Aprais Pty Ltd; Twin v Deputy Commissioner of Taxation

Judgment

1. GLEESON JA: Ten companies in a group known as the DAC Group have applied to the Court for relief under s 1322(4) of the Corporations Act 2001 (Cth) relating to non-compliance with the financial reporting and lodging requirements of Pt 2M.3 of the Corporations Act. The plaintiff companies are listed in Schedule 1 to these reasons.
2. Notice of the application has been to the Australian Securities and Investments Commission. ASIC has indicated in writing that it neither supports nor opposes the application.
3. Before addressing the factual circumstances giving rise to the application, it is of assistance to identify the relevant statutory framework.

Statutory framework - financial reporting

1. Part 2M.3 of the Corporations Act sets out the financial reporting requirements of certain entities, including large proprietary companies as defined in s 45A(3), which include strict requirements with respect to preparation, auditing, distribution and lodgement of financial statements and related reports: Corporations Act, ss 292, 301, 314, 315, 316 and 319. The plaintiff companies accept that they each satisfied two of the three thresholds as required by the definition of "large proprietary companies" relating to consolidated revenue, consolidated assets and number of employees: Corporations Act, s 45A(3).
2. In the case of group companies, the reporting obligations can be unduly burdensome. Part 2M.6 confers upon ASIC power to grant certain exemptions and modifications in relation to such matters. One such power is given by s 341 which empowers ASIC to make "an order in writing in respect of a specified class of companies … relieving" the companies and their directors (or auditors) from all or specified provisions of Pts 2M.2 and 2M.3. ASIC has made an order under s 341 designated "Class Order 98/1418" (98 Class Order) which provides relief to a wholly owned subsidiary of a body corporate from complying with the reporting obligations but only if certain conditions are satisfied. The 98 Class Order was replaced with effect from 17 December 2016 by an order designated "Instrument 2016/785" (2016 Class Order) which is to similar effect.
3. The most important condition upon which relief is made available by the class orders is that the holding company prepare consolidated financial reports that cover the subsidiary: Re Dana Australia (Holdings) Pty Ltd, in the matter of Dana Australia (Holdings) Pty Ltd [2006] FCA 355; (2006) 151 FCR 317 at [3] (Finklestein J). Another important condition is that the wholly owned entities and the holding entity entered into a deed of cross-guarantee. Other conditions include:

• the holding company must lodge its annual report with ASIC, as required by s 319;
• the notes to the financial statements must include a short description of the deed of cross guarantee to which the members of the group are required to be a party, and must also include a list of the parties to the guarantee;
• within four months of the end of the financial year, the subsidiary must lodge a notice that the directors have resolved that the subsidiary remain party to the cross guarantee and take advantage of the order;
• supplemental financial data must be consolidated and filed that does not include data from group members that are not party to the deed of cross guarantee; and
• the holding company must state that the members of the group will be able to meet any liabilities arising by virtue of the deed of cross guarantee.

1. Whilst the Corporations Act imposes the primary obligation with respect to financial reporting on the company, s 344(1) imposes an obligation on the directors to take all reasonable steps to comply, or secure compliance, with Pt 2M.3. If directors fail to take all reasonable steps to comply or secure compliance, they contravene the Corporations Act. Section 344(1) is a civil penalty provision.

Factual background

1. The plaintiff companies are members of the DAC Group of companies which provide aged care residential services throughout New South Wales, Queensland, Victoria and Western Australia. The tenth plaintiff, DAC Finance Pty Ltd, is the holding company and the first to ninth plaintiffs are its wholly owned subsidiaries. The Group's 2019 annual operating profit before tax is $895,000; its total net equity exceeds $91 million. Only three of the plaintiff companies traded during the relevant years, namely, Domain Aged Care Management Pty Ltd, Domain Aged Care Qld Pty Ltd and DAC Finance (NSW/Qld) Pty Ltd. Of those companies, only Domain Aged Care Management Pty Ltd is currently trading.
2. The shares in the holding company, DAC Finance Pty Ltd, are privately held by five investors: management and the AJS LTIP Discretionary Trust, which holds shares for employees of the DAC Group; Allium Holdings Pty Ltd, a company ultimately held by GK Goh Holdings Limited, a Singapore company listed on the Singapore Stock Exchange; Odyssey Investment Trust, a unit trust in which all units are held by AMP Capital Global Infrastructure Fund 4; and Aged Care Investment Trust No 1 and Aged Care Investment Trust No 2, each ultimately owned by AMP Life Limited.
3. Between 2008 and 2015, five wholly owned entities that were party to a deed of cross-guarantee dated 26 June 2008 sought to take advantage of the 98 Class Order and have not prepared or lodged any financial reports. The advisers acting on behalf of the DAC Group in 2008, who prepared the deed of cross guarantee and lodged an executed copy with ASIC, did not lodge the opt in notices required under Condition (kb) of the 98 Class Order. During the same period, a further three wholly owned entities that should have been included, but were omitted from the deed of cross-guarantee, have not prepared or lodged any financial reports. These matters were discovered in the course of a recent internal review in late 2019.
4. In 2015, the DAC Group acquired the Aquarius Group of companies which included three large proprietary companies: Aquarius Group Pty Ltd, Aquarius Group Aged Care Pty Ltd, and Aquarius Aged Care Pty Ltd. In the course of the investigation carried out in late 2019, it was discovered that the eighth plaintiff, Aquarius Group Aged Care Pty Ltd, did not comply with the financial reporting requirements under Pt 2M.3 for the two financial years immediately preceding its acquisition by the DAC Group, that is, the 2013 and 2014 financial years. The investigation has not revealed the reason for this non-compliance.
5. Since 2015, eight wholly owned entities which acceded to the deed of cross-guarantee by a deed of assumption on 2 June 2015 have sought to take advantage of the class orders and have not prepared or lodged any financial reports.
6. During the internal review in late 2019 it was discovered that the entities seeking to take the benefit of the class orders have not lodged with ASIC "opt-in notices" of the type specified in condition (k) of the 98 Class Order and have not passed annual resolutions of the type specified in Condition (kb) of the 98 Class Order. The evidence shows that Clayton Utz, the solicitors acting for the DAC Group in 2015 in relation to the deed of assumption, did not advise that it would be necessary for the wholly owned entities which had acceded to the deed of cross guarantee to lodge opt-in notices with ASIC in order to take the benefit of the class order relief.
7. Further, between 2015 and 2019, the parties to the deed of cross-guarantee, including those who acceded to its terms in 2015, have not prepared or lodged any financial reports.
8. Both the deed of cross guarantee and the deed of assumption have, at all relevant times, appeared on the registers maintained by ASIC with respect to the parties to these deeds. Further, since at least 2008, the accounts of the DAC Group have been prepared on a consolidated basis and audited by Ernst & Young, who have given unqualified audit opinions, including that the financial reports have been prepared in accordance with the Corporations Act, that they give a true and fair view of the consolidated financial position of the DAC Group and complied with Australian Accounting Standards.
9. On 21 October 2019, the DAC Group received letters from ASIC notifying it of the failures by certain companies in the Group to lodge their financial statements. As a result, the DAC Group commenced an internal investigation and engaged new external legal advisers to assist it in that regard. The investigation revealed a much greater level of non-compliance. The DAC Group notified ASIC of those additional matters.
10. On 4 December 2019, ASIC issued notices under s 1274(11) of the Corporations Act in respect of the failures to lodge financial statements that ASIC had previously notified.
11. Proceedings seeking relief under s 1322 of the Corporations Act were commenced by the first to ninth plaintiffs on 17 January 2020. It was subsequently discovered that DAC Finance Pty Ltd and the wholly-owned entities party to the deed of cross guarantee did not comply with the following reporting requirements: 1. the boards of each of the wholly-owned entities party to the deed of cross guarantee had failed to pass the annual resolutions required by condition (kb) of the 98 Class Order and cl 6(1)(i) of the 2016 Class Order; 2. DAC Finance had not included as a note to its financial statements the matters specified in cls (i) and (j) of the 98 Class Order and cls 6(1)(v) and (w) of the 2016 Class Order (concerning the deed of cross guarantee); 3. DAC Finance had not prepared its consolidated accounts in a manner which would enable it to comply with the requirements specified in cl (i)(v)-(vi) of the 98 Class Order and cl 6(1)(v)(v)-(vi) of the 2015 Class Order (providing separate information for the members of the consolidated class); 4. DAC Finance had not included within the notes to its consolidated financial statements the matters specified in reg 2M.3.01(1)(h) of the Corporations Regulations 2001 (Cth) (as to the deed of cross guarantee).
12. On 28 February 2020, an amended originating process was filed joining DAC Finance Pty Ltd as the tenth plaintiff.
13. The audited 2019 financial year accounts for the DAC Group have now been lodged with ASIC. In approving those accounts, the board of the tenth plaintiff determined that the 2019 financial year accounts comply with the 2016 Class Order and Pt 2M.3 of the Corporations Act. In addition, the boards of the first and ninth plaintiffs have passed the resolutions required by cl 6(1)(i) of the 2016 Class Order.

Admitted contraventions

1. The plaintiffs acknowledge that they have failed to satisfy from time to time a number of the conditions of the class orders, in particular: 1. cl (k) of the 98 Class Order, which requires a company seeking to take the benefit of the class order relief to notify ASIC of this decision by filing an 'opt-in' notice within four months after the end of the first financial year in respect of which the class order relief is sought; 2. cl (kb) of the 98 Class Order and cl 6(1)(i) of the 2016 Class Order, which require a company seeking to take the benefit of the class order relief to pass annual resolutions by which the directors confirm that they have considered the advantages and disadvantages associated with the company remaining party to the deed of cross guarantee and taking advantage of the class order relief; 3. cl (i) of the 98 Class Order and cl 6(1)(v) of the 2016 Class Order, which require the holding company to include in the notes to its consolidated financial statements specified information relating to, amongst other things, the deed of cross guarantee and where the consolidated financial statements also include entities which are not part of the closed group, (which expression is defined in the 2016 Class Order as "the holding entity and the wholly owned entities") separate consolidation information which is confined to those entities comprising the closed group only; 4. cl (j) of the 98 Class Order and cl 6(1)(w) of the 2016 Class Order, which require certain documents (as applicable) to include a statement as to whether there are reasonable grounds to believe that the members of the extended closed group will be able to meet any liabilities to which they are, or may become, subject because of the deed of cross guarantee; and 5. cl (v) of the 98 Class Order and cl 6(1)(x) of the 2016 Class Order, which requires the auditor of the holding entity to record his or her satisfaction that the conditions referred to in sub-pars 51(c) and 51(d) above, amongst others, have been met.
2. Separately to the non-satisfaction of the class order conditions, the tenth plaintiff, DAC Finance Pty Ltd, acknowledges that it did not comply with the obligation imposed by s 295(3)(a) of the Corporations Act to include certain prescribed information in the notes to its financial statements. Relevantly, there was an omission of a description of the deed of cross-guarantee, as required by cl 2M.3.01(1)(h) of the Corporations Regulations 2001 (Cth).

Relief sought

1. The primary relief sought by the plaintiffs is an order pursuant to s 1322(4)(c) of the Corporations Act relieving the plaintiffs and their past and present directors and officers in whole from any civil liability arising from the contraventions set out in Sch 2 to the amended originating process of the following provisions: ss 188(1)(h), 292(1)(c), 301(1)(i), 314(1), 315(4), 319(1) and 344(1). The plaintiffs submit that relief of this type was granted in analogous circumstances in Re Murray River Organics Limited [2019] FCA 931.
2. If this relief is granted, the plaintiffs do not press the balance of the relief sought in the amended originating process.

Section 1322

1. Section 1322 of the Corporations Act provides in part: 1322 Irregularities … (4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; (b) an order directing the rectification of any register kept by ASIC under this Act; (c) an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a); … and may make such consequential or ancillary orders as the Court thinks fit. (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (6) The Court must not make an order under this section unless it is satisfied: (a) in the case of an order referred to in paragraph (4)(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is just and equitable that the order be made; and (b) in the case of an order referred to in paragraph (4)(c) - that the person subject to the civil liability concerned acted honestly; and (c) in every case - that no substantial injustice has been or is likely to be caused to any person.
2. The "Court" in this context includes the Supreme Court of a state: s 58AA(1), Corporations Act.
3. Section 1322(4)(c) confers a remedial power on a superior court the exercise of which is conditioned on satisfaction by that court that the relevant person concerned in or party to the contravention or failure acted honestly and that no substantial injustice has been or is likely to be caused to any person.
4. It is well established that the provision is remedial in character: Re Wave Capital Ltd (2003) [2003] FCA 969; 47 ACSR 418 at [29] (French J); Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [38] (McKerracher J). The provision is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form: Weinstock v Beck (2013) 251 CLR 396; [2013] HCA 14 at [39] (French CJ). As the Chief Justice explained in Weinstein v Beck at [39], the provision reflects a long-standing legislative recognition that mistakes will happen in corporate governance and that it is not in the public interest that the validity of decisions made in relation to corporations be unduly vulnerable to innocent errors which may be corrected without substantial injustice to third parties.

Interested person

1. An "interested person" has standing to seek relief under s 1322(4). Whilst that expression is not defined, the affected corporation can be the "interested person": Oil Basins Ltd v Bass Strait Oil Company [2012] FCA 1122; (2012) 91 ACSR 700 at [66] (Gordon J), citing by way of example, Australian Innovation Ltd v Petrovsky (1996) 14 ACSR 218 at 223. An interested person will include a person whose financial interests are, or are likely to be adversely affected by a particular matter: Aprais Pty Ltd; Twin v Deputy Commissioner of Taxation [2004] 1 Qd R 450; [2003] QSC 329 at [16] (Holmes J). The plaintiff companies answer that description.

Contraventions

1. The power under s 1322(4)(c) to relieve a person from civil liability in respect of a contravention or failure of the kind referred to in par (a) of sub-sec (4), is enlivened in the present case given the acknowledged contraventions of the Corporations Act by the plaintiff companies in complying with their financial reporting and lodging obligations under Pt 2M.3. Here, the contraventions include any failure by the directors to comply with s 344(1): see above at [7]. Also included are contraventions by the secretary of each of the plaintiff companies of s 188(1)(h) of the Corporations Act which makes the secretary responsible for company contraventions of, relevantly, the obligation under s 319 to lodge annual reports with ASIC.
2. Turning to the relevant conditions referred to in s 1322(6)(b) and (c), in addition to establishing that the person subject to the civil liability concerned acted honestly, the onus is on the plaintiffs to establish positively that no substantial injustice has been or is likely to have been caused to any person (s 1322(6)(c)): Australian Hydrocarbons NL v Green (1885) ACLR 72 at 83; Elderslie Finance Corporation Ltd v Australian Securities and Investments Commission (1993) 11 ACSR 157 at 160.

Acting honestly

1. The requirement of "acting honestly" directs attention to the nature and circumstances in which the non-compliance occurred. The concept of acting honestly involves the absence of dishonesty and can include inadvertence or a failure to turn one's mind to the relevant issue: Re QBiotics Limited [2016] FCA 873 at [38]; or an active, but incorrect, consideration of a legal issue, as well as failure to consider the issue at all: Prime Life Corporation Ltd v Aevum Ltd [2005] NSWSC 269; (2005) 53 ACSR 283 at [8(19)]; and a failure to understand or appreciate the significance of non-compliance: Re Spirit Energy Ltd [2012] FCA 1354 at [44].
2. Inadvertence generally means being 'not properly attentive' or not directing one's mind to the doing of an act due, inter alia, to being ignorant of a requirement that an act be done, or done in a particular way, or by a particular time: Diamond Rose NL v Striker Resources NL (1998) 85 FCR 76 at 81D-E (Lee J), citing Hamilton v Property Investments Ltd [1983] WAR 317 and Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (In Liq) [1991] 2 Qd R 456.
3. A relevant, though non determinative, consideration is whether the person sought and obtained professional advice: Clarke v Great Southern Finance Pty Ltd [2014] VSC 516 at [1960]; Re iCandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 at [56].

Substantial injustice

1. The word "injustice" requires the Court to consider real, and not merely insubstantial or theoretical prejudice. A degree of prejudice to a person or persons may be outweighed if the overwhelming weight of justice is in favour of making the order: Re Compaction Systems Pty Ltd (1976) 1 ACLR 135 at 150.

Analysis

1. In the present case the plaintiffs fairly acknowledge that the number of contraventions for which relief is sought is not insubstantial, but submit that the contraventions were the product of two significant and inadvertent errors, the effects of which continued unnoticed over long periods of time.
2. The first error was made in June 2008 when the DAC Group initially sought to obtain the benefit of the class order relief. At that time advice was obtained from a professional consulting firm, TMF Corporate Services (Aust) Pty Ltd (TMF). The evidence shows that the error occurred because of a combination of: (a) the information provided by the DAC Group to TMF to prepare the draft deed of cross guarantee was incomplete and therefore incorrect; the information omitted three plaintiff companies that satisfied the definition of a large proprietary company under s 45A(3) of the Corporations Act; and (b) TMF did not advise the DAC Group of the particular requirements of the 98 Class Order, including the requirements to lodge opt-in notices and the ongoing obligation to pass annual resolutions at or near the end of each relevant financial year.
3. The current management of the DAC Group and its present external legal advisers have undertaken a comprehensive investigation of the circumstances in which the error occurred in June 2008. Difficulties have been encountered in contacting relevant former employees and unsurprisingly memories have faded. There is no suggestion, however, that the errors were conscious or deliberate.
4. The second error was made in June 2015 when the DAC Group added additional entities into the deed of cross guarantee, including the three plaintiff companies that had been omitted from the original deed of cross guarantee. It seems that advice was not given to the DAC Group by its then advisers Clayton Utz that it would be necessary to lodge opt-in notices with ASIC in order to take the benefit of the class order relief. Nor was advice given as to the need to satisfy the other conditions necessary to take the benefit of the class order relief.
5. The evidence shows that the then company secretary of the DAC Group, Ms Maria Bowling, was unaware of these requirements and expected that Clayton Utz would have advised the DAC Group in respect of any steps that would need to be taken to ensure that the deed of assumption dated 2 June 2015 was effective.
6. When Mr Feek joined the DAC Group as its chief financial officer in June 2018, he assumed that the Group had validly implemented its financial reporting processes in the past, including in relation to the deed of cross guarantee and did not conduct an audit of the steps taken by the Group in the past.
7. Between June 2018 and August 2019 there has been a replacement of the management team of the DAC Group. Mr Feek has been unable to identify the particular cause of the defaults relating to the preparation and lodgement of the financial statements of DAC Finance Pty Ltd, notwithstanding enquiries of former employees and the auditors of that company.
8. The plaintiffs submit, and I accept, that they have acted promptly on becoming aware of the contraventions, both in conducting an internal investigation after receipt of the letters from ASIC in October 2019 and in disclosing further non-compliance to ASIC discovered in preparing the application now before the Court.
9. I am satisfied that the failure to comply with the financial reporting and lodging requirements was not dishonest. I accept that the failure was the result of inadvertence, rather than a deliberate disregard of the plaintiff companies' obligations.
10. I am further satisfied that, subject to one qualification, it may be inferred that all of the persons who engaged in any contravention or failure under the Corporations Act did so in the bona fide belief that the relevant plaintiff company had been relieved from the requirement to report to members and to lodge financial statements with ASIC. The qualification relates to the non-compliance by the directors and secretary of Aquarius Group Aged Care Pty Ltd of their obligations under s 344(1) and s 188 (1)(h) of the Corporations Act in the financial years 2013 and 2014. The absence of any evidence explaining their non-compliance in the two years preceding the acquisition of this company by the DAC Group, means that it is not possible to draw an inference of inadvertence.
11. The question of whether the making of the order will cause any person substantial injustice directs attention here to the interests of creditors and shareholders.
12. There is no real prejudice to creditors, given the following considerations:

• the deed of cross guarantee and deed of assumption have been disclosed on the registers maintained by ASIC with respect to each plaintiff;
• the consolidated accounts of the DAC Group have, since 2008, been audited by Ernst & Young, which on each occasion have expressed an unqualified opinion that the accounts give a true and fair view of the financial position of the DAC Group;
• the evidence shows that the DAC Group is a profitable enterprise and no question of solvency arises. No creditor has in the past issued any statutory demand or commenced winding up proceedings against any company in the DAC Group. There is evidence that the DAC Group has access to approximately $500,000,000 in debt finance, being the undrawn balance of an external debt facility of $900,000,000;

1. As to the interests of shareholders, no shareholder has expressed any concern as to the financial reporting of the DAC Group.
2. It is also relevant to take into account the evidence of Mr Feek concerning the anticipated costs of the first to ninth plaintiffs complying with the reporting and lodging requirements over a period of 12 years, comprising internal costs in terms of employee hours calculated at over $570,000, and external auditing costs in the range of $450,000 to $550,000. In addition, the estimated cost of DAC Finance Pty Ltd preparing and lodging amended financial returns and obtaining the necessary auditors' reports in respect of those financial statements, comprises internal costs of $350,000 and external auditing costs of between $250,000 to $300,000.
3. Taking into account the above matters, I am satisfied that no substantial injustice has been or is likely to be caused to any person by reason of the contraventions, or by the making of the proposed form of order. The proposed order excludes the directors and officers of the ninth plaintiff, Aquarius Group Aged Care Pty Ltd, for the two financial years 2013 and 2014. The ninth plaintiff did not ultimately seek relief in relation to its past directors and officers for those two financial years, which preceded the acquisition of that company by the DAC Group. That carve out is appropriate for the reasons indicated above. Such persons can make their own application for relief under s 1322(4) if they consider a need to do so.

Conclusion and Orders

1. The plaintiff companies have made out a case for the relief they seek in par 1 of the amended originating process, subject to the carve out referred to above at [50].
2. Accordingly, the Court orders that: 1. Pursuant to s 1322(4)(c) of the Corporations Act 2001 (Cth), each plaintiff in Sch 1 of the amended originating process (and its current and former directors and officers, save for the former directors and officers of the ninth plaintiff during the periods 1 July 2012 to 30 June 2013 and 1 July 2013 to 30 June 2014) be relieved in whole from any civil liability in respect of any contravention of or failure to comply with the provisions of the Corporations Act 2001 (Cth) specified in Sch 2 to the amended originating process during the periods specified in that schedule. 2. The exhibits may be returned. SCHEDULE 1 - PARTIES First plaintiff - DAC Finance (NSW/Qld) Pty Limited ACN 129 420 499 Second plaintiff - Domain Group Holdings Pty Limited ACN 123 178 496 Third plaintiff - Domain Aged Care No 2 Pty Limited ACN 104 429 183 Fourth plaintiff - Domain Aged Care (Qld) Pty Limited ACN 104 420 671 Fifth plaintiff - Domain Aged Care No 3 Pty Limited ACN 128 348 569 Sixth plaintiff - Domain Aged Care Management Pty Limited ACN 113 753 834 Seventh plaintiff - Domain Aged Care (Victoria) Pty Limited ACN 118 771 485 Eighth plaintiff - Aquarius Group Pty Limited ACN 152 767 747 Ninth plaintiff - Aquarius Group Aged Care Pty Limited ACN 152 767 756 Tenth plaintiff - DAC Finance Pty Limited ACN 129 420 444

Amendments 17 March 2020 - Amendment to jurisdiction - not visible 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. Decision last updated: 17 March 2020