FEDERAL COURT OF AUSTRALIA CORPORATIONS - validity of notice requiring production of books given by Australian Securities and Investment Commission under s 30 of ASC Law – whether preamble of notice identified alleged or suspected contravention of Corporations Law – whether notice ambiguous – whether notice oppressive – meaning of expression "relating to". WORDS AND PHRASES – "relating to" ASC Law, ss 28, 30 Corporations Law, s 1001A Spencer Motors Pty Ltd v LNC Industries Ltd [1982] 2 NSWLR 921 (applied) Southern Pacific Hotel Services Inc v Southern Pacific Hotel Corporation Ltd [1984] 1 NSWLR 710 (applied) CLIFFORD CORPORATION LIMITED v AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION NG 3202 of 1998 LINDGREN J SYDNEY 14 DECEMBER 1998 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 3202 of 1998 BETWEEN: CLIFFORD CORPORATION LIMITED (ACN 000 750 103) APPLICANT AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION RESPONDENT JUDGE: LINDGREN J DATE OF ORDER: 14 DECEMBER 1998 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be treated as an application under the Administrative Decisions (Judicial Review) Act 1977 (Cth) for an order of review of the decision of the respondent to issue to the applicant notice dated 24 November 1998 requiring the production of books, and that compliance with O 54 of the Federal Court Rules be dispensed with. 2. The application be dismissed. 3. The parties have liberty to apply in respect of costs on a date and at a time by arrangement with the Associate to Lindgren J. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 3202 of 1998 BETWEEN: CLIFFORD CORPORATION LIMITED (ACN 000 750 103) APPLICANT AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION RESPONDENT JUDGE: LINDGREN J DATE: 14 DECEMBER 1998 PLACE: SYDNEY REASONS FOR JUDGMENT INTRODUCTION The relief for which the applicant ("Clifford") presses is a declaration that a notice dated 24 November 1998 from the respondent ("the ASIC") to Clifford requiring the production of books pursuant to s 30 of the ASC Law ("the Notice") is invalid and an order setting the Notice aside. In the alternative, Clifford seeks an order that the Notice be set aside as to paras 1, 2 and 3. A dispute between the parties as to an earlier notice dated 18 November 1998 was resolved when the ASIC withdrew that notice on 7 December. Clifford's application purports to have been brought under O 71 r 4 (1) of the Federal Court Rules. But this proceeding is not a proceeding arising under the ASC Law. The ASIC did not contend that the Court lacked jurisdiction to entertain Clifford's application and suggested that it might satisfactorily be treated as an application for an order of review under the Administrative Decisions (Judicial Review) Act 1977 ("the ADJR Act") of the decision to issue the Notice. The decision to issue the Notice was a decision under the ASC Law and was therefore a decision to which the ADJR Act applied. Grounds (c) and (d) of s 5(1) of the ADJR Act provide for the following grounds of review: "(c) that the person who purported to make the decision did not have jurisdiction to make the decision; (d) that the decision was not authorized by the enactment in pursuance of which it was purported to be made;…" Clifford's case is that the Notice was not authorised by s 30 of the ASC Law on two grounds: ambiguity and oppressiveness. Absence of jurisdiction or of authority would support the making of an order and granting of declaratory relief under s 16 of the ADJR Act. It has been appropriate to hear Clifford's application as an application for an order of review under the ADJR Act. I will dispense with compliance with O 54 which relates to the making of such applications and which, for example, requires that such applications be in, or substantially in, the form numbered 56 in the First Schedule to the Rules. BACKGROUND Clifford is a public company, the shares in which are listed and traded on the Australian Stock Exchange ("ASX"). It is the holding company of operating subsidiaries. The principal business of the subsidiaries is that of a builder and repairer of bus bodies. Through one subsidiary, Signature Group Australia Ltd ("Signature"), it operates a quite different business, namely, the leasing out of commercial office premises. Signature takes up head leases, undertakes a fit out, then sub-lets or licenses office suites to business and professional tenants. Signature itself has subsidiaries through which these activities are carried on. The ASIC's concern arose out of the fact that Clifford painted a "rosy" picture of its financial position, yet within a short time afterwards the true facts proved to be totally different. The detail will become clear from the following chronological account. On 23 March 1998, Clifford issued a "quarterly newsletter" for the period ended 31 December 1997. It included the following "box" which, as will appear below, was to be referred to in the Notice: Preliminary Forecasts to 30 June 1998 Actual Forecast 30/6/96 30/6/97 31/12/97 30/6/98 FY FY 6 mths FY $m $m $m $m Total Assets 38.4 98.6 118.3 127.9 Shareholders' Funds 25.8 53.6 56.1 64.9 Revenue 10.0 85.2 54.5 124.2 EBIT 3.1 5.1 5.1 12.9 Abnormals - 11.4 (0.4) 4.8 Interest .1 1.7 1.1 2.0 Net Profit 3.0 14.8 3.6 15.7 Shares on Issue (No.) 72.1m 129.0m 132.2m 136.0m It will be noted that as at 23 March 1998, Clifford was forecasting a net profit of $15.7m for the year ended 30 June 1998. On 26 May 1998, Clifford's directors informed the ASX that Clifford intended to release forward plans and projections for the next three years at simultaneous Australia-wide functions to be held on Tuesday 2 June. On 2 June the directors released those forward projections, one of which was: "4. Net profits will approximate $10.0m in the current year rising to more than $40.0m in 2001 as part of the 3 year development plan being released today." The "current year" referred to was the year ended 30 June 1998 and the three year period referred to was that covered by the years ended 30 June 1999, 2000 and 2001. Also on 2 June 1998, Clifford issued a quarterly newsletter for the period ended 31 March 1998. It contained the following article which, it will be seen below, was also to be referred to in the Notice: " TOWARDS 2001 Financial Projections The three year program is expected to have substantial ramifications on the profitability and earnings of the Clifford group. By the end of the period, the following milestones are planned to be reached: · consolidated turnover to rise from $109.0m (in 1998) to more than $290.9m – an increase of 166%. · turnover of the expanded Clifford group, including its partners, will exceed $550.0m. · profits to rise from more than $20.0m next year, to about $31.0m in 2000 and more than $40.0m in 2001. Overseas income will contribute progressively each year. · positive operating cashflows will progressively rise from $8.6m to more than $28.0m. · gross assets will rise in the current year to about $133.0m from last year's $99.0m, and are planned to rise to more than $227.0m in the planning period – a rise of 70% in the three years. · the net to gross assets ratio will rise from the current 54% to a planned 65%. · net assets and shareholder funds will rise from a current $72.0m to more than $146.0m, increasing at a rate of about 27% per year over the total three year plan period. · return on shareholder funds will more than double to 28%. · earnings per share will rise to more than 21.0 cents per share by 2001. · dividend policy will be maintained with an expected 4.0 cents total dividend this year progressing to 8.5 cents in 2001. Clifford expects to pay 5.5 cents per share next year." Of immediate significance is that as at 2 June 1998 Clifford was predicting a net profit of $10.0m for the year ended 30 June 1998. On 25 August 1998, the ASX wrote to Mr Craig Ellis, the Company Secretary of Clifford, referring to the fact that the market price of Clifford's securities had fallen from fifty four cents on 1 June to forty three cents on 25 August. The letter drew attention to the importance of timely disclosure of relevant information in the operation of an efficient market. The letter referred to ASX listing rule 3.1 which, the letter said, was "a particularly important listing rule" which was part of the ASX's "continuous disclosure regime", and which was based on the following principle: "Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest." The next day, 26 August, Clifford, through Mr Ellis, replied to several questions which the ASX letter had raised. The reply included the following: "3. As already advised to the market, the Company expects that the operating profit before abnormal items and income tax will change such that the figure for the financial year ended 30 June 1998 would be more than 15% higher than the previous year. ……………………………………………………………………………………………. 6. I hereby confirm that the Company is in compliance with the Listing Rules and in particular Listing Rule 3.1." On 11 September, Clifford released preliminary final results for the period ended 30 June 1998 as follows: Full-year 1998 ($M) 1997 ($M) Turnover 114.510 85.227 EBITDA 11.806 7.359 Amortisation & Depreciation (3.545) (2.110) 7.681 5.249 Interest (2.674) (1.701) Net profit before abnormals 5.007 3.548 Abnormals (4.254) 11.245 As appears from this table, Clifford's net profit before "Abnormals" was $5.007m and after deduction of them was $0.753m. Clifford's actual net profit therefore fell far short of its forecast in its quarterly newsletter issued on 23 March 1998 of $15.7m and its prediction in its quarterly newsletter issued on 2 June of approximately $10.0m. There followed further correspondence between the ASX and Clifford in relation to the difference between the predicted and actual figures. On 18 November, the ASIC issued a notice to Clifford requiring the production of books. As noted earlier, the ASIC withdrew this notice on 7 December. On 26 November, the directors of two of the bus body subsidiaries of Clifford appointed voluntary administrators in respect of those companies, and certain persons were appointed as receivers and managers of certain other companies in the Clifford group. On 24 November the ASIC issued the Notice which is as follows: "FORM 2 Regulation 5 AUSTRALIAN SECURITIES COMMISSION REGULATIONS Australian Securities and Investments Commission NOTICE REQUIRING THE PRODUCTION OF BOOKS To: Clifford Corporation Limited ACN 000 750 103 Level 10 66 Hunter Street SYDNEY NSW 2000 In relation to a suspected contravention by the directors of Clifford Corporation Limited ACN 000 750 103 ("the Company") of section 1309 of the Corporations Law ("the Law") between 2 June 1998 and the date of this notice and a suspected contravention by the Company of section 1001A of the Law between 2 June 1998 and the date of this notice, you are hereby notified that under Section 30 of the ASC Law, you are required to produce to Neil Johnson, at 10:00am on Wednesday, 2 December 1998, at Level 10, 135 King Street, Sydney, NSW, the following books: 1. All books relating to or used in the preparation of the 'Preliminary Forecasts to 30 June 1998' contained in the document entitled 'Clifford Corporation Limited Quarterly Newsletter – Period Ending 31 December 1997' dated 23 March 1998. 2. All books relating to or used in the preparation of the article entitled 'Towards 2001 Financial Projections' contained in document entitled 'Clifford Corporation Limited quarterly newsletter period ending 31 March 1998' dated 2 June 1998. 3. All management reports howsoever called relating to the financial performance of the Company or any of its subsidiaries during or for the financial year ended 30 June 1998. 4. All minutes of meetings of directors of the Company held during the period 1 July 1997 to the date of this notice. 5. All board papers howsoever called prepared for or considered at meetings of directors of the Company held during the period 1 July 1997 to the date of this notice. 6. All minutes of meetings of any audit committee of the Company held from 1 July 1997 to the date of this notice. 7. All books prepared for or considered at any meeting of any audit committee of the Company during the period 1 July 1997 to the date of this notice. 8. The agreements entered into by the Company with IB Your Office International Holdings Inc for the sale of Signature Group Australia Limited which are referred to in the Company's announcement to Australian Stock Exchange Limited on 21 October 1998, a copy of which is annexure "A" hereto. Dated 24 November 1998 Signature of the person requiring the production of books: Neil Johnson" A covering letter enclosed a copy of some definitions of expressions, some of which were used in the notice. These included the definition of "books" which is set out below. As well, the list referred to the penalties attracted by a failure to comply with the notice. On 26 November, Clifford's solicitor, Mr P A Biber, wrote to the ASIC asserting that the Notice was ambiguous and on 27 November he wrote again threatening proceedings. On 27 November, the ASIC replied. Clifford launched this proceeding on 2 December. REASONING Section 30 of the ASC Law provides: "30 The Commission may give to: (a) a body corporate that is not an exempt public authority; ... 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 "Commission" is the ASIC. Clifford is not "an exempt public authority." The expression "books" is defined in s 5 (1) of the ASC Law to include: "(a) a register; (b) financial reports or financial records, however compiled, recorded or stored; (c) a document; (d) banker's books; and (e) any other record of information". Section 28 of the ASC Law provides, relevantly, that the power conferred by s 30 may only be exercised: "(c) in relation to: (i) an alleged or suspected contravention of a national scheme law of this jurisdiction; ..." The expression "national scheme law" is defined in s 5 (1) of the ASC Law to mean, relevantly, the Corporations Law ("the Law"). I turn now to the attacks made on the Notice: The preamble Clifford attacks the words in the preamble, "and a suspected contravention by the Company of section 1001A of the Law". Subsections 1001A (1) and (2) of the Law are as follows: "1001A (1) This section applies to a listed disclosing entity if provisions of the listing rules of a securities exchange: (a) apply to the entity; and (b) require the entity to notify the securities exchange of information about specified events or matters as they arise for the purpose of the securities exchange making that information available to a stock market conducted by the securities exchange. (2) The disclosing entity must not contravene those provisions by intentionally, recklessly or negligently failing to notify the securities exchange of information: (a) that is not generally available; and (b) that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity." I need not discuss those expressions in these two subsections which are defined in the Law. It is not in dispute that Clifford was a listed disclosing entity to which the voluminous listing rules of the ASX applied and that those rules imposed on Clifford a "continuous disclosure obligation" of the kind described in par 1001A (1) (b). Clifford submits that the preamble in the Notice does not identify which listing rule is in question and therefore does not identify the "alleged or suspected contravention" in question. In my opinion, such a failure of a preamble in a notice under s 30 of the ASC Law to identify the alleged or suspected contravention or contraventions of a national scheme law would not spell invalidity for the notice. The relevant inquiry is whether the Commission had in fact exercised the power to give the notice in relation to an alleged or suspected contravention of a national scheme law of the jurisdiction in question. A failure of the preamble to identify the contravention might at most be some evidence relevant to that factual issue. In any event, in my view, in the context of the factual background, the relevant alleged or suspected contravention was identified. The expression "those provisions" in s 1001A (2) refers back to provisions of listing rules of the kind described in s 1001A (1). The listing rules of the ASX are in evidence. Listing rule 3.1 is, relevantly, as follows: "3.1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information." Listing rules 3.2 to 3.19 impose obligations to disclose information of specific kinds and in specific situations, such as, in the context of a takeover, a buy-back of shares or a reorganisation of capital. Clifford could not, on the evidence before me, have reasonably understood the reference in the preamble in the Notice to an alleged or suspected contravention of s 1001A of the Law, to have been referring to any of listing rules 3.2 to 3.20 and could have reasonably have understood it to be referring only to rule 3.1. Suggested ambiguity of paras 1 and 2 of the Notice Paragraphs 1 and 2 of the Notice are structured identically. Paragraph 1 refers to the table headed "Preliminary Forecasts to 30 June 1998" in Clifford's newsletter dated 23 March 1998 ("the Table"), while para 2 refers to the article headed "Towards 2001 Financial Projections" in Clifford's newsletter dated 2 June 1998 ("the Article"). Clifford submitted that the meaning "relating to ... the preparation of" the Table or the Article is only one possible meaning of the paras 1 and 2. Another is, according to the submission, "relating to ... the" Table or Article. In support, Clifford submits that the words "relating to" must have been intended to mean something different from the words "used in", otherwise they would not appear at all. In my opinion, the paragraphs are not ambiguous. Paragraphs 1 and 2 direct attention, not to the Table and Article themselves, but to the process of preparation of them. Clifford would reasonably have understood paras 1 and 2 to mean, and only to mean, "All books relating to, or used in, the preparation of the" Table or Article. It is, moreover, an unreasonable construction that the Notice was meant to call for production of every book (as defined) having any relationship whatever to any aspect of the contents of the Table or of the Article. The broad definition of "book" was set out earlier. So construed, the Notice would encompass every book of Clifford and of its subsidiaries in respect of their trading and balance sheet positions during the trading periods and as at the balance dates referred to in the Table and the Article. It is unreasonable to think that the Notice was intended to call for production of books so numerous and voluminous, a fortiori having regard to the fact that the time allowed was five week days and a Saturday and Sunday. Again, if the construction just described had been intended, the Notice would not have referred to the "preparation" of the Table and the Article, but would have said something like "all books relating to or used in the calculation or derivation of the figures in" the Table or the Article. I accept that my construction entails the result that the words "relating to" may not have a meaning substantially different from the words "used in": it is not easy to think of a book which would not have been "used in" the preparation of the Table or Article but which nonetheless "related to" that preparation. But there could be such a book. The words "related to" safeguard against the possibility of an unduly narrow construction of the words "used in". Even if, contrary to my view, paras 1 and 2 have the structural significance, "all documents relating to [the Table or the Article]", I think that a reasonable construction of them would be substantially the same as the construction of "all books relating to the preparation of [the Table or the Article]". The point is that either way, the reference is not to the calculation or derivation of the data or information as such contained in the Table or Article, but is to the Table or Article itself. What I have said to date does not depend upon the background facts which I have outlined earlier. That background, however, also makes it clear that the ASIC's concern was with the predictions in the Table and the Article of a net profit figure for the year ended 30 June 1998, in each case published not long before the end of that year. While I accept Clifford's submission that paras 1 and 2 do not refer only to those predictions in the Table and the Article, they support the view that Clifford ought reasonably to have understood the Notice not to refer to all the books containing underlying historical financial data and information, but with the process by which Clifford composed the Table and the Article. The background thus supports the construction which I have, in any event, concluded is the correct one. Suggested ambiguity of para 3 of the Notice I think that para 3 of the Notice is not ambiguous either. The expression "management report" relating to a company is a familiar one and refers to a report by management to the company's directors. The expression "financial performance of the Company or any of its subsidiaries" refers to the overall financial performance of the Company or of any of its subsidiaries and does not refer to individual aspects of financial performance. Accordingly, para 3 calls for production of all reports by management to a board of directors, the subject of which is the overall financial performance of Clifford or of any of its subsidiaries during or for the financial year ended 30 June 1998. Oppressiveness In his affidavit sworn 4 December 1998, Mr Ellis said that if para 1 of the Notice had one meaning identified by him, he would have to locate in respect of the twenty eight operating companies comprised in the Clifford group of companies, for the period 1 July 1995 to 24 November 1998, forty five classes of documents, and that this would take between several weeks and one and a half months, provided he had five people working full time to collate the documents for production to ASIC. He said that if, on the other hand, para 1 required Clifford to produce only books "used in the preparation of" the Table, only eight classes of documents would have to be produced and it would take only one day to have them available to be produced to the ASIC, provided Mr Ellis had five people working full time to collate the documents for production. Mr Ellis said that if para 2 required production of documents "used in the preparation of" the Article, a further two classes of documents would have to be produced. He does not say what additional time or effort would be involved and I proceed on the assumption that any additional time or effort would be negligible and would not affect his estimate of one day with five people working full time. My construction of paras 1 and 2 of the Notice, while not precisely that to which Mr Ellis secondly referred in his affidavit, is close to it. At least, I do not think that the presence of the words "relating to or" increase substantially the number or range of documents beyond those that would have been called for by the use of the words "used in" alone. The expression "relating to" is not to be given an oppressive interpretation, but rather its natural meaning in the context: Spencer Motors Pty Ltd v LNC Industries Ltd [1982] 2 NSWLR 921 at 929, per Waddell J; Southern Pacific Hotel Services Inc v Southern Pacific Hotel Corporation Ltd [1984] 1 NSWLR 710 at 720-1. The Notice was served late on 24 November and called for production at 10.00 am on Wednesday 2 December. Accordingly, it allowed five full working days and a Saturday and Sunday. In my opinion it is not shown that the Notice called for production within an oppressively short period. CONCLUSION Clifford's application will be dismissed. Senior counsel for Clifford indicated that he would wish to be heard on costs in any event in view of the ASIC's withdrawal of its earlier notice. The orders of the Court at this stage are: 1. The application be treated as an application under the Administrative Decisions (Judicial Review) Act 1977 (Cth) for an order of review of the decision of the respondent to issue to the applicant notice dated 24 November 1998 requiring the production of books, and that compliance with O 54 of the Federal Court Rules be dispensed with. 2. The application be dismissed. 3. The parties have liberty to apply in respect of costs on a date and at a time by arrangement with the Associate to Lindgren J. I certify that the preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. Associate: Dated: 14 December 1998 Counsel for the Applicant: Mr J V Agius SC and Mr R M Gye Solicitors for the Applicant: Phillip Anthony Biber Counsel for the Respondent: Mr D J Hammerschlag Solicitors for the Respondent: Rose Webb, Solicitor, Australian Securities and Investment Commission Date of Hearing: 9 December 1998 Date of Judgment: 14 December 1998