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:
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%2 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.
Noumi is an ASX listed company that runs a business in relation to the production of dairy and plant beverages, its popular brands including:
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.
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:
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.
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.
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:
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:
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
Noumi’s Accounting Policy, consistent with Australian accounting standards, requires revenue from the sale of goods to only be recognised when:15
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:
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
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
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:
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:
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 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:
In addition to the above, the Court also considered six mitigating circumstances, being that:
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.
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.
Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640 at [66] (French CJ, Crennan, Bell and Keane JJ).
Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249 at [63] (Keane CJ, Finn and Gilmour JJ).
ASIC v Noumi [ 61] citing Pattison, at [54].
ASIC v Noumi [ 61] citing Pattison, at [10], [49],[51].
ASIC v Noumi [ 61] citing Pattison, at [10].
ASIC v Noumi [ 61] citing Pattison, at [15] and [39].
ASIC v Noumi [ 61] citing Pattison, at [19] and [44].
ASIC v Noumi [ 61] citing Pattison, at [40] and [48].
ASIC v Noumi [ 61] citing Pattison, at [40] – [41].
ASIC v Noumi [ 61] citing Pattison, at [45].
ASIC v Noumi [ 61] citing Pattison, at [46].
ASIC v Noumi, at [69].
Ibid at [69] citing Australian Competition and Consumer Commission v Dell Australia Pty Ltd (No 2) [2023] FCA 983 at [10].
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).
Ibid at [73] citing Australian Securities and Investments Commission v Westpac Banking Corporation [2019] FCA 2147 at [272] and [308] (Wigney J).
Ibid citing Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd [1997] FCA 450; (1997) 145 ALR 36 at 53 (Goldberg J).
Ibid.
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).
Ibid [77].
Ibid [78].
Ibid [79].
Ibid [80].
Ibid [81].
Ibid [82].
Ibid [83].
Ibid [84].
Ibid [85].
Ibid [87].
Ibid [88].
Ibid [89].
Ibid [90].
Ibid [91].
Ibid [92]; see also Australian Securities and Investments Commission v Chemeq Ltd [2006] FCA 936; (2006) 234 ALR 511 at [98] (French J).
Ibid.