Celtic Capital Pty Ltd v CityView Corporation Ltd - [2010] WASC 357

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: CELTIC CAPITAL PTY LTD -v- CITYVIEW CORPORATION LTD [2010] WASC 357

CORAM: MASTER SANDERSON

HEARD: 16 NOVEMBER 2010

DELIVERED : 16 NOVEMBER 2010

PUBLISHED : 3 DECEMBER 2010

FILE NO/S: COR 186 of 2010

BETWEEN: CELTIC CAPITAL PTY LTD as Trustee for THE CELTIC CAPITAL TRUST
Plaintiff
AND
CITYVIEW CORPORATION LTD
Defendant

Catchwords:

Corporations Law - Application for remedial order after issue of shares pursuant to a prospectus subsequently the subject of a stop order - Principle to be applied

Legislation:

Nil

Result:

Order granted

Category: A

Representation:

Counsel:

Plaintiff: Mr M J Deleuil
Defendant: No appearance

Solicitors:

Plaintiff: Mallesons Stephen Jaques
Defendant: No appearance

Case(s) referred to in judgment(s):

Alpha Resources Ltd v Corporate Affairs Commission (1987) 5 ACLC 844
Harman v Energy Research Group Australia Ltd [1986] WAR 123
Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113
Millheim v Barewa Oil & Mining Company NL [1971] WAR 65
Re Chameleon Mining NL [2009] NSWSC 660
Re Golden Gate Petroleum Ltd (2004) 22 ACLC 1292
Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17
Re Insurance Australia Group Ltd (2003) 21 ACLC 1107
Re The Swan Brewery Co Ltd (No 2) (1976) 3 ACLR 168
Re Twin v Deputy Commissioner of Taxation [2004] 1 Qd R 450
Re Wave Capital Ltd (2003) 47 ACSR 418

MASTER SANDERSON: This was an application by the plaintiff for remedial orders under s 254E(1) and s 1322(4)(d) of the Corporations Act 2001 (Cth) (the Act) validating a share issue. After hearing argument I made the orders sought by the plaintiff and indicated I would publish reasons for making those orders. These are those reasons.
The application was supported by three affidavits. First, an affidavit of Peter Mark Smyth sworn 1 November 2010; second, an affidavit of Jason William Peterson sworn 15 November 2010; and third, an affidavit of Lara Lukich sworn 15 November 2010. The facts as set out below are drawn from these three affidavits and the annexures thereto.
By a prospectus dated 17 December 2009 the defendant offered 400 million shares at $0.0034 per share to the public to raise up to $1,360,000. The prospectus stated that the defendant would issue the shares after the minimum subscription was reached and apply for the shares to be admitted to quotation on the Australian Stock Exchange (ASX). If the application was not made within seven days of the issue or quotation was not granted within three months then the defendant would deal with the applications in accordance with the requirements of the Act.
The prospectus was lodged with the Australian Securities & Investment Commission (ASIC) on 17 December 2009. Immediately following the lodgment of the prospectus HSBC Custody Nominees (Australia) Ltd (HSBC) on behalf of Global Investment Strategy UK Ltd (GIS) applied for 160 million shares in the defendant. This amount constituted the minimum subscription pursuant to the prospectus. The shares were issued and allotted to HSBC on the same day and sold on to the market.
The defendant lodged an application with the ASX for the listing of the securities issued pursuant to the prospectus. The application was made on the evening of 17 December 2009 thus satisfying the seven day period referred to in the prospectus. On 18 December 2009 ASIC issued an interim stop order prohibiting the offer issue, sale or transfer of securities under the prospectus for a period of 21 days. Not surprisingly the ASX declined to quote the securities until the interim order was lifted.
On 7 January 2010 a further interim order was issued. On 4 February 2010 ASIC issued a final order prohibiting the defendant from dealing with the securities issued under the prospectus. The shares issued and allotted to HSBC were not quoted on the ASX within the time stipulated in the prospectus and as required under the Act.
Section 723(3) of the Act is in the following terms:
If a disclosure document for an offer of securities states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and:
(a)an application for the admission of the securities to quotation is not made within 7 days after the date of the disclosure document; or
(b)the securities are not admitted to quotation within 3 months after the date of the disclosure document;
then:
(c)an issue or transfer of securities in response to an application made under the disclosure document is void; and
(d)the person offering the securities must return the money received by the person from the applicants as soon as practicable.
It is important to note that the section refers to the issue or the transfer of the securities being 'void'. The issue is not said to be irregular or voidable. This is a distinction of some significance to which I will return later in these reasons.
Section 724(1)(b) of the Act is in the following terms:
[T]he disclosure document states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and:
(i)an application for the admission to quotation is not made within 7 days after the date of the disclosure document; or
(ii)the securities are not admitted to quotation within 3 months after the date of the disclosure document.
Section 724(2) of the Act is also relevant. It is in the following terms:
The person must either:
(a)repay the money received by the person from the applicants; or
(b)give the applicants:
(i)the documents required by subsection (3); and
(ii)1 month to withdraw their application and be repaid; or
(c)issue or transfer the securities to the applicants and give them:
(i)the documents required by subsection (3); and
(ii)1 month to withdraw their application and be repaid.
Section 737(1) of the Act gives the applicant - in this case HSBC - the right to return the securities and obtain a refund if the securities have been issued in contravention of s 724.
In this case the options set out in s 724(1) and s 737(1) of the Act are not possible. HSBC is not in a position to return the shares and to obtain a refund as the shares were sold in the market and have been subject to multiple dealings. There is now no means of identifying the present holders of those shares. Further, GIS the entity for whom HSBC held the shares is not prepared to have the transaction reversed. Of course there is no possibility of further disclosure documents solving the problem and those provisions are not presently relevant.
To avoid the operation of s 723(3) and s 724 of the Act the plaintiff sought orders under s 254E to validate the issue of the shares under the prospectus and orders under s 1322 of the Act. Section 254E(1) is in the following terms:
On application by a company, a shareholder, a creditor or any other person whose interests have been or may be affected, the Court may make an order validating, or confirming the terms of, a purported issue of shares if:
(a)the issue is or may be invalid for any reason; or
(b)the terms of the issue are inconsistent with or not authorised by:
(i)this Act; or
(ii)another law of a State or Territory; or
(iii)the company's constitution (if any).
Section 1322(4)(d) of the Act is in the following terms:
[A]n order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding.
The plaintiff made this application under s 254E in its capacity as a creditor of the defendant and under s 1322 as an interested person whose legal rights and economic interests will be substantially affected by the matter in issue. The evidence establishes the plaintiff falls within these categories.
On behalf of the plaintiff it was submitted that the term 'invalid' in s 254E is broad enough to encompass the situation where shares are stipulated to be void under the Act. The plaintiff relied on the decision of Lee J in Re Golden Gate Petroleum Ltd (2004) 22 ACLC 1292. His Honour said:
I am satisfied that s 254E uses the word 'invalid' in a broad sense to encompass not only an issue of shares which is liable to be declared void under the Act but also an issue of shares which the Act stipulates to be void [34].
His Honour then refers to two decisions. The first is Re The Swan Brewery Co Ltd (No 2) (1976) 3 ACLR 168. This was a decision of Gillard J made under similar provisions in the Companies Act 1961 (Vic). Dealing with s 63 of the Companies Act, which is the equivalent of the present s 254E, his Honour said:
For myself, I would have regarded the word 'invalid' in s 63 as possibly having a wider connotation than the word 'void'. For example, it would comprehend the effect of an issue or allotment being ultra vires, or being tainted with illegality, or being specifically declared void or invalid by some sections of the Companies Act or any other statute. In the end, of course, it would be quite appropriate in each of the examples I have just given to regard the issue or allotment as void or invalid (171).
His Honour did make reference to the decision of Burt J (as his Honour then was) in Millheim v Barewa Oil & Mining Company NL [1971] WAR 65 where in comments which were obiter dictum the learned judge rather suggested the word 'invalid' might not include issues which were void.
This was precisely the conclusion reached by Brinsden J in Harman v Energy Research Group Australia Ltd [1986] WAR 123. His Honour said:
Sometimes 'invalid' incorporates only the meaning irregular or voidable and sometimes it also includes void. The general rule seems to be that 'invalid' will ordinarily be interpreted to mean irregular or voidable: see Words and Phrases, vol 22A, pp 144‑145. Meaning, however, depends on the context in which it is used. I have considered s 539(4) in the light of the remaining statutory provisions of the Code and I reach the view that the prima facie meaning has not been displaced. In other words 'invalid' covers only what is irregular or voidable. The subsection is a remedial provision intended to permit to be made perfect what is imperfect in respect of some failure to comply with the provisions of the Code or the articles of the company. It is not intended to breathe into life something which is a nullity by reason of another provision of the statute (127).
It is worth noting in reaching this conclusion his Honour makes no reference to the decision of Gillard J in Re Swan Brewery. Nor does the case appear to have been cited in argument. The decision in Harman was noted by Lee J in Re Golden Gate Petroleum (2004) but is not discussed. So there is a clear conflict on the authorities.
In my view the approach of Lee J in Re Golden Gate Petroleum (2004) and Gillard J in Re Swan Brewery is to be preferred to the narrow approach adopted by Brinsden J in Harman. To adopt this wide view is, I think, to offer maximum flexibility to what is clearly intended to be a remedial provision. That seems to me to be consistent with the overall structure and thrust of this aspect of the corporations regime.
In making an order to validate and confirm the issue of shares under s 254E the legitimate expectations of innocent allottees of the shares are a major consideration. Gillard J makes particular reference to this issue in Re Swan Brewery. In Alpha Resources Ltd v Corporate Affairs Commission (1987) 5 ACLC 844, Waddell CJ in Eq said:
The legitimate expectations of innocent parties who have been allotted shares in the company are, I think, a dominant consideration (846 ‑ 847).
Also of particular importance is the reliance placed by innocent allottees on the validity of the share issue. This emerges from the decision of Kirby ACJ (as his Honour then was) in Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113, 1119 ‑ 1122. In this case by selling down the shares received the allottee has demonstrated unequivocal reliance on the validity of the issue.
The authorities make it plain that the court will look favourably on an application such as this where there is no prejudice to any party in making the order to validate and confirm the issue of shares and there will be prejudice to a party if the order is not made. Both these requirements are satisfied in this case. The shareholders are in favour of the recapitalisation. The financial position of the shareholders of the defendant will be strengthened by a successful raising of equity as part of the recapitalisation. The position of the plaintiff and other creditors of the defendant will be enhanced and the position of any future creditors will be improved as a result of the equity proposed to be raised as part of the recapitalisation. If the orders sought by the plaintiff were not granted the defendant would not be recapitalised and this would have a material adverse impact on both the plaintiff and the defendant.
As is almost invariably the case validation of the contravention of the Act in this case will need to operate retrospectively. The authorities make it plain this is possible. See in particular Re Chameleon Mining NL [2009] NSWSC 660.
Section 1322 of the Act applies to a wide class of persons including those 'whose material legal rights or pecuniary or other economic interests are or may be substantially affected by the matter in issue': see Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17 [44] citing Re Twin v Deputy Commissioner of Taxation [2004] 1 Qd R 450 [15] ‑ ]16].
Section 1322 of the Act is to be construed liberally so that it facilitates the conduct of commerce and serves the interests of the parties: see Re Insurance Australia Group Ltd (2003) 21 ACLC 1107 [27] (Lindgren J). For policy reasons a court should not set aside the requirements under the Act lightly. Each case should be considered on its merits and the court should only order the extension of time where it is considered to be appropriate and does not undermine the requirements under the Act: see Re Golden Gate Petroleum (2010) [43] citing Re Wave Capital Ltd (2003) 47 ACSR 418 [29].
Re Golden Gate Petroleum (2010) makes it plain that interested persons under s 1322 should be:
[R]elieved of unnecessary liability or inconvenience or the consequences of invalid transactions where:
(a)non-compliance with the [Corporations Act] is the product of honest and reasonable error or inadvertence;
(b)to do so is without prejudice to third parties; and
(c)to do so is without prejudice to the public interest in compliance with the [Corporations Act] [43].
In this case there is no explanation provided by the defendant for the delay in the making of, or the failure to make, an application under the Act. As this application is made by an interested or affected third party, delay by the company is not an issue. There is no suggestion of delay by the plaintiff. In any event delay is one factor to be taken into consideration. Remedial orders may be made where it is just and equitable and in the interests of all parties: Re Golden Gate Petroleum (2004) [33].
I was satisfied that it was in the interests of justice and equity that orders be made in this case. I reached that conclusion for the following reasons. First, the initial ASIC stop order prohibiting the offer, issue, sale or transfer of shares to HSBC under the prospectus was not issued by ASIC to the defendant until after the 160 million shares were issued and allotted to HSBC. Second, the transaction under which the defendant's shares were issued and allotted to HSBC cannot be unwound. Third, if the orders are not made the defendant's ability to raise funds will be severely constrained. Fourthly, if orders are not made the plaintiff will be forced to call on the loan and take steps to realise the assets of the defendant. This will be in no‑one's interests. Fifthly, there is no identifiable prejudice arising from the making of the orders.
A copy of the application has been provided to both ASIC and the ASX. Neither opposed the orders sought under the originating process. Both indicated they did not intend to appear at the hearing of the matter. In my view this is an important factor in favour of the making of the orders implying as it does the absence of any substantial injustice to any party.
Furthermore, each party to whom shares were issued namely GIS via HSBC has been notified of the application. Neither party has indicated a desire to be heard. The plaintiff published an announcement on the ASX website providing details of this application and the reasons for it. No person has filed any notice indicating an intention to be heard.
For all these reasons I made orders:
(a)validating and confirming the issue of 160 million Cityview Corporation Ltd shares to HSBC under the prospectus; and
(b)extending the period for admission to quotation on the financial market operated by the ASX of the shares issued pursuant to the prospectus.