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[2022] WASC 20
General information, not legal advice.
Supreme Court of WA
2022-01-28
Hill J
Original judgment source is linked above.
1 The plaintiff, by way of originating process filed 7 December 2021, seeks relief under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) from compliance with its financial reporting and lodgment obligations under pt 2M.3 of the Act for the financial year ending 30 June 2019. In addition, the plaintiff seeks relief from civil liability in respect of this non-compliance.
2 The plaintiff has provided a frank and detailed explanation as to the circumstances surrounding its non-compliance with pt 2M.3 of the Act. I was and am satisfied that the failure was caused by a misunderstanding of the significance of the change in financial reporting thresholds and how this impacted the plaintiff's obligations, rather than any deliberate disregard of the plaintiff's financial reporting obligations.
3 At the conclusion of the hearing on 14 December 2021, I made orders granting the relief sought and stated that I would publish written reasons for my decision. These are those reasons.
Financial reporting requirements under the Corporations Act
(a) prepare a financial report and a directors' report for each financial year;[2]
(b) have the financial report audited and obtain an auditor's report;[3]
(c) report to members for a financial year by providing to members the financial report, directors' report and auditor's report for that year;[4] and
(d) lodge each of these reports with the Australian Securities and Investments Commission (ASIC).[5]
6 The deadline for these entities to report to members and lodge the requisite documents with ASIC is four months after the end of the financial year.[6]
7 In contrast, a small proprietary company is only required to lodge or audit financial records if directed by ASIC or requested by shareholders holding 5% or more of the company.[7]
8 The plaintiff filed six affidavits in support of its application. These were:
(a) an affidavit of Phillip Alexander Raffan, the chief executive officer and company secretary of the plaintiff, filed 7 December 2021;
(b) an affidavit of Mario Gino Terri, a director and beneficial shareholder of the plaintiff, filed 7 December 2021;
(c) an affidavit of William Cid De La Paz, a director of a beneficial shareholder of the plaintiff, filed 7 December 2021;
(d) an affidavit of Richard James Bond, a director of a shareholder of the plaintiff, filed 7 December 2021;
(e) an affidavit of Andrew Craige Curtis, a director of a shareholder of the plaintiff, filed 7 December 2021; and
(f) an affidavit of Michael James Massarotto, a legal practitioner employed by the plaintiff's solicitors, filed 9 December 2021.
9 The plaintiff is an Australian proprietary limited company. The plaintiff provides medical hair services specialising in the treatment of hair loss. It operates in 21 locations throughout Australia, New Zealand and Singapore.[8]
11 On 21 November 2018, Mr Raffan became aware that the Federal Government proposed to lift the threshold for a 'large proprietary company' from 1 July 2019.[10] At that stage, he believed that the plaintiff would meet two of the three thresholds to be considered a 'large proprietary company' under s 45A(3) of the Act as at 30 June 2019. Specifically, the plaintiff's consolidated gross assets exceeded A$12.5 million and it had 50 or more employees.[11] As a result, the plaintiff was 'a large proprietary company' for the purpose of the Act for the financial year ending 30 June 2019.
12 On 1 July 2019, the Corporations Amendment (Proprietary Company Thresholds) Regulations 2019 (Cth) (Amending Regulations) came into effect. As a result of the increase in the threshold, the plaintiff reverted to being a 'small proprietary company' for the purpose of the Act. From this date, the plaintiff again was not obliged to comply with the financial reporting and lodgment obligations under part 2M.3 of the Act.
13 The plaintiff did not lodge audited financial reports or the ancillary documents with ASIC for the financial year ending 30 June 2019 by 31 October 2019.
14 On 28 October 2020, ASIC wrote to the plaintiff notifying it of its obligation to lodge financial statements for the financial year ending 30 June 2019.[12] On 11 December 2020, Mr Raffan wrote to ASIC explaining why the plaintiff had not filed these documents.[13] Mr Raffan did not receive a response to this communication.
15 On 26 March 2021, ASIC issued a notice to the plaintiff under s 1274(11) of the Act requiring it to lodge audited financial reports and ancillary documents, on the basis that the plaintiff was a large proprietary company for the 2019 financial year.[14]
16 Rather than lodging the financial statements, the plaintiff commenced these proceedings and sought relief from the reporting obligations.
Power under s 1322 of the Act to grant relief sought
(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;
(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.
(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.
18 Section 1322 confers broad authority on the court to grant relief where the statutory pre-requisites are met. The power must be exercised having regard to the interests of all parties affected and the public interest in ensuring compliance with the Act and company constitutions.[15]
Disposition Application by an 'interested party'
19 On the basis of the evidence before me, I accept that the plaintiff is an interested person for the purpose of s 1322(4) of the Act.
20 ASIC has been given notice of this application, served with the papers and elected not to appear at the hearing of the application. ASIC issued a letter to the plaintiff stating it neither consents nor opposes the application.[16]
21 I accept that as at 30 June 2019, the plaintiff was a large proprietary company for the purpose of s 292 of the Act. Accordingly, I accept that the plaintiff was obliged to comply with pt 2M.3 of the Act for the financial year ending 30 June 2019. This did not occur.
22 In its originating process dated 7 December 2021, the plaintiff sought orders under s 1322(4)(a) of the Act relieving the plaintiff and their current and former directors and officers from the financial reporting and lodgment obligations under s 314 and s 319 of the Act for the financial year ending 30 June 2019.
23 As was noted by O'Bryan J in Ozito Industries Pty Ltd v ASIC:[17]
Section 1322(4)(a) empowers the Court to declare that any act, matter or thing purporting to have been done 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. Thus, the power in s 1322(4)(a) is directed to making valid an act, matter or thing where the invalidity arises by reason of a contravention of a provision of the Act or the company's constitution.
24 That is, in order for the court to make orders under s 1322(4)(a) of the Act, it is necessary that:
(a) the proposed orders be framed in a declaratory form;
(b) the plaintiff identify the 'act, matter or thing' that is the subject of the application; and
(c) the plaintiff identify what might be invalid or a contravention that requires validation by the court.
25 The original orders sought by the plaintiff did not identify any of these matters. As a consequence, it was my view that the orders sought could not be made under s 1322(4)(a) of the Act. Prior to the hearing, the court drew the plaintiff's attention to this and the decision of Ozito Industries Pty Ltd v ASIC and requested the plaintiff file an amended minute of proposed orders.
26 Following an exchange with counsel at the hearing of the application, the orders sought by the plaintiff were further amended. The amended orders were framed in a declaratory form, identified the act, matter or thing as the failure to prepare financial reports for the year ended 20 June 2019 and the contravention as a contravention of s 314 and s 319 of the Act.
27 For an order to be made pursuant to s 1322(4)(a), one of the three requirements in s 1322(6)(a) must be met. They are:
(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.
28 The plaintiff submitted that each of the pre-conditions in s 1322(6)(a) was satisfied, although it is only necessary for one to be satisfied.
29 Turning first to the pre-condition in s 1322(6)(a)(ii), in Re ICandy Interactive Ltd, Banks-Smith J undertook a comprehensive review of the relevant principles in respect of whether the persons concerned or the company failed to act honestly.[18] Relevantly, Banks-Smith J considered that:
(a) when determining whether someone has acted honestly for the purposes of s 1322, the courts look to an absence of evidence of dishonesty and prompt action to remedy the error;[19]
(b) the concept of acting honestly can embrace:[20]
(i) inadvertence or a failure to turn their mind to the relevant issue;
(ii) an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all;
(iii) the failure to understand or appreciate the significance of non-compliance;
(c) when testing for honesty, the authorities reveal that the courts look at the company itself, the directors, the company secretary and others as may be concerned.[21]
30 Mr Raffan's evidence is that the plaintiff failed to lodge the required reports at the time on the basis of his belief that:
(a) on 1 July 2019, the plaintiff would resume being a small proprietary company because of the changes to the financial thresholds that had been announced, despite meeting the thresholds as at 30 June 2019 for a large proprietary company;[22]
(b) because of its momentary classification as a large proprietary company before reverting to being a small proprietary company, it was not necessary for the plaintiff to lodge the financial and other reports required.[23]
31 In this case, while the view taken by the plaintiff was incorrect, I accept it was held honestly by the plaintiff.[24] It is clear from the evidence of Mr Raffan, which I accept, that he did not seek legal or accounting advice in relation to the view he had formed. I accept the plaintiff's non-compliance with its obligations under the Act was not a deliberate disregard by the plaintiff of its financial reporting obligations.
32 I am also satisfied, for the following reasons, that it would be just and equitable to make the orders sought. Section 1322(6)(a)(iii) gives the court a wide discretion in exercising its powers under s 1322 of the Act.[25] In this case, none of the shareholders of the plaintiff have requested the plaintiff lodge audited financial reports nor has ASIC directed this to occur. The evidence before the court is that all of the plaintiff's creditors have been paid in full.
33 Before making orders, the court must be satisfied that no substantial injustice has been or is likely to be caused to any person.[26]
34 I have considered the classes of persons who may be impacted by the making of these orders.
35 First, the plaintiff's shareholders. All of the shareholders support the plaintiff's application.[27] I also accept that without orders being made, the shareholders will be prejudiced by incurring substantial costs in the production of audited financial reports which may reduce the amount of dividends to be paid to them[28] and will not provide them with any additional information about the plaintiff's financial performance.
36 Second, the plaintiff's creditors. The creditors have all been paid in accordance with the terms of payment between the plaintiff and its creditors to date.[29] In addition, the plaintiff's creditors have never been provided with or sought access to this type of information.
37 I accept and find that there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the Act to warrant refusal of the relief sought.[30]
38 There is nothing in the evidence before me suggesting that any minority shareholder interest might be oppressed, or any other interest might be affected.
39 In exercising the discretion to grant relief under s 1322(4) of the Act, a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it has been identified.[31]
40 In this case, the plaintiff was first made aware of the obligation to file financial reports in October 2020. Mr Raffan responded to ASIC in December 2020 and did not hear anything further until 26 March 2021, when ASIC issued a notice. After speaking with officers of ASIC in April 2021, in May 2021 the plaintiff engaged solicitors to assist with the matter.
41 Two main reasons were given for the delay in filing proceedings between May 2021 and December 2021. First, the complexity of the issues raised and the structure of the plaintiff which required affidavits to be obtained from its shareholders, some of whom are located outside Australia. This had the inevitable impact caused by working across different time zones. Second, a significant portion of the delay was caused by the turn-around time between solicitors and counsel in drafting the necessary documents.
42 While it could not be said that the plaintiff has acted urgently in finalising the application and seeking a hearing date, I accept that the plaintiff has acted diligently in seeking advice from solicitors and counsel once the issue was drawn to its attention. In particular, I accept that a significant portion of the delay was as a result of the time taken by the plaintiff's solicitors and counsel to finalise documents. In all of the circumstances, I do not consider the delay is a reason I should withhold granting the relief sought.
Relief from civil liability (s 1322(4)(c) of the Act)
43 Section 1322(4)(c) permits the court to make an order relieving a person from civil liability for a broad range of contraventions or failures, subject to the conditions in s 1322(6) that the person concerned acted honestly and that no substantial injustice has been or is likely to be caused to any person.[32]
44 As I have outlined previously in these reasons, I am satisfied that all persons concerned in or party to the contravention acted honestly, and that no substantial injustice has been or is likely to be caused to any person by reason of the contravention or the making of the proposed form of orders.
45 I am satisfied on the evidence before me that relief from civil liability under s 1322(4)(c) should be granted.
46 For these reasons, at the conclusion of the hearing, I made orders in terms of Annexure A.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
[1] Corporations Act 2001 (Cth) s 292(1)(b), (c).
[6] Corporations Act 2001 (Cth) s 315(4) and s 319(3).
[7] Corporations Act 2001 (Cth) s 293 and s 294.
[8] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [4].
[9] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [9].
[10] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [10].
[11] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [11].
[12] Affidavit of Phillip Alexander Raffan filed 7 December 2021 'PAR-2'.
[13] Affidavit of Phillip Alexander Raffan filed 7 December 2021 'PAR-3'.
[14] Affidavit of Phillip Alexander Raffan filed 7 December 2021 'PAR-4'.
[15] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418.
[17] Ozito Industries Pty Ltd v ASIC [2020] FCA 1432; (2020) 148 ACSR 585 [25].
[18] Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 [54] - [104].
[19] Re ICandy Interactive Ltd [54], [106] - [107].
[21] Re ICandy Interactive Ltd [60] - [104].
[22] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [13].
[23] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [13].
[24] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [13].
[25] Re Bellevue Gold Ltd [2021] WASC 80 [65] and the authorities cited therein.
[27] Affidavit of Richard James Bond filed 7 December 2021 [5]; Affidavit of Andrew Craige Curtis filed 7 December 2021 [7]; Affidavit of Mario Gino Terri filed 7 December 2021 [5]; Affidavit of William Cid De La Paz filed 7 December 2021 [8].
[28] Affidavit of Richard James Bond filed 7 December 2021 [5]; Affidavit of Andrew Craige Curtis filed 7 December 2021 [7]; Affidavit of Mario Gino Terri filed 7 December 2021 [5]; Affidavit of William Cid De La Paz filed 7 December 2021 [8].
[29] Affidavit of Phillip Alexander Raffan filed 7 December 2021 [14].
[31] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60].
[32] Re Murray River Organics [2019] FCA 931; (2019) 138 ACSR 365 [28].