JUDGMENT NO. ome 23. 74. CATCHWORDS Corporations Law - investigative powers of ASC - notice requiring production of books from auditors of body corporate - functions and powers of ASC under Corporations Law, s.1292 Auditors - registered company auditors - whether powers of Companies Auditors and Liquidators Disciplinary Board under Part 9.3 of the Corporations Law extend to conduct of registered company auditors in the performance of an audit of a building society which is an exempt body under the Corporations Law. Australian Securities Commission Act 1989 (Cth), ss.1, 1D, 5, 11, 28, 30, 70, 102, 202 Corporations Act 1989 (Cth), s.37 Corporations (South Australia) Act 1990, ss.9, 58, 60, 80, 90 Corporations (South Australia) Regulations, Regs.3, 4 Corporations Law, ss.66A, 597, 1278, 1292, 1294 Companies (South Australia) Code, $ss.12, 18, 23, 277 Building Societies Act 1975 (SA), ss.9a, 63 Financial Institutions (Application of Laws) Act 1992 (SA), ss.5, 6, 8, 9, 14 AFIC (South Australia) Code (SA) Australian Financial Institutions Commissions Act 1992 (Qld), ss.21, 30 Financial Institutions (South Australia) Code (SA), ss.65, 75, 76, 278, 279 Financial Institutions (Queensland) Act 1992 (Qld), s.30 Starr-Bowkett Societies Act 1975 (SA) Financial Custodian Corporation of Victoria Pty Ltd & Others v Taylor & Another (1991) 9 ACLC 1431 Edelsten v Health Insurance Commission (1990) 27 FCR 56 Hong Kong Bank of Australia Limited & Another v Australian Securities Commission & Others (1992) 108 ALR 70 Mercantile Mutual Life Insurance Co. Ltd & Another v Australian Securities Commission & Others (1993) 112 ALR 463 Matters Nos. SG 68 and SG 69 of 1994 COOPERS & LYBRAND v AUSTRALIAN SECURITIES COMMISSION and In the matter of COOPERS & LYBRAND; AUSTRALIAN SECURITIES COMMISSION v COOPERS & LYBRAND VON DOUSSA ADELAIDE DATE 17 NOVEMBER 1994 RECEIVED 18 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIAN DISTRICT REGISTRY ) ) ) GENERAL DIVISION No. SG 68 of 1994 BETWEEN: COOPERS & LYBRAND Applicant AND: AUSTRALIAN SECURITIES COMMISSION Respondent No. SG 69 of 1994 BETWEEN: IN THE MATTER of COOPERS & LYBRAND AUSTRALIAN SECURITIES COMMISSION Applicant AND: COOPERS & LYBRAND Respondent MINUTES OF ORDER JUDGE MAKING ORDER 3 VON DOUSSA J. WHERE MADE DATE OF ORDER ADELAIDE 17 NOVEMBER 1994 THE COURT ORDERS THAT: 1. On the preliminary issue the Court declares that the notice issued on 23 August 1994 by the Australian Securities Commission under s.30 of the Australian Securities Commission Act 1989 to "All the partners for the time being, Coopers & Lybrand, Accountants, 41 Currie Street, Adelaide, 5000" is not invalid on the grounds or any of them alleged in paragraphs Cl, C2 and C3 of the application for an order of review in Action No. SG 68 of 1994. 2. Both matters be relisted for further directions. 3. Costs of the preliminary issue reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIAN DISTRICT REGISTRY ) ) ) GENERAL DIVISION No. SG 68 of 1994 BETWEEN: COOPERS & LYBRAND Applicant AND: AUSTRALIAN SECURITIES COMMISSION Respondent No. SG 69 of 1994 BETWEEN: IN THE MATTER of COOPERS & LYBRAND AUSTRALIAN SECURITIES COMMISSION Applicant AND: COOPERS & LYBRAND Respondent REASONS FOR JUDGMENT Coram: von Doussa J. Place: Adelaide Date : 17 November 1994 These two matters are related, and arise out of the issue on 23 August 1994 of a notice under s.30 of the Australian Securities Commission Act 1989 ("ASC Law") to "All the partners for the time being, Coopers & Lybrand, Accountants, 41 Currie Street, Adelaide, 5000" ("the notice") requiring production of "books". The notice was issued by Francis Joseph Dennehy, a person duly delegated pursuant to s.102 of the ASC Law to exercise the powers of the Australian Securities Commission ("ASC") under s.30 of the ASC Law. It is sufficient for present purposes to set out the opening two paragraphs of the notice: "In relation to the exercise of the Australian Securities Commission's functions and powers under section 1292 of the Corporations Law, you are hereby notified that, under section 30 of the ASC Law, you are required to produce to Francis Joseph Dennehy at 12.00 noon on 30 August 1994 at the Australian Securities Commission Regional Office, 8th Floor, MLC Centre, 100 Pirie Street, Adelaide, the following books*: 1. All books, files and working papers relating to the audit by Coopers & Lybrand of the financial statements, including the consolidated accounts, of REI Building Society ('the Society') for the financial years ended 30 June 1989, 30 June 1990 and 30 June 1991 ('the audits'). " eee There are five further paragraphs specifying other books associated with the audits referred to in paragraph 1. It is unnecessary to set them out. The notice was served at the office of Coopers & Lybrand on 23 August 1994. The following day solicitors acting for Coopers & Lybrand delivered a letter to the ASC in which it was argued that the notice was invalid. It was contended that s.1292 of the Corporations Law does not empower the ASC to investigate the audit of a building society. On 24 August 1994 the ASC replied advising the solicitors for Coopers & Lybrand that the ASC considered that the notice was validly issued for reasons that were set out in the letter. The letter concluded by stating that if Coopers & Lybrand failed to comply with the notice, proceedings would be issued under s.70 of the ASC Law which empowers the Court to enquire into the case and to order compliance where the ASC certifies that a person has without reasonable excuse failed to comply with the requirement made under Part 3 of the ASC Law (which includes s.30). Coopers & Lybrand did not comply with the notice by the time of compliance specified in it, viz 12 noon on 30 August 1994. On 1 September 1994 each of the applications now before the Court was commenced. In action no. SG 68 of 1994 Coopers & Lybrand seek orders of review, first of the decision of Mr Dennehy to issue and serve the notice purportedly in exercise of the ASC's functions and powers under s.1292 of the Corporations Law; and secondly of the decision to issue proceedings under s.70 against Coopers & Lybrand in the event of non compliance with the notice. Action no. SG 69 of 1994 is an application by the ASC against Coopers & Lybrand under s.70 of the ASC Law. The contention by Coopers & Lybrand that the notice is invalid on the ground that the ASC was not empowered by any relevant legislation, and in particular by s.1292 of the Corporations Law, to issue the notice is a common question in both applications. The parties are agreed that this question of power should be resolved as a preliminary issue. The precise question to be decided has been formulated as whether the notice is invalid by reason of grounds Cl, C2 and C3 in the application for the order of review in Action No. SG 68 of 1994. Those grounds put forward the arguments considered in this judgment. For the purposes of the preliminary issue it is agreed that the REI Building Society was, in the years ended 30 June 1989, 30 June 1990 and 30 June 1991 ("the relevant years") a building society under the Building Societies Act 1975 (SA); and that Coopers & Lybrand, a firm of chartered accountants, were external auditors of REI in the relevant years. It may also be inferred from the correspondence filed by one or other of the parties in support of the applications that the ASC suspects irregularity in the financial statements of REI Building Society in the relevant years and seeks' to investigate the sufficiency of the audits conducted by Coopers & Lybrand in respect of those financial statements. It is necessary by way of background to briefly refer to aspects of the legislative scheme from time to time in place in South Australia under which the supervision and regulation of building societies occurred. By s.9a of the Building Societies Act inserted by the Building Societies Act Amendment Act 1984 with operation from 20 December 1984, the provisions of the Companies (South Australia) Code relating to inspection were extended to building societies as if they were corporations as defined by the Code. The effect of s.9a was to permit the regulatory authority for building societies, (then the Corporate Affairs Commission of South Australia) to avail itself of the powers vested in the NCSC under s.12 of the Companies (South Australia) Code. When the national scheme laws, including the ASC Law, came into force on 1 January 1991 the ASC did not become the regulatory authority for building societies in South Australia. By virtue of the Corporations (South Australia) Regulations, 1990 made under ss.80 and 90(7) of the Corporations (South Australia) Act 1990, s.90(2) of the Corporations (South Australia) Act 1990 did not apply to s.9a of the Building Societies Act. Had it done so references in s.9a to the Companies (South Australia) Code would have been taken to include a reference to corresponding provisions in the national scheme laws. The Companies (South Australia) Code provisions continued to have effect in relation to building societies under the Building Societies Act 1975, modified by Regulation 3, so that references to the "Commission" are references to the Corporate Affairs Commission of South Australia. The effect of these provisions was that after 1 January 1991 the Corporate Affairs Commission continued as the authority with responsibility for the regulation of building societies. This position changed on 1 July 1992, after the relevant period had ended. On that day the Financial Institutions (Application of Laws) Act 1992 (SA) came into operation. By ss.5 & 6 of that Act the AFIC Code set out in s.21 of the Australian Financial Institutions Commission Act 1992 of Queensland, and the regulations under Part 5 of the last mentioned Act, were applied as laws of South Australia, respectively to be referred to as the AFIC (South Australia) Code and the AFIC (South Australia) Regulations. By ss.8 & 9 of the Financial Institutions (Application of Laws) Act the Financial Institutions Code set out in s.30 of the Financial Institutions (Queensland) Act 1992 of Queensland, and regulations in force under Part 3 the last mentioned Act were also applied as laws of South Australia to be referred to as the Financial Institutions (South Australia) Code and the Financial Institutions (South Australia) Regulations. With the exception of societies governed by the Starr-Bowkett Societies Act 1975 all building societies in South Australia, including the REI Building Society, fell under the new regime as "financial institutions". By s.65 of the Financial Institutions (South Australia) Code the Corporations Law did not apply to them. The administration of the Financial Institutions (South Australia) Code and supervision of the former building societies is now vested in the State Supervisory Authority ("SSA"): see s.14 of the Financial Institutions (Application of Laws) Act. The SSA _ has enforcement powers under s.75 of the Financial Institutions (South Australia) Code including powers to obtain information by the service of a written notice, and further powers to obtain evidence under s.76. Those powers are analogous to certain of the powers of the ASC under Part 3 of the ASC Law. Prior to 1 July 1992, s.63(1) of Building Societies Act required that the accounts of a building society be audited annually or more frequently as may be prescribed by the rules of the society. Section 63(2) required the auditor of a society to be a member of a firm of registered company auditors. Section 63(3) specified the matters in respect of which it was the duty of the auditor to form an opinion, and 8.63(5) specified circumstances where the auditor was required to report irregularities discovered in the course of performing an audit. The expression "registered company auditors" used in 8.63(2) was not defined in the Building Societies Act. Provision existed elsewhere for the registration of company auditors. Prior to 1 January 1991 the relevant statutory scheme for registration of company auditors was established by Part II, Division 2, of the Companies (South Australia) Code. In particular s.18 provided for the registration of a person as an auditor, and s.23 made provision for the register of auditors to include the name of a firm under which the auditor practised. Section 277(2)(d) of the Code permitted a firm to act as the auditor of a company if at least one member of the firm was a registered company auditor ordinarily resident in a State or Territory. From 1 January 1991 corresponding provisions for registration of auditors were contained in Part 9.2 of the Corporations Law. Section 1278 in that Part provided that a person registered as an auditor under the Code immediately before the commencement of the Corporations Law is taken to have been registered by the ASC as an auditor under Division 2 of Part 9.2. After 1 July 1992 the Financial Institutions (South Australia) Code has required financial institutions to appoint a person or firm as auditor of the financial institution: 8.279. The qualifications of auditors are set out in s.278. A person consenting to act as auditor must be a registered company auditor. A firm consenting to act as auditor must have at least one member of the firm as a registered company auditor who is ordinarily resident in the State. As with the corresponding provisions of the Building Societies Act the legislation makes no provision for the registration of a company auditor. The legislation assumes that registration is otherwise obtained under the law of the State, as it is under Part 9.2 of the Corporations Law. Section 1292 referred to in the notice as the relevant source of the functions and powers of the ASC under which it was issued is one of the provisions in Division 3 of Part 9.2 headed Cancellation or Suspension of Registration. The section relevantly provides: "1292(1) The Board may, if it is satisfied on an application by the Commission for a person who is registered as an auditor to be dealt with under this section that, before, at or after the commencement of this section: (a) ..- (b) ... (C) ..- (d) the person has failed, whether within or outside Australia, to carry out or perform adequately and properly: (i) the duties of an auditor; or (ii) any duties or functions required by an Australian law to be carried out or performed by a registered company auditor; or is otherwise not a fit and proper person to remain registered as an auditor; by order, cancel, or suspend for a specified period, the registration of the person as an auditor. (12) This section has effect subject to section 1294". Section 1294 provides: "1294(1) The Board shall not: (a) cancel or suspend the registration of a person as an auditor, as a liquidator or as a liquidator of a specified body corporate; or (b) deal with a person in any of the ways mentioned in subsection 1292(9); unless the Board has given the person an opportunity to appear at a hearing held by the Board and to make submissions to, and adduce evidence before, the Board in relation to the matter. (2) Where subsection (1) requires the Board to give a person an opportunity to appear at a hearing and to make submissions to, and bring evidence before, the Board in relation to a matter, the Board shall give the Commission an opportunity to appear at the hearing and to make submissions to, and bring evidence before, the Board in relation to the matter." The notice required Coopers & Lybrand "under s.30 of the ASC Law" to produce the specified books. That section provides: "30 The Commission may give to: (a) a body corporate that is not an exempt public authority; or (b) an eligible person in relation to such a _ body corporate; a written notice requiring the production to a specified member or staff member, at a specified place and time, of specified books relating to affairs of the body." The auditors of REI Building Society are an "eligible person" in relation to that body corporate: s.5 of the ASC Law. Section 30 must be read with s.28 of the ASC Law which limits the exercise of the powers contained in s.30: see Financial Custodian Corporation of Victoria Pty Ltd & Others v Taylor & Another (1991) 9 ACLC 1431 at 1433. Section 28 provides: "28 A power conferred by this Division (other than sections 29, 35 and 36) may only be exercised: (a) for the purposes of the performance or exercise of any of the Commission's functions and powers under a national scheme law of this jurisdiction; or (b) for the purposes of ensuring compliance with a national scheme law of this jurisdiction; or (c) in relation to: (i) an alleged or suspected contravention of a national scheme law of this jurisdiction; or (ii) an alleged or suspected contravention of a law of this jurisdiction, being a contravention that concerns the management or affairs of a body corporate, or involves fraud or dishonesty and relates to a body corporate, securities or futures contracts; or (ad) for the purposes of an investigation under Division 1.° By s.58 of the Corporations (South Australia) Act 1990 (SA), the Australian Securities Commission Act 1989 (Cth), "other than the excluded provisions", is applied as a law of South Australia. Sections 28 and 30 are not excluded provisions. They therefore apply as part of the law of South Australia, and in that application the expression "a national scheme law of this jurisdiction" appearing in s.28(a) includes the Corporations Law of South Australia: see s.60 of the Corporations (South Australia) Act. The ASC in giving the notice purported to exercise functions and powers arising under the application of the ASC Law of South Australia and the Corporations Law of South Australia as part of a single national scheme law: see ss.1D and 11(7) of the ASC Law and 8.37 of the Corporations Act 1989 (Cth). Whilst reference is made generally to the ASC Law in this judgment, in strict form the reference is to the ASC Law of South Australia as it is applied as part of the national scheme law administered by the ASC in exercise of the functions and powers granted to it under the Australian Securities Commission Act 1989 (Cth), including those granted by s.11 of that Act. The only paragraph of s.28 relied upon by ASC is paragraph (a). The first and primary submission of Coopers & Lybrand is that s.1292 of the Corporations Law does not establish any function in, or confer any power on, the ASC. Accordingly the notice purportedly given under s.30 is not one given "for the purposes of the performance or exercise of any of the Commission's functions and powers" under the Corporations Law as required by s.28(a) of the ASC Law. This submission, as it is formulated, acknowledges that the ASC Law draws a distinction between the functions and the powers of the ASC. The distinction in the case of administrative bodies is well recognised in the law. The distinction was discussed by Northrop and Lockhart JJ in Edelsten v Health Insurance Commission & Others (1990) 27 FCR 56 at 62-63: "The distinction between the functions and powers of an administrative body is between functions or purposes or activities of an administrative body on the one hand and the powers conferred upon it to perform or execute those functions, purposes or activities on the other. This is the primary sense in which the words are understood. The types of statutory contexts in which the expressions 'functions' and 'powers' of such bodies appear differ considerably. Sometimes the two expressions are treated interchangeably or with blurred dividing lines; whilst some statutory definitions of 'functions' provide that ''functions' includes powers and duties'..." I am unable to accept the submission. By s.2 of the Corporations Law the ASC, subject to the ASC Law, has the general administration of the Corporations Law. In carrying out that administration the ASC must strive to achieve the objects of s.1(2) of the ASC Law. Section 1292(1) plainly reposes in the ASC the function of making application to the Companies Auditors and Liquidators Disciplinary Board established by s.202 of the ASC Law. The power of the Board under s.1292(1) by order to cancel or suspend for a specified period the registration of a person as an auditor may be exercised only when it is enlivened by an application by the ASC. It is the express function under s.1292(1) of the ASC to initiate the application. It is implicit in s.1292(1), particularly when it is read to have effect subject to s.1294 as required by s.1292(12), that the ASC as part of that function must monitor the conduct of registered auditors, and in the course of determining whether to exercise the function of making application to the Board, to gather information relevant to the circumstances on which the Board could appropriately order cancellation or suspension. To enable these administrative functions to be performed in my opinion it is implicit in s.1292(1) that the ASC is empowered to do so. The ASC is further empowered by 8.1294(2) to appear at a hearing to make submissions and to bring evidence before the Board. The exercise of this express function and power to be meaningful must extend also to conducting enquiries to ascertain the full circumstances of the conduct the subject of the hearing before the Board. In my opinion this interpretation of s.1292 of the Corporations Law gains strong support from the decision of the Full Court of this Court in Hong Kong Bank of Australia Limited & Another v Australian Securities Commission & Others (1992) 108 ALR 70 at 75. The questions before the Court concerned the functions and powers of the ASC in relation to s.597 of the Corporations Law as it then stood. The main issue before the Court concerned s.597(1), but relevantly s.597(2) provided that where specified matters appeared to the ASC or a prescribed person, the ASC or the prescribed person could apply to the Court for an order under s.597. The Full Court held that this subsection reposed in the ASC the function or power of making such an application to the Court. A more difficult question arose in relation to the source of the function or power of the ASC to authorise a person to make an application under the section so as to come within the description of a prescribed person referred to in s.597(1). The analogy in the present case is between s.1292(1) and s.597(2), not s.597(1). In Hong Kong Bank of Australia Limited & Anor v Australian Securities Commission & Others it was suggested that the source of power to authorise persons to make application under s.597 arose not under s.597(1) but under s.11(4) of the ASC Law, but it was not necessary to finally decide the point. However in the later decision of a Full Court of this Court in Mercantile Mutual Life Insurance Co. Ltd & Another v Australian Securities Commission & Others (1993) 112 ALR 463 the Court held that s.597 conferred the function upon the ASC of authorising persons to apply to Court for an order under 597, and, further, that whilst s.597(1) was not itself the source of power to so authorise, that power was conferred upon the ASC by s.11(4) of the ASC Law. If I am wrong in my conclusion that s.1292(1) is not only the source of a function to be performed by the ASC which extends to investigating circumstances that may justify an application in respect of a registered auditor to the Board, but also of the power to do so, s.11(4) of the ASC Law is a clear grant of power to perform the function. The investigative powers sought to be exercised by the ASC by the giving of the notice are necessary for or in connection with or reasonably incidental to the performance of the functions of the ASC arising under s.1292(1). If it is necessary to have recourse to sli(4) of the ASC Law as the source of power which enables the ASC to carry out the function reposed in it by s.1292(1) of the Corporations Law, the failure in the notice to refer to both sections does not invalidate the notice: Mercantile Mutual Life Insurance Co. Ltd v Australian Securities Commission, pp.466, 476 to 479, 488 to 490. A further submission in the alternative made on behalf of Coopers & Lybrand is that even if the ASC has functions and powers under s.1292(1) they do not extend to investigating the activities of auditors otherwise than in relation to their conduct as company auditors auditing a company within Part 3.7 of the Corporations Law. Section 66A(3) of the Corporations Law exempts certain bodies from the operation of Part 3.7 including building societies in South Australia, being bodies that are not companies for the purposes of s.9 of the Corporations Law of South Australia and being bodies corporate incorporated under a law of South Australia other than the Corporations Law or a corresponding previous law. This contention cannot be _ accepted. It faces insurmountable difficulties. The first is that the power of the Board under s.1292(1) arises where the Board is satisfied that "before, at or after" the commencement of the section a registered auditor has been guilty of the proscribed conduct. The section therefore has operation in respect of activities performed as an auditor before Part 3.7 commenced. Secondly, the duties and functions of an auditor recognised by the Corporations Law extend beyond those arising under Part 3.7, for example the functions of auditors in relation to dealers' accounts under Part 7.5, in relation to fidelity funds under s.900, in relation to futures' brokers under s.1215, in relation to the National Guarantee Fund under s.933, and in relation to buy backs under s.206BJ. Moreover the status of a registered auditor is recognised for somewhat different purposes in relation to the inspection of directors' records under s.289(8) and of the books of a company on behalf of a member under s.319(1). Thirdly, the power of the Board arises under s.1292(1)(d) in respect of the conduct of a registered auditor that occurs whether inside or outside Australia. The extension of the power to conduct occurring outside of Australia suggests that the scope of the section was intended to go beyond the conduct of audits under s.3.7 of the Corporations Law. Fourthly, the provisions of s.1292(1)(d)(ii) extend the powers of the Board to the failure to perform duties or functions required by an Australian law to be carried out or performed by a registered company auditor. Here is an express extension of the power of the Board beyond duties and functions arising under the Corporations Law. An "Australian law" includes a law of a State or Territory: s.9 of the Corporations Law. Of particular relevance to the present case, s.1292(1)(d)(ii) therefore extends to duties and functions required to be performed by a registered company auditor in relation to building societies under the Building Societies Act 1975 (SA) and the Financial Institutions (South Australia) Code. This last conclusion also disposes of the third contention advanced on behalf of Coopers & Lybrand that the Board has no function or power in relation to a registered auditor conducting the audit of a building society. Counsel for Coopers & Lybrand stresses that the ASC at no stage has had the administration of the legislation governing building societies, including REI Building Society, in South Australia. That power lay with the Corporate Affairs Commission of South Australia during the relevant period and now lies with the State Supervisory Authority. However the identity of the authority with the functions and powers to investigate the activities of REI Building Society is not the relevant enquiry. The relevant enquiry is as to the identity of the authority with the functions and powers to investigate the conduct of the auditors of the building society. Pursuant to the Building Societies Act, and now the Financial Institutions (South Australia) Code, the appointed auditor of REI Building Society was required to be a registered company auditor. It is the ASC under Part 9.2 of the Corporations Law which has the relevant authority in relation to registered company auditors. In my opinion the preliminary issue should be decided against Coopers & Lybrand, and the Court should declare that the notice was not invalid by reason of the matters raised in grounds Cl, C2 and C3 of the application for an order of review in Action No. SG 68 of 1994. I certify that this and the 18 preceding pages are a true copy of the Reasons for Judgment of Justice von Doussa Associate: Dated: !7 NOVEMBER (97% Counsel for the applicants :Mr N L Strawbridge and Ms R M Pak-Poy Solicitor for the applicants :Minter Ellison Baker O'Loughlin Counsel for the respondent :Mr J J O'Halloran and Ms C Francas Solicitor for the respondent sAustralian Securities Commission Date of hearing 27 October 1994