Re Bellevue Gold Ltd
[2021] WASC 80
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: EX PARTE BELLEVUE GOLD LTD [2021] WASC 80
CORAM: HILL J
HEARD: 4 MARCH 2021
DELIVERED : 4 MARCH 2021
PUBLISHED : 25 MARCH 2021
FILE NO/S: COR 33 of 2021
MATTER: IN THE MATTER OF BELLEVUE GOLD LTD
EX PARTE
BELLEVUE GOLD LTD
Plaintiff
Catchwords:
Corporations - Application for orders under s 1322 of Corporations Act 2001 (Cth) - Failure of company to have shareholder nominate auditor prior to annual general meeting - Failure of company to resolve to appoint auditor at annual general meeting - Impact on validity of cleansing notices - Where no blatant or flagrant disregard of obligations - Whether orders should be made relieving officers of civil liability - Appropriate form of orders
Legislation:
Corporations Act 2001 (Cth), s 327B, s 327C, s 328A, s 328B, s 707, s 708A, s 727, s 1322
Result:
Application allowed
Category: A
Representation:
Counsel:
| Plaintiff | : | Mr A J Papamatheos & Ms C E McKay |
Solicitors:
| Plaintiff | : | HWL Ebsworth Lawyers (Perth) |
Case(s) referred to in decision(s):
Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd [2005] NSWSC 1005; (2005) 55 ACSR 185
Crichton v Victorian Dairies Ltd [1965] VR 49
Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273
Gofur v Bangladesh Islamic Centre of NSW [2020] NSWSC 652
Re Caeneus Minerals Ltd [2018] FCA 560
Re Chinese Cultural Club Ltd (2004) 49 ACSR 568; 183 FLR 33; [2004] NSWSC 432
Re Classic Minerals Ltd [2018] FCA 2039
Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17
Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174
Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369
Re Murray River Organics [2019] FCA 931; (2019) 138 ACSR 365
Re Ozito Industries Pty Ltd [2020] FCA 1432; (2020) 148 ACSR 585
Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57
Re Wave Capital Ltd (2003) 47 ACSR 418
Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396
HILL J:
On 1 March 2020, the plaintiff, Bellevue Gold Limited (Bellevue), filed an originating process seeking orders under s 1322 of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 327B(1)(b), s 327C(2), s 328A and s 328B of the Act. The contraventions occurred as a result of Bellevue's failure to have a shareholder nominate Grant Thornton as auditor or have the appointment of Grant Thornton as auditor approved at its annual general meetings held in 2018, 2019 and 2020.
These contraventions have had a secondary impact on the company. Eighteen cleansing notices that were issued over this period by Bellevue were also arguably defective. For that reason, Bellevue also applied for orders pursuant to s 1322 of the Act for declarations these notices were not invalid.
In light of the urgency with which the application was brought, I made orders at the conclusion of the hearing on 4 March 2021 granting the relief sought and said that I would subsequently publish reasons for my decision. These are the reasons for my decision.
The provisions of the Act governing the appointment of auditors have been subject to only very limited judicial consideration and academic commentary. After the announcement of the filing of this application, two further proceedings were commenced in this court concerning similar contraventions. In publishing my reasons for decision, I have drawn on the helpful submissions of counsel who appeared for the plaintiff in this matter as well as the submissions of counsel in the other matters.[1]
[1] Ex parte: New Century Resources Ltd (COR 41 of 2021); Ex parte: Matador Mining Ltd (COR 44 of 2021).
Factual background
Bellevue is a mineral exploration company. Its flagship project is the Bellevue Gold Project in Western Australia.[2]
[2] First affidavit of Michael Dylan Naylor filed 1 March 2021 [15].
Bellevue is an Australian public company which was incorporated on 11 October 2004 and whose securities are listed on the Australian Securities Exchange (ASX).[3] As at 26 February 2021, Bellevue had 10,184 shareholders and a market capitalisation of approximately $617.11million.[4]
Appointment of Grant Thornton as auditor
[3] First affidavit of Michael Dylan Naylor filed 1 March 2021 [12].
[4] First affidavit of Michael Dylan Naylor filed 1 March 2021 [16] – [17], 'MDN-3'.
In early 2018, the directors of Bellevue resolved, after a competitive tender process, to appoint Grant Thornton as its auditor in place of KPMG. This decision was made for a number of reasons, including the relocation of Bellevue's head office from New South Wales to Western Australia.[5]
[5] First affidavit of Michael Dylan Naylor filed 1 March 2021 [20] - [21].
On 30 January 2018, following a request from Bellevue, KPMG resigned as auditor of Bellevue.[6] On 6 March 2018, ASIC consented to KPMG's resignation.[7]
[6] First affidavit of Michael Dylan Naylor filed 1 March 2021 [22], 'MDN-4'.
[7] First affidavit of Michael Dylan Naylor filed 1 March 2021 [23], 'MDN-5'.
On 7 March 2018, Grant Thornton issued written terms of engagement to Bellevue for audit services for the financial year ending 30 June 2018. The terms of engagement covered the audit of the accounts for the year ending 30 June 2018 as well as the review of the accounts for the period ending 31 December 2017.[8]
[8] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-7'.
On 13 March 2018, Grant Thornton was appointed by the directors of Bellevue as auditor to fill the casual vacancy pursuant to s 327C(1) of the Act.[9] The appointment was the subject of an ASX announcement on the same date. The announcement stated that a resolution for Grant Thornton's appointment as auditor would be put to shareholders at the upcoming 2018 annual general meeting.[10]
[9] First affidavit of Michael Dylan Naylor filed 1 March 2021 [24], 'MDN-6', 'MDN-7', 'MDN-8', 'MDN-9', 'MDN-10', 'MDN-11'.
[10] First affidavit of Michael Dylan Naylor filed 1 March 2021 [26], 'MDN-6'.
On 19 September 2018, Bellevue lodged with the ASX its annual report for the year ended 30 June 2018. The annual report listed Grant Thornton as Bellevue's auditor and contained an independent auditor's report of Grant Thornton, the standard auditor's sign‑off, and the auditor's independence declaration signed by Grant Thornton.[11]
[11] Affidavit of Stephen Andrew Parsons filed 1 March 2021, 'SAP-5'.
Bellevue's 2018 annual general meeting was held in November 2018. The agenda for the annual general meeting included an item for consideration of the annual report.[12] A representative of Grant Thornton (Matthew Hingeley, a Director of Audit and Assurance) attended the annual general meeting and his presence was recorded in the minutes.[13] The 2018 annual report, including Grant Thornton's report, was tabled at the meeting. No questions were asked at the annual general meeting about the 2018 annual report or Grant Thornton's report.[14]
[12] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-14'.
[13] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-15'.
[14] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-15'.
In preparing the notice of meeting for the 2018 annual general meeting, Mr Naylor, a director and joint company secretary of Bellevue, did not procure a shareholder to nominate Grant Thornton nor include a resolution for shareholders to approve Grant Thornton as Bellevue's auditor. Mr Naylor's evidence is that he knew there was a requirement for the auditor to be approved at the company's annual general meeting but simply overlooked it.[15] The notice of annual general meeting was reviewed by Bellevue's external legal advisors who did not identify this omission.[16] The draft notice was also submitted to the ASX for its review who confirmed that it had no objection to the draft notice.[17]
[15] First affidavit of Michael Dylan Naylor filed 1 March 2021 [29].
[16] First affidavit of Michael Dylan Naylor filed 1 March 2021 [30] – [31], 'MDN-12'.
[17] First affidavit of Michael Dylan Naylor filed 1 March 2021 [32] – [34], 'MDN-13'.
As a result of this omission, the shareholders of Bellevue did not resolve to appoint Grant Thornton as Bellevue's auditor at the 2018 annual general meeting. The consequence of this omission was that, by reason of s 327B(1)(b) of the Act, Grant Thornton ceased to be auditor of Bellevue at the conclusion of the 2018 annual general meeting.
During the 2019 and 2020 financial years, the directors of Bellevue did not resolve to appoint Grant Thornton as auditor to fill the casual vacancy that had arisen as a matter of law.
Grant Thornton issued separate letters of engagement for audit services for the years ending 30 June 2019[18] and 30 June 2020,[19] as well as the reviews for the half year ending 31 December 2018[20] and 31 December 2019.[21]
[18] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-9'.
[19] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-11'.
[20] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-8'.
[21] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-10'.
In 2019 and 2020, Bellevue lodged annual reports with the ASX. Each of the annual reports disclosed that Bellevue's auditor was Grant Thornton and contained Grant Thornton's independent auditor's report, the standard auditor sign‑off, and independence declaration of Grant Thornton.[22]
[22] Affidavit of Stephen Andrew Parsons filed 1 March 2021, 'SAP-1', 'SAP-3'.
A similar process was adopted by Mr Naylor in relation to the preparation of the materials for the 2019 and 2020 annual general meetings that he adopted for the 2018 annual general meeting. Mr Naylor instructed the company's external legal counsel to prepare notices of meetings, draft notices were provided to the ASX for their consideration, and the Board approved the final notices of meetings.[23]
[23] First affidavit of Michael Dylan Naylor filed 1 March 2021 [36].
Mr Naylor's evidence is that he did not turn his mind to whether Grant Thornton needed to be formally appointed at these meetings as he assumed they had already been formally appointed.[24] At no point in the preparations for the 2019 or 2020 annual general meeting did Bellevue's external solicitors, ASIC, the ASX or the board of directors query whether the notice of meeting needed to include a resolution for the appointment of Grant Thornton as auditor.[25]
[24] First affidavit of Michael Dylan Naylor filed 1 March 2021 [37].
[25] First affidavit of Michael Dylan Naylor filed 1 March 2021 [38].
The agendas of the annual general meetings for 2019 and 2020 included consideration of the relevant annual report, which included the auditor's report.[26] The minutes of both annual general meetings disclose that representatives of Grant Thornton were present at each meeting and that the relevant annual report was tabled with no questions raised, including as to the auditor's report.[27]
[26] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-16', 'MDN-18'.
[27] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-19', 'MDN-20'.
Prior to the annual general meetings in 2019 and 2020, Bellevue did not receive a shareholder nomination of Grant Thornton as auditor as required by s 328B(1) of the Act, or the prior written consent of Grant Thornton to their appointment as auditor pursuant to s 328A(1) of the Act. The engagement letters Bellevue received from Grant Thornton were received after the date of each of the annual general meetings and not beforehand.
In late 2020, after a competitive tender process, the board of directors of Bellevue selected Ernst & Young to replace Grant Thornton as auditor of Bellevue.[28] This decision followed Bellevue's expansion and substantial growth in its market capitalisation and operations since the initial appointment of Grant Thornton as auditor in March 2018.[29]
[28] First affidavit of Michael Dylan Naylor filed 1 March 2021 [43].
[29] First affidavit of Michael Dylan Naylor filed 1 March 2021 [42].
On 15 December 2020, Bellevue requested that Grant Thornton provide ASIC with a request to resign as auditor.[30] Grant Thornton lodged this request on or about 24 December 2020.[31]
[30] First affidavit of Michael Dylan Naylor filed 1 March 2021 [44].
[31] Affidavit of Maddison Joy Cramer filed 1 March 2021, 'MJC-1'.
On 25 January 2021, Ms Cramer, one of Bellevue's joint company secretaries, received a telephone call from ASIC. ASIC informed her that they had no record of Bellevue following the required procedure for the appointment of Grant Thornton as auditor.[32] On receipt of this advice, Bellevue took steps to inform ASIC and the ASX, notify the company's shareholders, and apply to the court for curative orders.[33]
[32] Affidavit of Maddison Joy Cramer filed 1 March 2021 [8].
[33] First affidavit of Michael Dylan Naylor filed 1 March 2021 [48]; Affidavit of Maddison Joy Cramer filed 1 March 2021 [12]; Affidavit of Stephen Andrew Parsons filed 1 March 2021 [27].
Notwithstanding the issue in respect of the appointment of Grant Thornton, on 29 January 2021, ASIC consented to Grant Thornton's request that they resign as auditors.[34]
[34] First affidavit of Michael Dylan Naylor filed 1 March 2021 [45], 'MDN-22'.
On 2 February 2021, Bellevue announced to the ASX that Grant Thornton had resigned as auditor and Ernst & Young had been appointed.[35]
[35] First affidavit of Michael Dylan Naylor filed 1 March 2021 [46], 'MDN-23'.
Since being informed of the issue, Mr Naylor, together with Bellevue's joint company secretaries and external legal counsel, has worked to determine the required course of action for resolving the matter.[36]
[36] First affidavit of Michael Dylan Naylor filed 1 March 2021 [47] – [48].
On about 26 February 2021, Bellevue's solicitors informed the company that a secondary issue had arisen, namely that, as a consequence of the company's non‑compliance with ch 2M of the Act, the cleansing notices that Bellevue had issued throughout the period were arguably defective.[37] This was because the cleansing notices stated that as at the date of their issue, Bellevue had complied with the provisions of ch 2M of the Act as they applied to Bellevue.[38]
[37] First affidavit of Michael Dylan Naylor filed 1 March 2021 [60]; Affidavit of Maddison Joy Cramer filed 1 March 2021 [12]; Affidavit of Stephen Andrew Parsons filed 1 March 2021 [26].
[38] Affidavit of Maddison Joy Cramer filed 1 March 2021 [12].
On 28 February 2021, the directors of Bellevue resolved to commence these proceedings.[39] On the same date, Bellevue informed both ASIC and the ASX of Bellevue's intention to commence these proceedings and the orders it intended to seek.[40]
[39] Affidavit of Stephen Andrew Parsons filed 1 March 2021 [28], 'SAP-7'.
[40] Affidavit of Maddison Joy Cramer filed 1 March 2021 [14], 'MJC-2', 'MJC-3'.
On 1 March 2021, prior to the open of the market, Bellevue applied for and obtained a voluntary trading halt of its securities.[41]
Issues of shares
[41] First affidavit of Michael Dylan Naylor filed 1 March 2021 [64], 'MDN-26'.
Between January 2019 and December 2020, Bellevue issued 18 cleansing notices in relation to various share issues conducted over this period. The shares were issued for a variety of reasons including vesting of performance rights, exercise of options, and placements.[42]
[42] First affidavit of Michael Dylan Naylor filed 1 March 2021 [58].
At the time of each of these share issues, Bellevue lodged a cleansing notice with the ASX.[43] Before each of the cleansing notices was issued, Mr Naylor considered and confirmed that Bellevue was in a position to issue the notice.[44] Each of these cleansing notices stated that as at the date of the relevant notice, the company had complied with the provisions of ch 2M of the Act as they applied to Bellevue.[45]
[43] First affidavit of Michael Dylan Naylor filed 1 March 2021, 'MDN-24'.
[44] First affidavit of Michael Dylan Naylor filed 1 March 2021 [57].
[45] First affidavit of Michael Dylan Naylor filed 1 March 2021 [55], 'MDN-24'.
Statutory regime
Financial reports and appointment of auditors
Chapter 2M of the Act is entitled 'Financial Reports and Audit'. The process for the appointment and removal of auditors is set out in pt 2M.4 of the Act.
The directors of a public company are obliged within one month of registration of the company to appoint an auditor, unless the members at a general meeting have appointed an auditor (s 327A(1)).
Where there is a vacancy in the office of auditor, pursuant to s 327B(1)(b) of the Act, a public company must appoint an auditor to fill the vacancy at each annual general meeting subsequent to the company's first annual general meeting. Section 327B(3) of the Act requires a director of a company to take all reasonable steps to comply with, or to secure compliance with, s 327B(1).
Section 327C of the Act deals with the circumstances where an auditor is appointed to fill a casual vacancy other than at an annual general meeting. If a vacancy occurs in the office of auditor of a public company, which is not caused by the removal of the auditor from office and there is no surviving or continuing auditor of the company, the directors must, within one month of the vacancy occurring, appoint an auditor to fill the vacancy unless the company at a general meeting has appointed an auditor to fill the vacancy (s 327C(1)). An auditor appointed to fill a casual vacancy under s 327C(1) holds office until the company's next annual general meeting (s 327C(2)).
Section 328A of the Act governs an auditor's consent to appointment. Under s 328A(1) of the Act, a company or its directors must not appoint an individual, firm or company as auditor unless that individual, firm or company has consented by written notice, before the appointment, to act as auditor and has not withdrawn that consent before the appointment is made.
Section 328B of the Act sets out the procedure that governs the nomination of an auditor. Pursuant to s 328B(1) of the Act, a company may appoint an individual, firm or company as auditor of the company at its annual general meeting only if a member of the company gives the company written notice of the nomination of the individual, firm or company before the meeting was convened, or not less than 21 days before the meeting (unless an auditor is removed from office at the annual general meeting). If a company purports to appoint an auditor in contravention of s 328B(1), the appointment is of no effect (s 328B(2)(a)) and the company and each officer of the company who is in default are guilty of an offence (s 328B(2)(b)).
Fundraising disclosures
Part 6D.2 of the Act imposes disclosure obligations on corporations in relation to the issue and sale of shares. In certain circumstances, these obligations can be satisfied by lodging what is commonly referred to as a cleansing notice or a prospectus.[46] If disclosure has not been made by the issuer and the shares are on‑sold within 12 months, the party to whom the shares are issued may be obliged to make disclosure.[47]
[46] Corporations Act, s 708A(5).
[47] Corporations Act, s 707(3). See also ReGolden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17.
The cleansing notice exception can only be relied upon if the preconditions in s 708A(5) of the Act are met. Section 708A(6) sets out the requirements of a valid notice. Relevantly, this includes the obligation for the notice to state that as at the date of the notice, the company has complied with 'the provisions of ch 2M as they apply to the body'.[48]
[48] Corporations Act, s 708A(6)(d).
The cleansing prospectus exception applies where a prospectus is lodged on or after the date that shares are issued but before the day on which a sale offer is made.[49] Where this occurs, the disclosure requirements for offers and sales of that class of securities are met from that date.
Power under s 1322 of the Corporations Act to grant relief sought
[49] Corporations Act, s 708A(11).
Section 1322 relevantly provides:
(4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
(b)an order directing the rectification of any register kept by ASIC under this Act;
(c)an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);
(d)an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;
and may make such consequential or ancillary orders as the Court thinks fit.
...
(6) The Court must not make an order under this section unless it is satisfied:
(a)in the case of an order referred to in paragraph (4)(a):
(i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii)that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii)that it is just and equitable that the order be made; and
(b)in the case of an order referred to in paragraph (4)(c)—that the person subject to the civil liability concerned acted honestly; and
(c) in every case—that no substantial injustice has been or is likely to be caused to any person.
In considering an application under s 1322(4)(a) of the Act, the essential principles are:[50]
(a)the prescriptive requirements of s 1322(4)(a) and one of the pre-conditions in s 1322(6) need to be satisfied;[51]
(b)the court retains a discretion under s 1322(4)(a) as to whether it makes the orders sought;
(c)the broad powers reflect a legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law;[52]
(d)implied limitations to the broad powers in s 1322 will not be readily implied.[53] Section 1322 is remedial in character and should be applied broadly;
(e)the court can make orders under s 1322(4)(a) on conditions and also make such consequential and ancillary orders as it thinks fit; and
(f)an order can be made under s 1322(4)(a) notwithstanding that the contravention or failure concerned resulted in the commission of an offence.[54]
[50] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174.
[51] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43], [53] and [64].
[52] Re Wave Capital Ltd (2003) 47 ACSR 418, 426 [29].
[53] Weinstock v Beck [43], [55] - [56] and [64].
[54] Corporations Act, s 1322(5).
Disposition
Application by an 'interested party'
I accept that the plaintiff is an interested party who may seek relief, as required by s 1322(4).[55]
Position of ASX and ASIC
[55] Re Caeneus Minerals Ltd [2018] FCA 560 [38]; Re Classic Minerals Ltd [2018] FCA 2039 [34].
The ASX has indicated that it was not in a position to comment on the application, did not support or oppose the application, and did not intend to appear at the hearing.[56]
[56] Affidavit of Deanna Jayne Carpenter filed 3 March 2021 [13], 'DJC-2'.
ASIC indicated that it neither supports nor opposes the application and did not intend to appear at the hearing of the matter.[57]
Validation of appointment of Grant Thornton as auditor
[57] Affidavit of Deanna Jayne Carpenter filed 3 March 2021 [29], 'DJC-3', p 39.
On the evidence before me, I make the following findings of fact:
(a)following the resignation of KPMG as Bellevue's auditor with effect from 6 March 2018, the directors of Bellevue complied with their obligations under s 327C(1) of the Act by appointing Grant Thornton as auditor with effect from 13 March 2018. However, by reason of s 327C(2) of the Act, the appointment of Grant Thornton to fill the casual vacancy only extended until the company's next annual general meeting;
(b)the effect of s 327C(2) of the Act is that Grant Thornton ceased to hold office as auditor of Bellevue following its annual general meeting on 20 November 2018;
(c)from this date, the directors of Bellevue were required, pursuant to s 327C(3) of the Act, to take all reasonable steps to comply with, or to secure compliance with s 327C(1) to appoint an auditor to fill the casual vacancy. This did not occur;
(d)Grant Thornton provided a written engagement letter to Bellevue on 7 March 2018. I accept the submission of counsel for the plaintiff that these terms comprised Grant Thornton's consent for the purposes of s 328A(1) of the Act to fill the casual vacancy until the 2018 annual general meeting. These terms were not a consent pursuant to s 328A(1) of the Act for the appointment of Grant Thornton as auditor of Bellevue from the 2018 annual general meeting onwards;[58]
(e)Grant Thornton did not provide its express written consent to its appointment as auditor of Bellevue prior to the 2018, 2019 or 2020 annual general meetings for their audit services for the financial years ending 30 June 2019 and 20 June 2020 and the review of the half-yearly accounts for 31 December 2018 and 31 December 2019 as their letters of engagement were dated after the dates of the respective meetings;
(g)at no stage did a shareholder nominate Grant Thornton as auditor of Bellevue nor was a resolution passed at any of the annual general meetings in 2018, 2019 or 2020 appointing Grant Thornton as auditor of Bellevue.
[58] Submissions, [27].
There is a long legislative history of the provisions in the Act governing the appointment of auditors. The limitation on the directors' power to appoint an auditor, to the initial appointment of the auditor and filling a casual vacancy, and the requirement that a member of the company nominate the auditor prior to the annual general meeting for resolution by members can be traced back to the Companies Act 1943 (WA).[59] Prior to this, there was no statutory requirement for the appointment of auditors in Western Australia; it was a matter covered by a company's articles of association. The Table 'A' Articles provided that auditors were required to be appointed by the company in general meeting. However, there was no obligation for the proposed auditor to be nominated by a member of the company.[60]
[59] Companies Act 1943 (WA), s 137(3).
[60] See Companies Act 1893 (WA), Sixth Schedule, Table A cl 86.
The first introduction in Australia of the requirement that a member nominate the auditor prior to the annual general meeting for resolution by members was in Victoria in 1910.[61] Prior to this, there was no statutory requirement for the appointment of an auditor as it was covered by the articles of association. The Table 'A' Articles in Victoria were different to those in Western Australia. The articles included a requirement that the company's accounts be audited 'by a committee of five members to be called the audit committee'. The first audit committee was nominated by the directors from the members of the company and thereafter, the nominations occurred at the annual general meeting of the company.[62]
[61] Companies Act 1910 (VIC), s 120(5).
[62] Companies Act 1890 (VIC), Sixth Schedule, cl 29 - cl 31.
Notwithstanding this long history, there is very limited judicial consideration or academic commentary concerning these provisions.
In Ford, Austin & Ramsay's, Principles of Corporations Law, the learned authors emphasise the importance of the role of external auditors in the following terms:[63]
The proper financial recordkeeping and public disclosure of financial information are normally justified as the price to be paid for the privilege of limited liability. In this way the law's requirements are seen as protecting creditors as well as shareholders. Certainly the legal requirements to maintain proper accounting records and to prepare financial statements, and the requirements for external audit of the company's financial system and accounts, are fundamental measures of protection for both investors and creditors. These requirements set a minimum standard of corporate financial management.
[63] Ford, Austin & Ramsay's, Principles of Corporations Law (17th ed, 2018) [11.010].
Audited financial statements are an important part of the financial information which is available to shareholders and creditors of a company as well as to capital markets more generally and form an essential part of a company's good corporate governance.[64] In order for an auditor's report to be credible and reliable, it is critical that the auditor of the company is independent from the directors and senior management of the company.
[64] See Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (CLERP) 9, [4.8].
In my view, the object of the provisions in div 5 of ch 2M.4 of the Act is to ensure that a company always has an independent auditor to perform the duties and functions prescribed by the Act. In the absence of any disqualifying factor, an auditor, once appointed, holds office indefinitely; they are not appointed for a fixed term. This ensures the independence of the auditor by emphasising that the role of the auditor is independent of the directors and management of the company. For listed public companies, this is qualified by the statutory rotation policy contained in pt 2M.4, div 5 of the Act.
It is consistent with this object that the appointment of the auditor is a decision that is vested in the members of the company, rather than its directors, and that a member is required to nominate the auditor.[65] The only power the directors have is to appoint the first auditor and to appoint an auditor to fill a casual vacancy.
[65] Crichton v Victorian Dairies Ltd [1965] VR 49, 52.
It is also of note that these provisions are considered to be matters of such importance that, if they are not complied with, the non-performance constitutes an offence.[66]
Orders under s 1322(4)(a)
[66] Crichton v Victorian Dairies Ltd, 53.
The plaintiff sought a declaration under s 1322(4)(a) of the Act that the appointment of Grant Thornton as auditor of the plaintiff from 20 November 2018 until 2 February 2021 was not invalid by reason of its failure to comply with the Act.
I accept that the prescriptive requirements of s 1322(4)(a) of the Act are satisfied in that:
(a)the proposed validation order is framed in a declaratory form;
(b)the act, matter or thing is the appointment of Grant Thornton pursuant to ch 2M.4 of the Act;
(c)the contravention is the failure by the plaintiff and its directors to comply with s 327B(1)(b), s 327C(2)(c), s 328A and s 328B of the Act.
Pre-conditions in s 1322(6)(a)
The plaintiff submitted that each of the pre-conditions in s 1322(6)(a) of the Act was satisfied.
Counsel for the plaintiff contended that the error that led to the failure to appoint Grant Thornton at the annual general meetings was of a procedural nature and was not a substantive breach of the Act. In any event, counsel for the plaintiff submitted there was no failure of the persons concerned or the company to act honestly and that it was just and equitable that the orders sought by the plaintiff be made.
While I accept that the failure to appoint Grant Thornton was inadvertent as the company secretary overlooked the requirements of the Act when preparing the notice of meeting, my preliminary view is that the plaintiff's failure to comply with the obligations in ch 2M of the Act is not an act of a 'procedural nature', within the meaning of that term in s 1322(6)(a)(i).[67] The failure to comply with the provisions governing the appointment of an auditor have been designated by Parliament to be sufficiently serious as to constitute a criminal offence.
[67] See Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd [2005] NSWSC 1005; (2005) 55 ACSR 185 [103]; Gofur v Bangladesh Islamic Centre of NSW [2020] NSWSC 652 [39] ‑ [40].
However, for the reasons which follow, it is not necessary for me to reach a concluded view on this point. Without the appearance of a contradictor to the position advanced by the plaintiff, I do not consider it is appropriate for me to express a concluded view on this matter.
Turning to the pre-condition in s 1322(6)(a)(ii), in Re ICandy Interactive Ltd, Banks‑Smith J undertook a comprehensive review of the relevant principles in respect of whether there is no failure of the persons concerned or the company to act honestly.[68] Relevantly, Banks‑Smith J considered that:
[68] Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 [54] - [104].
(a)when determining whether someone has acted honestly for the purposes of s 1322, the courts look to absence of evidence of dishonesty and prompt action to remedy the error;[69]
(b)the concept of acting honestly can embrace:[70]
(i)inadvertence or failure to turn one's mind to an issue;
(ii)active but incorrect consideration of a legal issue;
(iii)failure to consider an issue at all; or
(iv)failure to understand or appreciate the significance of non-compliance; and
(c)when testing for honesty, the authorities reveal that the courts look at the company itself, the directors, the company secretary and others as may be concerned.[71]
[69] Re ICandy Interactive Ltd [54], [106] - [107].
[70]Re ICandy Interactive Ltd [55].
[71] Re ICandy Interactive Ltd [60] - [104].
In this case, on the basis of the evidence of Mr Naylor, which I accept, there was no failure of any relevant person to act honestly. The failure arose through inadvertence, specifically that Mr Naylor overlooked the requirement at the time of preparing the notice of annual general meeting in 2018 to procure a nomination of Grant Thornton from a shareholder or to include a resolution confirming Grant Thornton's appointment as auditor. The contraventions in 2019 and 2020 flowed from the initial contravention. For these reasons, I accept the precondition in s 1322(6)(a)(ii) of the Act is satisfied.
I am also satisfied that it would be just and equitable to make the orders sought.
In Re Chinese Cultural Club Ltd, Campbell J cited with approval the comments of Barrett J in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd[72] on the width of the phrase 'just and equitable':[73]
The phrase 'just and equitable' is commonly used in legislative drafting: see, for example, Corporations Act 2001 (Cth), s 461(1)(k), Family Law Act 1975 (Cth), s 75(2); Motor Accidents Act 1988 (NSW), s 74(3); Property (Relationships) Act 1984 (NSW), s 20(1); Conveyancing Act 1919 (NSW), s 66M. Numerous cases have considered the significance of the phrase. The conclusions drawn are reflected in the words borrowed by Lord Shaw of Dunfermline in Loch v John Blackwood Ltd [1924] AC 783 at 791; [1924] All ER Rep 200 from Neville J in Re Bleriot Manufacturing Aircraft Co (1916) 32 TLR 253 at 255:
'The words 'just and equitable' are words of the widest significance and do not limit the jurisdiction of the Court to any case. It is a question of fact, and each case must depend on its own circumstances.'
A court directed by statute to proceed according to what is 'just and equitable' is given a wide discretion. There is, as Owen J observed in Thomas v MacKayInvestments Pty Ltd (1996) 22 ACSR 294 at p 302, 'no necessary limit on the generality of the words'. They are 'to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way.'
[72] Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273.
[73] Re Chinese Cultural Club Ltd (2004) 49 ACSR 568; 183 FLR 33; [2004] NSWSC 432 [19].
In my view, the making of the order sought by the plaintiff would be consistent with the public policy of ch 2M of the Act, which is to ensure that public companies appoint independent auditors to audit the companies' accounts and that audited accounts are lodged within the timeframes specified by the Act.
It is relevant that the plaintiff, the auditor, and the members of the company proceeded on the basis that Grant Thornton had been appointed auditor of Bellevue and that no issue, question, or complaint was or has been raised in 2018, 2019 or 2020 as to the accounts or the conduct of the audits by Grant Thornton.
In my view, the granting of the relief sought will remove any doubt as to the compliance by Bellevue with its financial reporting obligations and the potential impact on the operations of the company.
No substantial injustice (s 1322(6)(c))
I have considered the classes of persons who may be impacted by the making of these orders, being Bellevue, the shareholders of the plaintiff and the former auditor of Bellevue, Grant Thornton.
First, while the plaintiff and its directors and officers did not comply with the relevant provisions of the Act regarding the appointment of Grant Thornton as auditor of the company, at all material times, Grant Thornton has acted as auditor of the company. Grant Thornton undertook the audit of the 2018, 2019 and 2020 full year accounts and reviewed the half-yearly accounts for the financial periods ending 31 December 2017, 31 December 2018 and 31 December 2019. No shareholder has raised any issue concerning these accounts or the work that was performed by Grant Thornton. Neither has the regulator.
Second, in relation to Bellevue, I accept counsel's submission that if validating orders are not made by the Court, the appointment of Grant Thornton and the financial reports of the company for 2018, 2019 and 2020 will remain uncertain. This will impact the company's ability to issue cleansing notices for any future capital raisings as the company will be unable to certify its compliance with ch 2M of the Act.
Third, as to Grant Thornton, if validating orders are not made, the status of its appointment will be uncertain. This may raise questions as to the fees charged for the work that was performed and whether this work is covered by professional indemnity insurance.
Fourth, in relation to the plaintiff's shareholders, there is no evidence that any shareholder of the plaintiff has raised any issue regarding the financial reports of the company or the audits or reviews that were performed by Grant Thornton.
I find there is no basis for inferring that substantial injustice has been or is likely to be caused to any person by the making of the orders sought by the plaintiff.
I accept that if the orders sought are not made, there may be substantial injustice to each of the plaintiff, Grant Thornton, and the plaintiff's shareholders. In addition to the specific matters raised above, in the event that Grant Thornton's appointment is not validated and a complaint was raised about the work they had done, it is possible that a legal issue could be raised as to whether an auditor who is not appointed at law is liable for the work performed by them and whether the work is covered by their professional indemnity insurer. This could cause substantial injustice to both the shareholders and Grant Thornton.
No other discretionary reason to withhold relief
Notwithstanding the duration of time over which the contraventions occurred, I accept and find that there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the Act so as to warrant refusal of the relief sought.
There is nothing in the evidence before me that suggests that any minority shareholder interest might be oppressed or any other interest might be affected. I am satisfied that all shareholders as well as the ASX and ASIC have been notified of the plaintiff's contraventions of the Act and given notice of this hearing. No shareholder or either regulator has sought to intervene in the hearing or given notice that they want to be heard on the application.
In exercising the discretion to grant relief under s 1322(4)(a), a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it has been identified. In this case, the plaintiff was informed by ASIC of the issue regarding the appointment of its auditor on 29 January 2021. Less than one month later, the plaintiff was informed by its solicitors of the consequential effect this issue had on the cleansing notices lodged by the plaintiff and commenced these proceedings on 1 March 2021. I accept that the plaintiff has acted diligently after being informed of the issue.
Relief from civil liability
The plaintiff also sought orders relieving the company and its current and former directors and officers from any civil liability arising out of the contraventions of s 327B(3), s 328A(4)(b) and s 328B(2)(b) of the Act.
Section 1322(4)(c) permits the Court to make an order relieving a person from civil liability for a broad range of contraventions or failures, subject to the conditions in s 1322(6) that the person concerned acted honestly and that no substantial injustice has been or is likely to be caused to any person.[74]
[74] Re Murray River Organics [2019] FCA 931; (2019) 138 ACSR 365 [28].
A pre‑condition to making an order under s 1322(4)(c) is that the person to be relieved from civil liability acted honestly.[75]
[75] Corporations Act, s 1322(6)(b).
Counsel for the plaintiff submitted that the relevant parties acted honestly throughout the relevant period as they believed the requirements of the Act had been complied with. I accept that the contravention occurred by way of inadvertence or oversight for the reasons set out at [63] and that there is no evidence that Bellevue or its current or former directors or officers acted dishonestly.
For that reason, and having regard to the matters referred to at [69] to [75] above, I consider it is appropriate that the plaintiff and its current and former officers be relieved of any civil liability arising out of their contraventions of the Act. However, in my view, any relief granted under s 1322(4)(c) should be limited to those contraventions which arise from identified acts or omissions.
As was noted by O'Bryan J in Re Ozito Industries Pty Ltd:[76]
[T]he Court's absolution should be based on, and limited to, the confessed acts of contravention. The relief should not extend to contraventions arising from other acts or omission that have not been identified and admitted — the relief should not be a 'blank cheque', as it were. Such an approach is consistent with the principle stated by Colvin J in Re EHR Resources Ltd [2018] FCA 997 (at [7]) that 'care must be taken to confine relief in a manner which is consistent with the justification for the application'. The reason for confining the relief granted under s 1322(4) is that, for the Court to apply the requirements of s 1322(6), it is necessary to have regard to the admitted acts of omissions that caused the contravention. In relation to the admitted acts or omissions, the Court must consider (amongst other things) whether the relevant person the subject of the order acted honestly, and whether substantial injustice has been or is likely to be caused to any person. If the Court is satisfied of those matters, and considers that it is otherwise appropriate to make the order, the Court will relieve the relevant person from civil liability arising by reason of the act or omission. It would be inappropriate to relieve the relevant person from civil liability, even of the same kind, that arises by reason of different acts or omissions that are not admitted and therefore not known to the Court.
[76] Re Ozito Industries Pty Ltd [2020] FCA 1432; (2020) 148 ACSR 585 [30].
On the basis of the evidence before the court, I consider it is appropriate to make an order relieving the plaintiff and its current and former directors and officers from any civil liability arising out of any contravention of s 327B(3), s 328A(4)(b) or s 328B(2)(b) of the Act by reason of the failure of the plaintiff to have the appointment of Grant Thornton approved at the 2018, 2019 and 2020 annual general meetings of the plaintiff and to comply with s 328A and s 328B of the Act.
Validation of cleansing notices
In addition to the orders sought by the plaintiff in respect of the appointment of their auditor, the plaintiff also sought orders 'to the extent necessary' in respect of 18 cleansing notices issued by Bellevue between January 2019 and December 2020 (Cleansing Notices).
Counsel for the plaintiff in both their written and oral submissions raised as a preliminary point (consistent with the obligation of candour) whether the court had power to grant the relief sought. Counsel contended that it was arguable that the proper construction of s 708A(6)(d) may support an argument that a cleansing notice was not invalid if a representation of compliance with ch 2M was subsequently found to be incorrect.
Section 708A obliges a company to correct a defective notice. Relevantly, s 708A provides that:
(9)The body contravenes this subsection if:
(a) the notice given under subsection (5) is defective; and
(b) the body becomes aware of the defect in the notice within 12 months after the relevant securities are issued; and
(c) the body does not, within a reasonable time after becoming aware of the defect, give the relevant market operator a notice that sets out the information necessary to correct the defect.
(10)For the purposes of subsection (9), the notice under subsection (5) is defective if the notice:
(a) does not comply with paragraph (6)(e); or
(b) is false or misleading in a material particular; or
(c) has omitted from it a matter or thing the omission of which renders the notice misleading in a material respect.
In this case, each of the Cleansing Notices stated that Bellevue complied with the provisions of ch 2M of the Act as they applied to Bellevue. I accept that at the time this representation was made, Bellevue and its officers believed this was correct. However, this representation was false.
My preliminary view is that s 708A(9) and s 708A(10) do not validate any error or omission in a cleansing notice. Rather, these provisions create a further contravention of the Act if an error is discovered within 12 months and is not corrected. In circumstances where there was no proper contradictor who appeared at the hearing, I do not consider it is appropriate to express a concluded view on this matter. In any event, in my view, it is not necessary that I make a positive finding that there has been a contravention of the Act in order to grant the relief sought.
As was noted by French CJ in Weinstock v Beck:[77]
The dispensing power conferred on the court by s 1322(4)(a) is not in the nature of a general absolution for all past errors. It does not authorise the making of an order declaring that an impugned act, matter or thing is valid. It allows a determination by the court that the act, matter or thing done “is not invalid” by reason of a provision of the Corporations Act or a provision of the constitution of a corporation. The remedy may be sought by a party fearing or suspecting invalidity on such a ground or, as in the present case, to meet a contention of invalidity advanced by another party in adversarial proceedings. The effect of a declaration under the provision is limited to overcoming invalidity flowing from a particular contravention or contraventions. It could not be otherwise. It is only with respect to particular contraventions that the court can reach the state of satisfaction required by s 1322(6). [emphasis added]
[77] Weinstock v Beck [40] (per French CJ).
I accept that in this case, the plaintiff is concerned that the Cleansing Notices it issued may be invalid or defective. This is sufficient to give the court jurisdiction to make the orders sought by the plaintiff.
Orders under s 1322(4)(a)
The plaintiff sought a declaration under s 1322(4)(a) of the Act that the Cleansing Notices given by the plaintiff were effective when issued and that any offer for sale or sale of the quoted securities from the date of issue to the date of the orders is not invalid, by reason of any failure of the Cleansing Notices to exempt the sellers from the obligation of disclosure under the Act, or the sellers' consequent failure to comply with s 707(3) of the Act.
I note that:
(a)the proposed validation orders are framed in a declaratory form;
(b)the act, matter or thing is the offer and sale of securities;
(c)the contravention is the offering of securities for sale or sales without proper disclosure in contravention of s 707(3) of the Act.
Pre-conditions in s 1322(6)(a)
Counsel for Bellevue submitted that each of the pre‑conditions in s 1322(6)(a) of the Act was satisfied.
While I accept that the representation that the plaintiff was compliant with ch 2M of the Act was made honestly, my preliminary view is that representation and any consequent invalidity of the Cleansing Notice is not an act of a 'procedural nature', within the meaning of that term in s 1322(6)(a)(i).[78] As noted above at [60], the failure to comply with the provisions of ch 2M governing the appointment of an auditor have been designated by Parliament to be sufficiently serious to constitute a criminal offence.
[78] See Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd [103]; Gofur v Bangladesh Islamic Centre of NSW [39] - [40].
However, for the reasons which follow, it is not necessary for me to reach a concluded view on this point.
Bellevue submitted, which I accept, that there was no failure of the persons concerned in the preparation and lodgement of the Cleansing Notices or the company to act honestly.
In this case, the plaintiff lodged Cleansing Notices for the shares issued throughout the relevant period which have subsequently been discovered to contain a representation that is false. I accept that statements were made honestly and it is an inadvertent breach, which arises as a consequence of the contraventions regarding the appointment of the auditor, rather than any deliberate disregard by the plaintiff or its officers of the obligations under ch 6D of the Act.
I also accept that this is not a case where there has been a failure of the plaintiff's directors to take an active interest in the company's compliance with the Act or to properly define roles of company officers. I accept that the plaintiff's directors delegated responsibility for the drafting of the notices of annual general meeting and the preparation of the Cleansing Notices to the company secretary.
In addition, I am also satisfied that it is just and equitable for the orders sought by the plaintiff to be made. At present, the shares in the plaintiff are suspended from trading and will not be reinstated until orders are made by the court. In these circumstances, I consider that it is just and equitable for the orders to be made.
No substantial injustice (s 1322(6))
I have considered the classes of persons who may be impacted by the making of these orders.
First, the people who were issued the impugned shares. The prejudice to them is that the sale of the impugned shares may be void or voidable.[79]
[79] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57, 67 [63].
Second, any people who purchased shares from on-sellers may have on-sold the shares themselves by trading on the open market of the ASX since they were issued. Any further sales of shares will have occurred without disclosure under pt 6D.2 of the Act and these transactions may also be void or voidable.
I find that there is no basis for inferring that substantial injustice has been or is likely to be caused to any person by the making of the proposed orders.
I accept that if the orders sought are not made, there may be substantial injustice to the plaintiff as the offers and sales of shares may be void or voidable. This could give rise to commercial uncertainty and expense for the company as it must remain involved in problems caused by void or voidable offers and sales of its shares. I also accept that there may be substantial injustice to the other ordinary shareholders of the plaintiff, as they may not be able to trade their shares on an open market if the ASX does not lift the current suspension from trading.
It is usual in cases such as these to provide an opportunity for shareholders or other parties to raise a complaint about the proposed orders. The usual timeframe is that there be liberty to apply within 28 days from the date of the order. I accept that this is an appropriate timeframe in this case.
For the following reasons, I was and am satisfied that in the circumstances of this case, relief should be granted in the terms sought by the plaintiff in respect of the Cleansing Notices. First, the evidence before me is that a number of the shares have been sold.[80] It cannot be discounted that there have been resales of these shares. In these circumstances, I consider that it is appropriate to make the orders sought to remove any question as to title in the shares of the plaintiff. Second, the orders sought by the plaintiff did not concern a future act but a past act. Third, I am satisfied that the conduct of the plaintiff was inadvertent and not in blatant disregard of its obligations under the Act. I do not consider that public policy will be undermined by granting the plaintiff the relief sought.
[80] Second affidavit of Michael Dylan Naylor filed 3 March 2021 [7] – [9], 'MDN-1'.
Conclusion
For these reasons, I was satisfied that, in the circumstances of this case, relief should be granted in the terms sought by the plaintiff, with the amendment in order 2 (civil liability) set out at [85].
Accordingly, at the conclusion of the hearing, I made orders in the form annexed to these reasons as 'Annexure A'.
ANNEXURE A
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
HW
Research Associate to the Honourable Justice Hill
25 MARCH 2021
11
15
0