Federal Court of Australia

Entertainment Publications of Australia Pty Ltd v Australian Securities and Investments Commission [2022] FCA 960

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 1322(4)(d) of the Corporations Act 2011 (Cth), the time specified by clause 6(1)(f) and (2) of the ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (ASIC Instrument) for the plaintiff to lodge a Form 389 – Opt in/change of holding entity notice by wholly-owned company relieved from financial reporting obligations (Form 389 Opt-in Notice) be extended from 31 October 2018 to 9 December 2020.

2.    Pursuant to s 1322(4)(d) of the Corporations Act, the time specified by clause 7(2) of the ASIC Instrument for the plaintiff to lodge a Form 399 – Opt-out notice by wholly-owned company relieved from financial reporting obligations (Form 399 Opt-out Notice) be extended from 31 October 2020 to a date seven days from the date of this order.

3.    Under s 1322(4)(c) of the Corporations Act, the plaintiff and its current and former directors and officers are relieved from any civil liability in respect of the failures to comply with:

(a)    the requirement in clause 6(1)(f) and (2) of the ASIC Instrument to lodge a Form 389 Opt-in Notice by 31 October 2018;

(b)    the requirement in clauses 6(y)(i) and 7(2) of the ASIC Instrument to lodge a Form 399 Opt-out Notice by 31 October 2020;

(c)    the requirement in clause 6(1)(v) of the ASIC Instrument to include the notations in consolidated statements for the 2017-2018 financial year referred to in clause 6(1)(v) of the ASIC Instrument;

(d)    the requirement in clause 6(1)(i) of the ASIC Instrument for the directors of the plaintiff at or about the end of the 2018-2019 financial year to have:

(i)    considered the advantages and disadvantages associated with the company remaining a party to the deed of cross guarantee dated 25 June 2018 and taking advantage of the relief afforded by the ASIC Instrument; and

(ii)    resolved either:

A.    that the company should continue to remain a party to the deed of cross guarantee; or

B.    that the company should seek to revoke the deed of cross guarantee in respect of the company;

(e)    ss 292(1), 301(1), 314(1) and 319(1) of the Corporations Act in respect of the 2017-2018 financial year and the 2018-2019 financial year to the extent that compliance was required as a result of the failures referred to in sub-paragraphs (a) to (d) above; and

(f)    the notice issued by the defendant to the plaintiff under s 1274(11) of the Corporations Act dated 30 March 2021.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GOODMAN J

Introduction

1    The plaintiff, Entertainment Publications of Australia Pty Ltd (EPA), seeks relief under s 1322(4)(c) and (d) of the Corporations Act 2001 (Cth) in connection with its non-compliance with financial reporting obligations imposed by Pt 2M.3 of the Act. EPA has provided a detailed explanation of the circumstances attending the proven instances of non-compliance. I am satisfied that each such instance was the product of inadvertence and not of dishonesty. I am also satisfied that no such instance has caused substantial injustice to any person or that a grant of relief would cause substantial injustice. There are no discretionary factors which suggest that the Court should refuse relief.

2    The defendant, the Australian Securities and Investments Commission (ASIC), informed the Court that it neither consents to, nor opposes, the relief sought by EPA and did not otherwise participate in the proceeding.

3    For the reasons set out below, relief should be granted largely, but not completely, in the form sought by EPA.

Legal framework

4    Before considering the circumstances giving rise to the application, it is convenient to set out the legal framework in which the application arises.

Part 2M.3 of the Act and the definition of “large proprietary company”

5    Part 2M.3 of the Act imposes a series of reporting obligations upon various entities including “large proprietary companies”. “Large proprietary company” is defined in s 45A(3) of the Act as follows:

45A      Proprietary companies

…

Large proprietary company

(3)      A proprietary company is a large proprietary company for a financial year if it satisfies at least 2 of the following paragraphs:

(a)      the consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million, or any other amount prescribed by the regulations for the purposes of paragraph (2)(a), 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 $12.5 million, or any other amount prescribed by the regulations for the purposes of paragraph (2)(b), or more;

(c)      the company and the entities it controls (if any) have 50, or any other number prescribed by the regulations for the purposes of paragraph (2)(c), or more employees at the end of the financial year.

6    The “regulations” referred to in s 45A(3) are the Corporations Regulations 2001 (Cth). From 1 July 2019, the Corporations Regulations were amended by the Corporations Amendment (Proprietary Company Thresholds) Regulation 2019 (Cth). The amendments included the insertion of reg 1.0.02B into the Corporations Regulations. Regulation 1.0.02B, which applies to the 2019-2020 financial year and later financial years, provides:

1.0.02B    Proprietary company thresholds (Act s 45A)

(1)    For the purposes of paragraphs 45A(2)(a) and (3)(a) of the Act, the amount of $50 million is prescribed.

(2)    For the purposes of paragraphs 45A(2)(b) and (3)(b) of the Act, the amount of $25 million is prescribed.

(3)    For the purposes of paragraphs 45A(2)(c) and (3)(c) of the Act, the number 100 is prescribed.

7    Shortly stated, the effect of the insertion of reg 1.0.02B was to double each of the thresholds previously set by s 45A(3) of the Act.

8    In addition to the obligations on various entities to comply with Pt 2M.3 of the Act, the directors of such entities are obliged to take reasonable steps to comply, or secure compliance with, Pt 2M.3: s 344(1) of the Act.

Relief from the reporting obligations – Instrument 2016/785

9    Section 341 of the Act empowers ASIC to make a written order providing, inter alia, relief from some or all of the requirements of Pt 2M.3 of the Act. Relevantly for present purposes, ASIC made the ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, effective from 29 September 2016.

10    The purpose of Instrument 2016/785 is to enable a closed group of companies to prepare and lodge financial statements prepared on a consolidated basis where each such company is a party to a deed of cross-guarantee: Re SMS Operations Pty Ltd; ex parte SMS Operations Pty Ltd [2021] WASC 191 at [43]. In Car Buyers Australia Pty Limited v Australian Securities and Investments Commission [2020] FCA 599, Gleeson J stated at [22]-[23]:

22.    The rationale for the Instrument is explained in ASIC’s Explanatory Statement for the Instrument (Explanatory Statement):

Part 2M.3 of the Corporations Act requires companies (except most small proprietary companies), disclosing entities and registered managed investment schemes (registered schemes) to prepare and lodge a financial report, directors’ report and auditor’s report for a financial year.

The costs of preparing a financial report and having it audited are significant. Where entities are wholly owned within a group of companies, and there are deeds of cross-guarantee within the group, the information needs of creditors and other stakeholders may be sufficiently met by the consolidated financial statements for the group, rather than individual financial statements for each of the wholly owned entities.

23.    The Explanatory Statement summarises the operation of the Instrument, relevantly, as follows:

A wholly-owned company is relieved of its obligations under Part 2M.3 of the Corporations Act provided it enters into a deed of cross-guarantee with its holding entity and other wholly owned entities of the group, and meets certain other conditions. Entities that are not wholly owned may be a party to the deed but are not relieved from the requirements in Part 2M.3.

The deed of cross-guarantee is an instrument under which each entity enters into a covenant with the trustee to guarantee payment in full of any debt to creditors of each party to the deed by each other entity.

The deed of cross-guarantee is required as a protection for creditors of the company that will not have access to the company’s financial report in order to assess its financial position. …

11    Clause 5 of Instrument 2016/785 is in the following form:

5    Financial reporting relief for wholly-owned entities

(1)    A company that was party to a deed of cross guarantee at the end of a financial year (relevant financial year) does not have to comply with any of the following requirements of Part 2M.3 of the Act in relation to the financial year:

(a)    the requirement to prepare a financial report and a directors’ report under paragraphs 292(1)(b) and (c) and paragraph 292(2)(b);

(b)    the requirement to have the financial report audited and to obtain an auditor’s report under subclause 301(1);

(c)    the requirement to report to its members under section 314 within the time required by section 315;

(d)    the requirement to send reports to a member in accordance with a request under subsection 316(1) within the time required by subsection 316(2).

(2)    The directors of a company referred to in subsection (1) do not have to comply with the requirement under section 317 to lay reports before the AGM of the company following the relevant financial year.

12    Clause 6 of Instrument 2016/785 sets out a series of conditions all of which must be satisfied before the relief in cl 5 is available. Of present relevance are the following conditions:

(1)    clause 6(1)(f), which when read with cl 6(2), requires that if the company did not rely on Instrument 2016/785 in respect of the immediately preceding financial year, then the company must lodge an opt-in notice (Form 389) with ASIC, by the end of four months after the end of the relevant financial year, notifying ASIC that the company was taking advantage of Instrument 2016/785 and identifying its holding entity;

(2)    clause 6(1)(d), which requires that the relevant financial year and the financial year of the holding entity ended on the same date;

(3)    clause 6(1)(i), which requires that at or about the end of the relevant financial year, the directors of the company have considered the advantages and disadvantages associated with the company remaining a party to the deed of cross-guarantee and taking advantage of the relief afforded by Instrument 2016/785 and have resolved that the company should continue to remain a party to the deed of cross-guarantee or that it should revoke the deed in so far as it applies to the company;

(4)    clause 6(1)(v), which requires that the notes to the consolidated financial statements include particular specified information concerning the deed of cross-guarantee; and

(5)    clause 6(1)(y), which requires that the company has complied with the conditions in cl 7. In this regard, cl 7 requires the company to file an opt-out notice (Form 399) where the company relies on Instrument 2016/785 in relation to a financial year but does not rely on it in respect of the immediately following year and does not lodge an annual financial report prepared under Chapter 2M of the Act for that immediately following year. The opt-out notice must be lodged no later than four months after the end of the immediately following year.

Section 1322 of the Act

13    Failures to comply with Instrument 2016/785 and consequent failures to comply with Pt 2M.3 of the Act may be absolved by an exercise of the Court’s discretion under s 1322 of the Act which provides, in so far as is presently relevant:

1322    Irregularities

…

(4)    Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:

…

(c)    an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);

(d)    an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;

and may make such consequential or ancillary orders as the Court thinks fit.

…

(6)    The Court must not make an order under this section unless it is satisfied:

…

(b)    in the case of an order referred to in paragraph (4)(c)—that the person subject to the civil liability concerned acted honestly; and

(c)    in every case—that no substantial injustice has been or is likely to be caused to any person.

background

14    Against that framework, I turn now to the background to the application.

15    In support of its application, EPA relies upon affidavits of:

(1)    Mr Ben Newling, a director of EPA and its Chief Operating Officer. Mr Newling is also the Company Secretary for Incentiapay Limited (INP). INP is the sole shareholder of EPA and is a publicly listed company; and

(2)    Mr Desmond McLellan, the Financial Controller of INP (and in effect, EPA).

16    Set out below is a summary of that evidence.

17    On 1 July 2016, EPA became a wholly owned subsidiary of INP. EPA has remained a wholly owned subsidiary of INP since that date. The affairs of the INP Group (comprising INP, EPA and other subsidiaries of INP) are managed and operated as one business unit.

18    From March to September 2018, Mr Newling was a consultant to EPA.

19    During 2018, a decision was taken within the INP Group to consolidate the financial and other reporting and lodgement obligations of the members of that group and to seek relief from the reporting obligations imposed by Pt 2M.3 of the Act. At that time, EPA was required to comply with the reporting obligations under Pt 2M.3 because it was a “large proprietary company” within the meaning of s 45A(3) of the Act.

20    The relief to be sought was relief pursuant to Instrument 2016/785. As noted above, Instrument 2016/785 prescribed a number of conditions to the operation of such relief, including the execution of a deed of cross-guarantee; and the lodgement by EPA with ASIC of an opt-in notice.

21    At that time, INP employed a general counsel and a more junior in-house counsel. INP engaged an external law firm to advise it in connection with its efforts to seek relief under Instrument 2016/785.

22    On 25 June 2018, INP, EPA and other subsidiaries of INP entered into a Deed of Cross-Guarantee. On 2 July 2018, the external law firm lodged the Deed with ASIC, together with a certificate in relation to the Deed.

23    This occurred at a particularly busy time within the INP Group caused by economic circumstances and a major divestiture (between mid-2018 to December 2018).

24    In or around September 2018, INP’s general counsel left INP with no notice or handover. Since then INP has not had an in-house legal function.

25    From September 2018 to August 2019, Mr Newling was the General Manager-Commercial for EPA.

26    On 30 October 2018, ASIC issued an instrument bearing that date and titled “Subsection 340(1) – Order” and numbered [18-0993]. It defined “Group Entity” in terms which included EPA and provided in so far as is presently relevant:

Order

4.    Each Group Entity does not have to comply with any of the following requirements of Part 2M.3 of the Act in relation to a financial year:

(a)    the requirement to prepare a financial report and a directors' report under paragraphs 292(1)(b) and (c) and paragraph 292(2)(b);

(b)    the requirement to have the financial report audited and to obtain an auditor's report under subsection 301(1);

(c)    the requirement to report to its members under section 314 within the time required by section 315;

(d)    the requirement to send reports to a member in accordance with a request under subsection 316(1) within the time required by subsection 316(2); and

(e)    the requirement to lodge a financial report with ASIC under subsection 319(1) within the time required under subsection 319(3).

Where this order applies

5.    This order applies where the Holding Entity is IncentiaPay Limited ACN 167 603 992 and each Group Entity:

(a)    meets the requirements of ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 except for paragraph 6(l )(m) of ASIC Corporations (Wholly-owned Companies) Instrument 2016/785;

(b)    became parties to a Deed of Cross Guarantee on 25 June 2018; and

(c)    sent an original of the following documents to ASIC for lodgement by express post on 28 June 2018:

(i)    The Deed of Cross Guarantee; and

(ii)    The Certificate in relation to the Deed of Cross Guarantee.

27    As a result, EPA did not comply with Pt 2M.3 of the Act for the 2017-2018 financial year, or for the 2018-2019 financial year. Its financial results formed part of the consolidated results prepared by INP for those financial years.

28    On 31 October 2018, EPA was due to lodge its opt-in notice as required by cll 6(1)(f) and 6(2) of Instrument 2016/785. It failed to do so.

29    For the 2017-2018 financial year, INP published an Annual Report containing financial statements for the INP Group prepared on a consolidated basis. Those financial statements did not include notes providing the information concerning the Deed required by cl 6(1)(v) of Instrument 2016/785.

30    On 15 November 2018, Mr Newling was appointed as the company secretary for INP.

31    In December 2018, INP’s Chief Executive Officer left INP, also with no prior notice.

32    On 1 February 2019, Mr Newling was appointed as a director of EPA.

33    On 1 July 2019, as noted above, the definition of “large proprietary company” in s 45A(3) of the Act changed. As a result, EPA was no longer a “large proprietary company” as it had been during the 2017-2018 and 2018-2019 financial years. Mr Newling was unaware of this change until around February 2021.

34    On 8 July 2019, Mr McLellan commenced as the Financial Controller of INP.

35    In August 2019, Mr Newling commenced as the Chief Operating Officer of EPA.

36    On 28 October 2020, ASIC wrote to EPA indicating that EPA’s financial statements and reports for the 2018-2019 financial year had not been lodged.

37    Mr Newling’s evidence is that prior to receipt of that letter, he believed that EPA had met all of the criteria required in order to obtain and maintain relief from its reporting obligations under Pt 2M.3 of the Act and thus that EPA was not in breach of Pt 2M.3.

38    Mr McLellan’s evidence is that prior to receipt of that letter, he believed that EPA had met all the requirements for relief from the reporting obligations. From the time that he started employment with the INP Group in July 2019, the question of relief from reporting obligations came up occasionally in ordinary interactions between himself, Mr Newling and Mr Raymond Ting (the Statutory and Tax Accountant for the INP Group). During those interactions, no doubts were raised concerning EPA’s compliance with Pt 2M.3 of the Act. Mr McLellan believed that EPA was entitled to ongoing relief from the reporting obligations and was not in breach of Pt 2M.3 of the Act.

39    From 10 November 2020, EPA exchanged correspondence with ASIC. As a result of that correspondence, it emerged that ASIC had not received from EPA the opt-in notice required by cl 6(1)(f) of Instrument 2016/785.

40    Mr Newling, Mr McLellan and Mr Ting then undertook further investigations concerning the opt-in notice. As a result, Mr Newling formed the view that INP had instructed its general counsel, its in-house counsel and HWLE to prepare and lodge all documents necessary for EPA to be relieved from its reporting obligations following the execution of the Deed. This view was conveyed to ASIC. However, Mr Newling and Mr McLellan were unable to verify whether an opt-in notice had in fact been lodged and decided that EPA should lodge such a notice.

41    On 9 December 2020, EPA lodged an opt-in notice with ASIC. On the same day, Mr Newling lodged with ASIC an application under s 340 of the Act (s 340 application), seeking relief from the obligation to audit EPA’s financial accounts for the 2018-2019 and 2019-2020 financial years. The s 340 application:

(1)    did not focus upon the 2017-2018 financial year because ASIC’s letter dated 28 October 2020 referred only to the 2018-2019 financial year. Mr Newling and Mr McLellan did not turn their minds to the 2017-2018 financial year at that time and instead assumed that if there had been a problem with that year then this would have been specifically mentioned by ASIC; and

(2)    sought relief with respect to the 2019-2020 financial year because Mr Newling continued to believe that EPA was a “large proprietary company” as he was unaware of the change to the definition of that term effective from 1 July 2019.

42    On 28 January 2021, ASIC sought further information concerning the s 340 application. The questions asked by ASIC in that letter led Mr Newling to form the view that EPA’s failure to lodge an opt-in notice would affect EPA’s entitlement to relief from the reporting obligations for the 2017-2018 financial year in addition to the 2018-2019 financial year and that EPA ceased to be a “large proprietary company” following the changes to the definition of that term effective from 1 July 2019.

43    On 10 February 2021, Mr Newling responded to ASIC, providing further information. The further information included that the relief sought was not limited to the obligation to audit EPA’s financial accounts but also extended to their preparation and lodgement; and that EPA sought the same relief for the 2017-2018 financial year.

44    On 16 March 2021, and following further correspondence, ASIC indicated to Mr Newling that it would refuse the s 340 application.

45    On 30 March 2021, ASIC served on EPA a notice issued under s 1274(11) of the Act (s 1274(11) Notice), requiring EPA to lodge within 14 days of receipt of the notice, its financial statements, signed directors’ declaration, signed directors’ report and signed auditors’ report for the 2018-2019 financial year.

46    On 13 April 2021, the deadline for EPA to comply with the s 1274(11) Notice passed without compliance.

47    On 27 April 2021, ASIC refused the s 340 application.

48    In May 2021, EPA’s solicitors began preparation of the application which is presently before the Court. As part of the preparation of the application, Mr Newling and Mr McLellan investigated EPA’s historical compliance with all requirements of Instrument 2016/785.

49    As part of that investigation, questions arose concerning compliance with cll 6(1)(d) and 6(1)(v) of Instrument 2016/785 for the 2017-2018 financial year; cl 6(1)(i) of Instrument 2016/785 for the 2018-2019 financial year; and cll 6(1)(y) and 7(1) and (2) of Instrument 2016/785 for the 2019-2020 financial year. Those questions are considered in further detail later in these reasons.

50    Mr Newling’s evidence is that prior to this investigation he believed that EPA had met all the criteria required in order to obtain and maintain relief from the reporting obligations under Pt 2M.3 of the Act, with the exception of the failure to lodge the opt-in notice.

51    Mr Newling also provided evidence that:

(1)    from time to time since around 2018 he participated in or overheard discussions between other staff of INP or EPA concerning EPA’s relief from reporting obligations. Whilst he does not recall the details of any specific conversations, his impression from those conversations is that whatever had needed to be done by way of documents and lodgements in order to obtain and maintain such relief had been done. Further, he does not recall in any of those conversations any suggestion that there was a reason to doubt EPA’s entitlement to such relief. He would have likely remembered if such a doubt had been raised as it would have been a matter of concern to him and have caused him to seek immediate advice as to how to remedy the breach expeditiously;

(2)    his beliefs concerning EPA’s entitlement to relief from the reporting obligations were influenced by his awareness that at the time that the Deed had been entered into, INP had engaged an experienced general counsel and in-house counsel and that INP had instructed an external law firm both generally and specifically in relation to the obtaining of relief from the reporting obligations;

(3)    he was also aware that INP had finance and compliance staff and engaged external accountants and auditors and so he assumed that those persons had ensured and would continue to ensure that all steps necessary to obtain relief were carried out; and

(4)    he discovered nothing to suggest that anyone wilfully or recklessly disregarded the steps necessary for EPA to obtain and maintain relief from the reporting obligations. His belief is that EPA’s failures in that regard were the product of unintentional, honest and inadvertent error.

52    Similarly, Mr McLellan in the course of his investigations saw nothing that indicated that EPA’s failure to comply with Instrument 2016/785 was anything other than honest and inadvertent.

53    Mr Newling and Mr McLellan also provided evidence as to the effect upon EPA if the relief sought were not to be granted and EPA were to comply with the reporting obligations for the 2017-2018 and 2018-2019 financial years. In summary, that evidence is that:

(1)    Mr McLellan estimates that EPA would incur audit fees in the range of $350,000 to $450,000, in circumstances where it would be necessary for its auditors, KPMG, to consider the 2016-2017 to 2018-2019 financial years and there is likely to be little co-operation from INP’s previous auditors and financial reporting services provider with respect to the 2016-2017 and 2017-2018 years because the relationship between EPA and the previous auditors and financial reporting services provider ended poorly;

(2)    the effect of that additional costs burden would be magnified in circumstances where EPA’s business has been adversely affected by the impact of the COVID-19 pandemic upon the Australian hospitality sector. In this regard, EPA’s revenue for the first half of the 2020-2021 financial year was $10.3 million compared to $22 million for the corresponding period in the 2018-2019 financial year;

(3)    the work involved would impose a heavy burden on INP’s current finance team in circumstances where the team has been reduced in size due to budget constraints and the impact of the COVID-19 pandemic; and

(4)    Mr Newling is concerned that INP would need to notify its insurer that it is required to prepare additional financial and other reports and statements for EPA and that this may lead to an increase in the premium payable by INP in circumstances where there would be no material change to its risk profile.

Consideration

Standing

54    EPA seeks orders under s 1322(4)(c) and (d) of the Act. It is clear that EPA, which has a real financial interest in the result of this application, is an “interested person” within the meaning of that term in s 1322(4): see Re ex parte; Navitas Bundoora Pty Ltd [2020] WASC 87 at [35]; In the matter of DAC Finance (NSW/Qld) Pty Ltd [2020] NSWSC 182 at [29] and the authorities there cited.

Section 1322 generally

55    Section 1322(4) confers a broad discretion upon the Court. In Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 at 414 [39], French CJ explained:

Corporations, in contemporary Australian society, serve the purposes of enterprises, large and small, owned and operated by men and women, some of whom are sophisticated, knowledgeable and well-advised on matters of corporate governance and some, perhaps many, of whom are not. Section 1322(4) and related provisions reflect a long-standing legislative recognition that mistakes will happen in corporate governance and that it is not in the public interest that the validity of decisions made in relation to corporations be unduly vulnerable to innocent errors which may be corrected without substantial injustice to third parties. In accordance with its evident purpose, s 1322(4)(a) is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form.

56    In Car Buyers Australia, Gleeson J stated at [26]:

Section 1322(4) of the Act provides a wide power to validate non-compliance by companies in certain circumstances. It reflects a “broad legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law”: Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 at [29] (French J); Re Solco Ltd [2015] FCA 635; (2015) 106 ACSR 591 at [23] (McKerracher J); Re Murray River Organics Ltd [2019] FCA 931; (2019) 138 ACSR 365 … at [26] (Anderson J).

57    In exercising the discretion with respect to s 1322(4)(c) and (d), the Court must be satisfied that no substantial injustice has been or is likely to be caused: s 1322(6)(c). In the case of s 1322(4)(c) (but not s 1322(4)(d)), the Court must also be satisfied that the person subject to the civil liability concerned acted honestly: s 1322(6)(b). These conditions are considered in further detail below.

58    Satisfaction of the conditions in s 1322(6)(b) (for s 1322(4)(c)) and (c) (for s 1322(4)(c) and (d)) is necessary but not sufficient to ensure a favourable exercise of the discretion in s 1322(4)(c) and (d). The Court has a residual discretion even if those conditions are satisfied: Re Murray River Organics Ltd [2019] FCA 931; (2019) 138 ACSR 365 at [39]; Car Buyers Australia at [32]; Re ComfortDelGro Corporation Australia Pty Ltd [2020] FCA 378 at [45]; MB Vic Pty Ltd, in the matter of MB Vic Pty Ltd [2022] FCA 874 at [17]. Factors which have previously been considered as relevant to the exercise of the discretion in the context of applications involving a failure to comply with the conditions in Instrument 2016/785 include:

(1)    the general objects and purposes of the relevant statutory provision within the Act: Re Jaxsta Ltd [2018] WASC 390 at [43];

(2)    the public interest in ensuring compliance with the Act and the interests of all parties affected: Murray River Organics at [39]; Car Buyers Australia at [32]; Re ComfortDelGro at [45]; SMS Operations at [35];

(3)    the promptness of any action taken to remedy the error: ComfortDelGro at [45]; In the matter of Bremick Pty Ltd [2021] NSWSC 533 at [16]; and

(4)    whether ASIC opposes the application: Navitas Bundoora at [48]; Bremick at [16].

Section 1322(4)(d) order – extension of time to lodge the opt-in notice

59    The first order sought by EPA is an order pursuant to s 1322(4)(d) extending the time specified by cl 6(1)(f) of Instrument 2016/785 for the filing of an opt-in notice from 31 October 2018 to 9 December 2020. Clause 6(1)(f) required, in so far as is presently relevant:

Opt-in notice

(f)    if:

(i)    the company did not rely on the relief available under this instrument or ASIC Class Order [CO 98/1418] in respect of the financial year before the relevant financial year; or

    …

the company has lodged by the relevant time a notice signed by a director or secretary with ASIC using ASIC Form 389 as at the date of this instrument, containing a statement that the company has taken advantage of relief under this instrument together with the identity of the holding entity;

60    The “relevant time” was four months after the end of the relevant financial year: cl 6(2) of Instrument 2016/785.

61    Thus, the opt-in notice should have been lodged by 31 October 2018. It was not lodged until 9 December 2020.

62    Section 1322(4)(d) provides relevantly that the Court may make an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under the 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). However, prior to making an order under s 1322(4)(d), the Court must be satisfied that no substantial injustice has been or is likely to be caused to any person: s 1322(6)(c). In Murray River Organics at [35]-[38], Anderson J explained:

35.    The court must not make any order under s 1322 unless it is satisfied that no substantial injustice has been or is likely to be caused to any person: s 1322(6)(c) of the Act; Kimberley College Ltd v Davis, in the matter of Kimberley College Ltd [2018] FCA 1102 at [28]. There are two aspects to this requirement:

(a)    the expression “has been” invites an inquiry as to the effect of the irregularity sought to be cured; and

(b)    the expression “likely to be” draws attention to the effect of the proposed order: An v Joo [2019] NSWSC 39 at [34].

36.    A degree of prejudice to a person or persons may be outweighed if the overwhelming weight of justice is in favour of making the order: Elderslie Finance Corp Ltd v Australian Securities Commission (1993) 11 ACSR 157 (Elderslie Finance) at 160; An v Joo [2019] NSWSC 39 at [35].

37.    The reference to “substantial injustice” in s 1322(6)(c) is to a real and not insubstantial or theoretical prejudice: Elderslie Finance at 160. Whether there is real injustice requires a weighing of any prejudice if the order is made against the prejudice which would be suffered by the corporation and its directors and officers if an order was not made: Gangemi v Osborne [2009] VSCA 297 at [62], citing Re Compaction Systems Pty Ltd & The Companies Act [1976] 2 NSWLR 477 at 493; see also AHEPA NSW at [25].

38.    One mechanism by which the court may ensure that an order under s 1322(4) does not cause substantial injustice is to make an ancillary order permitting any interested person who may suffer substantial injustice to apply within a set period of time to vary or dissolve the s 1322(4) order: see Sprint Energy at [51]; Clancy Exploration Limited, in the matter of Clancy Exploration Limited [2018] FCA 569 at [36].

63    The question of whether the making of the orders sought will cause any person substantial injustice directs attention to the interests of (at least) the creditors and shareholders of the company: DAC Finance at [46] per Gleeson J.

64    For the following reasons, I am satisfied that no substantial injustice has been caused by the non-compliance or is likely to be caused by a grant of the relief sought.

65    First, the sole shareholder of EPA, INP, has not objected to the grant of relief.

66    Secondly, during the period of non-compliance from 31 October 2018 to 9 December 2020, creditors had the benefit of the Deed. In Car Buyers Australia at [24], in a passage adopted by Black J in In the matter of Flight Centre Technology Pty Ltd [2022] NSWSC 367 at [19] and Derrington J in MB Vic at [27], Gleeson J stated:

As Car Buyers submitted, the principal requirement of the ASIC Instrument is that the company seeking to be relieved of the reporting obligations in Pt 2M.3 must be a party to a deed of cross-guarantee, the rationale being that such a deed protects creditors and other stakeholders from any disadvantage that may arise from an inability to access a company’s financial reports. That obligation is imposed by cl 5 of the ASIC Instrument.

67    Thus, in the present case, the requirements of Instrument 2016/785 had been met in substance, but a requisite form had not been filed. The error was procedural in nature and the failure to file the opt-in notice did not affect the enforceability of the Deed: see MB Vic at [50].

68    Thirdly, there is no evidence that any third party may have been prejudiced by the failure to lodge the opt-in notice, or might be prejudiced by the grant of relief.

69    Fourthly, the relative prejudice that EPA would suffer if relief were not to be granted is relevant (Murray River Organics at [37]) and substantial for the reasons set out at [53] above. The prejudice that EPA would likely suffer if the relief sought were to be denied would be disproportionate to its act of non-compliance.

70    Finally, between 1 July 2019 and 9 December 2020 EPA was not a “large proprietary company” because of the changes to the definition of that term effective from 1 July 2019 and therefore was not required to comply with the financial reporting and lodgement obligations under Part 2M.3 of the Act during that period in any event.

71    I turn now to the Court’s residual discretion. I accept that EPA’s failure to lodge the opt-in notice was unintentional, honest and inadvertent. INP had instructed its general counsel, in-house counsel and external solicitors to lodge all necessary documents for EPA to be relieved of its reporting obligations. Mr Newling and Mr McLellan were understandably under the misapprehension that EPA had complied with cl 6(1)(f) of Instrument 2016/785.

72    Once the error was discovered, EPA acted promptly in seeking to remedy it. EPA became aware of its non-compliance on 28 October 2020. Mr Newling, Mr McLellan and Mr Ting immediately commenced investigations (including with former staff) during November 2020 to ascertain the circumstances surrounding the breach. After being unable to conclude whether an opt-in notice had in fact been lodged with ASIC, EPA again acted promptly in lodging the notice on 9 December 2020.

73    For the reasons set out at [59] to [72] above, and in circumstances where ASIC does not oppose a grant of relief, an order extending time to lodge the opt-in notice under s 1322(d) of the Act should be made.

Section 1322(4)(d) order – extension of time to lodge the opt-out notice

74    The second order sought by EPA is an order pursuant to s 1322(4)(d) extending the time specified by cl 7(2) of Instrument 2016/785 for the filing of an opt-out notice from 31 October 2020 to a date seven days after the Court’s order.

75    Clause 6(1)(y) required in so far as is presently relevant:

(y)    the company has complied with each of the following as they apply to the company:

(i)    the conditions in section 7;

...

76    Clauses 7(1) and (2) provided:

Opt-out notice

(1)    If a company:

(a)    relies on the relief available under subsection 5(1) in relation to a financial year; and

(b)    does not rely on the relief in respect of the immediately following financial year (first non-reliance year); and

(c)    does not lodge an annual financial report prepared under Chapter 2M of the Act for the first non-reliance year;

the company must lodge with ASIC a notice signed by a director or company secretary that the company has ceased to rely on the relief using ASIC Form 399 as at the date of this instrument.

(2)    A notice required under subsection (1) must be lodged no later than 4 months after the end of the first non-reliance year.

77    For the 2018-2019 financial year, EPA relied upon the relief available under cl 5(1) of Instrument 2016/785. However, for the 2019-2020 financial year, EPA did not rely upon that relief. It no longer needed to, by dint of the change to the definition of “large proprietary company” at the commencement of that financial year.

78    Thus, cll 6(y) and 7(1) and (2) required EPA to lodge an opt-out notice no later than 31 October 2020. No such notice was lodged.

79    Again, an order cannot be made unless the Court is satisfied that no substantial injustice has been, or is likely to be, caused. In my view, no substantial injustice has been caused by the non-compliance or is likely to be caused by a grant of relief, for the following reasons.

80    First, the sole shareholder of EPA, INP, has not objected to the relief sought. Secondly, for the 2017-2018 and 2018-2019 financial years, the creditors of EPA had the benefit of the Deed. Thirdly, for subsequent financial years, EPA was not obliged to comply with Pt 2M.3 of the Act. Finally, there is no evidence that any third party may have been prejudiced by the failure to lodge the opt-out notice, or might be prejudiced by the grant of relief.

81    There is no matter which, in the exercise of the residual discretion, counts against relief. Again, there is no suggestion of dishonesty; the failure was the result of Mr Newling being unaware that EPA had ceased to be a “large proprietary company”; EPA acted promptly once the error had been discovered; and ASIC does not object to relief being granted.

82    Thus an order extending time to lodge the opt-out notice under s 1322(d) of the Act should be made.

Section 1322(4)(c) order

The relief sought

83    The third order sought by EPA is an order pursuant to s 1322(4)(c) by which EPA and its current and former directors and officers are relieved from any civil liability in respect of the following breaches of Instrument 2016/785 and the Act:

(1)    any failure to comply with:

(a)    cll 6(1)(f), 6(1)(d) and 6(1)(v) for the 2017-2018 financial year;

(b)    cl 6(1)(i) for the 2081-2019 financial year;

(c)    cll 6(1)(y) and 7(2) for the 2019-2020 financial year;

(2)    any failure to comply with ss 292(1), 301(1), 314(1), and 319(1) of the Act in respect of the 2017-2018 and 2018-2019 financial years; and

(3)    any failure to comply with the s 1274(11) Notice.

84    It is convenient at this point to address the form of relief that is appropriate in making an order under s 1322(4)(c). The relief sought is expressed in terms of “any failure …”. In my view, this is overly broad and the relief granted should be directly relevant to the established acts or omissions which constitute a contravention. In this regard, I respectfully adopt the approach taken in Ozito Industries Pty Ltd v Australian Securities and Investments Commission [2020] FCA 1432; (2020) 148 ASCR 585, where O’Bryan J explained at [30]:

30.    I have come to the view that the relief granted under s 1322(4)(c) in respect of a contravention of a provision of the Act or a provision of the constitution of a corporation should generally be limited to a contravention arising by reason of identified acts or omissions. In other words, the Court’s absolution should be based on, and limited to, the confessed acts of contravention. The relief should not extend to contraventions arising from other acts or omission that have not been identified and admitted – the relief should not be a “blank cheque”, as it were. Such an approach is consistent with the principle stated by Colvin J in Re EHR Resources Ltd [2018] FCA 997 (at [7]) that “care must be taken to confine relief in a manner which is consistent with the justification for the application”. The reason for confining the relief granted under s 1322(4) is that, for the Court to apply the requirements of s 1322(6), it is necessary to have regard to the admitted acts of omissions that caused the contravention. In relation to the admitted acts or omissions, the Court must consider (amongst other things) whether the relevant person the subject of the order acted honestly, and whether substantial injustice has been or is likely to be caused to any person. If the Court is satisfied of those matters, and considers that it is otherwise appropriate to make the order, the Court will relieve the relevant person from civil liability arising by reason of the act or omission. It would be inappropriate to relieve the relevant person from civil liability, even of the same kind, that arises by reason of different acts or omissions that are not admitted and therefore not known to the Court.

85    To similar effect, see Flight Centre at [65] and MB Vic at [10] and [67].

Section 1322(4)(c) generally

86    Section 1322(4)(c) provides that the Court may make an order relieving a person from any civil liability in respect of a contravention or failure of a kind referred to in s 1322(4)(a). However, prior to making an order under s 1322(4)(c), the Court must be satisfied that: first, the person subject to the civil liability concerned acted honestly; and that secondly, no substantial injustice has been or is likely to be caused to any person: s 1322(6)(b) and (c).

87    As to honesty, in Murray River Organics, Anderson J explained at [28]–[30]:

28.    Section 1322(4)(c) permits the Court to make an order relieving a person from civil liability for a broad range of contraventions or failures, subject to the conditions in s 1322(6) that the person concerned acted honestly and that no substantial injustice has been or is likely to be caused to any person: Australian Securities and Investments Commission v Lewski (2018) 362 ALR 286; 132 ACSR 403 at [60]. The word “contravention” is to be construed broadly: Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2) [2019] FCA 93 (Lock) at [86], quoting Weinstock at [41]-[42].

29.    An order may be made under this provision to relieve a company, and its current and former directors and officers, from any civil liability in respect of any contravention by reason of a failure, inter alia, to lodge forms with ASIC: see, for example, Re Phylogica Ltd (2004) 52 ACSR 159.

30.    No order may be made under s 1322(4)(c) unless the relevant person “acted honestly”: s 1322(6)(b). When determining whether someone has acted honestly for these purposes, the court looks to an absence of evidence of dishonesty: Re G8 Communications Ltd (ACN 009 076 233) (2016) 112 ACSR 22 at [35]; Re iCandy Interactive Ltd (2018) 125 ACSR 369 (iCandy) at [54]. The court will also take into account whether the applicant has taken prompt action to remedy the error: iCandy at [54], citing Sprint Energy Ltd, in the matter of Sprint Energy Ltd [2012] FCA 1354 (Sprint Energy) at [44]; Re Golden Gate Petroleum Ltd (ABN 090 074 785) (2010) 77 ACSR 17 (Golden Gate) at [48]. Additionally, the concept of “acting honestly” can embrace:

(a)    active but incorrect consideration of an issue: Golden Gate at [47];

(b)    inadvertence and oversight: 5G Networks Limited, in the matter of 5G Networks Limited [2019] FCA 698 at [13]; and

(c)    a failure to turn one’s mind to the relevant issue or to give any consideration to the issue at all: Sprint Energy at [43], citing Golden Gate at [47].

88    The principles concerning the absence of substantial injustice have been discussed at [62] and [63] above.

89    Against that background, I now consider the particular omissions for which relief is sought.

Failure to comply with cll 6(1)(f) and (2) for the 2017-2018 financial year

90    As noted above, cll 6(1)(f) and (2) required the lodgement of an opt-in notice by 31 October 2018 and this did not occur until 9 December 2020. For the reasons set out at [64] to [72] above, I accept that EPA’s failure to lodge the opt-in notice by 31 October 2018 involved no dishonesty; that no substantial injustice has been or is likely to be caused to any person; and that no factor informing the exercise of the residual discretion counts against the making of an order under s 1322(4)(c). ASIC does not oppose relief being granted. Such an order should be made.

Failure to comply with cl 6(1)(d) for the 2017-2018 financial year

91    Clause 6(1)(d) of Instrument 2016/785 required that: “the relevant financial year and the financial year of the holding entity ended on the same date”.

92    The relevant financial year for present purposes is the 2017-2018 financial year.

93    The evidence of Mr Newling is that Mr Ting told him that “EPA’s financial year used to be the calendar year and not the standard financial year”; that Mr Ting did not know when EPA changed to a standard financial year; and that despite his further investigations, Mr Newling had been unable to determine whether that change was made prior to the end of the 2017-2018 financial year.

94    This evidence does not allow the Court to conclude that there was in fact a failure to comply with cl 6(1)(d) for the 2017-2018 financial year. In those circumstances, relief should not be given in respect of this clause.

Failure to comply with cl 6(1)(v) for the 2017-2018 financial year

95    Clause 6(1)(v) of Instrument 2016/785 required that:

(v)    the notes to the consolidated financial statements:

(i)    include a short statement of the nature of the deed of cross guarantee; and

(ii)    list the parties to the deed of cross guarantee as at the end of the relevant financial year, separately identifying:

(A)    the members of the closed group; and

(B)    the other members of the extended closed group; and

(iii)    give details (including dates) of parties to the deed of cross guarantee which, during or since the relevant financial year, have been:

(A)    added by an assumption deed; or

(B)    removed by a revocation deed; or

(C)    the subject of a notice of disposal; and

(iv)    give details (including dates and reasons) of any entities which obtained relief under this instrument or ASIC Class Order [CO 98/1418] at the end of the immediately preceding financial year but which were ineligible for relief in respect of the relevant financial year; and

(v)    if the consolidated financial statements cover entities which are not members of the closed group, set out the additional consolidation information in respect of the consolidation of the entities which are members of the closed group (after eliminating all transactions between members of the closed group); and

(vi)    if the consolidated financial statements cover entities which are not parties to the deed of cross guarantee, set out the additional consolidation information in respect of the consolidation of the holding entity and those entities which are parties to the deed of cross guarantee and controlled by the holding entity (after eliminating all transactions between parties to the deed of cross guarantee); and

(vii)    if there are any parties to the deed of cross guarantee (other than a trustee or alternative trustee that is not a Group Entity within the meaning of the deed) which are not controlled by the holding entity, set out the additional consolidation information in respect of those parties (either individually or in aggregate);

96    The 2017-2018 financial year consolidated financial statements do not include such notes. The evidence is that Mr Ting drafted notes for inclusion in the financial statements and provided them to the then in-house counsel but nothing came of his draft. There is no suggestion of dishonesty, or that the failure to comply with cl 6(1)(v) was otherwise than inadvertent. There is also no evidence that substantial injustice has been, or is likely to be, caused to any person. Nothing informing the residual discretion militates against a grant of relief. ASIC does not oppose relief being granted. An order granting relief should be made.

Failure to comply with cl 6(1)(i) for the 2018-2019 financial year

97    Clause 6(1)(i) of Instrument 2016/785 required that:

(i)    at or about the end of the relevant financial year, the directors of the company:

(i)    considered the advantages and disadvantages associated with the company remaining a party to the deed of cross guarantee and taking advantage of the relief afforded by this instrument; and

(ii)    resolved either:

(A)    that the company should continue to remain a party to the deed of cross guarantee; or

(B)    that the company should seek to revoke the deed of cross guarantee in respect of the company;

98    Mr Newling’s evidence is that despite undertaking searches, he has found no evidence that the directors of EPA did so for the 2018-2019 year. He believes that this may have been overlooked because of the circumstances that EPA found itself in in mid-2019. On the basis of this evidence, and the inherent likelihood that if the requisite steps had been taken there would be a written resolution evidencing those steps, I am satisfied that EPA failed to comply with cl 6(1)(i) for that financial year.

99    There is no suggestion of dishonesty, or that the failure to comply with cl 6(1)(i) was otherwise than inadvertent. There is also no evidence that substantial injustice has been, or is likely to be, caused to any person. Nothing informing the residual discretion militates against a grant of relief. ASIC does not oppose relief being granted. An order granting relief should be made.

Failure to comply with cll 6(y) and 7(1) and (2) for the 2019-2020 financial year

100    As noted above, cll 6(y) and 7(1) and (2) required the lodgement of an opt-out notice by 31 October 2020 and this has not occurred. As noted at [80] and [81] above, I am satisfied that EPA’s failure to lodge the opt-out notice by 31 October 2020 involved no dishonesty; that no substantial injustice has been or is likely to be caused to any person; that no factor informing the exercise of the residual discretion counts against the making of the order sought, namely an order that the time for the lodgement of the opt-out notice be extended to one week after the making of orders; and that ASIC does not oppose relief being granted. An order granting relief should be made.

Failure to comply with ss 292(1), 301(1), 314(1), and 319(1) of the Act in respect of the 2017-2018 and 2018-2019 financial years

101    EPA did not comply with ss 292(1), 301(1), 314(1) and 319(1) of the Act for the 2017-2018 and 2018-2019 financial years because it was operating on the basis that it was relieved from the obligation to do so by dint of Instrument 2016/785 and more particularly by Instrument [18-0993]. That basis was later revealed to be unsound because of non-compliance with certain conditions of Instrument 2016/785 set out above.

102    I am satisfied, for the reasons set out above, that this non-compliance did not involve any element of dishonesty; that the failure of EPA to comply with ss 292(1), 301(1), 314(1) and 319(1) of the Act for the 2017-2018 and 2018-2019 financial years did not cause any substantial injustice and that no substantial injustice is likely to be caused by a grant of relief. I am also satisfied that no factor informing the exercise of the residual discretion suggests that an order under s 1322(4)(c) should not be made. ASIC does not oppose relief being granted. Such an order should be made, but in a form in which the relief is limited to relief related to the failures to comply with cl 6(1) of Instrument 2016/785 which have been established on the evidence.

Failure to comply with the s 1274(11) Notice

103    Section 1274(11) provides that:

(11)    If a body corporate or other person, having made default in complying with:

(a)    any provision of this Law or of any other law that requires the lodging in any manner of any return, account or other document or the giving of notice to the Commission of any matter; or

(b)    any request of the Commission to amend or complete and resubmit any document or to submit a fresh document;

fails to make good the default within 14 days after the service on the body or person of a notice requiring it to be done, a court may, on an application by any member or creditor of the body or by the Commission, make an order directing the body or any officer of the body or the person to make good the default within such time as is specified in the order.

104    The s 1274(11) Notice was served on 30 March 2021. EPA failed to comply with it. In circumstances where, at that time, EPA was involved in detailed investigations and discussions with ASIC aimed at remedying its failures to comply with Instrument 2016/785, I am satisfied that EPA was acting honestly. Further, EPA’s failure to be in a position to lodge accounts was a result of the mistaken belief that EPA had been relieved of the obligation to do so under Instrument 2016/785. I am also satisfied that no substantial injustice has been caused to any person from the failure to comply with the s 1274(11) Notice, or will be caused to any person if relief is granted. Again, there is no factor which counts against a favourable exercise of the discretion to grant relief from non-compliance.

105    Further, as previously noted, ASIC has communicated that it neither consents to nor opposes the relief sought by EPA. I infer from that, that ASIC would not press EPA to lodge financial reports for the 2018 and 2019 financial years: see Ozito Industries at [33]. For all of the above reasons it is appropriate to grant relief from compliance with the s 1274(11) Notice.

106    An order granting relief should be made.

Conclusion

107    I will make orders accordingly.

Associate:    

Dated:    19 August 2022