Re Kaiser Reef Ltd
[2024] WASC 397
•24 OCTOBER 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE KAISER REEF LTD; EX PARTE KAISER REEF LTD [2024] WASC 397
CORAM: HILL J
HEARD: 18 OCTOBER 2024
DELIVERED : 18 OCTOBER 2024
PUBLISHED : 24 OCTOBER 2024
FILE NO/S: COR 158 of 2024
MATTER: IN THE MATTER OF KAISER REEF LTD
EX PARTE
KAISER REEF 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 - Impact on validity of cleansing notices - Where immediate steps taken to rectify irregularity - Where no substantial injustice caused by proposed orders - Where no blatant or flagrant disregard of obligations
Corporations - Application for orders under s 1322 of Corporations Act 2001 (Cth) - Application for declaratory relief to validate trading in shares issued without a valid cleansing notice or prospectus - Where immediate steps taken to rectify irregularity - Where no substantial injustice caused by proposed orders - Where no blatant or flagrant disregard of obligations
Legislation:
Corporations Act2001 (Cth) s 301, s 302, s 314, s 327B, s 327C, s 328A, s 328B, s 707, s 708A, s 1322
Result:
Application granted
Category: B
Representation:
Counsel:
| Plaintiff | : | M F Holler |
Solicitors:
| Plaintiff | : | Steinepreis Paganin |
Case(s) referred to in decision(s):
Re Bellevue Gold Ltd [2021] WASC 80
Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22
Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174
Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418
Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396
HILL J:
(This judgment was delivered extemporaneously and has been edited from the transcript to include references, headings, and to correct matters of grammar and expression.)
On 16 October 2024, the plaintiff, Kaiser Reef Ltd (Company), filed an originating process seeking orders under s 1322(4) of the Corporations Act2001 (Cth) (Act) relating to contraventions in the appointment process of its auditor and as a consequence, its compliance with the auditing, financial reporting, and lodgment obligations under pt 2M.3 of the Act.
These contraventions occurred as a result of the failure to have a shareholder nominate BDO Audit Pty Ltd (BDO) as auditor at its 2023 annual general meeting (AGM) or have BDO's appointment approved at the AGM.
These contraventions have had a secondary impact on the Company in raising a question as to whether cleansing notices issued by the Company on 27 December 2023 and 17 July 2024 are also defective. This is because the cleansing notices state that as at the date of their issue, the Company was in compliance with the provisions of ch 2M of the Act. For this reason, the Company has also applied for orders declaring these notices were effective when given and that any offer for sale or sale of their shares are not invalid.
In addition, as a part of a review that was undertaken as a consequence of the emergence of these issues, the Company identified there was an issue in respect of shares issued in September 2021 and seek curative orders under s 1322 of the Act in relation to the issue of 10 million shares in September 2021.
Factual background
In support of the originating process, the plaintiff read four affidavits: an affidavit of Aida Tabakovic, the joint company secretary of the plaintiff; an affidavit of Jonathan Charles Downes, the managing director of the plaintiff; and two affidavits of Anna Barningham Prior, a solicitor employed by the plaintiff's solicitors.
The plaintiff is a gold mining company, whose securities are listed on the Australian Securities Exchange (ASX). As at 15 October 2024, the Company had a market capitalisation of approximately $35.7 million and more than 1,100 shareholders.[1]
[1] Affidavit of Aida Tabakovic filed 16 October 2024 [12] - [13].
In late 2022, the Company resolved to move its auditors from Western Australia to Victoria. Until November 2022, the Company's auditors were BDO Audit (WA) Pty Ltd (BDO WA). In November 2022, BDO WA informed the Company of its intention to resign as auditor, and on 9 December 2022, the Company announced that BDO had been appointed as their auditors until the date of the Company's next AGM.[2] BDO had previously provided its written consent to act for the Company on 26 October 2022.[3]
[2] Affidavit of Aida Tabakovic filed 16 October 2024 [18] - [20], 'AT-05'.
[3] Affidavit of Aida Tabakovic filed 16 October 2024, 'AT-04'.
Ultimately, no resolution concerning the appointment of BDO as auditor was put to shareholders at the Company's AGM in November 2023. The evidence of Ms Tabakovic is that this was overlooked because at the time of drafting the AGM notice, she was extremely unwell.[4]
[4] Affidavit of Aida Tabakovic filed 16 October 2024 [23].
In commencing her preparation for the Company's 2024 AGM, Ms Tabakovic became aware that the plaintiff had not sought nor obtained shareholder approval for the appointment of BDO as its auditors at the 2023 AGM. On discovering the issue, she contacted the plaintiff's solicitors to determine what was required to resolve the issue, which has included liaising with both the Australian Securities and Investments Commission (ASIC) and the ASX in commencing these proceedings.
Since then, Ms Tabakovic has undertaken a review of all previous issues of shares by the plaintiff since its admission to the official list of the ASX on 26 February 2020. In the course of this review, she identified that shares issued in September 2021 were issued after a prospectus had been lodged, but before the offer of shares under the prospectus was open for acceptance. Her evidence is that this occurred as a result of her misunderstanding of advice that she had received from the Company's external solicitors.
On 16 October 2024, the Company requested that its securities be placed and remain in a trading halt.
Statutory regime
Financial reports and appointment of auditor
The statutory regime that governs financial reports and the appointment of auditors is contained in ch 2M of the Act. The process for the appointment and removal of auditors specifically is set out in pt 2M.4 of the Act.
Section 327C of the Act deals with the circumstances where an auditor is appointed to fill a casual vacancy other than at an AGM. Pursuant to s 327C(1), where this occurs, the directors must, within one month of the vacancy occurring, appoint an auditor to fill the vacancy unless the company has already done so at a general meeting. Pursuant to s 327C(2), where this occurs, the auditors hold office until the company's next general meeting.
Pursuant to s 328B(1) of the Act, a company may appoint an individual firm or company as auditor of the company at its AGM, but only if a member of the company gives the company written notice of the nomination before the meeting was convened, or not less than 21 days before the meeting.[5] Where a company purports to appoint an auditor in contravention of s 328B(1), pursuant to s 328B(2)(a) and s 328B(2)(b), the appointment has no effect and the company and each of its officers are guilty of an offence.
[5] Unless an auditor is removed from office at the AGM.
In relation to the company's reporting obligations, s 301 of the Act requires a company to have its financial reports audited in accordance with div 3 of pt 2M.3 of the Act and to obtain an auditor's report. Section 314 of the Act relevantly requires a company to report to its members for a financial year by providing certain specified reports, which include the auditor's reports.
Fundraising disclosures
Part 6D.2 of the Act imposes disclosure obligations on corporations in relation to rights, issues, and the issue and scale of quoted securities.
Section 708A of the Act governs the issue of quoted securities, including shares. In certain circumstances, the disclosure obligations can be satisfied by the lodgment of either a cleansing notice or a prospectus.[6] If disclosure has not been made and the shares are on‑sold within a period of 12 months, the party to whom the shares are issued may be obliged to make disclosure.
[6] Corporations Act 2001 (Cth) s 708A(5).
The notice that is issued by the company is required to comply with s 708A(6) of the Act, including a requirement that the notice state that, as at the date of the notice, the company is in compliance with the provisions of ch 2M of the Act.
Power under s 1322 of the Act to grant the relief sought
In this case, the plaintiff seeks orders under s 1322 of the Act. In considering an application under this section, the essential principles are well-known and can be summarised as follows:[7]
(a)the prescriptive requirements of the wording in s 1322(4) and the preconditions in s 1322(6) of the Act must be satisfied;[8]
(b)even where this is the case, the court retains a discretion under s 1322(4) of the Act as to whether it will make the orders sought;
(c)the broad powers that have been granted to the court under s 1322 of the Act reflect the legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where the 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;[9]
(d)limitations to these broad powers will not readily be implied.[10] This is because the section is remedial in character and should be applied broadly; and
(e)where the court makes orders under s 1322(4)(a) of the Act, conditions can be imposed, and the court can also make such consequential and ancillary orders as it thinks fit.
[7] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20] (Gilmour J).
[8] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43] (French CJ), [53] (Hayne, Crennan, & Kiefel JJ), [64] (Gageler J).
[9] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 [29] (French J).
[10] Weinstock v Beck [43] (French CJ), [55] ‑ [56] (Hayne, Crennan, & Kiefel JJ), [60], [64] (Gageler J).
Should the orders sought by the plaintiff be made?
Application by an 'interested person'
On the evidence before me, I accept the plaintiff has standing as an interested person under the Act to seek the relief sought.[11]
Position of ASX and ASIC
[11] Re Wave Capital Ltd [29] (French J).
The ASX has informed the Company it does not intend to appear at the hearing today.[12] Similarly, ASIC has informed the Company that it does not intend to appear, and that it neither supports nor opposes the application.[13] However, given the short time between service and hearing of the application, ASIC seeks 28 days within which to bring any application to set aside the orders. This is reflected in the orders that are now proposed by the plaintiff.[14]
Validation of appointment of auditor
[12] Affidavit of Anna Barningham Prior filed 18 October 2024, 'AP-08'; Letter from the Australian Securities Exchange to Steinepreis Paganin Lawyers and Consultants dated 18 October 2024.
[13] Affidavit of Anna Barningham Prior filed 18 October 2024, 'AP-06', 'AP-07'.
[14] Email from Steinepreis Paganin Lawyers and Consultants to the Associate of Justice Hill dated 18 October 2024.
On the evidence before me, I make the following findings of fact.
(a)Following the resignation of BDO WA as auditor of the Company in November 2022, the directors of the Company complied with their obligations under s 327C(1) of the Act by appointing BDO as auditor with effect from 9 December 2022.
(b)The directors of the Company were required, pursuant to s 327B(3) of the Act, to take all reasonable steps to comply with, or to secure compliance with s 327B(1) of the Act to appoint an auditor at its 2023 AGM to fill the vacancy created by the original resignation of BDO WA. This did not occur.
(c)No resolution was put nor passed at the 2023 AGM to appoint BDO as auditor of the Company. As a result, they ceased to be the Company's auditor at the conclusion of this AGM.
(d)The board of the Company did not comply with s 327B(1) of the Act to appoint an auditor.
(e)BDO has carried out the audit for the Company's financial reports for the year ended 30 June 2024 as well as the review of the Company's half‑year financial reports for the financial period ending 31 December 2023.[15]
(f)These reports have been lodged with ASIC and on the ASX, and the reports that have been lodged have been audited and reviewed by BDO.
[15] As required by s 301 and s 302 of the Act.
I have previously considered the relevant legislative history, objects, and purposes of ch 2M.4 of the Act in Re Bellevue Gold Limited.[16] Those reasons reflect my views on the matter, and it is not necessary for me to repeat what I said there. My views have not changed.
Orders under s 1322(4)(a) of the Act
[16] Re Bellevue Gold Ltd [2021] WASC 80 [48] ‑ [54].
In this case, the plaintiff seeks declarations under s 1322(4)(a) of the Act, including that the appointment of BDO as auditor of the plaintiff from 23 November 2023 is not invalid by reason of:
(a)the failure of the plaintiff to comply with s 327B(1)(b) of the Act by not approving the appointment of BDO as auditor of the plaintiff at its 2023 AGM;
(b)the failure of the plaintiff to comply with s 327C(1) and s 328B of the Act; and
(c)its consequent failures to comply with the financial reporting provisions and lodgment requirements.
In addition, the plaintiff seeks declarations that the cleansing notices given under s 708A(5) of the Act to the ASX on 27 December 2023 and 17 July 2024 were effective when given, and that any offer for sale or sale of the securities that were issued on 27 December 2023 were not invalid by reason of:
(a)any alleged failure of the notices given under s 708A(5)(e) of the Act to exempt sellers from the obligation of disclosure; and
(b)any consequent failure by the sellers of the securities to comply with s 707(3) of the Act.
The form of the orders that have been proposed by the plaintiff satisfy the prescriptive requirements of the Act,[17] in that:
(a)they are framed in a declaratory form;
(b)they identify the act, matter, or thing, namely, the appointment of an auditor and the offer and sale of securities; and
(c)they clearly identify the alleged contraventions of the Act.
Preconditions in s 1322(6)(a) of the Act
[17] Corporations Act 2001 (Cth) s 1322(4)(a).
While only one of the preconditions in s 1322(6)(a) of the Act need be satisfied, the plaintiff submitted that the preconditions in both s 1322(6)(a)(ii) and s 1322(6)(a)(iii) of the Act were satisfied in this case.
I accept the evidence of Ms Tabakovic that the failure to appoint BDO as auditor arose because of her illness at the time she drafted the notice of AGM and that it was inadvertent. This conclusion is supported by the steps that have been taken by the Company to rectify the irregularity as soon as it became aware of the issue. On this basis, I accept that the precondition in s 1322(6)(a)(ii) of the Act is satisfied.
Section 1322(6)(a)(iii) of the Act gives the court a wide discretion to exercise the powers under s 1322 of the Act.[18] I am satisfied on the evidence before me that it is just and equitable to make the orders sought.
[18] See Re Bellevue Gold Ltd [64] - [65] and the authorities cited therein.
In my view, the making of the orders sought by the plaintiff is consistent with the public policy of the Act contained in ch 2M, which is to ensure that public companies appoint independent auditors to audit their accounts, and that audited accounts are lodged within the timeframes specified in the Act and are provided to members.
It is relevant that in this case, all parties ‑ namely, BDO, the Company, and the Company's shareholders ‑ have proceeded on the basis that BDO has been validly appointed. No issue or complaint has been raised in relation to the accounts or the conduct of the audit or reviews that have been undertaken by BDO.
In my view, the granting of the relief sought will remove any doubt about the Company's compliance with its financial reporting obligations and the potential impact this may have on the Company's obligations.
No substantial injustice under s 1322(6)(c) of the Act
In making the orders sought, I have also taken into account the classes of persons who may be impacted by the making of these orders, namely, the Company, its shareholders, and BDO.
First, while I accept that the plaintiff and its directors and officers did not comply with the relevant provisions of the Act, at all material times, BDO has in fact acted as auditor of the Company. It has undertaken the audit of the 2023 full-year accounts and has reviewed the half-yearly accounts for the financial period ending 31 December 2023. No issue has been raised by the shareholders or either regulator concerning these accounts or the work that has been performed.
Second, in relation to the Company, if validating orders are not made, the appointment of BDO and the financial reports of the Company 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 compliance with ch 2M of the Act.
Third, in relation to BDO, if validating orders are not made, the status of their appointment will remain uncertain. This may raise questions in the future as to the fees that have been charged for the work they have done, and whether their work is covered by professional indemnity insurance.
In relation to the plaintiff's shareholders, there is no evidence that any shareholder of the plaintiff has raised an issue regarding the financial reports or the work that has been performed.
I also 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 these orders.
In contrast, it is my view that if the orders sought are not made, there may be substantial injustice to the plaintiff for the following reasons. First, there will be uncertainty attaching to the work that has been undertaken to date. Second, there will be uncertainty as to the status of the plaintiff's compliance with its financial reporting and audit obligations. Thirdly, the shares of the Company are likely to remain suspended, which perhaps has the greatest injustice to the parties concerned.
No discretionary reason to withhold relief
I accept and find there is no evidence of any substantial misconduct, serious wrongdoing, or flagrant disregard of the Act or the Company's constitution which warrants refusal of the relief that has been sought.[19]
[19] Re Wave Capital Ltd [29] (French J).
There is nothing in the evidence before me that suggests any minority interest might be oppressed or that any other interest could be affected by the orders sought. I am satisfied on the evidence before me that all shareholders, together with the ASX and ASIC, have been notified of the issue and been given notice of this hearing. No shareholder or either regulator has sought to be heard or intervene in the hearing today.
In exercising the discretion to grant relief, a relevant factor is the promptness with which the plaintiff sought to remedy their irregularity once it was identified.[20] In this case, after the issue was identified in early October 2024, the plaintiff has taken steps to determine what relief was required, sought legal advice, commenced these proceedings, and sought an urgent hearing.
Validation of issues of securities subject of a notice under s 708A(5) of the Act
[20] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60] (Barker J).
In addition to the orders sought by the Company in relation to the appointment of BDO, the Company also seeks orders in respect of the issues of securities the subject of cleansing notices on 27 December 2023 and 17 July 2024 (as set out in Annexure 'A' of the plaintiff's originating process) as well as the shares that were issued on 14 September 2021.
In respect of these orders, I note that:
(a)the proposed validation order is framed in a declaratory form;
(b)it identifies the act, matter or thing; and
(c)it identifies the contraventions.
Once again, in this case, counsel submitted that each of the preconditions have been satisfied.[21]
[21] Corporations Act 2001 (Cth) s 1322(6)(a)(ii) and s 1322(6)(a)(iii).
Ms Tabakovic's evidence, in relation to the share issues in December 2023 and July 2024, is that when she issued the relevant cleansing notices, she did not turn her mind to the question as to whether the Company was in compliance with the provisions of ch 2M of the Act. I accept that, given this evidence, there is no evidence that there has been a failure of any of the persons concerned, the Company or its directors and officers to act honestly.
In relation to the shares that were issued in September 2021, Ms Tabakovic's evidence is that she misunderstood the advice received from the Company's solicitors and believed the shares could be issued after the prospectus was lodged with ASIC. The Company submitted, which I accept, that given this, there is no failure of the persons concerned (including Ms Tabakovic), the Company or its other directors and officers to act honestly.
Given this, I am satisfied the precondition in s 1322(6)(a)(ii) of the Act is satisfied in respect of all share issues. I am also satisfied on the evidence before me that it would be just and equitable to make the orders sought.
Once again, in considering whether there would be any substantial injustice if the orders sought are made, I have considered the classes of persons who may be impacted by the making of these orders.
First, the people who have been issued these shares. The prejudice to them if the orders are not sought is that any future sale of these shares may be void or voidable.
Second, the shareholders of the Company. The Company's failure to comply with the relevant provisions of the Act has caused the Company to enter into a trading halt of its securities. If orders are not made by the court and the trading halt is not lifted, the security holders will not have the benefit of a market for their securities.
Third, I accept that if the orders sought by the plaintiff are not made, there may, in fact, be substantial injustice to the Company, as any offer and subsequent sale of securities may be void or voidable, which gives rise to commercial uncertainty and expense for the Company as it must remain involved in problems caused by this issue.
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.
For the following reasons, I accept that it is appropriate in the circumstances of this case to broadly grant relief in the terms sought by the plaintiff (subject to one amendment). First, the evidence before the court is that there have been sales of the securities issued in September 2021 and December 2023, but not in respect of the shares issued on 17 July 2024. Second, I accept there is a question as to the validity of the cleansing notices given the failure to comply with ch 2M.4 of the Act, and the issue of shares prior to the opening of the prospectus in respect of the share issue in September 2021. Third, the orders sought address a past act and do not concern a future act. Finally, I am satisfied the conduct was inadvertent and was not done in blatant disregard of the Company's obligations.
It is usual in cases such as this to provide an opportunity for shareholders and other parties to raise any complaint about the proposed orders. The usual timeframe is that there be liberty to apply within 28 days, which is the proposed timeframe sought in the minute of proposed orders.
Conclusion
It is my view that public policy will not be undermined by granting the relief sought by the plaintiff. For these reasons, I am satisfied that in the circumstances of this case, relief should be granted to the plaintiff broadly in accordance with the orders sought.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
KC
Associate to the Honourable Justice Hill
24 OCTOBER 2024
3
1