Weinstock v Beck

MARKOVIC J: 1 On 15 June 2021 on the application of the plaintiff, Clarity Pharmaceuticals, I made declarations and orders pursuant to s 1322 of the Corporations Act 2001 (Cth) in relation to the appointment by Clarity of its auditor, Grant Thornton Audit Pty Ltd. These are my reasons for making those orders.

background 2 Clarity was incorporated as a proprietary company on 8 April 2010. It is a clinical stage radiopharmaceutical company that develops proprietary theranostic (therapy and imaging) technology.

Clarity appoints auditors 3 In 2011 Lawler Partners was appointed as Clarity's auditor. 4 On or about 19 June 2014 at a board meeting Grant Thornton was appointed as Clarity's auditor. On 7 July 2014 Clarity executed a letter of engagement provided to it by Grant ‍Thornton and on or about 17 July 204 Grant Thornton confirmed its consent to act as auditor for Clarity. 5 On 3 February 2017 Clarity converted to a public company (Conversion). 6 Since its appointment, Grant Thornton has audited Clarity's financial statements, including for the financial years ending 30 June 2017, 30 June 2018, 30 June 2019 and 30 June 2020 and the half year ending 30 December 2020. 7 Following the Conversion Clarity held annual general meetings (AGM) on or about 9 November 2017 (2017 AGM), 23 November 2018 (2018 AGM), 29 November 2019 (2019 AGM) and 19 November 2020 (2020 AGM). 8 Matthew John Harris was the managing director, chief executive officer and company secretary of Clarity at the time of the Conversion until 5 September 2019. Mr Harris assisted the chair of the board, Dr Alan Taylor, with preparation of the notice of AGM for the 2017 AGM. In doing so he did not include a motion to appoint an auditor. At the time he understood that Grant Thornton had already been validly appointed on 19 June 2014 and that nothing further needed to be done in relation to its appointment following the Conversion. Mr Harris says that if his understanding was incorrect, his mistake was inadvertent and unintentional. 9 Mr Harris' evidence is that following the Conversion, and until the time of his resignation as managing director, chief executive officer and company secretary of Clarity, he continued to believe that Grant Thornton's appointment as auditor on 19 June 2014 was valid and that there was no need for any further appointment either by Clarity's shareholders or directors. During that period Mr Harris was not advised by Clarity's lawyers or accountants or by Grant Thornton that there was any need to arrange for appointment of Grant Thornton by shareholders after the Conversion and he did not turn his mind to whether the Corporations Act included any such requirement. As far as Mr Harris was aware, no director of Clarity knew that there was any issue with the validity of Grant Thornton's appointment as auditor until the issue was raised in May 2021. 10 Robert Cochrane Vickery is the current secretary and chief financial officer for Clarity. Mr Vickery's evidence is that while he was generally aware of the statutory requirements relevant to public companies when preparing the notices of AGM for the 2019 AGM and the 2020 AGM, he did not turn his mind to the specific requirements in relation to the appointment of auditors of public companies. Like Mr Harris, until about 25 March 2021 Mr Vickery believed that Grant Thornton's appointment as auditor on 19 June 2014 remained valid and that there was no need for a further appointment by Clarity's shareholders or its directors. Since the time of his appointment as company secretary Mr Vickery has not received any advice from Clarity's lawyers or accountants or from Grant Thornton suggesting any need to arrange for the re-appointment of Grant Thornton by Clarity's shareholders following the Conversion.

Clarity becomes aware of an issue with the appointment of its auditor 11 On or about 25 March 2021, while compiling data room sections on audited financial statements and shareholder meetings for the proposed initial public offering of shares in Clarity and its associated listing on the Australian Securities Exchange (ASX), Mr Vickery was unable to locate any shareholder resolution approving Grant Thornton's appointment as auditor. In particular, he could not locate any board resolution appointing Grant Thornton as auditor of Clarity after the Conversion, a consent to act as auditor from Grant Thornton or any shareholder nomination of Grant Thornton as auditor prior to the 2017 AGM, the 2018 AGM, the 2019 AGM or the 2020 AGM. Similarly, there is no reference to a proposed resolution to appoint Grant Thornton as auditor in the notices for the 2017 AGM or the 2018 AGM and no proposed resolution, as evidenced by the minutes, to appoint Grant Thornton as auditor at the 2019 AGM or the 2020 AGM. 12 After reviewing company records Mr Vickery informed Clarity's lawyers, KPMG Law, of the situation. Thereafter, Clarity sought legal advice. 13 Mr Taylor gives evidence that he first became aware of an issue with Grant Thornton's appointment as auditor in early May 2021 when he was contacted by David Morris, a partner at KPMG Law, to inform him that, in undertaking the due diligence for Clarity's intended listing on the ASX, a potential breach of the Corporations Act had been discovered. On 14 May 2021 Mr Morris again contacted Mr Taylor and informed him that the issue was the failure to properly appoint Grant Thornton under the Corporations Act. Thereafter Mr Taylor immediately called Mr Harris to inform him that there was a need to search Clarity's records for documents regarding auditor appointments and informed Roseanne Robinson, a shareholder representative on the board of Clarity, of the issue.

Subsequent steps taken by Clarity 14 During the week commencing 17 May 2021 Mr Morris advised Clarity that the best course of action was to make the application the subject of this proceeding. Clarity immediately commenced a process to do so. 15 Mr Vickery also gives evidence of the steps taken consequent upon learning of the issue that arose with the appointment of Grant Thornton as auditor. In particular the following occurred: (1) on 31 May 2021 Clarity: (a) issued correspondence to Grant Thornton seeking that it confirm in relation to its audits of the financial reports for the financial years ending 30 June 2017, 30 ‍June 2018, 30 June 2019, 30 June 2020 and the half year to 31 December 2020 that: (i) the audits conducted by it were completed in accordance with Australian Accounting Standards; (ii) Clarity is able to continue to rely on those audits; and (iii) Grant Thornton's opinion as stated in each financial report remains true and correct and it does not withdraw or propose any changes to any of its opinions; (b) received correspondence from Grant Thornton providing confirmation of each of those matters; and (2) on 1 June 2021 in accordance with s 327C(1) of the Corporations Act the board of Clarity resolved to appoint Grant Thornton as auditor of Clarity until the next AGM and to commence a proceeding in this Court to obtain relief under s 1322 of the Corporations Act in relation to the failure to properly appoint Grant Thornton.

statutory FRAMEWORK and legal principles 16 Chapter 2M of the Corporations Act concerns financial reports and audit, including Pt 2M.4 which sets out the process for the appointment and removal of auditors. 17 Section 327A(1) provides that the directors of a public company must appoint an auditor of the company within one month after the day of its registration unless the company at a general meeting has appointed an auditor. A director must take all reasonable steps to comply with or secure compliance with subsection (1): see subs (3). 18 Section 327B(1) requires a public company to appoint an auditor at its first AGM and to appoint an auditor of the company to fill any vacancy in the office of auditor at each subsequent AGM. A director of a company must take all reasonable steps to comply with, or to secure compliance with, those requirements: see subs (3). 19 Section 327C of the Corporations Act 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). (Note omitted.) 20 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 given written consent, before the appointment, to act as auditor and has not withdrawn that consent before the appointment is made. 21 Section 301 of the Corporations Act requires a company to have its financial report for a financial year audited in accordance with Div 3 of Pt 2M.3 and to obtain an auditor's report. 22 Section 314 of the Corporations Act relevantly requires a company to report to its members for a financial year by providing certain specified reports, including the auditor's report, to its members. 23 Section 1322 of the Corporations Act 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. 24 Section 1322(4) of the Corporations Act is a remedial provision and should be given a broad construction: see In the matter of Bremick Pty Ltd [2021] NSWSC 533 at [16]. Before an order can be made under s 1322(4) the Court must be satisfied, among other things, that one or more of the conditions set out in s 1322(6)(a)(i) to (iii) have been met: see In the matter of Pacific Springs Pty Limited [2020] NSWSC 1240; (2020) 148 ACSR 454 at [174]. The power to make an order under s 1322(4)(a) is not limited to cases of procedural irregularity: see Weinstock v Beck (2013) 251 CLR 396 at [10]. 25 In Ex parte Bellevue Gold Ltd [2021] WASC 80 (Bellevue Gold) Hill J considered an application under s 1322(4) of the Corporations Act which arose in similar circumstances to the application that was before me, namely where there had been contraventions by the plaintiff of, among others, s 327B(1)(b) and s 327C(2) of the Corporations Act in connection with the appointment of its auditor. At [43] her Honour summarised the following principles in relation to such an application: In considering an application under s 1322(4)(a) of the Act, the essential principles are: (a) the prescriptive requirements of s 1322(4)(a) and one of the preconditions in s 1322(6) need to be satisfied; (b) the court retains a discretion under s 1322(4)(a) as to whether it makes the orders sought; (c) the broad powers reflect a legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law; (d) implied limitations to the broad powers in s 1322 will not be readily implied. Section 1322 is remedial in character and should be applied broadly; (e) the court can make orders under s 1322(4)(a) on conditions and also make such consequential and ancillary orders as it thinks fit; and (f) an order can be made under s 1322(4)(a) notwithstanding that the contravention or failure concerned resulted in the commission of an offence. (Footnotes omitted.) 26 At [60] her Honour expressed a preliminary view that the failure to comply with the requirements of Ch 2M of the Corporations Act was not an act of a procedural nature within the meaning of that term in s 1322(6)(a)(i). Her Honour observed that the failure to comply with the provisions governing the appointment of an auditor "have been designated by Parliament to be sufficiently serious as to constitute a criminal offence": see too Ex parte New Century Resource Ltd [2021] WASC 86 at [48] and Re Matador Mining Ltd; Ex parte Matador Mining Ltd [2021] WASC 132 at [75]. 27 In Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 at [54]-[57] Banks-‍Smith J considered the meaning of honesty for the purposes of s 1322 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 [44]. 56 Consideration of the honesty of an applicant also arises in the context of s 1318 of the 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, i.e. 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 [2014] VSC 516 at [1960].

Consideration 28 As Clarity pointed out the provisions of Pt 2M.4 of Ch 2M of the Corporations Act do not clearly address the auditor appointment obligations of a company and its directors in circumstances where its status has changed from that of a proprietary company to a public company. That said, it is open to conclude that ss 327A, 327B and 327C of the Corporations Act require a company after its conversion from a proprietary to a public company to re-appoint its auditor. That is, upon conversion a company should take steps pursuant to s 327A(1) and/or s 327B(1)(a) of the Corporations Act to appoint its auditor at the first AGM following the conversion, despite the auditor having been previously validly appointed. 29 Clarity did not take those steps. It did not appoint Grant Thornton as its auditor within one month of the Conversion as required by s 327A(1) nor did it take steps pursuant to s 327B(1)(b) to appoint Grant Thornton as auditor at its 2017 AGM, which was the first AGM immediately following the Conversion, or at the 2018 AGM, the 2019 AGM or the 2020 AGM. Accordingly, Clarity's directors may have contravened ss 327A(1), 327B(1) and 327C(1) of the Corporations Act. 30 Counsel appearing for Clarity also noted that it may have contravened s 301(1) of the Corporations Act, which requires a company to have its financial report for a financial year audited in accordance with Div 3 of Pt 2M.3 and to obtain an auditor's report, and s 314(1), which requires a company to report to its members for a financial year by providing certain reports, including the auditor's report, to its members. This was said to be so because Clarity failed to have its annual financial reports for the financial years ended 30 June 2017, 30 June 2018, 30 June 2019 and 30 June 2020 audited by a properly appointed auditor and failed to obtain an auditor's report. 31 Given those issues, Clarity sought declarations and orders pursuant to s 1322(4)(a) of the Corporations Act in relation to its failure to approve the appointment of Grant Thornton as auditor at any of its AGMs to date following the Conversion. It also sought orders pursuant to s 1322(4)(c) reliving it and its current and former directors from any civil liability arising out of its contraventions of ss 301(1), 314(1), 327A(1), 327B(1)(a), 327B(1)(b), 327C(1) and 344(1) of the Corporations Act. 32 An application under s 1322(4) can be made by an interested person. I was satisfied that Clarity is an interested person for the purposes of s 1322(4) and able to seek relief. Clarity gave notice of its application to the Australian Securities and Investments Commission (ASIC). It did not appear at the hearing and indicated that it neither supported nor opposed the application. 33 I was satisfied based on the evidence before me that any failure to properly appoint Grant ‍Thornton following the Conversion arose from inadvertence. The evidence clearly established that: (1) Mr Harris was not aware that a proposal to appoint Grant Thornton as auditor needed to be placed before the shareholders at an AGM of Clarity following the Conversion. He understood that Grant Thornton had been validly appointed on 19 June 2014 and, because of that understanding, when preparing notices for the 2017 AGM and the 2018 ‍AGM, he did not turn his mind to the requirements of the Corporations Act; (2) Mr Vickery believed that Grant Thornton's appointment on 19 June 2014 remained valid and that there was no need for a further appointment by shareholders or the board. While Mr Vickery was generally aware of the statutory requirements when preparing notices for the 2019 AGM and the 2020 AGM, he did not turn his mind to the specific requirements in relation to the appointment of auditors of public companies; and (3) Mr Taylor understood that nothing further needed to be done to validly appoint Grant ‍Thornton after its initial appointment on 19 June 2014 in preparation for and at the time of the 2017 AGM, 2018 AGM, 2019 AGM and the 2020 AGM and accordingly he did not turn his mind to whether there was any further requirement to appoint Grant Thornton. He relied on Messrs Harris and Vickery in their respective roles as company secretary to inform him of the legal or regulatory requirements for the notices for Clarity's AGMs. 34 The evidence also established that, upon discovering the failure to comply with the relevant sections of the Corporations Act, Clarity acted expeditiously. Mr Vickery first became aware of the issue on or about 25 March 2021 when compiling data for the proposed initial public offering of shares in Clarity. He immediately informed Clarity's solicitors and sought legal advice. Clarity also undertook a review of its books and records to ensure that there was no requisite resolution of its shareholders or the board. 35 Mr Taylor's evidence is that he was informed by KPMG Law of an issue with Grant Thornton's appointment as auditor on 14 May 2021. Thereafter he contacted Mr Harris. It was only at this time that Mr Harris became aware of the issue. 36 As set out at [15(2)] above, on 1 June 2021 the board of Clarity resolved to appoint Grant Thornton as auditor until its next AGM in accordance with s 327C(1) of the Corporations Act and to commence this proceeding. The board of Clarity has also sought and received confirmation from Grant Thornton that its audits of Clarity's financial reports and its subsidiaries for each of the years ending 30 June 2017 to 30 June 2020 inclusive and the half year ending 31 December 2020 were in accordance with Australian Auditing Standards, that Clarity is able to continue to rely on the audits, that the opinion of Grant Thornton stated in each report remains true and correct and that it does not withdraw or propose any changes to any of its opinions. 37 Given those matters, I was satisfied that Clarity and its officers acted honestly. 38 I was also satisfied that it would be just and equitable to make the orders sought. As submitted by Clarity, it has had all of its financial statements audited by Grant Thornton since the Conversion and all relevant parties conducted themselves on the assumption that Grant Thornton's appointment was valid. There was no query ever raised about the audits prior to Clarity discovering the issue in relation to the appointment of Grant Thornton. Further, granting the relief sought would remove any doubt as to Clarity's compliance with its financial reporting obligations and the potential impact on the operations of the company: see Bellevue Gold at [65]-[68]. 39 Finally I was satisfied that no substantial injustice had been or was likely to be caused to any person as required by s 1322(6)(c) of the Corporations Act. Since the Conversion no shareholder has raised any issue in relation to Clarity's accounts or the work performed by Grant Thornton and, as set out at [32] above, ASIC took a neutral position to the application and did not appear at the hearing.

Conclusion 40 For those reasons I made the declarations and orders sought by Clarity. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.