Re Arizona Lithium Ltd - [2021] WASC 446

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   RE ARIZONA LITHIUM LTD; EX PARTE ARIZONA LITHIUM LTD [2021] WASC 446
CORAM:   HILL J
HEARD:   23 NOVEMBER 2021
DELIVERED          :   23 NOVEMBER 2021
PUBLISHED           :   10 DECEMBER 2021
FILE NO/S:   COR 201 of 2021
MATTER:   IN THE MATTER OF ARIZONA LITHIUM LTD

EX PARTE
ARIZONA LITHIUM LTD
Plaintiff

Catchwords:

Corporations law - Securities - Application for declaratory relief to validate trading in securities issued without a valid cleansing prospectus - Two instances of securities being issued without a valid cleansing prospectus - 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 727, s 1322

Result:

Application granted

Category: B

Representation:

Counsel:

Plaintiff

M Holler & D Hird

Solicitors:

Plaintiff

Steinepreis Paganin

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

Re Bellevue Gold Ltd [2021] WASC 80
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] HCA 14; (2013) 251 CLR 396

HILL J:

On 18 November 2021, the plaintiff, Arizona Lithium Ltd (Arizona), filed an originating process seeking orders under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 708A(11), s 707(3) and s 727(1) of the Act. The contraventions occurred as a result of sales of securities following two separate instances of securities being issued by the plaintiff on 10 November and 11 November 2021 without a valid cleansing prospectus pursuant to s 708A(5)(e) of the Act.
Arizona has provided a frank and detailed explanation as to the circumstances surrounding the issue of these securities. Based on the evidence before me, I was and am satisfied that the failure to issue a cleansing prospectus 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 23 November 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 of the Corporations Act

Part 6D.2 of the Act imposes disclosure obligations in relation to the issue and sale of securities. 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 securities are on-sold within 12 months, the party to whom the securities are issued may be obliged to make disclosure.[2]
[1] Corporations Act 2001 (Cth) s 708A(5).
[2] Corporations Act 2001 (Cth) 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 s 708A(5) of the Act are met.
The cleansing prospectus exception applies where a prospectus is lodged on or after the date that securities 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 2001 (Cth) s 708A(11).

Factual background

In support of its application, Arizona relied on three affidavits: an affidavit of Oonagh Malone, the company secretary of Arizona, filed 18 November 2021; an affidavit of Paul Lloyd, the plaintiff's managing director, filed 18 November 2021; and an affidavit of Dominic Hird, a solicitor at Steinepreis Paganin, the plaintiff's solicitors, filed 23 November 2021.
The plaintiff is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). Arizona is a mineral exploration company engaged in lithium exploration in the United States of America.[4] As at 17 November 2021, Arizona had 1,943,456,327 fully paid ordinary shares on issue, 11,353 shareholders and a market capitalisation of approximately $213,780,196.[5]
[4] Affidavit of Oonagh Malone filed 18 November 2021 [10].
[5] Affidavit of Oonagh Malone filed 18 November 2021 [11].
On 29 October 2021, the plaintiff placed its shares into a trading halt pending the release of an ASX announcement by Arizona in relation to a proposed capital raising.[6]
[6] Affidavit of Oonagh Malone filed 18 November 2021 [18], '3'.
On 1 November 2021, Arizona announced to the ASX that it had received firm commitments for 173,333,334 shares (Placement Shares) to raise approximately $13 million with one free attaching quoted option (Quoted Options) per two shares (Placement).[7]
[7] Affidavit of Oonagh Malone filed 18 November 2021 [19], '4'.
On that same date, Ms Malone sought advice from William Benson, a solicitor at Steinepreis Paganin, as to the process of issuing quoted options on the ASX as she did not have experience with the process.[8] Mr Benson advised that Arizona would need to confirm the process with the plaintiff's ASX advisor. Ms Malone's evidence was that, in hindsight, she may not have made it clear to Mr Benson the Quoted Options were a new class of securities for the plaintiff and that she was not referring to the unquoted options already on issue.[9] Following this conversation, Ms Malone engaged in further conversations with various ASX employees regarding the required process for quotation of the Quoted Options. During these conversations, the requirement for Arizona to issue a cleansing prospectus was not raised.[10]
[8] Affidavit of Oonagh Malone filed 18 November 2021 [15], [20].
[9] Affidavit of Oonagh Malone filed 18 November 2021 [20].
[10] Affidavit of Oonagh Malone filed 18 November 2021 [21].
On 9 November 2021, following the receipt of funds from various investors under the Placement, Ms Malone arranged for the quotation of the Placement Shares on the ASX and the lodgement of a cleansing prospectus.[11]
[11] Affidavit of Oonagh Malone filed 18 November 2021 [22] - [23], '5' - '6'.
On 10 November 2021, Ms Malone arranged for the quotation of 86,666,709 Quoted Options on the ASX by lodging an Appendix 2A and a cleansing notice.[12]
[12] Affidavit of Oonagh Malone filed 18 November 2021 [24], '7'.
On 11 November 2021, Ms Malone arranged for the quotation of a further 20,000,000 Quoted Options as part consideration for broker services in relation to the Placement by lodging an Appendix 2A and a cleansing notice.[13]
[13] Affidavit of Oonagh Malone filed 18 November 2021 [25], '8'.
Ms Malone deposed that, based on her understanding of the advice given by Steinepreis Paganin, she inadvertently lodged a cleansing notice when a cleansing prospectus should have been lodged.[14]
[14] Affidavit of Oonagh Malone filed 18 November 2021 [26].
On 11 November 2021, Mr Lloyd spoke with Roger Steinepreis, a partner at Steinepreis Paganin.[15] Mr Steinepreis informed Mr Lloyd that in respect of the Quoted Options, the plaintiff was required to lodge a cleansing prospectus rather than a cleansing notice. This was because it was the first time that Arizona had issued quoted options and, as a result, the options were not in a class of securities that were quoted securities at all times in the three months before the day on which the Quoted Options were issued, as required by s 708A(5)(a) of the Act.[16]
[15] Affidavit of Paul Lloyd filed on 18 November 2021 [9] - [10]; Affidavit of Oonagh Malone filed 18 November 2021 [27].
[16] Affidavit of Paul Lloyd filed on 18 November 2021 [9] - [10].
Following her discovery of the error, Ms Malone contacted the plaintiff's solicitors to obtain advice.[17] On 12 November 2021, she spoke with Mr Steinepreis who confirmed that a cleansing prospectus was required for the Quoted Options and that an application would need to be made to the court. Ms Malone instructed Steinepreis Paganin to proceed with this application.[18]
[17] Affidavit of Oonagh Malone filed 18 November 2021 [29].
[18] Affidavit of Oonagh Malone filed 18 November 2021 [30].
On 18 November 2021, the plaintiff:
(a)entered into a trading halt prior to the opening of the market;[19]
(b)by its solicitors, wrote to this court requesting a hearing of the application and wrote to the ASX and ASIC to give notice of the proposed application;[20]
(c)through its share registry, notified all recipients of the Quoted Options of the plaintiff's failure to properly cleanse the Quoted Options and informed them of Arizona's intention to commence this application;[21] and
(d)issued a cleansing prospectus pursuant to s 708A(11) of the Act in respect of the Quoted Options.[22]
[19] Affidavit of Oonagh Malone filed 18 November 2021 [31].
[20] Affidavit of Oonagh Malone filed 18 November 2021 [37], '14' - '15'.
[21] Affidavit of Oonagh Malone filed 18 November 2021 [36], '13'.
[22] Affidavit of Oonagh Malone filed 18 November 2021 [32].
Ms Malone deposed that the delay between identification of the plaintiff's error on 11 November 2021 and the request to enter into a trading halt on 18 November 2021 was due to the need to verify facts and confirm the process required to be undertaken by Arizona.[23]
[23] Affidavit of Oonagh Malone filed 18 November 2021 [31].
The plaintiff has conducted a review of its previous issues of securities since 2014 and is not aware of any other failures to properly cleanse securities during that period, including instances where it has inadvertently lodged a cleansing notice instead of a cleansing prospectus.[24] Ms Malone has also conducted a review of the trading history of the Quoted Options and identified there has been trading of some of the Quoted Options.[25]
[24] Affidavit of Oonagh Malone filed 18 November 2021 [33].
[25] Affidavit of Oonagh Malone filed 18 November 2021 [34].
Both Ms Malone and Mr Lloyd have considered whether a cleansing prospectus could have been lodged instead of a cleansing notice at the time the Quoted Options were issued and are satisfied that it could have been.[26]
[26] Affidavit of Oonagh Malone filed 18 November 2021 [16]; Affidavit of Paul Lloyd filed 18 November 2021 [10].

The power under s 1322 of the Act 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:[27]
(a)the prescriptive requirements of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;[28]
(b)the court retains a discretion under s 1322(4) 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;[29]
(d)limitations to the broad powers in s 1322 will not be readily implied.[30] 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 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.[31]
[27] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20].
[28] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43], [53] and [64].
[29] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 [29].
[30] Weinstock v Beck [43], [55] - [56], [60], [64].
[31] Corporations Act2001 (Cth) s 1322(5).

Disposition

Application by an 'interested person'

I accept that the plaintiff is an interested person who may seek relief, as required by s 1322(4) of the Act.[32]

Position of ASX and ASIC

[32] Re Wave Capital Ltd [29].

The ASX indicated that it was not in a position to comment on the matter and did not intend to appear at the hearing.[33] ASIC indicated that it neither supports nor opposes the application and did not intend to appear at the hearing of the matter.[34]

Orders under s 1322(4)(a) of the Act

[33] Affidavit of Dominic Hird filed 23 November 2021 [6], '4'.

[34] Affidavit of Dominic Hird filed 23 November 2021 [9], '7'.

The plaintiff seeks two separate declarations under s 1322(4)(a) of the Act. The first is in respect of the 86,666,709 Quoted Options issued on 10 November 2021 and the second in respect of the 20,000,000 Quoted Options issued on 11 November 2021. In both instances, declarations are sought that any offer for sale or sale of the Quoted Options in the plaintiff, during the period after their issue to the date the cleansing prospectus issued on 18 November 2021 (inclusive), is not invalid by reason of:
(a)the plaintiff's failure to issue a prospectus under s 708A(11) of the Act to exempt the sellers from the obligation of disclosure under the Act; and
(b)the sellers' consequent failure to comply with s 707(3) and s 727(1) of the Act.
I note that the prescriptive requirements of s 1322(4)(a) of the Act are satisfied in 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; and
(c)the contravention is the offering of securities for sale or sales without proper disclosure in contravention of s 707(3) of the Act.[35]

Pre-conditions in s 1322(6)(a) of the Act

[35] See Re Caeneus Minerals Ltd [2018] FCA 560 [39] - [40]; Re Classic Minerals Ltd [2018] FCA 2039 [35] - [36].

Arizona submitted that each of the pre-conditions in s 1322(6)(a) of the Act was satisfied, although it is only necessary for one to be satisfied.
I accept that the pre-condition in s 1322(6)(a)(i) is satisfied in that the act, matter or thing is of a procedural nature, being the issue of a cleansing prospectus.
I turn then to the pre-condition in s 1322(6)(a)(ii) 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 in respect of whether there is no failure of the persons concerned or the company to act honestly.[36] Relevantly, Banks‑Smith J considered that:
[36] 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;[37]
(b)the concept of acting honestly can embrace:[38]
(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.[39]
[37] Re ICandy Interactive Ltd [54], [106] - [107].
[38]Re ICandy Interactive Ltd [55].
[39] Re ICandy Interactive Ltd [60] - [104].
In this case, an error occurred by the plaintiff inadvertently lodging a cleansing notice when it should have lodged a cleansing prospectus. This resulted from an active but incorrect consideration and understanding of the legal advice it sought and received. In respect of the Quoted Options, I find that the actions of Arizona in failing to lodge the cleansing prospectus required by s 708A(5)(e) of the Act were honest and inadvertent.
I also accept that this is not a case where there has been a failure of the directors of Arizona to take an active interest in the company's compliance with the Act or to properly define roles of company officers. I accept that Arizona's directors relied on the company secretary for compliance matters, such as the issue of cleansing prospectuses.[40]
[40] Affidavit of Paul Lloyd filed 18 November 2021 [8].
I am also satisfied that it would be just and equitable to make the orders sought. Section 1322(6)(a)(iii) gives the court a wide discretion in exercising its powers under s 1322 of the Act.[41]

No substantial injustice (s 1322(6)(c) of the Act)

[41] Re Bellevue Gold Ltd [2021] WASC 80 [64] and the authorities cited therein.

I have considered the classes of persons who may be impacted by the making of these orders.
First, the people who were issued the Quoted Options. The prejudice to them is that the sale of these securities may be void or voidable.[42]
[42] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57, 67 [63].
Second, any people who purchased these securities from on-sellers may have on‑sold the securities themselves by trading on the open market of the ASX since they were issued. Any further sales of securities may have occurred without the requisite disclosure under pt 6D.2 of the Act.
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 securities 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 securities. 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 securities 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 discretionary reason to withhold relief

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 to warrant refusal of the relief sought.[43]
[43] Re Wave Capital Ltd [29].
There is nothing in the evidence before me suggesting 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. No shareholder or either regulator has sought to intervene in the hearing or given notice they want to be heard on the application.
In exercising the discretion to grant relief under s 1322(4) of the Act, a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it has been identified.[44] In this case, the plaintiff discovered the failure to lodge the cleansing prospectus on 11 November 2021 and immediately sought legal advice. One week later, on 18 November 2021, the plaintiff commenced these proceedings and sought a trading halt. I accept that the plaintiff acted diligently after being made aware of the issue.
[44] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60].

Conclusion

For these reasons, I was and am satisfied that in the circumstances of this case, relief should be granted in the terms sought by the plaintiff. Accordingly, at the conclusion of the hearing on 23 November 2021, 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
10 DECEMBER 2021