Re Animoca Brands Corporation Ltd
[2019] WASC 225
•27 JUNE 2019
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION: RE ANIMOCA BRANDS CORPORATION LTD; EX PARTE ANIMOCA BRANDS CORPORATION LTD [2019] WASC 225
CORAM: HILL J
HEARD: 13-14 JUNE 2019
DELIVERED : 14 JUNE 2019
PUBLISHED : 27 JUNE 2019
FILE NO/S: COR 126 of 2019
BETWEEN: ANIMOCA BRANDS CORPORATION LTD
Plaintiff
Catchwords:
Corporations – Application for orders under s 1322 of the Corporations Act 2001 (Cth) - Shares issued on four occasions without valid cleansing notice – Shares issued on one occasion without cleansing notice or prospectus – Where shares issued for partial consideration for a previous acquisition – Where vendor queried whether a cleansing notice had been issued - Where trading of shares prior to issue of cleansing prospectus - Where no blatant or flagrant disregard of obligations – Whether orders should be made relieving shareholders of civil liability – Whether relief from civil liability should extend to the vendor - Consideration of appropriate form of orders
Legislation:
Corporations Act 2001 (Cth), s 707, s 708A, s 727, s 1322
Result:
Application allowed
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr A J Papamatheos |
Solicitors:
| Plaintiff | : | AGH Law |
Case(s) referred to in decision(s):
Associated Beauty Aids Pty Ltd v Federal Commissioner of Taxation (1965) 113 CLR 662
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
State of South Australia v Slipper MP [2003] FCA 1414; (2003) 203 ALR 473
Weinstock v Beck (2013) 251 CLR 396
HILL J:
The plaintiff (company), by originating motion filed 6 June 2019, seeks relief under the Corporations Act 2001 (Cth) ('Act'), s 1322(4) for alleged contraventions of pt 6D.2 to relieve shareholders from liability in circumstances where they may have unknowingly contravened the secondary sale provisions of the Corporations Act. It does not seek relief as to the potential civil liability of the company or its officers.
The contraventions concern five separate instances of shares being issued. In respect of four of the instances, a cleansing notice was issued at the time of the share issues. It was later discovered by the company that these notices may not be valid as the Australian Securities Exchange Limited (ASX) considered that the company had been suspended from trading for more than five days in the preceding 12 month period. In respect of the last share issue, no cleansing notice or contemporaneous prospectus was lodged.
The company has provided a frank and detailed explanation as to the circumstances surrounding each of these instances. I am satisfied that each of the failures was caused by inadvertence or an incorrect assessment of the legal position rather than any deliberate disregard of its obligations.
In light of the urgency with which the application was brought, I made orders at the conclusion of the hearing on 14 June 2019 granting the relief sought. These are the reasons for my decision.
Part 6D.2, Corporations Act
Part 6D.2 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 2001 (Cth), s 708A(5) and s 708A(11).
[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 including that:
[T]rading … was not suspended for more than a total of 5 days during the shorter of the period during which the class of securities were quoted, and the period of 12 months before the day on which the relevant securities were issued.[3]
[3] Corporations Act, s 708A(5)(b).
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.[4] The lodgement of a prospectus meets the disclosure requirements for offers and sales of that class of securities from that date.
[4] Corporations Act, s 708A(11).
Factual background to application
On 16 April 2019, the company issued 32,553,202 shares (April share issue).[5] Prior to the April share issue being announced, trading in the company's shares were suspended at the company's request from 9:34 am on 3 April 2019 until 10:41 am on 4 April 2019.[6]
[5] Affidavit of Christopher Paul Whiteman filed 8 June 2019, pars 62 - 63.
[6] Affidavit of Christopher Paul Whiteman filed 8 June 2019, pars 56 - 61.
On 10 May 2019, the company's shares were placed in a trading halt,[7] following a request by the company.[8] On 14 May 2019, the company's shares were voluntary suspended from quotation,[9] following a request by the company.[10]
[7] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-28'.
[8] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-27'.
[9] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-31'.
[10] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-30'.
On 15 May 2019, the company received an email from the ASX querying why it had not issued a cleansing notice in respect of the April share issue. On 16 May 2019, the company informed the ASX that it intended to issue a cleansing notice after it had made an announcement. On the same date, the ASX informed the company that it believed the company was not eligible to issue a cleansing notice and that it was necessary for the company to issue a cleansing prospectus and seek relief under s 1322 of the Act.[11] The ASX subsequently informed the company that it believed the company may not be able to issue a cleansing notice as it may have been suspended for more than five days in the 12 months prior to the April share issue.
[11] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-32'.
On Monday 20 May 2019, the plaintiff commenced work on a cleansing prospectus[12] and sought advice from its solicitors. On Thursday 23 May 2019, the company informed the market of an intention to seek orders from the court.[13]
[12] Affidavit of Christopher Paul Whiteman filed 8 June 2019, par 123.
[13] Affidavit of Julian Richard Rockett filed 13 June 2019, pars 52 - 54, 56 - 57.
The company, by its solicitors, undertook a review of its previous share issues. This review identified that the company had issued cleansing notices on four previous occasions (7 September 2018, 16 November 2018, 13 December 2018 and 25 January 2019)[14] when the company may not have been eligible to issue a cleansing notice due to having been suspended from trading for more than five days in the 12 months prior to the relevant share issues. The company's shares had been suspended from trading for the following periods:
(a)from 11:02 am on 24 January 2018 to 10:14 am on 25 January 2018;
(b)from 9:24 am on 11 July 2018 to 9:49 am on 12 July 2018;
(c)from 9:46 am on 10 August 2018 to 10:20 am on 15 August 2018.[15]
[14] Chronology filed 12 June 2019, p 2.
[15] Affidavit of Julian Richard Rockett filed 13 June 2019, par 71; Affidavit of Christopher Paul Whiteman filed 8 June 2019.
On 24 May 2019, solicitors for the plaintiff informed this court of its intention to lodge the application and sought a date for the hearing. By 3 June 2019, the plaintiff and its solicitors drafted, verified and lodged with Australian Securities & Investments Commission (ASIC) a cleansing prospectus pursuant to s 708A(11) which addressed disclosure for secondary sales (or trading) of all shares after 3 June 2019.[16]
[16] Chronology filed 12 June 2019, p 3.
The originating process was filed on 6 June 2019 and listed for hearing on 13 June 2019. When the matter came before me on that date, the company relied on six affidavits.[17] There were matters that had not been addressed in the company's evidence and, as a result, the matter was adjourned until 14 June 2019 to enable the company to file further evidence. The company filed a further eight affidavits on 14 June 2019[18] before the matter came back before me for hearing later that day.
[17] Affidavit of Christopher Paul Whiteman filed 8 June 2019; Affidavit of Yat Siu filed 10 June 2019; Affidavit of Alyn Tai filed 11 June 2019; Affidavit of Danielle Maree Janette Petch filed 11 June 2019; Affidavit of Julian Richard Rockett filed 13 June 2019; Affidavit of George Robert Dowling Henderson filed 13 June 2019.
[18] Affidavit of Arnoldo Benjamin Concepcion filed 14 June 2019; Second Affidavit of Julian Richard Rockett filed 14 June 2019; Second Affidavit of Yat Siu filed 14 June 2019; Further Affidavit of Christopher Paul Whiteman filed 14 June 2019; Affidavit of Say Li Woo filed 14 June 2019; Second Affidavit of Alyn Tai filed 14 June 2019; Second Affidavit of George Robert Dowling Henderson filed 14 June 2019; and Second Affidavit of Arnoldo Benjamin Concepcion filed 14 June 2019.
At the time of each of the share issues, the company did not employ its own company secretary but engaged Corporate Counsel Pty Ltd which was subsequently acquired by Boardroom Pty Ltd to provide it with share registry, company secretarial and corporate services. Under this engagement, Ms Alyn Tai was the company secretary of the plaintiff from 20 March 2017 until she resigned effective 19 December 2018. Mr Julian Rockett was appointed in her place on that day. Ms Tai and Mr Rockett are both legal practitioners.
Each of Ms Tai and Mr Rockett deposed that they were aware that a company could not rely upon a cleansing notice if it had been suspended for a total of more than five days in the 12 months preceding an issue of shares.
In relation to the share issues on 7 September 2018, 16 November 2018 and 13 December 2018, Ms Tai deposed that:
At the time, Boardroom considered that a cleansing notice could be used because I, together with my other colleagues at Boardroom (including other company secretaries and a former ASX Listings Senior Adviser), calculated whether there had been a total of more than 5 days of suspension of the plaintiff's shares, and formed the view that the plaintiff had not been suspended for a total of more than 5 days in the preceding 12 months to the issue of shares, as the 14 minutes and 20 minutes on 25 January 2018 and 15 August 2018 respectively did not each constitute a day of suspension for the purposes of the Act.[19]
[19] Affidavit of Alyn Tai filed 11 June 2019, par 18.
I will return to the question as to whether the suspensions on 25 January 2018 and 15 August 2018 form part of a day for the purposes of the Act.
In relation to the share issue on 25 January 2019, Mr Rockett deposed that on 25 January 2019, the directors of the plaintiff resolved that the plaintiff had not been suspended for more than a total of five days during the prior 12 month period, and, as a consequence, the company issued a cleansing notice.[20] There was no evidence from anyone on behalf of the company as to whether consideration was given at that time as to whether the company was eligible to issue a cleansing notice.
[20] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-36'.
Mr Rockett deposed that a cleansing notice was not issued in relation to the April share issue because he was not directed to take steps to cleanse the shares and he did not recommend that this occur. He stated that the plaintiff's failure to issue a cleansing notice was an administrative oversight.[21]
[21] Affidavit of Julian Richard Rockett filed 13 June 2019, pars 63 - 64.
Mr Whiteman, a director of the company, stated that he was aware that a cleansing notice was an instrument that allows unrestricted trading of shares without a disclosure document and that a cleansing notice is issued if the shares are to be tradeable. He deposed that he relied on the company secretary to ensure that cleansing notices were issued when required or, if the company was not eligible to issue a cleansing notice, for this to be brought to his attention prior to the share issue.[22]
[22] Affidavit of Christopher Paul Whiteman filed 8 June 2019, pars 9 - 10, 21.
Mr Whiteman stated that the company was planning on appointing a dedicated company secretary and is putting in place new procedures to ensure that the company met its regulatory compliance obligations, including its obligations under pt 6D.2 of the Corporations Act.[23]
[23] Affidavit of Christopher Paul Whiteman filed 8 June 2019, pars 25, 140 - 143.
Mr Whiteman and Mr Yat Siu, the chairman of directors of the company, deposed that at the time the company issued shares on 7 September 2018, 16 November 2018, 13 December 2018 and 25 January 2019, there was no excluded information for the purposes of the Corporations Act, s 708 held by the company.[24] In respect of the April share issue, both Mr Whiteman and Mr Yat Siu deposed that announcements described as price sensitive announcements were made by the company on 1 May 2019 and 6 May 2019 and that there was no significant movement in the share price of the plaintiff's shares from 17 April 2019 until trading in the company's shares was suspended on 10 May 2019.[25]
[24] Affidavit of Christopher Paul Whiteman filed 8 June 2019, par 131; Affidavit of Yat Siu filed 10 June 2019, par 43(a).
[25] Affidavit of Christopher Paul Whiteman filed 8 June 2019, pars 135 - 136; Affidavit of Yat Siu filed 10 June 2019, par 43(b).
Mr Yat Siu deposed that he was generally aware that a cleansing notice was an alternative to a prospectus to give disclosure on share issue and that there were limits on whether a cleansing notice could be issued. He stated that he did not consider it was his role to check whether a cleansing notice could be issued as a company secretary and professional services firm had been appointed to undertake this task. He relied on the company secretary at the relevant time for this.[26]
[26] Affidavit of Yat Siu filed 10 June 2019, pars 8 - 10.
Mr Yat Siu stated that he had made enquiries of the other directors of the company, Ms Holly Liu and Mr David Brickler, and that each of them had informed him that they relied upon the company secretary of the company at the relevant time to ensure that the necessary compliance and disclosure obligations of the company had been met.[27]
[27] Affidavit of Yat Siu filed 10 June 2019, par 36.
Mr Yat Siu deposed that in relation to the share issue by the company of 20,381,168 shares on 16 November 2018, 6,000,000 shares and 3,000,000 options were issued to him and 400,000 shares and 200,000 options were issued to Ms Liu. He stated that he has not sold these shares and that, after making enquiries of Ms Liu, she had not either.[28]
[28] Affidavit of Yat Siu filed 10 June 2019, pars 12 - 13, 18.
Mr Yat Siu deposed that, in retrospect, given the company was undertaking a number of transactions over 2018 and 2019 which required trading halts and suspensions, he should have identified that the totality of these periods could have impacted the company's ability to issue a cleansing notice and should have asked the company secretary to specifically consider this matter.[29]
[29] Affidavit of Yat Siu filed 10 June 2019, pars 32, 42.
Mr Yat Siu stated that the company has considered its processes for issuing shares and complying with its obligations under the Corporations Act. On 13 June 2019, the directors resolved to adopt a new protocol.[30]
[30] Affidavit of George Robert Dowling Henderson filed 13 June 2019, 'GRDH-5' and 'GRDH-6'.
Ms Danielle Petch, an employee of Security Transfer Australia who manages the share register of the company, addressed the issue of share sales. She deposed that of the 57 shareholders the company identified as having been issued shares the subject of the Appendix 3Bs considered by this application, 22 had sold or transferred at least some of the shares issued to them.[31]
[31] Affidavit of Danielle Maree Janette Petch filed 11 June 2019, 'DMJP4'.
The company emailed a letter to these 57 shareholders informing them that the company had applied to this court for relief and inviting them to attend the hearing if they wished to be heard on the application.[32] From the evidence before me, I find that the majority of the shares were issued to sophisticated investors or vendors under share sale and purchase agreements.[33] Apart from one shareholder, who sought clarification about the application, no communication was received by the company from any shareholder about the application.[34] No shareholder or any other party appeared at the hearings before me.
[32] Affidavit of Yat Siu filed 10 June 2019, 'YS-3' to 'YS-6'.
[33] Outline of further submissions filed 14 June 2019, Annexure 'A'.
[34] Affidavit of George Robert Dowling Henderson filed 14 June 2019, pars 9, 18, 'GRDH-3'.
April share issue
The shares issued in the April share issue fell into 3 categories:
(a)14,353,202 shares issued to Mr Fredrik Wahrman and Mr Niklas Wahrman as partial consideration for the company's previous acquisition of TicBits;
(b)200,000 shares pursuant to an exercise of share options; and
(c)18,000,000 shares issued to investors under a placement announced on 4 April 2019, five of whom were clients of Taylor Collison, the company's corporate advisors.[35]
[35] Affidavit of Christopher Paul Whiteman filed 14 June 2019, par 13, 'CPW26' – 'CPW30', 'CPW36'.
In respect of the share issue to Mr Fredrick Warhman and Mr Niklas Warhman, on 17 April 2019, Mr Fredrik Wahrman, in an email to the company which was copied to Mr Niklas Wahrman, noted that a cleansing notice had not been issued by the company and set out his understanding that without a cleansing notice, the Wahrmans were not able to sell or transfer their shares.[36] Mr Concepcion deposed that following receipt of this email:
I called Fredrik a few minutes later and discussed the matter. I explained our securities blackout policy and that they could not sell shares at those times. We did not otherwise discuss the cleansing notice issue they raised in their email. The focus was on limitation of them selling during the blackout period as it was not permitted.
On 9 May 2019, they wanted to sell. They sent a further email. …They did not raise any cleansing notice point but the focus was blackout periods.[37]
[36] Affidavit of Arnoldo Benjamin Concepcion filed 14 June 2019, 'ABC-1'.
[37] Affidavit of Arnoldo Benjamin Concepcion filed 14 June 2019, par 11(b), (c).
Mr Concepcion stated that he did not share the email from Mr Warhman with anyone else within the company or fully appreciate the question as he is not familiar with Australian laws and requirements and was focussed on ensuring that trading did not occur during blackout periods.[38]
[38] Affidavit of Arnoldo Benjamin Concepcion filed 14 June 2019, pars 12 - 14.
In respect of the shares issued to investors under the placement, these investors included a number of clients of the company's corporate advisors, Taylor Collison. The agreements between Taylor Collison and its clients were in identical terms. The agreement included terms that:
The [company] has represented to [Taylor Collison] that [company] will satisfy the criteria required under the Corporations Act to permit You to transfer and on-sell the Securities without restriction following allotment of these Securities.[39]
You will comply with any restrictions in the Information Materials on the offering for sale, or sale, of Securities acquired or to be acquired under the Offer.[40]
[39] Affidavit of Christopher Paul Whiteman filed 14 June 2019, 'CPW-26' p 346 [Schedule 1, Section 2, Item 2].
[40] Affidavit of Christopher Paul Whiteman filed 14 June 2019, 'CPW-26' p354 [Schedule 3, Section 1, Item 2].
Nothing in this agreement imposed any obligation on Taylor Collison or its clients to ensure compliance with the Corporations Act, s 708A or any other disclosure requirements imposed by the Act.
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, the essential principles are:[41]
(a)the prescriptive requirements of the wording in s 1322(4)(a) and s 1322(4)(c) and the pre‑conditions in s 1322(6) need to be satisfied;[42]
(b)the court retains a discretion under s 1322(4)(a) and s 1322(4)(c) 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;[43]
(d)implied limitations to the broad powers in s 1322 will not be readily implied.[44] Section 1322 is remedial in character and should be applied broadly;
(e)the court can make orders under s 1322(4)(a) and s 1322(4)(c) 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.[45]
[41] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174.
[42] Weinstock v Beck (2013) 251 CLR 396 [43], [53] and [64].
[43] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 [29].
[44] Weinstock v Beck [43], [55] ‑ [56] and [64].
[45] Corporations Act, s 1322(5).
Application by an 'interested party'
I accept that the company is an interested person who may seek relief, as required by s 1322(4).[46]
[46] Re Caeneus Minerals Ltd [2018] FCA 560 [38]; Re Classic Minerals Ltd [2018] FCA 2039 [34].
Position of ASX and ASIC
The ASX has indicated that it did not oppose the application nor intend to appear at the hearing.[47] ASIC indicated that it neither supports nor opposes the application and did not intend to appear at the hearing of the matter. It formed this view taking into account a number of matters, including that the company did not seek relief as to its own conduct, its directors or company secretary.[48]
[47] Affidavit of George Henderson filed 13 June 2019, 'GRDH-3'.
[48] Affidavit of George Henderson filed 13 June 2019, 'GRDH-4'.
Act, matter or thing that may be invalid by reason of contravention
The company seeks a declaration that any act, matter or thing purporting to have been done under the Corporations Act or in relation to a corporation is not invalid by reason of any contravention of a provision of the Corporations Act.
That is:
(a)the proposed validation orders are framed in a declaratory form;
(b)the act, matter or thing, are the offers and sales of securities; and
(c)the contravention is the offering of securities for sale or sales without proper disclosure in contravention of s 707(3) and s 727(1) of the Act.[49]
[49] Re Caeneus Minerals Ltd [39] ‑ [40]; Re Classic Minerals Ltd [35] ‑ [36].
In the argument before me, counsel raised whether it was a necessary precondition for an order to be made under the Corporations Act s 1322 for the court to find that there had been a contravention of the Act or whether it was necessary only to find an arguable contravention. This argument, in part, depended on what the proper construction of 'day' is in s 708A(5)(b) of the Act.
I do not consider that it is necessary for me to address either of these matters and I decline to do so.
On the facts before me, the shares of the plaintiff were suspended:
(a)in January 2018, for less than 24 hours across two trading days;
(b)in July 2018, for more than 24 hours but only involving one trading day;
(c)in August 2018, for more than 72 hours across four trading days;
(d)in April 2019, for more than 24 hours across two trading days.
Counsel for the plaintiff conceded, properly in my view, that on the facts before me the plaintiff's shares had been suspended from trading for a total of more than five days. For this reason, the proper construction of day and the meaning of 'more than a total of five days' does not have any bearing on the outcome of this case. Accordingly, it is not necessary for me to consider this matter further.
I note that the ASX considers that if a company is suspended from trading for part of a trading day that this constitutes one day.[50] I observe that there is no definition of 'day' or 'days' in the Corporations Act and that the Acts Interpretation Act 1901 (Cth) is of limited assistance.
[50] Affidavit of Julian Richard Rockett filed 13 June 2019, 'JRR-33'.
The general approach adopted by the courts is not to count parts of days[51] although this will not apply where the sequence of events on a particular day are important.[52] My initial view is that, in the context of suspension of the trading of shares on a prescribed financial market, the sequence of events on a particular day may be important. However, without a contradictor or the ASX being afforded the opportunity to appear to make submissions in support of the policy position they have adopted, it is not appropriate nor necessary for me to make any determination on this issue.
[51] Associated Beauty Aids Pty Ltd v Federal Commissioner of Taxation (1965) 113 CLR 662, 669.
[52] State of South Australia v Slipper MP [2003] FCA 1414; (2003) 203 ALR 473 [52] ‑ [54].
Pre-condition in s 1322(6)(a)
The company submitted that the pre‑condition is satisfied in that there is no failure of the persons concerned or the company to act honestly.
In Re ICandy Interactive Ltd, Banks‑Smith J undertook a comprehensive review of the relevant principles.[53] Relevantly, Banks‑Smith J considered that:
[53] 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 section 1322, the courts look to absence of evidence of dishonesty and prompt action to remedy the error;[54]
(b)the concept of acting honestly can embrace:[55]
(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.[56]
[54] Re ICandy Interactive Ltd [54], [106] - [107].
[55]Re ICandy Interactive Ltd [55].
[56] Re ICandy Interactive Ltd [60] - [104].
In respect of the share issues on 7 September 2018, 16 November 2018 and 13 December 2018, where the company issued cleansing notices when it was not entitled to, I find that the actions of the company in considering whether the company had been suspended from trading for a total of more than five days but failing to come to the correct conclusion was honest.
In respect of the share issue on 25 January 2019, I find that the actions of the company in failing to properly consider whether the company had been suspended from trading for a total of more than five days was inadvertent and that there was no failure by the company to act honestly.
In respect of the April share issue, the company failed to consider whether a cleansing notice was required. I accept that this was inadvertence on the part of the company and find that there was no failure of the company to act honestly.
No substantial injustice (section 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 if they seek to offer to sell or sell the impugned shares, such offers or sales may be void or voidable for want of compliance with the statutory requirements.[57]
[57] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57 [63].
Second, any people who purchased shares from on-sellers may have on-sold the impugned shares themselves by trading on the open market of the ASX since their issue on the relevant dates. The company knows which of the 57 persons who were originally issued shares have on‑sold them[58] but does not know precisely how many of each tranche of shares has been sold or on-sold again. Any further sales of shares will have occurred without the requisite disclosure under the Corporations Act, pt 6D.2, which could expose these sellers to civil liability. I consider that the orders proposed under s 1322(4)(c) should address this potential prejudice.
[58] Affidavit of Danielle Petch filed 11 June 2019, pars 23 - 24, 'DMJP4'.
Third, the people who were issued shares to which escrow requirements applied.[59] In this case, the people issued shares with escrow requirements up to or after the lodgement of the cleansing prospectus on 3 June 2019 cannot have on-sold them or be adversely affected.
[59] Affidavit of Danielle Petch filed 11 June 2019, par 23, 'DMJP4'.
Finally, the people who were issued shares in the April share issue with no disclosure. The evidence before me is that there has been no substantial movement in the share price of the company from 16 April 2019 until 10 May 2019, when trading in the shares of the company was suspended.[60]
[60] Affidavit of Christopher Paul Whiteman filed 8 June 2019, pars 136 - 137; Affidavit of Yat Siu filed 10 June 2019, par 43(b).
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 are not made, then there may be substantial injustice to the plaintiff as the offers of and sales of shares may be void or voidable which could give rise to some 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; as well as 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 am conscious in this case that Mr Fredrik Wahrman or Mr Niklas Wahrman, whose position I address below, reside overseas. For this reason, I consider it is appropriate in this case to extend the usual period to 42 days from the date of this order. In my view, this will give them sufficient time to consider whether to seek relief from civil liability and to file any papers relevant to the matters that I would need to consider in order to grant any relief.
Relief from Civil Liability (s 1322(4)(c))
A pre‑condition to an order under s 1322(4)(c) is that the person to be relieved from civil liability acted honestly.[61]
[61] Corporations Act, s 1322(6)(b).
In Re Poseidon Nickel Ltd, Colvin J noted that in applications such as the one before me, there are three different aspects to the relief sought. First, orders are sought to remove uncertainty as to the validity of the title to the share so as to enable them to be offered for further sale. Second, orders are sought that prior dealings with the shares are not invalidated by reason of any contravention of pt 6D.2. Third, orders are sought to relieve parties from civil liability in respect of any contravention or failure to meet disclosure requirements in relation to the offering and selling of shares the subject of the impugned share issues.
Colvin J stated that:
In the third case there is a requirement that the person the subject of the civil liability acted honestly. In the first two cases, the order can be made if it is just and equitable to do so or if the persons concerned in or a party to the contravention acted honestly... The wider public interest in maintaining the integrity in the market in the shares supports the making of orders of the first and second kind in most cases like the present.
However, in my view, considerable care must be taken in granting an order of the third kind for the benefit of parties who are not before the Court presenting evidence and submissions as to their state of knowledge. It is preferable, in cases like the present, that general relief under s 1322(6)(c) be confined to cases where it is clear that the parties who will be protected by the relief are innocent third parties whose involvement in any contravention has been brought about by the conduct of the company who has issued the shares or other parties.
In Re Golden Gate Petroleum Ltd, relief was initially sought that would afford protection from liability for the issuing company and its officers. After concerns were raised by ASIC, the application was amended to exclude the company and its officers from the protections afforded by the orders sought.
In my view, that is an approach that generally should extend to cases where the parties who on-sold the shares were parties with actual knowledge (or should have known) of the disclosure requirements and their potential application to them if there had not been disclosure when the shares and who took no steps to inquire as to whether there had been disclosure at the time of issue of the shares.[62]
[62] Re Poseidon Nickel Ltd [66] - [69].
I note that the court will readily infer, on the basis that shareholders have access to the relevant Appendix 3Bs which contain warranties that disclosure obligations have been addressed, that the shareholders to whom the shares are issued have acted honestly in on-selling the shares. This inference cannot be drawn where there is evidence that a shareholder had actual knowledge of the non‑disclosure. In this respect, I respectfully agree with Colvin J's conclusion in so far as it extends to actual knowledge. In this case, it is unnecessary for me to consider whether the approach referred to by Colvin J should be extended beyond this and I decline to do so.
Applying these principles, I infer that the current holders of these shares issued on 7 September 2018, 16 November 2018, 13 December 2018 and 25 January 2019 have acted honestly. There is no evidence before me which suggests that the parties who acquired these shares did so with any suggestion that there may have been a failure to comply with the disclosure obligations under the Corporations Act. This is particularly the case given the company issued cleansing notices when it was not entitled to.
In relation to the April share issue, apart from the shares issued to Mr Fredrik and Mr Niklas Wahrman, I infer that the current holders of the shares issued in the April share issue have acted honestly. There is no evidence before me which suggests that the parties who acquired these shares did so with any suggestion that there may have been a failure to comply with the disclosure obligations under the Corporations Act.
In relation to the clients of Taylor Collison who received shares as part of the placement in the April share issue, I have considered the agreements which governed the issue of the shares to them. I accept the submission of the plaintiff's counsel that this agreement does not fix them with actual knowledge of the requirements of the company to comply with the Corporations Act, pt 6D.2. First, the relevant clauses do not specifically refer to s 708A of the Corporations Act or other specific disclosure requirements. Second, on a proper construction of the agreement between Taylor Collison and its clients, these clauses are relevant to the apportionment of liability as between Taylor Collison and its clients and not to ensure compliance with pt 6D.2. Third, the 'Information Material' of the offering included the Appendix 3B which contained a warranty that the disclosure obligations had been addressed. For these reasons, in my view, it cannot be said that under the terms of the agreement, these investors must be taken to have knowledge of the relevant disclosure requirements under pt 6D.2 of the Corporations Act.
The position in relation to Mr Fredrik and Mr Niklas Wahrman is materially different. In their case, there is evidence before me that they had actual knowledge of the company's obligation to issue a cleansing notice and that this had not occurred. For this reason, I do not consider that an order should be made at this stage relieving Mr Fredrik Wahrman or Mr Niklas Wahrman from civil liability without further evidence.
No other discretionary reason to withhold relief
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.[63]
[63] 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 given notice of this hearing.[64] No shareholder or either regulator has sought to intervene in the hearing or given notice that they want to be heard on the application.
[64] Affidavit of George Robert Dowling Henderson filed 13 June 2019, 'GRDH-3' and 'GRDH-4'.
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.[65]
[65] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60].
In this case, I accept that the plaintiff acted diligently after discovering the irregularity in the April share issue on the afternoon of Tuesday 14 May 2019.
Just and equitable
Even if I was not satisfied that the company and the relevant parties had acted honesty (which I have found to be the case), it is open to me to make orders under s 1322(4) if it is just and equitable to do so and no substantial injustice has been or is likely to be caused to any person. For the reasons set out above, I consider that it would be just and equitable to grant relief to the extent necessary to reasonably protect the interests of current shareholders and for the integrity of future trading in the plaintiff's shares.
Disposition of matter
The conduct of the company was not in blatant disregard of its obligations under the Corporations Act. I do not consider that public policy will be undermined by granting the plaintiff the relief sought.
For these reasons, I am satisfied that in the circumstances of this case, relief should be granted.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
MG
Research Orderly to the Honourable Justice Hill2 JULY 2019
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