITORS : Appellant: Heaney Richardson & Nemes Respondent: Blake Dawson Waldron CATCHWORDS : WORKERS COMPENSATION - insurance premiums under s 168 of Act - Insurance Premiums Order - determination of premium payable by insured - whether insurance history of "predecessor" should be taken into account when assessing premium payable - assessment of premium reviewed by Respondent - ADMINISTRATIVE LAW - judicial review of the determination made by Respondent's delegate resolved in favour of Respondent - appeal from that decision - FACTS - Appellant company (SJP(NSW)) was closely related to another company (SJP (Aust)) - both companies had same registered office, telephone number, similar shareholding and largely similar trading names operating in the same market - ASSESSMENT OF INSURANCE PREMIUM - issue on appeal as to whether one company was the predecessor of the other - "predecessor" was defined by Insurance Premiums Order as where an "employer has acquired the business of the person" - meaning of expressions "acquire" and "business", given broad ordinary meaning - acquisition capableof occurring in a gradual way. ND LEGISLATION CITED : Workers Compensation Act 1987 Allina Pty Limited v Commissioner of Taxation (1991) 28 FCR 203 Congreve v Inland Revenue CASES CITED: Commissioners (1947) 1 All ER 168 Hope v Bathurst City Council (1980) 144 CLR 1 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 DECISION : Appeal dismissed; Apellant to pay the Respondent's costs of the appeal.

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA 40778/99 ALD 30011/99 MASON P PRIESTLEY JA IPP AJA

Wednesday, 21 February 2001 CSRP APARTMENTS PTY LIMITED v WORKCOVER AUTHORITY OF NEW SOUTH WALES

JUDGMENT 1 MASON P: I agree with Ipp AJA. 2 PRIESTLEY JA: I agree with Ipp AJA. 3 IPP AJA: This appeal involves the construction and application of certain Insurance Premiums Orders ("the Orders") made pursuant to s 168 of the Workers Compensation Act 1987. The relevant parts of the Orders are contained in Schedule 1 and Schedules 4 and 5 thereto. Schedules 4 and 5 required premiums payable by an employer for policies of insurance within the meaning of the Act to be calculated by reference to the "particulars of claims" and the "cost of claims" not only of the employer concerned but its "predecessor". The term "predecessor" was defined by cl 1 of Schedule 1, which provided: "For the purposes of this Order, a person is a predecessor of an employer if the employer has acquired the business of the person. This sub-clause applies whether the business acquired is the whole or main part of the business of the person or is the whole or main part of a separate and distinct business of the person, and whether or not the business acquired is carried on at the same location".

4 The dispute between the parties concerns the proper calculation of premiums payable by the appellant (to whom I shall refer as "SJP (NSW)") under a workers compensation insurance policy issued to it on 27 September 1995 by MMI Workers Compensation NSW Limited ("MMI"). The cover so provided was renewed for the policy years 1 July 1996 to 30 June 1997 and 1 July 1997 to 30 June 1998. In calculating the premiums payable by SJP (NSW) for those policy years, MMI sought to rely on the provisions of the Orders to which I have referred by taking into account the claims experience of a related company, SJP Formwork (Aust) Pty Limited ("SJP Aust"), on the basis that it was a "predecessor" of SJP (NSW) within the meaning of cl 1(2) of Schedule 1. 5 In terms of s 170 of the Act, if an employer claims that an insurer, in demanding a premium for the issue of a policy of insurance to an employer or for the renewal of such a policy, has breached an Insurance Premiums Order, the employer may apply to the respondent for a determination as to the premium to be charged. In November 1997, SJP (NSW) claimed that MMI, in calculating and demanding premiums for the policy years in question, had breached the Orders by wrongly having regard to the claims history of SJP (Aust) as its predecessor. SJP (NSW) contended that SJP (Aust) was not its predecessor and sought a determination as to the premiums "to be charged" for those years. 6 On 20 January 1999, a delegate of the respondent dismissed SJP (NSW)'s application. By inference, the delegate appears to have been "of the opinion" (in terms of s 170(3)(c)(ii) of the Act) that the premiums charged by MMI were payable by SJP (NSW) in accordance with the Orders. The delegate, apart from formally determining that the application should be dismissed, made the following affirmative orders: "1. The premium payable by SJP Formwork (NSW) Pty Limited is to be calculated using the experience of SJP Formwork (Aust) Pty Limited in liquidation. 2. For premium calculation purposes as at 30 June 1997 and 30 June 1998, the experience-adjusted premium utilised by MMI Workers Compensation (NSW) Limited are correct as issued."

The Act in general (and s 170 in particular) makes no express provision for the making of affirmative orders. SJP (NSW), however, took no point concerning the making of the affirmative orders (which did not in any way prejudice it). 7 SJP (NSW) applied for judicial review of the delegate's determination and claimed: "1. A declaration that [SJP (Aust)] is not a predecessor of [SJP (NSW)] and [SJP (NSW)] has not acquired the whole or main part of the business of [SJP (Aust)].

2. A declaration that in calculating the premium payable by [SJP (NSW)] to [MMI] for the periods 1 July 1996 to 30 June 1997 and for 1 July 1997 to 30 June 1998 … the premiums should have been calculated without including the claims experience of [SJP (Aust)] or the wages paid to employees by [SJP (Aust)].

3. An order setting aside the Determination of [the delegate] made pursuant to s 170 of the Workers Compensation Act 1987 on 20 January 1999."

8 SJP (NSW)'s application was heard by Dunford J who held that the delegate had not made any error and dismissed the application. SJP (NSW) now appeals against the decision of Dunford J. 9 SJP (Aust) was incorporated on 25 June 1986. The company was trustee for the Pejkovic Family Trust and, as such, operated as a formwork, steel fixing and concreting contractor. The shares in SJP (Aust) were owned by Mr Steve Pejkovic and his wife Lydia. The sole director of SJP (Aust) was Steve Pejkovic. He was also the secretary of the company. 10 On 20 March 1990, SJP (NSW) was incorporated. It was then known as SJP Constructions Pty Limited. On 16 December 1993 SJP Constructions Pty Limited changed its name to SJP Formwork (NSW) Pty Limited (that is, to the present name of the appellant, SJP (NSW)). At that time, the shareholders of SJP (NSW) were John and Tony Pejkovic, sons of Steve and Lydia Pejkovic. On 16 December 1993 Steve and Lydia Pejkovic became directors of SJP (NSW). At some date thereafter (which is not apparent from the papers), Steve Pejkovic became the sole director of SJP (NSW) [BB 39X]. As was the case with SJP (Aust), Steve Pejkovic was the secretary of the company. 11 SJP (NSW) was formed to assist the Pejkovic family in extending the business it carried on through the medium of SJP (Aust). Apparently, various developers and contractors, who were potential customers of SJP (Aust), objected to contracting with a company acting as trustee. SJP (NSW) became the contracting party with these persons. That is to say, both companies carried out the same type of business in the same sector, namely formwork, steel fixing and concreting, but, by arrangement between the two, SJP (NSW) dealt with those who were reluctant to contract with a trustee and SJP (Aust) dealt with others. Accordingly, the companies did not compete with each other. They divided the market between them and traded, together, in the manner indicated. 12 The registered office of both companies was 653 Darling Street, Rozelle and until May 1997 this was the principal place of business of both companies. Thereafter, both companies operated from the same address at Glendenning. Both used equipment supplied by the same company, CSPR Pty Limited (another company owned by the Pejkovic family). The telephone number of each of the companies was the same. SJP (NSW) traded as "SJP Formwork" [BB 26R] and it seems that SJP (Aust) traded under the same name. The delegate found that "the name 'SJP Formwork' is widely known in the market and is of value in obtaining contracts". The delegate concluded that from the perspectives of both companies, "and for that matter from most external perspectives", SJP (Aust) and SJP (NSW) were "essentially represented as the same business". 13 It is not clear from the papers when SJP (NSW) commenced trading. Certainly, it was carrying on its contracting business by January or February 1995 when it undertook a project at Prince of Wales Children's Hospital. At that stage, SJP (NSW) did not directly employ workers to perform the work it had contracted to carry out. Instead, it utilised, on a sub-contract basis, the services of workers employed by SJP (Aust). By January 1996, however, this practice had changed and in that month SJP (NSW) commenced work on a project at the Imax Theatre for which it employed its own workers and did not sub-contract labour from SJP (Aust). 14 During 1995, SJP (Aust) experienced a considerable downturn in its work. In June 1995 it started laying off its staff members and in December 1995 it retrenched all of its staff "and for all intents and purposes did not further trade or perform construction work". This led to many of the employees of SJP (Aust) taking up employment with SJP (NSW). 15 In SJP (Aust)'s last payroll period of significant operations (the week ending 13 December 1995), it employed 36 persons. In the year ended 30 June 1996, 31 of these 36 employees were employed by SJP (NSW). Moreover, of the 119 employees who worked for SJP (NSW) in the year ended 30 June 1996, 52 had previously been employed by SJP (Aust) within the period 1 July 1995 to 13 December 1995. It is apparent that when SJP (Aust) ceased trading in December 1995, the vast majority of its employees commenced employment with SJP (NSW). 16 After December 1995, all key positions in SJP (NSW) were filled by staff who had held similar positions with SJP (Aust), although some middle management employees did not transfer from SJP (Aust) to SJP (NSW). 17 On 23 May 1996 an administrator was appointed to SJP (Aust) and at about the same time a receiver-manager was appointed to the company by the Commonwealth Bank. Thereafter, presumably to retain the services of those former employees of SJP (Aust) who had become employed by it, SJP (NSW) voluntarily paid them their leave entitlements. On 10 July 1996 SJP (Aust) was placed in liquidation. When wound up, the tangible assets of SJP (Aust) consisted of plant and equipment with an estimated value of $25,000. This plant and equipment was apparently sold for the benefit of the bank. A report by the administrator to creditors dated 3 July 1996 indicated, however, that the prime assets of SJP (Aust) were its name, the goodwill associated with that name and the expertise of its skilled staff.

18 The delegate held that "acquired" as used in the Orders was a wider term than transfer, sale or purchase and meant "to gain by any means, to come to have"; and that "business" included "commercial activity engaged in for gain or livelihood". On this basis he held that the business operations of SJP (Aust) had been acquired by SJP (NSW). Therefore, he found SJP (Aust) was a predecessor of SJP (NSW) and the premium payable by SJP (NSW) had been correctly calculated by MMI. 19 Dunford J identified the question of law before him as being whether the facts found by the delegate came within the ordinary meaning of the expressions "acquire" and "business". His Honour adopted (at 7) what was said by the Court in Allina Pty Limited v Commissioner of Taxation (1991) 28 FCR 203 at 209 to 210 namely: "The verb 'to acquire', according to its ordinary and natural meaning, connotes in our view to obtain, gain or get something. The first meaning given in the Oxford English Dictionary (2nd ed, 1989), is : '1. To gain, obtain or get as one's own, to gain the ownership of (by one's own exertions or qualities).' The second meaning is: '2. To receive, or get as one's own (without reference to the manner), to come into possession of.' The Macquarie Dictionary gives a similar definition. There must be something in existence that can be obtained or gained; ….'

The learned judge also pointed out that the Court in Allina (at 211) had quoted with approval what was said by Cohen LJ in Congreve v Inland Revenue Commissioners (1947) 1 All ER 168 (at 173), namely: "….as used by lawyers the word 'acquired' has long covered transactions of a purely passive nature and means little more than receiving. Indeed that is the second ordinary meaning given in the Shorter Oxford Dictionary". 20 His Honour then noted that the ordinary meaning of "business" is a commercial enterprise carried on for the purpose of profit on a continuous and repetitive basis: Hope v Bathurst City Council (1980) 144 CLR 1 (at 8 to 9), and observed that this meaning was "not inconsistent with the delegate's description 'commercial activity engaged in for gain or livelihood'". The learned judge pointed out that "the business" of a company "means its undertaking, its management, workers, equipment, business expertise, experience, procedures and goodwill (which in turn includes its reputation, location, telephone number and, particularly in a type of business here involved, its personal contacts)". His Honour proceeded (at 8): "If a business (formwork, concreting etc) is carried on by a company with a name known in the trade, and the principals of that company form another company with a very similar name (SJP Formwork (Aust)/SJP Formwork (NSW)) which one may reasonably infer will be identified in the trade as having the same principals, competency, expertise and business practices, and either promptly or over a period of time, the first company ceases to carry on its business, and the second company starts to carry on business of the same nature, from the same premises, with the same telephone number, using the same management team, and to a large extent the same workers, and employing the same business practices, working for the same or similar customers acquired through the same or similar contacts, the second company may fairly be said to have 'acquired' the business of the first company. This is even more so when it hires equipment from the same hire company which is closely related by shareholding and directors to both the other companies and operates out of the same premises." 21 Dunford J pointed out that such a result is consistent with a purposive construction of the orders. His Honour noted that compensation premiums are traditionally assessed on the number of employees and the claims history of the insured, these being the factors more likely to influence the level of future claims. He said (at 9): "Therefore, if the second entity is doing the same type of work for the same type of clients and has substantially the same employees or a substantial proportion of the employees of the previous entity and the same management team, who are responsible inter alia for safety procedures, then the former entity is in a very real sense for the purposes of assessing premiums the ' predecessor ' of the later entity". 22 Senior counsel for the appellant submitted that the learned judge (and the delegate) had erred in a number of respects. 23 He submitted that SJP (Aust) never formally transferred to SJP (NSW) any right to goodwill or any other of its assets; therefore, there had been no acquisition by SJP (NSW). Allied to this proposition was the argument that the delegate had accepted that there never was a particular, identifiable transaction between SJP (Aust) and SJP (NSW) which could have constituted an acquisition by SJP (NSW). Without such a transaction, it was said, no acquisition could have occurred. 24 These submissions must be considered against the background of the relevant facts which can be summarised as follows. SJP (Aust) allowed SJP (NSW) to trade under the name "SJP Formwork" (a name which through the past business carried on by SJP (Aust) had some value in the market place). SJP (Aust) allowed SJP (NSW), as a new entity, to represent itself as being part of the same business that SJP (Aust) had conducted for some time. SJP (Aust) arranged for SJP (NSW) to take over those of its customers who were reluctant to trade with it because it was a trustee. The two companies had the same sole director and secretary, and were owned and controlled by the same family. They had the same telephone number and operated out of the same address. They obtained their equipment from the same company (owned by the same family). Initially, SJP (Aust) allowed SJP (NSW) to utilise the labour and skill of workers employed by it so that SJP (NSW) did not have to employ any workers itself. Thereafter, SJP (NSW) took steps to ensure that the large majority of SJP (Aust)'s workers were employed by it. After the demise of SJP (Aust), SJP (NSW) solicited the business of those customers who had dealt with SJP (Aust) and, by inference, entered into contracts with at least some of them. In so acquiring the business of SJP (Aust)'s former customers, SJP (NSW) was materially assisted by all the matters recounted in this paragraph. 25 These facts establish that SJP (NSW), over a period of time and largely by consensual arrangement between the two companies, gradually acquired the management, staff, name and custom of SJP (Aust). In my opinion, it thereby acquired SJP (Aust)'s business or, at the least, the "main part" of it. 26 While there was no evidence of any formal transfer of assets by SJP (Aust), in my view that is immaterial. I also regard it as immaterial that there was no particular, identifiable transaction by which the business was transferred. These are not elements of the concept of "acquired" as this word is used in the Orders. This was the basis of the reasoning of Dunford J and I agree with it. In particular, I agree with Dunford J that the word "acquired" as used in the Orders has a wide meaning and encompasses the receipt of assets where those assets are not transferred pursuant to a formal act or an identifiable and particular transaction. The authorities to which his Honour referred afford convincing support for this construction. I also agree with the meaning Dunford J attributed to "business". 27 Senior counsel for the appellant submitted further that the fact that in 1995 both SJP (Aust) and SJP (NSW) were trading in the same market meant that each was a separate and independent business. Therefore, as I understood the argument, SJP (NSW) could not have acquired the business of SJP (Aust) without an identifiable transaction and a formal transfer.

This argument however, overlooks the fact that the two companies were never in competition with each other but worked together in tandem for the benefit of their shareholders so as to obtain, collectively, the largest possible number of contracts that were available in the market. Nothing in the way that they carried on business in 1995 precluded SJP (NSW) from acquiring the business of SJP (Aust). 28 Senior counsel for the appellant submitted that the business of SJP (NSW) was acquired through its own efforts and was not transferred to it by SJP (Aust). He argued that, if all the customers of a business which closes its doors (such as SJP (Aust)) are forced to deal with a surviving supplier (such as SJP (NSW)), it cannot be said that the surviving supplier "acquires" the business of the first supplier.

I do not accept that the business of SJP (NSW) was acquired entirely through its own efforts. As I have pointed out, the facts establish that, in substance, SJP (NSW) acquired its business largely through consensual arrangements with SJP (Aust) and with its constant co-operation. The example put forward is premised on the assumption that the two businesses postulated were in genuine competition with each other, and the business that closed was entirely separate and independent from the survivor. For reasons that I do not have to repeat, that is not this case. The cessation of business by SJP (Aust) and the movement of staff to SJP (NSW), followed by the latter dealing with the former customers of SJP (Aust), were merely steps in SJP (NSW)'s incremental acquisition of the business of SJP (Aust) (or a main part of it). 29 Senior counsel for the appellant submitted that for a business to be acquired it must be acquired on or by a distinct point in time.

As Dunford J pointed out, however, "on any view of the facts the acquisition of the business by [SJP (NSW)] was complete by 30 June 1996". It is not necessary for there to be an identifiable date on which the acquisition took place, as long as there is a finding that the acquisition was complete before the policy years in question. 30 Senior counsel for the appellant submitted, finally, that the delegate's determination embodied the same error of law in regard to goodwill as identified by the High Court in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 619 to 620. In that case the majority of the High Court (Gaudron, McHugh, Gummow and Hayne JJ) said (at 617 to 618): "Care must be taken to distinguish the sources of the goodwill of a business from the goodwill itself. Goodwill is an item of property …. and an asset in its own right … Goodwill, as property, is 'inherently inseverable from the business to which it relates' ….That which can be assigned and transferred from the business may, while it is connected to the business, be a source of the goodwill of the business but cannot logically constitute any part of the goodwill of the business."

The majority emphasised (at 619) that the potential use value of an asset of a business must be distinguished from the goodwill of the business that is derived from the use of that asset. Their Honours observed (at 620) that it is erroneous to assert "that goodwill is not an asset but a series of assets that inhere in other assets of a business." They explained, "[s]uch a conclusion contradicts the two fundamental premises of the law of goodwill, that is to say, that goodwill has no existence independently of a conduct of a business and that goodwill cannot be severed from the business which created it". 31 Senior counsel for the appellant submitted that the determination of the delegate and the decision of Dunford J were inconsistent with the law of goodwill as explained in Murry's case. Underlying the argument advanced seems to be the proposition that it is not possible for an owner of a business to transfer to another a part of the business together with the goodwill that adheres to that part. Essentially, the submission was that, as goodwill cannot be severed from the business, the delegate and his Honour erred in deciding that it was possible for SJP (NSW) to acquire the business, including goodwill, in a gradual way (because, as I understood the argument, part of the goodwill of a business cannot be detached from a business and then transferred). 32 In my opinion, however, the remarks of the majority do not support these submissions which, in my view, must fail. The fact that "goodwill has no existence independently of a conduct of a business" and that "goodwill cannot be severed from the business which created it", does not mean that if the business is split into two parts, and one part transferred to another, no goodwill can adhere to the part that is transferred. Their Honours' remarks do not bear on this situation and, in reality, it is quite clear that - once part of a business is transferred to another - that part may form part of an existing business such that a new business is constituted with its own goodwill inherent in it. 33 In my opinion, neither the delegate nor Dunford J have been shown to be wrong in any respect. I would dismiss the appeal and order that the appellant pay the respondent's costs of the appeal. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.