Australian Securities and Investments Commission v Holista Colltech Ltd

Federal Court of Australia|2024-05-17|Before: Ms J, Derrington J

The pecuniary penalty ordered to be paid by the first defendant to the Commonwealth of Australia in the amount of $1,800,000, in respect of the contraventions of s 674(2) of the Corporations Act 2001 (Cth), by Order 1 of the judgment in Australian Securities and Investments Commission v Holista Colltech Ltd [2024] FCA 244 (Holista (No 1)), be paid in two equal instalments.
The penalty be paid over a period of 12 months from 19 March 2024 in the following instalments: (a) $900,000 before 4.00pm AEST on 18 November 2024; and (b) $900,000 before 4.00pm AEST on 18 March 2025.
Pursuant to s 52(2)(b) of the Federal Court of Australia Act 1976 (Cth), the interest payable on the instalments arising from Order 2 be 0% per annum.
If there is any default in payment of the first instalment by the date in Order 2(a): (a) The entire penalty will be due and payable immediately; and (b) Interest will be payable on the entire penalty at the prescribed rate, per r 39.06 of the Federal Court Rules 2011 (Cth), from the date as of which the judgment in Holista (No 1) was entered, in accordance with s 52(2)(a) of the Federal Court Act. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 On 19 March 2024, judgment was delivered in Australian Securities and Investments Commission v Holista Colltech Ltd [2024] FCA 244 (Holista (No 1)). Relevantly, by Order 1 of that judgment, I ordered that Holista Colltech Ltd (the first defendant) pay to the Commonwealth of Australia a pecuniary penalty in the amount of $1,800,000, in respect of its contraventions of s 674(2) of the Corporations Act 2001 (Cth). 2 The issue that remains is whether an order should be made permitting Holista to pay the pecuniary penalty by instalments, and by extension of that issue, the period within which any such instalment payments should be made. To assist in the determination of that issue, Order 6 of the judgment in Holista (No 1) required Holista and the Australian Securities and Investments Commission (ASIC) (the plaintiff) to file and serve written submissions as to whether the penalty under Order 1 should be paid in instalments. 3 For the reasons that follow, it is appropriate that the penalty be paid in two equal instalments in November 2024 and March 2025, respectively.

THE RELEVANT LEGAL PRINCIPLES 4 The question of whether a civil pecuniary penalty is to be paid by instalments has been dealt with frequently by this Court: see, eg, Director of Consumer Affairs Victoria v Hocking Stuart (Richmond) Pty Ltd (No 2) [2016] FCA 1435 (Middleton J); Australian Competition and Consumer Commission v ABG Pages Pty Ltd [2018] FCA 764 (Rangiah J); Australian Competition and Consumer Commission v Ashton Raggatt McDougall Pty Ltd [2024] FCA 351 (Halley J). An order for payment of a penalty by instalments can be made where the financial information before the Court is sufficient to justify such an arrangement: Australian Competition and Consumer Commission v Humax Pty Ltd [2005] FCA 706 at [12] (Merkel J); CEO of AUSTRAC v Crown Melbourne Ltd [2023] FCA 782 at [236] (Lee J). 5 Considering the nature of the decision required, it is appropriate to restate that the primary purpose of an order requiring payment of a civil pecuniary penalty is deterrence: Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; 274 CLR 450 at [15]. In Trade Practices Commission v CSR Ltd [1990] FCA 762 at [40], in respect of pecuniary penalties under the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)), French J stated: The principal, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act. (Emphasis added.) 6 In Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 2) (2005) 215 ALR 281 at [9], Merkel J said: The size of the contravening companies and their respective capacities to pay a penalty were relied on as factors in mitigation in the present case. Plainly, such factors can be relevant to the penalty that is necessary to deter the company from contravening the Act in the future … However, a contravening company's capacity to pay a penalty is of less relevance to the objective of general deterrence because that objective is not concerned with whether the penalties imposed have been paid. Rather, it involves a penalty being fixed that will deter others from engaging in similar contravening conduct in the future. Thus, general deterrence will depend more on the expected quantum of the penalty for the offending conduct, rather than on a past offender's capacity to pay a previous penalty. (Emphasis added.) 7 The Full Court in Australian Competition and Consumer Commission v High Adventure Pty Ltd [2005] FCAFC 247 similarly emphasised the paramount nature of the deterrent effect of pecuniary penalties, at [11]: … as deterrence (especially general deterrence) is the primary purpose lying behind the penalty regime, there inevitably will be cases where the penalty that must be imposed will be higher, perhaps even considerably higher, than the penalty that would otherwise be imposed on a particular offender if one were to have regard only to the circumstances of that offender. In some cases the penalty may be so high that the offender will become insolvent. That possibility must not prevent the Court from doing its duty for otherwise the important object of general deterrence will be undermined. (Emphasis added.) 8 It is a logical corollary, therefore, that where an order for payment by instalments is made, the deterrent effect of the relevant penalty must be preserved. There is potential for such an effect to be undermined where instalment payments are so ordered. As it was put by Edelman J in Australian Competition and Consumer Commission v Multimedia International Services Pty Ltd (No 2) [2016] FCA 490 at [6]: … the longer the delay in payment, the greater the ameliorative effect and the less the deterrent effect of the penalty. (Emphasis added.) 9 I interpolate, however, that - where payment by instalments is ordered - the imperative to preserve deterrence need not be read as justification for an oppressive instalment plan, and that - conversely - an appropriate instalment arrangement can preserve the deterrent effect, and operate in the public interest. The appropriateness of attempting to arrive at such a balance was identified by Rangiah J in ABG Pages at [144]: I accept that deterrence is the primary objective of the imposition of a civil penalty. However, that is principally achieved by the amount of the penalty imposed … In considering the length of time over which a penalty should be permitted to be paid, it is relevant to consider the capacity of a contravener to pay. It is difficult to see that much, if anything, is added to the deterrent effect of a penalty by imposing an instalment plan that simply cannot be fulfilled. There may as well be no instalment plan at all. On the other hand, if allowing the contravener limited amount of additional time to pay is likely to result in full payment of the penalty, that must be in the public interest. (Emphasis added.) 10 Factors otherwise relevant to the imposition of an instalment arrangement include "the nature, size and financial resources of [the contravener]" (emphasis added): Hocking Stuart at [4].

THE PRESENT CASE 11 ASIC urged the Court not to make an order for payment of the penalty by instalments, but that, if the Court were to make such orders, any instalments should be paid over a short timeframe, with interest to accrue at the prescribed rate, in accordance with r 39.06 of the Federal Court Rules 2011 (Cth).

The proposed instalment arrangement 12 By its written submissions, Holista submitted that it should be ordered to pay the penalty by instalments over a three-year period, in accordance with the following arrangement: (i) $20,000 each month for the months of June, September and December 2024, payable by no later than the 28th day of each month, being a total payment in Calendar Year (CY) 2024 of $60,000; (ii) $50,000 each month for the months of March, June, September and December 2025, payable by no later than the 28th day of each month, being a total payment in CY 2025 of $200,000; (iii) $260,000 each month for the months of March, June, September and December 2026, payable by no later than the 28th day of each month, being a total payment in CY 2026 of $1,040,000; and (iv) $500,000 in the month of March 2027, payable by no later than the 28th day of the month, being a total payment in CY 2027 of $500,000. 13 Holista also offered an undertaking that it would, in good faith, review its financial position and capacity to pay the penalty annually, and notify ASIC in the event that the initial payments could be varied to facilitate an appropriately accelerated payment.

Capacity to pay and risk of insolvency 14 Holista submitted that its proposed instalment plan should be preferred by the Court for five reasons. First, it is in the public interest that the penalty be paid in full. Secondly, the plan does not diminish the deterrent effect of the penalty. Thirdly, the plan aims to avoid Holista's experiencing financial hardship and the risk of becoming insolvent. Fourthly, the duration of the plan is not excessive. Finally, unless the Court orders payment pursuant to an instalment plan that can be fulfilled, such as the arrangement proposed, there may as well be no payment plan at all. 15 In support of its submission that absent a payment plan, Holista would face financial hardship and risk insolvency, Holista relied on three affidavits: an affidavit of Ms Loren Ann King, a non-executive director of Holista, dated 23 November 2023, and on which she was cross-examined in the penalty hearing (King Affidavit); and two affidavits of Mr David Ross Deloub, the Chairperson and non-executive director of Holista, dated 2 April 2024 (First Deloub Affidavit) and 8 May 2024 (Second Deloub Affidavit) respectively. 16 It can be accepted that it is in the public interest that penalties imposed by the Court ought to be paid in full and that it is preferable that account be taken of whether any proposed plan might negate the prospect of there being any payment at all: see ABG Pages at [144]. Holista submitted that the instalments proposed represent a "significant proportion of its available cashflows over the relevant period", being, in particular, 97% of the forecast for the month ended June 2024, 37% for the month ended September 2024, 93% for the month ended December 2024, and 70% for the month ended March 2025. 17 The cashflow forecast also accounts for payments being made towards Holista's estimated costs exposure to ASIC. However, it does not account for the circumstances where ASIC might make an order under s 91 of the Australian Securities and Investments Commission Act 2001 (Cth) to recover a portion of the expenses of its investigation: First Deloub Affidavit at [19]-[20]. During oral submissions, Senior Counsel for ASIC informed the Court that, to the extent that any costs are sought by ASIC, it would be prepared to postpone any such recovery of costs until after the penalty had been paid. 18 In the First Deloub Affidavit, Mr Deloub refers to an updated monthly cashflow forecast for the calendar years from 2024 to 2029 (updated forecast). The updated forecast differs significantly from that which had been sworn to by Ms King in the penalty hearing. The differences between the forecast relied on at the penalty hearing, and the updated forecast include: a 92% reduction in the Group cash balance as at December 2024; a significant reduction in projected receipts from customers in the months of January, March, May, July, September and November 2024; the absence of any projected loan repayments from Galen Biomedical Inc. in November and December 2023; and a reduction of approximately one third in the projected receipts from customers in Holista's Malaysian subsidiary. Mr Deloub deposed that the differences between the forecasts were occasioned by the lapse of time since the filing of the King Affidavit, and the quantum of the penalty imposed in Holista (No 1): First Deloub Affidavit at [16]. 19 Subsequent to receiving ASIC's submissions, Holista filed the Second Deloub Affidavit, in which Mr Deloub purported to explain the discrepancies between the forecasts. The downward revision in sales forecast for the calendar year 2024 was attributed to "external market factors" which were said to include a contraction of consumer healthcare in the Malaysian market, the depreciation of the Malaysian Ringgit, delays to the release of new product lines, and global shipping restraints: Second Deloub Affidavit at [9(a)]. Mr Deloub, however, did not proffer any evidence to support these assertions. 20 The ongoing legal fees of this proceeding were also said to be a relevant factor (Second Deloub Affidavit at [9(b)]), although I observe that no reference to legal fees appears in the forecasts. 21 In respect of the non-payment of the loan from Galen Biomedical Inc., Mr Deloub simply observed that, despite the expectation that repayments were to be received in November and December 2023, no amounts have been received: Second Deloub Affidavit at [9(c). No further explanation was proffered, nor was there any indication of what, if any, steps were being pursued by Holista to recover the debt. 22 The reduction in projected receipts was said to correspond directly with the expiration of a contract between Holista and a key customer on 31 December 2023: Second Deloub Affidavit at [10]. However, no explanation was offered as to why knowledge of the expiration of that contract would not have been reflected in the earlier forecast. It was not said to have been unexpected. 23 Similarly, the approximate one third reduction in projected monthly receipts for Holista's Malaysian subsidiaries is said to be "the result of comprehensive adjustments to the sales forecasts … reflecting both an external review and an internal reassessment of our financial strategy": Second Deloub Affidavit at [12]. This is an explanation without elucidation. 24 Moreover, I observe that neither forecast relied upon by Ms King and Mr Deloub was prepared by either of them. The accounts on which Ms King relied were prepared by Mr Edward Tan, Holista's Chief Financial Officer: King Affidavit at [30]. The First and Second Deloub Affidavits are silent as to who prepared the updated forecast. It is curious that, as Senior Counsel for ASIC pointed out, Mr Tan was apparently not asked to give direct evidence of Holista's current financial position. 25 In the circumstances, I have some difficulty accepting the reliability of the cash flow forecasts now put forward by Holista to support its submission that, absent a payment plan, it will face financial hardship and risk insolvency. 26 This is particularly so in light of Holista's Annual Report dated 31 December 2023, which was tendered by ASIC. Relevantly, the Annual Report, and the financial statements therein, were signed by Mr Deloub. The independent auditor's report enclosed is dated 28 March 2024. That report states: Material Uncertainty Relating to Going Concern As referred to in Note 1 to the financial statements, the financial statements have been prepared on a going concern basis. On 31 December 2023, the Group had cash and cash equivalents totalling $59,767, net deficiencies of $3,386,159, incurred a loss after tax for the year of $4,919,087 and incurred net cash outflows from operating activities of $409,667. These matters, and other matters disclosed in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. 27 Note 1 refers to the prospect of the Court ordering that the penalty should be paid in instalments and states that "[a]s at the date of [the] financial report, the payment plan has not yet been agreed". In Mr Deloub's Directors' Report, he observes that "[e]ffective liquidity management, contingent upon a structured repayment schedule for the penalty, is paramount to ensuring the company's ongoing viability and future success". 28 Nevertheless, the enclosed consolidated statement of profit and loss and other comprehensive income included in the financial statements accounted for the $1.8 million penalty as a current liability. Note 30, albeit referring to contingent liabilities, states that the pecuniary penalty has been imposed and that "[i]nline with the judgement, the Company have provided a liability for $2 million for the financial year ended 31 December 2023." Note 30 also states, "[t]he prosecution commenced by ASIC in relation with Directors, Ex-Directors, and Ex-Company Secretaries is coverable by the insurer of Director and Officers insurance policy [(D&O Policy)]." No evidence was adduced as to what cover was, in fact, available to Holista under its D&O Policy. 29 As ASIC submitted, it is also apparent from the financial statements that the provision for a $2 million liability has been accounted for within "[t]rade payables" and so was treated as being payable by 31 December 2024. 30 Further, Mr Deloub stated in his "Letter from Chair": • "[o]ur performance in FY2023 should be seen against the backdrop of our emergence from nearly two years of movement restrictions in Malaysia due to the pandemic"; • "[w]hile Group revenue declined 28% to $5.9 million in FY2023 compared to FY2022, Holista demonstrated resilience by achieving a 70-basis point increase in gross margin to 49.1% and a 63% improvement in net operating cash outflow to $410,00"; • "[t]he Court's decision on 19 March 2024 and the immediate changes outlined above will eliminate a layer of uncertainty which had held back product launches and affected negotiations with suppliers. At the same time, we expect our non-operational costs to decline substantially in the current year. The closure of this matter will free up resources and management time to re-focus on organic growth …"; • "management expects to deliver an improved result for FY2024 due to growth in revenue and operating leverage from cost efficiencies achieved in FY2023"; • "sales have been improved from the low experienced in the second quarter of 2023. Consumer spending in Malaysia is starting to recover"; • "[t]he Group is in active negotiations with Behn Meyer Thailand for a new supply agreement"; and • "Holista believes it will deliver improved results in FY2024 as a result of the expected growth of its two largest divisions … which contributed around 95% of total revenue in FY2023, is likely to more than offset weakness in other divisions [sic]". 31 These optimistic statements are somewhat difficult to reconcile with Mr Deloub's explanations for the downward forecast for the 2024 calendar years as compared with the previous forecast. 32 Similar optimism is evident in the ASX Announcement dated 29 February 2024, titled 'Rebasing the Business to Position for a Recovery in 2024', being Annexure DRD1 to the First Deloub Affidavit. 33 The First Deloub Affidavit also annexes (by Annexure DRD2) a 'Appendix 4C and Activities Report: Building the Base for a Stronger 2024' in respect of the three months ended 31 December 2023, dated 31 January 2024. Relevantly, it records "[t]he Group's total available funds at the end of the quarter was $1.3 million, which is made up of $59K in cash and cash equivalents and $1.2 million in available but undrawn trade facilities". 34 A more recent Appendix 4C Report, dated 30 April 2024, was tendered by Holista, and postdates the judgment in Holista (No 1). That report relevantly states: • Total sales rose 18% Quarter-on-Quarter (QoQ) to $1.7M in 1QFY24. • Operating costs fell by 6% QoQ due to good cost control and easing inflationary pressures. • Holista's largest division, Dietary Supplements, was the key growth driver with sales increasing 56% QoQ to $1.6M. • Sales from Food Ingredients and Ovine Collagen divisions expected to recover after falling in the latest quarter. • The Group's total available funds at the end of the quarter was $1.1 million, which is made up of $49K in cash and cash equivalents and $1.051 million in available but unused trade credit facilities. 35 ASIC accepted that the finance facilities could not be used to pay the penalty, but also submitted that the availability of those facilities evidenced the capacity of Holista to use the facilities to arrange its affairs so as to free up cash flow for other purposes, such as payment of the penalty. 36 Whilst I accept that the obligation to pay a penalty of $1.8 million will present a challenge to Holista, I do not accept that, on the evidence before the Court, Holista has discharged its onus sufficiently to maintain its submission that its proposed payment plan should be preferred. In my view, the proposed plan involves an "excessive" period for payment (Hocking Stuart at [19]), noting - for example - that the instalment amount proposed to be paid in September 2024 represents only 37% of its forecasted available cash flow. Consequently, the proposed arrangement would, in my view, operate to "[diminish] the general deterrent effect of the imposition of [the] penalty": Hocking Stuart at [19].

A lump sum payment 37 Although I do not consider that the evidence adduced by Holista is sufficient to justify its proposed payment plan, I am conscious of the need nonetheless to consider the nature, size, and financial resources of the company, and the time that might be required for Holista to re-arrange its financial affairs so as to improve its cashflow in the near future: see Hocking Stuart at [4]. In particular, I am also conscious that Holista employs 51 people, who - in addition to other shareholders in the company - should not be punished for the conduct of the company by any payment schedule that is excessively punitive. As Middleton J exemplified in Hocking Stuart at [4]: An instalment order that [the contravener] is unable to satisfy will have significant consequences for the employees of [the contravener] particularly if the order has the consequence that [the contravener] becomes insolvent. 38 Further, notwithstanding that a contravening company's capacity to pay is less relevant than achieving the object of deterrence, I am not convinced that, in this case, an order requiring payment of the penalty in a lump sum is necessary. The focus of deterrence is on the "[fixture]" of a penalty, not its payment: Leahy at [9]. Indeed, the imposition and quantum of the penalty are the operative features which achieve deterrence, and both aspects of the penalty in this case are, in my view, sufficient to achieve the intended deterrent effect: see Leahy at [9]; CSR at [40].

Payment to be in two equal instalments 39 After taking all matters into account, I am not persuaded that it is necessary, or desirable, to order payment of the penalty in a lump sum. Nor, however, am I persuaded that the instalment plan proposed by Holista would preserve the deterrent effect of the penalty. 40 In my view, it is appropriate that Holista be required to pay the pecuniary penalty imposed by Order 1 of the judgment in Holista (No 1) in two equal instalments. The first, by 18 November 2024, being 8 months after the date of that Order, and the balance on 18 March 2025, being within 12 months of the date of the Order. 41 The forecasted Group cash balance, attested to by Ms King at the penalty hearing, for the month ending November 2024, was $991,212. Further, at that hearing, the evidence contained in the Appendix 4D Half Yearly Report dated 31 August 2023 disclosed that, as at 30 June 2023, Holista had net assets of $262,602. The then most recent Appendix 4C Report, dated 31 October 2023 (the October 2023 4C Report), stated that its total quarterly unaudited sales jumped 48% quarter-on-quarter, and three of its four divisions recorded material improvements. It also stated that Holista had total available funds of $1.5 million, comprising $100,000 in cash and cash equivalents, plus $1.4 million in available but unused debt facilities. In addition, Holista was owed $559,517 by Galen Biomedical Inc. 42 Although the revised Group cash forecast now put before the Court for the month ending November 2024 has decreased dramatically, to $76,680, I do not accept that any reasonable explanation has been given for that. 43 Further, the results referred to in the October 2023 4C Report postdate COVID-19 and the "movement restrictions in Malaysia" that were referred to in Mr Deloub's "Letter from Chair". It is reasonable to assume that those difficulties have passed, and that the optimism conveyed in the Annual Report and the various ASX announcements is genuine. Sales are apparently continuing to grow, the debt from Galen Biomedical Inc. remains due and owing, and is - presumably - recoverable, and cash and cash equivalents, including the financing facilities, are to the value of $1.1 million. 44 From the positive messaging to shareholders and the market, I infer that the actual result for the month ending November 2024 will be higher than $76,680, perhaps significantly so. 45 In all the circumstances, no undue hardship will be visited on Holista by the requirement to pay the penalty within 12 months in two equal instalments. Nonetheless, I do not propose to order that interest be paid on the instalments.

Disposition 46 Accordingly, I will make orders that Holista be required to pay the pecuniary penalty imposed by Order 1 of the judgment in Holista (No 1) in two equal instalments, the first on or before 18 November 2024, and the balance on or before 18 March 2025. 47 Should the first instalment not be paid by the date stipulated, the entire penalty will become due and payable immediately with interest payable on the entire penalty at the prescribed rate per r 39.06 of the Rules, calculated from the date on which the judgment in Holista (No 1) was entered, in accordance with s 52(2)(a) of the Federal Court of Australia Act 1976 (Cth). I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Sarah C Derrington.

Trade Practices Act 1974(Cth)

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