Corporate Registration and the Fit and Proper Person Director
By Justin Cotton, Director, Lovegrove & Cotton – Construction and Planning Lawyers
Since July 2018 there has been a new system of corporate registration for builder and building surveying companies in Victoria, meaning that the company entity itself becomes a registered building practitioner in the appropriate category. This is a big departure because previously the registered building practitioner in these disciplines has always been the natural person individual.
This new development in the building and building surveying industries introduces a parallel licensing scheme whereby a registered building practitioner must maintain their annual registration in their individual, personal name, but where their company in which they are (most likely) a director will also need registration in its corporate name.
In other words, once the company gains registration as a building practitioner there is still nevertheless an onus on the individual building practitioners to maintain their personal registration, so that at least one director of the company is a registered practitioner in the appropriate category.
We have seen a delay in the processing of some applications for corporate registration since July last year, and concerns raised in other situations about whether the “nominee director” of the company applying for corporate registration is in fact a “fit and proper person” under the Victorian Building Authority’s guidelines. This has led not only to companies being delayed in getting corporate registration in the appropriate discipline, but in some cases registration has been refused altogether.
Critically, until the company gains its corporate registration in the appropriate discipline in which the company is operating (eg, domestic builder-unlimited), after the relevant date in July 2018 it has not been able to enter into new contracts for work. Therefore the longer the delay the worse the financial ramifications for the companies and the directors of these entities trying to earn their livelihoods. Quite simply, they will be frozen in their ability to take on new work.
Predictably the most apparent consternation has been with registered builders in Victoria, due to their large numbers compared with the other construction disciplines. As we know, and particularly with builders, it is the company that enters into contractual agreements with owners, and therefore it is the company that bears the burden of compliance with contractual duties and the statutory warranties about the fitness and quality of the work (found in section 8 of the Domestic Building Contracts Act 1995).
In Victorian domestic building contracts, while the individual registered builder will be named in the schedule alongside their registration number with the Victorian Building Authority, this is really just to evidence that there is a registered building practitioner (and therefore domestic builder insurance) standing behind the company should the company be wound in up in insolvency.
As a consequence, we see that in the vast run of building litigations between an owner and a builder, the case will involve the building company in its corporate name as one of the warring parties, while the “natural person” directors are generally not involved in their personal names. While there could be an esoteric argument run that the individual directors are also “managing and arranging” the works and owe a duty of care, in practice we see such arguments run on only very rare occasions.
These director individuals are then afforded the ability to shield themselves behind the “corporate veil” and take the benefit of the limited liability of the company (where the company’s liability does not extend to its directors, except in limited circumstances). Put simply, the company is almost always “in the gun” rather than the individual directors when it comes to civil and contractual legal proceedings.
That said, the fact that the registered builder or building surveyor has until last year been a natural person individual, has meant that individuals and not the company have been subjected to misconduct complaints at the Victorian Building Authority. Indeed, there is a section of the Building Act 1993 that explicitly states that where a company has breached a provision of that Act (or the Regulations) the breach of the company can also be seen as a breach by the company’s directors.
In terms of gaining corporate registration, there has to be at least one nominee director who is registered in the correct work or discipline category (that matches the application brought by the company). These applications are then lodged with the Victorian Building Authority (“VBA”) and that body in making the assessment will inquire into the work history, financials and insurance bona fides of the applicant. This will include also an inquiry into the record of the nominee director.
Since July 2018 we have had carriage of some matters where corporate registration has been with-held on the basis of concerns by the VBA that the nominee director is not a “fit and proper person”. This test of what is a “fit and proper person” obviously incorporates notions of honesty and integrity of that individual, and their track record in terms of competence and discipline.
We have found that arguments can be run in defence of such allegations, in terms of demonstrating that prior errors made were honest mistakes made in good faith, precautions have been put in place to avoid a recurrence, and that there is no honesty or integrity element that was found wanting on the practitioner’s part. However, the VBA tends to have regard to their most recent guidelines that set out the fit and proper person test, which go beyond intentional dishonest conduct and which allow for consideration of different aspects of an individual’s work character.
We have seen instances where a director has had their record challenged on the “fit and proper person” basis due to such factors as:
(i) having had charges proven against them at the Building Practitioners Board the previous year, even where the charges were seen as minor and only a light penalty had been imposed;
(ii) having allowed their equivalent license to lapse in another State, but not because of any misconduct reason;
(iii) argued breaches of other legislation (ie not the Building Act 1993), for example for alleged pollution offences under the Environment Protection Act 1970 or for prosecutions under the occupational health laws.
Obviously there are questions of degree and if previous charges found proven against an individual are less serious in nature, or are not directly relevant to work as a registered builder of the relevant category, then arguments can be made that the with-holding of corporate registration would be disproportionate. This is because it would have the effect of preventing the company entering into new contracts, and could affect the livelihood of not only the practitioner director and their family, but potentially the livelihoods of employees and contractors of the company.
In particular, the with-holding of such registration could end up imposing a disproportionate “back door” form of suspension on an individual’s ability to practice, in circumstances where the earlier conduct that is again under scrutiny was never going to be serious enough to have this egregious impact in the first place.
Such findings can and should be reviewed, firstly by way of the internal review process via the VBA itself (where you can choose to have a lawyer present to set out your argument) and then if the internal review is unsuccessful, by exercising a further review right to VCAT.
We have found that one should not assume that an initial decision to “knock back” corporate registration will be the final decision, as we have seen such decisions overturned at the internal review stage if a well presented challenge can be mounted at a review conference.
In addition, some thought needs to be given to appropriate indemnity protection to individuals who are willing to take on the role as nominee director of a building company, particularly in regard to potential loss of income arising from misconduct proceedings. This is particularly important for larger companies where the director is further removed from the actual physical work taking place on a given site.
For the reasons explained in some detail above, the risk to the individual director is higher with regard to disciplinary or misconduct proceedings where the individual is exposed, than in regard to civil proceedings (e.g. building defect claims) that tend to focus only on the corporate contracting entity.
There needs to be consideration on whether a deed of indemnity is drawn up between the company that will be taking the corporate registration and the individual director, or alternatively some thought given to whether the director is given a higher remuneration to compensate them for the risk of their position.
Often such directors, particularly in larger operation building companies, are more or less totally reliant on the company’s administrative processes to ensure that quality and standards are maintained and regulations are complied with. Such directors cannot be expected to be on every site and they necessarily must rely on the administrative processes and site supervisors.
For more expert assistance on this area of law and regulation, do not hesitate to take prompt legal advice from practitioners experienced in construction law.
Lovegrove & Cotton Lawyers to the building industry
For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Justin Cotton is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his appointment as Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing email@example.com.