Plaintiff/Appellant v Defendant/Respondent

4 The application before the Master was by way of originating process filed 29 March 2007. In that application, Marchetti sought orders that TR's statutory demand dated 2 March 2007, and served on Marchetti on 8 March 2007, be set aside. Marchetti relies on the following affidavits in support of its application:

(1) Stephen James Campbell, CEO of Marchetti, sworn 29 March 2007, the first Campbell affidavit;

(2) Stephen James Campbell, sworn 16 May 2007, the second Campbell affidavit; and

(3) Stephen James Campbell, sworn 7 June 2007, the third Campbell affidavit.

Marchetti also relies on affidavits of Claudia Anne Baskett, sworn 16 May 2007 and 7 June 2007.

5 In opposition to the application TR relies on two affidavits of its sole director, Ross David Taylor, sworn 2 May 2007 and 7 June 2007.

6 Marchetti carries on a trucking business, and Mr Taylor, at all relevant times, was the accountant to Marchetti. In September 2002, Mr Taylor proposed to Marchetti an arrangement that he said would significantly reduce Marchetti's WorkCover premium liabilities. Marchetti conducts a trucking business, as mentioned above, and the WorkCover premium applicable to all its employees, whether they were involved in driving trucks or administration, was a high rate applicable to the trucking industry.

7 Mr Taylor pointed out that if the administration and other similar staff could be separately assessed in separate businesses, then they would bear a much lower rate of WorkCover premiums saving Marchetti a considerable sum of money. Under the proposal put to Marchetti by Mr Taylor, arrangements were to be made for a number of companies to be set up as labour hire companies. Each company would receive a percentage fee of the wages and other expenses invoiced. Mr Marchetti accepted the proposal and Marchetti and TR entered into a labour hire agreement

8 Similar agreements to the one entered into between TR and Marchetti were entered into between Marchetti and other labour hire companies. I will come in a moment to the agreement which was entered into specifically between TR and Marchetti. There were several companies involved in the arrangement: they included TR, Deanfield Pty Ltd, Australia-Wide Sales & Marketing Pty Ltd, Hair@106 Pty Ltd, and Jaylene Pty Ltd.

9 The companies were established as labour hire companies which would provide labour to Marchetti. The workers were employed by the labour hire companies and the companies would contract with Marchetti to provide their labour. Originally the fee payable by Marchetti to TR and the other labour hire companies for the provision of labour hire was three per cent of the amounts invoiced, but this was later increased to four per cent or five per cent depending on when the invoices were paid by Marchetti.

10 TR accepts that the primary objective of the arrangement put by Mr Taylor was to reduce Marchetti's WorkCover premiums. In June 2005, the WorkCover Authority carried out a review of the operations of labour hire companies used by Marchetti and TR determined that:

(a) Pursuant to the relevant schedule of the WorkCover Insurance Premiums Order, the workplaces of TR and the other labour hire companies, at the Bangholme Road address, were deemed to be one workplace for the purposes of determining the character of the predominant activity of the group, and the relevant industry premium rate payable.

(b) TR and the other labour hire companies' workplaces were considered to be located at 82 Bangholme Road, Dandenong ( Marchetti's premises).

(c) As a consequence of (a) and (b), TR and the other labour hire companies were classified by the Victorian WorkCare Authority (VWA) as being members of the same group.

(d) The workplace was reclassified as one carrying on a long distance interstate road freight transport operation, effective as of 1 July 2004.

11 A review of the VWA's determination was sought. However, the determination was upheld. This resulted in a reassessment of the WorkCover premiums payable by Marchetti, TR and the other labour hire companies for the current and previous years in which the labour hire arrangements had been conducted.

12 On 12 October 2006, Marchetti's solicitors wrote to TR terminating the labour hire arrangement and placing TR on notice that Marchetti would look to it and the directors personally to indemnify it for the additional liability that it had suffered as a result of the VWA investigation and reclassification.

13 The statutory demand served on Marchetti is Exhibit SJC2 to the affidavit of Stephen James Campbell of 29 March 2007. The statutory demand gives particulars of 20 or 30-odd invoices ranging from 31 January 2006 through to the latest being 25 January 2007, totalling $242,398.92.

14 Invoice 7130 for $186,804.97 includes, or is composed of, additional WorkCover premiums imposed through the reclassification of TR's employees, the service fee applicable thereon and GST, made up as $162,665.40 for additional WorkCover premium and penalties, service fees of $7157.28 and GST on those two sums in the amount of $16,982.27. Putting aside that invoice, the other invoices relate to service fees and GST.

15 Initially, Marchetti claimed that it had a good defence to the claim for those fees, as there had been a total failure of consideration for the agreement that Marchetti had made with TR. I will come in a moment to the details of the agreement that was made between Marchetti and TR, but for present purposes it is sufficient to say that I agree with Mr Evans that there was not a total failure of the obligations on TR as expressed in the letter of 1 October 2002 which is Exhibit SJC4. Mr Brett agreed there was not a total failure of consideration.

16 Putting invoice 7130 to one side, I find that the appellant does not have a defence to the other invoices on the basis that there was a total failure of consideration. Shortly, I will return to Marchetti's other response to the invoices, other than 7130. As to Invoice 7130, the issue is whether Marchetti has disclosed a genuine dispute between it and TR in relation to that sum, or has an offsetting claim.

17 Under s 459H(5) of the Corporations Act 2001, "offsetting claim" means:

"a genuine claim that the company has against the respondent by way of counterclaim, setoff or cross-demand (even if it does not arise out of same transaction or circumstances as a debt to which the demand relates)".

18 The offsetting claim has to be a genuine claim. I quote from what the Master said about the claim of Marchetti against TA arising out of the failure of TA to achieve the WorkCover savings that it claimed and the resultant imposition of penalties through Marchetti's failure to do so. The Master said:

"The scheme failed in relation to workers' compensation payments but not payroll tax. The scheme in relation to WorkCover did not comply with the requirements of WorkCover legislation, and WorkCover payments have been reassessed. The defendant has done what it is required to do pursuant to the agreement, and has provided the labour services.

The fact that Mr Taylor is a director of the defendant does not enable the plaintiff to claim a genuine dispute against the company. There is clearly an arguable offsetting claim but not against the company. On the evidence before the Court any application against the company would be summarily dismissed. There is no credible evidence before the Court which could lead to the conclusion that there is an offsetting claim against the company.

The plaintiff claims a genuine dispute in relation to the sum of $186,804.97 for an invoice of Victorian WorkCover premium. That sum relates to the indemnity under the contract. The contract does not fail and consideration has been provided. That sum is to be paid pursuant to s 66A of the Accident Compensation (WorkCover Insurance) Act 1993".

19 With respect I do not agree with the Master's characterisation of the genuine claim that may be open to Marchetti in this matter. The evidence about the agreement between TR and Marchetti is essentially contained in the first affidavit of Stephen James Campbell sworn 29 March 2007 and the letter SJC4 that Mr Campbell exhibits to his affidavit, being the letter of 1 October 2002.

20 In his affidavit of 29 March 2007 Mr Campbell gives evidence of the communication between Mr Taylor and Mr Marchetti in 2002 on information and belief from Mr Marchetti.

21 Mr Marchetti has not sworn an affidavit that is relied upon in these proceedings. Mr Campbell says, in Paragraph 4 and following:

"(4) As stated in the supporting affidavit, Mr Taylor is the director of the defendant. However, I am informed by Mr Marchetti (a director of the Company) and believe that Mr Taylor had for a long period of time (and continued until recently to have) a detailed involvement with the Company and its affairs. Specifically, Mr Taylor had been the Company's external accountant and trusted adviser in regards to all aspects of the Company's business.

(5) As a result of that involvement Mr Taylor had a thorough understanding of the company's financial affairs, which included information about WorkCover premiums payable to the Victorian WorkCover Authority ("VWA").

(6) In or about September 2002, I am further informed by Mr Marchetti and believe that Mr Taylor implemented a scheme that was meant to be an economical alternative to the Company employing labour directly and as such, its WorkCover premiums would be significantly reduced. As part of the scheme, Mr Taylor was to arrange for various companies to be set up as labour hire companies and, in return for this, each company would receive a percentage fee of wages and other expenses invoiced. In effect, the percentage to be charged was calculated by Mr Taylor to split the savings to be made by the Company on WorkCover premiums between the Company and the labour hire companies.

(7) Upon commencement of this scheme, Mr Taylor made arrangements for TR Administration Pty Ltd (the defendant), Deanfield Pty Ltd, Australia Wide Sales and Marketing Pty Ltd, Hair@106 Pty Ltd and Jaylene Pty Ltd, the entities to be set up as the outsource labour companies.

(8) On or about 1 October 2002, the defendant provided to Company an agreement for the supply of labour to the Company by the defendant ("the agreement") and labour hiring commenced. At the date of swearing this affidavit, I have been unable to locate a copy of the agreement signed by either party.

Now produced and shown to me and marked with the letters "SJC4" is a true copy of the agreement."

22 I turn to the agreement itself, which is Exhibit SJC4, and in particular I refer to the indemnity which is set out at the top of page 2. I should indicate that the letter is under the letterhead of TR addressed to Mr F. Marchetti of Frank Marchetti & Sons Pty Ltd and signed by R.D. Taylor, Director. Under the heading "Indemnity", the letter provides:

"As is the case with all outsourcing and bureau arrangements, you will need to indemnify us for all costs, expenses, disbursements and liabilities incurred on your behalf. For example, this indemnity would include liability for income tax rate changes, changes in direct and indirect labour costs, both prospectively and retrospectively. This would also include re-rating by various authorities such as WorkCover, payroll tax, superannuation, any costs incurred as a result of re-rating or audit.

As you have acknowledged when agreeing to this indemnity, it doesn't really impose any further obligation on you than you were previously exposed to when you were employing staff in Victoria."

23 The letter refers to Mr Marchetti agreeing to this indemnity thereby confirming, what is apparent, that there was a prior oral agreement between the parties. The letter has to be read in the light of the oral agreement there referred to. The evidence of the oral agreement we have is limited to the evidence given on the information and belief by Mr Campbell referred to above. Under the heading of "Termination", it is provided in the first paragraph of the letter of 1 October 2002:

**"**Although we are confident you will enjoy economies which will flow from the administrative efficiencies in outsourcing, if you wish to vary or terminate this arrangement, we will require one month's notice in writing from you."

24 In my view, the evidence that I have referred to and which includes the necessary inferences which must be drawn from the words in the letter is sufficient to support a genuine claim that TR had agreed to achieve savings in respect of administration staff through them being rated at a lower rate than they currently bore as employees of Marchetti. In my opinion there is sufficient evidence to raise a genuine claim, whether it be by way of defence or counter-claim, to argue that TR has failed to perform its agreement and its failure to do so has led to the incurring of the additional premiums and penalties that are the subject of Invoice 7130.

25 In my opinion, therefore, Marchetti has established for the purposes of s 459H that it either has a good defence or (as probably more likely) a good offsetting claim to that invoice. It seems to unlikely that TR could have fulfilled its contract by classifying the administration employees as being in the trucking industry, and claim it was under no obligation to achieve the lower rates that were available. The agreement does not make much commercial sense unless there is some obligation on TR to seek to achieve the object that Mr Taylor had proposed to Mr Marchetti. Mr Evans' arguments to the contrary are not sufficient to lead me to find that there is no genuine basis for arguing the contract went that far.

26 Mr Brett and Mr Gardner conceded that the balance of the invoices, which he said amounted to about $60,000, but according to my calculation amounted to $55,593.95, related to matters which were fees which had otherwise been properly charged in respect of the hiring of the labour. Mr Brett and Mr Gardner submitted that the answer to those claims would have to lie in an offsetting claim. Mr Brett put forward two bases on which an offsetting claim could be made to offset the balance of the invoices.

27 First, Mr Brett and Mr Gardner submitted that Marchetti had a claim against TR in respect of the WorkCare premiums and penalties that were imposed by reason of the failure of TR and the other four companies I have referred to in achieving the reduced WorkCare premiums. Mr Brett said that each company is jointly and severally liable for the failure of any and all of them to, in his words, do their part of the bargain properly.

28 Mr Evans submitted that there was no evidence that Mr Taylor was able to contract for or on behalf of the other four companies, or that he was entitled to make representations on their behalf. I note that Mr Taylor did negotiate the increase in fees on behalf of all the companies, and I refer in particular to Exhibit RDT2, relied upon by TR, in which Mr Taylor referred to discussions about arrangement for payment of the long standing arrears of sums due to the labour hire entities, "which are currently supplying labour to your business, both in Victoria and interstate".

29 I have had reservations about this submission of Mr Brett and Mr Gardner, but on balance, I find that the claim enunciated is a genuine claim proper for Marchetti to make. I was informed by counsel that the test I should apply is similar to a test on a summons for final judgment, and I have been assisted somewhat in bearing that test in mind.

30 If I am wrong, however, Mr Brett and Mr Gardner rely upon an alternate argument that Marchetti is entitled to make a claim for damages or restitution or howsoever for the fees of some $58,343 it has paid to TR in respect of the services TR provided in the financial years 2004/2005, 2005/2006 and 2006/2007. In my opinion there is a genuine claim open within the meaning of s 495H to Marchetti to claim damages, to the extent of the fees incurred when the primary objective of the scheme was not achieved. I do not think it is appropriate for me to finesse and fine tune those damages, and try and make an accurate assessment myself. I think it is sufficient to say that that claim is open to be genuinely made.

31 In reaching my decision I have been mindful of s 459A of the Corporations Act being the first section in Division 1, which provides:

"On an application under section 459P the court may order that an insolvent company be wound up in insolvency."

The object of Division 1 is to enable an insolvent company to be wound up, not to enable debts to be recovered.

32 For the reasons I have given I allow the appeal and make the orders sought and in particular I order that:

1. The order of Master Efthim made on 2 July 2007, dismissing the plaintiff's application to set aside the statutory demand, be set aside;

2. The statutory demand dated 2 March 2007, and served by the defendant on the plaintiff, be set aside; and

3. The defendant pay the plaintiff's costs of the appeal and the application before the Master.