AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION - Corporations Act 2001 - requirement to lodge annual financial reports by large proprietary companies - application for relief from disclosure - whether disclosure does impose unreasonable burdens on the Applicants - discussion of what is unreasonable - held that disclosure of the companies' activities not held to be unreasonable - decision of the Respondent affirmed.

Corporations Act 2001 ss 45(2), 45A(3), 296(1), 293, 319(1), 340(1), 342(1)(2)(3), Parts 2M.2, 2M.3, 2M.4

Australian Securities and Investment Commission Act 1989

Australian Securities and Investment Commission Policy Statement No 43 - Accounts and Audit Relief

Directors of Liquid Air (WA) Pty Ltd v Commissioner for Corporate Affairs (1989) 15 ACLR 29

Incat Australia Pty Ltd v Australian Securities and Investment Commission [2000] FCA 58

Re Incat Australia Pty Ltd v Australian Securities and Investment Commission [1999] AATA 800

Re DG Brims and Sons Pty Ltd v Australian Securities and Investment Commission (1999) AAR 474

Re Mazda v Australian Securities and Investment Commission (1992) 28 ALD 57

1. This is an application by SRKKK and SRNNN ("the Applicants") for a review of a decision of a delegate of the Australian Securities and Investments Commission ("ASIC") made on 7 August 2001 to refuse the Applicants' application for relief pursuant to s 340 of the Corporations Act 2001 ("the Act") from the requirement to lodge annual financial reports. At the hearing, the Applicants were represented by Dean Jordon, Solicitor, of Clayton Utz, Solicitors, and ASIC was represented by Cassandra Francas, Solicitor, of the Australian Securities and Investments Commission. The evidence before the Tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ("the T Documents") together with the documents tendered by the parties. Howard Michell, the director of the Applicants, gave oral evidence at the hearing.

2. SRKKK and SRNNN are proprietary limited companies. SRKKK is wholly owned by SRNNN and SRNNN is wholly owned by a discretionary family trust. Howard Michell is the sole director of SRKKK and SRNNN. The Applicants are each a "small proprietary company" within the meaning of s 45(2) of the Act, in so far as their consolidated gross operating revenue for the financial years to date has been "less than $10 million". However, it is anticipated that the Applicants will each become a "large proprietary company" in the near future. A "large proprietary company" is defined in s 45A(3) as including a company whose consolidated gross operating revenue for a financial year "is $10 million or more".

3. Section 296(1) of the Act provides that the "financial report for a financial year must comply with the accounting standards". However, a small proprietary company's report does not have to comply with particular accounting standards if the report is prepared in response to a shareholder direction under s 293 that the financial report does not have to comply with those standards.

4. Section 340(1) empowers ASIC, on an application made in relation to a company, to grant relief "from all or specified requirements of Parts 2M.2, 2M.3 and 2M.4" of the Act. Pursuant to s 319(1) of Part 2M.3, a company which is required to prepare or obtain a report for a financial year under Division 1 must lodge that report with ASIC. Under Division 1, pursuant to s 292(1), all large proprietary companies are required to prepare an annual financial report and a director's report.

5. On 12 June 2001, the Applicants, anticipating that they would become large proprietary companies in the near future, applied to ASIC for an order under s 340(1) relieving them from complying with the requirements of s 319(1) - from lodging annual financial reports and a director's report. Section 342(1) states that:

342 Criteria for specific exemption orders and class orders

(1) To make an order under section 340 or 341, ASIC must be satisfied that complying with the relevant requirements of Parts 2M.2, 2M.3 and 2M.4 would:

(a) make the financial report or other reports misleading; or

6. The Applicants contended that to comply with s 319(1) of Part 2M.3 - the lodging of annual financial reports and a director's report - would impose unreasonable burdens. In deciding whether it is satisfied in relation to audit requirements, ASIC must have regard to other matters. Subsections 342(2) and (3) state:

(2) In deciding for the purposes of subsection (1) whether the audit requirements for a proprietary company, or a class of proprietary companies, would impose an unreasonable burden on the company or companies, ASIC is to have regard to:

(a) the expected costs of complying with the audit requirements; and

(b) the expected benefits of having the company or companies comply with the audit requirements; and

(c) any practical difficulties that the company or companies face in complying effectively with the audit requirements (in particular, any difficulties that arise because a financial year is the first one for which the audit requirements apply or because the company or companies are likely to move frequently between the small and large proprietary company categories from one financial year to another); and

(d) any unusual aspects of the operation of the company or companies during the financial year concerned; and

(e) any other matters that ASIC considers relevant.

(3) In assessing expected benefits under subsection (2), ASIC is to take account of:

(a) the number of creditors and potential creditors; and

(b) the position of creditors and potential creditors (in particular, their ability to independently obtain financial information about the company or companies); and

(c) the nature and extent of the liabilities of the company or companies.

7. The reasons stated by the Applicants as to why compliance with s 319(1) would impose unreasonable burdens were as follows: first, the companies are family companies and the director and ultimate beneficial owners wish to preserve their privacy; secondly, the administrative, economic and personal burden on the companies resulting from compliance "would be out of all proportion to the value of the disclosure to those who have an interest in the accounts" of the companies having regard to the expected costs and benefits of compliance (T3).

8. By letter dated 7 August 2001, ASIC advised the Applicants that their applications had been refused (T1). On 25 September 2001, ASIC provided a Statement of Reasons for its decision (T2). In making its decision, ASIC referred to its policy on granting relief set out in Policy Statement No 43, Accounts and Audit Relief. While this policy, last updated on 17 June 1996, refers to superseded provisions of the 1996 Corporations Law, particularly ss 313(1)(b) and 313(11)(b), those sections were in substantially the same terms as ss 340(1) and 342(1) of the Act.

9. The relevant paragraphs of Policy Statement No 43 referred to by ASIC in its Statement of Reasons are as follows:

Subparagraph 313(11)(a)(iii): compliance would impose an unreasonable burden on the company, an officer of the company or the auditor of the company.

[PS 43.23] A requirement of the Law may be burdensome in one of two ways:

(a) there may be a burden associated with attaining compliance with the requirement; or

(b) a burden may result from having complied with the requirement.

[PS 43.24] However, before relief can be granted, the applicant must demonstrate not only that there is a burden, but also that the burden is not unreasonable. In the Mazda case, the Oxford English Dictionary definition of "unreasonable" was invoked to conclude that an unreasonable burden, in the context of the Law, is a burden that goes beyond what is based on reason or good sense, goes beyond what is equitable or is excessive. It was also held that "applicants have a high standard of proof to overcome in showing the existence of an unreasonable burden" and that "the use of the word 'unreasonable', indicates that the balance must be so far against the interests of the application as to be fairly described as overwhelming".

[PS 43.25] In relation to subparagraph (a) of [PS 43.23], for example, the fact that compliance will involve additional costs or that the compilation and analysis of the required information will present difficulties and necessitate the company having to obtain the assistance of an expert does not, in itself, satisfy the unreasonable burden pre-condition. The applicant must demonstrate that the administrative burden is out of all proportion to the value of the resultant disclosures to the users of the accounts. Similar, under subparagraph (b) of [PS 43.23], an application will only be successful if the burden is such that a serious economic detriment will result if there is compliance with the legislative requirement with little or no compensating benefit to users of the accounts: Directors of Liquid Air (WA) Pty Ltd v Commissioner for Corporate Affairs (1989) 15 ACLR 29.

[PS 43.41] ASIC must take into account the matters in s 313(11) of the Law and the objectives underlying the establishment of ASIC, as outlined in s 1(2) of the ASIC Act 1989 (Cth). Subsection 1(2) provides that in performing its functions and exercising its powers, ASIC shall, in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy, strive to maintain, facilitate, and improve the performance of companies and to maintain the confidence of investors in the securities markets by ensuring adequate protection for such investors.

[PS 42.42] The accounts, audit and directors' report provisions of the Law are directed to attaining the objectives of the maintenance of investor confidence and the enhancement of market efficiency through the provision of relevant, reliable and timely financial and other information to market participants and in particular to shareholders and debentureholders and present and prospective creditors.

10. ASIC stated that it was not satisfied that the invasion of the privacy of the beneficial owners of the Applicants resulting from compliance with the requirements of the Act imposed "an excessive burden on the Applicants or on the H E Michell family members, or that it would be overwhelmingly against any [of] their interests for the financial information to be disclosed" (T2, paragraph 13). Furthermore, ASIC was not satisfied that the costs of compliance with the Act outweighed the benefits to the markets, members and creditors. The administrative burden was not out of all proportion to the value of the resultant disclosures to the users of the accounts, and ASIC was not satisfied "that a serious economic detriment as described in PS 43 would result from compliance with the legislative requirements" (T2, paragraph 17).

11. On 16 October 2001, the Applicants lodged an application with the Tribunal for a review of this decision. The parties agreed that the issue to be determined by the Tribunal is whether compliance with the relevant requirements of Parts 2.M2, 2M.3 and 2.4 of the Act would "impose unreasonable burdens" on the Applicants. If the Tribunal so determines, then it must decide whether to exercise the discretion to grant relief pursuant to s 340(1) of the Act.

12. Mr Michell's evidence is that SRKKK and SRNNN are proprietary limited companies. SRNNN is wholly owned by SRKKK, which is in turn wholly owned by a discretionary trust. Mr Michell is the sole director of the Applicants and the principal of and the primary beneficiary of the Trust. The other beneficiaries of the Trust are family members or family owned entities. Mr Michell is also a director of the proprietary company, which is the trustee of the Trust.

13. SRNNN trades in equities, currencies and commodities. It has no creditors other than institutions with whom it may, from time to time, have a negative trading balance which is, in any event, secured. SRKKK invests in liquid assets such as bank bills and other interest bearing deposits. It also acts as a banker to family members, so that revelation of its accounts would reveal their individual borrowings. Neither of the Applicants employs any staff, and expenses such as the salaries of three employees and rent are paid by another family company. The Applicants have no customers or external unsecured creditors.

14. Mr Michell contended that there are two bases upon which the financial affairs of the Applicants should be kept private. First, disclosure of the Applicants' accounts would significantly disadvantage them in so far as the accounts would reveal their trading strategy and the scale of trading. Persons with some knowledge of the Applicants and their operations could supplement their knowledge from the accounts and deduce the Applicants' trading strategy. Others would then be able to mimic their strategy or counter-trade. Secondly, he contended that (A1):

the financial affairs of...[the Applicants] are the private financial affairs of the H E Michell family. My concern is that a corporate "predator" or a financial journalist could with, minimal forensic research, search my name as a company director in order to access the list of companies of which I am a director, and then request financial statements from ASIC. These financial statements would disclose names of family members, including children who have funds on deposit. Furthermore, funds on deposit would be revealed as well as the current nett asset position. It is a very short step to make the linkage between net worth of these companies and that of family members.

Mr Michell said he has been the subject of public exposure in the past and wants to avoid this in the future.

15. Currently, the Applicants' turnover has been curtailed to less than the threshold of $10 million. The Applicants have applied for relief under s 340(1) for the above reasons. They have considered the alternatives, for example operating through a larger number of small proprietary companies, but such arrangements are more difficult and expensive and complicate the organisational and administrative structure and the associated risks.

16. Mr Jordan, for the Applicants, said the Applicants' accounts (A2 and A3) do not currently have to be prepared in accordance with all the Australian Accounting Standards Board ("AASB") standards, for example, AASB 1033 on Presentation and Disclosure of Financial Instruments (A4). Paragraph 5.3 of this standard states:

The entity's objectives for holding or issuing derivative financial instruments, the context needed to understand those objectives, and its strategy for achieving those objectives must be disclosed.

to assist users in understanding what the entity is trying to accomplish through derivative financial instruments.

Thus, SRNNN would have to reveal its trading strategies to the world.

17. Mr Jordan questioned who would benefit from such disclosure. The Applicants are rather special companies in so far as there are no employees, no customers, no unsecured creditors, no shareholder issues and nobody with a real need to know what is in the accounts. The viability of the Applicants would be jeopardised by such disclosures which should, therefore, be considered an unreasonable burden. Disclosure would also reveal to readers of the accounts the individual wealth of members of the Michell family.

18. Mr Jordan referred the Tribunal to the Federal decision in Incat Australia Pty Ltd v Australian Securities and Investment Commission [2000] FCA 58 as to the meaning of "unreasonable" in this context. Heerey J, at paragraph 9, approved the meaning attributed to it by the Tribunal in that case, Re Incat Australia Pty Ltd and Australian Securities and Investment Commission [1999] AATA 800, at paragraph 20:

Whether a burden may fairly be described as "unreasonable" is essentially one of feet requiring an evaluation of the evidence, having regard to the nature of the requirement 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.

19. Mr Jordan also referred to the Tribunal decision in Re D G Brims and Sons Pty Ltd and Australian Securities and Investment Commission [1999] AAR 474, which, he contended, was decided on similar facts. The Tribunal said, at 479, that its obligation was:

to make the correct or preferable decision after an objective assessment of the material before the Tribunal. In doing so it may take into account the Commission's published policy guidelines but must ultimately make its decision according to law.

that disclosure of the financial statements for the year ended 30 June 1997 by lodgment with the Commission could provide the applicant's competitors with commercial information about the applicant so as to unfairly prejudice the applicant in a competitive industry...

Compliance would be inappropriate because the public interest in the lodgment of accounts is outweighed in this case by the potential for the company to be subjected to price competition from major competitors with the inherent potential to make the company no longer financially viable.

20. Ms Francas, for ASIC, submitted that in this case the Tribunal must first be satisfied that compliance would impose an unreasonable burden on the Applicants, and then, secondly, must decide whether to exercise the discretion in s 340(1) to grant relief from compliance.

21. Ms Francas submitted that there is no evidence to support Mr Michell's contention that if accounts for the Applicants are lodged, another entity would be able to mimic their trading strategy or counter-trade thereby undermining the Applicants' viability. The objective of the Act is to ensure that there is a properly informed market. Ms Francas questioned why, if other companies have to comply with the Act's disclosure requirements, the Applicants should not also have to do so. Why should the Applicants be given a competitive advantage over other trading entities?

22. Ms Francas said it is the Accounting Standards which determine what has to be revealed. An alternative open to the Applicants would be to seek an exemption as a non-reporting entity which could then choose not to comply with AASB 1033.

23. Ms Francas said ASIC Policy Statement No 43 notes that a requirement of the Act may be burdensome in one of two ways: first, in attaining compliance and, second, as a result of compliance. This is consistent with the Tribunal's approach in Re Incat (supra). In the present case, the Applicants are seeking to establish that an unreasonable burden would be the result of compliance. Thus, following the principles set out in Re Incat:

the issue for the Tribunal is whether the burden resulting from the lodgment by the applicants of their annual reports is unreasonable, that is, exceeds the bounds of reason, is immoderate or exorbitant, having regard to the policy objective of the legislation that large proprietary companies, being companies of economic significance, lodge accounts.

24. Ms Francas referred to the Statement of Accounting Concepts (SAC 2) Objective of General Purpose Finance Reporting (R1). This discusses, at paragraph 16, the users of financial reports including parties performing a review or oversight function and managements and governing bodies.

25. Ms Francas sought to distinguish the decision in DG Brim (supra) on the basis that in that case the Tribunal found that unfair prejudice would be caused to the Applicant by compliance with the disclosure requirements. By contrast, in the present case, there is no evidence of potential competitive disadvantage or detriment other than Mr Michell's statement. The Respondent therefore submits that the Applicants have not established an unreasonable burden would be imposed by compliance with the disclosure requirements, which, in any event, would only require the disclosure of historical information.

26. Ms Francas submitted that the protection of privacy was not the sort of burden contemplated by the Act. Parliament knew it was dealing with proprietary companies when distinguishing between small and large proprietary companies and must be taken to have intended that once the company's income reached a certain level, different disclosure requirements would apply. Parliament contemplated an informed market in the case of larger proprietary companies.

27. At the conclusion of the hearing, the Tribunal invited the parties to make short written representations on the questions:

Can a large proprietary company be a "non-reporting entity" and, if it is a non-reporting entity, do the Accounting Standards enable the non-reporting entity to prepare special purpose accounts thereby avoiding preparing its accounts in accordance with particular Accounting Standards?

In the Tribunal's view, the answers to these questions could be relevant considerations in making its decision.

28. In its written submissions, ASIC noted that whether the Applicants are reporting entities is a matter for them to decide taking into account the likely users of their accounts and, in particular, whether according to SAC 1, "Definition of the Reporting Entity", paragraph 40, there are users:

dependant on general purpose financial accounts for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources.

there appears to be no reason why the Applicants cannot continue to prepare special purpose financial reports, regardless of whether they become large proprietary limited companies.

29. In their written submission, the Applicants stated that ASIC:

has clearly stated that the potential users of the Applicants' financial reports are broader than creditors and that ASIC does not accept that there are no users who would benefit from access to the Applicants' financial information in order to make their own business decisions...

Accordingly, the Applicants are considered by ASIC to be reporting entities within the definition of paragraph 40 of the Statement of Accounting Concepts 1 and will be required therefore to comply with the Accounting Standards including Accounting Standard 1033.

30. In a supplementary written submission, the Applicants stated that ASIC's submission that "there appears to be no reason why the Applicants cannot continue to prepare special purpose financial reports" flies in the face of and is directly inconsistent with the Respondent's findings in its letter of 11 February 2002.

31. The Tribunal must determine, first, whether, pursuant to s 342(1)(c) of the Act, it is satisfied that compliance with the relevant requirements of Parts 2M.2, 2M.3 and 2M.4 would "impose unreasonable burdens" on the Applicants, and, second, if so, whether to grant relief under s 340(1). The Tribunal notes that in deciding whether the audit requirements for a proprietary company would impose unreasonable burdens on a company, regard should also be had, pursuant to ss 342(2) and (3), to the expected costs and benefits of compliance with the audit requirements, any practical difficulties in compliance, any unusual aspects of a company's operations during the particular financial year, and any other relevant matters.

32. The meaning of unreasonable burden approved by Heerey J in Re Incat (supra) and quoted above involves the following prescription:

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.

33. ASIC Policy Statement No 43 paragraphs 43.23, 43.24 and 43.25 were drafted in the light of the Tribunal decision in Re Mazda and ASIC (1992) 28 ALD 57 and before the Federal Court decision in Re Incat (supra). To the extent that Heerey J in Re Incat approved a prescription for the meaning of "unreasonable burden" which did not follow equating the word "unreasonable" with "overwhelming" as in Re Mazda (supra), paragraphs 43.23 to 43.25 must be read with care.

34. The Applicants' application for relief under s 340(1) puts forward two grounds for their contention that compliance with the relevant requirements imposes unreasonable burdens: first, that disclosure of the Applicants' accounts would cause the Applicants a significant detriment in that their trading strategy and scale of trading could be deduced from an examination of the accounts, thereby jeopardising the Applicants' trading profitably in a competitive market; second, that private information concerning the Applicants and, more particularly, Mr Michell and members of his family, would, thereby, be revealed to their detriment. The evidence adduced in support of this contention was that of Mr Michell, recorded above.

35. The Tribunal did not find the first of these two grounds convincing. A company's accounts are historical documents recording its activities in the past financial year. While the Tribunal accepts that the accounts may reveal information as to past trading strategy and scale of trading on the basis of which predictions could be made by an analyst as to future trading activity, other trading entities of similar size are also likely to be subject to similar accounting disclosure requirements. The Tribunal is not satisfied on the basis of the evidence before it that the Applicants would suffer a significant detriment by reason of the compliance requirements to which they would be subject as a large proprietary company.

36. With regard to the second ground on which relief was sought, namely that of maintaining the privacy of the Applicants and, in particular, that of Mr Michell and members of his family, the Tribunal acknowledged that the Applicants' compliance with the relevant requirements may reveal private information about family members. However, this is a cost of using such a corporate structure to conduct business or financial activities when the objective of the regulatory regime appears to be intended to ensure that once companies reach a certain level of turnover, presumably considered to be of economic significance, then those companies should provide fuller financial accounts. Obviously, the provision of fuller accounts facilitates oversight by regulatory bodies as well as providing useful information for those conducting business or in contractual relationships with such companies. In the Tribunal's view, this public policy objective must have been intended by Parliament which would have been aware of the competing interests of small companies and their proprietors in keeping their affairs private. The fact that the Applicants have no employees, customers, or unsecured creditors is not sufficient to undermine the overall public policy objective. The Tribunal notes that the Applicants did not seek to justify the grant of relief on the basis of the financial cost or other practical difficulties involved in complying.

37. Being mindful of Heerey J's approved prescription in Re Incat (supra) of what an unreasonable burden means in this context, the Tribunal has evaluated the evidence and finds that the burden of compliance is not so unreasonable in the circumstances as to justify exercise of ASIC's discretion to grant relief under s 340(1). The Tribunal considers any detriment flowing to the Applicants as likely to be outweighed by the policy objective of the Act.

38. The Tribunal also had regard to the parties' further submissions on the issue of whether the Applicants, if large proprietary companies, might, nevertheless, be non-reporting entities. ASIC submitted that this is possible, while the Applicants contended that such a submission flies in the face of earlier ASIC findings. It is not necessary for the Tribunal to make any determination on such an issue and, even if such a determination was adverse to the Applicants, this would not affect the Tribunal's decision. The Tribunal merely comments that the Applicants may wish to explore this further.

39. In conclusion, the Tribunal is not satisfied that compliance with the relevant would impose unreasonable burdens on the Applicants. Thus, ASIC's decision of 7 August 2001 refusing the Applicants' application for relief under s 340(1) must be affirmed.

I certify that the 39 preceding paragraphs are a true copy of the reasons for the decision herein of Mr RP Handley, Deputy President.

Signed: .....................................................................................

Solicitor for the Applicant Mr D Jordan, Clayton Utz