Re Delecta Ltd
[2022] WASC 163
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE DELECTA LTD; EX PARTE DELECTA LTD [2022] WASC 163
CORAM: HILL J
HEARD: 11 APRIL 2022
DELIVERED : 11 APRIL 2022
PUBLISHED : 10 MAY 2022
FILE NO/S: COR 63 of 2022
MATTER: IN THE MATTER OF DELECTA LTD (ACN 009 147 924)
EX PARTE
DELECTA LTD
Plaintiff
Catchwords:
Corporations law - Securities - Application for declaratory relief to validate trading in shares issued without a valid cleansing notice or prospectus - Seven 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, s 727(1), s 1322(4)
Result:
Application granted
Category: B
Representation:
Counsel:
| Plaintiff | : | M F Holler |
Solicitors:
| Plaintiff | : | Steinepreis Paganin |
Cases referred to in decision:
Re Bellevue Gold Ltd [2021] WASC 80
Re Caeneus Minerals Ltd [2018] FCA 560
Re Classic Minerals Ltd [2018] FCA 2039
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) 47 ACSR 418
Weinstock v Beck (2013) 251 CLR 396
HILL J:
The plaintiff, Delecta Limited (Delecta), by way of originating process filed 4 April 2022, seeks relief under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) relating to a number of contraventions of s 707(3) and s 727(1) of the Act. The contraventions occurred as a result of sales of shares in the plaintiff between 11 October 2018 and 2 November 2021, without a valid cleansing notice or cleansing prospectus having been lodged.
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.
In light of the urgency with which the application was brought, at the conclusion of the hearing on 11 April 2022, I made orders granting the relief sought and stated that I would publish written reasons for my decision. These are those reasons.
Reporting requirements under Part 6D.2 of the 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 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, 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.
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 2001 (Cth) s 708A(11).
Factual background
In support of its application, the plaintiff relies on three affidavits: an affidavit of John Burness, the company secretary of the plaintiff, filed 6 April 2022; an affidavit of Malcom Day, the managing director of the plaintiff, filed 6 April 2022; and an affidavit of Dominic Hird, a solicitor of Steinepreis Paganin, the plaintiff's solicitors, filed 11 April 2022.
Delecta is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). Delecta engages in the wholesale distribution of adult products and mining exploration and evaluation activities in Colorado and Nevada.[4]
[4] Affidavit of John Burness filed 6 April 2022 [11].
As at 14 February 2022, Delecta had 3,403 shareholders, an issued capital of 1,204,908,705 shares and a market capitalisation of approximately $13,253,996.[5]
[5] Affidavit of John Burness filed 6 April 2022 [12].
On 30 March 2022, Delecta's legal counsel, Pia Drummond, asked Mr Burness why the plaintiff had not issued cleansing notices for various share issues from 2020 onwards.[6] Following this conversation, a review was undertaken of all of the share issues undertaken by Delecta from 1 January 2015.[7] This date was chosen because of s 1317K of the Act which provides that proceedings for a declaration of contravention, a pecuniary penalty order, or a compensation order can be started no later than six years after the contravention.[8]
[6] Affidavit of John Burness filed 6 April 2022 [41] - [42].
[7] Affidavit of John Burness filed 6 April 2022 [43].
[8] Submissions [27].
The review identified seven share issues between 11 October 2018 and 2 November 2021 where Mr Burness had failed to issue a valid cleansing notice or prospectus (Share Issues), namely:
(a)an issue of 12,500,000 shares on 11 October 2018, for payment of marketing services and pursuant to a binding option agreement for the acquisition of Silver Queen Mining Pty Ltd;[9]
(b)an issue of 100,000,000 shares on 1 July 2020, being tranche one of a placement announced on 24 June 2020;[10]
(c)an issue of 212,625,000 shares on 4 September 2020, being tranche two of the placement announced on 24 June 2020;[11]
(d)an issue of 139,412,500 shares on 20 September 2021, following receipt of a number of option exercise forms;[12]
(e)an issue of 5,000,000 shares on 29 September 2021, following receipt of a further option exercise form;[13]
(f)an issue of 3,750,000 shares on 22 October 2021, following receipt of a further option exercise form;[14] and
(g)an issue of 8,125,000 shares on 2 November 2021, following receipt of a number of option exercise forms.[15]
[9] Affidavit of John Burness filed 6 April 2022 [18] - [19].
[10] Affidavit of John Burness filed 6 April 2022 [21] - [23].
[11] Affidavit of John Burness filed 6 April 2022 [25].
[12] Affidavit of John Burness filed 6 April 2022 [27] - [28].
[13] Affidavit of John Burness filed 6 April 2022 [30] - [31].
[14] Affidavit of John Burness filed 6 April 2022 [33] - [34].
[15] Affidavit of John Burness filed 6 April 2022 [36] - [37].
On 31 March 2022, the plaintiff sought an urgent hearing of this application.
On 5 April 2022, the plaintiff gave ASIC and the ASX notice of its intention to make this application.[16]
[16] Affidavit of John Burness filed 6 April 2022 [49].
On 6 April 2022, the plaintiff released an ASX announcement advising the market of the plaintiff's intention to make this application.[17] On the same date, the plaintiff notified the recipients of the Share Issues of the failure to properly cleanse the shares that had been issued.[18]
[17] Affidavit of John Burness filed 6 April 2022 [48].
[18] Affidavit of John Burness filed 6 April 2022 [47].
On 8 April 2022, the plaintiff lodged a cleansing prospectus in respect of the Share Issues pursuant to s 708A(11) of the Act.[19]
[19] Affidavit of Dominic Hird filed 11 April 2022 [13], 'DH-9'.
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:[20]
(a)the prescriptive requirements of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;[21]
(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;[22]
(d)limitations to the broad powers in s 1322 will not be readily implied.[23] 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.[24]
[20] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20].
[21] Weinstock v Beck (2013) 251 CLR 396 [43], [53], [64].
[22] Re Wave Capital Ltd (2003) 47 ACSR 418, 426 [29].
[23] Weinstock v Beck [43], [55] - [56], [60], [64].
[24] 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.[25]
Position of ASX and ASIC
[25] 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 of the matter.[26] ASIC neither supported nor opposed the application and did not appear at the hearing.[27]
Orders under s 1322(4)(a) of the Act
[26] Affidavit of Dominic Hird filed 11 April 2022, 'DH-3'.
[27] Affidavit of Dominic Hird filed 11 April 2022, 'DH-7'.
The plaintiff seeks declarations under s 1322(4)(a) of the Act that any offer for sale or sale of the quoted securities, during the period between 11 October 2018 to 2 November 2021 (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) 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.[28]
Pre-conditions in s 1322(6)(a) of the Act
[28] See Re Caeneus Minerals Ltd [39] - [40]; Re Classic Minerals Ltd [35] - [36].
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.
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.[29]
[29] Re Strike Energy Ltd [2012] FCA 725 [15].
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.[30] Relevantly, Banks-Smith J considered that:
[30] 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;[31]
(b)the concept of acting honestly can embrace:[32]
(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.[33]
[31] Re ICandy Interactive Ltd [54], [106] - [107].
[32] Re ICandy Interactive Ltd [55].
[33] Re ICandy Interactive Ltd [60] - [104].
In this case, Delecta failed to lodge cleansing notices or prospectuses in relation to each of the Share Issues. Mr Burness' explanation was simply that the failure on each occasion was inadvertent.[34] In correspondence from the plaintiff's solicitors following a request for clarification by ASIC dated 8 April 2022,[35] the plaintiff's solicitors explained that: [36]
Mr Burness had a misunderstanding of the requirements to cleanse securities prior to their sale. This misunderstanding lead to a failure to properly cleanse shares initially, with this mistake being repeated in subsequent share issues in which he has been involved in.
[34] Affidavit of John Burness filed 6 April 2022 [16], [20], [24], [29], [32], [35], [38].
[35] Affidavit of Dominic Hird filed 11 April 2022, 'DH-6'.
[36] Affidavit of Dominic Hird filed 11 April 2022, 'DH-6'.
On the basis of this explanation, I am satisfied that the initial misunderstanding was a matter of oversight, which was then repeated on subsequent occasions. I accept the error was the result of inadvertence, rather than a deliberate disregard by Delecta or its officers of their respective obligations under ch 6D of the Act.
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.[37]
No substantial injustice (s 1322(6)(c) of the Act)
[37] Re Bellevue Gold Ltd [2021] WASC 80 [65] and the authorities cited therein.
I have considered the persons and classes of persons who may be impacted by the making of these orders.
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.
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.
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.
I accept that if the orders sought are not made, there may be substantial injustice to the plaintiff as the offers for sale 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.
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
I accept that there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law or constitution so as to warrant refusal of the relief sought.
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 as well as the ASX and ASIC have been notified of the plaintiff's contraventions of the Act and given notice of this hearing. No shareholder or either regulator has sought to intervene in the hearing or given notice that they want to be heard on the application.
In exercising the discretion to grant relief under s 1322(4)(a), a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it was identified. In this case, on 30 March 2022, Mr Burness of the plaintiff became aware of the issues with the Share Issues. The plaintiff immediately sought legal advice and commenced these proceedings on 31 March 2022. Further, the plaintiff informed the market of the issue on 6 April 2022 and informed the recipients of the Share Issues on the same day. I accept and find that the plaintiff has acted diligently in seeking to remedy the matters the subject of the application.
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, a number of the shares in each of the Share Issues have been subsequently traded.[38] As it is difficult to ascertain with any certainty which shares were bought and sold and whether any were the Share Issues shares, there exists potential for title issues for parties to those sale transactions. It cannot be discounted that there may 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.[39] Third, I am satisfied that the conduct of Delecta in failing to lodge a cleansing prospectus which was required under the Act was inadvertent and not in blatant disregard of its obligations. Fourth, Delecta acted promptly upon realising the error, preparing the required paperwork and approaching the court. I do not consider that public policy will be undermined by granting the relief sought.
[38] Affidavit of John Burness filed 6 April 2022 [44].
[39] Affidavit of Dominic Hird filed 11 April 2022, 'DH-9'.
Costs
Given the numerous instances of non-compliance with the plaintiff's regulatory obligations, counsel for the plaintiff specifically addressed the appropriate order as to costs. Counsel contended that, notwithstanding the number of instances, the appropriate order was that no costs order should be made.
In my reasons in Metalicity Ltd [2020] WASC 387, I commented at [62] that:
Where the court is satisfied that there has been no failure of the persons concerned or the company to act honestly, under s 1322(6)(a)(ii) of the Act, it would only be in the most unusual circumstances that an order for costs would be made against the officers of the company.
I am satisfied that in the circumstances of this case, the plaintiff has brought the application in the company's interests. The plaintiff has undertaken a detailed investigation in relation to the Share Issues. In my view, the risk of a personal costs order should not impact the decision of directors or officers of a company (either past or present) to investigate matters or to bring an application before the court.
For these reasons, I will make no order as to costs.
Orders made
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.
FD
Associate to the Honourable Justice Hill
10 MAY 2022
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