CITYVIEW CORPORATION LIMITED and AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
[2010] AATA 503
•6 July 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 503
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2009/4506
GENERAL ADMINISTRATIVE DIVISION ) Re CITYVIEW CORPORATION LIMITED Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Deputy President S D Hotop Date6 July 2010
PlacePerth
Decision The Tribunal affirms the decision under review. .............sgd S D Hotop..........
Deputy President
CATCHWORDS
CORPORATIONS – Corporations Act 2001 – provisions regarding rights issues and sale offers that do not need disclosure (ss 708AA, 708A) – provisions regarding special prospectus content rules for continuously quoted securities (s 713) – respondent made determination excluding applicant from relying on those provisions – determination expressed to operate from 20 August 2009 until 20 August 2010 – applicant did not keep written financial records that would enable true and fair financial statements to be prepared and audited – applicant contravened s 286(1) in Chapter 2M of Corporations Act in previous 12 months – discretion to make determination enlivened – appropriate that determination be made in respect of applicant – appropriate that determination be in force for 12 months commencing on 20 August 2009 and expiring on 19 August 2010 – decision under review affirmed
Corporations Act 2001 (Cth), s 285, s 286, s 295, s 297, s 301, s 704, s 706, s 708AA, s 708A and s 713
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577
Hneidi v Minister for Immigration and Citizenship (2010) 182 FCR 115
REASONS FOR DECISION
6 July 2010 Deputy President S D Hotop Introduction
1. On 20 August 2009 a delegate of the Australian Securities and Investments Commission (“ASIC”) made a determination under each of s 708AA(3), s 708A(2) and s 713(6) of the Corporations Act 2001 (Cth) (“the Act”) in relation to CityView Corporation Limited (“CityView”) in the following terms:
“ Under subsections 708AA(3) and 708A(2) of the Corporations Act 2001 (the Act), the Australian Securities and Investments Commission (ASIC) determines that sections 708AA and 708A of the Act do not apply to an offer of securities of the body specified in the Schedule from the date of this instrument until 20 August 2010.
Under subsection 713(6) of the Act, ASIC determines that the body specified in the Schedule may not rely on section 713 of the Act from the date of this instrument until 20 August 2010.”
2. By letter dated 20 August 2009 an officer of ASIC notified CityView of that determination and described its effect as follows:
“ This determination prevents the Company and other relevant persons from relying on:
a.the disclosure exemptions for certain sale offers of securities under section 708A of the Act;
b.the disclosure exemption for rights issues of securities under section 708AA of the Act; and
c.the special prospectus rules under section 713 of the Act
until 20 August 2010. The determination comes into effect immediately.”
3. On 18 September 2009 CityView lodged with the Tribunal an application for review of the abovementioned determination.
4. At the request of CityView, and with the consent of ASIC, the Tribunal, on 21 May 2010, directed that this application for review be listed for a determination “on the papers”, without a hearing, pursuant to s 34J of the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”).
5. Accordingly, the application for review was so listed on 24 May 2010.
The Papers
6. The documents considered by the Tribunal for the purpose of reviewing ASIC’s determination of 20 August 2009 comprised:
· the “T Documents” (T1 – T37, pp 1 – 830) lodged with the Tribunal by ASIC in accordance with s 37 of the AAT Act;
· CityView’s Statement of Facts, Issues and Contentions (including tabs 1 – 7 and a letter from Somerville Corporate Pty Ltd dated 12 February 2010), filed on 12 February 2010;
· ASIC’s Statement of Facts and Contentions, filed on 24 March 2010;
· CityView’s written submissions (including annexures A – E), filed on 27 April 2010;
· ASIC’s written submissions (including annexures A and B), filed on 13 May 2010; and
· CityView’s written submissions in reply, filed on 17 May 2010.
The Factual Background
7. The following relevant background facts are not in dispute.
8. CityView is, and has at all material times been, a company included in the official list of the Australian Securities Exchange (“ASX”). The ordinary shares of CityView are, and have at all material times been, quoted on the ASX.
9. In the period from 1 January 2008 to 31 December 2008 CityView announced the acquisition of, or further investment in, several investments, including investments in:
· Fortitude Minerals Limited;
· Canzar Resources PLC;
· Pendasor Resources Inc;
· an oil refinery; and
· a diamond processing plant through Canzar Resources PLC.
10. On 19 May 2008 a resolution was passed at CityView’s Annual General Meeting to appoint Somes and Cooke as auditors of CityView.
11. On 1 April 2009 CityView lodged its annual report for the financial year ended 31 December 2008 (“2008 Annual Report”) with ASIC and the ASX.
12. The 2008 Annual Report contained (at p 27) a “Directors’ Declaration”, dated 31 March 2009, as follows:
“ In the Directors’ opinion:
a)the financial statements and notes set out on pages 28 to 65 are in accordance with the Corporations Act 2001, including:
(i)complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and
(ii)giving a true and fair view of the company’s and consolidated entity’s financial position as at 31 December 2008 and of their performance, as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; …
…”
13. The 2008 Annual Report also contained (at pp 24-26) an “Independent Auditor’s Report”, dated 31 March 2009, signed by Kevin Somes on behalf of Somes and Cooke, as follows:
“ To the members of CityView Corporation Limited
Report on the Financial report
We have audited the accompanying financial report of CityView Corporation Limited (the Company) and Controlled entities (the Consolidated entity), which comprises the balance sheet as at 31st December 2008, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year.
DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL REPORT
The directors of CityView Corporation Limited are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (Including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements, that compliance with the Australian Equivalents to International Financial Reporting Standards (IFRS) ensures that the financial report, comprising the financial statements and notes, complies with IFRS.
The directors of the company are also responsible for the remuneration disclosures contained in the directors’ report.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Our responsibility is also to express an opinion on the remuneration disclosures contained in the directors’ report.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
INDEPENDENCE
In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.
BASIS FOR DISCLAIMER OF AUDITOR’S REPORT
Limitation of scope
We have been unable to obtain all the information and explanations we require in order to form an opinion on the financial report in respect to the following investments and payments as detailed below.
Investments – Associated Companies
Balances prior to impairment through the Income Statement
– European Oil Limited $ 887,760
– Fortitude Minerals Limited $ 10,064,021
– Pensador Resources Inc $ 12,436,720
Audited financial accounts for the period ended 31st December 2008 have not been made available to us in respect to the above associated companies or other evidence to support the investments.
Write off – Preliminary diamond exploration expenditure $4,190,413.
We have not been provided with sufficient evidence to perform appropriate audit procedures to test the integrity of the above expenditure which has been written off through the Income Statement.
DISCLAIMER OF AUDITOR’S OPINON
In our opinion
a)because of the limitation on the scope of our work as described in the preceding paragraph we are unable to and do not express an opinion as to whether the financial report of CityView Corporation Limited is in accordance with the Corporations Act 2001 including:
i)giving a true and fair view of the Company’s and Consolidated entity’s financial position as at 31st December 2008 and of its performance for the year ended on that date; and
ii)complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.
b)The financial report also complies with the International Financial Reporting Standards as disclosed in Note 1.
MATERIAL UNCERTAINTY REGARDING CONTINUATION AS A GOING CONCERN
Without further qualifying our opinion we draw attention to the matters set out in note 1(c) in the financial report. These matters indicate the existence of a material uncertainty which may cast significant doubt on the group’s ability to continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report.
AUDITOR’S OPINION OF AASB 124 REMUNERATION DISCLOSURES CONTAINED IN THE DIRECTOR’S REPORT
We have audited the Remuneration Report included in pages 17 to 21 of the director’s report for the year ended 31st December 2008. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.
AUDITORS OPINON
In our opinion the remuneration disclosures that are contained in the director’s report comply with Australian Accounting Standard AASB 124 Related Party Disclosures.
We do not express an opinion on any other disclosure made in the Director’s Report.”
14. By letter dated 14 August 2009 ASIC informed CityView that it had conducted a review of the 2008 Annual Report and that it had “concerns” that CityView had failed to comply with Chapter 2M of the Act – specifically, ss 297, 295(3)(c), 301 and 286 – during the past 12 months. ASIC’s letter also informed CityView that ASIC was currently considering whether it should make determinations under subss 708AA(3), 708A(2) and 713(6) of the Act and offered CityView the opportunity to make submissions to ASIC in relation to whether ASIC should make such determinations.
15. By letter dated 19 August 2009 CityView made submissions to ASIC addressing ASIC’s “concerns” and submitting that it had “at all times complied with Chapter 2M of the Corporations Act, in particular sections 295(3)(c), 286, 297, 301 and the ASX Listing Rules, in particular Listing Rule 3.1”.
16. On 20 August 2009 a delegate of ASIC made a determination under each of s 708AA(3), s 708A(2) and s 713(6) of the Act in relation to CityView in the terms set out in paragraph 1 above.
The Relevant Legislation
17. The relevant provisions of Chapter 2M of the Act are as follows:
“ CHAPTER 2M – Financial reports and audit
Part 2M.1 – Overview
285 Overview of obligations under this Chapter
Obligations under this Chapter
(1)Under this Chapter, all companies, registered schemes and disclosing entities must keep financial records (see sections 286‑291) – and some must prepare financial reports (see sections 292‑323D). All those that have to prepare financial reports have to prepare them annually; disclosing entities have to prepare half‑year financial reports as well. The following table sets out what is involved in annual financial reporting:
Annual financial reporting
steps
sections
comments
1 prepare financial report
s 295
The financial report includes:
· financial statements
· disclosures and notes
· directors’ declaration
2 prepare directors’ report
s 298
The report has a general component (sections 299 and 299A), a specific component (section 300) and a special component for listed companies (section 300A).
3 have the financial report audited and obtain auditor’s report
s 301, 307, 308
A small proprietary company preparing a financial report in response to a shareholder direction under s 293 only has to have an audit if the direction asks for it.
Under s 312, officers must assist the auditor in the conduct of the audit.
ASIC may use its exemption powers under s 340 and 341 to relieve large proprietary companies from the audit requirements in appropriate cases (s 342(2) and (3)).
4 provide the financial report, directors' report and auditor's report to members
s 314
A concise financial report may be provided to members instead of the full financial statements (s 314(1)‑(2)).
For deadline see s 315(1)‑(4).
5 lodge the financial report, directors' report and auditor's report with ASIC
s 319
For deadline see s 319(3).
Companies that have the benefit of the grandfathering in the relevant Part 10.1 transitionals do not have to lodge.
6. [public companies only] lay financial report, directors' report and auditor's report before AGM
s 317
For the AGM deadline see s 250N.
…
Part 2M.2 – Financial Records
286 Obligation to keep financial records
(1)A company, registered scheme or disclosing entity must keep written financial records that:
(a) correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited.
The obligation to keep financial records of transactions extends to transactions undertaken as trustee.
Note: Section 9 defines financial records.
…
Part 2M.3 – Financial Reporting
Division 1 – Annual financial reports and directors’ reports
…
295 Contents of annual financial report
Basic contents
(1) The financial report for a financial year consists of:
(a) the financial statements for the year; and
(b) the notes to the financial statements; and
(c) the directors' declaration about the statements and notes.
Financial statements
(2) The financial statements for the year are:
(a)the financial statements in relation to the entity reported on that are required by the accounting standards; and
(b)if required by the accounting standards – the financial statements in relation to the consolidated entity that are required by the accounting standards.
Notes to financial statements
(3) The notes to the financial statements are:
(a) disclosures required by the regulations; and
(b) notes required by the accounting standards; and
(c) any other information necessary to give a true and fair view (see section 297).
…
297 True and fair view
The financial statements and notes for a financial year must give a true and fair view of:
(a)the financial position and performance of the company, registered scheme or disclosing entity; and
(b)if consolidated financial statements are required – the financial position and performance of the consolidated entity.
This section does not affect the obligation under section 296 for a financial report to comply with accounting standards.
Note:If the financial statements and notes prepared in compliance with the accounting standards would not give a true and fair view, additional information must be included in the notes to the financial statements under paragraph 295(3)(c).
…
301Audit of annual financial report
(1)A company, registered scheme or disclosing entity must have the financial report for a financial year audited in accordance with Division 3 and obtain an auditor's report.
…
18. Chapter 6D (Fundraising) of the Act contains the following relevant provisions:
“ …
Part 6D.2 – Disclosure to investors about securities
Division 1 – Overview
704 When disclosure to investors is needed
Sections 706, 707, 708, 708AA and 708A say when an offer of securities needs disclosure to investors under this Part.
…
Division 2 – Offers that need disclosure to investors
706 Issue offers that need disclosure
An offer of securities for issue needs disclosure to investors under this Part unless section 708 or 708AA says otherwise.
…
708AA Rights issues that do not need disclosure
(1)This section applies to an offer of a body's securities (the relevant securities) for issue if:
(a)but for subsection (2), disclosure to investors under this Part would be required by section 706; and
(b)a determination under subsection (3) is not in force in relation to the body at the time when the relevant securities are offered.
Conditions required for rights issue
(2) The offer does not need disclosure to investors under this Part if:
(a) the relevant securities are being offered under a rights issue; and
(b) the class of the relevant securities are (sic) quoted securities at the time at which the offer is made; and
(c)trading in that class of securities on a prescribed financial market on which they are quoted was not suspended for more than a total of 5 days during the shorter of the following periods:
(i) the period during which the class of securities is quoted;
(ii) the period of 12 months before the day on which the offer is made; and
(d)no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (c); and
(e)no order under section 340 or 341 covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (c); and
(f)the body gives the relevant market operator for the body a notice that complies with subsection (7) within the 24 hour period before the offer is made.
Determination by ASIC
(3)ASIC may make a determination under this subsection if ASIC is satisfied that in the previous 12 months the body contravened any of the following provisions:
(a) subsection 283AA(1), 283AB(1) or 283AC(1);
(b) the provisions of Chapter 2M as they apply to the body;
(c) section 674 or 675;
(d) section 724 or 728;
(e) subsection (10) of this section;
(f)section 1308 as that section applies to a notice under subsection (2) of this section.
…
708ASale offers that do not need disclosure
Sale offers to which this section applies
(1)This section applies to an offer (the sale offer ) of a body's securities (the relevant securities ) for sale by a person if:
(a) but for subsection (5), (11) or (12), disclosure to investors under this Part would be required by subsection 707(3) for the sale offer; and
(b) the securities were not issued by the body with the purpose referred to in subparagraph 707(3)(b)(i); and
(c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued.
(1A)This section also applies to an offer (the sale offer ) of a body's securities (the relevant securities ) for sale by a person if:
(a) but for subsection (5), disclosure to investors under this Part would be required by subsection 707(5) for the sale offer; and
(b) the securities were not sold by the controller with the purpose referred to in subparagraph 707(5)(c)(i); and
(c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued.
Determination by ASIC
(2)ASIC may make a determination under this subsection if ASIC is satisfied that in the previous 12 months the body contravened any of the following provisions:
(a) subsection 283AA(1), 283AB(1) or 283AC(1);
(b) the provisions of Chapter 2M as they apply to the body;
(c) section 674 or 675;
(d) section 724 or 728;
(e) subsection (9) of this section; or
(f) section 1308 as that section applies to a notice under subsection (5) of this section.
…”
Division 3 of Part 6D.2 contains s 709 which describes the types of disclosure documents to be used if an offer of securities needs disclosure to investors under that Part, namely, prospectus, short-form prospectus, profile statement, and offer information statement. Division 4 (ss 710 - 716) contains provisions which prescribe the disclosure requirements applicable to prospectuses, short-form prospectuses, profile statements, and offer information statements. Section 713 provides:
“ 713 Special prospectus content rules for continuously quoted securities
Alternative general disclosure test
(1) A prospectus for an offer of:
(a) continuously quoted securities of a body; or
(b) options to acquire continuously quoted securities of a body;
satisfies section 710 if it complies with subsections (2), (3) and (4) of this section.
(2)The prospectus must contain all the information investors and their professional advisers would reasonably require to make an informed assessment of:
(a) the effect of the offer on the body; and
(c) the rights and liabilities attaching to the securities offered; and
(d) if the securities are options – the rights and liabilities attaching to:
(i)the options themselves; and
(ii)the underlying securities.
The prospectus must contain this information only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus.
(3) The prospectus must state that:
(a) as a disclosing entity, the body is subject to regular reporting and disclosure obligations; and
(b) copies of documents lodged with ASIC in relation to the body may be obtained from, or inspected at, an ASIC office.
(4)The prospectus must either:
(a) inform people of their right to obtain a copy of any of the following documents:
(i)the annual financial report most recently lodged with ASIC by the body;
(ii)any half‑year financial report lodged with ASIC by the body after the lodgment of that annual financial report and before the lodgment of the copy of the prospectus with ASIC;
(iii)any continuous disclosure notices given by the body after the lodgment of that annual financial report and before the lodgment of the copy of the prospectus with ASIC; or
(b) include, or be accompanied by, a copy of the document.
If the prospectus informs people of their right to obtain a copy of the document, the person making the offer must give a copy of the document free of charge to anyone who asks for it during the application period for the prospectus.
Information excluded from continuous disclosure notice
(5)Information about the offer must also be set out in the prospectus if the information:
(a)has been excluded from a continuous disclosure notice in accordance with the listing rules of the prescribed financial market whose operator was given the notice; and
(b) is information that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:
(i)the assets and liabilities, financial position and performance, profits and losses and prospects of the body; and
(ii)the rights and liabilities attaching to the securities being offered.
The prospectus must contain this information only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus.
ASIC power to exclude entity from this section
(6)ASIC may determine in writing that a body may not rely on this section if it is satisfied that, in the previous 12 months, any of the following provisions were contravened in relation to the body:
(a) the provisions of Chapter 2M;
(aa) subsection 674(2) or 675(2);
(ab) subsection 708AA(10) or 708A(9);
(b) section 724;
(c) section 728;
(d) section 1308 as it applies to a notice under subsection 708AA(2) or 708A(5);
ASIC must publish a copy of the determination in the Gazette. While the determination is in force, section 710 and not this section applies to securities of the body.”
[The Tribunal notes that s 710 prescribes the “general disclosure test” in respect of the contents of prospectuses.]
The Relevant ASIC Policy Statements
19. ASIC has, for the purpose of administering the Act, issued various regulatory documents, including (relevantly):
· Regulatory Guide 173: Disclosure for on-sale of securities and other financial products (“RG 173”); and
· Regulatory Guide 66: Transaction-specific disclosure (“RG 66”).
20. RG 173 relevantly states:
“ …
What is the purpose of the on-sale provisions?
RG 173.1The on-sale provisions are an anti-avoidance mechanism that is designed to minimise the opportunity for issuers of securities or other financial products to avoid giving disclosure to retail investors by:
(a)first issuing the financial products to an intermediary for whom disclosure is not required; and
(b)the intermediary then on-selling the financial products to retail investors.
RG 173.2The on-sale provisions seek to ensure that, regardless of whether financial products are issued directly to retail clients or indirectly:
(a)retail clients receive adequate disclosure for what is, in substance, an issue of financial products; and
(b)the issuer is liable to retail clients for the efficacy of that disclosure.
Balancing commercial considerations and investor protection
RG 173.3The issue of financial products to wholesale investors is an important feature of the Australian capital market. Generally, such issues can be completed more quickly and at a lower cost than issues made to retail clients due to a combination of factors, including economies of scale and fewer regulatory requirements.
RG173.4Many of the products issued in the wholesale market are of the same kind as those issued or traded in the wider markets. In such cases, financial products issued to wholesale investors could be on-sold to retail clients. Such transactions, being secondary in nature, usually do not attract an obligation to issue a disclosure document or Product Disclosure Statement (PDS). This is because disclosure requirements in the Corporations Act (eg prospectus disclosure under Pt 6D.2 and PDS disclosure under Pt 7.9) generally apply to the issue of financial products and not to their on-sale, unless the sale occurs within 12 months of the issue and the on-sale provisions apply.
RG173.5Financial products issued in the wholesale market are likely to be on-sold into the retail market in the ordinary course of wholesale investors carrying on their investment activities. In such transactions, avoiding disclosure to retail clients will usually not be a relevant motive.
RG173.6However, the differences in the regulatory requirements between wholesale and retail markets necessarily raises the potential for:
(a)financial products issued in the wholesale market to be on-sold to retail investors within 12 months of their issue (this may undermine the requirements for disclosure for retail offers of financial products); and
(b)opportunities for abuse of those differences by persons who are inclined to exploit them.
RG173.7Consequently, anti-avoidance provisions have long been a feature of Australian law. By enacting the on-sale provisions, Parliament intended to tighten the operation of their anti-avoidance effect.
RG173.8Nonetheless, we realise that without relief the on-sale provisions can present some practical difficulties. For example,
(a)in certain circumstances, ordinary placements of equities or other financial products might be unduly impeded; and
(b)retail clients who are issued financial products without disclosure under a specific exemption from the disclosure provisions (eg for dividend reinvestment plans or as consideration for a takeover offer) might not be able to on-sell those products within 12 months of their issue.
RG173.9In consider relief, it would generally not be appropriate for us to exercise our discretionary powers to make fundamental changes to the settings determined by Parliament. However, we can exercise our powers to enable the legislation to operate more appropriately in particular circumstances that may not have been envisaged, or to ameliorate apparently unintended outcomes.
When do we provide relief?
RG 173.10This guide discusses relief we have provided from the on-sale provisions. There are two types of relief:
(a)Disclosure-based relief: The Corporations Act itself provides exemptions from the on-sale provisions. The on-sale exemptions apply where retail investors have the benefit of information that is comparable to that otherwise available in a prospectus or PDS. If the on-sale exemptions do not apply, but retail investors have the benefit of this type of information and investor protection is not compromised, we may provide additional on-sale relief: See Section B.
(b)Exemption-based relief: This relief ensures that products issued to persons including retail clients under separate disclosure exemptions may be readily on-sold: see Section C.
RG 173.11In considering whether to provide relief and the nature of this relief, we have sought to balance the commercial considerations relevant to wholesale capital markets against the retail client protection provided by disclosure under the on-sale provisions.
RG 173.12We believe that any significant relief from the on-sale provisions can only be justified if a comparable level of protection is otherwise available to retail clients who acquire financial products by way of transfer within 12 months of their issue.
RG 173.13We have provided relief where we consider it will facilitate fundraising and on-sales without compromising the investor protection that the on-sale provisions provide to retail clients.
Exclusion power
RG 173.14This guide also discusses our power to make a determination to exclude an entity from relying on the statutory on-sale exemptions where the entity has contravened certain provisions of the Corporations Act (‘exclusion power’): see RG 173.38 – RG 173.43.
…
Exclusion power
RG 173.38We have the power to make a determination removing the benefit of s 708A and 1012DA if an issuer has contravened relevant provisions of the Corporations Act in the previous 12 months: s 708A(2) and 1012DA(2).
RG 173.39The on-sale exemptions are not available to those entities that, at the time when the relevant securities are issued, are the subject of a determination made by ASIC: s708A(1)(c) and 1012DA(1)(d).
RG 173.40We may make a determination if we are satisfied that in the previous 12 months the body has not complied with any of the provisions set out in:
(a)s708A(2) if the product offered is a security; or
(b)s1012DA(2) if the product offered is a financial product other than a security.
RG 173.41Before exercising our exclusion powers, we will generally offer the body an opportunity to make submissions about whether the determination should be made. We will not usually regard it as a sufficient argument against making a determination that the breach of the relevant obligation has since been rectified in some way. We will use our exclusion powers in a way that provides an incentive to ensure that full, accurate and timely disclosure is provided to the market and to investors.
RG 173.42A determination must be in writing, and is required to be published in the Gazette: s708A(3) and 1012DA(3). We will also send the determination to the operator of the market on which the entity is listed to ensure that the operator is aware of the determination for its supervision of listed entities and for market transparency.
Note: A disclosing entity should consider, at the time it becomes aware of its failure to comply with the provisions and after a determination is made, whether it has an obligation to disclose any information to comply with its continuous disclosure obligations.
Period of exclusion
RG 173.43A determination made by us under either s708A(2) or 1012DA(2) will generally exclude an entity from accessing disclosure relief for a period of 12 months from the date of the instrument of exclusion.
…”
21. RG 66 relevantly states:
“ …
RG 66.1 This guide sets out:
(a)how we administer s713 and 1013FA of the Corporations Act 2001 (the Act);
(b)the relief we give to enable transaction-specific disclosure to be used where an issuer of a prospectus or Product Disclosure Statement (PDS) would otherwise be prevented from using such disclosure (we give both class order and case-by-case relief);
(c)our power to exclude a disclosing entity from using transaction-specific disclosure; and
(d)the content required in transaction-specific disclosure.
RG 66.2Section 713 sets out the general provisions applicable to a prospectus used by a disclosing entity to offer continuously quoted securities or options to acquire continuously quoted securities of a body. Such a prospectus is also commonly referred to as a transaction-specific prospectus. In addition, s1013FA permits an issuer of interests in a registered managed investment scheme that are continuously quoted securities to use a shorter, or transaction-specific, PDS.
PART 1: Policy behind transaction-specific disclosure
RG 66.4Transaction-specific prospectuses were introduced by the Corporate Law Reform Act 1994 (the CLRA). The CLRA also introduced a continuous disclosure regime for certain entities. Since the CLRA, the transaction-specific prospectus provisions have been amended further and are now contained in s713 of the Act. Unlike previous provisions, s713 also covers options to acquire continuously quoted securities.
RG 66.5The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) introduced transaction-specific PDSs. Before the commencement of the CLERP 9 Act, the disclosure provisions for financial products made no express distinction between the requirements for continuously quoted securities and those that are not continuously quoted. The CLERP 9 Act introduced s1013FA to permit issuers of interests in a registered managed investment scheme that are continuously quoted securities (‘continuously quoted managed investments’) to issue more concise, or transaction-specific, PDSs.
Rationale for transaction-specific disclosure
RG 66.6Transaction-specific disclosure was introduced so that a disclosing entity could issue a prospectus or PDS with a specified limited content for continuously quoted securities.
RG 66.7Transaction-specific disclosure is possible only within a regime of continuous disclosure. When a disclosing entity issues continuously quoted securities, the market generally should have all information necessary to reach an informed view about the relevant continuously quoted securities.
RG 66.8That view will be based on previous disclosures the entity has made to the market about its activities, financial standing and prospects. The market’s view will already be reflected in the price of those continuously quoted securities: see para 254 of the CLRA Explanatory Memorandum.
RG 66.9This means that the only new information investors should require in a transaction-specific prospectus is:
(a)the effect of the offer on the entity;
(b)the rights and liabilities attaching to the securities offered; and
(c)if the securities are options, the rights and liabilities attaching to:
(i) the options themselves; and
(ii) the underlying securities; and
(d)information not previously disclosed to the market, which covers information excluded from a continuous-disclosure notice under the listing rules (s713(5)) (see RG 66.56).
RG 66.10The CLERP 9 Act introduced s 1013FA to align the operation of the transaction-specific disclosure regime for both PDSs and prospectuses by aligning the framework of disclosure in Pt 7.9 with the framework in Ch 6D as they apply to continuously quoted securities. Section 1013FA is modelled largely on s713 but does not replicate that section, given the differing content requirements of PDSs and prospectuses.
RG 66.11A transaction-specific PDS need not contain all of the PDS content requirements outlined in s1013D, 1013E and 1013F. Under s1013FA, an issuer’s transaction-specific PDS need not disclose to investors any information included in any of the following documents:
(a) the issuer’s most recently lodged annual financial report;
(b)any half-year financial report lodged by the issuer after the most recent lodgment of an annual financial report and before the date of the transaction-specific PDS; or
(c)any continuous disclosure notices given by the issuer after the most recent lodgment of an annual financial report and before the date of the transaction-specific PDS.
RG 66.12Under s1013FA, a transaction-specific PDS cannot be used for options over continuously quoted securities, unless the options are themselves continuously quoted securities. However, a disclosing entity may apply to ASIC for individual relief to do so: see RG 66.22.
RG 66.13Notwithstanding the differences between the legislative provisions governing transaction-specific prospectuses and those governing transaction-specific PDSs, the policy proposition that gives rise to the legislative exemptions is similar: namely, when issuing continuously quoted securities, disclosing entities need not disclose information to investors if that information is already available in the marketplace.
…
ASIC’s exclusion powers: s713(6) and 1013FA(3)
RG 66.32We have the power to exclude a disclosing entity from the benefit of s713 and 1013FA (s713(6) and s1013FA(3)), and this is normally done by an instrument in the form of Pro Forma 162 [PF162]. When such an instrument is in force, the relevant disclosing entity cannot use transaction-specific disclosure during the period specified in the notice.
RG 66.33Under s713(6), we may exercise our power to exclude a disclosing entity from s713 whenever we become aware that, in the previous 12 months, that entity had not complied with any or all of its disclosure obligations under provisions for:
(a) financial reports and audit (Ch 2M);
(b) a defective issuer’s notice (s708A(9));
(c) continuous disclosure (s674 and 675);
(d)false or misleading statements (see s1308) in an issuer’s notice required by s708A(5);
(e)defective disclosure documents (s724); and
(f)misstatements in, or omissions from, a disclosure document (s728).
RG 66.34A similar power exists under s1013FA(3) for transaction-specific PDSs. We may determine that a disclosing entity may not issue a transaction-specific PDS if we are satisfied that, in the previous 12 months, the entity issuing the continuously quoted managed investments has not complied with any or all of its disclosure obligations under provisions for:
(a)financial reports and audit (Ch 2M);
(b)continuous disclosure (s674 and 675);
(c)a defective issuer’s notice (s1013DA(9)); and
(d)false or misleading statements in an issuer’s notice required by s1012DA(5) (s1308).
RG 66.35In addition, we may exclude the operation of the transaction-specific PDS regime if we are satisfied that, in the previous 12 months, the responsible person for the PDS has contravened its obligations under provisions for:
(a)PDS disclosure conditions (s1016E); or
(b)preparing defective disclosure documents (s1021D, 1021E and 1021J).
RG 66.36We will use our exclusion powers to prevent a disclosing entity from utilising the transaction-specific disclosure regime even if the entity’s continuously quoted securities are suspended from quotation or are the subject of a trading halt.
RG 66.37Before exercising out exclusion powers, we will generally offer the disclosing entity an opportunity to make submissions about whether the determination should be made. We will not usually regard it as a sufficient argument against making a determination that the breach of the relevant obligation has since been rectified in some way.
RG 66.38Each determination is required to be published in the Gazette: s713(6) and 1013FA(4). We will also send the determination to the operator of the market on which the entity is listed to ensure the operator is aware of the determination for its supervision of listed entities and for market transparency.
Note: A disclosing entity should consider, at the time it becomes aware of its failure to comply with the provisions and after a determination is made, whether it has an obligation to disclose any information to comply with its continuous disclosure obligations.
Period of exclusion
RG 66.39A determination made by ASIC under either s 713(6) or 1013FA(3) will generally exclude a disclosing entity from using transaction-specific disclosure for a period of 12 months from the date of the determination.
…”
22. The Tribunal notes that ASIC has not issued a regulatory document in respect of its exclusion power under s 708AA(3) of the Act.
CityView’s Case
23. CityView, in its Statement of Facts, Issues and Contentions, addressed the matter which it understood to be the basis of ASIC’s concerns that it had failed to comply with Chapter 2M of the Act, namely, the following extract from the Independent Auditor’s Report, dated 31 March 2009, included in the 2008 Annual Report (see paragraph 13 above):
“ BASIS FOR DISCLAIMER OF AUDITOR’S REPORT
Limitation of scope
We have been unable to obtain all the information and explanations we require in order to form an opinion on the financial report in respect to the following investments and payments as detailed below.
Investments – Associated Companies
Balances prior to impairment through the Income Statement
- European Oil Limited $887,760
- Fortitude Minerals Limited $10,064,021
- Pensador Resources Inc $12,436,720
Audited financial accounts for the period ended 31st December 2008 have not been made available to us in respect to the above associated companies or other evidence to support the investments.
Write off – Preliminary diamond exploration expenditure $4,190,413.
We have not been provided with sufficient evidence to perform appropriate audit procedures to test the integrity of the above expenditure which has been written off through the Income Statement.”
CityView addressed that matter as follows:
“ The reason for the Qualification was because the audit firm, Ashings Limited (Ashings) was unable to complete its audit of Fortitude Minerals Limited (FML) until 16 April 2009 because of the lateness in the grant of the last of the legal tenements titles to an FML subsidiary: four were completed on 6 March 2009 but the fifth did not occur until 25 March 2009.
CitView’s Board, as at 31 March 2009, formed that the view that the Annual Report was ‘true and fair’ as declared at page 27 of the 2008 Annual Report despite the inclusion of the Qualification, due to the fact the carrying value of the investments were fully impaired (refer page 44 of the 2008 Annual Report).
The Board was of the view that there was sufficient interim information available to it to form this view at the time. The Board partly relied upon the draft financial statements for the year ended 31 December 2008 for FML and the Chief Executive Officer of CityView personally inspected the draft financial statements in London as part of the verification process.
In addition assurances were given by the FML directors and management that the draft financial statements for the year ended 31 December 2008 for FML would not be materially different once signed off by Ashings. The Board also had written evidence verifying its shareholdings and loans in associated companies.
Accordingly CityView’s Board decided that it was the prudent course of action to comply with section 319(3)(a) of the Corporations Act and lodge the Annual Report despite the above circumstances beyond CityView’s control as at 31 March 2009.”
24. CityView’s Statement of Facts, Issues and Contentions continued:
“1.3On 29 May 2009, CityView held its AGM. By the time of the AGM, the evidence required in regard to the relevant investments and payments the subject of the Qualification had become available. During the AGM, CityView’s auditor, Mr Kevin Somes of Somes & Cooke Chartered Accountants, informed CityView members present at the AGM that he was satisfied with the information provided in relation to the associated companies and would not include a limitation of scope qualification in the future provided audited financial statements were received.
1.4On July 15 2009, CityView lodged its Annual Report for the financial year ended 31 December 2008 (US Annual Report) with the United States Securities & Exchange Commission.
…
1.5(a) The US Annual Report is, in all material respects, identical to the Annual Report; and
(b)The US Annual Report was issued with an unqualified audit report.”
25. As regards para 1.3 of its Statement of Facts, Issues and Contentions, CityView filed with the Tribunal on 27 April 2010 (by way of annexure B to its written submissions) a letter from Kevin Somes of Somes and Cooke, dated 22 April 2010, which states as follows:
“ To Whom It May Concern:
At the AGM meeting of CityView Corporation Limited held on 29th May 2009, I informed the shareholders present that subsequent to signing the audit report dated 31 March 2009, I have obtained audited accounts for:
·Fortitude Minerals Limited
·European Oil Limited and
·Angola Diamonds Holding (sic) Limited
and;
Obtained additional information in respect to:
·Write off – Preliminary diamond exploration expenditure.
·The sale of CityView’s investment in Pensador Resources Limited.
If the above information was made available to us prior to signing the audit report, we would have been in a position to state:
The financial report of CityView Corporation Limited is in accordance with the Corporations Act 2001 including:
(a) Giving a true and fair view of the financial position of CityView Corporation Limited and the consolidated entity at 31st December 2008 and of their performance for the year ended on that date and;
(b) Complying with Australian Accounting Standards (including the Australian Accounting interpretations) and the Corporations Act 2001.
The Financial report also complies with Internationals (sic) Financial Reporting Standards as issued by the International Accounting Standards Board.”
26. As regards para 1.4 of its Statement of Facts, Issues and Contentions, CityView filed with the Tribunal on 12 February 2010 (by way of tab 2 to that Statement) a copy of its US Annual Report which included (at p 38) the following audit report by Michael F Albanese CPA, dated 14 July 2009:
“ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the Board of Directors and Shareholders of CityView Corporation Limited:
I have audited the accompanying consolidated balance sheet of CityView Corporation Limited as of December 31, 2008, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, I express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CityView Corporation Limited as of December 31, 2008, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in Australia, and in conformity with International Financial Reporting Standards as adopted by the International Accounting Standards Board.
I also have audited the adjustments to the 2007 and 2006 financial statements to apply the adjustments as described in Note 1(a), 9, 24 and 33. In my opinion, such adjustments are appropriate and have been properly applied. I was not engaged to audit, review, or apply any procedures to the 2007 and 2006 financial statements of the Company other than with respect to the adjustments and, accordingly, I do not express an opinion or any other form of assurance on the 2007 and 2006 financial statements taken as a whole.”
27. CityView also filed with the Tribunal on 12 February 2010 a letter from Somerville Corporate Pty Ltd, dated 12 February 2010, which states as follows:
“The Directors
CityView Corporation Limited
…
Dear Sirs
GENERAL ADVICE – CORPORATIONS ACT 2001
We refer to the request of the Directors of CityView Corporation Limited (‘CityView’ or ‘the Company’) to reply to two questions on the ASIC Determination relating to the Directors’ Declaration that was made in the Company’s Annual Report for the financial year ended 31 December 2008.
We confirm that based on the two questions and the limited information provided to us about the Company, we will only be able to provide the Company with general information about the application of the Corporations Act 2001 in relation to the Company’s Annual Report, in response to your questions.
Question 1:
What is the standard normally applied when assessing whether a financial statement and accompanying notes give a true and fair view of the financial position and performance of a company?
Do financial statements in the Annual Report meet the standard required to qualify as giving a true and fair view of the financial position and performance of CityView?
Specifically, is the ‘conservative approach’ adopted by CityView in fully impairing the carrying value of the investments and payments in question consistent with giving a true and fair view of the financial position and performance of CityView?
Section 295(A) of the Corporation Act 2001 (sic) requires each person who performs the chief executive officer function or chief financial officer function (‘person’s’) (sic) of a listed company to provide the directors with a declaration stating whether in the person’s opinion:
(a)The financial records of the company for the financial year have been properly maintained in accordance with section 286; and
Section 286 requires the company to keep written financial records that correctly record and explain its transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited.
(b)The financial statements and notes as referred to in paragraph 295(3)(b) for the financial year comply with the accounting standards; and
(c)The financial standards and notes for the financial year give a true and fair view (section 297); and
Section 297 states that the financial statements and notes for the financial year must give a true and fair view of the financial position and performance of the company and the financial position and performance of the consolidated entity;
(d)Any other matters that are prescribed by the regulations in relation to the financial statements and notes for the financial year are satisfied.
It is the directors of the company that declare the financial statements and notes are in accordance with the Corporations Act 2001 based on the opinion of the chief executive officer and the chief financial officers (‘person’s’) (sic) that:
(a)the financial records of the company for the financial year have been properly maintained; and
(b)the financial statements and notes for the financial year comply with the accounting standards; and
(c)the financial statements and notes for the financial year give a true and fair view; and
(d)any other matters that are prescribed by the regulations in relation to the financial statements and notes for the financial year are satisfied.
The impairing of the carrying value of the investments should have little impact on the person’s opinion when providing the directors with a declaration stating amongst the other requirements of section 295(A) of the Corporations Act 2001 as to whether in the person’s opinion the financial statements give a true and fair view of the financial position and performance of CityView.
In fact it could be argued that the Directors took the ‘conservative approach’ and impaired the carrying value of the investments due to a lack of financial records being maintained by the Company and at the request of the auditors that provided the Company with a limitation of scope qualification as a result of not being provided with sufficient appropriate audit evidence to base an audit opinion.
Question 2:
Do the notes to the financial statements give all further information necessary to give a true and fair view of the financial position and performance of CityView? If no, what further information should have been provided?
Due to the limited information provided it would not be appropriate for us to comment as to what other information should have been provided in the Annual Report.
Again as previously outlined in response to question 1 above it is the directors of the company that declare the financial statements and notes are in accordance with the Corporations Act 2001 based on the opinion of the chief executive officer and the chief financial officer (‘person’s’) (sic) that:
(a)the financial records of the company for the financial year have been properly maintained; and
(b)the financial statements and notes for the financial year comply with the accounting standards; and
(c)the financial statements and notes for the financial year give a true and fair view; and
(d)any other matters that are prescribed by the regulations in relation to the financial statements and notes for the financial year are satisfied.
Delaying the lodgement of the Annual Report may have seen the Annual Report being lodged with an unqualified audit report as was the case in the United States with the lodgement of the US Annual Report. ASIC may then not have the current concerns as to whether the Annual Report was prepared in accordance with the Corporations Act 2001 which may have avoided this matter.
Responsibility
This limited information has been provided to the Company on the basis and only in respect to the above two questions.
We verify that the responsibility for the responses in this letter are limited to the Company, and the Company alone and these responses only relate to the specific questions raised by the Directors of the Company.
We confirm that this general information about the application of the Corporations Act 2001 is not an expert opinion, thus may not be relied upon, disclosed to, or copied by anyone without our prior written consent. No responsibility will be accepted for any loss occasioned to any other person acting on or refraining from any action as a result of the information provided to you. You agree to indemnify Somerville Corporate Pty Ltd against all liabilities, claims, costs or expenses incurred in respect of any claim or action by a third party, in connection with the provision of this letter.
Should you have any queries about the information provided to you, we strongly encourage you to seek your own independent legal advice on the matter.”
28. CityView, in its Statement of Facts, Issues and Contentions (at para 1.7(c)), reiterated its response to ASIC’s concerns that it had failed to comply with specified provisions of Chapter 2M of the Act, as set out in its letter to ASIC dated 19 August 2009 (referred to in paragraph 15 above) as follows:
“(a)the true and fair view obligation under section 297 of the Act – The Annual Report gives a true and fair view of CityView’s financial condition and performance at the relevant times as determined by the Board (after taking into account the considerations outlined above) and independently confirmed by:
·CityView’s Australian auditor Mr Kevin Somes at the Company’s Annual General Meeting; and
·CityView’s US auditor Mr Michael F Albanese CPA in issuing an unqualified audit report in respect to the 20-F Annual Report for the year ended 31 December 2008, which was not materially different from the 2008 Annual Report.
(b) the content requirements for the annual financial reports under paragraph 295(3)(c) of the Act – The 2008 Annual Report complies with the content requirements. We note that the 2008 Annual Report and the 20-F Annual Report for the year ended 31 December 2008 dated 14 July 2009 are materially identical except for the Subsequent Events note, which is only different due to the relevant timing of the lodgements.
(c) the audit obligation under section 301 of the Act – At all times CityView has complied with this section, The qualification was only issued due to the fact the CityView’s Auditor was unable to obtain audited financial statements of FML and ADHL by 31 March 2009 to express an unqualified audit opinion due to circumstances beyond CityView’s control. The advice received from the auditor was that unless audited financial statements were received from ADHL and FML, he would have no choice other than to issue a limitation of scope qualification.
(d) the obligation to keep proper financial records under section 286 of the Act – At all times CityView has kept proper financial records relating to all subsidiaries and controlled entities in accordance with the Act at Level 9, 28 The Esplanade Perth WA 6000.”
29. Finally CityView, in its Statement of Facts, Issues and Contentions, summarised its contentions as follows:
“ 2. Contentions
2.1ASIC should not have applied RG173.41 because the rectification by CityView at the AGM of 29 May 2009 was adequate to overcome any technical breach.
2.2The Annual Report, by fully impairing the Assets, provided a true and fair view of CityView’s financial position.
2.3The Annual Report provided sufficient information to give a true and fair view of the financial position and performance of CityView.
2.4CityView has at all times kept proper financial records that correctly record and explain its transactions and financial position and performance.
2.5The Determination should not be upheld because there was no material detriment nor was the market misled.”
Those contentions were reiterated in CityView’s written submissions filed with the Tribunal on 27 April 2010 and 17 May 2010.
ASIC’s Case
30. ASIC’s case is comprised of the T Documents, its Statement of Facts and Contentions filed with the Tribunal on 24 March 2010, and its written submissions filed with the Tribunal on 13 May 2010.
31. In its written submissions ASIC states:
“1.5 The gravamen of the ASIC’s concerns is that, having regard to the contents of CityView’s Annual Report for the financial year ended 31 December 2008 (‘Annual Report’) (T6 p394), CityView did not keep written financial records that correctly recorded and explained its transactions and financial position and performance and that would enable true and fair financial statements to be prepared and audited in accordance with its obligations under s 286 of the Act.
1.6A further and related concern of ASIC is that the Annual Report and the notes to it do not give a true and fair view of the financial position and performance of the company as required by s 297 of the Act.
1.7Accordingly, the issues that arise for consideration in the proceedings are whether in the 12 months preceding the Determination:
(a)CityView kept proper financial records in accordance with the requirements of s 286 of the Act; and
(b)Whether the Annual Report and accompanying notes gave a true and fair view of its financial position and performance in accordance with the requirements of s 297 of the Act….”
32. As regards the s 286 issue, ASIC submitted:
“3.3 It is important to note that the obligations under s286(1)(b) of the Act is for a company to keep written financial records that will enable true and fair financial statements ‘’to be prepared and audited’.
3.4The auditor’s opinion accompanying the Annual Report (see T6 p394 at 418) contains the following statements by the auditor:
‘ We have been unable to obtain all the information and explanations we require in order to form an opinion on the financial report in respect of (sic) the following investments and payments as detailed below…’
‘… we are unable to and do not express an opinion as to whether the financial report of CityView … is in accordance with the Corporations Act 2001 including:
(i)giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 31st December 2008 and of its performance for the year ended on that date; and
(ii)complying with Australian Accounting Standards … and the Corporations Regulations 2001.’
3.5The auditor was accordingly unable to form an opinion under s 307 of the Act as to whether the Annual Report complied with the accounting standards and provided a true and fair view of the financial position and performance of the company.
3.6That being the case it must follow that CityView has, in the 12 months prior to the making of the Determination, failed to keep written financial records that would enable true and fair financial statements to be prepared and audited in accordance with the requirements of s 286(1)(b) of the Act.” (original emphasis)
33. As regards the s 297 issue, ASIC’s submissions may be summarised as follows:
·the Directors’ Declaration contained in the 2008 Annual Report (see paragraph 12 above) is merely an expression of opinion without any expressed reasons or other foundation and it must, accordingly, be read subject to the report of the independent auditor who was unable to express an opinion as to whether the financial report in the 2008 Annual Report gave a true and fair view of CityView’s financial position as at 31 December 2008 and of its performance for the year ended on that date (see paragraph 13 above);
·as regards CityView’s reliance on the statements of Kevin Somes made subsequently to the lodgment of the 2008 Annual report with ASIC and the ASX on 1 April 2009 (see paragraphs 24 and 25 above) – the objective of the reporting provisions of the Act is to ensure that both the markets and shareholders are kept fully apprised of a company’s financial position and performance as that information may affect investment decisions, and it would either defeat or severely restrict the financial reporting objectives if an auditor could amend the opinions expressed by him in writing in the manner suggested especially as there is no mechanism for informing the market of any such amendment;
·as regards CityView’s reliance on the audit report of Michael Albanese included in its US Annual Report lodged with the Securities and Exchange Commission on 15 July 2009 (see paragraphs 24 and 26 above) – Mr Albanese’s report is “insufficient to overcome” the qualified opinion expressed by Kevin Somes in the 2008 Annual Report because Mr Albanese is not a registered company auditor in Australia and his audit was not conducted in accordance with the requirements of s 307A of the Act and the required auditing standard (namely, ASA 700);
·notwithstanding CityView’s assertion that, for the purpose of preparing the financial statements and notes for the 2008 Annual Report, the “carrying values” of its investments in associated companies were “fully impaired”, Kevin Somes, in the independent auditor’s report included in the 2008 Annual Report, noted that audited financial accounts or other sufficient evidence in respect of the relevant associated companies for the period ended 31 December 2008 had not been made available to him and that, accordingly, he was unable to express an opinion as to whether the financial report of CityView gave a true and fair view of its financial position and performance.
34. ASIC further submitted that the Tribunal, in deciding whether or not to affirm ASIC’s decision to exercise the discretion conferred by each of s 708AA (3), s 708A (2), and s 713 (6) of the Act, should have regard to:
·the purpose of the legislative provisions to which those discretions relate; and
·ASIC’s policy in respect of the exercise of those discretions.
ASIC’s submissions relevantly state:
“ Purpose of the legislation
8.3ASIC’s discretion under ss 708AA(3), 708A(2) and 713(6) is contained in Chapter 6D of the Act which regulates the fundraising activities of companies. In general, offers to issue securities (or sell securities within 12 months of their issue) to retail investors must be made using a prospectus containing all information that investors and their professional advisers would reasonably require to make an informed assessment about the securities (ss 706, 707, 709 and 710).
8.4In certain circumstances, companies listed on the ASX are exempted from the usual prospectus requirements and allowed to offer their quoted securities with reduced disclosure (ss 708AA 708A and 713). These disclosure exemptions rely on the company keeping the market fully informed at all times through its continuous disclosure and financial reporting about its activities, financial position and financial performance. For this reason, these disclosure exemptions generally do not apply where, among other things:
(a)trading in the company’s securities on ASX has been suspended for more than a total of 5 days in the previous 12 months (ss 708A(5)(b) and 708AA(2)(c));
(b)the company is covered by an order under ss 340 or 341 of the Act exempting it from parts of the financial reporting provisions in Chapter 2M of the Act (ss 708AA(2)(e) and 708A(5)(d)); or
(c)the company contravenes the continuous disclosure obligations under s 674 or the financial reporting provisions under Chapter 2M and, within 12 months of the contravention, the ASIC makes a determination that the company cannot rely on the disclosure exemptions (ss 708AA(1)(b), 708A(1A)(c) and 713(6)).
8.5The ASIC submits that CityView should not be allowed to raise money from retail investors without providing full prospectus disclosure and, therefore, it is appropriate for the ASIC to make a determination excluding CityView from relying on the disclosure exemptions under ss 708AA, 708A and 713.
8.6CityView’s failure to keep proper financial records and the uncertainty about its financial position and performance make it important that CityView meets the standards of prospectus disclosure under s 710 of the Act. In particular, CityView should be required to undertake thorough due diligence into its ‘assets and liabilities, financial position and performance, profits and losses and prospects’ and disclose all material information to retail investors who are considering an investment in the company (s 710).
The ASIC’s policy
8.7The ASIC’s policy in relation to the exercise of its powers under ss 708A(2) and 713(6) of the Act is set out in:
(a)Regulatory Guide 173: Disclosure for on-sale securities and other financial products (RG 173) at paragraphs RG 173.38 – RG 173.43 (T17); and
(b)Regulatory Guide 66: Transaction-specific disclosure (RG 66) at paragraphs RG 66.32 – RG 66.39 (T16).
The ASIC does not have a published policy in relation to the exercise of its powers under s 708AA(3) of the Act.
8.8The ASIC’s policy provides that it will not usually regard it as a sufficient argument against making a determination that the breach of the relevant obligation has since been rectified in some way. The ASIC’s policy is to use its determination powers in a way that provides an incentive to ensure that full, accurate and timely disclosure is provided to the market and to investors: see RG 173.41 and RG 66.37.
8.9The ASIC submits that the Determination is consistent with ASIC’s published policy. Regardless of whether CityView’s assertion that Mr Somes has since ‘amended’ his audit opinion is correct, the ASIC submits that it was appropriate for it to make the Determination because it promotes full, accurate and timely disclosure of material information to the market. CityView has not provided any evidence that the market was provided with full, accurate and timely disclosure about Mr Somes’ ‘amendment’ to his audit opinion.”
CONSIDERATION
Did CityView, in the period of 12 months ending on 19 August 2009, contravene s 286 of the Act?
35. The first question for the Tribunal’s determination is whether or not CityView, in the period of 12 months immediately preceding ASIC’S determination of 20 August 2009 (“the relevant period”), fulfilled its obligation under s 286(1) of the Act to:
“ keep written financial records that:
(a)correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited.”
36. The focus of this inquiry is the 2008 Annual Report lodged with ASIC and the ASX by CityView on 1 April 2009 – in particular, the financial statements and notes, the directors’ declaration, and the independent auditor’s report contained in that Annual Report.
37. As previously set out (see paragraph 13 above), the auditors noted in their report:
“ We have been unable to obtain all the information and explanations we require in order to form an opinion on the financial report in respect to the following investments and payments as detailed below.
Investments – Associated Companies
Balances prior to impairment through the Income Statement
- European Oil Limited $887,760
- Fortitude Minerals Limited $10,064,021
- Pensador Resources Inc $12,436,720
Audited financial accounts for the period ended 31st December 2008 have not been made available to us in respect to the above associated companies or other evidence to support the investments.
Write off – Preliminary diamond exploration expenditure $4,190,413.
We have not been provided with sufficient evidence to perform appropriate audit procedures to test the integrity of the above expenditure which has been written off through the Income Statement.”
The auditors then expressed the following opinion:
“ In our opinion
a)because of the limitation on the scope of our work as described in the preceding paragraph we are unable to and do not express an opinion as to whether the financial report of CityView Corporation Limited is in accordance with the Corporations Act 2001 including:
i)giving a true and fair view of the Company’s and Consolidated entity’s financial position as at 31st December 2008 and of its performance for the year ended on that date: and
ii)complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.
…”
38. In the Tribunal’s opinion it may reasonably be inferred from the above extracts from the independent auditor’s report that CityView did not provide, or otherwise make available, to the auditors certain financial records which the auditors regarded as necessary to enable them to conduct a full audit of the financial statements and notes contained in the 2008 Annual Report and to express an opinion as to whether those financial statements and notes gave a true and fair view of CityView’s financial position as at 31 December 2008 and of its performance for the financial year ended on that date.
39. It may also, in the Tribunal’s opinion, reasonably be inferred, from CityView’s abovementioned failure to provide, or otherwise make available, to the auditors the relevant financial records, that it did not then have those financial records in its possession or under its control. That state of affairs, indeed, appears to have been acknowledged by CityView in its letter to ASIC dated 19 August 2009 (referred to in paragraph 15 above) and in its Statement of Facts, Issues and Contentions herein (referred to in paragraphs 23 and 24 above) whereby CityView sought to explain the auditors’ qualified opinion by stating that the relevant audited financial accounts, which were required by the auditors, did not become available to CityView until after 31 March 2009 (the date of the independent auditor’s report).
40. Having regard to the abovementioned considerations, the Tribunal is satisfied, and finds, that CityView, in the relevant period, did not fulfil its obligation under s 286 (1)(b) of the Act to “keep written financial records that … would enable true and fair financial statements to be prepared and audited”, and that it thereby contravened that provision.
Did CityView, in the relevant period, contravene s 297 of the Act?
41. The next question for the Tribunal’s determination is whether or not CityView, in the relevant period, contravened s 297 of the Act by including in the 2008 Annual Report financial statements and notes (within the meaning of s 295 of the Act) which did not “give a true and fair view of the financial position and performance” of CityView.
42. As previously mentioned, the auditors, in their report included in the 2008 Annual Report, stated that they had not been provided with sufficient financial evidence or information to enable them to perform a full and proper audit of the financial statements and notes included in the 2008 Annual Report and that, accordingly, they were unable to express an opinion as to whether the financial report (including the financial statements and notes) gave a true and fair view of CityView’s financial position as at 31 December 2008 and of its performance for the year ended on that date.
43. On that basis, the Tribunal cannot be satisfied that the financial statements and notes included in the 2008 Annual Report gave “a true and fair view of … the financial position and performance” of CityView for the financial year ended 31 December 2008, for the purposes of s 297 of the Act.
44. Accordingly, the Tribunal is not satisfied that CityView, in respect of the financial statements and notes included in the 2008 Annual Report in the relevant period, complied with s 297 of the Act. The Tribunal, however, on the basis of the evidence before it, is unable to make a positive finding that CityView contravened s 297 of the Act in the relevant period.
Is the making of a determination under s 708AA(3), s 708A(2) and s 713(6) of the Act, in relation to CityView, appropriate in this case?
45. It follows from the Tribunal’s finding (in paragraph 40 above) that CityView, in the relevant period, contravened s 286(1) of the Act that the discretionary power, conferred by each of s 708AA(3), s 708A(2) and s 713(6) of the Act, to make a determination is enlivened in this case: see s 708AA(3)(b), s 708A(2)(b) and s 713 (6)(a).
46. In deciding whether to exercise the discretionary power conferred by each of s 708AA(3), s 708A(2), and s 713(6) of the Act, regard should be had to the scope, subject matter and purpose of the Act – in particular, Chapter 6D of the Act.
47. The scope, subject matter and purpose of Chapter 6D (including ss 708AA, 708A and 713) are generally described in ASIC’s Section 37 Statement (T2, pp 9 - 10), its Statement of Facts and Contentions (paras 30 - 32), and its written submissions (paras 8.3 - 8.4) and may be summarised as follows:
·Chapter 6D of the Act regulates the fundraising activities of commercial entities, including companies;
·Part 6D.2 of Chapter 6D, which comprises ss 704–725, deals with the circumstances in which disclosure to investors about an offer of securities is required, or not required, to be made (ss 704–708A), the disclosure documents (including prospectuses) and the content requirements applicable thereto (ss 709–716), and the procedure for offering securities (including the lodgment of the disclosure document with ASIC) (ss 717–725);
·the general policy of Part 6D.2 of Chapter 6D is that disclosure of all relevant up-to-date information about an offer of securities is required to be made in order to enable investors and their professional advisers to make an informed assessment of those securities;
·Part 6D.2 of Chapter 6D contains certain exceptions to the general disclosure requirement, including (relevantly), s 708AA (“rights issues that do not need disclosure”) and s 708A (“sale offers that do not need disclosure”);
·Part 6D.2 also includes a provision (s 713) whereby, in the case of “continuously quoted securities”, the prospectus content requirements are significantly lower than those generally applicable to an offer of securities;
·Part 6D.2, however, includes provisions whereby ASIC is authorised to make determinations, the effect of which is that the abovementioned exceptions to the general disclosure requirement (ss 708AA and 708A) and prospectus content requirements (s 713) do not apply, if ASIC is satisfied that in the previous 12 months the body whose securities are offered contravened any of certain specified provisions of the Act, including the provisions of Chapter 2M.
48. It is appropriate for the Tribunal in determining, on the basis of the material before it, whether the making of a determination under s 708AA(3), s 708A(2) and s 713(6) is the preferable decision in this case, to have regard to relevant policy statements of ASIC, although the Tribunal is, of course, not bound by such policy statements: see Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 at 590 - 591; Hneidi v Minister for Immigration and Citizenship (2010) 182 FCR 115 at 120 - 121.
49. The relevant ASIC policy statements are set out in paragraphs 19–21 above: see, in particular, paras RG 173.38 – RG 173.43 (regarding s 708A(2)) and paras RG 66.32 – RG 66.39 (regarding s 713(6)) of those policy statements.
50. As regards the exercise of the power to make a determination under s 708A(2) of the Act, the Tribunal regards it as appropriate that that power be exercised “in a way that provides an incentive to ensure that full, accurate and timely disclosure is provided to the market and investors” (as stated in para RG 173.41 of RG 173) – that is, in a way that promotes the policy and object of Part 6D.2 of Chapter 6D of the Act. In the Tribunal’s opinion, the same considerations apply in relation to the exercise of the power to make a determination under s 708AA(3) and s 713(6) of the Act.
51. In the present case, the Tribunal has found that CityView, in the relevant period, contravened a provision of Chapter 2M of the Act, namely, s 286 (1), in that it failed to keep “written financial records that… would enable true and fair financial statements to be prepared and audited” (within the meaning of that subsection). The Tribunal, furthermore, is not satisfied that the financial statements and notes included in the 2008 Annual Report, in the relevant period, gave “a true and fair view of … the financial position and performance” of CityView for the financial year ended 31 December 2008, for the purposes of s 297 of the Act. These considerations, in the Tribunal’s opinion, represent significant failures by CityView to provide to the public full and accurate disclosure regarding its financial position and performance in the 2008 Annual Report. The Tribunal accepts ASIC’s submission that:
·the statements of Kevin Somes of Somes and Cooke made at CityView’s Annual General Meeting on 29 May 2009, subsequent to the lodgment of the 2008 Annual Report with ASIC and the ASX on 1 April 2009, as confirmed in Mr Somes’ letter of 22 April 2010 (see paragraphs 24–25 above); and
·the audit report of Michael Albanese included in CityView’s US Annual Report lodged with the Securities and Exchange Commission on 15 July 2009 (see paragraph 26 above);
did not effectively rectify the failure by CityView to provide to the market and to the public full and accurate disclosure regarding its financial position and performance in the 2008 Annual Report. Furthermore, even if those subsequent events were to be regarded as rectifying CityView’s contravention of s 286(1) of the Act, that, in the Tribunal’s opinion, would not of itself suffice to render inappropriate the making of a determination under each of s 708AA(3), s 708A(2) and s 713(6) in relation to CityView (see para RG 173.41 of RG 173 and para RG 66.37 of RG 66).
52. Having regard to the abovementioned considerations, the making of a determination under each of s 708AA(3), s 708A(2) and s 713(6) of the Act in relation to CityView, on the ground that it had contravened a provision of Chapter 2M of the Act, namely s 286(1), in the relevant period was, in the Tribunal’s opinion, appropriate.
53. The Tribunal notes that ss 708AA, 708A and s 713 do not address the matter of the period for which a determination made under s 708AA(3), s 708A(2) or s 713 (6) may be in force. That matter is, however, addressed in para RG 173.43 of RG 173, in relation to s 708A(2), and in para RG 66.39 of RG 66, in relation to s 713 (6). In each case ASIC’s policy is that a determination will generally be expressed to operate for a period of 12 months from the date of the determination (RG 66.39) or “instrument of exclusion” (RG 173.43).
54. In the Tribunal’s opinion, having regard to the nature of CityView’s contravention of s 286(1) of the Act which enlivened the discretionary power to make the relevant determinations in this case, there is no good reason to depart from ASIC’s policy in this respect. The Tribunal regards it as appropriate in the circumstances of this case that the determination made in relation to CityView under each of s 708AA(3), s708A(2) and s 713(6) of the Act on 20 August 2009, embodied in the instrument dated 20 August 2009 set out in paragraph 1 above, be in force for a period 12 months commencing on 20 August 2009 and expiring on 19 August 2010.
Conclusion
55. The Tribunal concludes, therefore, that the preferable decision in this case is the making of a determination under each of s 708AA(3), s 708A(2) and s 713(6) of the Act in relation to CityView, such determinations to be in force for a period of 12 months commencing on 20 August 2009 and expiring on 19 August 2010. Although the determinations set out in the abovementioned instrument dated 20 August 2009 were expressed, in effect, to operate “from the date of this instrument until 20 August 2010”, the Tribunal understands that phrase to mean that those determinations are in force from, and including, 20 August 2009 to, and including, 19 August 2010 – that is, that those determinations expire on 19 August 2010 and that they do not have effect on and from 20 August 2010. That understanding is consistent with ASIC’s policy referred to in paragraph 53 above. So understood, those determinations should be affirmed.
Decision
56. For the above reasons the Tribunal affirms the decision under review.
I certify that the 56 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President S D Hotop
Signed: ……..sgd E Jordan ........
Associate
Date of Hearing (on the papers) 24 May 2010
Date of Decision 6 July 2010Representative of the Applicant Mr M Smyth
CityView Corporation Ltd
Representatives of the Respondent Mr A Lo Surdo of Counsel
Mr M Povey
Chief Legal OfficeAustralian Securities and Investments
Commission
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