Australian Securities and Investments Commission v Vocation Limited

MARKOVIC J: 1 On 23 March 2021 on the application of the plaintiff, Red River Resources Limited (Red River), I made orders pursuant to s 1322(4) of the Corporations Act 2001 (Cth) (Corporations Act). The orders were sought because of Red River's failure to comply with the relevant requirements of Ch 2M of the Corporations Act at the time it appointed its current auditors. These are my reasons for making those orders.

background 2 Red River is incorporated in Australia and admitted to ASX Limited's (ASX) official list and whose fully paid ordinary shares have been admitted for quotation on ASX's market. 3 On 22 November 2013, at its 2013 annual general meeting (AGM), Red River appointed Rothsay Chartered Accountants (Rothsay) to the office of company auditor. 4 On 9 April 2018 Red River's board of directors resolved to appoint RSM Australia Partners (RSM) to the office of company auditor, subject to the Australian Securities and Investments Commission (ASIC) accepting Rothsay's resignation. On 1 May 2018 ASIC consented to Rothsay's resignation. 5 On 11 May 2018 Rothsay provided written notice of its resignation, and of ASIC's consent, to Red River. 6 On 14 May 2018 Red River disclosed to the market that RSM had been appointed as the company's auditor because of the resignation of Rothsay and that a resolution to ratify the appointment of RSM would be put to shareholders at the 2018 AGM. 7 Between May and August 2018 Cameron Bodley, Red River's company secretary, was involved with Rod Lovelady, Red River's chief financial officer, in the preparation of the full year accounts. From June to August 2018 RSM attended Red River's offices to conduct the audit. Mr Bodley was involved in liaising with RSM at the time. 8 Mr Bodley prepared a notice of general meeting dated 21 September 2018 for the 2018 AGM (2018 Notice). That notice did not include a resolution to appoint RSM as company auditor. 9 On 25 October 2018 Red River held its 2018 AGM. As no resolution to appoint RSM was included in the 2018 Notice, no such resolution was made at the meeting. 10 On 6 November 2019 and 25 November 2020 respectively Red River held its 2019 AGM and its 2020 AGM. The notices of general meeting for each of the 2019 AGM (2019 Notice) and 2020 AGM (2020 Notice) did not include a resolution to appoint RSM as company auditor and no such resolution was made at either AGM.

Identification of defect in the appointment of RSM as auditors 11 On 9 March 2021 Melkon Palancian, Red River's managing director, read several announcements by New Century Resources Limited (NCZ) regarding its securities being placed in a trading halt in circumstances where it had not obtained shareholder approval for the appointment of its auditor (NCZ Announcements). Upon reading the NCZ Announcements Mr Palancian contacted Mr Lovelady to inquire whether Red River had properly ratified RSM's appointment as company auditor. 12 Later that day Messrs Palancian, Lovelady and Bodley held a conference call during which Messrs Lovelady and Bodley informed Mr Palancian that RSM had not been appointed as company auditor at the 2018 AGM. 13 On 11 March 2021 Mr Palancian instructed Red River's lawyers, Piper Alderman, to provide legal advice in relation to the failure to appoint RSM as auditor at the 2018 AGM. 14 On 18 March 2021 Red River explained the issue to RSM and RSM then sent a letter to Red River confirming its consent to continue as its auditor. 15 On 19 March 2021, Red River's directors resolved that RSM be appointed to the office of auditor.

Shares and cleansing notices 16 Since the 2018 AGM, Red River has issued the following tranches of shares: (1) on 30 June 2019, it issued 750,000 shares to Mr Karl Spaleck, operations manager for the its Hillgrove Mine, following the exercise of options previously issued to Mr Spaleck and others (Option Shares); (2) on 27 August 2019, it issued 23,024,804 shares to Meridian Capital CIS Fund as consideration for the acquisition of the Hillgrove mine and a receivable associated with the Hillgrove mine (Meridian Consideration Shares); (3) on 31 October 2019, it issued 2,532,061 shares following the vesting and exercise of certain performance rights under its 2017 Performance Rights Plan (2017 Rights Plan Shares); and (4) on 29 September 2020, it issued 1,535,502 shares following the vesting and exercise of certain performance rights under its 2018 Performance Rights Grant (2018 Rights Plan Shares), (Relevant Shares). 17 Red River lodged "cleansing notices" with the ASX to be released to the market in relation to each parcel of the Relevant Shares pursuant to s 708A(5)(e)(i) of the Corporations Act (Cleansing Notices). Each of the Cleansing Notices stated that, as at the date of its issue, Red River had complied with the provisions of Chapter 2M of the Corporations Act as they apply to it. 18 Between 5 September 2019 and 8 January 2020, Mr Spaleck disposed of 720,455 of his Option Shares. He continues to hold the remaining 29,545 Option Shares. When Mr Spaleck disposed of those shares, he was not aware of any issue about the appointment of RSM as auditor or that there was any obligation of disclosure in relation to the sale by him of any of his Option Shares. 19 None of the Meridian Consideration Shares were transferred during the 12-month period after their issue and none of the 2017 Rights Plan Shares or 2018 Rights Plan Shares have been disposed of or traded.

Notification to ASIC and the ASX 20 On 22 March 2021, Red River went into a trading halt and issued a release to the ASX about its failure to comply with s 327B(1)(b) of the Corporations Act in which it gave notice under s 708A(9)(c) of the Corporations Act in relation to each of the Cleansing Notices. 21 Between 19 and 22 March 2021 Red River, through its solicitors, engaged with ASIC and the ASX in relation to its failure to appoint RSM at the 2018 AGM. 22 By letter dated 22 March 2021, the ASX informed Red River that it does not monitor and enforce compliance with the Corporations Act, that it neither supported nor opposed Red River's application and that it did not intend to appear at the hearing. 23 On 23 March 2021 ASIC informed Red River that it neither supported nor opposed Red River's application and that it did not intend to appear at the hearing of its application.

Statutory framework and legal principles 24 Chapter 2M of the Corporations Act concerns financial reports and audit including, in Div 6 of Pt 2M.4, provisions relating to the appointment and removal of auditors and their fees. 25 Section 327B relevantly provides: (1) A public company must: (a) appoint an auditor of the company at its first AGM; and (b) appoint an auditor of the company to fill any vacancy in the office of auditor at each subsequent AGM. … (2) An auditor appointed under subsection (1) holds office until the auditor: (a) dies; or (b) is removed, or resigns, from office in accordance with section 329; or (c) ceases to be capable of acting as auditor because of Division 2 of this Part; or (d) ceases to be auditor under subsection (2A), (2B) or (2C). … (3) A director of a company must take all reasonable steps to comply with, or to secure compliance with, subsection (1). 26 Section 329(5) of the Corporations Act provides that an auditor of any company may, by notice in writing given to the company, resign as an auditor if the auditor has, by notice in writing given to ASIC, applied for consent to the resignation and stated the reasons for the application and, at or about the same time as the notice was given to ASIC, notified the company in writing of the application to ASIC and ASIC has given its consent. 27 The resignation of an auditor under s 329 of the Corporations Act takes effect on either the day, if any, specified for the purpose in the notice of resignation; or the day on which ASIC gives its consent to the resignation; or the day, if any, fixed by ASIC for the purpose, whichever last occurs: see s 329(8). 28 Section 327C of the Corporations Act concerns the appointment of an auditor to fill a casual vacancy for a public company. It provides: (1) If: (a) a vacancy occurs in the office of auditor of a public company; and (b) the vacancy is not caused by the removal of an auditor from office; and (c) there is no surviving or continuing auditor of the company; the directors must, within 1 month after the vacancy occurs, appoint an auditor to fill the vacancy unless the company at a general meeting has appointed an auditor to fill the vacancy. (2) An auditor appointed under subsection (1) holds office, subject to this Part, until the company's next AGM. (3) A director of a public company must take all reasonable steps to comply with, or to secure compliance with, subsection (1). 29 Section 328A of the Corporations Act provides that a company and its directors must not appoint an individual, firm or company as auditor unless that individual, firm or company has consented in writing, before the appointment, to act as auditor and has not withdrawn that consent before the appointment is made. If a company, or its directors appoint an individual, firm or company as auditor in contravention of s 328(1) the purported appointment does not have any effect and the company and any officer of the company in default are each guilty of an offence: see s 328A(4). 30 Section 328B concerns the nomination of an auditor and relevantly provides: (1) Subject to this section, a company may appoint an individual, firm or company as auditor of the company at its AGM only if a member of the company gives the company written notice of the nomination of the individual, firm or company for appointment as auditor: (a) before the meeting was convened; or (b) not less than 21 days before the meeting. This subsection does not apply if an auditor is removed from office at the AGM. (2) If a company purports to appoint an individual, firm or company as auditor of the company in contravention of subsection (1): (a) the purported appointment is of no effect; and (b) the company and any officer of the company who is in default are each guilty of an offence. 31 Chapter 6D of the Corporations Act concerns fundraising. Division 2 of Pt 6D.2 relates to offers of securities that require disclosure. 32 Section 707, titled "Sale offers that need disclosure", sets out those offers that require disclosure. Relevantly, s 707(3) provides that an offer of a body's securities for sale within 12 months after their issue requires disclosure to investors in certain specified circumstances unless s 708 or s 708A say otherwise. Section 708A, which concerns sale offers that do not need disclosure, relevantly provides: Sale offer of quoted securities - case 1 (5) The sale offer does not need disclosure to investors under this Part if: (a) the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and (b) trading in that class of securities on a prescribed financial market on which they were quoted was not suspended for more than a total of 5 days during the shorter of the period during which the class of securities were quoted, and the period of 12 months before the day on which the relevant securities were issued; and (c) no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (d) no order under section 340 or 341 covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (e) either: (i) if this section applies because of subsection (1) - the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made; or (ii) if this section applies because of subsection (1A) - both the body, and the controller, give the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made. (6) A notice complies with this subsection if the notice: (a) is given within 5 business days after the day on which the relevant securities were issued by the body; and (b) states that the body issued the relevant securities without disclosure to investors under this Part; and (c) states that the notice is being given under paragraph (5)(e); and (d) states that, as at the date of the notice, the body has complied with: (i) the provisions of Chapter 2M as they apply to the body; and (ii) section 674; and (e) sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)). … Obligation to correct defective notice (9) The body contravenes this subsection if: (a) the notice given under subsection (5) is defective; and (b) the body becomes aware of the defect in the notice within 12 months after the relevant securities are issued; and (c) the body does not, within a reasonable time after becoming aware of the defect, give the relevant market operator a notice that sets out the information necessary to correct the defect. (10) For the purposes of subsection (9), the notice under subsection (5) is defective if the notice: (a) does not comply with paragraph (6)(e); or (b) is false or misleading in a material particular; or (c) has omitted from it a matter or thing the omission of which renders the notice misleading in a material respect. 33 Red River seeks relief under s 1322 of the Corporations Act which relevantly provides: (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); (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding; 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. 34 In Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17; [2010] FCA 40 at [43] McKerracher J observed: Notwithstanding the liberal approach to the interpretation of s 1322 of the [Corporations Act], the broad policy underlying s 1322 of the [Corporations Act ] does not authorise the Court lightly to set aside the requirements of the [Corporations Act] where they have not been observed. Each case is to be considered on its merits to ensure that the indulgence sought is appropriate and does not undermine the requirements of the [Corporations Act]: Re Wave (at [29]) per French J (as he then was). However, interested persons should be relieved of unnecessary liability or inconvenience or the consequences of invalid transactions where: (a) non-compliance with the [Corporations Act] is the product of honest and reasonable error or inadvertence; (b) to do so is without prejudice to third parties; and (c) to do so is without prejudice to the public interest in compliance with the [Corporations Act ]. 35 In ICandy Interactive Limited, in the matter of ICandy Interactive Limited (2018) 125 ACSR 369; [2018] FCA 533 (ICandy) at [43] Banks-Smith J said the following about the operation of s 1322: Section 1322 contemplates that there may be instances of non-compliance with the [Corporations Act] and facilitates the validation of non-compliance in certain circumstances. It is remedial in nature and is to be given a liberal interpretation: Re Wave Capital Ltd (2003) 47 ACSR 418; [2009] FCA 969 [29] (Wave Capital). It has been utilised to validate non-disclosure by shareholders who on-sell shares on a number of occasions: Re Golden Gate Petroleum and cases collected at [41(e)]; Re Sprint Energy Limited [2012] FCA 1354; Re Elemental Minerals Ltd (2010) 79 ACSR 277; [2010] FCA 687; Re European Lithium Limited [2017] FCA 894; Re Silver Lake Resources Ltd (2012) 87 ACSR 436; [2012] FCA 32 (Silver Lake); TV2U International Limited [2016] FCA 1556; Re Spectrum Rare Earth Limited [2017] FCA 883 (Spectrum Rare Earth). 36 At [54]-[57] Banks-Smith J considered the meaning of honesty as follows: 54 When determining whether someone has acted honestly for the purposes of s 1322 of [the Corporations Act] the court looks to an absence of evidence of dishonesty: G8 Communications Ltd, in the matter of G8 Communications Ltd (2016) 122 ACSR 22; [2016] FCA 297 at [35]. It also takes into account whether the applicant has taken prompt action to remedy the error: Sprint Energy at [44]; Golden Gate at [48]. 55 The concept of acting honestly can embrace the following: (a) inadvertence or a failure to turn their mind to the relevant issue: Re QBiotics Limited [2016] FCA 873 (QBiotics) at [38]; (b) an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all: Primelife Corporation Ltd v Aevum Ltd (2005) 53 ACSR 283; [2005] NSWSC 269 at [8]; Golden Gate at [47]; Sprint Energy at [43]; (c) failure to understand or appreciate the significance of non-compliance: Sprint Energy at [44]. 56 Consideration of the honesty of an applicant also arises in the context of s 1318 of the [Corporations Act]. In Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 Palmer J stated (at [325]): In my view, when considering whether a person has acted honestly for the purposes of a defence under CA s 1317S(2)(b)(i) or s 1318, the Court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, ie whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the Court must have regard under CA s 1317S(2)(b)(ii) and s 1318. 57 The obtaining of advice does not conclusively establish that a person was acting honestly. It is however an important consideration in determining whether proper competent and expert advice was sought and obtained: Clarke v Great Southern Finance Pty Ltd (recs and mgrs apptd) (in liq) [2014] VSC 516 at [1960].

CONSIDERATION 37 It was not in issue that Red River and/or its directors did not comply with Ch 2M of the Corporations Act in its appointment of RSM as company auditor in 2018 in that: (1) by failing to appoint RMS as auditor of Red River at the 2018 AGM (and at the 2019 AGM and the 2020 AGM), it did not comply with s 327B(1)(b) of the Corporations Act; (2) by failing to appoint RSM as auditor of the company within one month of the 2018 AGM, its directors failed to comply with s 327C(1) of the Corporations Act; and (3) in light of the breaches set out at (1) and (2) above, it is arguable that the directors of Red River have also breached s 327B(3) and s 327C(3) of the Corporations Act. 38 Insofar as the Cleansing Notices are concerned, because of the non-compliance with s 327B(1)(b) and s 327C(1) of the Corporations Act, Red River had not as at the date of each of those notices complied with the provisions of Ch 2M of the Corporations Act. The Cleansing Notices were therefore defective under s 708A(9) of the Corporations Act: see Australian Securities and Investments Commission v Vocation Limited (in liq) (2019) 371 ALR 155; [2019] FCA 807 at [715]. 39 Red River contended that it was arguable that, despite the incorrect statement included in each of the Cleansing Notices about its compliance with Ch 2M, each of those notices was valid for the purposes of s 708(5)(e) and (6) because s 708A(6)(d)(i) simply requires the notice must state that, as at its date, the body had complied with the provisions of Ch 2M. However, for the purpose of this proceeding Red River proceeded on the basis that the Cleansing Notices did not comply with s 708A(6)(d)(i). Accordingly, I do not need to consider whether that is so. 40 Given the concession made by Red River, it follows that the exemption in s 708A(5) of the Corporations Act does not apply to the Relevant Shares and any offer of those securities for sale by shareholders required disclosure to investors in accordance with s 707(3) of the Corporations Act. 41 Red River sought orders under s 1322(4)(a) in relation to its failure to approve the appointment of RSM at the 2018 AGM or any subsequent AGM and the consequent breach in the issuing of the Cleansing Notices which did not comply with s 708A(6)(d)(i) of the Corporations Act at the time they were issued. It also sought orders under s 1322(4)(c) relieving it and its current and former directors from any civil liability arising out of the contraventions of ss 327B(3), 327C(3), 328A(4)(b) and 328B(2)(b) of the Corporations Act and for any person who sold or offered for sale relevant securities during the period from their respective dates of issue until the date on which the Court made its orders. 42 Red River is an interested person for the purposes of s 1322 of the Corporations Act given that it and its directors contravened the Corporations Act and its shares have been onsold in breach of the Corporations Act: see ICandy at [46]. 43 For the following reasons I was satisfied that the orders sought by Red River should be made. 44 In relation to the appointment of RSM as auditor, the evidence establishes that the failure to approve their appointment at the 2018 AGM and any subsequent AGM was caused by the honest inadvertence of Mr Bodley and not because he, or any other person, acted dishonestly or intentionally. In particular: (1) following RSM's appointment on 14 May 2018 by the directors of Red River, Red River disclosed to the market that a resolution to ratify that appointment would be put to shareholders at the 2018 AGM. Red River was aware of the requirement to appoint RSM at the next AGM and indicated an intention to do so; (2) despite being aware of the requirement to appoint RSM at the 2018 AGM, Mr Bodley omitted to include such a resolution in the 2018 Notice due to his own inadvertence. This occurred in circumstances where RSM had been working as auditor between June and August 2018 and Mr Bodley was involved in the process of preparing the full year accounts and worked with RSM in relation to its audit. However, by the time Mr Bodley came to prepare the 2018 Notice he had forgotten that a resolution was required to be passed at the AGM in respect of RSM's appointment; (3) RSM continued to act as auditor in 2019 and 2020. However, as Mr Bodley was not aware that they had not been validly appointed at the 2018 AGM, it did not occur to him at the time of preparing the 2019 Notice or the 2020 Notice that a resolution to appoint RSM was required. I accept that this oversight was caused by honest inadvertence on the part of Mr Bodley; and (4) Mr Palancian also believes that the failure to formalise the appointment of RSM as auditor of the company at one of its AGM's was due to an honest oversight. 45 The evidence also establishes that Mr Spaleck acted honestly in selling his Option Shares. At the time of the disposal of those shares, Mr Spaleck was not aware of any issue regarding the appointment of RSM as auditor and did not understand that there was a requirement for disclosure in relation to the sale. 46 I was also satisfied that no substantial injustice had been, or is likely to be, caused to any person. The orders sought, if made, will regularise the position. As was recognised in Re RCR Tomlinson Ltd [2009] FCA 1130 (RCR Tomlinson) at [23], the contrary may be the case if relief was to be refused. Relevantly: (1) since 14 May 2018 RSM has been engaged to perform, and has performed, the role of company auditor for Red River; (2) RSM has confirmed its consent to be appointed as auditor and the directors of RSM have resolved to appoint RSM as Red River's auditor; (3) Mr Palancian was not aware of any injustice or prejudice that would be caused to any person by the Court making the orders sought; (4) to the extent that any purchaser has suffered loss by reason of the incorrect statement in the Cleansing Notice about Red River's compliance with the provisions of Ch 2M of the Corporations Act, they would likely have independent causes of action available to them and, by the granting of liberty to apply, they would have additional relief by reason of the orders made in this proceeding. Further, the granting of liberty to apply to vary or discharge the orders within a specified time, together with the requirements for notification of the orders, would appear to accommodate any unforeseen injustice: see RCR Tomlinson at [23]-[24]. 47 In addition, if the orders were not made, the following adverse consequences would flow: Mr Spaleck's sale of the Option Shares would continue to be unlawful; any sales of the 2018 Right's Plan Shares would be restricted until 29 September 2021 when the 12-month period under s 707(3) of the Corporations Act expires; and Red River's shares would continue to be suspended from trading and Red River's shareholders would be denied the opportunity to trade their shares. 48 Finally, neither ASIC nor the ASX opposed the relief sought by Red River.

Conclusion 49 For those reasons I made the orders sought by Red River. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.