Weinstock v Beck

Introduction 1 As observed by French CJ in Weinstock v Beck [2013] HCA 14; 251 CLR 396 at [39], corporations, in contemporary Australian society, serve the purposes of enterprises, large and small, owned and operated by people, some of whom are sophisticated, knowledgeable and well-advised on matters of corporate governance and some, perhaps many, of whom are not. I interpose to observe that even in respect of those who are sophisticated, knowledgeable and well-advised, innocent errors can and do occur. 2 Section 1322(4) of the Corporations Act 2001 (Cth), and related provisions, reflect a long-standing legislative recognition that mistakes will happen in corporate governance and that it is not in the public interest that the validity of decisions made in relation to corporations be unduly vulnerable to innocent errors which may be corrected without substantial injustice to third parties. The provision is remedial in character and is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form. See Weinstock v Beck at [39] and Re Wave Capital Ltd [2003] FCA 969; 47 ACSR 418 at [29] per French J. 3 The Act and the Corporations Regulations 2001 (Cth) impose complicated regimes requiring compliance. More specifically, Pt 2M.3 of the Act and the Regulations sets out the financial reporting requirements of certain entities, including "large proprietary companies" as defined in s 45A(3). These include strict requirements with respect to the preparation, auditing, distribution and lodgement of financial statements and related reports. 4 Part 2M.6 of the Act gives the Australian Securities and Investments Commission (ASIC) power to grant certain exemptions and modifications from reporting obligations. One such power is given by s 341 which empowers ASIC to "make an order in writing in respect of a specified class of companies ... relieving [them] from all or specified requirements" of, amongst others, Pt 2M.3. Relevantly, ASIC made a 1998 Class Order CO 98/1418, which was amended from time to time and provided relief to wholly-owned subsidiaries of a body corporate from complying with the reporting obligations but only if certain conditions were satisfied. More recently, the 1998 Class Order was succeeded by the ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. For ease, I will refer to the 1998 Class Order as amended from time to time and the Instrument together as the Class Orders. 5 The plaintiffs, in order of first to fifth, are Canon Australia Pty Ltd and three of its wholly-owned subsidiaries, Canon Finance Australia Pty Ltd, Canon Business Services Australia Pty Ltd and Harbour IT Pty Ltd, and Canon Production Printing Australia Pty Ltd. The latter company is indirectly wholly-owned through foreign registered companies by the Japanese public listed holding company, Canon Inc, which also owns all the shares in Canon Australia. All the Australian companies are accordingly commonly owned. They are referred to as the Canon Group. Each is also a large proprietary company as defined. 6 The plaintiffs seek relief under s 1322(4) of the Act in respect of historical failures to comply with certain of the financial reporting requirements under Pt 2M.3. The second to fifth plaintiffs had at the relevant times understood that they were exempt from these requirements due to their invocation of the Class Order relief granted by ASIC. Only recently has it come to light that that view was incorrect. 7 The contraventions in question are those identified in the annexure to the orders that I propose to make. With few exceptions, the contraventions flow from failures to satisfy the terms of a deed of cross-guarantee and the conditions for relief under the relevant Class Orders made by ASIC. 8 Canon Australia, as the parent company of the Canon Group, has historically prepared its accounts and those of the group on a consolidated basis consistently with the accounting standards. Those accounts have been audited. However, compliance with the conditions imposed by the Class Orders is necessary for subsidiaries which are large proprietary companies to be relieved from the obligations to individually prepare financial reports, to have them audited, to lodge them with ASIC and to report upon them to their respective members. 9 For the reasons that follow, I am satisfied that the contraventions are the result of inadvertence and a mistaken understanding of the conditions imposed by the deed of cross-guarantee and the Class Orders. For those reasons, the plaintiffs acted honestly for the purposes of s 1322(6)(b) of the Act. I am also satisfied that no third party prejudice has been occasioned by the contraventions, and, for the purposes of s 1322(6)(c) of the Act, no substantial injustice has been or is likely to be caused to any person if the relief sought is granted.

The deed of cross-guarantee and Class Orders 10 As provided for under s 341 of the Act, the Class Orders provide relief from reporting obligations subject to the satisfaction of certain conditions. Satisfaction of the conditions operates to relieve eligible entities - relevantly including large proprietary companies - from the need to comply with the following financial reporting requirements under the Act: (1) the requirement to prepare a financial report and a directors' report under ss 292(1)(b) and (c) and s 292(2)(b); (2) the requirement to have the financial report audited and to obtain an auditor's report under s 301(1); (3) the requirement to report to its members under s 314 within the time required by s 315; (4) the requirement to send reports to a member in accordance with a request under s 316(1) within the time required by 316(2); and (5) the requirement to lodge reports with ASIC under s 319(1). 11 It has been said that the most important condition that is required to be met under the Class Orders is that the holding company compile consolidated financial statements that cover the subsidiary: Re Dana Australia (Holdings) Pty Ltd [2006] FCA 355; 151 FCR 317 at [3] per Finkelstein J. Another condition, particularly relevant in the present case, is that the wholly-owned entities and the holding entity enter into a deed of cross-guarantee. That is on a prescribed form with prescribed requirements. It provides for assumption deeds to be entered into in the event additional wholly-owned subsidiaries that are large proprietary companies join the group. 12 A number of further conditions are identified in Re Dana (at [3]), including: (1) the holding company must lodge its annual report with ASIC, as required by s 319; (2) the notes to the financial statements must include a short description of the deed of cross-guarantee to which the members of the group are required to be a party, and must also include a list of the parties to the guarantee; (3) within four months of the end of the financial year, the subsidiary must lodge a notice that the directors have resolved that the subsidiary remain party to the cross-guarantee and take advantage of the order; (4) supplemental financial data must be consolidated and filed that does not include data from group members that are not party to the deed of cross-guarantee; and (5) the holding company must state that the members of the group will be able to meet any liabilities arising by virtue of the deed of cross-guarantee. 13 There are also other conditions which are presently relevant, including that: (1) if the person holding office as trustee under the deed of cross-guarantee is a "Group Entity", another non-Group Entity company must be appointed as an alternative trustee (condition (db)); (2) the wholly-owned entities must pass annual resolutions to confirm their continuation as parties to the deed of cross-guarantee (condition (kb)); and (3) the wholly-owned entities lodge "opt-in" and "opt-out" notices with ASIC as required (condition (k)). 14 The evidence establishes that a number of the conditions of the Class Orders were not satisfied, and that the relevant employees tasked with ensuring that the Canon Group complied with its corporate governance obligations acted at all times under the misapprehension that the plaintiffs had taken the benefit of the Class Orders. It was on the basis of this mistaken belief that the second to fifth plaintiffs did not otherwise prepare and lodge their individual financial statements and related reports in the succeeding years. 15 On 24 October 2008, Canon Australia lodged with ASIC a deed of cross-guarantee, which it had entered into with Canon Finance. The purpose of entering into the deed of cross-guarantee was for Canon Finance to obtain the benefit of the relief granted by the 1998 Class Order. Canon Australia assumed the position of trustee under the deed and did not appoint any alternative trustee. Such an appointment was required because the trustee, Canon Australia, was a "Group Entity" as defined in the deed, ie, an entity listed in part 1 of the schedule to the deed. 16 At the time, and having regard to the Canon Group's then composition, it was only Canon Australia and Canon Finance that were large proprietary companies and therefore subject to the financial reporting obligations under Pt 2M.3 of the Act (see s 292(1)(c)). Canon Australia, in each year thereafter, continued to satisfy the criteria for a large proprietary company under s 45A(3) of the Act. Canon Finance likewise enjoyed that status at all times between 2007 and 2017 and for the year ending 31 December 2019. 17 After 2007, the Canon Group made a number of corporate acquisitions that are presently relevant. 18 On 1 October 2012, Canon Australia acquired all the issued shares in Canon Production (which had a different name at the time). As Canon Production was a large proprietary company, an assumption deed was entered into and lodged with ASIC on 11 January 2013, the intended effect of which was to include Canon Production within the terms of the deed of cross-guarantee so as to take the benefit of the relief under the 1998 Class Order. Canon Production remained a large proprietary company at all times thereafter until at least 2017 at the time of its divestment from the Canon Group. In the years post-divestment, Canon Production, as a foreign owned company, has been subject to the financial reporting requirements under Pt 2M.3 of the Act due to the application of s 292(2)(b) of the Act. 19 On 1 December 2015, Canon Australia acquired all the issued shares in Canon Business (which had a different name at the time). Canon Business was also a large proprietary company at that time. A further assumption deed was entered into on 22 September 2016 and lodged with ASlC. Again, the intended effect was to include Canon Business within the terms of the deed of cross-guarantee so as to take the benefit of the relief under the Class Orders. 20 Harbour IT became a wholly-owned subsidiary of Canon Australia on or about 6 July 2017. In the years 2017, 2018 and 2019, Harbour IT was a large proprietary company. A further assumption deed was lodged with ASIC on 18 December 2017, the intended purpose of which was to enable Harbour IT to obtain the relief under the Class Orders.

Discovering non-compliance 21 In March 2022, following the Canon Group's acquisition of another company earlier that year, David Field who is the Group's company secretary and Director, People & Finance, and Chief Legal Counsel, directed employees to prepare the necessary documentation to enable the new acquisition to acceded to the deed of cross-guarantee and obtain financial reporting relief. In the course of preparing that documentation, an employee brought to Mr Field's attention that the deed of cross-guarantee failed to appoint an alternative trustee. As mentioned, it had always been a requirement that an alternative trustee be appointed but that seemed to have been overlooked. 22 Following that, in April 2022, Mr Field caused the Canon Group to seek legal advice from its external legal advisers in relation to the failure to appoint an alternate trustee and to conduct a comprehensive review of the Group's compliance with the Class Orders. During the course of the review, further non-compliance issues were identified. 23 Extensive investigations were undertaken by Mr Field and his staff and the Group's external legal advisers with regard to the reasons for non-compliance. It is not necessary to set out the details of those investigations. They are well-documented in the evidence.

The nature of the non-compliance 24 Mr Field has in his affidavits documented in detail the instances of non-compliance in respect of each of the plaintiff companies. In the plaintiffs' written submissions in support of the relief that they seek, counsel have summarised the nature of the deficiencies by the companies. It is convenient to adopt those summaries. 25 In respect of Canon Australia, he identified the following deficiencies: (1) in the financial reporting years 2008 to 2021, Canon Australia did not comply with the condition to appoint an alternative trustee to the deed of cross-guarantee; (2) in the financial reporting years 2010 to 2017, Canon Australia did not provide information relating to the solvency of members of the closed group (being the entity and its wholly owned-entities that are the subjects of the deed of cross-guarantee) in the director's declaration; (3) in the financial reporting years 2010 to 2021, Canon Australia did not provide specific financial information relating to members of the closed group in the notes to its financial reports which differentiates the information otherwise disclosed in the consolidated accounts relating to both closed group and non-closed group members of the consolidated entity; (4) in the financial reporting years 2014 to 2021, Canon Australia did not provide certain disclosures or provided inaccurate disclosures relating to the deed of cross-guarantee in the notes to its financial reports; (5) in the financial reporting years 2017 to 2021, Canon Australia did not disclose information relating to details of any party subject to a notice of disposal (ie, the shares of which were disposed of) in the notes to its financial reports; (6) in the financial reporting years 2008 to 2021, Canon Australia did not ensure that the financial years of its consolidated entities were synchronised with its own financial year within the time prescribed under the Act; (7) in the financial reporting years 2014 to 2015, Canon Australia did not lodge its consolidated financial report within the time prescribed; (8) in the financial reporting years 2008 to 2021, Canon Australia did not sign solvency statements before the end of the first financial year in which it took advantage of the class order relief; and (9) in the financial reporting years 2008 to 2021, Canon Australia did not pass annual resolutions to remain a party to the deed of cross-guarantee. 26 In respect of Canon Finance, Mr Field identified the following deficiencies: (1) in the financial reporting year 2007, Canon Finance did not lodge with ASIC its financial report for the year ending 31 December 2007; (2) in the financial reporting year 2008, Canon Finance did not lodge with ASIC an opt-in notice as required when a company wishes to take advantage of the class order relief; (3) in the financial reporting years 2008 to 2019, Canon Finance did not pass annual resolutions to remain a party to the deed of cross-guarantee; (4) in the financial reporting years 2008 to 2019, Canon Finance did not synchronise its financial year end date with that of Canon Australia; (5) in the financial reporting years 2008 to 2019, Canon Finance did not sign solvency statements before the end of the first financial year in which it took advantage of the class order relief; (6) in the financial reporting years 2008 to 2019, Canon Finance did not pass board resolutions approving entry into the deed of cross-guarantee; and (7) in the financial reporting years 2020 to 2021, Canon Finance did not lodge with ASIC an opt-out notice as required when a company no longer wishes to take advantage of the class order relief. 27 In respect of Canon Business, Mr Field identified the following deficiencies: (1) in the financial reporting years 2016 to 2021, Canon Business did not pass annual resolutions to remain a party to the deed of cross-guarantee; (2) in the financial reporting years 2016 to 2021, Canon Business did not sign solvency statements before the end of the first financial year in which it took advantage of the class order relief; and (3) in the financial reporting years 2016 to 2021, Canon Business did not pass board resolutions approving entry into the assumption deed. 28 In respect of Harbour IT, Mr Field identified the following deficiencies: (1) in the financial reporting years 2018 to 2019, Harbour IT did not pass annual resolutions to remain a party to the deed of cross-guarantee; (2) in the financial reporting years 2018 to 2019, Harbour IT did not synchronise its financial year end date with that of Canon Australia; (3) in the financial reporting years 2018 to 2019, Harbour IT did not sign solvency statements before the end of the first financial year in which it took advantage of the class order relief; (4) in the financial reporting years 2018 to 2019, Harbour IT did not pass board resolutions approving entry into the assumption deed; (5) in the financial reporting years 2020 to 2021, Harbour IT did not lodge with ASIC an opt-out notice as required when a company no longer wishes to take advantage of the class order relief; (6) the assumption deed was not executed by Canon Australia, despite it being a necessary and named party; and (7) the lawyer's certificate signed by Mr Field bears an earlier date than the date of the assumption deed. 29 In respect of Canon Production, Mr Field identified the following deficiencies: (1) in the financial reporting year 2007, Canon Production did not lodge with ASIC its financial report for the year ending 31 December 2012; (2) in the financial reporting year 2013, Canon Production lodged an opt-in notice with ASIC which recorded incorrectly that Canon Production had taken advantage of financial reporting relief in respect of the financial year ending 31 December 2012 rather than 31 December 2013; (3) in the financial reporting years 2013 to 2017, Canon Production did not pass annual resolutions to remain a party to the deed of cross-guarantee; and (4) Canon Production did not lodge its annual financial reports for the financial reporting years 2018 to 2021.

The empowering provisions 30 Under s 1322(4) of the Act, the court is (relevantly) empowered to make orders of the following kinds and in the following circumstances: (1) Section 1322(4)(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) (ie, any contravention of a provision of the Act or a provision of the constitution of a corporation); and (2) Section 1322(4)(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. 31 Section 1322(4)(d) is available in respect of a proceeding under the Act or in relation to a corporation. It has been held that the court has power under this provision to extend or abridge time limitations in the 1998 Class Order and, by implication, the Instrument: Re Dana at [11] and Re Affinity Health Ltd [2006] NSWSC 679 at [13] per Barrett J. 32 Further, the power is available to extend or abridge time notwithstanding that the relevant provision does not, in terms, impose an obligation to act within a specified time or fix a time for compliance. It is sufficient for the purposes of the provision that the validity of an act is conditioned on the happening of an event within a particular period of time: Re Wave Capital at [30]. The power is available where the period for doing the relevant act did not form part of a provision which in terms imposed an absolute positive obligation to do the act: Re Insurance Australia Group Ltd [2003] FCA 581; 128 FCR 581 at [28] per Lindgren J. 33 Extension orders have been made in respect of failures to lodge accounts: Re Phosphate Resources Ltd [2005] FCA 1705 per French J. They have been formulated so as to operate retroactively or nunc pro tunc: Re Azure Minerals Ltd [2013] FCA 63 at [11] per Barker J. 34 The powers in s 1322(4) are conditioned by s 1322(6), which provides that the court must not make any such orders unless it is satisfied (relevantly): (1) in the case of an order under s 1322(4)(c), that the person subject to the civil liability concerned acted honestly; and (2) in every case, that no substantial injustice has been or is likely to be caused to any person.

Consideration 35 Mr Field has explained, and I accept, that the contraventions in question are in large measure due to misapprehension as to the nature and requirements of the Class Orders. The contraventions continued unnoticed until April 2022 because Mr Field reasonably believed that when he assumed his role as company secretary in August 2017, the Class Order relief had been efficaciously implemented by his predecessors. As mentioned, I am satisfied that the contraventions which flowed from the deficiencies were honest and occasioned through error and inadvertence. 36 In that regard, I am satisfied that the investigations recently undertaken by Mr Field and the Group's external legal advisers have been comprehensive. Attempts have been made to contact former members of staff who may have been involved in the transactions which led to the Group into seeking to take advantage of the Class Order relief. Those attempts have been largely unsuccessful, and where contact has been possible, the recollections of those involved have significantly, and understandably, faded in the ensuing 15 years. 37 Although the investigations have not been able to explain conclusively why the Canon Group did not act in strict compliance with the conditions of the Class Orders, the compelling inference is that its failure to do so was the product of honest inadvertence and reliance on professional advice which, as it happened, was incomplete. 38 It is also to be noted that the Canon Group has acted promptly and responsibly once it became aware of the contraventions in investigating them and in seeking to remedy them. Unlike in what may be the usual case, the Canon Group has itself identified the contraventions and has sought to remedy them; this is not a case where ASIC has had to bring the contraventions to the notice of the relevant company. 39 On the question of whether the making of the orders that are sought will cause any person substantial injustice, Mr Field's evidence is that it is very unlikely that there are any persons, such as creditors of the Canon Group, who would be affected by the grant of the relief sought. In that regard, the deed of cross-guarantee and the deeds of assumption are disclosed on the registers maintained by ASIC with respect to each of the plaintiff companies. All of the relevant financial reports of Canon Australia have been prepared on a consolidated basis. In each case, the auditors have expressed their opinion that the accounts give a true and fair view of the financial position of the Group. The reports show that the Group is clearly a profitable enterprise so no question of solvency arises; any spectre of injustice to any third party thus recedes. 40 ASIC has been given notice of the relief that the plaintiffs seek as well as all the evidence and submissions, and it has raised not objection to the relief - it has adopted its usual "neither supports nor opposes" position. It has also not raised any particular point of consideration for the Court. 41 If the relief is declined, the plaintiffs will be left in the position that they must comply with the financial reporting requirements imposed by the Act. In that regard, I accept the evidence of Mr Field which addresses the scope and extent of the accounting work that would be involved in each of the companies retrospectively achieving compliance with the financial reporting requirements over an extended period of time. The burden on them would be very considerable - estimated to be more than $25m. 42 There are no discretionary factors that have been brought to my attention, or of which I am aware, which would count against the relief being granted. I consider that considerations of public interest support the relief being granted. 43 In all of the circumstances, I am satisfied that the plaintiffs should have the relief they seek in their amended originating application. 44 As to the form of relief, I note that relief in substantially the same form was granted in similar circumstances in Re Murray Rive Organics Ltd [2019] FCA 931; 138 ACSR 365 at [48] per Anderson J and In the matter of DAC Finance (NSW/Qld) Pty Ltd [2020] NSWSC 182 at [52] per Gleeson J. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

SCHEDULE OF PARTIES NSD 1160 of 2022 Plaintiffs Fourth Plaintiff: HARBOUR IT PTY LTD ACN 096 093 453 Fifth Plaintiff: CANON PRODUCTION PRINTING AUSTRALIA PTY LTD ACN 004 315 913