Re Kalamazoo Resources Limited
[2024] WASC 83
•22 MARCH 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE KALAMAZOO RESOURCES LIMITED; EX PARTE KALAMAZOO RESOURCES LIMITED [2024] WASC 83
CORAM: HILL J
HEARD: 6 MARCH 2024
DELIVERED : 6 MARCH 2024
PUBLISHED : 22 MARCH 2024
FILE NO/S: COR 28 of 2024
MATTER: IN THE MATTER OF KALAMAZOO RESOURCES LIMITED
EX PARTE
KALAMAZOO RESOURCES LIMITED
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 immediate steps taken to rectify irregularity - Where no substantial injustice caused by proposed orders - Where no blatant or flagrant disregard of obligations
Legislation:
Corporations Act 2001 (Cth) s 327B, s 327C, s 328A, s 328B, s 707, s 708A, s 727, s 1322
Result:
Application granted
Category: B
Representation:
Counsel:
| Plaintiff | : | A Papamatheos & C McKay |
Solicitors:
| Plaintiff | : | Hamilton Locke |
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 Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17
Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174
Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57
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.)
On 1 March 2024, the plaintiff, Kalamazoo Resources Ltd (Company), filed an originating process seeking orders under s 1322(4)(a) of the Corporations Act2001 (Cth) (Act) relating to contraventions in the appointment process of its auditor. These contraventions occurred as a result of a failure to have a shareholder nominate BDO Audit (WA) Pty Limited (BDO) as auditor or have the appointment as auditor approved at its annual general meeting (AGM) held in November 2023.
These contraventions have had a secondary impact on the Company in raising a question as to whether cleansing notices issued by the Company earlier this year are also defective. This is because the cleansing notices state that as at the date of their issue, the Company had complied with the provisions of ch 2M of the Act as they apply to the Company. For this reason, the Company has also applied for orders declaring these notices were effective when given and that any offer for sale or sales of their shares are not invalid.
Factual background
In support of the application, the plaintiff relies on six affidavits: three affidavits of Christopher Paul Hood, a partner of the plaintiff's solicitors, filed on 5 March 2024 and two on 6 March 2024; an affidavit of Luke Lincoln Reinehr, a director and chairman of the plaintiff, filed on 5 March 2024; an affidavit of Carly Tenille Terzanidis, company secretary of the plaintiff, filed on 5 March 2024; and an affidavit of Kate June Dytlewski, assistant company secretary and office manager of the plaintiff, filed 5 March 2024.
The plaintiff is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). The evidence before me is that it is a gold, lithium and base metals exploration and development company.[1]
[1] Affidavit of Christopher Paul Hood filed 5 March 2023 [5].
As of 1 March 2024, the Company had approximately 175 million shares on issue, 2,412 shareholders and a market capitalisation of almost $17 million based on the closing price of the plaintiff's shares as quoted on the ASX on 29 February 2024.[2]
[2] Affidavit of Christopher Paul Hood filed 5 March 2023 [7] - [8].
Until April 2023, the auditors of the Company were Grant Thornton Audit Pty Ltd (Grant Thornton).
In April 2023, the Company asked Grant Thornton to resign as auditor following some internal discussions within the Company, and BDO was approached to and consented to act as auditor. In May 2023, the directors of the Company resolved by circular resolution to appoint BDO as auditor, subject to the Australian Securities and Investments Commission (ASIC) approving the resignation of Grant Thornton.[3] This occurred on 16 May 2023[4] and Grant Thornton provided a formal notice of resignation on 23 May 2023.[5]
[3] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [21], 'LLR-1'.
[4] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [25], 'LLR-3'.
[5] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [26], 'LLR-4'.
On 30 May 2023, BDO was formally engaged by the Company to act as its auditor, which was the subject of an announcement by the Company to the ASX on that same day.[6] The announcement referred to the Company's intention to include a resolution for the appointment of BDO as its auditor in the notice of meeting for its 2023 AGM.
[6] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [28], 'LLR-6', 'LLR-7'.
In fact, no resolution concerning the appointment of BDO was put to shareholders at the AGM in November 2023.[7] The evidence is that the then company secretary overlooked this requirement as a result of a number of personal and health issues he was experiencing at the time.[8]
[7] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [46].
[8] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [50] ‑ [58]; Affidavit of Kate June Dytlewski filed 5 March 2024 [37].
In January and February 2024, the Company issued a total of 3,434,066 shares to Lind Global Fund II LP City Corp Nominees Pty Ltd (Lind), pursuant to a subscription agreement that was entered into on or around 29 August 2022. Cleansing notices were issued at the time of each of these share issues.[9]
[9] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [68] - [69], [71], 'LLR-20', 'LLR-21'; Affidavit of Carly Tonille Terzanidis filed 5 March 2024 [24] - [35].
On 27 February 2024, Ms Terzanidis discovered that the Company had failed to appoint BDO as auditor at its 2023 AGM.[10] Since that date, the board of directors of the Company have been informed of the issue, legal advice has been sought from external solicitors as well as counsel, and the Company has sought and obtained a trading halt.[11]
[10] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [64]; Affidavit of Kate June Dytlewski filed 5 March 2024 [44] ‑ [47].
[11] Affidavit of Carly Tonille Terzanidis filed 5 March 2024 [47]; Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [72] ‑ [77], 'LLR-23'.
On 29 February 2024, the Company made an announcement to the ASX advising of its intention to make this application.[12]
[12] Affidavit of Luke Lincoln Reinehr filed 5 March 2024, 'LLR-23'.
On 1 March 2024, the Company's solicitors wrote to the court requesting an urgent hearing of this application.[13] On the same date, the Company's solicitors wrote to the ASX and ASIC to give notice of this application.[14]
[13] Email from Hamilton Locke to the Associate to Hill J dated 1 March 2024.
[14] Affidavit of Luke Lincoln Reinehr filed 5 March 2024 [74].
Statutory regime
Financial Reports and appointment of auditor
The statutory regime that governs the financial reports and appointments of auditors is set out in ch 2M of the Act, entitled 'Financial Reports and Audit'. The process for the appointment and removal of auditors is set out in pt 2M.4 of the Act.
Pursuant to s 327A(1) of the Act, 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.
Pursuant to s 327B(1)(b) of the Act, where a vacancy in the officer of auditor occurs, a company must appoint an auditor to fill the vacancy at each AGM subsequent to the company's first AGM. Section 327B(3) of the Act requires a director of the company to take all reasonable steps to comply with, or to secure compliance with s 327B(1) 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) of the Act, where this occurs, and not by removal of the auditor from the 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 has already done so at a general meeting.
Pursuant to s 327C(2) of the Act, where an auditor is appointed to fill a casual vacancy under s 327C(1) of the Act, they hold office until the company's next general meeting.
Section 301 of the Act requires a company to have its financial reports for a financial year 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, including the auditor's reports, to its members.
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 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 AGM). Where a company purports to appoint an auditor in contravention of s 328B(1) of the Act, pursuant to s 328B(2)(a) and s 328B(2)(b) of the Act, the appointment is of no effect and the company and each of its officers who are in default are guilty of an offence.
Fundraising disclosures
Part 6D.2 of the Act imposes fundraising disclosure obligations on corporations in relation to rights, issues and the issue and sale of quoted securities.
Section 708A of the Act governs the issue of quoted securities, including shares. In certain circumstances and pursuant to s 708A(5) of the Act, the disclosure obligations can be satisfied by lodging a cleansing notice or a prospectus. If disclosure has not been made by the issuer 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.[15]
[15] Corporations Act 2001 (Cth) s 707(3). See also ReGolden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17.
The notice that is issued by the company is required to comply with s 708A(6) of the Act. This includes a requirement the notice state that, as at the date of the notice, the body has complied with the provisions of ch 2M of the Act.
Power under s 1322 of the Act to grant the relief sought
The plaintiff's originating process 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:[16]
(a)the prescriptive requirements of the wording in s 1322(4) and the pre‑conditions in s 1322(6) of the Act need to be satisfied;[17]
(b)the court retains a discretion under s 1322(4) of the Act as to whether it makes the orders sought;
(c)the broad powers that are granted to the court under s 1322 of the Act 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;[18]
(d)limitations to the broad powers in s 1322 of the Act will not be readily implied.[19] This section is remedial in character and should be applied broadly;
(e)the court can make orders under s 1322(4)(a) of the Act on conditions and make such consequential and ancillary orders as it thinks fit; and
(f)an order can be made under s 1322(4)(a) of the Act notwithstanding that the contravention or failure concerned resulted in the commission of an offence.[20]
[16] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20].
[17] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43], [53], [64].
[18] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 [29].
[19] Weinstock v Beck [43], [55] - [56], [60], [64].
[20] Corporations Act2001 (Cth) s 1322(5).
Disposition
Application by an 'interested person'
In this case I accept that the plaintiff is an interested person who may seek relief under the Act.[21]
Position of ASX and ASIC
[21] Re Wave Capital Ltd [29].
The ASX has indicated that it did not, and it does not intend to appear at the hearing today,[22] and ASIC similarly indicated that it did not intend to appear and neither supported nor opposed the application.[23]
Validation of appointment of auditor
[22] Second Affidavit of Christopher Paul Hood filed 6 March 2024, 'CPH-9'.
[23] Third Affidavit of Christopher Paul Hood filed 6 March 2024, 'CPH-2'.
On the evidence before me today, I make the following findings of fact.
Following the resignation of Grant Thornton as auditor of the Company, the directors of the Company complied with their obligations under s 327C(1) of the Act by appointing BDO as auditor with effect from that date.
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. This did not occur.
By letter dated 20 April 2023, BDO consented to fill the casual vacancy as auditor of the Company until the 2023 AGM for the purposes of s 328A(1) of the Act. However, no shareholder nominated BDO as auditor of the Company nor was a resolution passed at the 2023 AGM to appoint BDO as auditor of the Company. As a result, BDO's consent did not translate into a valid permanent appointment given the Company's failure to ratify this appointment at their 2023 AGM by a resolution of its members. As no resolution was passed at the 2023 AGM to ratify the appointment of BDO as auditor, BDO ceased to be the auditor of the Company at the conclusion of the 2023 AGM.
The board of the Company did not comply with s 327B(1) of the Act to appoint an auditor following the 2023 AGM.
The final factual finding I make is that BDO carried out the audit for the Company's financial reports for 30 June 2023 in accordance with the provisions of s 301(1) and s 314(1) of the Act.
I have previously considered the legislative history and the objects of ch 2M.4 of the Act in Re Bellevue Gold Ltd.[24] These reasons for decision reflect my views on the matter and it is not necessary for me to repeat what I said there.
Orders under s 1322(4)(a) of the Act
[24] 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 29 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 appointing an auditor of the plaintiff to fill any vacancy in the office of auditor at the AGM of the plaintiff in November 2023; and
(b)the failure of the plaintiff to comply with s 328B of the Act.
In addition, the plaintiff has sought declarations that the cleansing notices given under s 708A(5) of the Act to the ASX on 9 January 2024 and 13 February 2024 were effective when given and that any offer for sale or sale of securities were not invalid by reason of:
(a)any alleged failure of the notices given under s 708A(5)(e) of the Act to exempt the sellers from the obligation of disclosure under the Act; and
(b)any consequence failure by the sellers of the securities to comply with s 707(3) of the Act.
In this case, I note that the prescriptive requirements of s 1322(4)(a) of the Act are satisfied in that:
(a)each of the proposed validation orders are framed in a declaratory form;
(b)the act, matter or thing is either the appointment of an auditor or the offer and sale of securities; and
(c)the contraventions are clearly identified.
I now turn to whether the preconditions in s 1322(6) of the Act have been satisfied.
Pre-conditions in s 1322(6)(a) of the Act
Counsel who appeared on behalf of the plaintiff before me today submitted that the pre-conditions in s 1322(6)(a)(ii) and s 1322(6)(a)(iii) of the Act were satisfied in this case. No reliance was placed on section 1322(6)(a)(i) of the Act.
In this case, I accept the evidence that has been filed on behalf of the plaintiff that the failure to appoint BDO as auditor arose as a matter of inadvertence. This conclusion is supported by the steps that have been taken by the Company to rectify the irregularity once it became aware of the issue. As was noted by Ms McKay who appears before me today as counsel for the plaintiff, the Company has worked extremely hard and has taken steps to rectify the irregularity with significant haste.[25] On this basis, I accept that the pre-condition in s 1322(6)(a)(ii) of the Act is satisfied.
[25] ts 7.
Section 1322(6)(a)(iii) of the Act gives the court a wide discretion to exercise the powers under s 1322 of the Act.[26] I am satisfied on the evidence before me today that it would be just and equitable to make the orders sought.
[26] See Re Bellevue Gold Ltd [64] - [65], and the authorities cited therein.
In my view, the making of an order sought by the plaintiff is 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.
In this case, it is material that all relevant parties - namely, BDO, the Company and its shareholders - have proceeded on the basis that BDO has been validly appointed as auditor of the Company. No issue or complaint has been raised in relation to the accounts that were audited by BDO as of 30 June 2023, or the conduct of the audit that has been undertaken by BDO.
In my view, the granting of relief will remove any doubt about the Company's compliance with its financial reporting obligations and the potential impact on the Company's operations.
No substantial injustice under s 1322(6)(c) of the Act
I have also considered the classes of persons who may be impacted by making these orders: namely, BDO, the Company and its shareholders.
I find there is no basis for inferring that substantial injustice has been or is likely to be caused to any person by making the proposed orders.
In fact, in contrast, I accept that if the orders sought are not made, there may be substantial injustice to the plaintiff for the following reasons:
(a)the uncertainty that will attach to the work that has been undertaken by BDO;
(b)the uncertainty as to the status of the plaintiff's compliance with the financial reporting and audit obligations under ch 2M of the Act; and
(c)as was highlighted before me today in argument by Ms McKay as counsel for the plaintiff, the risk that if the Company remains in a trading halt, this may occasion an event of default under the agreement with Lind and lead to a request for repayment, which would have very serious consequences for the Company.[27]
No discretionary reason to withhold relief
[27] ts 6.
I accept and find that there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the Act or the Company's constitution which would warrant refusal of the relief sought.[28]
[28] Re Wave Capital Ltd [29].
There is nothing in the evidence before me today that could suggest that any minority shareholder interest might be oppressed, or that any other interest may be affected. I am satisfied on the evidence that all shareholders, as well as the ASX and ASIC, have been notified of the plaintiff's contravention of the Act and have been given notice of the hearing. No shareholder or either regulator has sought to intervene in the hearing or have notice that they sought to be heard in this application.
In exercising the discretion to grant relief under s 1322(4) of the Act, a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it has been identified.[29] In this case, after the issue was identified on 28 February 2024, the plaintiff has taken significant steps to determine what relief was required, sought legal advice, commenced these proceedings and sought a hearing in approximately seven days.
Validation of issues of securities subject to a notice under s 708A(5) of the Act
[29] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60].
In addition to the orders sought by the Company in respect to the appointment of BDO, the Company also seeks orders in respect of the issue of securities to Lind which were the subject of cleansing notices on 9 January 2024 and 13 February 2024.
As noted earlier:
(a)the proposed validation order is framed in a declaratory form;
(b)the act, matter or thing is the offer for sale or issue, or sale of securities for the purposes of s 706, s 708A(5) or s 707(3) of the Act; and
(c)the contraventions are the offering of securities for sale without proper disclosure in contravention of s 706 and s 707(3) of the Act.
Counsel for the plaintiff submitted that the pre-conditions in s 1322(6) of the Act were satisfied.
The evidence before me today is that when Ms Terzanidis issued the cleansing notices, she mistakenly believed there was compliance with the provisions of ch 2M of the Act. The Company submitted, and I accept, that this was a genuine error and that there was no failure of the persons concerned, the Company, or its directors and officers to act honestly. On this basis, I am satisfied that the pre-condition in s 1322(6)(a)(ii) of the Act is satisfied. I also accept that in respect of the cleansing notices, this may be a procedural irregularity.
I am also satisfied that the pre-condition in s 1322(6)(a)(iii) of the Act is satisfied and that it would be just and equitable to make the orders sought.
In evaluating whether there would be any substantial injustice if the orders are made, I have once again considered the classes of persons who may be impacted by the making of these orders. It is my view that:
(a)for the parties who have been issued the impugned shares, the prejudice to them is that any future sale of their shares may be void or voidable;[30] and
(b)for the shareholders of the Company, as a result of the Company's failure to comply with the relevant provisions of the Act, the Company is presently in a trading halt. If orders are not made by the court and the trading halt is not lifted, the security holders of the Company will not have the benefit of a market for their securities.
[30] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57 [63].
Finally, I accept that if the orders sought are not made, there may be substantial injustice to the Company in a number of respects including that the offer of securities may be void or voidable and that it may give rise to an event of default under the agreement I have already referred to. I accept that this could give rise to commercial uncertainty and further expense for the Company.
In this case, I find there is no basis to infer that substantial justice has been or is likely to be caused to any person by the making of the proposed orders.
I am satisfied that in the circumstances of this case relief should be granted in the terms sought in respect of the issue of securities for the following reasons. First, the evidence before the court is that it is unclear whether there have been any sales of these securities. Second, I accept that there is a question as to the validity of the cleansing notice given the failure to comply with ch 2M.4 of the Act. Third, the orders as presently framed address the possibility that there has been a past act of a sale, that is, it concerns a possible past act and does not concern future acts. Fourth, I am satisfied the conduct was inadvertent and not done in blatant disregard of the Company's obligations under the Act.
Conclusion
In my view, the public policy will not be undermined by granting the relief sought.
In this case, the Company has provided a frank and detailed explanation of the circumstances surrounding the failure to formally appoint their auditor at the AGM on 29 November 2023. Based on the evidence before me today, I am satisfied that the failure to appoint BDO as auditor at the 2023 AGM was caused by inadvertence, rather than any deliberate disregard of the plaintiff's obligations.
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 orders. I accept that this is the appropriate timeframe in this case, and is the order sought by the plaintiff.
For these reasons, I am satisfied that, in the circumstances of this case, relief should be granted in terms of the plaintiff's minute of proposed orders.
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
22 MARCH 2024
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