Canon Australia Pty Ltd, in the matter of Canon Australia Pty Ltd: A reminder of the Court's powers in relation to deeds of cross guarantee
Whilst ASIC Corporations (Wholly-owned Companies) Instrument 2016/785.(Class Order) can be very helpful in terms of relieving financial reporting burdens on certain subsidiaries within a group, failure to comply with one of the many requirements contained in the Class Order renders the relief provided ineffective. ASIC does not have the power to waive these requirements. So, what can you do if you realise that you have made a mistake and cannot rely on the Class Order? Fortunately, the Court has a broad power to assist with rectifying such issues to enable companies who have made an honest mistake to take advantage of the Class Order relief.
In Canon Australia Pty Ltd, in the matter of Canon Australia Pty Ltd  FCA 281, Stewart J made orders that enabled the late lodgement of an opt-out notice, the late lodgement of financial reports and the late passage of board resolutions to enable particular companies to rely on the Class Order. Justice Stewart also made an order relieving each plaintiff (and its current and former directors and officers) from any civil liability in respect of any contravention of or failure to comply with the financial reporting requirements contained in the Corporations Act 2001 (Cwlth) (Act).
A reminder on deeds of cross guarantee
Part 2M.3 of the Act and the Regulations sets out the financial reporting requirements of certain entities, including “large proprietary companies” as defined in s 45A(3) of the Act. These include strict requirements with respect to the preparation, auditing, distribution and lodgement of financial statements and related reports.
Part 2M.6 of the Act gives the Australian Securities and Investments Commission (ASIC) power to grant certain exemptions and modifications from reporting obligations. ASIC has made the Class Order which provides relief to wholly-owned subsidiaries of a body corporate from complying with the reporting obligations contained in Part 2M.3 of the Act but only if certain conditions are satisfied including:
- Entry into a deed of cross guarantee in the prescribed form;
- If the person holding office as trustee under the deed of cross-guarantee is a “Group Entity”, another non-Group Entity company must be appointed as an alternative trustee (condition (db)); and
- the wholly-owned entities lodge “opt-in” and “opt-out” notices with ASIC as required (condition (k)).
The Court's powers
Under s 1322(4) of the Act, the Court is empowered to make orders of the following kinds and in the following circumstances:
- an order relieving a person in whole or in part from any civil liability in respect of a contravention of the Act or failure to comply with the Act; and
- 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) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding.
The powers in s 1322(4) are conditioned by s 1322(6), which provides that the Court must not make any such orders unless it is satisfied:
- in the case of an order under s 1322(4)(c), that the person subject to the civil liability concerned acted honestly; and
- in every case, that no substantial injustice has been or is likely to be caused to any person.
- On 24 October 2008, Canon Australia Pty Ltd (Canon Australia) lodged with ASIC a deed of cross-guarantee, which it had entered into with Canon Finance Pty Ltd. Canon Australia assumed the position of trustee under the deed and did not appoint any alternative trustee. Such an appointment was required because the trustee, Canon Australia, was a “Group Entity”.
- After 2007, the Canon Group made a number of corporate acquisitions:
- On 1 October 2012, Canon Australia acquired all the issued shares in Canon Production Pty Ltd, a large proprietary company.
- On 1 December 2015, Canon Australia acquired all the issued shares in Canon Business Pty Ltd. Canon Business Pty Ltd was also a large proprietary company at that time.
- Harbour IT Pty Ltd became a wholly-owned subsidiary of Canon Australia on or about 6 July 2017. In the years 2017, 2018 and 2019, Harbour IT was a large proprietary company.
- Assumption deeds were lodged on behalf of each of the above named entities and it was assumed that those entities had the benefit of the Class Order relief.
In early 2022, it was identified that an alternative trustee should have been appointed under the deed of cross guarantee. Failure to do this meant that the Class Order could not be relied upon. This meant that Canon Australia, Canon Production Pty Ltd, Canon Business Pty Ltd and Harbour IT Pty Ltd had not complied with their financial reporting requirements pursuant to the Act. The plaintiffs asked the Court to make orders which would allow them to rely on the Class Order. They also sought relief for their directors and officers from any civil penalties which may be applied due to non-compliance with financial reporting requirements.
In granting the requested relief, Stewart J made the following remarks, which will be relevant for anyone considering utilising section 1322 of the Act:
- Section 1322(4) of the Act reflects 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. The provision is remedial in character and is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form.
- Section 1322(4)(d) is available in respect of a proceeding under the Act or in relation to a corporation. It has been held that the Court has power under this provision to extend or abridge time limitations in the Class Order.
- The power is available to extend or abridge time notwithstanding that the relevant provision does not impose an obligation to act within a specified time or fix a time for compliance. It is sufficient for the purposes of the provision that the validity of an act is conditioned on the happening of an event within a particular period of time. The power is available where the period for doing the relevant act did not form part of a provision which imposed an absolute positive obligation to do the act.
- The plaintiffs acted promptly and responsibly once they became aware of the contraventions in investigating them and in seeking to remedy them. The Canon Group had identified the contraventions and had sought to remedy them; this is not a case where ASIC had to bring the contraventions to the notice of the relevant company.
- It is very unlikely that there were any persons, such as creditors of the Canon Group, who would be affected by the grant of the relief sought. In that regard, the deed of cross-guarantee and the deeds of assumption were disclosed on the registers maintained by ASIC with respect to each of the plaintiff companies. All of the relevant financial reports of Canon Australia had been prepared on a consolidated basis. In each case, the auditors have expressed their opinion that the accounts give a true and fair view of the financial position of the Canon Group. The reports show that the Canon Group is clearly a profitable enterprise so no question of solvency arises and there should therefore be no injustice to any third party.
- The scope and extent of the accounting work that would be involved in each of the companies retrospectively achieving compliance with the financial reporting requirements over an extended period of time is relevant. The burden on them would be very considerable – estimated to be more than $25 million.
- Here, the non-compliance occurred due to misapprehension as to the nature and requirements of the Class Order. The contraventions continued unnoticed until April 2022 because it was reasonably believed that the Class Order relief had been properly implemented.
- The contraventions which flowed from the deficiencies were honest and occurred through error and inadvertence. Although the investigations had not been able to explain conclusively why the Canon Group did not act in strict compliance with the conditions of the Class Order, the compelling inference was that the failure to do so was due to honest inadvertence and reliance on professional advice which, as it happened, was incomplete.
Authors: Miriam Kleiner, Partner.