Incat Australia Pty Ltd v Australian Securities and Investment Commission

Incat's business 4 In the early 1970s Mr Robert Clifford operated passenger ferries on the River Derwent at Hobart. Following the collapse of the Tasman Bridge in 1975 the demand for his services expanded greatly. He commenced building small aluminium catamaran ferries. By 1989 Incat, controlled by Mr Clifford, was building fast ocean-going aluminium wave piercing passenger and vehicle carrying catamaran ferries from purpose built facilities at Prince of Wales Bay. The business has been extraordinarily successful. There are currently 79 fast ferries in operation throughout the world, of which 55 are catamarans. Of the latter, Incat have built 26. 5 Uniquely among world shipbuilders, Incat do not build to a customer's order but rather operates a continuous production line. Incat commence the construction of a vessel taking the risk that a buyer will be found before completion. The vessels are virtually identical in design and major components. It is only interior fitout that depends on customer preference. The only significant variation in production is the length, which ranges from 74 metres through to the 96 metre model in current production. Between vessels of different length the only change is that larger vessels have larger engines. 6 The production of an homogeneous product has enabled economies of scale to be achieved resulting in significant cost savings. Due to the production line method vessel deliveries have an established pattern enabling the level of completion of a given vessel to be easily established. Production numbers vary between three and four vessels per annum. 7 Incat Tasmania is the actual builder. It onsells vessels at cost to Incat Australia and another company Incat Chartering Pty Ltd which are responsible for marketing and sales. Incat Tasmania employs a workforce of about 900. On site at any one time there are also twenty or so subcontractors with about 250 employees. Incat are the largest private employer in Tasmania and earn some 15 per cent of the State's export income.

Incat's case 8 Incat contended that because they only make the one product, and a few units of that product each year, if they were obliged to lodge accounts customers and competitors would be able to ascertain the profit per vessel. It was said that this would put Incat at a severe negotiating and competitive disadvantage. Customers would squeeze profit margins in price negotiations. Hence the lodging of accounts would impose "unreasonable burdens" on Incat and would be "inappropriate" in their circumstances.

The AAT's decision 9 The AAT commenced its discussion of the question of "unreasonable burdens" by noting that it was not suggested that there were any particular difficulties in actual compliance. The AAT thought that a judgment had to be made whether the burden or obligation to lodge accounts was "unreasonable" in the ordinary meaning of the word, that is "exceeding the bounds of reason; immoderate; exorbitant" (Macquarie Dictionary), as distinct from something that is moderate or not excessive, that is, reasonable. The AAT referred to an earlier decision of the Tribunal in Mazda Australia Pty Ltd v Australian Securities Commission (1992) 8 ACSR 613 in which "unreasonable" was equated with "overwhelming". In the present case the AAT said (par 20): "The difference is one of degree rather than substance but it seems to me in the present context that while a burden that is overwhelming is an unreasonable one the converse is not necessarily true. Whether a burden may fairly be described as "unreasonable" is essentially one of fact requiring an evaluation of the evidence, having regard to the nature of the requirements to be performed, keeping in mind the policy objective of the legislation that companies of economic significance lodge accounts and the extent of economic detriment (if any) likely to flow to the applicants as a result of compliance." This view of the law was not challenged and I respectfully agree with it. 10 The AAT then reviewed the evidence as follows. The other builders of fast ferry catamarans were Austal Ships, a Western Australian publicly listed corporation, and Kvaerner Fjellstrand of Norway. The former built a range of vessels including, but not confined to, vessels in competition with Incat's larger vessels. The latter was a division of a larger corporation. Mr Roger Mabbott, Incat's European representative, said that it was not possible to make a rough estimate of Incat's profit margins from information that is presently publicly available. In his view sales were usually subject to a number of factors not on the public record, including cost of financing, discounting, price paid for bought in tonnage and the equity (if any) retained by the builder. 11 Incat's accounting methods complied with AASB 1009: Accounting for Construction Contracts. Where an unconditional sales or construction contract exists, the profit on the vessel is brought to account using the percentage of completion method. When a vessel is constructed without an unconditional contract in place the profit on the vessel is recognised when it is sold. Since 1995-96 vessels sold have either been contracted and sold to customers in the same financial years or uncontracted, completed and unsold at balance date and sold in the following or subsequent year. Thus it was said that since 1995-96 it was easier to make an estimate of profit for vessels as 100 per cent of profit on each vessel has been recognised in the year of sale. Customers and competitors no longer need to estimate vessel's percentage of completion. 12 Mr Robin Allardice, Incat's group accountant, prepared estimates of gross profit using two methods of calculation from information in the financial statements to illustrate his contention that reasonably accurate profit margins per vessel were able to be calculated. He contended that, by contrast, methodology advanced by the Commission to calculate profit margins on the basis of publicly available information gave inaccurate estimates. 13 Mr Lance Balcombe, Incat Secretary and Chief Financial Officer, believed that on an examination of the accounts it would be a relevantly straightforward exercise for an "educated user" to calculate profit margins because of the small numbers (three to four per year) of large items. It was well known and publicised in the industry if vessels were chartered or sold and when sold. 14 Mr John Shanahan, an audit partner of Deloitte Touche Tomatsu, opined that Incat fell within the competitive disadvantage guidelines in par 27 of the ASC Policy Statement 43. He referred to the estimates of profit margin made by the Commission on the information available from magazine and newspaper articles as an illustration of the unreliability or imprecision of the exercise, as opposed to the estimates which could be made if the accounts were lodged. 15 The AAT then said (some figures have been removed to preserve confidentiality): "32. Contrary to Mr Abbott's [counsel for Incat] submission, I do not accept, from the evidence as a whole, that precise calculations of the profit per vessel manufactured can be adduced by customers from the information contained in the financial statements, to the detriment of the applicants. Mr Allardice agreed in cross examination that someone undertaking the exercise of calculating operating profit per vessel would have to make a number of assumptions. 33. On a reading of the sum total of Ms McCahey's [Chief Accountant of the Commission] evidence, it is also I think correct to say that a number of assumptions would need to be made, or additional information provided to enable reliable profit estimates for each vessel to be made. That is not to suggest that the principles of prescribed accounting standards and practices have not been adopted but simply to reinforce the view that additional information would be required to assure that meaningful profit estimates per vessel could be made. I accept the conclusion in her statement, that although various estimates of gross profit per vessel can be calculated based on the financial statements of Incat Australia and Incat Tasmania, the financial statements contain insufficient information to enable an external user of them to be confident that any such calculations they make are a substantially accurate estimate of the profit made by the Incat Group on each of the vessels it produces. 34. The factors essential to determine the profit margin derivation per vessel sold are calculated from (a) sales revenue, corresponding costs and sales volume or from (b) operating profit and sales volume. Each factor in either (a) or (b) must be known in order for the unit profit margin to be precisely calculated. In this case a customer would have to rely on sales volume in any one year derived from general industry information, as an adjunct to information expressed in the financial statements. Incat contends that the source of much of the industry information arises from its own marketing activities and customer on site presence may be another source of sales revenue and sales volume information. The intimate knowledge of the Incat operations possessed by Mr Balcombe is obviously not available to the reader or "educated user" of the accounts, for instance it would not be clear to the reader how many vessels are included in the respective accounts, if they are sold within the Incat group at cost and if they are sold or chartered. 35. It was contended by the applicants that if the market became aware of the returns on investment earned by Incat, as the result of the availability of financial statements information, Incat's customers would request increased discounts resulting in lower Incat future profits. There is evidence that indicates that Incat Australia is "always discounting" its vessels based upon a quote price and cites as an example quoting $US [x] on an 86 metre vessel in the knowledge that probably $US [y] will be obtained for it. 36. There is no doubt that the applicants successfully combine an innovative production assembly line construction method and favourable trade discounts and terms from aluminium and component suppliers in order to maximise profit. The results of these and other management strategies have produced favourable returns on investment results. It follows that if financial statement information became known to customers some negative impact on earnings may result in the future from increased discount requests from customers. 37. However, the risk of increased negative pressure on earnings from customers discount demands, especially in the case of any manufacturer enjoying sustained high levels of profitability, is not unique to Incat and does not, in my view, impose unreasonable burdens on the applicants. 38. Even if it were to be accepted that customers were able to make reliable profit estimates this does not necessarily translate into an unreasonable burden for Incat. 39. While I accept the evidence that Incat operates in a very competitive market, and that there are particular features of its business, the evidence of Mr Balcombe, Mr Mabbott, and common commercial understanding, would indicate that there are many and diverse factors including supply and demand considerations, exchange rates, preservation of residual values, economic and political policy considerations which may from time to time influence whether a sale is made and the price at which it is struck. 40. Incat's ability to successfully compete in a very competitive business environment (one in which the evidence disclosed the number of shipbuilders worldwide is diminishing) and its percentage of worldwide sales is testament to the acceptance of the product in the marketplace and the achievement of a reputation for performance and reliability. Equally, with a diminishing number of manufacturers, it is reasonable to infer that customers are aware that their best interests may not necessarily be served if the number of manufacturers diminish even further. A customer will want to do business with a successful corporation with a proven track record of reliability and performance. Evidence of this is the repeat business that Incat procures. Price is obviously a very important consideration in any decision of this magnitude, but it is not the only consideration as Mr Mabbott acknowledged. A customer's first consideration is the operating cost of a vessel and an attraction to some customers is the greater vehicle carrying capacity of the Incat product by comparison with its competitors. 41. To make an order granting relief from compliance pursuant to sub-s. 313(2) of the Law on the basis, implicit in the applicants submission, of unreasonable burden due to the disclosure to customers of a high return on investment, appears to be somewhat different to granting relief because a customer may extract precise information from financial statements of a specific nature, (profit per unit sold), which may be detrimental to future earnings and/or competitiveness. Granting relief to a company solely due to the disclosure of high return on investment results may allow the segmentation of a business to avoid disclosure of high profit, a potential consequence which cannot be in harmony with the object and purpose of the legislation."

Incat's case on appeal 16 Incat's notice of appeal raised grounds to the effect that the AAT ought to have made findings that the lodging of accounts would enable customers to determine "with a substantial degree of accuracy" the profit per vessel and that customers armed with that knowledge would be "so empowered in negotiations" as to enable them to drive down the prices of vessels and that the failure of the AAT to make such findings was so unreasonable that no reasonable tribunal could have failed to so find. 17 These contentions were abandoned at the hearing. Instead Incat relied on an alleged failure of the AAT to make any or any sufficient findings of fact from which its conclusions could reasonably be drawn. There was also said to be a failure to comply with s 43(2B) of the Administrative Appeals Tribunal Act 1975 (Cth) by including in its reasons findings on material questions of fact and a reference to the evidence or other material on which those findings were based. 18 It was further contended that in pars 35-41 of its reasons the AAT wrongly considered whether lodging of the accounts would disclose a high rate of return on the investment of Incat. It was said that it was not part of Incat's case that they would suffer damage from disclosure of a rate of return on investment - the only concern was with the question of profit per vessel. 19 Finally Incat contended that the Tribunal should have found that the Incat companies were "non reporting entities" and that the lodgment of their accounts was "inappropriate in the circumstances" for the purposes of s 313(11)(a)(ii).

Findings of Fact 20 The High Court has warned against an over zealous or pedantic approach in judicial review of administrative decisions where it is alleged some inadequacy may be gleaned from the way in which the reasons are expressed: Minister for Immigration and Ethnic Affairs v Wu Shang Liang (1996) 185 CLR 259 at 271-272. This caveat is particularly apt in the present case where the AAT was being asked to make abstract predictions as to what sort of information a particular class of people (Incat customers) may be able to deduce from published accounts and answer the further, essentially speculative, question as to what effect the disclosure of any such information might have on Incat's ability to maximise the price for their vessels. 21 The profit of a business, either overall or attributable to a particular unit of production, is ultimately a matter of estimate rather than arithmetic calculation. This can often be a complex and problematic exercise (see eg Dart Industries Inc v The Décor Corporation Pty Ltd (1993) 179 CLR 101). Competent people may reach different conclusions. I do not think the AAT can be criticised for failing to express its findings in any more precise terms than it did. 22 Viewed in that light it seems to me that the passage quoted above from the AAT's reasons at par 32 and following contain an adequate discharge of its functions. A critical finding of fact is contained in the first sentence of par 32. There is reference to the evidence on which that finding is based, namely the evidence of Mr Allardice and Ms McCahey. In particular the AAT indicates that it accepts Ms McCahey's evidence as to the need for the hypothetical reader of the accounts to make a number of assumptions. A reference to the evidence or other material on which findings are based can, where appropriate, take the form of simply identifying evidence in a way which enables the reader to assess the link between the evidence and the finding. It is not mandatory for the AAT literally to set out in its reasons all the evidence it has relied on in coming to its findings. 23 Nor is a decision-maker required to give reasons for rejecting evidence inconsistent with the findings made or to give reasons for rejecting, or attaching no weight to, evidence or other material which would tend to undermine any finding: Addo v Minister for Immigration and Multicultural Affairs [1999] FCA 940. The AAT did not have to give "a line-by-line refutation of the evidence for the claimant either generally or in those respects where there is evidence that is contrary to findings of fact made by the Tribunal." (Re Minister for Immigration and Multicultural Affairs ex parte Durarajasinghan [2000] HCA 1 at 23 (McHugh J). 24 The two authorities just mentioned dealt with review of decisions of the Refugee Review Tribunal under the Migration Act 1958 (Cth) but the principles are equally applicable to appeals from the AAT. 25 This practical approach is essentially the same as that discussed by Woodward J in relation to the obligation under s 13(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth) in Ansett Transport Industries (Operations) Pty Ltd v Wraith (1983) 48 ALR 500 at 507. His Honour thought that s 13(1) "… requires the decision-maker to explain his decision in a way which will enable a person aggrieved to say, in effect: 'Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging'." 26 In the present case the material before the AAT included a detailed written statement by Ms McCahey who is the Chief Accountant of the Commission. She is a Chartered Accountant and has had extensive experience with KPMG, as a lecturer in the Commerce Faculty of the University of Melbourne and at the Australian Accounting Research Foundation where she was Director of Accounting Standards. In her conclusions, McCahey says: "While various estimates of gross profit per vessel can be calculated based on the financial statements of Incat Tasmania, Incat Australia and Incat Chartering, for the reasons outlined in paragraphs 27, 28, 30 and 32 it is my opinion that the financial statements contained insufficient information to enable an external user of them to be confident that any such calculations they make are a substantially accurate estimate of the profit made by the Incat group on each of the vessels it produces." 27 In turn those earlier paragraphs of her statement contain discussion of detailed aspects of the accounting in question. Plainly it was open to the AAT to accept Ms McCahey's evidence. In expressing its reasons in the way it did the AAT made sufficient reference to her evidence and discharged its obligations under s 43(2B).

Return on investment 28 The essence of the complaint here is that the AAT dismissed a contention which Incat did not make, namely that the lodging of their accounts would disclose their return on investment and hence give a negotiating advantage to customers. 29 The short answer would seem to be that if Incat did not rely on this argument then they are no worse off for it being rejected. But in any case the AAT was engaged in an administrative enquiry, not a judicial determination defined by pleadings. I do not see that this particular question was inherently irrelevant to the ultimate exercise of the discretion which the AAT had to exercise. The AAT was not legally disentitled from considering it. And such consideration did not rebound in any adverse way on Incat.

Inappropriateness; non-reporting entity 30 At the relevant time a "large proprietary company" was required to lodge, inter alia, its financial statements: s 317B. The definition of "large proprietary company" depended on certain minimum revenue ($10 million) gross assets ($5 million) and employee numbers (50) criteria. It was common ground that Incat substantially exceeded all these criteria and were obliged to lodge accounts, unless the relief sought was granted. 31 The content of the actual obligations of a particular company depended on whether it was a "reporting entity", a concept which the Corporations Law left to regulations to define: s 294A(1). The Statement of Accounting Concepts SAC 1 defined a "reporting entity" as follows: "Reporting entities are all entities (including economic entities) in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources." 32 Incat contended that the Incat companies were "non-reporting entities" and that their accounts were not required to be, and were not in fact, general purpose accounts. Incat only supplied limited, special purposes financial statements to banks and other major financiers, major creditors, export credit insurers, underwriters and credit rating agencies. It was said that it was not reasonable to expect there would be users dependent on general purposes accounts. There was "no need for financial information to be made available on the public domain via lodgment of accounts". Thus it was "inappropriate" to require the lodgement of accounts. 33 The AAT said: "52. At the end of the day it is not a question of whether a company is a reporting entity but whether or not it is a large proprietary company. The introduction of a distinction between "small" and "large" in the 1995 Act in place of the former distinction between exempt and non exempt proprietary companies meant that financial reporting obligation are based on criteria relating to the economic significance of a company. A proprietary company classified as "large" is inherently economically significant because to be so classified it has to satisfy criteria relating to its economic significance. The obligation to lodge accounts flows from its status as a large proprietary company following the legislative distinction made between small and large proprietary companies not whether it is a reporting entity, a concept removed from the Law. As the Explanatory Memorandum to the legislation noted, the financial reporting requirements have been strengthened for companies which have significant economic impact. Furthermore the legislative policy underlying the requirement to lodge accounts is indicative of the expectation that there are users of the accounts. 53. Because the applicants fulfil the criteria for classification as large public companies it is reasonable to expect there will be users of the accounts. I would respectfully agree with the view of the Tribunal inMazda that 'users' should be given the widest possible interpretation and not restricted to shareholders, potential shareholders, creditors, potential creditors and customers: see Liquid Air at 34. 54. The Incat group is a major player in the production of fast ferries worldwide producing 3-4 vessels per year in a worldwide demand of approximately 10 per year. The Incat group is economically significant in the market in which it operates both in economic and political terms, particularly to the Tasmanian economy, not only in generating export earnings but in the development and utilisation of a skilled manufacturing base. 55. While it is noted that the applicants provide financiers, export credit insurers, credit rating agencies, underwriters and major creditors with special purpose financial statements, on the other hand fiscal information for trade creditors appears to be provided by the applicants on a discretionary basis and is not made available to 'minor' goods and services providers and potential investors. Trust unit holders are permitted to peruse financial statements and to discuss this information with a financial executive. This practice of providing relevant information only to selected groups seems to be to be inconsistent with the intent of the legislation. 56. Another potential category of 'users' is the Incat workforce. The focus of the system of industrial regulation in recent years has shifted from one of conciliation and arbitration in determining award entitlements to one of enterprise and workplace bargaining. Whereas in the past there was a centralised system of wage accords, this has been replaced by collective and/or individual bargaining based on the primacy of enterprise bargaining as enshrined in legislation in recent years. The focus of the system is the facilitation of agreements. Awards are now only to be regarded as a basic safety net with most conditions of employment regulated by enterprise agreements: see Workplace Relations Act 1990 (C'th) also Part IVA of the Industrial Relations Act 1984 (Tas). The Tasmanian legislation makes provision for an enterprise agreement that may or may not involve employee organisations and may be collective or individual. In a bargaining exercise of this nature where the balancing of that which can be afforded against that which may be given up, it is reasonable to expect that as an aid to the decision making process in the present climate of enterprise bargaining, employees may property be regarded as potential 'users' of accounts. The fact that employees or unions were not supplied with any financial statements (or may not have requested any) in negotiating the existing industrial agreement covering production employees, is not to the point." 34 The AAT therefore concluded that it was not "inappropriate for Incat to lodge accounts". This reasoning seems to me free of legal error. I do not see how there has been any failure to make relevant findings. Contrary to Incat's submissions, the AAT's findings necessarily involve a conclusion, which must be one of fact, that the Incat companies were "reporting entities". In any case, the ultimate question is whether a company is a "large proprietary company". 35 The application will be dismissed with costs, including reserved costs.

I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

Counsel for the Respondent: Mr P Rose and Ms F Grey