Holista's state of mind
56 For the period between 26 May 2020 and 9 July 2020, and after the commencement of the Coronavirus Determination, Holista admits it was "at least negligent" with respect to whether the Non-Disclosed Information would, if was generally available, have a material effect on the price or value of the shares in Holista, or whether Holista knew or was reckless as to that matter.
57 ASIC submitted that the evidence establishes that, in the relevant period, Holista knew, or was reckless, as to the materiality of the Non-Disclosed Information. It urges such a finding in support of a higher penalty range. Holista submitted that it is unnecessary for the Court to make a finding as to knowledge or recklessness because Holista's state of mind is not relevant as an aggravating factor in considering the quantum of the penalty. Holista submitted that the purpose of the Coronavirus Determination was not to give the Court an avenue for increasing penalties in certain circumstances.
58 The purpose of the Coronavirus Determination as described in the Explanatory Statement was "to temporarily modify the continuous disclosure provisions in the [Corporations Act] to facilitate the continuation of business in circumstances relating to COVID-19", albeit that the modifications were subsequently made permanent. In other words, its purpose was to ameliorate the strict liability for breach of the continuous disclosure obligations under the Corporations Act by imposing liability only for breaches committed knowingly, recklessly, or negligently. During the operation of the Coronavirus Determination, and prior to the enactment of ss 674A and 675A by the 2021 Measures, a failure to comply with the modified s 674(2) was both an offence and a civil penalty provision, even in cases of mere negligence. Whilst I accept Holista's submission as to the purpose of the Coronavirus Determination, I do not accept that it is unnecessary for the Court to consider whether Holista had knowledge, or was reckless, as to the materiality of the Non-Disclosed Information. In assessing the appropriate penalty, the "deliberateness" of the contravention and the period over which it was extended is, at least, one of the many factors that courts have identified as generally relevant to the assessment of pecuniary penalties, in addition to any mandatory statutory considerations (in this case, those prescribed by s 1317G(6)): Trade Practices Commission v CSR Ltd [1990] FCA 762; [1991] ATPR ¶41-076 at 52,152-52,153; Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2017) 254 FCR 68 at [101]; Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; 274 CLR 450 at [18], [19]. The use of the term 'deliberateness' in this context is shorthand for the relevant state of mind. ASIC does not contend that Holista deliberately contravened s 674(2).
59 Further, in Australian Competition and Consumer Commission v Reckitt Benickser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25, the Full Court said, at [132]:
Ultimately, a judge must form his or her own views on whether and if so what state of mind existed on the evidence that is before the Court, provided that a party has been given an opportunity to be heard. To do otherwise is to require a judge to surrender an essential judicial function, even if it is not as clear-cut for civil penalty proceedings as it is for criminal proceedings: the CFMEU civil penalty case at [61]. The Court cannot surrender the ultimate responsibility for making the necessary findings leading to penalty, even if any penalty agreed between the parties cannot easily be departed from. The determination of state of mind, if any, is a central judicial function.
60 It remains, of course, for the party asserting a particular state of mind, in this case ASIC, to prove its assertion.
61 I have already observed that the Coronavirus Determination incorporates the definitions of "knowledge" and "recklessness" from the Criminal Code, albeit in the context of a civil penalty provision. Therefore, it is perhaps important to recall and state the nature of the differences between criminal and civil regimes. In the course of considering civil penalty provisions under the Fair Work Act 2009 (Cth) in Pattinson, the High Court observed at [14]:
In Commonwealth v Director, Fair Work Building Industry Inspectorate ("the Agreed Penalties Case"), French CJ, Kiefel, Bell, Nettle and Gordon JJ said that civil penalty provisions of the kind enacted in s 546 have a "statutory function of securing compliance with provisions of the [statutory] regime". Although it is accepted in the authorities that the courts may adapt principles which govern criminal sentencing to civil penalty regimes, "basic differences" between criminal prosecutions and civil penalty proceedings mean there are limits to the transplantation of principles from the former context to the latter. Indeed, the Act is emphatic in drawing a distinction between its civil penalty regime and criminal proceedings. For example: a contravention of a civil remedy provision is not an offence; the rules of evidence and procedure for civil matters are applicable to proceedings relating to a contravention of a civil remedy provision; and a court must not make a pecuniary penalty order for a contravention of a civil remedy provision against a person who has already been convicted of an offence for substantially the same conduct.
(Emphasis added.)
62 As is apparent from the text of the Coronavirus Determination, unlike the Fair Work Act, no "emphatic … distinction" has been drawn between the civil and criminal consequences of contravening s 674(2) of the Corporations Act. Such a breach enlivens both an offence and a civil penalty. It seems therefore that, by the incorporation of the definitions from the Criminal Code, the Parliament intended those definitions to apply to both the offence and the civil penalty provision created by ss 1311(1) and 1317E of the Corporations Act, respectively.
63 By virtue of the application of the definitions of "knowledge" and "recklessness" from the Criminal Code to the Coronavirus Determination (see s 8), "knowledge" is defined in relation to circumstances and results, but not conduct. Section 5.3 of the Criminal Code relevantly provides:
A person has knowledge of a circumstance or a result if he or she is aware that it exists or will exist in the ordinary course of events.
(Emphasis added.)
64 By contrast, "intention", is defined in s 5.2 of the Criminal Code in the following way:
(1) A person has intention with respect to conduct if he or she means to engage in the conduct.
(2) A person has intention with respect to a circumstance if he or she believes that it exists or will exists.
(3) A person has intention with respect to a result if he or she means to bring it about or is aware that it will occur in the ordinary course of events.
(Emphasis added.)
65 Although it is not elaborated upon in the Explanatory Statement, it may be presumed that the decision to incorporate "knowledge" in the Coronavirus Determination as the requisite fault element, rather than "intention", was intended to better facilitate the prosecution of offences under ss 674 and 675 by only requiring proof of "awareness" of the requisite circumstance or result, rather than, for example, subjective belief in the existence of same: see R v Selim [2007] NSWSC 362 at [26].
66 "Recklessness" is defined in s 5.4 of the Criminal Code.
(1) A person is reckless with respect to a circumstance if:
(a) he or she is aware of a substantial risk that the circumstance exists or will exist; and
(b) having regard to the circumstances known to him or her, it is unjustifiable to take the risk.
(2) A person is reckless with respect to a result if:
(a) he or she is aware of a substantial risk that the result will occur; and
(b) having regard to the circumstances known to him or her, it is unjustifiable to take the risk.
(3) The question whether taking a risk is unjustifiable is one of face.
(4) If recklessness is a fault element for a physical element of an offence, proof of intention, knowledge or recklessness will satisfy the fault element.
(Emphasis added.)
67 As provided in s 5.4(3), the question of whether taking a risk is unjustifiable is a matter of fact. The concept of "unjustifiable risk" points to the application of an objective standard of reasonableness, assessed in light of the defendant's knowledge: see, for example, Australian Securities and Investments Commission (ASIC) v Mariner Corp [2015] FCA 589; 241 FCR 502 at [261].
68 It is necessary to understand what is comprised by Holista's admission of being "at least negligent". Holista admits inter alia that, in the period from 9 April 2020 (or, notwithstanding the finding at paragraph [55] above, at least by 22 April 2020 with respect to the second and third pieces of information) to 9 July 2020:
(a) it was aware of the Non-Disclosed Information;
(b) the Non-Disclosed Information was not generally available;
(c) a reasonable person would expect, if it were generally available, the Non-Disclosed Information to have a material effect on the value of Holista's securities. It also admits that it would, or would have been likely to, influence investors.
(Emphasis added.)
69 It admits that in the period from 26 May 2020 to 9 July 2020 it was at least negligent as to whether the Non-Disclosed Information would, if it was generally available, have a material effect on the price or value of Holista securities. This is an admission as to circumstances and results, not conduct.
70 It is uncontroversial that, as directors or officers of Holista, the knowledge of each of Dr Marnickavasagar and Mr Tan is to be attributed to Holista pursuant to s 769B of the Corporations Act, and as a matter of common law: Krakowski v Eurolynx Properties Ltd [1995] HCA 68; 183 CLR 563 at 582-3, quoting Brambles Holdings Ltd v Carey (1976) 15 SASR 270 at 279 (Bright J). Moreover, knowledge of agents of a corporation engaged in a transaction can be aggregated to establish a company's state of mind: Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157 at [2183]-[2184], [2187].
71 Prior to the enactment of the Coronavirus Determination, Holista was strictly liable for any contravention of s 674(2). Nevertheless, its state of mind within that period could still be relevant to the appropriate penalty.
72 From 26 May 2020, it is necessary to establish not merely that Holista failed to notify the ASX of the Non-Disclosed Information, but that it also had the requisite state of mind. Holista has admitted to negligence. An admission that it was at least negligent as to those matters as from 26 May 2020 is to be construed as an admission that Holista fell short of the standard required by s 674(2) to notify the ASX of the Non-Disclosed Information. As Professor Bant has pointed out (Elise Bant, "Modelling Corporate States of Mind through Systems Intentionality" in Elise Bant (ed), The Culpable Corporate Mind (Hart, 2023) 231 at 241):
Negligence is a standard that may apply to conduct and, indeed, to states of mind. Consistently, a person may breach that same standard through conduct so as to attract liability in negligence without any mental state at all. Advertent or inadvertent conduct may both count as negligent: the main focus of the law is on whether the defendant's conduct breached the required standard.
(Emphasis added.)
73 As to whether Holista knew the relevant information would have a material effect on the price of its shares, the incorporation of the Criminal Code definition of "knowledge" should be construed as displacing the usual classification of types of knowledge for the purposes of civil liability, as set out in Baden Delvaux & Lecuit v Société Générale pour Favoriser le Développement du Commerce at de l'Industrie en France SA [1992] 4 All ER 161, 235, 242-43. Consequently, what must be established is the first of the five Baden categories - actual knowledge - with the other categories being wilful blindness; wilfully and recklessly failing to undertake such inquires as would an honest and reasonable person; knowledge of circumstances that would indicate the facts to an honest and reasonable person; and knowledge of circumstances that would put a reasonable person on inquiry: see Baden at [250]. In Selim at [26], Fullerton J explained that:
Where knowledge as to a state of affairs might be taken to include a belief as to the existence of that state of affairs under the Queensland Code or at common law, this is not the position under the Code. The definition of knowledge in s 5.3 of the Criminal Code eschews belief and imposes a more exacting standard of conscious awareness.
(Emphasis added.)
74 Similarly, with respect to the definition of "recklessness" in the Criminal Code, it is not sufficient for ASIC to establish that the relevant risk was simply obvious or well known. Conscious awareness of the substantial risk is required: Hann v Commonwealth of Australia [2004] SASC 86; 88 SASR 99 at [26]; R v Alif, Amin and Zolmin [2012] QCA 355; [2013] 2 Qd R 140 at [68].
75 ASIC submits that the evidence enables a finding that Holista knew, or was reckless as to, the materiality of the Non-Disclosed Information. ASIC referred first to the 9 April 2020 Announcement, and submitted Holista's decision to make the announcement was due to its knowledge that such an announcement would receive market interest. I accept that the only logical inference to be drawn from that announcement is that Holista knew that the market was likely to respond to such a "good news" story.
76 Secondly, the orders announced represented more than 50% of Holista's revenue from the previous financial year. I infer that the significance of the increase in revenue would have been known to Holista. This inference is supported by Professor Putnan's expert report, dated 17 April 2023, which was unchallenged, and noted that the positive return from 9 April 2020 was a price increase of 14.29% on the day of the 9 April 2020 Announcement and that such a return is substantial both in an absolute sense, and relative to Holista's stock volatility. ASIC submitted that I may infer that, by 26 May 2020, when Mr Usher requested an amendment to the announcement, Holista knew the impact of its disclosure on the share price because it was readily observable. I accept that submission.
77 Thirdly, in his affidavit dated 24 August 2022, Mr Fraser's unchallenged evidence was that he was aware of the materiality of the revenue forecast. He deposed:
This announcement was made to keep the market informed because this was a significant contract for Holista and was, accordingly, market sensitive and there was a high level of investor interest in Holista. The amount of $3.8 million referred to in the announcement would make a major contribution to Holista's revenue.
(Emphasis added.)
78 Fourthly, Mr Usher's comment on the draft 9 April 2020 Announcement queried "[c]an we include payment terms of the sales order, timing of cash received in the Coy?" I accept ASIC's submission that this comment indicates a clear awareness of the materiality of the revenue forecast, and of the timing of the cash flow.
79 Fifthly, as at 9 April 2020, Holista knew that Health Therapies had placed orders for only 26,558 bottles of NatShield. Nothing occurred between that date and 22 April 2020, which would indicate that any further orders were yet to be placed. At best, Holista had received via email the Sales Projection Spreadsheet from Mr Maison on 8 April 2020, which were said to be based on "actual discussions". On 22 April 2020, it was made pellucid that Health Therapies had not placed any further orders, and had not ever agreed to prepay for stock.
80 Holista contended that the absence of any evidence that this email was brought to the attention of the Board despite the 9 April 2020 Announcement suggests that Mr Tan and Dr Marnickavasagar were not consciously aware that it was material information. It must be recalled however, that Holista has admitted that, as at 9 April 2020 it was aware: (1) that it did not have orders for 415,000 bottles of NatShield totalling A$3.8M for delivery between April and June 2020; (2) of the unlikelihood of orders being fulfilled; and (3) of the unlikelihood of the revenue target being reached.
81 Prior to the release of the 9 April 2020 Announcement, Mr Usher had queried the omission of the payment terms and the timing of cash to be received, from the terms of the announcement. The only inference to be drawn from that inquiry is that Mr Usher considered it would be useful to inform the market of some details of the otherwise fairly general information regarding its dealings with Health Therapies, which employed language of market expectation in relation to delivery and revenue, in contrast to the very clear statement that Health Therapies only "[had] placed additional orders". It is inconceivable that Mr Usher's inquiry would not have drawn Mr Tan's and Dr Marnickavasagar's attention to the circumstance that, because Holista did not yet have orders for 415,000 bottles of NatShield, they could not respond to Mr Usher's inquiry. There is no evidence that they did respond. It is not to the point that Mr Usher did not advise the Board not to release the 9 April 2020 Announcement without the additional information. In my view, through Mr Tan and Dr Marnickavasagar, Holista was, at this point in time, aware of a risk that the Non-Disclosed Information was material.
82 Sixthly, the draft announcement circulated on 27 April 2020 stated, "[t]he Company expects total sales of A$2,160,000 in the next quarter, an improvement as the Company anticipates increasing orders of NatShield™ to be realised in the 2nd quarter of 2020". Mr Fraser commented:
9 April 2020, HCT announced it had confirmed sales from Health Therapies of $3.8m fulfilled by June 2020.
SO THIS NUMBER IS INCORRECT or THE ANNOUNCEMENT WAS INCORRECT
83 A further draft circulated on 28 April 2020 stated that Holista had:
booked a total cash inflow from customers of A$1,989,000 for the quarter ending 31st March 2020. The Company expects a total cash inflow from customers of A$2.467,000 in the next quarter, an improvement as the Company anticipates increasing orders of Natshield™ to be realised in the 2nd quarter of 2020.
84 On 28 April 2020, Mr Usher asked Mr Tan how confident he was on the June quarter cash inflows from sales receipts. Mr Tan sought to explain the discrepancy between the 9 April 2020 Announcement and the 29 April 2020 Announcement as being a difference between sales (A$3.8 million) and collection (A$2.467 million). ASIC submitted that this email chain demonstrates at least a level of recklessness about the materiality of information, which was undisclosed to the market in circumstances where, on 9 April 2020, a figure of A$3.8 million in recorded revenue between April and June 2020 had been announced. I accept that submission.
85 The final version of the 29 April 2020 Announcement made no express reference to the expected cash inflow in the second quarter.
86 Seventhly, on 31 May 2020, Dr Marnickavasagar emailed the executives of Health Therapies, noting, in particular, that "[Holista] are a publicly-traded company that has serious reporting obligations. By choosing to be [their] Exclusive distributor in North America, [Health Therapies] [had] to be part of [their] obligations". He asked for a number of pieces of information including, relevantly, "weekly reports of sales (from Health Therapies) to the market", a breakdown of "all the channels - online, offline, stores ect [sic]", "a clear business plan with a breakdown of sales, stock forecast, sales-related activities, marketing-related activities, budgeting allocation", and a "monthly sales review".
87 Holista contended that this email suggested that Dr Marnickavasagar was still labouring under a misapprehension that no information of a material nature had come to light that would require the 9 April 2020 Announcement to be rectified. It is, however, equally consistent with Dr Marnickavasagar's attempt to mitigate the associated risk, of which he was, by this time, aware. I accept ASIC's submission that this email evidences Dr Marnickavasagar's awareness of the importance of being able to substantiate the figures that had been disclosed to the market. That he was aware of the importance of these matters is reinforced by the fact that the request followed on from Mr Fraser's request, described below.
88 Eighthly, on 22 May 2020, Mr Fraser wrote to all Board members requesting a Board Meeting on 28 May 2020 and asked Mr Tan to produce, "[a]s a minimum":
the year to date financials by month,
the actual cashflow for YTD from January 2020,
Work papers for the reassessment of the cashflow for 2020,
Application of the $6M raised since January 2020, and
Schedule of all current distribution agreements for each category of product in HCT, and their performance to agreed terms.
89 Mr Fraser deposed to the several occasions between 9 April and May 2020 on which he had requested Dr Marnickavasagar to provide him with an update on the orders of NatShield.
90 The Board Meeting was held on 4 June 2020. Mr Usher deposed that there was a discussion about needing to make an announcement to the ASX if Holista was not going to meet its expected sales targets. He stated that Dr Marnickavasagar said, "he would prepare a market update on NatShield sales and would update the Board on those sales (the) next week".
91 Ninthly, on 23 June 2020, the Board considered the management accounts. They revealed that in the period January to May, total sales amounted to A$202,000 against a budgeted amount of A$167,000. Following that meeting, an ASX announcement was prepared, to be issued on 30 June 2020. On 29 June 2020, Mr Fraser wrote to Mr Tan, copying in the Board, drawing attention to the need for there to be an explicit statement of reasons on the sales achieved for each product line and stating:
I would like to remind the board there is a process for ASX announcements and this must be followed. Attached is an article where such a procedure was not followed. Please provide the supporting material so each Board member can reference data for this release.
92 Later, on the same day, Mr Fraser wrote to Mr Tan, with the Board in copy, and said:
The continuous disclosure requirements prescribe keeping the market informed when the company becomes aware of any notifiable event. HCT must report on all its products if it seeks to keep the market informed not just NatShield.
…
Edward, if you seek to quote the ASX listing rules and guidelines that's fine, as this is an area we are quite familiar so ensure you clearly understand these regulations. Details on the product sales should not wait to be released in the 4D, there is a material change to what has been announced - which if you understood the Listing rules you would know.
…
Specially there is a need for a narrative around SALES and ORDERs for each of HCT's products and if there is a reference to previous announcements then put the date and headline of that announcement into the release.
(Errors in original.)
93 On 30 June 2020, Mr Usher wrote to the Board, relevantly expressing his concern as follows:
The ASX announcement dated 9 April, titled 'US Distributor increases orders of NatShield amounting to $3.8M'. In this announcement it confirms that Health Therapies has placed additional orders for 415,000 bottles totalling $3.8M for delivery between May and June.
In the sales update announcement you say this order is now $1.9M. There is a reference to both sales and purchase orders, so the Company will need to ensure this is properly reconciled and is conveyed clearly on the announcement.
Nonetheless, the difference is a material change and as such should be immediately disclosed to ASX - and should disclosed from the moment the Company is in receipt of such information. From my understanding of the announcement the purchases have been carried forward/delayed through to August, so we will get the $3.8M of purchases - it's just a timing difference. The Board should consider a trading halt until this is reconciled, resolved and disclosed to the ASX. Without suitable narrative around this shortfall it may likely raise concerns with ASX from a continuous disclosure obligation.
(Errors in original.)
94 Dr Marnickavasagar responded by agreeing that it was "just a timing issue". It is apparent that Dr Marnickavasagar was of the view that the $3.8 million in sales would be realised, albeit not in the same quarter that had been announced to the market. His acknowledgment of a mere "timing issue" demonstrates that he was reckless as to the materiality of the information which remained undisclosed as at 30 June 2020.
95 Further draft announcements were circulated amongst the Board in the following days. On 7 July 2020, Mr Usher wrote:
In reference to my earlier email, dated 30 June, as attached, the revised announcement still fails to fully explain the reasons why, between 9 April, where it was disclosed that the company would achieve sales of $3.8M of NatShield by 30 June, to actual sales of $500K. This material variance is not fully explained within the announcement, nor is this announcement referenced.
…
I reiterate that I do not approve the announcement for lodgement as it fails various continuous disclosure requirements. However, as a board you have approved the announcement and I will therefore lodge it with MAP on your behalf.
Please re-confirm your instructions.
96 That same day, Mr Jonathan Pager, a Board member of Holista, responded with "[i]t would be good to know exactly which continuous disclosure requirements fail?"
97 Mr Usher responded by setting out ASX Listing Rules 3.1, 4.1 and 4.4 and s 677 of the Corporations Act. He also wrote:
Expect the ASX to make further enquiries to ascertain when management were first aware that sales of $3.8M were not going to be achieved and why this information had not been disclosed earlier. A false market has in effect been operating which needs to be corrected ASAP.
98 Holista contended that, aside from Mr Tan and Dr Marnickavasagar, the evidence demonstrates that the other members of the Board were not consciously aware of the true shortfall in orders until late June 2020. Even accepting that to be correct, it does not change the knowledge attributable to Holista by the knowledge of Mr Tan and Dr Marnickavasagar as and from 9 April 2020, as I have found. Corporate attribution does not depend upon every board member or senior manager having the same degree of knowledge at the same time: see Australian Securities and Investments Commission v Westpac Banking Corp (No 2) [2018] FCA 751; 357 ALR 240 at [1660].
99 I am satisfied that Holista was aware of a risk that the Non-Disclosed Information was material.