'SAQ' and Australian Securities and Investments Commission

[2005] AATA 553

CATCHWORDS – CORPORATIONS – accounts – large proprietary company – application for relief from obligation to lodge financial report – whether complying with requirements would impose unreasonable burdens – whether public disclosure of financial information would decrease company’s ability to compete in the market – whether discretion should be exercised – whether Australian Securities and Investments Commission has power to make exemption order after date for lodging accounts passed – decision varied.

Acts Interpretation Act 1901 s. 8
Administrative Appeals Tribunal Act 1975 ss. 35 and 43
Administrative Decisions (Judicial Review) Act 1977 s. 7
Australian Securities and Investments Commission Act 1989 s. 1
Corporations Act 2001 ss. 9, 45A, 70, 237, 259B, 266, 286, 287, 288, 289, 290, 291, 292, 295, 295A, 296, 299, 300, 301, 307, 308, 309, 310, 311, 312, 313, 314, 319, 340, 341, 342, 343, 445G, 459G, 912C, 1287A, 1314 and 1322
Companies (Victoria) Code s. 215C
Corporations Law ss. 313, 319 and 447A
Corporations Law (Vic) ss. 459G and 1322
Corporations Regulations 2001 rr. 2M.6.01 and 2M.6.03
Customs Act 1901
First Corporate Law Simplification Act 1995 Schedule 4
Interpretation Ordinance s. 10
Planning and Development Act 1966
Taxation Laws Amendment (Drought Relief Measures) Act 1995, Schedule 1, Part 1
Trade Practices Act 1974 ss. 5 and 46

Alexandra Private Geriatric Hospital Pty Ltd v Blewett and Another (1984) 2 FCR 368; 56 ALR 265
Anthony Hordern and Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1
BHP Direct Reduced Iron Ore Pty Ltd v Chief Executive Officer, Australian Customs Service (1998) 55 ALD 665
Bostik (Australia) Pty Ltd v Gorgevski (No 1) (1992) 36 FCR 20
Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317
David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265; 131 ALR 353
Director of Public Works v Ho Po Sang [1961] AC 901
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577; 2 ALD 60
Esber v Commonwealth of Australia and Another (1992) 174 CLR 430
Incat Australia Pty Ltd v Australian Securities and Investments Commission (2000) 33 ACSR 462
Kouflidis v City of Salisbury (1982) 29 SASR 321
Low v Swan Cove Holdings Pty Ltd and City of Subiaco [2003] WASCA 115
Mathieson v Burton (1971) 124 CLR 1
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 140 FLR 247
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636; 162 ALR 441
Re Australasian Memory Pty Ltd and Corporations Law; Brien v Australasian Memory Pty Ltd (1997) 149 ALR 393
Re DG Brims and Sons Pty Ltd and Australian Securities and Investments Commission (1999) 29 AAR 474
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634
Re Incat Australia Pty Ltd and Australian Securities and Investments Commission (1999) 30 AAR 291
Re Jebb and Repatriation Commission [2005] AATA 470
Re Pinpoint Pty Ltd and Australian Securities and Investments Commission (1999) 33 ACSR 201
Re SRKKK and SRNNN and Australian Securities and Investments Commission (2002) 68 ALD 671, 42 ACSR 551
Robertson v City of Nunawading [1973] VR 819
Stammers v Akron Securities Ltd (1997) 140 FLR 146

DECISION AND REASONS FOR DECISION [2005] AATA 553

ADMINISTRATIVE APPEALS TRIBUNAL     )          
  )          S2003/111
GENERAL ADMINISTRATIVE DIVISION     )          

Re                ‘SAQ’

Applicant

AndAustralian Securities and InvestmentS Commission

Respondent

DECISION

Tribunal:                  Deputy President S A Forgie
Date:  3 June 2005
Place:  Adelaide

Decision:The Tribunal:

1.affirms the respondent’s decision dated 1 May 2002 in so far as it related to the financial year ending 31 December 2001; and

2.sets aside the decision of the respondent dated 24 February 2003; and

3.substitutes for that decision a decision that:

in relation to the reports for the financial years ending 31 December 2002, 2003 and 2004, the applicant is relieved of the requirement imposed by s. 319 of the Corporations Act 2001 to lodge a report with the Australian Securities and Investments Commission.

S A FORGIE
  Deputy President

REASONS FOR DECISION

I have given a decision and reasons that are subject to an order[1] restricting their disclosure to the parties and their officers and legal representatives. This version of the reasons omits substantial passages setting out the evidence, references to the evidence and findings of fact as well as information generally capable of identifying the applicant.  Consistently with the general principle that it is desirable that the Tribunal’s proceedings be held in public, this version is intended to reflect the essential features of my decision and reasons.  If there should be any variation between this version and the original, the original prevails and is not qualified or varied in any way.   

[1] Made under Administrative Appeals Tribunal Act 1975, s. 35

1. The central issue in this case is whether the applicant, who has been called SAQ, should be relieved of the requirement to lodge a report under s. 319 of the Corporations Act 2001 (“Act”) on the basis that to do so would impose unreasonable burdens within the meaning of s. 342(1)(c). The first year for which it had to lodge that report was the financial year ending 31 December 2001. The time to lodge it expired on 30 April 2002. As the respondent, the Australian Securities and Investments Commission (“ASIC”), was unable to make a decision regarding SAQ’s application before the end of 30 April 2002, it decided that it could not make a decision at all in relation to the year ending 31 December 2001. On 24 February 2003, ASIC decided to refuse SAQ’s application. I have decided that ASIC was unable to make a decision in relation to the financial year ending 31 December 2001 after the time to do so had expired on 30 April 2002. With regard to later financial years, I have decided that complying with the requirement in s. 319 would impose unreasonable burdens on SAQ. Consequently, I have decided to relieve SAQ of the requirement to lodge a report under s. 319 in relation to the financial years ending 31 December 2002 to 31 December 2004 inclusive.

1. One of the witnesses, Mr Alpha, has worked for two affiliates of SAQ.  In one, Laiki Pty Ltd (“Laiki”), he held a senior position.  Laiki is the marketing arm of Nannouc Pty Ltd (“Nannouc”), which is the ultimate holding company of SAQ.  It markets SAQ’s product as well as a similar product produced in a country other than Australia.  The product produced in that other country represents approximately 10 to 15% of SAQ’s product.  In the other affiliate, Allagi Pty Ltd (“Allagi”), Mr Alpha was the manager with responsibility for supply of the product.  Allagi is a joint venture between Nannouc and Babia Pty Ltd.  Mr Alpha held both positions for over three years but was then assigned to SAQ as an internal consultant.  He has been involved in marketing the product and has made marketing trips to various countries in the 1980s and 1990s.  Before that, he was involved in another aspect of the production of the product.  Costs estimation was his first job in the industry. 

1. Mr Beta has been SAQ’s Financial Controller for over four years and its Company Secretary for over three.  He had previously held similar positions with other companies engaged in production of products not produced by SAQ.  His duties have included his preparing annual accounts and fulfilling statutory and other regulatory requirements.  He has been a qualified accountant for over 20 years and a member of the National Institute of Accountants. 

1. Since 1 June 1998, Mr Douglas David Niven has been employed by ASIC as Deputy Chief Accountant in its Office of Chief Accountant (“OCA”).  He had previously spent 15 years in the Audit Division at Deloitte Touche Tohmatsu (“Deloitte”) and a further two years as its National Technical Manager. 

LEGISLATIVE BACKGROUND

1. Chapter 2M of the Act is concerned with financial reports and audits. It requires all companies, registered schemes and disclosing entities to keep financial records[2] and some must prepare financial reports.  Section 292(1) requires all large proprietary companies to prepare a financial report and a directors’ report for each financial year.  Most large proprietary companies are also required to lodge these
   reports with ASIC[3].  A “large proprietary company” for a particular financial year is a proprietary company:

“if it satisfies at least 2 of the following paragraphs:

(a)the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is $10 million or more;

(b)the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $5 million or more;

(c)the company and the entities it controls (if any) have 50 or more employees at the end of the financial year.”[4]

[2] Act, Part 2M.2, ss. 286-291

[3] Act, s. 319(1)

[4]Act, ss. 9 and 45A(3)

1. Part 2M.3 of the Chapter is concerned with financial reporting and Division 1 of that Part with annual financial reports and directors’ reports.  A financial report for a financial year must generally comply with the accounting standards[5] and consists of:

   [5] Act, s. 296(1). An “accounting standard” is an instrument in force under s. 334 of the Act. It is made in writing by the Australian Accounting Standards Board for the purposes of the Act and is not inconsistent with either it or the Regulations made under the Act: Act, s. 334(1). Accounting standards are disallowable instruments for the purposes of s. 46A of the Acts Interpretation Act 1901: Act, s. 334(2). Unless a contrary intention appears, an expression used in an accounting standard has the same meaning as in Chapter 2M and the interpretations given in Part 1.2 of the Act are incorporated in them: Act, s. 337.

   the financial statements for the year[6]:

   [6] Act, s. 295(1)(a)

   that is, a profit and loss statement for the year, balance sheet as at the end of the year, a statement of cash flows for the year and, if required by the accounting standards, a consolidated profit and loss statement, balance sheet and statement of cash flows[7];

   [7] Act, s. 295(2)

   the notes to the financial statements[8]:

   [8] Act, s. 295(1)(b)

   that is, disclosures required by the regulations, notes required by the accounting standards and any other information necessary to give a true and fair view of the financial position and performance of the company[9];

   [9] Act, ss. 295(3) and 297

   the director’s declaration about the statements and notes[10]:

   that is, a declaration that, whether before or after its amendment from 1 July 2004[11]:

   is made in accordance with a resolution of the directors, specifies the date on which it is made and is signed by a director[12]; and

   that specifies:

   (i)      that the financial statements and the notes to those statements comply with the accounting standards[13];

   (ii)     that the financial statements and notes give a true and fair view[14];

   (iii)   whether, in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due and payable[15]; and

   (iv) whether, in the directors’ opinion, the financial statements and notes are in accordance with the Act i.e. particularly whether they comply with the accounting standards and give a true and fair view[16].

   (v)     since 1 July 2004, if the company is listed, that the directors have given the declaration required by s. 295A[17].

   [10] Act, s. 295(1)(c)

   [11] Amended by Act No. 103 of 2004, s. 3, Schedule 11, cl. 9 when s. 295(4) was amended by repealing ss. 295(4)(a) and (b)

   [12] Act, s. 295(5)

   [13] Act, s. 295(4)(d)(i) and see also 296

   [14] Act, s. 295(4)(d)(ii) and see also s. 297

   [15] Act, s. 295(4)(c)

   [16] Act, s. 295(4)(d)

   [17] Act, s. 295(4)(e) inserted by Act No. 103 of 2004, s. 3 and Schedule 2, Part 1, cl. 1

2. Directors’ reports must comply with ss. 299 and 300 of the Act. Section 299 is concerned with the provision of general information and requires directors to review matters such as the entity’s operations and significant changes in the entity’s state of affairs or activities during the year as well as any matters or circumstances that have arisen since the end of the year and that may significantly affect the entity’s operations, results or state of affairs in future financial years.  Directors are required to refer to likely developments in future years unless to do so is likely to result in unreasonable prejudice to the entity.  Section 300 deals with specific information that must be included in the directors’ report.  That information relates, in general terms, to the entity’s shares or options, indemnities, directors’ qualifications and interests and benefits, directors’ meetings and proceedings brought or intervened in on behalf of the company by leave of a court under s. 237.

1. Audits and the auditor’s report are the subject of Division 3 of Part 2M.3 of the Act. Section 307 regulates the matters about which the auditor must form an opinion while ss. 308 and 309 provide that an auditor must report to members on whether the financial reports comply with the relevant accounting standards and represent a true and fair view.  The auditor is given powers to obtain information[18] and to report certain matters to ASIC[19].

   [18] Act, s. 310

   [19] Act, s. 311

1. Division 5 of Part 2M.3 is concerned with the lodgement of reports with ASIC.  A company that has to prepare or obtain a report for a financial year under Division 1 must lodge that report with ASIC[20].  The exceptions to the obligation are not relevant in this case.  In the case of a large proprietary company, they must be lodged within four months of the end of the financial year[21]. 

   [20] Act, s. 319(1)

   [21] s. 319(3)(b)

1. Part 2M.6 of the Act is concerned with exemptions and modifications to the obligations otherwise imposed under, among others, Part 2M.3[22].  ASIC may give relief to, among others, a company, directors or auditors[23].  An application for relief must be authorised by a resolution of the directors, be in writing signed by a director and lodged with ASIC[24].  Any order made by ASIC may be expressed to be subject to conditions and may be indefinite or limited to a specified period[25].  If it wishes, ASIC may make such an order in relation to a specified class of companies[26]. 

   [22] It is also permits ASIC to relieve the directors, the company, scheme or entity or the auditor from all or specified requirements of Part 2M.2 relating to Financial Records and of Part 2M.4 relating to the appointment and removal of auditors.

   [23] Act, ss. 340(1) and 341(1)

   [24] Act, s. 340(3)

   [25] Act, s. 340(2)

   [26] Act, s. 341

1. If it is to make an order at all, ASIC must be satisfied that:

   “… complying with the relevant requirements of Parts … 2M.3 … would:

   (a)make the financial report or other reports misleading; or

   (b)be inappropriate in the circumstances; or

   (c)impose unreasonable burdens.”[27]

   [27] Act, s. 342(1)

1. Section 342(2) goes on to specify the matters to which ASIC must have regard in considering whether the audit requirements for a proprietary company, or a class of proprietary companies, would impose an unreasonable burden on the company or companies.  No reference is made in the provision to requirements other than audit requirements.  Those matters are:

   “(a)   the expected costs of complying with audit requirements; and

   (b)the expected benefits of having the company or companies comply with the audit requirements; and

   (c)any practical difficulties that the company or companies face in complying effectively with the audit requirements (in particular, any difficulties that arise because a financial year is the first for which the audit requirements apply or because the company or companies are likely to move frequently between the small and large proprietary company categories from one financial year to another); and

   (d)any unusual aspects of the operation of the company or companies during the financial year concerned; and

   (e)any other matters that ASIC considers relevant.”

In assessing the “expected benefits of having the company or companies complying with the audit requirements” under s. 342(2)(b), ASIC is required to take account of:

“(a)   the number of creditors and potential creditors; and

(b)the position of creditors and potential creditors (in particular, their ability to independently obtain financial information about the company or companies); and

(c)the nature and extent of the liabilities of the company or companies.”[28]

[28] Act, s. 342(3)

1. The operation of Chapter 2M may be modified by the Regulations in relation to, among others, a specified company or companies of a specified kind[29]. Although rr. 2M.6.01 and 2M.6.03 of the Corporations Regulations 2001 have modified its operation, those regulations are not relevant to SAQ.

   [29] Act, s. 343

POLICY STATEMENTS

1. ASIC’s Policy Statement is entitled Accounts and Audit Relief (“PS 43”). It sets out ASIC’s policy in relation to applications made under s. 313(1) of the Corporations Law (“the Law”). It was initially issued on 18 January 1993 and updated on 17 June 1996. Section 313 was amended between the two dates[30] but there is no significant difference for the purposes of this case. At the time of its being updated, s. 313(1) provided that the company’s directors could make an application for an order relieving the company or others from compliance with specified requirements of the Law relating to accounts and directors’ reports under Division 6 of the Law. Section 313(2) went on to provide that:

   “On an application under subsection (1), the Commission may make an order relieving the directors, the company, or the auditor of the company, as the case may be, from compliance with all or any of the specified requirements either unconditionally or on condition that the directors comply, the company complies, or the auditor of the company complies, as the case may be, with such other requirements relating to, or to the audit of, the accounts or to the report as the Commission imposes.”

   [30] Taxation Laws Amendment (Drought Relief Measures) Act 1995, Schedule 1, Part 1 and First Corporate Law Simplification Act 1995 (“FCLS Act”), Schedule 4

1. The directors had to provide a supporting statement[31] and give any further information on company operations required by ASIC’s predecessor, the Australian Securities Commission (“Commission”)[32].  Where it considered it appropriate, the Commission could make an order in respect of a specific class of companies[33].   

   [31] Law, s. 313(3)

   [32] Law, s. 313(4)

   [33] Law, s. 313(6)

1. Section 313(11) provided that the Commission could not make an order unless it was satisfied in relation to the company, or to the class of companies, that:

   “(a) in relation to each requirement of this Law that is specified in the order, the Commission is of the opinion that compliance with the requirement:

   (i)would render accounts or consolidated accounts, or a report required by Division 6, misleading;

   (ii)would be inappropriate to the circumstances of the company, or of the companies included in that class, as the case may be; or

   (iii)would impose unreasonable burdens on:

   (A)     the company, an officer of the company or the auditor (if any) of the company; or

   (B)     the companies, or officers or auditors of the companies, included in that class;

   as the case may be; or

(b)the company is a company (in this paragraph called a ‘relevant company’):

(i)not carried on for the purposes of profit or gain to its individual members;

(ii)prohibited, by the terms of its constitution, from making any distribution whether in money, property or otherwise, to its members; and

(iii)required by or under an Australian law to prepare annually a statement of income and expenditure or a statement as to its financial position, or both;

or that class is a class of relevant companies, as the case may be.”

In deciding whether audit requirements would impose an unreasonable burden for a large proprietary company, or a class of large proprietary companies, the Commission was required to have regard to matters similar to those in s. 342(2) of the Act[34]. 

[34] Law, s. 313(11A) and see also s. 313(11B) in relation to the assessment of expected benefits.

1. ASIC observed in PS 43 that the “inappropriate to the circumstances of the company”:

   “… pre-condition will normally only apply in cases where there is an anomaly in the Law or in cases where compliance with the Law will give rise to consequences not intended by the legislature: Mazda Australia Pty Ltd v ASC (1992); 8 ACSR 613. For example, a requirement of the Law may be considered inappropriate to the circumstances of the company where compliance with that requirement would be inconsistent with the procedure adopted by the company in accordance with another Australian legislative requirement, for example, the Banking Act 1959 (Cth).

   43.20   It is not sufficient for an applicant to show that the requirement is irrelevant or of no benefit to users of the accounts or report.  For example the fact that shareholders of a subsidiary company already have access to the information required to be disclosed, through their board of directors, is not a relevant factor in determining the application if the shareholders of the ultimate holding company do not also have access to the information:  Re Australian Newsprint Mills Ltd (1988) 6 ACLC 1205 at 1207. In addition, the needs of other users of the accounts, for example, creditors and prospective shareholders, must also be taken into consideration. …”[35]

It continued in relation to the structure of a company:

“43.21 ASIC does not regard difficulties arising solely from the way in which a company has decided to structure its operations (particularly its group structure) or as a result of a policy determined by the directors as valid grounds for granting relief.

43.22   Similarly, a claim that the ultimate holding company, being incorporated outside Australia, is not required to provide similar disclosures is not a valid basis for granting relief.”[36]

[35] PS 43.19 and 43.20

[36] PS 43.21 and 43.22

1. PS 43.23 observed that a requirement with the Law might be burdensome because there might be a burden with attaining compliance with the requirement or because a burden might result from compliance. ASIC went on to explain what was entailed in a company’s establishing that it laboured under such a burden:

   “PS 43.24     However, before relief can be granted, the applicant must demonstrate not only that there is a burden, but also that the burden is unreasonable.  In the Mazda case, the Oxford English Dictionary definition of ‘unreasonable’ was invoked to conclude that an unreasonable burden, in the context of the Law, is a burden that goes beyond what is based on reason or good sense, goes beyond what is equitable or is excessive. It was also held that ‘applicants have a high standard of proof to overcome in showing the existence of an unreasonable burden’ and that ‘the use of the word “unreasonable”, indicates that the balance must be so far against the interests of the applicant as to be fairly described as overwhelming’.

   PS 43.25      In relation to subpara(a) of [PS43.23], for example, the fact that compliance will involve additional costs or that the compilation and analysis of the required information will present difficulties and necessitate the company having to obtain the assistance of an expert does not, in itself, satisfy the unreasonable burden pre-condition.  The applicant must demonstrate that the administrative burden is out of all proportion to the value of the resultant disclosures to the users of the accounts.  Similarly, under subpara (b) of [PS 43.23], an application will only be successful if the burden is such that a serious economic detriment will result if there is compliance with the legislative requirement with little or no compensating benefit to users of the accounts:  Directors of Liquid Air (WA) Pty Ltd v Commissioner for Corporate Affairs (1989) 15 ACLR 29.”

1. PS 43 also explored an argument that competitive disadvantage may amount to an unreasonable burden.  PS 43.26 stated that reasons given to support that argument in the past had included:

   “(a)   competitors not being required to disclose similar information;

   (b)customers being able to use such information to support claims for price concessions; or

   (c)suppliers of inputs (including labour) placing pressure on the company to increase prices paid to those suppliers.”

ASIC’s view was that:

“Only in rare circumstances can the ‘competitive disadvantage’ argument be successfully mounted in support of a claim that a particular disclosure requirement imposes an unreasonable burden.  For such an argument to succeed, the applicant would need to demonstrate that if the disclosure requirement is complied with, competitors, suppliers or customers will be able to estimate the profitability and/or contribution margin per unit of company, giving rise to detrimental economic consequences.  This may happen in circumstances where, for example, the company has only one customer, or where the company provides a single service or product and information about the physical level or the applicant’s output is available to

competitors.”[37]

[37] PS 43.27

1. In relation to other factors to which it might have regard, the Commission drew attention to ASIC’s objectives in addition to those outlined in s. 313(11).  Section 1(2) of the Australian Securities and Investments Commission Act 1989 (“ASIC Act”), it said:

   “… provides that in performing its functions and exercising its powers, ASIC shall , in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy, strive to maintain, facilitate, and improve the performance of companies and to maintain the confidence of investors in the securities markets by ensuring adequate protection for such investors.”[38]

ASIC continued:

“ The accounts, audit and directors’ reports provisions of the Law are directed to attaining the objectives of the maintenance of investor confidence and the enhancement of market efficiency through the provision of relevant, reliable and timely financial and other information to market participants and in particular to shareholders and debentureholders and present and prospective creditors.”[39]

[38] PS 43.41

[39] PS 43.42

FACTUAL BACKGROUND

1. Having regard to the verbal and written evidence, I have made the findings of fact set out in this section of my reasons.

SAQ and Nannouc

1. SAQ was incorporated some years ago.  It is an affiliated company of Nannouc, which is the ultimate holding company of SAQ.  Both companies have common share holders.  On the basis of Mr Beta’s evidence, I find that Nannouc’s accounts are not publicly available.  SAQ is dependent on Nannouc for its financial survival. 

1. Until 2001, the applicant, SAQ was a proprietary company as that term is defined in s. 45A(2) of the Act. In that year, it began commercial production of its product. Among those who produce that product, it is a small producer whether assessed by Australian or international standards. At the same time as it began commercial production, it became a large proprietary company fulfilling all three criteria in s. 45A(3). On 26 April 2002, it applied to ASIC, for an order relieving it from its obligation under s. 319 of the Act to lodge a report for the financial year (“financial report”).

SAQ’s application

1. On 26 April 2002, SAQ’s solicitors wrote to ASIC enclosing an application made by a director of SAQ.  On behalf of the company, he applied “… for relief from the requirements to comply with section 319 of the Corporations Act 2001”. His application complied with s. 340(3) of the Act. On 1 May 2002, ASIC advised that it did not have power to grant relief from compliance once the date for compliance had fallen due. It advised SAQ that it should have allowed at least three weeks for its application to be considered before 30 April 2002. On 2 May 2002, SAQ’s solicitors asked ASIC to consider SAQ’s application in so far as it applies to financial years after 31 December 2001.

1. ASIC asked for further information in its letters of 24 September 2002 and 26 November 2002.  SAQ’s solicitors responded on 22 October 2002 and 29 November 2002.  On 24 February 2003, ASIC advised SAQ, through its solicitors, that its application had been refused.  It sent its reasons in a further letter dated 26 February 2003. 

Report on Aspects of the Regulation of Proprietary Companies

1. In March 2001, the Parliamentary Joint Statutory Committee on Corporations and Securities (“Joint Committee”) prepared a report entitled Report on Aspects of the Regulation of Proprietary Companies (“Report”). It noted an ASIC report on the operation of the provisions in the Act in relation to large and small proprietary companies that had been introduced in the Corporations Law by the FCLS Act.  Under those amendments, large proprietary companies were required to lodge audited accounts with ASIC within four months of the end of the financial year.  Not all large proprietary companies had previously been required to lodge financial statements.  ASIC could exempt them from doing so if it took into account factors such as the expected costs and benefits of the company’s complying with the requirements.  It took into account ASIC’s Policy Statement 43 (“PS 43”), entitled, Accounts and Audit Relief and Policy Statement 115 entitled, Audit Relief for Proprietary Companies (“PS 115”). ASIC deferred the reporting requirements for these companies to years ending on or after 9 December 1997. Some large proprietary companies, which had been exempt proprietary companies on 30 June 1994 and which had its accounts audited and met other criteria, were also exempt from lodging accounts by virtue of s. 319(4) of the Law. Generally, small proprietary companies were not required to lodge audited accounts.

1. ASIC’s report to the Joint Committee noted that, in 1998, 99.3% of proprietary companies that would previously have been required to prepare financial statements had no financial reporting requirements to meet after the FCLS Act’s amendments.  Reporting requirements for 2,101 grandfathered large proprietary companies had not been changed but a further 1,592 non-grandfathered large proprietary companies that had previously been exempt were then required to lodge financial statements and to have them audited.  Approximately 42% of large proprietary companies had been grandfathered. 

1. In its report, the Joint Committee noted that:

   “The unlevel playing field has also imposed barriers to effective competition and increased the likelihood of market inefficiencies.  The accounting firm Atkinson Gibson described the anti-competitive impact of the reporting requirements on large proprietary companies which are not grandfathered:

   Some of my clients are competing against large Australian companies and/or multi-national companies.  Some are finding the commercial marketplace a very hostile environment.  They are concerned that they could be the target of a takeover by a larger predatory company/and or ‘squeezed’ in the market place by a large competitor who has a disproportionately larger financial resource.

   Such activity is not uncommon and involves predatory pricing and poaching of staff.  Thus the issue makes some of my clients feel very vulnerable and view the requirement by government for them to make financial information public as an act which at the very least weakens their position and at worst could lead to the demise of their business.  This is a serious issue to them …”

THE EVIDENCE

Role of Nannouc in relation to SAQ

1. Mr Alpha said that SAQ produces the product for Nannouc.  Allagi actively bids on contracts for private supply, negotiates contracts and administers contracts.  It charges SAQ for providing that service.  Mr Alpha was not sure whether the contracts were negotiated with Allagi or SAQ as the party selling the product.  SAQ ultimately receives payment for its product but Mr Alpha understood that Allagi receives its commission or fee from the payment first.  Mr Alpha “guessed” that purchasers would know that they were bidding for SAQ’s product when they were negotiating with Allagi but it would depend on the bidding document involved.  Some bidding documents specify the source of the product but most do not.  It is understood that Allagi is marketing on behalf of SAQ. 

1. Mr Beta said that SAQ contracts with Allagi and Allagi contracts with the ultimate customer.  He believed that that Allagi charged the customer the same price it paid SAQ.  SAQ regards Allagi as its agent and the ultimate customer is unimportant to it.  Traditionally, Allagi buys for itself and then on sells the product.  Mr Beta did not know whether Allagi bids for large or small contracts.  Some of Allagi’s contracts specify the source of the product and others do not.

SAQ’s liabilities

1. Mr Beta expressed the view that the non disclosure of SAQ’s financial accounts has not, and will not, cause any detriment to its creditors, suppliers or employees.  He gave details in relation to each group of people.  In any one month, SAQ has 100 to 150 creditors who have provided a diverse range of services.  A figure of $X would be about the mark of SAQ’s monthly trade liabilities.  Generally, they are paid in a timely manner and within 30 days of the end of the month in which SAQ incurred the liability was incurred.  Mr Beta believed that creditors regarded SAQ as a very good payer. 

1. Mr Beta said that SAQ’s accounting practice is to take up liability for shipping and other costs when the product leaves the production line even if the amounts are not payable until a later time.  Some of those costs are calculated on the basis of a percentage of the product’s sale price.  Mr Beta did not reveal their quantum. 

1. In addition to having a substantial investment in SAQ, Nannouc has also lent SAQ a substantial amount of its operating funds.  Nannouc will be looking to SAQ to repay those loans.  One loan is at a fixed interest rate for a fixed period expiring in approximately 2012.  The other is a revolving loan.  Funds are drawn down as they are required and it is paid from net revenue. The loans, representing 32% of its total liabilities, are shown as liabilities in SAQ’s annual accounts for 2002 and not as equity.  Without clarification of Nannouc’s role and its financial commitment to SAQ’s success, any typical financial analysis using the information in its balance sheet may not reflect the strength of Nannouc’s commitment to it. 

1. A bank (“Bank”) has given SAQ a line of credit facility.  That facility is supported by letters of credit from Nannouc’s bankers.  In Mr Beta’s opinion, SAQ would have been very unlikely to have obtained funding from the Bank or any other finance company had it not had Nannouc’s support and letters of credit.  Each year, the Bank reviews the arrangement.  With that in mind, SAQ is required to give the bank its annual accounts each year.  Based on SAQ’s annual accounts for 2002, the line of credit facility represents 58% of SAQ’s total liabilities. 

1. SAQ has obtained loans from a finance company (“Lender”) to fund particular activities necessary to support its production.  The loans are supported by guarantees from Nannouc.  The first loan is to be repaid over 96 monthly instalments with a residual payment payable at the conclusion of the term of the loan in July 2008.  The second loan is repayable in 36 monthly instalments concluding in September 2005.  In accordance with the lender’s requirements, SAQ gives it a copy of its financial accounts each year.  Based on SAQ’s annual accounts for 2002, the loans represent 3.4% of SAQ’s total liabilities.

SAQ’s trade creditors

1. Mr Beta said of SAQ’s dealings with its suppliers and creditors:

   “In establishing trading accounts with the company’s various suppliers and contractors, it is established company practice that financial details and other information are NOT provided.  To the best of my knowledge no trade creditors of SAQ other than the … Bank and … [the lender] have been provided with this information, however, where necessary and as required trade creditors are referred to the …Bank or other long standing suppliers of SAQ for the credit worthiness of SAQ.  Over the past four years or so SAQ has established many trading relationships and confidence with its trade creditors and as such I do not believe that access to SAQ’s accounts will provide any real use to its creditors.  Based on the balance sheet per the 2002 Year Annual Accounts Trade Creditor accounts at year end represent 2% of the total liabilities of SAQ.”

SAQ’s employees

1. As to SAQ’s employees, Mr Beta said:

   “All employees and contractors are aware of the relationship between SAQ and it’s [sic] parent company ….  This relationship provides employees with the comfort of a solid financial backing for their employer.  As far as I am aware SAQ’s financial position has not been questioned by any employees or contractors.  In fact, from my experience over the past 4 years or so, I feel that both employees and contractors do obtain more comfort and a sense of security from this relationship than might otherwise be the case if employees only had access to the company’s financial accounts.”

1. Mr Beta said that, in his view, non-disclosure of SAQ’s financial accounts had not, and will not, cause any detriment to its employees, trade creditors or creditors generally.  SAQ has over 100 employees.  Most would know about SAQ’s relationship with Nannouc as it is part of their induction package.  To the best of his knowledge, no employee has ever asked about the security of their workplace agreements.

ASIC’s policy

1. Mr Niven said that the OCA develops policy for ASIC and provides it with advice in relation to accounting, financial reporting, disclosure and auditing matters. OCA also assists other areas of ASIC to regulate and enforce the financial and auditing provisions of the Act in order to promote honesty and fairness in financial markets. It also liaises with external bodies regarding financial reporting and audit issues.

1. In addition to any matters that it was required under the Law to take account of, ASIC was also required to take into account the objectives underlying the establishment of the ASIC Act[40]. Under the objects of the ASIC Act, s. 1(2) sets out ASIC’s aims.  They are, in part, to:

   “(a)   maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and

   (b)promote the confident and informed participation of investors and consumers in the financial system; …”[41].

   [40] PS 43 at PS 43.41

   [41] ASIC Act, ss. 1(2)(a) and (b)

1. Mr Niven said that:

   “9. It is a major policy underpinning the Act that proprietary companies that have a significant economic impact prepare financial reports and lodge them with ASIC. The Explanatory Memorandum to the First Corporate Law Simplification Bill says ‘Financial reporting requirements under the Law have been reduced for most proprietary companies, but strengthened for companies which have a significant economic impact.’ Economic impact is measured by reference to the ‘large/small test’ in s. 45A of the Act.

   10.The Applicant is a large proprietary company, and is therefore considered by the Act to be economically significant.

   11.This public reporting of a company’s financial position and performance is the ‘price’ it pays for getting the benefits of the company structure, including limited liability and perpetual succession.”

1. Mr Niven gave examples of instances in which ASIC has given relief to proprietary companies controlled by foreign companies.  One occurs where wholly owned entities enter into deeds of cross guarantee with their parent entities[42].  Another occurs when small proprietary companies are controlled by foreign companies that are not part of a large group[43].

   [42] ASIC Class Order 98/1418

   [43] ASIC Class Order 98/0098

1. PS 43 was first issued on 18 January 1993 and last updated on 17 June 1996. It set out ASIC’s policy in considering applications made under s. 313 of the Law that was formerly in force. Among other matters, it indicated how ASIC would consider applications made under s. 313(1) of the Law for relief from its requirements relating to accounts, audit and directors’ reports. Those obligations were also found in Chapter 2M of the Law and, although somewhat re-drafted are still found in the same chapter and are in substantially the same terms.

1. In relation to a claim that compliance with a disclosure requirement would be an unreasonable burden because it gave rise to competitive disadvantage, Mr Niven drew attention to PS 43.26.  Mr Niven said that regard should also be had to PS 43.27 referring to disadvantage as a potential circumstance in which relief may be granted[44].  He also drew attention to PS 43.21 and PS 43.42.

   [44] see [20] above

1. Mr Niven said that to grant relief to enable SAQ to establish its business is contrary to the policy behind Chapter 2M of the Act. It would also give SAQ an advantage over its local competitors, which are required to lodge their financial reports. That would be contrary to public policy. When SAQ established its business in Australia, it would have been aware of the size of its competitors and the competitive factors in the market. That is particularly so given Nannouc’s previous experience in the market. There may be greater reason for SAQ’s financial reports to be available publicly if it is considered to be at a greater risk of failure during its first years of operation.

1. Since PS 43 was last updated, Mr Niven said, there have been significant changes in the Australian Accounting Standards made by the Australian Accounting Standards Board (“AASB”) affecting the level of disclosure required in an entity’s financial reports.  Of particular relevance are:

   “(a)   The introduction of accounting standard AASB 1018 ‘Statement of Financial Position’ in October 1999, which was the first standard to require all entities that report revenue in accordance with accounting standards to disclose ‘cost of goods sold’, and to require all entities to report details of their expenses by nature or function.

   (b)The replacement of accounting standard AASB 1005 ‘Financial Reporting by Segments’ with accounting standard AASB 1005 ‘Segment Reporting’, which was issued in August 2000.  Unlike its predecessor, the new AASB 1005 applies to all reporting entities and not just listed companies.  The new AASB 1005 requires disclosure of financial information by geographical and business segment, including external segment revenues and segment assets.  The primary segment information may be either the geographical segment information or business segment information.  For each primary segment, the new AASB 1005 requires disclosure of segment result, segment liabilities and non-cash segment expenses.  Segment revenue and segment result enable the calculation of expenses and margins.

   Paragraph 8.1 of the new standard defines ‘business segment’ and ‘geographical segment’ as follows:

   ‘business segment means a distinguishable component of an entity and that component is engaged in providing an individual product or service or a group of related products or services and is subject to risks and returns that are different from those of other distinguishable components of the entity.  Factors to be considered in determining wether products and services are related include:

   (a)     the nature of the products or services;

   (b)     the nature of the production processes;

   (c)     the type or class of customer for the products or services;

   (d)     the methods used to distribute the products or provide the services; and

   (e)     if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities …

   ‘geographical segment means a distinguishable component of an entity and that component is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of components operating in other geographical areas.  Factors to be considered in identifying geographical segments include:

   (a)     similarity of economic and political conditions;

   (b)     relationships between operations in different geographical areas;

   (c)     proximity of operations;

   (d)     special risks associated with operations in a particular area;

   (e)     exchange control regulations; and

   (f)      the underlying currency risks’.

   This means that all reporting entities preparing financial reports under Chapter 2M of the Act, including large proprietary companies, are now specifically required to report information that enables the calculation of their operating margins.”

1. Mr Niven drew the conclusion from this material that, in considering applications for exemption under s. 319(1), ASIC must now take into account that both Parliament and the AASB expressly intend that an entity’s operating margins be clearly evident from its financial reports.

The market for the product

1. Mr Alpha said that the market for the product, which is conducted entirely outside Australia, has been a buyers’ market for over 20 years.  It is anything but a sellers’ market.  He referred to various published material to support his evidence.  ASIC also produced various material to illustrate a contrary position.

SAQ’s place in the market

1. SAQ, Mr Alpha said, is a very small producer that has only begun to establish itself as a long-term dependable producer of the product.  There are other producers of the product which are much larger and have produced the product for a much longer period of time.  They have well-established reputations in the world market.

1. Mr Alpha said that SAQ is not a threat to the Australian competitors but Australian competitors could be a true threat to SAQ even if unintentionally.  Australian competitors can bid on the contracts for supply of the product, whether in small or large quantities.  By way of contrast, SAQ would be limited to bidding on smaller contracts.  Its being limited to the smaller contracts means that SAQ is vulnerable to the market share desires or strategic designs of the larger producers. 

1. In his statement, Mr Niven questioned why a customer would not make a series of small purchases rather than a single large purchase.  If it did so, it would be able to diversify its supply lines.  It was also unclear to Mr Niven why larger producers would be willing to cut prices on smaller contracts but not on larger contracts.  Temporary anomalies might exist in the short term because prices have been fixed for a period under contracts of differing durations. 

1. Mr Beta said that he believed that SAQ had sold all of the product it produced in 2001.  It sold most of that to Allagi to fulfil contracts it already had.  Mr Beta believed that SAQ had sold all of the product it produced in 2002 but it had not, at the time of the hearing, sold all that it had produced in 2003.  He did not know how much product was subject to contracts that continued into the future.

Supply and demand of product

1. Mr Alpha said that the supply of product far exceeds demand.  He relied on various texts.  Mr Alpha referred to the statement appearing in SAQs’ self promotional material that “demand … now exceeds supply”.  He said that it is an incorrect statement given the current state of the market.  The statement was originally included in a public relations document written several years ago at a time when the primary industry was optimistic that the secondary sources were diminishing.  The statements had “a bit of spin” to reassure investors or shareholders that it could be a successful business[45]. Had SAQ said that it was a marginal producer, it might have reflected on its ability to be a long term producer.  Therefore, it is always trying to put on its best face.  SAQ’s optimism proved short-lived and is not accurate in the present market.  Mr Alpha expected the market to continue to be oversupplied for the next three to five years.  Mr Alpha illustrated his evidence with regard to oversupply with a series of charts and graphs.

   [45] It is unclear who the investors would be given that Nannouc is the ultimate holding company of SAQ.

Customers

1. Mr Alpha described the competitive bidding process for the product.  That process may lead to the contract’s being awarded to a company that did not submit the lowest bid initially.  Mr Alpha illustrated his point.  If buyers were given a detailed knowledge of the producers’ costs, they would be given even greater ability to influence the bidding process.  That would further compromise the competitive bidding process for all producers.  As it is, they can shop around for best financial package as they do not have to accept any seller’s terms and conditions.  Instead, they seek more favourable terms such as shorter lead times, larger discounts, increased flexibility and rights of unilateral termination.  It is customers’ view that producers should share their “cost competitiveness” with their customers.  No thought is given to SAQ’s needs for capital recovery, exploration and development and return on its investment.  In his statement, Mr Alpha said that unsolicited and off-market attempts to secure new business with reasonable prices around the published market price are generally declined by buyers. 

1. Mr Niven rejected the proposition that providing customers with detailed knowledge of a supplier’s costs would compromise the bidding process for all producers.  Some of SAQ’s competitors’ costs are already known and it is reasonable to expect that the profitability and/or contribution margin per unit of output can be determined by customers.  It was not clear how SAQ’s lodging financial reports could compromise the bidding process either for it or for other producers.  In cross-examination, he did not agree that disclosure of financial statements is useful in the bidding process.  The market prices are the important things and the margins that SAQ might want to achieve are not relevant.  In re-examination, he said that it is not possible to calculate the unit cost of production from the financial statements alone.  Additional information is needed.  Some of that could be found in the figures produced by the Australian industry and regulatory bodies.  Furthermore, some costs are variable from year to year.  Depreciation may be affected by the level of production. 

Competition and prices in the industry

1. Mr Alpha said that competition is strong.  Customers are cost conscious and making decisions almost exclusively on price.  Contracts are often lost by pennies.  Therefore, any advantage given to SAQ’s competitors would be likely to have an impact on SAQ’s sales.  Whether the product is purchased through a public request for proposals or through off-market negotiations, the price will be related to published market indices. 

1. As a small producer, Mr Alpha said, SAQ cannot compete with a large producer.  Larger producers could be willing to undercut on the smaller contracts for which SAQ must compete.  They would be willing knowing that they could win larger contracts at a higher price.  Mr Alpha said that SAQ has competitors willing to do this both inside and outside Australia.  Traders often deal with producers that are not required to publish financial information.  Those producers come from particular overseas countries where they may be the beneficiaries of special privileges and powers extended by their governments.

1. In his statement, Mr Alpha said that SAQ has only one competitor whose production costs can fairly and accurately be calculated from its financial reports.  This follows from its being a single product company which, as a listed company, is required to publish detailed financial reports for its shareholders.  I will refer to it as Athelfi.

1. Mr Niven said that the law of supply and demand dictates that there will be price pressure whenever there is excess supply in a market.  There is nothing to suggest that SAQ’s lodgement of its financial reports in that environment would create a competitive disadvantage for it.  It is not unusual for competitors to be able to estimate or determine reliably the cost of their competitors’ production and to do so without using information contained in financial reports.  Using their own production or engineering staff or consultants, for example, they may be able to estimate the profitability and/or contribution margin per unit of output.  They may be able to do so from their own knowledge of production techniques, size of operation, production volumes, materials, number and costs of employees required for a given production level, costs of machinery and goods and services required for production, location, product characteristics and the quality of that product.  In addition, they may gather information from former employees of those competitors or of other consultants, production costs of similar operations in the industry and a physical inspection of the operation whether from the inside or the outside.  In Mr Niven’s opinion, it is reasonable to presume that SAQ’s competitors have sufficient information to derive a reasonable estimate of its production costs and margin per unit.

1. Mr Niven added that, if competitors wanted to undercut SAQ, they could do so regardless of whether they have access to the financial reports or not.  It is unlikely that Australian competitors would sell their product below their own cost of production and it is reasonable to expect that they would seek to maximise their own margins.  Even if other Australian competitors were in a position to undercut SAQ

and damage it, they would need to be mindful of s. 46(1) of the Trade Practices Act 1974 (“TP Act”). That section provides that:

“A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:

(a)eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b)preventing the entry of a person into that or any other market; or

(c)deterring or preventing a person from engaging in competitive conduct in that or an other market.”

1. Mr Niven said that Athelfi is required to produce quarterly production information to the Australian Stock Exchange Limited (“ASX”) and produces full year and, although they do not include the costs of sales, half year financial reports.  There is no evidence that Athelfi has been placed at a competitive disadvantage by disclosing both its production amounts and financial information.  Unlike SAQ, it does not appear that Athelfi can call on the support of a parent company.

1. Mr Niven referred to SAQ’s parent company, Nannouc, which he understands has other subsidiaries and affiliates.  In his view, Nannouc will assist SAQ’s ability to compete in the market.  When SAQ established its business in Australia, it would have been aware of the size of its competitors and the competitive factors in the market.  That is particularly so in view of Nannouc’s experience in the market.  If SAQ is at greater risk of failure in its first years of operation, that may be a reason why its financial report should be publicly available.

1. Mr Niven said that customers cannot drive down prices unless competitors offering similar security of supply are willing to undercut SAQ.  He was unaware that any individual customer is a price maker in the market.  Mr Niven would expect that customers would be a reasonably diverse group with no individual price markers in the market.  From SAQ’s contentions, customers are attempting to reduce prices regardless of the availability of the financial reports.

1. Mr Niven prepared a table comparing the margins for Athelfi over three periods with SAQ’s for one period.  Athelfi’s gross margin per unit appears to vary from period to period, he said in his statement.  If that is typical in the industry, historical margins may provide limited information to competitors or others.  He also said that entering long term contracts is a complex process.  There is a need to look to the future and historical information is not relevant.  That is so when it is expected that SAQ’s production costs will be reduced by 2004.  Mr Niven acknowledged that he is not an expert in the industry but he based his view on the evidence that had been given together with his knowledge of other markets. 

1. Mr Niven said that he had heard of the submission made by
   Atkinson and Gibson, who are accountants, but was not sure of the situation they contemplated. He had heard of situations in which companies had been priced out of the market. Mr Niven could not recall if ASIC had ever received applications from that firm. If they had, he would have thought that their applications on the basis of competitiveness would have been refused. Predatory pricing is not a feature of all markets and the TP Act provides some protection. It seemed to apply overseas but it might not. It would be a serious consideration if Athelfi or another Australian competitor sought to undercut SAQ. In any event, the TP Act needs to be read as part of a patchwork of provisions.

Financial reports and their uses with reference to SAQ

1. Mr Niven continued by referring to the value of a financial report:

   “12.   A financial report provides an historical record of the financial position of an entity at a point in time and the financial performance of an entity for the reporting period.  Users of the financial report are able to compare the financial position and performance of the entity to that for previous periods, and also compare it against the financial performance and position of other entities to assist them in their decision making.

   13.The information contained in financial reports is of benefit to those who may deal with, have an interest in such companies or are otherwise users of those financial reports.  Depending on the relationship they have with the company, as information needs differ between different users of the financial report, the financial report may provide useful information, including but not limited to, how the company and its management are performing, whether the company is financially viable and able to meet its financial commitments as and when they fall due, whether it is able to meet its production and other commitments, and whether it is likely to be financially viable in the future having regard to its financial position and historical trends.”

1. In his statement, Mr Niven explained that the requirement to prepare and lodge financial reports with ASIC is intended to inform those who use them to make decisions about the allocation of scarce resources.  “The legislative policy underlying the requirement to lodge financial reports is indicative of the expectation that there are users of the financial reports.”  He referred to the Statement of Accounting Concepts SAC2 “Objective of General Purpose Financial Reporting” (“SAC2”) issued on behalf of CPA Australia and the Institute of Chartered Accountants in Australia in which they discuss the users of financial reports:

   “Users of General Purpose Financial Reports

   16.Many individuals and organisations base resource allocation decisions on their relationship with and knowledge about reporting entities and are therefore potentially interested in the information provided in general purpose financial reports.  The following three categories of user groups are identified as the primary users of general purpose financial reports, and those whose common information needs should dictate the type of information to be disclosed by such reports: resource providers, recipient of goods and services, and parties performing a review or oversight function.

   Resource providers

   17.Providers of resources include those who may be compensated either directly or indirectly for the resources they provide.  The former category includes employees, lenders, creditors, suppliers and, in the case of business entities, investors and contributors.  The latter category includes donors, members of non-business entities such as clubs, societies and professional bodies, and, in the case of public sector bodies, parliament, taxpayers and ratepayers.

   Recipients of goods and services

   18.Recipients of goods and services are those who consume or otherwise benefit from the goods and services provided by the reporting entity.  This category comprises customers and beneficiaries.  In many non-business entities recipients of goods and services include resource providers, for example, ratepayers, taxpayers and members of professional associations.

   Parties performing a review or oversight function

   19.Certain parties, including parliaments, governments, regulatory agencies, analysts, labour unions, employer groups, media and special interest community groups, perform oversight or review services on behalf of the community.  Members of this group tend to have indirect or derived interests in general purpose financial reports since they advise or represent those who have direct interests.”

1. Mr Niven pointed to the reference in s. 342(3) of the Act to the needs of current and potential creditors as users of financial reports. He also said that it is reasonable to expect that those using SAQ’s financial reports will include: employees and potential employees, unions, customers and potential customers and those with an in interest generally in the industry. There has been public interest in the industry by particular parts of the community and this interest creates a demand for greater transparency than might otherwise be the case with participants in other industries. With regard to SAQ’s customers, they have an interest in the financial reports in order to assess the company’s ability to provide continued supply of the product. Competitors can be users of the financial reports but their information may be of little assistance to them. It would, however, undermine the legislative intent of the requirement to lodge financial returns, Mr Niven said, were a company able to obtain relief because it has customers or competitors in a competitive market. It is not appropriate to withhold financial information from some users merely because a company will provide certain information to certain users such as large financiers or the company’s parent company.

1. The existence of a large parent is not a substitute for SAQ’s being required to lodge financial reports, Mr Niven said.  Mr Niven referred to SAQ’s financial report for the year ending 31 December 2001.  It shows creditors of $X and other creditors and accruals of $Y.  It appeared to Mr Niven that all creditors were unsecured.  He continued:

   “… Irrespective of whether terms of trade are arranged and agreed prior to supply being made, these creditors should still be able to view the financial reports if they wish, to determine whether the arranged trade are arranged and agreed prior to supply being made, these creditors should still be able to view the financial reports if they wish, to determine whether the arranged trade terms can be met within the time periods agreed or at all.  A credit worthiness statement to creditors or others is not a substitute for financial statements – it is not a guarantee that creditors will be paid and even a guarantee is no substitute for financial information on the entity with the primary financial obligation.  Past payment of accounts within agreed timeframes is no guarantee that future payment will be made within the arranged timeframes or at all.  It is a legitimate and intended use for creditors and potential creditors to be able to view the Applicant’s financial reports before they engage in business with the Applicant or before they continue to engage in business with the Applicant and extend credit to the Applicant.”

1. In Mr Niven’s view, employees have an interest in the financial reports in terms of assessing their job security and the security of their accrued employee entitlements.  SAQ’s financial report for the year ended 31 December 2001 showed employee entitlements of $Z.  The fact that no employee or contractor is known to have questioned SAQ’s current financial standing is not a basis for deciding that its financial reports need not be lodged.

1. SAQ’s financial report for the year ended 31 December 2001 also showed that it had operating lease commitments, had forward exchange cover and had other liabilities and fiscal responsibilities.  In summary, Mr Niven said of these interests that:

   “… That creates a demand for greater transparency that might not exist to the same degree for participants in other industries.  There can be a wide range of interests in the financial information, including … the Applicant’s ability to meet statutory obligations, and the extent of reliance on continued support from the Applicant’s parent.”

1. Mr Niven said that relief from the reporting requirements might result in SAQ’s not only not being placed at a competitive disadvantage but being placed at a competitive advantage in relation to its competitors. That would be inconsistent with the conditions set out in s. 342(1) of the Act and with the policy outlined in PS 43. He made particular reference to the activities of other Australian companies that are wholly-owned subsidiaries of overseas companies.

1. Mr Beta said that he had prepared SAQ’s accounts in accordance with the accounting standards.  He did not believe that the requirement to report on a company’s business by reference to geographic segments put the company on the same basis as a single product company. 

Report on Aspects of the Regulation of Proprietary Companies

1. Mr Niven agreed that there was no sunset provision on those grandfathered companies.  He also agreed that it is possible for proprietary companies with overseas parents to be exempted from reporting requirements.  It is also possible for entities to structure themselves through trusts and subsidiaries to avoid reporting requirements. 

Public availability of financial data

1. Mr Niven said that financial statements have three purposes: custodial, managerial and investment.  The first two overlap to some extent and the third concerns creditors, employees and customers as well as members.  That is important, he said, even when a company has a parent company supporting it.  Who knows how long that support will last, he asked.  Customers and others can take a great deal of comfort from financial statements as they contain detail and the auditors have put their name on the line.  He rejected the suggestion that it was very unusual for creditors to go to a company’s financial statements before dealing with it.  Many have to prepare their own and are quite sophisticated when reading them.  They would be able to make an assessment of the company’s financial position.  Banks who may lend money to a company would have sufficient leverage to obtain its financial statements. 

1. Mr Niven said that a small number of Australian companies are required to produce quarterly production information to the ASX as well as producing full year and half-year financial reports.  Their half-yearly reports do not include costs of its sales. 

1. Mr Alpha said that all of the world’s producers of the product have a competitive advantage over that small number of companies.  That is because they are not only listed companies and must disclose their financial information to the public but also single product companies.  No other companies, including those overseas, are required to provide information to the public to such an extent that it is possible to determine its production costs with any accuracy.  In his oral evidence, Mr Alpha said that if the production quantities and a couple of financial statements are available for a single product company, it is quite easy to calculate production costs.  With a small number of Australian companies, it is possible to do so almost to the penny.  They have a natural advantage not enjoyed by SAQ in that they are among the world’s lowest cost producers.  There are very few people who can put them at a disadvantage.  SAQ’s production costs are somewhat greater than their costs. 

1. Production costs are calculated on total cost divided by the number of units produced. By the end of 2004, Mr Alpha expected that SAQ would have implemented any changes needed to improve the process of production. 

1. Mr Alpha acknowledged that these were matters that were not affected by the publication of SAQ’s accounts but said that publication would not make things any better.  If its potential customers saw it as a marginal operator, it could cause concerns as to whether they are reliable suppliers.  He could not see any good coming out of publication.  SAQ was far better off being anonymous.  In approximately two to four years’ time, he estimated, publication would not hurt SAQ.  Publication will reduce the margins

1. Overseas companies, Mr Alpha said, are not required to operate in a regulatory environment that is so different from that in which SAQ operates.  They do publish accounts but the information regarding production is obscured because of the other products they produce.

1. When asked how he saw SAQ’s financial statements having an impact on the short term market, he replied that it did not sell on that market and, to his knowledge, never has.  In 2003, it had to go to that market to buy as its contracts had committed it to supply more than it could produce in that year.  It has contracts out to the year 2007.  More than 50% of its production for 2004 was committed for sale under those contracts.  Mr Alpha did not know the situation in relation to 2005.

1. Mr Niven disputed Mr Alpha’s assertion by stating that there is no evidence that other Australian companies that are single product producers have been placed at a competitive disadvantage by disclosing its production figures and financial information.  Furthermore, it does not appear that they can call on the support of a parent company.  The fact that SAQ’s production costs were decreasing indicated that historical data revealed in any financial statements would not be a good indication of future costs.  Even assuming that production costs are relevant to the market, current production costs would not be a good indicator of production costs incurred at the time that product is delivered according to a long term contract.

1. Mr Niven attached a table showing those other single product Australian companies and SAQ’s unit gross margins of production for the years ended 31 December 2000, 2001 and 2002.  It had been prepared on the basis of information from their financial reports and other publicly available sources.  It shows that their gross margins per unit had varied from year to year.  If that is typical in the industry, Mr Niven said, historic margins may provide limited information to competitors or to others.  Later, he said that production costs may change from period to period as production increases and economies are achieved or a level is reached at which certain fixed costs change.  It follows that historical margins are not necessarily accurate indicators of future costs.  Supply and demand governs the price which will fall and rise accordingly. 

1. Mr Niven rejected the suggestion that he gave that evidence on the basis of there being a perfect market.  He did not accept the proposition that bidders take advantage of producers.  If there are a number of bidders, a purchaser will buy at a price it considers reasonable.  Companies generally want to make a profit but there will be occasions on which they are prepared to incur a loss.  It would be a relevant factor to know what competitors are bidding but producers try to obtain the highest price.  Some are in a stronger position than others but that is normal in a competitive market. 

1. Mr Alpha said in his statement that SAQ is a new, small company attempting to break into a highly competitive and over-supplied market.  It is quite vulnerable at this early stage of its life to both direct and indirect competitive forces.  It has also been vulnerable to the rising value of the Australian dollar as it is making Australian producers less competitive in the world market. In those terms, SAQ’s costs in the two years to the end of 2003 had increased by 36%.  This made SAQ even more sensitive to the competitive environment. 

1. In his oral evidence, Mr Alpha said that SAQ would suffer if its financial information were known in the market place.  Potential purchasers would know the figure to which SAQ could be pushed and would give them a lot of leverage.  SAQ has missed out on contracts in the past as it has been underbid.  When the margin is very, very slim, negotiation becomes very difficult.  Nannouc is only prepared to fund SAQ to some degree.  Once losses reach a certain point, production would be shutdown until prices rise once more. 

1. Public disclosure of its financial information would further decrease its ability to compete with other producers and would allow its customers additional leverage with which to negotiate.  It is to Australia’s economic benefit that its product is sold at the highest price possible.  By publicly disclosing SAQ’s costs, Australia stands to lose sales revenue and that must be weighed against what Mr Alpha described as the highly unlikely gain in user benefits.  In his oral evidence, Mr Alpha drew a distinction between purchasers’ and competitors’ being able to estimate SAQ’s margins and knowing its margins.  It would be difficult to estimate production costs with any greater than plus or minus 25%.  Such an estimation helps a producer to see what its competitors are doing but would not enable it to optimise its bid.  With the assistance of financial statements, a competitor could estimate SAQ’s production costs with an accuracy of plus or minus 5%.  That would bring it much closer to the true cost of production.  That is so even when the published data is historical in the sense of being four to six months old when it is published.  It assumes that the method of production and the environment in which production occurs are relatively stable.

CONSIDERATION

What are unreasonable burdens?

1. On behalf of SAQ, it was submitted that its being required to lodge financial reports would “impose unreasonable burdens” within the meaning of s. 342(1)(c) of the Act. At the heart of their submissions is the proposition that SAQ would be placed at a competitive disadvantage leading to its suffering a serious economic detriment. At the same time, there would be no advantage to persons other than its competitors.

1. The starting point is to consider on whom are “unreasonable burdens” imposed. Unlike its predecessor, s. 313(11)(a)(iii)(A) of the Law, s. 342(1) of the Act does not specify upon whom the unreasonable burdens are imposed. In the case of a company, s. 313(11)(a)(iii)(A) of the Law provided that the Commission had to be satisfied that unreasonable burdens would be imposed on the company, an officer of the company or the company’s auditor. That provision was consistent with that in s. 313(2) giving the Commission power to relieve those persons or entities from certain of their obligations under the Law after they had made an application under s. 313(1).  Section 313(2) of the Law was, in turn, consistent with a provision such as s. 313(7), providing that such an order could be made either conditionally or unconditionally. On its face, s. 313(11) did not enable the Commission to make an order in relation to persons or entities other than the company.  It enabled the Commission to make only “an order in relation to a company”.  Section 313(11), however, had to be read with s. 313(12). That provided that a reference in s. 313(11) to “an order in relation to a company” is a reference to, among others, an order under s. 313(2) of the Law relieving the directors of the company, the company or its auditors. Sections 340(1) and 342(1) of the Act achieve the same result without the need for a provision such as s. 313(11) of the Law.

1. In deciding whether there would be an imposition of an unreasonable burden, the Commission had to have regard to the matters set out in s. 313(11A) under the Law but only in relation to whether the audit requirements would impose an unreasonable burden on the company. That is mirrored in s. 342(2) of the Act. In both instances, the Commission, ASIC as it was to become, was and is not required to have regard to the matters set out in the section in deciding whether there would be an unreasonable burden on, among others, the directors or the auditor. Furthermore, the Commission, or ASIC, was and is not required to have regard to those matters in relation to all of the requirements that a company was required to meet; only in relation to the “audit requirements for a proprietary company”. 

1. I do not consider that the expression “audit requirements” includes all of the requirements in Parts 2M.2, 2M.3 and 2M.4.  Part 2M.2 relates only to requirements more in the nature of “housekeeping” matters in relation to the form and retention of financial records but not their substance.  Part 2M.3 deals with the substance of the financial reports.  A company must report to its members each year by giving them either a full or concise report.  If it chooses to send a full report, it must include a copy of the auditor’s report on that full report[46].  If it chooses to send a concise report, it must include a statement by the auditor that the financial report has been audited and that it complies with the appropriate accounting standards[47].  Section 301 of Part 2M.3 imposes on most companies, other than certain small proprietary companies[48], the obligation to have the financial report for a company for a financial year audited[49]. Audits must comply with ss. 307 to 313 of the Act. The appointment and removal of auditors is the subject of Part 2M.4. The Act draws a distinction between audit and other requirements in relation to financial reports. A “financial report” is defined in s. 9 of the Act to mean “an annual financial report or a half-year financial report prepared under Chapter 2M” of the Act and that distinction is continued in s. 342(2).

   [46] Act, s. 314(1)

   [47] Act, s. 314(2)

   [48] Act, s. 301(2)

   [49] Act, s. 301(1)

1. It is not clear to me whether my conclusion is contrary to that reached by Deputy President Handley in Re SRKKK and SRNNN and Australian Securities and Investments Commission[50] when he said:

   “ The tribunal must determine, first, whether, pursuant to s 342(1)(c) of the Act, it is satisfied that compliance with the relevant requirements of Pts 2M.2, 2M.3 and 2M.4 would ‘impose unreasonable burdens’ on the applicants, and, second, if so, whether to grant relief under s 340(1). The tribunal notes that in deciding whether the audit requirements for a proprietary company would impose unreasonable burdens on a company, regard should also be had, pursuant to s 342(2) and (3), to the expected costs and benefits of compliance with the audit requirements, any practical difficulties in compliance, any unusual aspects of a company’s operations during the particular financial year, and any other relevant matters.”[51]

He was concerned with an application for relief from the requirement to lodge annual financial reports but made no further reference to s. 342(2) in his reasons. Annual financial reports have to be audited, as I have said, and the annual reports lodged with ASIC pursuant to s. 319(1) of the Act would have to be audited. Had Parliament intended s. 342(2) to refer to the requirements both to prepare financial reports and to have them audited, it could have referred to the requirements to prepare financial reports.  In light of the meaning given to the expression “financial report” by s. 9, that would have encompassed all of the requirements relating to them, including their being audited. As it did not and referred only to the audit requirements in a wider context in which audit requirements are dealt with separately from other requirements, s. 342(2) should be read strictly and confined to audit requirements.

[50] (2002) 68 ALD 671; 42 ACSR 551

[51] (2002) 68 ALD 671; 42 ACSR 551 at 678; 558

1. That leaves me to consider what is meant by “unreasonable burdens” in relation to SAQ’s being required to lodge a financial report.  Deputy President Handley adopted the meaning approved by Heerey J in Incat Australia Pty Ltd v Australian Securities and Investments Commission[52] in relation to s. 313(11)(iii) of the Law that:

   “Whether a burden may fairly be described as ‘unreasonable’ is essentially one of fact requiring an evaluation of the evidence, having regard to the nature of the requirements to be performed, keeping in mind the policy objective of the legislation that companies of economic significance lodge accounts and the extent of economic detriment (if any) likely to flow to the applicants as a result of compliance.”[53]

   [52] (2000) 33 ACSR 462

   [53] (2000) 33 ACSR 462 at 465 Heerey J approved the meaning that had been given to the expression by Deputy President Forrest in giving the decision appealed from: Re Incat Australia Pty Ltd and Australian Securities and Investments Commission (1999) 30 AAR 291 at 296

1. Given the nature of the industry and the bidding processes, SAQ’s position in it as a new producer of only one product and its being a company whose ownership is closely held in private hands, are among the reasons leading me to conclude that a requirement to lodge financial reports under s. 319 is beyond what is reasonable or fair, and so unreasonable, in the early days of its operation.  It would impose unreasonable burdens upon it while it was becoming established in the industry.  Taking into account the other considerations that I have mentioned in the preceding paragraphs, that would continue to be the case while SAQ is known to have the support of Nannouc, is establishing itself in the market and supply is closer to demand rather than significantly exceeding it as has been the case in earlier years. 

1. I am satisfied that, by mid 2008, SAQ will be in a position in which it would be reasonable to expect that it could be expected to go to the market subject to the same scrutiny as other Australian large proprietary companies.  The burden imposed by its having to lodge financial reports would no longer be unreasonable.  On the basis of Mr Alpha’s evidence, I find that its production costs were expected to have stabilised by the end of 2004.  A year or two later, demand is expected to outstrip supply.  Certainly, SAQ would continue to be a single product company but that cannot, on its own, make unreasonable the burden of lodging financial reports.  By the end of 2006, SAQ would have had the opportunity to be established in its operations and in its place in the market just as other Australian producers are established.  To continue to give it exemption after that date would be to favour it over those Australian companies, which are required to lodge financial reports and from which, in the case of those that are single product companies, it is possible to calculate production costs accurately from its financial reports.  It would be to ignore the legitimate needs of those who wish to scrutinise SAQ’s activities.  It would be to ignore the fact that a parent company that is not engaged in a profitable business will not continue to support that business and that those dealing with such a business should be able to make their own assessment of the likelihood of the parent company’s continued support.  The fact that a company has that sort of support cannot, on its own, support its being treated differently from a company such as those that are listed companies, firmly established in the market, whose shareholders may have a legitimate interest in their financial viability.  To continue to give SAQ exemption after the end of 2006 would be to ignore the legitimate needs of those who want to analyse any of SAQ’s statements to see whether they withstand proper scrutiny or whether they are, to use Mr Alpha’s words, “a bit of spin” to reassure employees or contractors, governments or regulatory bodies and so on that it is a successful business. 

Should the discretion be exercised to make an exemption order?

1. Having decided that the reporting requirement would impose an unreasonable burden, I must consider whether I should exercise the discretion to make the order. That discretion is inherent in that s. 340(1) provides that ASIC “may” make an order relieving, among others, a company from its obligations under Chapter 2M.  In this case, the same reasons lead me to conclude that it should be exercised in SAQ’s favour in relation to the financial years up to an including the financial years ending 31 December 2004. 

1. I leave open whether the discretion should be exercised in favour of subsequent years. SAQ’s solicitors submitted that I should make the order until 31 December 2007. Certainly, SAQ’s application of 26 April 2002 was wide enough to cover those years as well as the earlier years beginning with that ending 31 December 2001. It did not refer to any specific years. Even if it were not wide enough, the letter of 2 May 2002 to ASIC clearly seeks relief from the requirement of s. 319 generally and not specifically in relation the year ending 31 December 2001.

1. The evidence that I had at the time of the hearing, supports my finding that SAQ would suffer an unreasonable burden up to and including 31 December 2007.  At the same time, I am mindful that circumstances affecting a particular market and a company’s place in it can change quite rapidly.  To make an order in respect of at least six financial reports for the financial years beginning with that ending 31 December 2002 and ending with that ending 31 December 2007 would require the wisdom of Merlin, who knows better that which has not happened than that which has.  The market place generally is one of fluctuations and, on the evidence of Mr Alpha, I am satisfied that the market place for the product is no different.  As it is, the effect of my order will be that SAQ will not have to lodge a financial report until 30 April 2006 in relation to the financial year ending 31 December 2005.  If SAQ wishes to be relieved of the requirement to lodge financial reports for the years ending 31 December 2005 and beyond, it should make a further application and the merits of that application assessed on contemporaneous evidence rather than evidence that will, by then, be three years out of date.  It would be an entirely new matter and this decision would not be relevant in making the new decision on any application for relief[73].

   [73] Issues relating to estoppel would need to be taken into account.  A discussion of relevant authorities in relation to estoppel is found in Re Jebb and Repatriation Commission [2005] AATA 470 per Deputy President Jarvis.

May the power to make an exemption order be made retrospectively?

1. May the power to make an exemption order under s. 340 of the Act be exercised retrospectively? At the hearing, it seemed to have been assumed by both parties that it could not and they did not develop the issue during the hearing. I subsequently asked both parties if they wished to make any submissions on this point and they both filed written submissions. I did so because, unless ASIC had power to make a decision in relation to the financial year ending 31 December 2001, I do not have power to do so on the review. The power implicit in s. 43(6) of the AAT Act to make an order varying the date of effect of its decision does not, in the absence of express authority, give the Tribunal power to make a decision that the original decision maker did not have power to make.

1. In so far as the courts are given power to grant relief from failure to comply with an obligation or to gain an approval, the authorities that I have found suggest that the fact that a date for compliance with an obligation or for gaining an approval has passed does not mean that relief from compliance with that obligation may not be granted or approval given by a court after that date.  The general principle is stated by Gummow J, with whom Brennan CJ, Dawson, Gaudron and McHugh JJ agreed, in David Grant & Co Pty Ltd v Westpac Banking Corp[74] in relation to remedial powers such as the validating powers given to a court under s. 1322(4)[75] of what was then s. 1322(4) of the Corporations Law (Vic) but which is now repeated in the same section in the Act:

   “         As a general precept, it is inappropriate to read provisions which confer jurisdiction or grant powers to a court by the making of implications or imposition of limitations not found in the express words of the legislative provision.  …”[76]

If a provision is remedial or beneficial and is ambiguous, the ambiguity:

“… should be construed beneficially … This means, of course, not that the true signification of the provision should be strained or exceeded, but that it should be construed so as to give the fullest relief which the fair meaning of its language will allow.”[77]

[74] (1995) 184 CLR 265; 131 ALR 353

[75] “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 of 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.”

[76] (1995) 184 CLR 265; 131 ALR 353 at 275-6; 359

[77] Bull v Attorney General (NSW) (1913) 17 CLR 370 at 384 per Isaacs J. In Butler (or Black) v Fife Coal Co Ltd [1912] AC 149 at 178-9, Lord Shaw said “…the Act shall be interpreted in the sense favourable to making the remedy effective and the protection secure…”.

1. The courts will not, however, interpret their powers beyond their proper limits.  In David Grant & Co Pty Ltd v Westpac Banking Corp, the High Court declined to read into s. 1322 a power to extend the time within which an application could be made under s. 459G of the Victorian legislation[78] to set aside a statutory demand served on a company.  That was so even though s. 1322(4)(d) provided that a court could extend or abridge time.  Section 459G, which was enacted in the Law after s. 1322, provided that an application “…may only be made within 21 days after the demand …” was served[79].  As to the temporal requirement it imposed and the timing of its enactment, Gummow J referred to a passage from the judgment of Gavan Duffy CJ and Dixon J in Anthony Hordern and Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia[80]:

   “         When the Legislature explicitly gives a power by a particular provision which prescribes the mode in which it shall be exercised and the conditions and restrictions which must be observed, it excludes the operation of general expressions in the same instrument which might otherwise have been relied upon for the same power.”[81]

In addition, Gummow J observed, ss. 459G(2) and (3) operate to define a court’s jurisdiction. He looked to the structure of the Act and of the particular scheme it established in Part 5.4 in relation to winding up insolvency.  “... to treat s 1322 as authorising the court to extend the period of 21 days specified in s 459G would deprive the word ‘only’ of effect …”[82].

[78] Section 459G is in the same terms as s. 459G of the Act.

[79] Act, s. 459G(2).  Section 459G(3) provides that “An application is made in accordance with this section only if, within those 21 days …” supporting documentation is filed with the application and a copy of all material is served on person who served the demand: s. 459G(3).

[80] (1932) 47 CLR 1

[81] (1932) 47 CLR 1 at 7 and see also McTiernan J at 20-21. Referred to by Gummow J at (1995) 184 CLR 265; 131 ALR 253 at 276; 359

[82] (1995) 184 CLR 265; 131 ALR 353 at 277; 360

1. There was some debate in the courts as to the operation of the general power given by s. 447A(1) of the Law to “… make such order as it thinks appropriate about how this Part [Part 5.3A] is to operate in relation to a particular company.”  Part 5.3A is concerned with the administration of a company’s affairs with a view to executing a deed of company arrangement.  In MYT Engineering Pty Ltd v Mulcon Pty Ltd[83], Powell JA concluded that:

   “ The power conferred by s 447A(1) is a power to make an order about how the provisions of Pt. 5.3A are to operate, a phrase which, to my mind, indicates that the order is directed towards the future operations of the provisions of the Part, a view which in my opinion is supported by the provisions of s 447A(2). I appreciate that that view is at odds with the approach taken by Young J in Cawthorn v Keira Constructions Pty Ltd, in which case His Honour held that it was open to him, in reliance upon the provisions of the section, ex post facto to extend the time during which a meeting convened under s 439A of the Law might be adjourned.”[84]

Handley JA did not express any view on the subject but Dunford AJA did not agree and could:

“… see no reason either in the language of s 447A or in the objects of the Part as set out in s 435A which would limit the section to a power to make orders to operate in the future …”[85]

[83] (1997) 140 FLR 247

[84] (1997) 140 FLR 247 at 269

[85] (1997) 140 FLR 247 at 276

1. In the later case of Re Australasian Memory Pty Ltd and Corporations Law; Brien v Australasian Memory Pty Ltd[86], Santow J agreed with Dunford AJA:

   “ I conclude that s 447A does permit both a prospective and retrospective operation. The words ‘is to operate’ in s 447A(1) are expressed to convey the sense of operating from now into the future. That means, from the time the relevant orders are made, the relevant irregularity is cured, though it has occurred already (or is anticipated). The section may thus operate for the future in relation to past events. Following the pattern of remedial provisions like s 1322, it could be expected to provide a regime applicable to a particular company, always provided that regime is compatible with the objects of Pt. 5.3A.”[87]

Santow J delivered his judgment before the High Court heard the appeal from the Court of Appeal in MYT Engineering Pty Ltd v Mulcon Pty Ltd[88].  The majority of the High Court concluded that the conditions to the operation of s. 445G, in relation to which relief had been sought under s. 447A, had not been met and so did not decide whether the power could be exercised to have a retrospective operation to validate an otherwise invalid act[89].  As Kirby J considered that conditions had been established and so had to consider the scope of the power s. 445G.  He said:

“ It is enough for me to say on this point that I agree with the reasons of Dunford A-JA in the Court of Appeal. Unless such retrospective relief could be given, the beneficial purpose of s 445G would be entirely robbed of its effectiveness in a case such as the present. That cannot have been the object of Parliament in enacting such a remedial provision. The alternative construction of the Law is available. It should be preferred.”[90]

Although the majority and Kirby J reached different conclusions on the facts, all agreed that the conditions necessary for the exercise of the power had to exist.  This means that those conditions could not be waived, or their omission validated, by order of the court.

[86] (1997) 149 ALR 393

[87] (1997) 149 ALR 393 at 436

[88] MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636; 162 ALR 441

[89] (1999) 195 CLR 636 at 651;451 per Gleeson CJ, Gaudron, Gummow and Hayne JJ

[90] (1999) 195 CLR 636 at 664; 461

1. These cases concerned a court’s power in certain circumstances. They are both consistent with the proposition that a court may act to rectify acts and omissions that have occurred in the past. They may act to relieve a company or person of liability that has been incurred in the past and may do so retrospectively. Whether they can act to do either in a particular case depends on the limits of its power in light of the particular provision with which it is concerned and the place of that provision in the scheme of the Act.

1. A second set of circumstances in which relief may be given even though a time limit for acting has passed is found in s. 70 of the Act. It provides that:

   “Where this Act confers power to extend the period for doing an act, an application for the exercise of the power may be made, and the power may be exercised, even if the period, or the period as last extended, as the case requires, has ended.”

1. Various provisions confer power to extend the period without qualification. They include s. 912C(3) permitting ASIC to extend the time within which a financial services licensee must give ASIC a written statement and s. 266(4) permitting the court to extend the period to lodge a notice in respect of a charge. When read with s. 70, they would permit an application for extension to be made after the expiration of the specified time.

1. Other provisions confer power to extend the period but are qualified.  They include s. 259B(4) permitting ASIC to extend the period of 12 months within which a company may hold shares it has acquired after exercising a security.  “ASIC may extend this period of 12 months if the company applies for the extension before the end of the period.”  Another example appears in s. 1287A(2) providing that ASIC may, on the application of a registered company auditor made before the end of the period for lodging an annual statement, extend, or further extend the period.  The principle stated by Gavan Duffy CJ and Dixon J in Anthony Hordern and Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia[91] is pertinent in considering the interaction of sections such as these with s. 70. The more general provision in s. 70 must give way to the more particular provisions of ss. 259B(4) and of 1287A(2) limiting the circumstances in which ASIC may extend the periods i.e. to circumstances in which the application for extension has been made before the expiration of those periods.

   [91] see [125] above

1. Some sections do not provide for an extension of the time permitted at all.  Section 340 is an example of such a section. As s. 70 only operates where the Act confers power to extend the period for doing an act, s. 340, which grants no such power, cannot be read as conferring power to grant an extension of the period for doing the act of applying for an order for relief from certain obligations.  A court would not be able to extend the time to lodge an application using its powers in s. 1322(4)(d) as s. 340 does not prescribe a period within which an application may be made. It would be able to extend the time within which a financial report must be lodged under s. 319 as it does prescribe a time limit[92].

   [92] Act, s. 319(3)

1. As it made its application on 26 April 2002, SAQ made its application before the expiration of the period specified in s. 319(3).  The question of an extension is not directly relevant but it is indirectly relevant in considering whether ASIC may make a decision after the expiration of the period.  That indirect relevance is this.  Section 340 does not permit ASIC to extend the time to comply with the requirements but gives that power to the court.  ASIC’s extending the time in which to make an application for relief is of questionable value in the absence of its having power to extend the time to comply with the obligation.  If it cannot extend the time within which to comply with the obligation, should it, as a matter of logic, be said to have the power to make a decision after the date in relation to that obligation?  What would be the effect of its having the power to make such a decision if it could do so?  I will explore that question further before concluding whether ASIC may exercise its power after 30 April 2002.

1. I have looked first to the planning cases in which planning approval is sought after land has been used for a purpose for which approval is subsequently sought.  That analogy is not precisely the same but there are similarities.  Whereas SAQ has breached a requirement to lodge a financial report by an act of omission, the applicant for building approval has breached a requirement to obtain a planning approval by an act of commission. 

1. Taking Kouflidis v City of Salisbury[93], as an example, the City of Salisbury Council’s prior consent was required if Mrs Kouflidis were to use her land for a shop and dwelling house.  She applied for that consent in 1980.  Her previous application in 1973 had been refused.  Two years later, she applied for, and was granted, approval to extend her dwelling house.  She used the extension for commercial purposes in breach of the approval and contrary to the regulations under the Planning and Development Act 1966.  Of her 1980 application, King CJ said:

   “… An application for consent to the use is necessarily an application for consent to the future use of the land.  There can be no ex post facto consent to use which has already occurred.  An application for consent to use land can therefore have no bearing upon the liability of the applicant in the prosecution which is pending in respect of the prior unlawful use. …”[94]

This was adopted by the Western Australian Court of Appeal in Low v Swan Cove Holdings Pty Ltd and City of Subiaco[95] and the authorities cited in the judgment of Roberts-Smith J.

[93] (1982) 29 SASR 321

[94] (1982) 29 SASR 321 at 323

[95] [2003] WASCA 115 at [181] and see generally the analysis of the issue at [172]-[181]

1. Applying the logic of the planning cases and assuming for the moment that ASIC could exercise its power to make an exemption order in respect of the lodgement of the financial report after 30 April 2002, the result would be that a decision favourable to SAQ could only have effect from the time it was made.  It could not alter the fact that SAQ was in breach of its obligation for those hours on 1 May 2002 between midnight and the time ASIC made its decision.  

1. There is, however, a question whether, on 1 May 2002, SAQ still had an obligation from which it could be exempted. On 30 April 2002, it certainly did. On 1 May 2002, it was in a position where it had previously had an obligation and it had failed to meet that obligation. Having failed to meet it, the obligation was an ongoing obligation. That is the effect of s. 1314(1)(d) of the Act. There was an ongoing obligation from which it could be relieved, but that leaves open the question whether ASIC had any power under s. 340(1) to relieve SAQ of its obligation up to 30 April 2002 once that date had passed.

1. An interpretation that ASIC does not have power to relieve SAQ of its obligation prior to 1 May 2002 is consistent with the jurisprudential concept that the jural co-relative of a liability or an obligation is a power.95a Once the obligation has passed, the co-jural power also passes. In the case of an ongoing obligation, the obligation and the power keep pace so that ASIC could relieve SAQ from its obligation from the date of its decision but not before. This interpretation is also consistent with the structure of the Act and, in particular, with the power given to a court to remedy irregularities. It would be open, for example, for SAQ to apply to a court relieving it in whole or in part from any civil liability in respect of its having failed to lodge its financial report by 30 April 2002. I understand from the parties that, should I reach a decision otherwise favourable to SAQ on the merits of the case, ASIC would not institute any proceedings for any breach of s. 319 in relation to the financial year ending 31 December 2001. 

   95a Fundamental Legal Concepts as Applied in Judicial Reasoning; 1919 Yale University Press, 4^th Printing, 1966

1. I note that Mason P of the New South Wales Court of Appeal, with whom Meagher and Beazley JJA concurred, reached a similar conclusion in considering the Commission’s power to exempt persons from certain provisions under s. 215C of the Companies (Victoria) Code.[96]  His Honour said:

   “         In my view, it is clear that s 215C operated prospectively, in the sense that it related only to identified later conduct that would otherwise have contravened, inter alia, Div 6. This is the fair reading of the section and is reinforced by contrasting s 539 of the Code which authorises the Court to relieve against the consequences of past contraventions.  It follows that the exemption does not purport in terms to excuse antecedent breaches of s 170 or s 171.”[97]

   [96] Section 215C equates to s. 1084 of the Law giving the Commission power to exempt persons from the operation of certain provisions of Chapter 7.

   [97] Stammers v Akron Securities Ltd (1997) 140 FLR 146 at 165

1. Counsel for the Applicant drew my attention to Deputy President Purvis’s decision in Re Pinpoint Pty Ltd v Australian Securities and Investments Commission[98] as a matter in which a contrary decision was reached. I do not believe that it is. Pinpoint Pty Ltd had applied under s. 313 of the Law for relief from the audit requirements for the financial year ending 30 June 1998. It did so on 29 May 1998 and the Commission received it on 12 June 1998. The Commission made its decision on 11 August 1998. The directors were obliged to take reasonable steps to ensure that the company’s financial statements were audited before the “deadline” for the accounting period ending on 30 June 1998[99].  The “deadline” is set out in s. 58C[100] and varies according to whether a company is, or is not, a disclosing entity.  It is not clear whether the company was a disclosing entity but, either way, the Commission’s decision was made before the earliest deadline prescribed by s. 58C.

   [98] (1999) 33 ACSR 201

   [99] Law, s. 296(1)

   [100] Law, s. 9

1. The conclusion is also consistent with the nature of an application of the sort made by SAQ under s. 340.  An application seeking the exercise of a discretionary power of the sort given to ASIC does not create a right so that there is a corresponding duty on ASIC to decide its application before 30 April 2002.  It creates “a power to take advantage of an enactment”[101]. Having taken advantage of s. 340, ASIC would have a duty to make a decision.  In the absence of a prescribed time limit, it would only have a duty to do so in a reasonable time[102].  The amount of time between the application and the date for compliance with the obligation would be reasonable in deciding what is reasonable.  If favourable to SAQ, its decision would alleviate it of an obligation and so affect SAQ’s rights and duties to that extent.  SAQ’s rights and duties would not be affected before ASIC made its decision.  They would not be affected by simply having the power to make an application or even having made an application. 

   [101] Mathieson v Burton (1971) 124 CLR 1 at 23 per Gibbs J

   [102] Failure to make a decision could lead to an application under s. 7(1) of the Administrative Decisions (Judicial Review) Act 1977.

1. That this is so is clear from those cases that have considered the preservation of rights when legislation is repealed or amended and a person has made an application for the exercise of a discretionary power.  As the Full Court of the Supreme Court of Victoria said in Robertson v City of Nunawading[103] in relation to an application to a council for approval of a plan for subdivision of commercial land:

   “If the conclusion is justified (as it appears to be) that the mere taking of procedural steps under a statute in the expectation of achieving a benefit from an administrative authority does not create a right to the continuance of the proceedings after the repeal of the statute, then the conclusion seems equally justified that the mere taking of such procedural steps does not create a right to the continuance of the proceedings unaffected by amendment of the statute.

   [103] [1973] VR 819 (Winneke CJ, Gowans and Starke JJ)

1. In reaching its conclusion, the Full Court referred to a judgment of the Privy Council in Director of Public Works v Ho Po Sang[104] when their Lordships considered s. 10 of the Interpretation Ordinance. That section is in substantially the same terms as s. 8 of the Acts Interpretation Act 1901 (“AI Act”). The Privy Council said:

   “         It is to be observed that under s. 10(e) a repeal is not to affect any investigation, legal proceeding or remedy ‘in respect of any such right.’  The right referred to is the right mentioned in section 10(c), i.e., a right acquired or accrued under a repealed enactment.  This part of the provisions in paragraph (e) of section 10 does not and cannot operate unless there is a right as contemplated in paragraph (c).  It may be, therefore, that under some repealed enactment a right has been given but that in respect of it some investigation or legal proceeding is necessary.  The right is then unaffected and preserved.  It will be preserved even if a process of quantification is necessary.  But there is a manifest distinction between an investigation in respect of a right and an investigation which is to decide whether some right should or should not be given.  Upon a repeal the former is preserved by the Interpretation Act.  The latter is not.  Their Lordships agree with the observation of Blair-Kerr J. that:  ‘It is one thing to invoke a law for the adjudication of rights which have already accrued prior to the repeal of that law; it is quite another matter to say that, irrespective of whether any rights exist at the date of the repeal, if any procedural step is taken prior to the repeal, then, even after the repeal the applicant is entitled to have that procedure continued in order to determine whether he shall be given a right which he did not have when the procedure was set in motion.”[105]

   [104] [1961] AC 901

   [105] [1961] AC 901 at 922

1. In BHP Direct Reduced Iron Ore Pty Ltd v Chief Executive Officer, Australian Customs Service[106], Carr J declined to express a concluded view as to whether an application for a tariff concession under the Customs Act 1901 led to its having an accrued right within the meaning of s. 8 of the AI Act. The application called upon the Chief Executive Officer of Customs to exercise his discretionary power. His Honour:

   “… respectfully share[d] the doubts raised by the full court in Yao^[[107]] that, where a discretion is involved (in contrast to an entitlement) a right may not be said to have been accrued …”[108]

   [106] (1998) 55 ALD 665

   [107] Yao v Minister for Immigration and Ethnic Affairs (1996) 69 FCR 583

   [108] BHP Direct Reduced Iron Ore Pty Ltd v Chief Executive Officer, Australian Customs Service (1998) 55 ALD 665 at 695

1. The application made by SAQ on 26 April 2002 and not considered until 1 May 2002 is to be contrasted with the application made to the Tribunal for review of ASIC’s decision.  Due to the Tribunal’s workload, the time for fulfilling SAQ’s obligations in relation to the financial years ending 31 December 2003 and 2004 have passed.  The time for fulfilling its obligation in relation to the year ending 31 December 2002 had already passed before the hearing.  ASIC’s decision, though, was made on 1 May 2002 and so well before those dates.  Once SAQ had lodged its application in the Tribunal for review of that decision, it had the same right as the applicant in Esber v Commonwealth of Australia and Another[109] even though Mr Esber claimed redemption of his weekly compensation payments and SAQ applied for relief from compliance with a statutory obligation:

   [109] (1992) 174 CLR 430 (Mason CJ, Deane, Toohey and Gaudron JJ, Brennan J dissenting)

   “… Once the appellant lodged an application to the Tribunal to review the delegate's decision, he had a right to have the decision of the delegate reconsidered and determined by the Tribunal.  It was not merely ‘a power to take advantage of an enactment’ (Mathieson v. Burton (1971), 124 C.L.R. 1, at p. 23, per Gibbs J.; and see Robertson v. City of Nunawading, [1973] V.R. 819). Nor was it a mere matter of procedure see Newell v. The King (1936), 55 C.L.R. 707, at pp. 711-712; it was a substantive right see, by way of analogy, Australian Coal and Shale Employees Federation v. Aberfield Coal Mining Co. Ltd. (1942), 66 C.L.R. 161, at pp. 175, 178, 185, 194; Colonial Sugar Refinery Co v. Irving, [1905] A.C. 369, at pp. 372-373. …”[110]

   [110] (1992) 174 CLR 430 at 440

It is then the duty of the Tribunal, again as the majority said in Esber:

“The Tribunal was required to stand in the shoes of the decision-maker (the delegate) and arrive at its own decision (Drake v Minister for Immigration (1979) 24 A.L.R. 577, at p. 589). In Drake, Bowen CJ and Deane J said of the Tribunal (at p. 589):

‘The question for the determination of the Tribunal is not whether the decision which the decision maker made was the correct or preferable one on the material before him.  The question for the determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal.’”[111]

These principles are encapsulated in s. 43(6) of the Administrative Appeals Tribunal Act 1975, to which Ms Francas referred.  It provides that, unless the Tribunal otherwise orders, its decision is “… deemed to have had effect, on and from the day on which the decision under review has or had effect.”  As I said earlier, that does not give the Tribunal power beyond that given to the original decision-maker.

[111] (1992) 174 CLR 430 at 440

Decision

1. For the reasons I have given, I:

1.affirm the respondent’s decision dated 1 May 2002 in so far as it related to the financial year ending 31 December 2001; and

2.set aside the decision of the respondent dated 24 February 2003; and

3.substitute for that decision a decision that:

in relation to the reports for the financial years ending 31 December 2002, 2003 and 2004, the applicant is relieved of the requirement imposed by s. 319 of the Act to lodge a report with ASIC.

I certify that the one hundred and forty-six preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President S A Forgie,

Signed:           ………………………...........................

Nathaniel Wills  Associate

Dates of Hearing  18 and 19 November 2003

Date of Decision  3 June 2005
Counsel for the Applicant        confidential
Solicitor for the Applicant       confidential

Solicitor for the Respondent     Ms C. Francas, Senior Lawyer

Australian Securities & Investments Commission