Ex Parte - [2021] WASC 55

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   EX PARTE ARCHTIS LTD [2021] WASC 55
CORAM:   HILL J
HEARD:   19 FEBRUARY 2021
DELIVERED          :   19 FEBRUARY 2021
PUBLISHED           :   3 MARCH 2021
FILE NO/S:   COR 18 of 2021

EX PARTE
ARCHTIS LTD
Plaintiff

Catchwords:

Corporations law - Securities - Application for declaratory relief to validate trading in shares issued without a valid cleansing notice or prospectus - 28 instances of securities being issued without a valid cleansing notice - Where no blatant or flagrant disregard of obligations - Where no substantial injustice if orders made - Application granted

Legislation:

Corporations Act 2001 (Cth), s 707, s 708A, s 1322

Result:

Application granted

Category: B

Representation:

Counsel:

Plaintiff

Mr M F Holler

Solicitors:

Plaintiff

Steinepreis Paganin

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

Re Caeneus Minerals Ltd [2018] FCA 560
Re Classic Minerals Ltd [2018] FCA 2039
Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22
Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17
Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174
Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369
Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57
Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418
Weinstock v Beck (2013) 251 CLR 396

HILL J:

On 12 February 2021, the plaintiff, archTIS Ltd (archTIS), filed an originating process seeking orders under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 707(3) and s 727(1) of the Act. The contraventions occurred as a result of share sales following 28 separate instances of shares being issued between 31 August 2020 and 12 February 2021 without a valid cleansing notice or cleansing prospectus.
Despite the number of instances where shares were issued without a valid cleansing notice or cleansing prospectus, archTIS has provided a frank and detailed explanation as to the circumstances surrounding each of the share issues. On the basis of the evidence before me, I was and am satisfied that the failure was caused by inadvertence rather than any deliberate disregard of the plaintiff's obligations.
In light of the urgency with which the application was brought, I made orders at the conclusion of the hearing on 19 February 2021 granting the relief sought and said that I would subsequently publish reasons for my decision. These are the reasons for my decision.

Part 6D.2, Corporations Act

Part 6D.2 of the Act imposes disclosure obligations in relation to the issue and sale of shares. In certain circumstances, these obligations can be satisfied by lodging what is commonly referred to as a cleansing notice or a prospectus.[1] If disclosure has not been made by the issuer and the shares are on-sold within 12 months, the party to whom the shares are issued may be obliged to make disclosure.[2]
[1] Corporations Act, s 708A(5).
[2] Corporations Act, s 707(3). See also ReGolden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17.
The cleansing notice exception can only be relied upon if the preconditions in the Corporations Act, s 708A(5) are met.
The cleansing prospectus exception applies where a prospectus is lodged on or after the date that shares are issued but before the day on which a sale offer is made.[3] Where this occurs, the disclosure requirements for offers and sales of that class of securities are met from that date.
[3] Corporations Act, s 708A(11).

Factual Background

In support of its application, the plaintiff filed five affidavits: an affidavit of James Richard Palmer (archTIS' company secretary) filed 12 February 2021; an affidavit of Daniel Chun Leung Lai (the chief executive officer of archTIS) filed 15 February 2021; an affidavit of Miles Jakeman (the chairman of archTIS) filed 16 February 2021; an affidavit of Bruce Alexander Talbot (a founder and the chief architect of archTIS) filed 17 February 2021; and an affidavit of Dominic John Hird (a solicitor employed by Steinepreis Paganin, archTIS' solicitors) filed 19 February 2021.
archTIS is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). archTIS is a technology company which develops and designs products, solutions and services for secure information sharing and collaboration. As at present, archTIS has 226,125,057 shares on issue and 5,831 shareholders.[4]
[4] Affidavit of James Richard Palmer filed 12 February 2021 [17].
Between 31 August 2020 and 12 January 2021 (Breach Period), Mr Lai and Mr Palmer authorised a number of issues of shares. The shares were issued either on the conversion of options or to current and former directors.[5] The details of each of these issues are set out below.
[5] Affidavit of James Richard Palmer filed 12 February 2021 [32] – [64]; Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [19] – [23].
On 31 August 2020, Mr Lai authorised the issue of 2,500,000 shares following the receipt of an option exercise form from AMICAA Advisors Pty Ltd.[6]
[6] Affidavit of James Richard Palmer filed 12 February 2021 [32]; Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [19].
On 3 September 2020, Mr Lai authorised the issues of shares to specific archTIS directors, former directors, or their respective nominees. These issues were approved by shareholders at a general meeting of the plaintiff on 27 August 2020 (3 September issue).[7]
[7] Affidavit of James Richard Palmer filed 12 February 2021 [33]; Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [22].
On 8 September 2020, Mr Palmer authorised the issue of 70,000 shares to WLP Investments Pty Ltd following the receipt of an option exercise form on 4 September 2020 (8 September issue).[8]
[8] Affidavit of James Richard Palmer filed 12 February 2021 [35] – [36], 'JP-05', 'JP-06'.
On 11 September 2020, Mr Palmer authorised the issue of 1,000,000 shares to MST Financial Services Pty Ltd (MST) following the receipt of an option exercise form on 10 September 2020 (11 September issue).[9]
[9] Affidavit of James Richard Palmer filed 12 February 2021 [37] – [38], 'JP-07', 'JP-08'.
On 15 September 2020, Mr Palmer authorised the issue of 1,000,000 shares to MST following MST's conversion of options (15 September issue).[10]
[10] Affidavit of James Richard Palmer filed 12 February 2021 [39] – [40], 'JP-09', 'JP-10'.
On 17 September 2020, Mr Palmer authorised the issue of another 1,000,000 shares to MST following the conversion of options (17 September issue).[11]
[11] Affidavit of James Richard Palmer filed 12 February 2021 [41] – [42], 'JP-11', 'JP-12'.
On the same date, Mr Palmer authorised the issue of a further 1,950,000 shares after receiving option exercise forms from Celtic Capital Pty Ltd, Albatross Pass Pty Ltd, Kelly Anne Smith, and CPS Capital Investments Pty Ltd (21 September issue).[12]
[12] Affidavit of James Richard Palmer filed 12 February 2021 [43] – [45], 'JP-13', 'JP-14', 'JP-15'.
Between 31 August 2020 and 21 September 2020, Mr Palmer and Mr Lai authorised the issue of 7,250,000 shares after receiving nine option exercise forms from various option holders.[13]
[13] Affidavit of James Richard Palmer filed 12 February 2021 [32] – [46]; Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [20] – [23].
On 21 September 2020, after the release of 25,482,151 shares from an ASX imposed escrow, Mr Palmer lodged an Appendix 2A with the ASX (21 September Appendix 2A).[14]
[14] Affidavit of James Richard Palmer filed 12 February 2021 [47], 'JP-16'.
On 22 September 2020, the ASX sent an email to Mr Palmer informing him of a discrepancy between the plaintiff's records as to the number of shares on issue and the ASX's records of the number of quoted shares.[15] On reviewing the matter, Mr Palmer became aware that the plaintiff had not issued an Appendix 2A as required by s 708A of the Act in relation to the 31 August issue, 3 September issue, 8 September issue, 11 September issue, 15 September issue, 17 September issue and the 21 September issue.
[15] Affidavit of James Richard Palmer filed 12 February 2021 [48], 'JP-17'.
On 23 September 2020, Mr Palmer lodged four Appendix 2As for the application for quotation of all the shares that had been issued on these dates.[16] At that time, cleansing notices could not be lodged because more than five business days had passed since each of these shares were issued.[17]
[16] Affidavit of James Richard Palmer filed 12 February 2021 [49], 'JP-18'.
[17] Affidavit of James Richard Palmer filed 12 February 2021 [49].
On 23 September 2020, Mr Palmer authorised the issue of 175,000 shares to Celtic Capital Pty Ltd (Celtic)[18] and 1,934,940 shares to Gemelli Nominees Pty Ltd (Gemelli)[19] following the conversion of options by each of these entities. On 24 September 2020, the plaintiff lodged Appendix 2As in respect of these share issues but did not issue a cleansing notice.
[18] Affidavit of James Richard Palmer filed 12 February 2021 [53] – [54], 'JP-20', 'JP-21'.
[19] Affidavit of James Richard Palmer filed 12 February 2021 [55] – [56], 'JP-22', 'JP-23'.
Between 30 September 2020 to 11 January 2021, the plaintiff received a further 11 option exercise forms[20] and Mr Palmer authorised the issue of new shares in respect of each of these conversions. Mr Palmer applied for quotation of these shares on the ASX by lodging Appendix 2As in respect of each of the share issues.[21]
[20] Affidavit of James Richard Palmer filed 12 February 2021 [62], 'JP-26' – 'JP-36'.
[21] Affidavit of James Richard Palmer filed 12 February 2021 [63], 'JP-37' – 'JP-47'.
On 21 January 2021, during a conversation with the plaintiff's external legal counsel, Mr Palmer was advised that the plaintiff had not lodged cleansing notices for the shares that had been issued in the Breach Period as it was obliged to do.[22] Mr Palmer immediately sought legal advice from the plaintiff's external legal counsel and took steps to rectify the situation.[23]
[22] Affidavit of James Richard Palmer filed 12 February 2021 [65] – [66].
[23] Affidavit of James Richard Palmer filed 12 February 2021 [67].
On 22 January 2021, the plaintiff requested a trading halt[24] and a voluntary suspension on 27 January 2021.[25]
[24] Affidavit of James Richard Palmer filed 12 February 2021 [67], 'JP-48'.
[25] Affidavit of James Richard Palmer filed 12 February 2021 [70], 'JP-49'; Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [34], 'DL-07'.
On 11 February 2021, the solicitors for the plaintiff informed the court of its intention to lodge the application and sought a date for the hearing. The originating process was filed on 12 February 2021 and was listed for hearing before me on the afternoon of 19 February 2021.
On 12 February 2021, the plaintiff lodged a cleansing prospectus with ASIC and announced this to the ASX.[26] The plaintiff has written to each shareholder and director (or former director) to whom the impugned shares were issued, informing them of the failure to lodge cleansing notices and notifying them of the plaintiff's intention to apply to the court for a declaration validating any subsequent sale of shares.[27]
[26] Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [34], 'DL-07'.
[27] Affidavit of James Richard Palmer filed 12 February 2021 [86], [93], 'JP-57'; Affidavit of Dominic John Hird filed 19 February 2021 [6] – [20], [22], 'DH-01', 'DH-03', 'DH-06'.
Mr Palmer was appointed company secretary of the plaintiff on 31 July 2020. His evidence is that he did not and has not received any formal company secretarial training nor had he previously acted as a company secretary for any ASX listed company prior to commencing as company secretary of archTIS.[28]
[28] Affidavit of James Richard Palmer filed 12 February 2021 [3], [24].
Mr Palmer's evidence is that in August 2020, his wife died suddenly and unexpectedly, leaving him as the primary carer for their children. Mr Lai offered support and assistance to Mr Palmer from this time, including in authorising the issue of certain shares.[29] Mr Palmer deposes that the plaintiff's failure to lodge cleansing notices throughout the Breach Period was an inadvertent error and an honest mistake.
[29] Affidavit of James Richard Palmer filed 12 February 2021 [30] – [33].
Mr Palmer has reviewed the company's operations over the Breach Period. His evidence is that the plaintiff fulfilled its obligations to keep the market fully informed by continuing to make announcements to the ASX and that the plaintiff would have been entitled to lodge a s 708A notice at the date of issue of each of the impugned shares.[30]
[30] Affidavit of James Richard Palmer filed 12 February 2021 [70] – [72], 'JP-49'.
Mr Lai was appointed chief executive officer of the plaintiff in August 2014, having been a director of archTIS since August 2007. His evidence was that from August 2020 he has been required to adopt a more active role in relation to the issue of shares by the plaintiff. In August 2020, Mr Lai discussed with Mr Palmer the plaintiff's standard processes in relation to the issue of shares. During these discussions, Mr Palmer did not explain that the plaintiff was required, following the issue of shares, to seek quotation of these shares on the ASX or to lodge cleansing notices. As a consequence, Mr Lai did not perform these tasks when he issued shares during the Breach Period.[31] Mr Lai's evidence was that his failure to issue cleansing notices was inadvertent and an honest mistake.[32]
[31] Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [18] – [20].
[32] Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [24].
Since discovery of the contraventions, the plaintiff has taken steps to ensure the company maintains compliance with the Act and that a breach of the same nature does not take place again. The plaintiff's board initiated a review of the company's current procedures, as well as an investigation of the failure to issue cleansing notices during the Breach Period. As a result of this review, archTIS lodged a cleansing prospectus with ASIC on 12 February 2021.[33]
[33] Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [31] – [34], 'DL-07'.
On 12 February 2021, the plaintiff appointed experienced company secretaries, Ms Erlyn Dale and Mr Winton Willesee, as new joint company secretaries to act alongside Mr Palmer.[34]
[34] Affidavit of Daniel Chun Leung Lai filed 15 February 2021 [32], 'DL-06'.

The power under Corporations Act s 1322 to grant the relief sought

Section 1322 relevantly provides:
(4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
(b)an order directing the rectification of any register kept by ASIC under this Act;
(c)an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);
(d)an 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;
and may make such consequential or ancillary orders as the Court thinks fit.
...
(6) The Court must not make an order under this section unless it is satisfied:
(a)in the case of an order referred to in paragraph (4)(a):
(i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii)that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii)that it is just and equitable that the order be made; and
(b)in the case of an order referred to in paragraph (4)(c)—that the person subject to the civil liability concerned acted honestly; and
(c) in every case—that no substantial injustice has been or is likely to be caused to any person.
In considering an application under s 1322 of the Act, the essential principles are:[35]
(a)the prescriptive requirements of the wording in s 1322(4)(a) and the pre-conditions in s 1322(6) need to be satisfied;[36]
(b)the court retains a discretion under s 1322(4)(a) as to whether it makes the orders sought;
(c)the broad powers reflect a legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law;[37]
(d)implied limitations to the broad powers in s 1322 will not be readily implied.[38] Section 1322 is remedial in character and should be applied broadly;
(e)the court can make orders under s 1322(4)(a) on conditions and also make such consequential and ancillary orders as it thinks fit; and
(f)an order can be made under s 1322(4)(a) notwithstanding that the contravention or failure concerned resulted in the commission of an offence.[39]
[35] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174.
[36] Weinstock v Beck (2013) 251 CLR 396 [43], [53] and [64].
[37] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418, 426 [29].
[38] Weinstock v Beck [43], [55] - [56] and [64].
[39] Corporations Act, s 1322(5).

Disposition

Application by an 'interested party'

I accept that the plaintiff is an interested person who may seek relief, as required by s 1322(4).[40]

Position of ASX and ASIC

[40] Re Caeneus Minerals Ltd [2018] FCA 560 [38]; Re Classic Minerals Ltd [2018] FCA 2039 [34].

The ASX indicated that it was not in a position to comment on the matter and did not intend to appear at the hearing.[41] ASIC indicated that it neither supports nor opposes the application and did not intend to appear at the hearing of the matter.[42]

Orders under s 1322(4)(a)

[41] Affidavit of Dominic John Hird filed 19 February 2021 [12], 'DH-02'.

[42] Affidavit of Dominic John Hird filed 19 February 2021 [20], 'DH-04'.

The plaintiff seeks a declaration under s 1322(4)(a) of the Act that any offer for sale or sale of the quoted securities, during the period between 31 August 2020 and 12 February 2021 (inclusive), is not invalid, by reason of the failure of the plaintiff to issue a cleansing notice pursuant to s 708A(6) of the Act or to issue a cleansing prospectus pursuant to s 708A(11) of the Act to exempt the sellers from the obligation of disclosure under the Act, or the sellers' consequent failure to comply with s 707(3) and s 727(1) of the Act.
I note that:
(a)the proposed validation orders are framed in a declaratory form;
(b)the act, matter or thing is the offer and sale of securities;
(c)the contravention is the offering of securities for sale or sales without proper disclosure in contravention of s 707(3) of the Act.[43]

Pre-conditions in s 1322(6)(a)

[43] See Re Caeneus Minerals Ltd [39] - [40]; Re Classic Minerals Ltd [35] - [36].

The company submitted that the each of the pre‑conditions in s 1322(6)(a) of the Act is satisfied in that there is no failure of the persons concerned or the company to act honestly.

Turning first to the pre-condition in s 1322(6)(a)(ii), in Re ICandy Interactive Ltd, Banks‑Smith J undertook a comprehensive review of the relevant principles in respect of whether there is no failure of the persons concerned or the company to act honestly.[44] Relevantly, Banks Smith J considered that:
[44] Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 [54] - [104].
(a)when determining whether someone has acted honestly for the purposes of s 1322, the courts look to absence of evidence of dishonesty and prompt action to remedy the error;[45]
(b)the concept of acting honestly can embrace:[46]
(i)inadvertence or failure to turn one's mind to an issue;
(ii)active but incorrect consideration of a legal issue;
(iii)failure to consider an issue at all; or
(iv)failure to understand or appreciate the significance of non-compliance; and
(c)when testing for honesty, the authorities reveal that the courts look at the company itself, the directors, the company secretary and others as may be concerned.[47]
[45] Re ICandy Interactive Ltd [54], [106] - [107].
[46] Re ICandy Interactive Ltd [55].
[47] Re ICandy Interactive Ltd [60] - [104].
In this case, errors have occurred in the plaintiff failing to lodge cleansing notices for the shares issued throughout the Breach Period. I accept that these errors have occurred honestly and inadvertently in the relevant officers of the plaintiff failing to consider whether a cleansing notice or prospectus was required to be lodged or seeking legal advice as to whether this was required, rather than any deliberate disregard by the plaintiff or its officers of the obligations under ch 6D of the Act.
I also accept that this is not a case where there has been a failure of the plaintiff's directors to take an active interest in the company's compliance with the Act or to properly define roles of company officers. I accept that the plaintiff's directors had delegated this responsibility to the company secretary.

No substantial injustice (s 1322(6)(c))

I have considered the classes of persons who may be impacted by the making of these orders.
First, the people who were issued the impugned shares. The prejudice to them is that the sale of the impugned shares may be void or voidable for want of compliance with the statutory requirements.[48]
[48] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57, 67 [63].
Second, any people who purchased shares from on-sellers may have on-sold the shares themselves by trading on the open market of the ASX since they were issued. Any further sales of shares will have occurred without the requisite disclosure under the Act, pt 6D.2.
I find that there is no basis for inferring that substantial injustice has been or is likely to be caused to any person by the making of the proposed orders.
I accept that if the orders sought are not made, there may be substantial injustice to the plaintiff as the offers of and sales of shares may be void or voidable. This could give rise to commercial uncertainty and expense for the company as it must remain involved in problems caused by void or voidable offers and sales of its shares. I also accept that there may be substantial injustice to the other ordinary shareholders of the plaintiff, as they may not be able to trade their shares on an open market if the ASX does not lift the current suspension from trading.
It is usual in cases such as these to provide an opportunity for shareholders or other parties to raise a complaint about the proposed orders. The usual timeframe is that there be liberty to apply within 28 days from the date of the order. I accept that this is an appropriate timeframe in this case.

No other discretionary reason to withhold relief

Notwithstanding the number of instances of contravention that have been identified by archTIS, I accept and find that there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law or the company's constitution so as to warrant refusal of the relief sought.[49]
[49] Re Wave Capital Ltd [29].
There is nothing in the evidence before me that suggests that any minority shareholder interest might be oppressed or any other interest might be affected. I am satisfied that all shareholders impacted by the contravention as well as the ASX and ASIC have been notified of the plaintiff's contravention of the Act and given notice of this hearing.[50] No shareholder or either regulator has sought to intervene in the hearing or given notice that they want to be heard on the application.
[50] Affidavit of James Richard Palmer filed 12 February 2021 [86], [93], 'JP-57'; Affidavit of Dominic John Hird filed 19 February 2021 [6] – [20], [22], 'DH-01', 'DH-03', 'DH-06'.
In exercising the discretion to grant relief under s 1322(4), a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it has been identified.[51] In this case, on 21 January 2021, the plaintiff was informed by its solicitors that it had not lodged the required cleansing notices in relation to the share issues during the Breach Period. One day after receiving this advice, on 22 January 2021, the plaintiff sought a trading halt to allow it time to consider the issues in relation to this application before commencing these proceedings on 12 February 2021. I accept that the plaintiff acted diligently after being informed of the issue.
[51] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22, 34 [60].

Conclusion

For the following reasons, I was and am satisfied that in the circumstances of this case, relief should be granted in the terms sought by the plaintiff. First, the evidence before me is that a number of the shares, 14,472,859 of the 20,293,969 shares issued in the Breach Period,[52] have been sold. It cannot be discounted that there have been resales of these shares. In these circumstances, I consider that it is appropriate to make the orders sought to remove any question as to title in the shares of the plaintiff. Second, at the time the application came on for hearing, a cleansing prospectus had been lodged with ASIC and announced to the ASX.[53] For that reason, the order did not concern a future but a past act. Third, I am satisfied that the conduct of the plaintiff in failing to lodge the cleansing notices required under the Act was inadvertent and not in blatant disregard of its obligations under the Act. I do not consider that public policy will be undermined by granting the plaintiff the relief sought.
[52] Affidavit of James Richard Palmer filed 12 February 2021 [74].
[53] Affidavit of Daniel Chun Leung Lai filed 15 February 2021, [34], 'DL-07'.
Accordingly, at the conclusion of the hearing, I made orders in the form annexed to these reasons as Annexure 'A'.

ANNEXURE A

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
HW
Research Associate to the Honourable Justice Hill
3 MARCH 2021