ASIC Takes Account Of Bad Accounting Practices

In the recent case of Australian Securities and Investments Commission v Noumi Limited [2024] FCA 862 (ASIC v Noumi), ASIC commenced proceedings in the Australian Federal Court against Noumi Limited (Noumi), the owner of several popular alternative milk brands, for failing to adhere to the ASX Listing Rule’s requirements for continuous disclosure. 

ASIC alleged that Noumi’s failure was a consequence of not adhering to proper accounting practices, including:

  • failing to write off un-sellable stock; and
  • classifying potential future payments expected under a cancellable contract as an "asset" of the company

In this case Noumi, a company that had recorded assets of just over $100m, had the potential to receive the maximum fine of $11.2 billion due to its continued contraventions.1  However, due to penalty considerations, his Honour Justice Jackman found it fit to only fine the company $5 million.  His Honour noted that Noumi’s total market capitalisation dropped by 82.39%falling to a value of $30.47 million,3 demonstrating the damaging effects that such breaches can have on shareholder sentiment.

This case serves as a reminder to directors and officers to always ensure that its company adheres to the continuous disclosure obligations pursuant to the ASX Listing Rules (Listing Rules) and the Corporations Act 2001 (Cth) (Corporations Act), as members of the general public rely on such company disclosures in order to make their investing decisions.

Background

Noumi is an ASX listed company that runs a business in relation to the production of dairy and plant beverages, its popular brands including:

  • Milk Lab;
  • Australia’s Own;
  • So Natural; and
  • Vitalife.

As an ASX listed entity, Noumi was required each half and full financial year to prepare and disclose to the ASX financial reports, including financial statements which complied with Australian accounting standards.

Applicable Legislation

The continuous disclosure regime is set out in Chapter 6CA of the Corporations Act 2001 (Cth) (Corporations Act).

Pursuant to s 674(2) of the Corporations Act, an ASX listed entity must disclose information to the market where:

  • the Listing Rules require notification of the information to the ASX;
  • the information is not “generally available”; and
  • the information is price-sensitive (i.e. it is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the securities of the entity).

ASX Listing Rule 3.1 provides that once an entity becomes aware of any information 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 notify the ASX of that information in accordance with the Listing Rules.

The term “aware” is defined in Listing Rule 19.12 as follows:

an entity becomes aware of information if, and as soon as an officer of the entity ... has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties as an officer of that entity.

The Contraventions

As an ASX listed entity, Noumi was required each half and full financial year to prepare and provide the ASX with financial reports including financial statements which complied with Australian accounting standards. 

These financial statements were required to give a true and fair view of the financial position and performance of Noumi and its subsidiaries which formed its consolidated group, including its inventories, revenue, and profit.

However, for the reasons described below, Noumi breached its obligations in two distinct ways.

Failure to Write Off Not Saleable Inventory

Noumi subscribed to an accounting policy which was consistent with Australian accounting standards (Noumi’s Accounting Policy).4  

Noumi’s Accounting Policy required that its stock must be valued at the lower of cost and net realisable value.  The practical effect of this policy meant that whenever stock was unable to be sold, it should have been written down and recorded as an expense in the period that the write-down or loss had occurred.5

However, Noumi’s CEO put in place a standing policy which stated that stock was not to be disposed of or written off unless the CEO gave authority or permission to do so (CEO’s Instructions), and was often not given by the CEO.6

Because of the CEO’s Instructions, a practice developed at Noumi where no such disposal or write-down of inventory occurred.7  Instead, as a consequence of the CEO’s Instructions, a practice developed where Noumi would not write off inventory that was no longer able to be sold (Not Saleable Inventory), and instead Noumi would:

  • store the Not Saleable Inventory in warehouses;
  • assign the Not Saleable Inventory as “non-nettable inventory” within its stock-take software; and
  • still record the Not Saleable Inventory as assets in Noumi’s reports to the market.

Noumi stored away so much of its Not Saleable Inventory that it was required to lease additional warehouse spaces to store the obsolete, rejected or expired stock.8  The Court noted that Noumi’s Chief Financial Officer (CFO) at the time of the continuing contraventions, when attending one of these warehouses sent the following text message to Noumi’s General Manager of Commercial Strategy: “I have just walked though all the hidden factories at shepparton - holy holy crap!” (sic), to which she replied “yep, photos don’t do it justice”.9

From 29 August 2019 to 25 May 2020, Noumi disclosed to the market its:

  • end of financial year report released to the ASX on 29 August 2019 in respect of Noumi’s financial position up to 30 June 2019; and
  • end of financial year report released to the ASX on 29 August 2019 in respect of Noumi’s financial position up to 30 June 2019; and half year financial report released to the ASX on 27 February 2020 in respect of Noumi’s financial position up to 31 December 2019 (HY20 Financial Report).10

In both reports, Noumi recorded the Not Saleable Inventory as an asset of the Company, thus leading Noumi to overstate its net asset position by more than $20 million.11

The Court found that Noumi’s CEO and CFO at the time of the continuing contraventions ought to reasonably have come into the possession of the knowledge that Noumi was holding on to a material amount of Not Saleable Inventory,12 and therefore Noumi was aware that the information that it represented to the market with respect to its net asset position was incorrect.13  As such, Noumi was required to notify the market of this information under Listing Rule 3.1 and s 674 (2)(b) of the Corporations Act.14

Counting Transaction Price Under A “Cancellable Contract” As An Asset

Noumi’s Accounting Policy, consistent with Australian accounting standards, requires revenue from the sale of goods to only be recognised when:15

  • a contract has been formed;
  • the performance obligations of each party have been identified;
  • the transaction price has been determined;
  • there has been an allocation of the transaction price to the performance obligations within the contract; and
  • the performance obligations under the contract are satisfied.

In April 2019, Noumi received a lucrative purchase order from a Singaporean company (Interfood) for 4,000kg of Noumi’s product, lactoferrin, at a price of USD1,950 per kg (Purchase Order).  The Purchase Order represented a total sale price of USD7.8 million to Noumi.16

However, the Purchase Order was subject to certain requirements which included:

  • customer sample approval;
  • Certification and Accreditation Administration of China approval (CNCA Approval); and
  • an export licence to China by June 2019, (Requirements under the Contract).

If the Requirements under the Contract were not fulfilled, then Interfood had the right to cancel the Purchase Order.17

Between 1 July 2019 and 31 December 2019, Noumi raised 16 invoices to Interfood in respect of the Purchase Order (Interfood Invoices), amounting to a total price of at least $9.8 million.18  Noumi recorded this amount of $9.8 million as an asset of the company after all of the Interfood Invoices were raised.

However, between 1 July 2019 and 31 December 2019, all of the Requirements of the Contract had not been fulfilled, namely because there was no customer sample approval and there was no CNCA Approval.19  Therefore at this point, the Purchase Order was able to be cancelled by Interfood.

Notwithstanding the above, Noumi still recorded the amount of $9.8 million in respect of the Interfood Invoices as an asset of the company within its HY20 Financial Report, in circumstances where the Purchase Order was able to be cancelled.

By March 2020, none of the Interfood Invoices had been paid, and none of the lactoferrin sales had been shipped in relation to the Purchase Order.20  It was reported to Noumi’s CFO on 26 March 2020 that this lack of payment resulted in a loss of $9,309,375 to Noumi’s net asset position.21

The Court found that Noumi’s CEO and CFO at the time of the continuing contraventions ought to reasonably have come into the possession of the knowledge that Noumi was not receiving, or due to receive, monies in relation to the Purchase Orders, and therefore Noumi was aware that the information that it stated to the market with respect to its net asset position was incorrect.22  Noumi was required to notify the market of this information under ASX Listing Rule 3.1 and s 674 (2)(b) of the Act.23

Penalty Considerations

As Noumi had admitted to these two continuing contraventions, the Court was then required to determine whether the penalty agreed by the parties was appropriate in the circumstances.

Section 674(2), being the section of the Corporations Act breached by Noumi, is a civil penalty provision.  Therefore, the Court may order a person to pay the Commonwealth a pecuniary penalty in relation to the contravention of s 674(2) if the contravention:24

  • materially prejudices the interests of acquirers or disposers of the relevant financial products; or
  • materially prejudices the issuer of the relevant financial products or, if the issuer is a corporation or scheme, the members of that corporation or scheme; or
  • is serious.

In this case, the parties both agreed that each contravention materially prejudiced the interests of Noumi, and the material prejudice to the shareholders was serious.25

The Court found that the prejudice to shareholders was serious because, following Noumi’s corrective disclosure, Noumi’s:

  • share price collapsed, where Noumi’s share price was 82.39% lower than before the corrective disclosure was made.26
  • standing with its debt and equity providers was harmed, requiring Noumi to conduct capital raisings in May 2021 and May 2022.27
  • shares were traded, and shareholders bought and sold their shares, in an uninformed market from 29 August 2019 until 25 May 2020.28

The purpose of a civil penalty regime is primarily, if not solely, the promotion of the public interest in compliance with the provisions of the relevant Act by the deterrence, specific and general, of further contraventions.29 The penalty must be fixed with a view to ensuring that the penalty is not such as to be regarded by the offender or others as an acceptable cost of doing business.30  In other words, those engaged in trade and commerce must be deterred from the cynical calculation involved in weighing up the risk of penalty against the profits to be made from contravention.31

In assessing the quantum of the appropriate penalty in this case, his Honour took guidance from the following principles:

  • the prescribed maximum penalty is one yardstick that ordinarily must be applied and must be treated as one of a number of relevant factors;32
  • the maximum penalty is not to be reserved for the most serious cases and there is no place for the notion that the penalty must be proportionate to the seriousness of the conduct that constituted the contraventions;33
  • the required relationship between the statutory maximum and the penalty in a particular case is established where the penalty as imposed does not exceed what is reasonably necessary to achieve general and specific deterrence;34
  • neither retribution nor rehabilitation has any part to play in economic regulation where civil penalties are to be imposed where there is a failure to comply with the regulatory requirements;35
  • factors pertaining to the character of the contravening conduct and the character of the contravener may be considered, but there is no legal checklist, and the task is to determine the appropriate penalty in the circumstances of the particular case;36
  • the discretion to assess the appropriate penalty must be exercised fairly and reasonably for the purpose of protecting the public interest by deterring future contraventions;37
  • the penalty must not be oppressive by being greater than is necessary to achieve the object of deterrence and, in that particular sense, must be proportionate;38
  • concepts from criminal sentencing such as totality, parity and course of conduct may be usefully deployed in the assessment of what is reasonably necessary to deter further contravention;39 and
  • it will be appropriate to consider whether the conduct involves a deliberate flouting of the law, whether the person responsible was aware of the law and whether they have been disciplined for their conduct.40

A maximum Noumi could receive for contravening section 674 of the Corporations Act was a penalty of $46 million per trading day.  The parties agreed that Noumi contravened this section of the Corporations Act for a total of 244 trading days.  Therefore, the maximum penalty amount Noumi was liable to pay for the combined entirety of those contraventions was the astronomically high figure of $11.2 billion.41

There are times where a maximum penalty may be so disproportionately large that it is not helpful to the Court.42  In such circumstances, the Court may adopt the “course of conduct” principle, in conjunction with the “totality principle”.

The course of conduct is where there is a factual and legal overlap between two or more contraventions such that consideration should be given as to whether or not it is appropriate to impose a single overall penalty for that course of conduct.43

The totality principle requires the Court to review the “aggregate” penalty to ensure that it is just and appropriate, and not out of proportion to the contravening conduct considered “as a whole” or the “totality of the relevant contravening conduct”.44  It involves a “final overall consideration of the sum of the penalties determined” by consideration of all the relevant factors, and requires the Court to make a final check of the penalties to be imposed on a wrongdoer, considered as a whole.45  The totality principle will not necessarily result in a reduction from the penalty that would otherwise be imposed. In cases where the Court considers that the cumulative total of the penalties to be imposed would be too low or too high, the Court should alter the final penalties to ensure that they are just and appropriate.46

In fixing a pecuniary penalty, the Court will engage in an “intuitive or instinctive synthesis” of all the relevant matters by weighing together all relevant factors, rather than engage in a sequential, mathematical process.47

The Court’s considerations

The Court was satisfied that the appropriate civil penalty should be $5 million.  In considering what the appropriate penalty should be, the Court took into consideration the following nine distinct salient features of the case, being that:

  • Noumi’s failure to disclose the relevant information to the market formed part of a course of conduct that spanned eight months and two financial reporting periods.  It therefore cannot be said to be isolated, or a momentary lapse in judgement.48
  • Noumi was aware of the relevant information through the knowledge and involvement of its most senior executive officers, namely its then CEO and CFO.49
  • the awareness of Noumi’s then CEO and CFO of the facts and circumstances giving rise to the failure to write off Not Saleable Inventory, even where requested by Noumi’s staff, gave rise to the clear inference that the omission of the relevant information from the financial reports was deliberate, or at least reckless, conduct by the CEO and CFO.50
  • the relevant information was internal to the company and would not have been discoverable by a third party. The market therefore relied on the company to comply with its continuous disclosure obligations in order to trade on an informed basis.51
  • Noumi’s failure to disclose the relevant information to the market was significant as it may have raised questions as to whether Noumi was operating at an overall loss.  Noumi restated the results after it issued corrective disclosure to the market, and its profit and loss for HY20 was restated from a profit of $6.9 million to a loss of $50.2 million.52
  • while it is likely that the corrective disclosures by Noumi of its reduced inventory valuation, revenue, and profit would have resulted in a fall in the share price in any event, the Court found that the contraventions delayed the resultant fall.  The Court therefore inferred that investors are likely to have acquired shares in Noumi during the period between 29 August 2019 and 27 February 2020 at a price that was higher than the price at which the shares would have traded had disclosure been given.53
  • in light of Noumi’s market capitalisation and the volume of shares traded on the ASX during the period of contravention (a total of 131,434,905), the potential effect of the contravening conduct on the market and harm to investors was significant.54
  • the contraventions indicated that there was a corporate culture at a senior management level that was not conducive to compliance with the Corporations Act, particularly in relation to Noumi’s financial reporting obligations and associated market disclosure.55
  • Noumi’s new CEO gave evidence that while Noumi had experienced a deteriorated financial position, it also had improved its operational earnings performance and reported positive adjusted operating earnings before interest, taxes, depreciation, and amortization (EBITDA) of $30.4 million. 
  • none of Noumi’s witnesses suggested that Noumi could not pay a penalty in the amount of $5 million by instalments, if ordered to do so by the Court.56

In addition to the above, the Court also considered six mitigating circumstances, being that:

  • the conduct giving rise to the contraventions was engaged in without the knowledge of the Noumi’s board.57
  • Noumi, through its new CEO, had acknowledged the seriousness of the contraventions and of the failings which it represented on the part of Noumi, and had apologised for the conduct giving rise to the contraventions.58
  • Noumi has introduced a new board and executive leadership team and had made a number of changes to the company's policies, procedures, operations and culture so that the contravening conduct cannot be repeated.59
  • Noumi has not previously been found to have contravened the Corporations Act.60
  • Noumi has provided significant cooperation to ASIC, including by making admissions of fact and contravention in its defence, and by ultimately agreeing the amount of the penalty.61
  • it is relevant, in the context of penalties for contraventions of the continuous disclosure provisions, that the costs of deterrence will ultimately be borne by shareholders, some of whom are the very shareholders who were harmed by the contraventions.62  In the present case, the potential impact on shareholders was significant, given that Noumi’s market capitalisation on 26 June 2024 was $30.47 million.63

Ultimately, Noumi was required to pay the penalty of $5 million in instalments where the total amount would be paid just over 2 years from the date of judgment.

Lavan Comment

This case is a good reminder to directors and officers of the importance of ensuring a company’s strict adherence with proper accounting practices and compliance with its continuous disclosure obligations. 

Further, where a company has contravened the Listing Rules or its obligations arising pursuant to the provisions of the Corporation Act, prompt action must be taken with respect to obtaining legal advice and taking steps to mitigate further damage and cease continuing any contravening conduct.  Lavan has extensive experience advising directors and companies generally regarding ASIC prosecutions and advising on compliance with ASX Listing Rules.  For further information, contact Cinzia Donald, Partner, who leads Lavan’s Corporate Crime and Investigations Team.

 

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.
AUTHOR
Cinzia Donald
Partner
AUTHOR
Jethro Schoeman
Associate
SERVICES
Corporate Crime & Investigations


FOOTNOTES
  1. Australian Securities and Investments Commission v Noumi Limited [2024] FCA 862 (ASIC v Noumi), [69].
  2. Ibid [48].
  3. Ibid [92].
  4. Ibid [16].
  5. Ibid.
  6. Ibid [21].
  7. Ibid [25].
  8. Ibid [26].
  9. Ibid [27].
  10. Ibid [34].
  11. Ibid [32(a)], [35(a)].
  12. Ibid [29] – [30], [33].
  13. Ibid [43] – [45].
  14. Ibid [42].
  15. Ibid [17].
  16. Ibid [37].
  17. Ibid [37].
  18. Ibid [38]
  19. Ibid [39].
  20. Ibid [40].
  21. Ibid [40].
  22. Ibid [45].
  23. Ibid [42].
  24. Corporations Act, s 1317G(1)(b).
  25. ASIC v Noumi, [53].
  26. Ibid [54].
  27. Ibid [55].
  28. Ibid [55].
  29. See Australian Building and Construction Commission v Pattinson (2022) 274 CLR 450 (Pattison) at [9], [15] and [31] (Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ).
  30. Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640 at [66] (French CJ, Crennan, Bell and Keane JJ).

  31. Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249 at [63] (Keane CJ, Finn and Gilmour JJ).

  32. ASIC v Noumi [ 61] citing Pattison, at [54].

  33. ASIC v Noumi [ 61] citing Pattison, at [10], [49],[51].

  34. ASIC v Noumi [ 61] citing Pattison, at [10].

  35. ASIC v Noumi [ 61] citing Pattison, at [15] and [39].

  36. ASIC v Noumi [ 61] citing Pattison, at [19] and [44].

  37. ASIC v Noumi [ 61] citing Pattison, at [40] and [48].

  38. ASIC v Noumi [ 61] citing Pattison, at [40] – [41].

  39. ASIC v Noumi [ 61] citing Pattison, at [45].

  40. ASIC v Noumi [ 61] citing Pattison, at [46].

  41. ASIC v Noumi, at [69].

  42. Ibid at [69] citing Australian Competition and Consumer Commission v Dell Australia Pty Ltd (No 2) [2023] FCA 983 at [10].

  43. Ibid at [70], citing Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (in liq) (No 3) [2017] FCA 1018 at [36] (Beach J).

  44. Ibid at [73] citing Australian Securities and Investments Commission v Westpac Banking Corporation [2019] FCA 2147 at [272] and [308] (Wigney J).

  45. Ibid citing Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd [1997] FCA 450; (1997) 145 ALR 36 at 53 (Goldberg J).

  46. Ibid.

  47. Ibid at [74], citing Markarian v R [2005] HCA 25; (2005) 228 CLR 357 as applied to civil penalty proceedings in Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2015] FCA 330; (2015) 327 ALR 540 at [6] (Allsop CJ).

  48. Ibid [77].

  49. Ibid [78].

  50. Ibid [79].

  51. Ibid [80].

  52. Ibid [81]. 

  53. Ibid [82].

  54. Ibid [83].

  55. Ibid [84].

  56. Ibid [85].

  57. Ibid [87].

  58. Ibid [88].

  59. Ibid [89].

  60. Ibid [90].

  61. Ibid [91].

  62. Ibid [92]; see also Australian Securities and Investments Commission v Chemeq Ltd [2006] FCA 936; (2006) 234 ALR 511 at [98] (French J).

  63. Ibid.