Weinstock v Beck

Affidavit and other evidence

1. I will first refer to the affidavit and documentary evidence, then to the applicable principles, then to a determination of the application, which it seems to me is straightforward once the evidence is understood in the context of the applicable principles.
2. The Company relies on the affidavit of its solicitor, Ms Walkam, filed on 17 May 2022, which gives evidence of the prosecution brought by ASIC against the Company, which commenced on 7 April 2022, prior to the filing of these proceedings on 17 May 2022, and of service of these proceedings upon ASIC.
3. By a second affidavit dated 19 May 2022, Mr Tim Broadfoot, who is one of the Company's directors and its company secretary, gives evidence of matters which relate to this application. The Company's other directors did not give evidence in the application. Mr Broadfoot notes that the Company was and is an oil and natural gas exploration and development group headquartered in Houston, Texas, with its registered office situated in Australia. Mr Broadfoot refers to a complete change in the Company's board between February and May 2019, and to the commencement of the prosecution brought against the Company by ASIC in respect of its failure to lodge financial reports in the period noted above. Mr Broadfoot refers to issues which arose in respect of certain transactions initiated by the Company's previous board, and to the present board's investigation of matters relating to those transactions. That should be treated as background only, so far as the issues in respect of those transactions appear to have arisen and been resolved prior to the late filing of the half-yearly financial report of the Company for the year ended 31 December 2018, which is not the subject of the prosecution brought by ASIC or any application for relief in these proceedings. Mr Broadfoot refers to the Company's engagement of a third party to provide secretarial, chief financial officer and administration services from March 2019, and notes that those services were to include matters relating to the preparation of financial reports.
4. Mr Broadfoot also refers to the fact that, on 14 March 2019, the Company requested a voluntary suspension of trading on the Australian Stock Exchange ("ASX"), on the basis that it had been unable to produce audited financial reports in time for the statutory deadline of 15 March 2019. I pause to note it appears that shareholders in the Company, who had originally invested in a listed company, which would have a more liquid market for its shares by virtue of that listing and the quotation of its shares, were therefore unable to trade its shares on the ASX from March 2019 to date. They may well have wished to do so had they been made fully aware of the parlous state of the Company's financial position, which was also not fully disclosed to them by reason of its failure to lodge its financial reports. I will return to those matters below. Mr Broadfoot refers to subsequent announcements made to the ASX which I accept disclosed the difficulties which the Company was having in finalising its financial reports, including initially its half-yearly reports and subsequently its annual reports. I also note that the disclosure to shareholders of those difficulties did not substitute for the kind of information which would have emerged from the lodgement of those financial reports, the content of which is now apparent where they have been prepared following the commencement of the prosecution against it.
5. Mr Broadfoot in turn refers to subsequent developments, including disputes with several third parties in respect of earlier events, and notes a board meeting on 20 June 2019 which identified two "critical factors" which were then holding up the Company's financial reports, namely the determination of transactions with related parties and purchase price calculations and monthly oil transaction allocation. I will assume, favourably to the present directors of the Company, that those events largely related to matters involving transactions prior to the appointment of the Company's present board. Mr Broadfoot refers to the Company's application to ASIC for relief allowing it to extend the time for it to hold its 2019 annual general meeting, which ASIC reached an in principle decision to reject, and which was then withdrawn by the Company. That annual general meeting was not held in that year.
6. By 27 April 2020, the ASX informed the Company that if it did not lodge its outstanding quarterly cash flow report and accompanying quarterly activity report by 30 April 2020, it would be delisted, where the lodgement of that information was a requirement of the Listing Rules. The Company failed to do so and was then delisted. At that point, shareholders in the Company, which was, as I noted above, then in a parlous financial position, were deprived of any remaining possibility of regaining a market for their shares on the ASX, and it became more difficult for them to exit their investment in the Company, if they wished to do so by reason of its then financial position.
7. Mr Broadfoot then refers to subsequent developments, including declines in commodity prices and the impact of the COVID-19 pandemic, which were plainly adverse to the Company, as they were adverse to other companies within the resources and other sectors. He refers to the issue of the court attendance notice to the Company in respect of the prosecution brought by ASIC for its failure to lodge its financial reports in the relevant period, and the steps which the Company's directors have subsequently taken to prepare the outstanding financial reports, at the directors' personal cost. It is, no doubt, to the directors' credit, that they have taken steps, at their own cost, to cause those financial reports to be prepared, following the commencement of the Company's prosecution. If the relief sought is not granted, that is no doubt a matter that can be drawn to the attention of the Local Court in that prosecution which may be relevant to the question of any penalty which is imposed on the Company in respect of the alleged contraventions. However, those steps must be understood in the context that they were not taken, nor was any application to the Court under s 1322 of the Act brought, prior to the commencement of the prosecution against the Company.
8. Mr Broadfoot seeks to contend in his affidavit that there was no prejudice to shareholders from these events, and points to the fact that there were only a couple of instances where shareholders made enquiries with the Company about its financial reporting or about the annual general meetings that it had not held. It seems to me that any suggestion that there was no prejudice to shareholders from the failure to lodge its financial reports has little merit where shareholders were deprived of the ongoing information about the Company's financial position which Ch 2M of the Act contemplates that they would be provided; they lost the ability to trade their shares, when the Company originally sought suspension of trading of its shares on the ASX because of its inability to, or failure to, complete its financial reports; and then had their investment in a listed company changed to an investment in an unlisted company, when the Company lost its listed status by reason of its failure to comply with its financial reporting requirements under the Listing Rules. Mr Broadfoot, in turn, refers to his, and other directors' concerns as to the potential impact upon them, in their capacity as directors in other companies, if the Company is convicted in respect of a failure to lodge its financial reports in the relevant period. I recognise that directors will face collateral disadvantages as a consequence of criminal prosecutions of companies from time to time. I bear this matter in mind, but it seems to me that it has limited significance having regard to the public policy issues which arise in this matter.
9. Mr Broadfoot exhibits a substantial number of documents to his first affidavit, including the court attendance notice which identifies the offences which the Company has been charged. He exhibits the half-yearly financial report for the Company for the period to 31 December 2018 which relevantly disclosed the current directors' concern with the transactions involving the Company, initiated by its prior board, and the information available relating to those transactions, which were matters ultimately addressed in those half-yearly reports. That financial report, and a covering letter to shareholders, provided an outline of the Company's principal activities and a review of its assets, and also identified a number of disputes which had existed and had been resolved. It noted that, by 31 December 2018, records in the United States had been restored to the extent that the Company's board was satisfied they depicted a fair and reasonable reflection of the economic activities in the United States and the Company as a whole. Mr Williams fairly accepted that, by the time these half-yearly financial reports were lodged, the issue which had caused concern in respect of previous transactions had been resolved. Subsequent difficulties in preparing financial reports appears to relate to the Company's inability to fund their preparation and audit rather than to substantive concerns as to the transactions to be included in them.
10. The Company's half-yearly financial reports for the six month period to 31 December 2018 also referred to a loss of nearly $8.9 million. The extent of that loss highlights the significance, for the Company's shareholders, of the receipt of ongoing financial information to indicate whether, as appears to be the case, that loss increased in subsequent periods, or was mitigated in subsequent periods. That information was not in fact provided to those shareholders. The notes to that account included events after the reporting period, which record a series of difficulties in respect of the Company's ongoing affairs continuing up to but not beyond November 2019.
11. I also bear in mind that the Company released an update as to its position and forward steps on 18 May 2020, to which Mr Williams drew attention, which noted that its board had commenced a programme in late 2019 to seek cornerstone investors as part of a recapitalisation and revitalisation programme, and pointed to difficulties in that process. It referred to the circumstances in which the Company had been delisted and noted that the Company could not undertake a pro rata rights issue without a full product disclosure statement, as a result of the fact that it was no longer a listed company. That highlights a further disadvantage to which the Company, and its shareholders, were exposed by reason of the failure to lodge its financial reports in a timely way and the loss of its listing on the ASX in consequence.
12. By a further affidavit dated 2 June 2022, Mr Broadfoot refers to the steps which the directors have now taken to prepare financial reports, and notes that all of the annual financial reports for the period in issue have now been lodged with ASIC. He acknowledges that the lodgement of half-yearly financial reports is not yet complete, apparently because it was only later recognised, on obtaining legal advice, that such half-yearly reports would also be required to be lodged. Mr Broadfoot indicates, and I proceed on the basis that, the outstanding half-yearly reports should be lodged by the end of July 2022.
13. The exhibit to Mr Broadfoot's second affidavit is significant because it includes the financial reports which have now been prepared, which indicate the information that was not made available to shareholders in the relevant period, where those financial reports were not lodged when required. In particular, the Company's financial report for the year dated 30 June 2019, had it been lodged when required, would have disclosed to its shareholders a loss of some $28.6 million for the year ended 30 June 2019. It may be that, as Mr Williams submits, the Company's financial position had by that part deteriorated to such an extent that there was little that shareholders could have done with that information, other than to recognise that their shares may then have had no or no significant value. However, information has its own benefit to shareholders in a market that depends on disclosure, particularly of negative information. Those financial reports, had they been lodged as required, would also have disclosed that by that point the Company's total equity was then in excess of negative $5.15 million, and would have disclosed that the Company's ability to continue as a going concern was by then dependent upon the support of a financier associated with one of its directors. They would also have disclosed that, by that point, the Company's investments in US entities had been written down to nil, and there was an issue as to whether the Company continued to control those US entities. Again, on the face of it, that is information that a shareholder would likely have wished to know, if only to reach the conclusion that his or her investment in the Company no longer had any significant value. The audit report in respect of those financial reports, if prepared and lodged at that time, would have in turn disclosed issues which gave rise to an adverse opinion, for the purposes of the audit, and a material uncertainty relating to the Company's ability to continue as a going concern.
14. Subsequent reports would also have been significant for shareholders, at least so far as they had indicated that there had been no real improvement in that position, albeit it had not substantially deteriorated from that which then existed. For example, the annual report for the year ended 30 June 2020 would have disclosed that, following a loss in the order of $28.6 million in the 2019 financial year, the Company had incurred a further loss of $1.2 million in the 2020 financial year. It would have also disclosed that the Company's total deficiency in equity had by that point increased, from some $5.16 million at the end of the 2019 financial year to some $6.4 million, again being a negative equity. It would have also disclosed that the Company had made a modest profit in that year from the realisation of assets.
15. By a further affidavit filed on 5 June 2022, Mr Broadfoot again refers to the position in respect of the prosecution brought by ASIC, and to his concerns in respect of investigations of historical transaction undertaken by the Company. However, I have pointed out above that, as Mr Williams fairly accepts, that issue appears to have been resolved by the time the Company filed its last half-yearly reports, and the reasons for the failure to lodge subsequent financial reports are of a different character, arising from its inability to fund their preparation and audit.

The Company's submissions and applicable legal principles

1. The Company here seeks relief under s 1322(4)(d) of the Act, which allows the Court to make orders, relevantly, extending the time in which any act in relation to a corporation may be done. As I noted above, Mr Williams made detailed submissions which provide a factual overview of the events to which I referred above, and identify the relevant legal principles in respect of s 1322(4)(d) of the Act. I will refer to those principles in relatively short form, drawing upon my recent decision in Re Flight Centre Technology Pty Ltd [2022] NSWSC 367 at [28] and also bearing in mind the detailed review of those principles in Mr Williams' submissions. I pause to note, before turning to those principles, that none of the cases to which my attention has been drawn involve an extension of time under s 1322 of the Act in respect of an advertent failure to file financial reports continuing over a substantial period, where reports were not prepared because the Company was in financial difficulty or possibly, as Mr Williams submitted, gave priority to other matters, including the attempt to realise its assets in the United States.
2. I bear in mind that s 1322 of the Act is a remedial provision and should be given a broad construction: Weinstock v Beck (2013) 251 CLR 396; (2013) 93 ACSR 231; [2013] HCA 14. I also bear in mind that there are a number of cases where relief has been granted, including lengthy extensions of time, in respect of a failure to lodge financial reports of companies within a group, where the requirement to lodge those reports had not been recognised, for example, because the conditions for class order relief were not satisfied: see, for example, the several cases to which I refer in Re Flight Centre Technology Pty Ltd above at [29]. I also there noted that relevant factors in those applications have been identified as including whether any non-compliance arose as a result of imprudence, carelessness, or wilful ignorance of the law; whether public policy would be undermined by the making of such orders; whether the plaintiff had acted reasonably promptly when it became aware of the error; and whether ASIC opposed the relief sought. As will emerge below, it seems to me that none of those matters assist the Company here. The cases have recognised, as I there noted, that the lapse of a significant period of time does not in itself prevent the making of orders under s 1322(4)(d) of the Act in an appropriate case.
3. There is a question of construction as to the operation of s 1322(6)(c) of the Act which it is not necessary to resolve in this case. That section provides that the Court must not make an order under s 1322(4)(d) extending the time for a relevant act unless it is satisfied that no substantial injustice has been or is likely to be caused to any person. On the face of it, construing that section in accordance with its terms, it appears to direct attention to whether substantial injustice has previously been caused by reference to the conduct as to which relief is sought. On that construction, it might well be thought that no relief is available here, because it is plain enough that the Company has not established, as a matter of fact, that substantial injustice has not been caused to its shareholders by the failure to lodge in financial reports as required. On the face of it, it appears likely that substantial injustice has been caused to its shareholders, where they have been exposed, in turn, to a lack of relevant information concerning the Company's financial position throughout the relevant period; a loss of the ability to sell their shares on the ASX when the Company sought suspension of trading by reason of its failure to comply with financial reporting requirements under the Listing Rules; and subsequently to the loss of the listed status of the Company in which they had invested. I bear in mind, however, that the case law has largely referred to what may be a second aspect of s 1322(6)(c), whether injustice is likely to be caused to any person, and the case law often refers to Re Compaction Systems Pty Ltd and the Companies Act [1976] 2 NSWLR 477 (referring to the earlier provision in former s 366(3) of the Companies Act 1961(Cth)), which drew attention to the comparison of the position where relief was granted and was not granted. I need not resolve the question whether s 1322(6)(c) requires the Court to have regard to substantial injustice which has previously occurred by the conduct in question, as distinct from the injustice which may or may not arise from the making of the order, because the difference between the two would make no difference to the result in this case.

Determination

1. It seems to me that the basis for the relief sought by the Company has not been established. The facts which I have set out above, and the review of the relevant principles, makes clear why that result follows. The non-compliance with financial reporting requirements was here not inadvertent, and did not result from, for example, any misunderstanding that there a class order was in place that relieved the Company from compliance with those requirements. It was advertent, and continuing, where the directors considered that they were unable to lodge financial reports in the relevant period, apparently largely by reason of the Company's inability to fund the costs of their preparation, but took no steps, for example, to appoint a provisional liquidator or liquidator of the Company where it was not complying with Ch 2M of the Act.
2. It seems to me that public policy would be significantly undermined by the making of such an order, because Ch 2M of the Act, as Mr Williams fairly accepts, has a significant purpose in informing shareholders, and the public, as to a company's financial position. There is, in truth, little that distinguishes this case from any case where a company, or its directors, fail to lodge financial reports, because the company is in a parlous position and cannot afford their preparation, or chooses to apply such assets as it has to other activities, here the realisation of its assets in the United States. The grant of relief in this case, and similar cases, would promote an entirely perverse result that, where a company's position is in a dire or parlous state, and shareholders most need to be informed as to that position, they are then not informed of that position. The effect of Ch 2M of the Act would be diluted, and its public purpose undermined, if a company could seek relief from the obligation to comply, or a substantial extension of time so that the obligation to comply is only met too late, because its financial position was poor and it had difficulty in complying with those requirements at the relevant time. In that situation, a company and its directors have other avenues available to them, most obviously the appointment of a provisional liquidator or liquidator where the company is no longer able to comply with its statutory obligations to keep its shareholders or the public informed of its financial position by lodging financial reports as required.
3. The delay involved in bringing this application reinforces the fact that relief should not be granted. No attempt was made to seek such relief at the time the non-compliance arose, and that non-compliance must have been obvious to the directors at that time. There is no suggestion that the directors have only recently become aware that the Company did not lodge its financial reports on an ongoing basis for a considerable period; instead, the only new matter that has come to their attention is that ASIC has commenced prosecution against the Company as a result of its failure to do so. Finally, so far as this is a relevant matter addressed in the case law, ASIC opposes the relief sought. It submits, and I have accepted above, that the relief sought would undermine the public policy of the Ch 2M of the Act.
4. For all these reasons, I am satisfied that the application should be dismissed. The Company must pay ASIC's costs of and incidental to the application as agreed or as assessed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 June 2022