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Re ICRA Rolleston Pty Ltd[2021] QSC 98

Re ICRA Rolleston Pty Ltd[2021] QSC 98

SUPREME COURT OF QUEENSLAND

CITATION:

Re ICRA Rolleston Pty Ltd [2021] QSC 98

PARTIES:

IN THE MATTER OF ICRA ROLLESTON PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED)

ACN 106 260 600

JOHN PHILLIP CANAVAN

(applicant)

v

WILLIAM JAMES HARRIS, KEITH ALEXANDER CRAWFORD AND JASON PRESTON AS RECEIVERS AND MANAGERS OF ICRA ROLLESTON PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED)

(respondents)

FILE NO:

SC No 4006 of 2021

DIVISION:

Trial

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court at Brisbane

DELIVERED ON:

18 May 2021

DELIVERED AT:

Brisbane

HEARING DATE:

5 May 2021

JUDGE:

Flanagan J

ORDER:

  1. The originating application filed on 9 April 2021 is dismissed.
  2. I will hear the parties as to costs.

CATCHWORDS:

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – INSPECTION OF OR ACCESS TO FINANCIAL RECORDS, REGISTERS, DOCUMENTS AND OTHER INFORMATION – FINANCIAL RECORDS – GENERALLY – where receivers and managers were appointed to a company – where the receivers and managers entered into a contract to sell the company’s interest in a coal mining joint venture – where the company’s sole director seeks to inspect the contract of sale for the purposes of formulating a deed of company arrangement – where the director is entitled to inspect ‘financial records’ kept by the receivers and managers pursuant to s 421 of the Corporations Act 2001 (Cth) – where the receivers and managers oppose inspection by the director – whether the contract is a ‘financial record’ for the purposes of s 421 of the Corporations Act 2001 (Cth)

Corporations Act 2001 (Cth), s 9, s 421, s 1303

Australian Gas Light Co v Valuer-General (1940) 40 SR (NSW) 126, applied

Australian Securities and Investments Commission v Rich (2005) 216 ALR 320; [2005] NSWSC 417, considered

Boulos v Carter (2005) 220 ALR 572; [2005] NSWSC 891, applied

Commonwealth Bank of Australia v Tabet [2008] VSC 161, considered

Confidential v Federal Commissioner of Taxation (2013) 93 ATR 491; [2013] AATA 112, considered

Phillips v Corporate Affairs Commission (SA) (1986) 11 ACLR 182, considered

Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57; [2011] FCAFC 58, applied

Re Lawrence Waterhouse Pty Ltd (in liq) [2011] NSWSC 964, considered

Van Reesema v Flavel (1992) 7 ACSR 225, considered

COUNSEL:

D B O'Sullivan QC, with C A Wilkins, for the applicant

M R Hodge QC, with A R Langshaw, for the respondents

SOLICITORS:

Piper Alderman for the applicant

Arnold Bloch Leibler for the respondents

  1. [1]
    The applicant applies for an order pursuant to s 1303 of the Corporations Act 2001 (Cth) (Act) compelling the respondents to immediately make available for inspection and copying a contract of sale.  Section 1303 gives the Court a discretion to make such an order if a person, in contravention of the Act, refuses to permit the inspection of any book or supply a copy of any book.  The applicant asserts that the respondents have contravened s 421(2) which provides that:

“Any director, creditor or member of a corporation may, unless the Court otherwise orders, personally or by an agent, inspect records kept by a managing controller of property of the corporation for the purposes of paragraph (1)(d).”

  1. [2]
    Section 421(1)(d) requires a managing controller, which includes receivers and managers such as the respondents, to:

“keep such financial records as correctly record and explain all transactions that the managing controller enters into as the managing controller.”

  1. [3]
    “Financial records” is defined in s 9 as follows:

“‘financial records’ includes:

  1. (a)
    invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
  1. (b)
    documents of prime entry; and
  1. (c)
    working papers and other documents needed to explain:
  1. (i)
    the methods by which financial statements are made up; and
  1. (ii)
    adjustments be made in preparing financial statements.”
  1. [4]
    The applicant is entitled to inspect the contract of sale under s 421(2) only if it is a “financial record”.  This is the issue to be determined in this application. 
  2. [5]
    As the contract of sale is not one of the documents specified in paragraph (a) of the definition of “financial records”, the issue can be further refined into three sub-issues:
    1. (a)
      Is the contract of sale a document of prime entry?
    2. (b)
      Is the contract of sale a working paper or other document needed to explain:
      1. the methods by which financial statements are made up; and
      2. adjustments to be made in preparing financial statements?
    3. (c)
      As the definition of “financial records” in s 9 is an inclusive definition, is the contract of sale a financial record within the ordinary meaning of that term? 

These three questions arise in the context of the following background.

Background

  1. [6]
    ICRA Rolleston Pty Ltd (Company), Rolleston Coal Holdings Pty Ltd (Glencore) and Sumisho Coal Australia Pty Ltd are parties to a joint venture in respect of a coal mine located near Rolleston, Queensland.  Glencore holds a 75% interest in the joint venture and its assets, and the Company and Sumisho each hold 12.5%. 
  2. [7]
    The applicant is the sole director, an employee and a creditor of the Company.  He is also one of three directors of the Company’s sole shareholder, ICR Australia Pty Ltd.
  3. [8]
    On 8 December 2020, Glencore, as a secured creditor, appointed the respondents as receivers and managers of the Company pursuant to Glencore’s right under a charge.
  4. [9]
    On 10 December 2020, the applicant appointed an administrator pursuant to s 436A of the Act on the basis that the Company was insolvent or likely to become insolvent at a future time.
  5. [10]
    On 21 December 2020, Glencore, at the first meeting of creditors, caused the administrator originally appointed by the applicant to be replaced by new administrators.
  6. [11]
    In or about February 2021, the respondents entered into a contract to sell the Company’s 12.5% interest in the joint venture.  This contract of sale is not before the Court.  It is accepted, however, that the contract is executory as the transaction it contemplates has not been completed and, as such, Glencore remains a creditor of the Company for the full amount of its lodged proof of debt (which exceeds $29 million).  Glencore is the Company’s most significant creditor.
  7. [12]
    On 10 March 2021, the applicant, by his then solicitors, Stokes Lawyers, told the new administrators that they ought to request details of the sale from the respondents.  On 17 March 2021, having received no response to their correspondence of 10 March, Stokes Lawyers made a further enquiry of the administrators as to what enquiries they had made of the respondents about the sale of the Company’s joint venture interest.
  8. [13]
    On 22 March 2021, the administrators responded to Stokes Lawyers, stating:

“We confirm that we have made several formal demands for information from [Glencore] since our appointment.  Additionally, we have also held several telephone conversations and one meeting with [Glencore] to obtain further information regarding the operation of the Rolleston joint venture.  For the avoidance of doubt, we have verbally flagged with [Glencore] that we expect further enquiries will be made as our investigations progress.

As to the second element of your letter, we are on notice that the [respondents] intend to sell [the Company’s] interest in the Rolleston Joint Venture, although the details surrounding that sale have not been disclosed to us at this time.  In the normal manner, we have advised the [respondents] that [the Company’s] rights in relation to any sale process are being reserved.”

  1. [14]
    The administrators, despite having a power under s 438C of the Act to access the Company’s books, have apparently not requested a copy of the contract of sale from the respondents.  I note that the administrators were served with the material for the present application but did not appear.
  2. [15]
    In these circumstances, the applicant’s solicitors, who by this stage were Piper Alderman, wrote to the respondents on 1 April 2021 as follows:

“Pursuant to Corporations Act 2001 (Cth), s.421(2), our client seeks, by his agent (being a solicitor of this firm), to inspect (and take copies of) the financial records which correctly record and explain the transactions you have entered into as receivers and managers of the Company.

For the avoidance of doubt, we should make it plain that we consider that:

  1. a sale of property of the Company by you as receivers and managers is a transaction you have entered into as receivers and managers of the Company; and
  1. a contract or agreement for any such sale is the financial record or document that correctly records and explains the transaction it effects.”
  1. [16]
    On 14 April 2021, the respondents’ solicitors relevantly replied:

“Contrary to the assertion in your 1 April letter and the orders sought in the Application, however, our clients are not required to make available for inspection pursuant to section 421(2) the contract of sale for the sale of [the Company’s] 12.5% joint venture interest which was the subject of that letter and the correspondence to which you refer in the affidavit filed in support of the Application (or any such document).  A contract is not a ‘financial record’ for the purpose of section 421(2) and, as such, your client is not entitled to inspect it: see, by way of example, Boulos v Carter; Re TARBS World TV Australia Pty Ltd (2005) 220 ALR 572; ASIC v Rich (2009) 236 FLR 1; Re Melbournehomes.com Pty Ltd (In Liq) [2020] VSC 854.”

  1. [17]
    In that same letter, the respondents offered to make available for inspection the transaction statement for the account held by them as receivers in the name of the Company and any associated relevant financial records, but they declined to make available for inspection the contract of sale.
  2. [18]
    The convening period for the second meeting of creditors has been extended to 19 May 2021.  The applicant deposes that he wishes to propose a deed of company arrangement (DOCA) to the creditors and that he needs to see the contract of sale in order to be able to formulate the terms of any such DOCA.  However, the applicant’s reasons for seeking to inspect the contract of sale are irrelevant in determining whether, as a matter of statutory construction, the contract of sale is a financial record for the purposes of ss 9 and 421(1)(d) of the Act.

(a) Is the contract of sale a document of prime entry?

  1. [19]
    The Act does not define the term “document of prime entry”.  The applicant submits that a “document of prime entry” encompasses both books of prime entry and source documents used to create those books.[1]  The respondents submit, however, that:

“A ‘document of prime entry’, read in the context of s 9, is a document into which an accounting record of a transaction is first entered within a company’s books of account; by contradistinction, for example, to later compilations of the company’s accounts.  The term ‘prime’ is a synonym for ‘first’, and the relevant ‘entry’ means an entry into the company’s books of account, rather than ‘entry’ into the transaction generally.”[2]

  1. [20]
    Both parties refer to several authorities in support of their competing constructions of the term.  None of those authorities expressly decide that a contract of sale constitutes a document of prime entry.  The parties also rely on expert accounting evidence as to the ordinary meaning of the term “document of prime entry”.  According to the applicant’s expert, Mr Stavrou, the ordinary meaning extends to an original source document used to make accounting entries in books of prime entry, such as a cash book, purchase ledger or fixed asset register.  To the contrary, the respondents’ accounting expert, Mr Morris, considers that the term “document of prime entry” is not, in his experience, used in accounting.  In his view, it is incorrect to characterise a contract of sale as a document of prime entry.[3]  I deal further with the expert evidence below.  In any case, the question of whether the contract of sale constitutes a “document of prime entry” is a question of statutory construction for the Court.[4]
  2. [21]
    The applicant relies on two principal decisions to support the submission that the contract of sale is a document of prime entry.  The first is Phillips v Corporate Affairs Commission (SA).[5]  The relevant definition that Olsson J was considering was that of “accounting records” in s 5(1) of the Companies (SA) Code (Code).[6]  The relevant definition read:

“‘accounting records’ includes invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, vouchers and other documents of prime entry and also includes such working papers and other documents as are necessary to explain the methods and calculations by which accounts are made up.”

  1. [22]
    An investigator employed by the Corporate Affairs Commission had issued a notice pursuant to s 12(2)(b) of the Code requiring the production of the relevant company’s various books and records for inspection.  The investigator deposed that he wished to view two weapons manufacturing contracts entered into by the company to determine whether any liabilities or payments had become due under them (and therefore ought be reflected in the company’s books of account) and whether the company’s books correctly showed an appropriate amortisation of intangible assets in light of them.  The plaintiffs sought declarations that the notice was ineffective to require production of the contracts.  The notice stated that it was issued for the purposes of ensuring compliance with s 267(1)(a) or (b) of the Code.  These sub-sections required a company to keep such accounting records as correctly recorded and explained the company’s transactions and financial position and to keep its accounting records in such a manner as to enable the preparation of true and fair accounts of the company and for those accounts to be audited.
  2. [23]
    The applicant relies on the following statement of Olsson J:

“There can be no doubt that, generically, a contract related to the sale of goods to be manufactured may well be capable of being a document of prime entry (and thus, by definition, part of the accounting records of a company) or could otherwise constitute part of the books of a company or other documents bearing upon dealings with its assets or the incurring of liabilities.  In the latter case these could also be or bear upon the accounting records of the company within the meaning of 267(1).  In that section it is clear that the phrase ‘accounting records’ is used according to its widest possible normal connotation to encompass the full normal accounts required to be maintained by a company to indicate its true financial position.  In this regard it is to be noted that the definition of ‘accounting records’ in 5(1) is an inclusive and not exclusive definition and I do not therefore read it as, in any sense, narrowing the obviously general scope of 267, bearing in mind the clear intendment of that section.”[7]

  1. [24]
    His Honour’s observations must be understood in the context that his Honour found that only one of the contracts was covered by the notice.  The relevant contracts were not before the Court, but the evidence revealed certain details about them.  His Honour concluded as follows:

“… I conclude that the contract with Greenhorn does not answer the description in the notice of requirement.  The sole evidence before me is that it is for the manufacture and supply of a large number of weapons contingently upon acceptance of a final prototype; and that no income, liabilities, or disposal of assets presently stem from it.  As it was executed after 30 June 1986 it can have no bearing upon amortisation of intangible assets until the accounts for the year ended 30 June 1987 are prepared. 

The situation concerning the Duraprint contract is somewhat different.  Whilst the evidence led from Mr Travers is that it stands on the same generic basis as the Greenhorn contract, the fact is that I have uncontroverted evidence before me from Calaby, as an expert witness, that the consummation of it could well be a highly relevant factor bearing upon what, if any, allowance for amortisation of intangible assets ought to have been provided for in true and fair accounts of Armtech then being prepared (and later actually published) in respect of the fiscal year ended 30 June 1986.”[8]

  1. [25]
    Olsson J noted one of the Corporate Affairs Commission’s submissions as follows:

“3. At the time of giving the notice of requirements Calaby reasonably considered that it was necessary to sight the contracts as constituting either probable direct documents of prime entry or alternatively portion of the ‘books’ of Armtech likely to bear upon the question of the manner in which intangible assets ought properly to be amortised in the accounting records of that company.” 

  1. [26]
    Evidently from his Honour’s conclusions, the application was determined not on the basis that one of the contracts constituted a document of prime entry but rather that the contract bore upon the proper accounting that ought to have been made for the amortisation of intangible assets in the accounts being prepared for the company.  His Honour’s observations as to whether the contracts constituted documents of prime entry are therefore obiter dicta. 
  2. [27]
    The applicant accepts that Olsson J’s statement is obiter but submits that it is consistent with the later decision of the Full Court of the Supreme Court of South Australia in Van Reesema v Flavel[9] where King CJ stated:

“The expression ‘accounting records’ in its ordinary connotation is, in my opinion, apt to include the various books of prime entry such as cashbook and journal as well as the ledgers.  The definition in s 5 extends the expression to include a range of source materials being ‘invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, vouchers and other documents of prime entry and also includes such working papers and other documents as are necessary to explain the methods and calculations by which accounts are made up’.”[10] 

  1. [28]
    The Chief Justice’s observation is merely a restatement of the definition of “accounting records” in s 5 of the Code.  It does not assist in determining whether the contract of sale in the present case is a document of prime entry and it does not lend greater authority to Olsson J’s obiter statement in Phillips v Corporate Affairs Commission (SA).
  2. [29]
    The second principal case relied on by the applicant is Commonwealth Bank of Australia v Tabet.[11]  That case required a consideration of s 1305 of the Act which provides that a book kept by a body corporate under requirement of the Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.  The document in question was a loan agreement between the bank and a customer.  Robson J stated at [7]:

“In my view, the loan contract including its financial information is a document of prime entry.  It is the document to which the accountants must refer to ascertain the amount that is loaned, the terms of the loan and the interest rate payable.  It is a document which records the fees and expenses which are to be paid by the borrower.  It is the document in which the loan transaction and its financial terms are first recorded.  It is thus a book and financial record under s 9.  I find that the loan contract was a book kept by the bank under a requirement of the Act for the purposes of s 1305.  In particular, I find that the loan contract was a financial record required to be kept under s 286 as it correctly recorded and explained the loan transaction and would enable true and fair statements to be prepared and audited.”

  1. [30]
    Tabet is of little precedential weight in determining whether the contract of sale in the present case is a document of prime entry.  The decision is, in effect, an evidentiary ruling which did not provide any detailed consideration of the definition of “financial records” in s 9 or any of the relevant authorities.[12]  Further, his Honour’s statement does not accord with other authorities, including those discussed at [56] to [64] below, which draw a distinction between source documents and documents of prime entry. I also note that Robson J’s conclusion that the loan agreement was a document of prime entry was apparently premised on the agreement’s tendency to record and explain the relevant transaction:

“In particular, I find that the loan contract was a financial record required to be kept under s 286 as it correctly recorded and explained the loan transaction …”[13]

  1. [31]
    The fact that a document tends to record and explain a transaction does not necessarily make it a financial record.  That is because s 286 does not govern what is a financial record – it governs which financial records are required to be kept by companies.
  2. [32]
    The respondents refer to two decisions as to the meaning of the term “documents of prime entry”.  In Confidential v Federal Commissioner of Taxation,[14] the Administrative Appeals Tribunal considered the meaning of the term “document of prime entry” in the context of a company’s obligation to keep written financial records in accordance with s 286 of the Act.  The Tribunal, referring to the definition of “financial records” in s 9, stated:[15]

“A ‘document of prime entry’ of the sort referred to in (b) is also known as a ‘book of prime entry’ and is:

‘A book or record in which certain types of transaction are recorded before becoming part of the … double-entry bookkeeping system.  The most common books of prime entry are the … day book, the … cash book, and the … journal.”

  1. [33]
    The respondents also rely on Austin J’s observation in Australian Securities and Investments Commission v Rich:[16]

“A question has arisen in the cases as to whether ‘financial records’ (‘accounting records’ in the earlier cases) extend beyond documents of prime entry such as the cashbook and journal, to ‘derivative’ documents that have been prepared using judgment or prediction, and involving the interpretation of financial data.”

  1. [34]
    The respondents submit that this statement implies that documents such as cash books and journals, rather than underlying transaction documentation, are what comprise documents of prime entry.[17]  While I accept the respondents’ submission that the contract of sale in the present case does not constitute a document of prime entry, I do not agree with their submission that the term “document of prime entry” is synonymous with “book of prime entry” and that it is limited to “the initial accounting book into which a transaction is recorded, such as a day book, cash book or general ledger”.[18]  Paragraph (b) of the definition of “financial records” in s 9 of the Act uses the word “documents” not “books”.  Austin J, in ASIC v Rich at [297], recognised that the term “financial records” encompassed more than those documents identified in paragraphs (a), (b) and (c) of the definition:

“… Recording and explaining the transactions, financial position and performance of a large business enterprise will involve much more than the preservation of documents of prime entry and the maintenance of a cashbook, general ledger and journal.  It will involve, with the aid of computers, a variety of strategies designed to keep track of such matters as sales, cost of sales, cash, debtors, creditors, and banking and financial arrangements.  The company’s strategies will be likely to include, as essential parts of the process of providing explanations which enable directors and management to understand the company’s financial position and performance, the preparation of snapshot reports on a regular basis and when needed, and assessments of actual figures against projections made in various ways (for example, in budgets and business plans).”

  1. [35]
    Turning then to the expert evidence.  In his report,[19] Mr Stavrou expresses the opinion that a contract for the sale of property of a company is a document of prime entry. He states his opinion as follows:

“4.4.1 A contract for the sale of property is document [sic] of prime entry.

4.4.2 The Corporations Act 2001 does not define documents of prime entry.

4.4.3 Documents of entry are ordinarily understood to be those documents which form the original source material for accounting entries made into the ‘books of prime entry’.  The books of prime entry include the cash book, purchase ledger, and fixed asset register.

4.4.4 A contract of sale of property would be necessary to ascertain both the nature of the assets acquired, the price paid for those assets, and the terms on which such payment is to be made.  It is therefore a necessary source document, or ‘document of prime entry’ in accounting for the transaction within the company’s books and records.”[20]

  1. [36]
    In his subsequent affidavit,[21] Mr Stavrou expresses the opinion that the terms “documents of entry” and “document of prime entry” are used in accounting, although not regularly.  He opines that the more commonly used term is “source documents”.  He identifies that, in his report, he has used the terms “documents of entry” and “document of prime entry” synonymously.  In addition, he has used both these terms synonymously with the terms “prime documents” or “source documents”.  He gives no explanation as to why these terms are synonymous.  He notes that the term “prime documents” is defined in A Dictionary of Accounting, 5th ed (2016), Oxford University Press, as:

“The documents used to initiate and record the accounting entries in an accounting or management accounting system.  Prime documents include sales invoices, materials requisitions, materials returns notes, and direct charge vouchers.”

  1. [37]
    The respondents object to Mr Stavrou’s evidence on the basis that he has failed to explain his reasons for adopting the opinion that a contract of sale is a document of prime entry.[22]  While the respondents’ objection has substance, in the result, it is unnecessary to decide the objection.  During crossexamination, it became apparent that Mr Stavrou could not say that the contract of sale was a document of prime entry.  Mr Stavrou limited a document of prime entry to one which gives “rise to information that’s necessary in the books of prime entry”.[23]  In his opinion, an outcome arising from a source document had to be “probable”; that is, if a transaction was probable, then it would give rise to an adjustment in the financial statements.[24]  According to Mr Stavrou, a source document or prime document, which he considers to be synonymous with a document of prime entry, is one which results in an adjustment to the numbers in the financial accounts of a company.[25]  A source document is therefore a document that generates an input into either the books of prime entry or, alternatively, the financial statements of the company.[26]  Mr Stavrou therefore agreed that not every contract of sale of property would be a document of prime entry.[27]  A contract of sale would only become a document of prime entry when the outcome of the transaction is “probable”.[28]  Mr Stavrou accepted that, until such probability is determined, he is unable to say whether a contract of sale is a document of prime entry or not.[29]
  2. [38]
    In the present case, the transaction that is the subject of the contract has not yet completed.[30]  It is unknown when the contract will complete because it is subject to the satisfaction of conditions precedent relating to third party consents.
  3. [39]
    According to the respondents’ expert, Mr Morris, the terms “documents of entry” and “document of prime entry” are not, in his experience, used in accounting.[31]  The term “book of prime entry” is, however, used widely.[32]  Books of prime entry include the day book, the cash book, the journal and purchase ledger.  Neither Mr Stavrou nor Mr Morris suggested that a contract of sale is a book or ledger of a company that would fall into that category of records.
  4. [40]
    As I have already observed, the contract of sale is not before the Court, nor has it been examined by Mr Stavrou in formulating his opinions.  Not having considered the contract of sale, Mr Stavrou is not in a position to determine the probabilities that such an executory contract would require an adjustment to the Company’s financial accounts.  Even if the contract of sale did necessitate such an adjustment, this does not necessarily make the contract of sale itself a document of prime entry.  It is the document that records the financial effect of the transaction the subject of the contract that constitutes the document of prime entry.

(b) Is the contract of sale a working paper or other document needed to explain:

(i) the methods by which financial statements are made up; and

(ii) adjustments to be made in preparing financial statements?

  1. [41]
    The applicant submits that a contract of sale of company property is a document which falls within paragraph (c) of the definition of “financial records” in s 9 and, because the contract of sale evidences a transaction undertaken by the respondents as receivers, it also comprises a financial record of the kind captured by s 421(1)(d).
  2. [42]
    In support of that submission, the applicant relies upon Mr Stavrou’s opinion that a contract for the sale of property of a company is a document needed to explain the methods by which financial statements are made up:

“4.2.1 Such a sale contract provides direct evidence and necessary information for accounting entries required to be made in the accounting system relating to the nature of the asset purchased and the initial cost of the asset.

4.2.2 Australian Accounting Standards require certain details arising from a contract for the sale of property to be disclosed in an entity’s financial report.

4.2.3 Australian Accounting Standard AASB101 Presentation of financial statements paragraph 15 states that ‘Financial Statements must present fairly the financial position, financial performance and cashflows of an entity.  Fair presentation requires the faithful representation of the effects of transactions, other events and conditions … The application of Australian Accounting Standards is presumed to result in financial statements that achieve a fair presentation’.

4.2.4 Fair presentation of an entity’s financial position requires inclusion of all assets and liabilities of the company.  Assets are frequently established through contractual rights.  Similarly, liabilities often exist as the result of contractual obligations.

4.2.5 Income and expenses, which determine the company’s financial performance, are also usually the result of contracts entered into for the sale or purchase of property, goods, and services.

4.2.6 Depending on the sale price and payment terms struck with a contract sale agreement, the measurement basis of certain assets and/or liabilities in the financial statements could be affected [sic] through adjustments to values of asset and/or liabilities.

4.2.7 Therefore, in my opinion, a sale contract is a necessary document to ensure the fair presentation of financial statements and in understanding the methods by which certain elements of those financial statements have been made up.”

  1. [43]
    In oral evidence, Mr Stavrou identified that simply because a transaction was probably going to occur at some time in the future does not necessarily affect whether the relevant contract is a document needed to explain adjustments to be made in preparing financial statements:

“So if it’s giving us information now, that the value of these assets that we’d previously recorded at value (a) and now they’re not going to be – if the current negotiations are indicating a price less than what the assets are currently recorded in the books at, then that’s an adjustable subsequent event because, even those it’s happening, say, post 30 June, as at 30 June things still need to be – book values can’t exceed the recoverable amount, if we’re talking about fixed assets...”[33]

  1. [44]
    Mr Stavrou, however, clarified that this would depend on the nature of the contract and the stage of the negotiations.[34]  Whether the contract was needed to explain any adjustment to be made in preparing the financial statements would depend on “when the outcome is probable”.[35]  Mr Stavrou accepted that, until such probability is determined, he could not say whether any particular contract constituted a source document.[36]  As I have already observed, the contract of sale is not before the Court and has not been examined by Mr Stavrou.  Even if it was thought that the contract was capable of falling within paragraph (c) of the definition of “financial record”, the evidence before the Court in the present case does not establish that it is a document needed to explain either of the matters referred to in sub-paragraphs (c)(i) or (ii) of the definition.
  2. [45]
    The applicant relies on the following statement of Austin J in ASIC v Rich:

“In my opinion the critical question under s 286 is whether the document fits into the process of recording and explaining the company's transactions, financial position or performance and enabling true and fair financial statements to be prepared and audited. A financial record is a record prepared by the company as part of this process of recording and explaining, a process that may well involve preparation of projections and assessments of historical figures against those projections.”[37]

  1. [46]
    Austin J’s observation is of limited assistance in determining whether the contract of sale constitutes a document needed to explain the methods by which the financial statements are made up or adjustments to be made in preparing the financial statements.  The term “financial statements” is defined in s 9 of the Act to mean annual financial statements under s 295 or half-year financial statements under s 303.  Section 295 identifies the content of annual financial reports.  Section 295(1) provides that the financial report for a financial year consists of:
    1. (a)
      the financial statements for the year; and
    2. (b)
      the notes to the financial statements; and
    3. (c)
      the directors’ declaration about the statements and notes.
  2. [47]
    The question that Austin J was considering was whether “‘financial records’ … extend beyond documents of prime entry such as the cashbook and journal, to ‘derivative’ documents that have been prepared using judgment or prediction, and involving the interpretation of financial data.”[38]  His Honour accepted that, as part of this process of recording and explaining, it may well involve the preparation of projections and assessments of historical figures against those predictions.  His Honour was not considering whether a transactional document, such as a contract of sale, was a document needed to explain the methods by which financial statements are made up and adjustments to be made in preparing financial statements.
  3. [48]
    The applicant also refers to the statement of Barrett J in Boulos v Carter[39] at [57]:

“There is no reason to doubt the receivers’ statement that the two documents effecting the sale to PanAmSat Asia Pty Ltd relate to ‘the only major transaction entered into by the receivers since their appointment’. The statement of receipts is consistent with this. The actual contract documents are, virtually by definition, the documents that ‘correctly record and explain’ the transactions they effect. No other document could do so as fully and effectually as the comprehensive written contract itself. Mr Boulos and Mrs Boulos thus already have that to which they ask the court to secure access for them, so far as the PanAmSat Asia transaction is concerned.”

  1. [49]
    I deal in more detail with Boulos v Carter below.  The applicant relies on this statement in support of the submission that a contract to sell the company’s property falls within the reach of s 421(1)(d).[40]  The statement does not, in my view, support the applicant’s submission.  The application in Boulos v Carter was confined to particular documents relating to “all transactions that the defendants have entered into as receivers and managers of [the company]”.  As noted by Barrett J, the application was “thus concerned only with documents relating to transactions actually completed.  It does not extend to proposed or possible transactions considered but not actually undertaken”.[41]  The receivers had already provided the two relevant documents effecting the sale to the plaintiffs.  I accept the respondents’ submission that Barrett J’s statement must be understood “in the context of his Honour considering whether the orders sought were inutile because the applicants in that case already held copies of the documents which they sought, in circumstances where the receivers had voluntarily provided two particular asset sale agreements”.[42]  Further, his Honour’s statement must be read in light of the observations made by his Honour at [34], where a clear distinction is drawn between source documents, such as a contract, and financial records.  This distinction is discussed further below.

(c) As the definition of “financial records” in s 9 is an inclusive definition, is the contract of sale a financial record within the ordinary meaning of that term?

  1. [50]
    The applicant submits that the contract of sale is a “financial record” within the ordinary meaning of that expression.  The definition of “financial records” in s 9 is inclusive and not exhaustive.  The word “includes” is used to enlarge the ordinary or natural meaning of a word.[43]  The applicant submits that if an invoice or receipt of the Company counts as a “financial record”, it is difficult to see why a contract by which its principal asset has been sold is not a financial record.[44]
  2. [51]
    As the definition of “financial records” in s 9 is inclusive, it is appropriate in considering that term as used in s 421(1)(d) to have reference to the legislative purpose of s 421.[45]
  3. [52]
    Section 421(1) provides:

“A managing controller of property of a corporation must:

  1. (a)
    open and maintain an account, with an Australian ADI, bearing:
  1. (i)
    the managing controller’s own name; and
  1. (ii)
    in the case of a receiver of the property – the title ‘receiver’; and
  1. (iii)
    otherwise – the title ‘managing controller’; and
  1. (iv)
    the corporation’s name;

or 2 or more such accounts; and

  1. (b)
    within 3 business days after money of the corporation comes under the control of the managing controller, pay that money into such an account that the managing controller maintains; and
  1. (c)
    ensure that no such account that the managing controller maintains contains money other than money of the corporation that comes under the control of the managing controller; and
  1. (d)
    keep such financial records as correctly record and explain all transactions that the managing controller enters into as the managing controller.”
  1. [53]
    One of the duties of a receiver is to keep such financial records as correctly record and explain all transactions that the receiver enters into as the receiver.  The word “transaction” is defined in s 9 for the purposes of Part 5.7B of the Act which deals with voidable transactions in Division 2.  The respondents identify the purpose of the legislative scheme created by s 421 as being one “to ensure that there is a record of the acts taken by the [r]eceivers as agents of the company, and in particular to later enable a proper accounting to be undertaken of the transactions into which they have entered into on behalf of the company”.[46]  Those transactions, however, are not limited to those recorded in the bank accounts opened and maintained by a receiver provided for in s 421(a) to (c). 
  2. [54]
    A receiver’s duty extends to keeping “financial records” that record and explain all transactions that the receiver enters into as receiver.  A receiver appointed by a secured creditor is often tasked with realising the company’s assets that are the subject of the security.  In the present case, the relevant secured asset is the Company’s 12.5% interest in the joint venture.  The issue is whether the respondents’ obligation under s 421(1)(d) to keep such “financial records” as correctly record and explain all transactions extends to the contract of sale.  Such an obligation will only arise if the contract of sale is a financial record.
  3. [55]
    Section 421(d), on an ordinary reading, draws a distinction between financial records that correctly record and explain a transaction and the transaction itself.  The applicant submits that the financial record that correctly records and explains the transaction, being the sale of the Company’s 12.5% interest in the joint venture, is the contract of sale itself.[47]  This submission however, fails to draw any distinction between “financial records” which correctly record and explain the transaction and the source document which evidences the transaction.
  4. [56]
    In Boulos v Carter, the plaintiffs, Mr and Mrs Boulos, were directors of a company. They sought orders that they be allowed to inspect “such books and financial records kept by the defendants as correctly record and explain all transactions” that the defendants had entered into as receivers and managers of the company.  Prior to the application being brought by the plaintiffs, the receivers and managers’ solicitors had provided a folder of documents to the plaintiffs which included documents related to an asset sale agreement and a deed of assignment of registered trademarks.  In response, the plaintiffs’ solicitors asserted their right of access to all documents and not simply copies of those selectively chosen by the receivers and managers.  The receivers and managers submitted that the documents sought by the application went beyond “financial records”.
  5. [57]
    Barrett J stated at [34]:

“The term ‘financial records’ obviously refers principally to what would generally be called ‘books of account’, with ancillary documents and records brought within the concept by the inclusive definition in s 9.  As that definition implies, ‘financial records’ are used to compile ‘financial statements’ and represent source materials in their preparation.  In the s 290 context, this is made clear by s 286 which says that financial records kept by a company in conformity with that section must ‘correctly record and explain its transactions and financial position and performance’ and ‘enable true and fair financial statements to be prepared and audited’.  But ‘contracts and transactions’ (to use the words in the plaintiff’s request of 4 May 2005) are, of themselves, too remote from the compilation of financial statements to represent ‘financial records’, even though the effects of contracts and transactions will inevitably be reflected in ‘financial records’ so that they may in due course be appropriately accounted for in financial statements.”

  1. [58]
    Barrett J therefore drew a distinction between:
    1. (a)
      a source document, which evidences a contract or transaction;
    2. (b)
      a financial record, which reflects the effect of a contract or transaction; and
    3. (c)
      a financial statement that accounts for a contract or transaction and is compiled using financial records.
  2. [59]
    His Honour also had to consider a claim by Mr and Mrs Boulos pursuant to s 421(2) of the Act.  His Honour stated at [40]:

“Sales of company property by the receivers in exercise of the power of sale conferred by the debenture are accordingly, for s 421(1)(d) purposes, ‘transactions that the controller enters into as the controller’.  The s 421(1)(d) duty therefore extends to the keeping of ‘financial records’ which correctly record and explain such sales.”

  1. [60]
    His Honour accepted that s 421(2) would support, by means of s 1303 or more generally, an order that Mr and Mrs Boulos be given access to the whole (or some specified part) of the financial records created by the receivers under s 421(1)(d), assuming that there was evidence that such access was being denied.[48] 
  2. [61]
    The applicant submits that the observation of Barrett J at [34] is to be understood in the context in which it was made:

“His Honour was making the point that the terms of the plaintiffs’ request were far too wide: ‘contracts and transactions’ does not mean or equate to ‘financial records’; and after having earlier explained that ‘financial records’ are documents ‘used to compile “financial statements” and represent source materials in their preparation’.  Barrett J was, it is submitted, plainly not intending to say that a ‘contract’ or ‘transaction’ could not ever qualify as a financial record.”[49]

  1. [62]
    I do not accept this submission.  As I have said, in my view, Barrett J at [34] regards a source document (such as a contract) as being too remote from the effects of the contract which his Honour noted would inevitably be reflected in “financial records”.  As correctly submitted by the respondents, a contract for the sale of property does not constitute a financial record “simply because it creates legal obligations that will have, or potentially have, a significant effect for the finances of the company”.[50]
  2. [63]
    In Re Lawrence Waterhouse Pty Ltd (in liq),[51] Ward J considered the meaning of “financial records” in the context of whether a presumption of insolvency pursuant to s 588E(4) of the Act had risen in respect of a company due to its failure to keep financial records as required by s 286.  After quoting the relevant definition of “financial records” her Honour noted that such records are required to be kept under s 286 and include “a balance sheet, profit and loss statement and a cash flow statement”.[52]  Her Honour referred to Austin & Black’s commentary:

Austin & Black note that the keeping of a general ledger appears to be one of the ‘minimum requirements’ of this section and that this requirement is not met by keeping the source material from which a set of books may be written up.  They note:

‘It appears that monthly management accounts of a company are not accounting records required to be kept under this section or its predecessors.  On the other hand, books, wage records and other documents prepared by an accountant were held to be accounting records required to be kept under a predecessor of this section in Caratti v R (2000) 22 WAR 527.  The concept of ‘financial records’ does not extend to underlying contracts and transaction documentation, although the effect of those contracts and transactions should be reflected in company’s [sic] financial records so that they are appropriately accounted for.’”[53]

  1. [64]
    The respondents submit that none of the documents identified by Ward J as constituting “financial records”[54] are of a comparable nature to underlying contractual or transaction documents. Rather, they say that Ward J identifies documents that are in the nature of records created in order to record and reflect the effect of transactions into which a company has entered, and are created for the purpose of maintaining a company’s accounts (as opposed to effecting the transactions themselves).[55]  It may be accepted, as submitted by the applicant,[56] that Ward J did not decide that a contract was not a financial record.  Her Honour’s analysis, however, of what constitutes “financial records” is, in my view, consistent with the views expressed by Barrett J in Boulos v Carter where his Honour drew a distinction between source material such as a contract and “financial records” which are used to compile “financial statements”.[57]  Applying that distinction to the present case, the contract of sale does not fall within the ordinary meaning of the term “financial records”.

Disposition

  1. The originating application filed on 9 April 2021 is dismissed.
  2. I will hear the parties as to costs.

Footnotes

[1]  Applicant’s Outline of Argument in Reply, paragraph 20.

[2]  Respondents’ Outline of Submissions, paragraph 27.

[3]  Affidavit of Brian Morris affirmed 4 May 2021, CD16, Exhibit BM-1.

[4] Australian Gas Light Co v Valuer-General (1940) 40 SR (NSW) 126, 137 (Jordan CJ); Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57, [60] (Keane CJ, Mansfield and Middleton JJ).

[5]  (1986) 11 ACLR 182.

[6]  The Companies (SA) Code was a modified version of the Companies Act 1981 (Cth) adopted as a law of South Australia by the Companies (Application of Laws) Act 1982 (SA).

[7] Phillips v Corporate Affairs Commission (SA) (1986) 11 ACLR 182, 190-1.

[8] Phillips v Corporate Affairs Commission (SA) (1986) 11 ACLR 182, 191.

[9]  (1992) 7 ACSR 225.

[10] Van Reesema v Flavel (1992) 7 ACSR 225, 229.

[11]  [2008] VSC 161 (Robson J).

[12]  Respondents’ Outline of Submissions, paragraph 31.

[13] Commonwealth Bank of Australia v Tabet [2008] VSC 161, [7] (emphasis added).

[14]  (2013) 93 ATR 491.

[15]  (2013) 93 ATR 491, [444] (Forgie DP).

[16]  (2005) 216 ALR 320, [284].

[17]  Respondents’ Outline of Submissions, paragraph 29.

[18]  Respondents’ Outline of Submissions, paragraph 28.

[19]  Affidavit of Stephen George Stavrou sworn 22 April 2021, CD11, Exhibit SGS-01. 

[20]  Affidavit of Stephen George Stavrou sworn 22 April 2021, CD11, Exhibit SGS-01, page 8.

[21]  Affidavit of Stephen George Stavrou sworn 5 May 2021, filed by leave.

[22] Uniform Civil Procedure Rules 1999 (Qld) r 428(2)(e); Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705, [64], [69] and [79] (Heydon JA).

[23]  T 1-15, lines 35-37.

[24]  T 1-16, lines 10-15.

[25]  T 1-16, lines 31-34.

[26]  T 1-16, line 45 to T 1-17, line 2.

[27]  T 1-18, lines 34-35.

[28]  T 1-18, lines 45-46.

[29]  T 1-21, lines 30-41.

[30]  Affidavit of John Preston affirmed 30 April 2021, CD14, paragraph 26.

[31]  Affidavit of Brian Morris affirmed 4 May 2021, CD16, Exhibit BM-1, paragraph 3.4.

[32]  Affidavit of Brian Morris affirmed 4 May 2021, CD16, Exhibit BM-1, paragraphs 3.4 to 3.6.

[33]  T 1-17, line 43 to T 1-18, line 2.

[34]  T 1-18, lines 20-22.

[35]  T 1-18, lines 45-46.

[36]  T 1-21, lines 30-39.

[37] Australian Securities and Investments Commission v Rich (2005) 216 ALR 320, [298].

[38] Australian Securities and Investments Commission v Rich (2005) 216 ALR 320, [284].

[39]  (2005) 220 ALR 572.

[40]  Applicant’s Submissions, paragraph 39.

[41] Boulos v Carter (2005) 220 ALR 572, [56].

[42]  Respondents’ Outline of Submissions, paragraph 22.

[43]  Applicant’s Outline of Argument in Reply, paragraph 16; R v Gray; Ex parte Marsh (1985) 157 CLR 351, 364-5 (Gibbs CJ).

[44]  Applicant’s Outline of Argument in Reply, paragraph 17.

[45] Australian Securities and Investments Commission v Rich (2005) 216 ALR 320, [296].

[46]  Respondents’ Outline of Submissions, paragraph 40.

[47]  T 1-39, lines 30-45.

[48] Boulos v Carter (2005) 220 ALR 572, [42].

[49]  Applicant’s Submissions, paragraph 40.

[50]  T 1-58, lines 20-23.

[51]  [2011] NSWSC 964 (Ward J).

[52] Re Lawrence Waterhouse Pty Ltd (in liq) [2011] NSWSC 964, [235] citing Australian Securities and Investments Commission v ABC Fund Managers Ltd (2001) 39 ACSR 443, [44].

[53] Re Lawrence Waterhouse Pty Ltd (in liq) [2011] NSWSC 964, [236] (citations omitted).

[54] Re Lawrence Waterhouse Pty Ltd (in liq) [2011] NSWSC 964, [234]-[238].

[55]  Respondents’ Outline of Submissions, paragraph 24.

[56]  Applicant’s Outline of Argument in Reply, paragraph 19.

[57] Boulos v Carter (2005) 220 ALR 572, [34].

Close

Editorial Notes

  • Published Case Name:

    Re ICRA Rolleston Pty Ltd; Canavan v William James Harris, Keith Alexander Crawford and Jason Preston as Receivers and Managers of ICRA Rolleston Pty Ltd

  • Shortened Case Name:

    Re ICRA Rolleston Pty Ltd

  • MNC:

    [2021] QSC 98

  • Court:

    QSC

  • Judge(s):

    Flanagan J

  • Date:

    18 May 2021

  • Selected for Reporting:

    Editor's Note

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.
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