Re Buddy Technologies Ltd

[2022] WASC 98

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   RE BUDDY TECHNOLOGIES LTD; EX PARTE BUDDY TECHNOLOGIES LTD [2022] WASC 98

CORAM:   HILL J

HEARD:   3 MARCH 2022

DELIVERED          :   3 MARCH 2022

PUBLISHED           :   22 MARCH 2022

FILE NO/S:   COR 40 of 2022

MATTER:   IN THE MATTER OF BUDDY TECHNOLOGIES LTD

EX PARTE

BUDDY TECHNOLOGIES LTD

Plaintiff

Catchwords:

Corporations law - Securities - Application for declaratory relief to validate trading in shares issued without a valid cleansing notice or prospectus – Several 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(3), s 708A(11), s 1322(4)

Result:

Application allowed

Category:    B

Representation:

Counsel:

Plaintiff : Mr N J Wallwork

Solicitors:

Plaintiff : Thomson Geer - Perth

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 Strike Energy Ltd [2012] FCA 725

Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418

Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396

HILL J:

1. On 1 March 2022, the plaintiff, Buddy Technologies Limited (Buddy Technologies), filed an originating process seeking orders under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) relating to a number of contraventions of s 707(3) of the Act. The contraventions occurred as a result of sales of shares in the plaintiff between 1 April 2021 and 31 January 2022, without a valid cleansing notice or cleansing prospectus having been lodged.

2. All of the shares the subject of the application were issued under an employee incentive plan.  In issuing the shares, the plaintiff relied on ASIC Class Order CO 14/100 (Class Order).  Subsequently, the plaintiff became aware that it was not eligible to rely on the Class Order as trading in its shares had been suspended for more than five days in the preceding 12 months. 

3. Buddy Technologies has provided a frank and detailed explanation as to the circumstances in which this occurred.  On the basis of the evidence before me, I was and am satisfied that the failure to lodge a cleansing prospectus was caused by inadvertence rather than any deliberate disregard of the plaintiff's obligations.

4. In light of the urgency with which the application was brought, I made orders at the conclusion of the hearing on 3 March 2022 granting the relief sought and said that I would subsequently publish reasons for my decision.  These are the reasons for my decision.

Reporting Requirements under Part 6D.2 of the Corporations Act

1. 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 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.

2. The cleansing notice exception can only be relied upon if the preconditions in s 708A(5) of the Act 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. Companies are entitled to relief from these reporting requirements under the Act in certain circumstances.  These include where shares are issued under an 'employee incentive scheme' covered by the Class Order.   However, in order to be eligible for relief under the Class Order, shares must not have been suspended from trading for more than five days in the previous 12 months.[3]

   [3] ASIC Class Order CO 14/100, RG49.101.

Factual Background

1. In support of its application, the plaintiff relied on five affidavits: an affidavit of Victoria Marie Allinson, the company secretary of the plaintiff, filed 1 March 2022; two affidavits of Sarah Megan Watrous, Buddy Technologies' chief of staff, filed 1 and 2 March 2022; an affidavit of David Peter McLauchlan, the chief executive officer and an executive director of the plaintiff, filed 1 March 2022; and an affidavit of Hendrik Christoffel van Aswegen, a partner of Thomson Geer Lawyers, the plaintiff's solicitors, filed 2 March 2022.

2. Buddy Technologies is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX).  Buddy Technologies undertakes business in Australia and the United States and operates in the industrial analytics and smart lighting sectors, with its primary business being the manufacture and supply of Internet of Things and cloud-based technology products, including LIFX smart lights.[4]

   [4] Affidavit of Sarah Megan Watrous filed 1 March 2022 [23].

3. As at 24 February 2022, Buddy Technologies had 7,878 shareholders, an issued capital of 3,483,887,330 shares and a market capitalisation of approximately $27,870,000.[5]

   [5] Affidavit of Sarah Megan Watrous filed 1 March 2022 [24] – [25].

4. On 25 March 2019, at a general meeting of shareholders, the plaintiff approved an employee incentive plan (the Plan) and the issue of securities under the Plan.[6]  Pursuant to the terms of the Plan, Buddy Technologies was able to issue shares to key employees, consultants, senior managers and directors in both Australia and the United States as part of their remuneration package.[7]  The Plan was re-approved at the plaintiff's annual general meeting of shareholders on 28 January 2022, which also authorised the issue of securities under the Plan.[8]

   [6] Affidavit of Sarah Megan Watrous filed 1 March 2022 [28], 'SMW-4'.

   [7] Affidavit of Sarah Megan Watrous filed 1 March 2022 [27].

   [8] Affidavit of Sarah Megan Watrous filed 1 March 2022 [29].

5. From May 2020, trading of the plaintiff's shares was suspended on three separate occasions. 

6. First, on 4 May 2020, prior to the opening of the market, the plaintiff sought and obtained a voluntary suspension in trading in its shares pending the release of an ASX announcement regarding an equity financing agreement.[9]  On 5 May 2020, the shares were reinstated to official quotation on the ASX.  On this occasion, trading was suspended for one business day.[10]

   [9] Affidavit of Sarah Megan Watrous filed 1 March 2022 [35], 'SMW-5'.

   [10] Affidavit of Sarah Megan Watrous filed 1 March 2022 [36], 'SMW-6'.

7. Second, on 30 October 2020, prior to the opening of the market, the plaintiff sought and obtained a voluntary suspension of trading in its shares pending the release of an announcement about legal proceedings concerning an equity financing agreement.[11]  On 6 November 2020, the shares were reinstated to official quotation on the ASX.  On this occasion, trading was suspended for a total of five business days.[12]

   [11] Affidavit of Sarah Megan Watrous filed 1 March 2022 [38], 'SMW-7'.

   [12] Affidavit of Sarah Megan Watrous filed 1 March 2022 [39] – [40], 'SMW-8'.

8. Third, on 23 April 2021, the plaintiff requested and obtained a voluntary suspension in the trading of its shares pending the release of an announcement regarding an update to the plaintiff's March 2021 financial results.[13]  The voluntary suspension was extended on several occasions, including 30 April, 4 May and 6 May 2021.  On 16 July 2021, following the plaintiff's response to several ASX queries and the release of an announcement regarding an equity capital raising, the shares were reinstated to official quotation.  On this occasion, the plaintiff's shares were suspended from trading for a total of 60 days.[14]

   [13] Affidavit of Sarah Megan Watrous filed 1 March 2022 [42], 'SMW-9'.

   [14] Affidavit of Sarah Megan Watrous filed 1 March 2022 [43] – [44], 'SMW-10'.

9. As a consequence of these separate periods of suspension, at all times since 6 November 2020, trading in the plaintiff's shares had been suspended for more than five days in the preceding 12 months.  As a result, the plaintiff was not eligible under the Class Order for relief from its disclosure obligations.  In addition, although it did not purport to do so, the plaintiff was also unable to issue cleansing notices in respect of any shares that were issued and was required to lodge a cleansing prospectus.

10. Since 6 November 2020, the plaintiff has issued shares under the Plan to some of its employees and directors on numerous occasions.  In issuing these shares, the plaintiff was relieved from any disclosure obligations under s 706 of the Act because each person to whom the shares were issued comprised either senior management, a foreign investor, or a professional sophisticated investor.[15] However, given that Buddy Technologies was not eligible for relief under the Class Order when issuing the shares, any on-sale without disclosure within 12 months would be in breach of s 707(3) of the Act.

    [15] Affidavit of Sarah Megan Watrous filed 1 March 2022 [57].

11. On Sunday 20 February 2022, Ms Watrous and Mr McLauchlan were informed by the plaintiff's solicitors that they had identified an issue in relation to the Plan.[16]  Immediately after becoming aware of this issue, Mr McLauchlan instructed Ms Watrous to direct all employees not to sell any shares until the plaintiff was able to determine the extent of and understand the issue.[17]

    [16] Affidavit of Sarah Megan Watrous filed 1 March 2022 [46]; Affidavit of David Peter McLauchlan filed 1 March 2022 [8].

    [17] Affidavit of David Peter McLauchlan filed 1 March 2022 [9].

12. On 21 February 2022, Ms Watrous and Mr McLauchlan discussed the issue with the plaintiff's solicitors to determine the extent of the plaintiff's non‑compliance with the Act.[18]  Following that discussion, Ms Watrous undertook a review of the shares issued under the Plan,[19] which was completed on 24 February 2022.[20]

    [18] Affidavit of Sarah Megan Watrous filed 1 March 2022 [47] – [48]; Affidavit of David Peter McLauchlan filed 1 March 2022 [10].

    [19] Affidavit of Sarah Megan Watrous filed 1 March 2022 [49].

    [20] Affidavit of Sarah Megan Watrous filed 1 March 2022 [53] – [54].

13. From this review, Ms Watrous identified that 29,646,894 shares issued to nine recipients were, or may have been, on‑sold within 12 months of their issue and prior to the issue of a cleansing prospectus.[21]  Ms Watrous confirmed that seven of the nine recipients of these shares had on‑sold their shares.  The remaining two recipients did not confirm whether or not the shares had been on‑sold.  As a result, the plaintiff cannot discount the possibility that these shares have also been on‑sold.

    [21] Affidavit of Sarah Megan Watrous filed 1 March 2022 [13], [52].

14. On 25 February 2022, prior to the opening of the market, the plaintiff sought and obtained a trading halt.[22]  The plaintiff's shares are suspended from trading pending the outcome of this application.[23] 

    [22] Affidavit of Sarah Megan Watrous filed 1 March 2022 [58]; Affidavit of David Peter McLauchlan filed 1 March 2022 [14]; Affidavit of Victoria Marie Allinson filed 1 March 2022 [17].

    [23] Affidavit of David Peter McLauchlan filed 1 March 2022 [14].

15. On 2 March 2022, the plaintiff lodged a cleansing prospectus in respect of these shares pursuant to s 708A(11) of the Act.[24]

    [24] Affidavit of Hendrik Christoffel van Aswegen filed 2 March 2022 [27], 'HVA-6'. 

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

1. 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.

2. In considering an application under s 1322 of the Act, the essential principles are:[25]

   (a)the prescriptive requirements of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;[26]

   (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;[27]

   (d)limitations to the broad powers in s 1322 will not be readily implied.[28]  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.[29]

   [25] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20].

   [26] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43], [53] and [64].

   [27] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418, 426 [29].

   [28] Weinstock v Beck [43], [55] - [56], [60], [64].

   [29] Corporations Act2001 (Cth) s 1322(5).

Disposition

Application by an 'interested person'

1. I accept the plaintiff is an interested person who may seek relief, as required by s 1322(4) of the Act.[30]

Position of ASX and ASIC

[30] Re Wave Capital Ltd [29].

1. The ASX indicated it was not in a position to comment on the matter and did not intend to appear at the hearing.[31]  ASIC indicated it neither supports nor opposes the application and did not intend to appear at the hearing of the matter.[32]

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

[31] Affidavit of Hendrik Christoffel van Aswegen filed 2 March 2022 [25], 'HVA-4'. 

[32] Affidavit of Hendrik Christoffel van Aswegen filed 2 March 2022 [18], 'HVA-2'. 

1. 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 1 April 2021 and 31 January 2022 (inclusive), during the period after their respective dates of issue to the date of the next cleansing prospectus issued by the plaintiff (inclusive), is not invalid, by reason of:

   (a)the failure of the plaintiff to issue a cleansing notice pursuant to s 708A(5)(e) 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; and

   (b)the sellers' consequent failure to comply with s 707(3) of the Act.

2. 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.[33]

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

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

1. The plaintiff submitted that, while only one of the pre‑conditions in s 1322(6)(a) of the Act needs to be satisfied, in this case, each of the preconditions was satisfied.

2. I am satisfied the pre-condition in s 1322(6)(a)(i) is satisfied in that the act, namely the failure to lodge a cleansing notice or a cleansing prospectus, is essentially of a procedural nature.[34]

   [34] Re Strike Energy Ltd [2012] FCA 725 [15].

3. Turning 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.[35]  Relevantly, Banks‑Smith J considered that:

   [35] 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;[36]

   (b)the concept of acting honestly can embrace:[37]

   (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 the courts look at the company itself, the directors, the company secretary and others as may be concerned.[38]

   [36] Re ICandy Interactive Ltd [54], [106] - [107].

   [37] Re ICandy Interactive Ltd [55].

   [38] Re ICandy Interactive Ltd [60] - [104].

4. In this case, errors have occurred in Buddy Technologies failing to lodge cleansing prospectuses for the shares that were issued under the Plan between 1 April 2021 and 31 January 2022.  I accept and find that during this period, the plaintiff was not eligible to rely on the Class Order as it did not satisfy all of the relevant criteria, namely that trading in the plaintiff's shares had not been suspended for more than five days in the preceding 12 months.  On the basis of the evidence of Ms Watrous, Mr McLauchlan and Ms Allinson, I accept that no-one in the company specifically turned their mind to the question of whether a cleansing prospectus was required.  As a result, I accept this failure was inadvertent, rather than a deliberate disregard by Buddy Technologies or its officers of their respective obligations under ch 6D of the Act.

5. I also accept this is not a case where there has been a failure of Buddy Technologies' 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 Buddy Technologies' directors delegated the responsibility for the relevant tasks to the plaintiff's chief of staff and company secretary.   

1. I am also satisfied it would be just and equitable to make the orders sought.  Section 1322(6)(a)(iii) of the Act gives the court a wide discretion in exercising its powers under s 1322 of the Act.[39]

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

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

1. I have considered the persons and classes of persons who may be impacted by the making of these orders. 

2. First, the shareholders who were issued the impugned shares.  The prejudice to them is that the sales of the impugned shares may be void or voidable for want of compliance with the statutory requirements.

3. Second, those people who purchased the shares may have re-sold the impugned shares themselves. Any further sales of these shares will also have occurred without the requisite disclosure under pt 6D.2 of the Act.

4. I find 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.

5. 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 the 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.  I also accept 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 current suspension from trading is not lifted.

6. 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 orders.  I accept this is an appropriate timeframe in this case.

No other discretionary reason to withhold relief

1. Notwithstanding the number of instances of contravention that have been identified by Buddy Technologies, 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.[40] 

   [40] Re Wave Capital Ltd [29].

2. There is nothing in the evidence before me that suggests any minority shareholder interest might be oppressed or any other interest might be affected.  I am satisfied that all shareholders as well as the ASX and ASIC have been notified of Buddy Technologies' contravention of the Act and given notice of this hearing.[41]  No shareholder or either regulator has sought to intervene in the hearing or given notice they want to be heard on the application.

   [41] Affidavit of Hendrik Christoffel van Aswegen filed 2 March 2022 [11], [19], [26], 'HVA-1', 'HVA-3', 'HVA-5'.

3. 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.[42] In this case, on 20 February 2022, the plaintiff was informed by its solicitors of its potential failure to comply with its obligations under the pt 6D.2 of the Act. On being made aware of the issue, the plaintiff immediately instructed all recipients of the shares not to sell any shares until the matter was more thoroughly understood and undertook a review of the shares issued under the Plan. Following this review and after discussions with its solicitors, the plaintiff wrote to this court on 28 February 2022 to request an urgent hearing of the application. A cleansing prospectus was lodged on 2 March 2022 in respect of the shares, and the matter was brought on for hearing on 3 March 2022. I accept and find that Buddy Technologies acted diligently in relation to the issues once they were drawn to its attention.

Conclusion

[42] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60].

1. 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 issued pursuant to the Plan have been traded.[43]  It cannot be discounted that there have been resales of these shares.  In these circumstances, I consider 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 in respect of the impugned share issues.[44]  Third, I am satisfied that the conduct of Buddy Technologies in failing to lodge a cleansing prospectus which was required under the Act was inadvertent and not in blatant disregard of its obligations.  I do not consider that public policy will be undermined by granting the relief sought.

   [43] Affidavit of Sarah Megan Watrous filed 2 March 2022 [12] – [14], [52].

   [44] Affidavit of Hendrik Christoffel van Aswegen filed 2 March 2022 [27], 'HVA-6'. 

Orders made

1. For these reasons, 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

Associate to the Honourable Justice Hill

22 MARCH 2022