Re Force Commodities Ltd

Case [2019] FCA 1815

FEDERAL COURT OF AUSTRALIA

Force Commodities Ltd, in the matter of Force Commodities Ltd [2019] FCA 1815

File number: WAD 540 of 2019
Judge: MCKERRACHER J
Date of judgment: 1 November 2019
Date of publication of reasons: 5 November 2019
Catchwords:

CORPORATIONS – application for orders under s 1322(4) and s 254E of the Corporations Act 2001 (Cth) – application to validate trading in the plaintiff’s shares – application to relieve sellers of shares from civil liability – carve out in respect of director and officers regarding relief from civil liability – non-compliance with ASIC Class Order

Held:  application allowed

Legislation: Corporations Act 2001 (Cth) ss 254E, 706, 707(1), 707(3), 708A(5), 708A(6), 708A(11), 721(1), 727(1), 1322(4)(a), 1322(4)(b), 1322(4)(c), 1322(4)(d), 1322(6)(a), 1322(6)(a)(ii), 1322(6)(a)(iii), 1322(6)(b), 1322(6)(c), Ch 6D
Cases cited:

Australian Dairy Farms Limited, in the matter of Australian Dairy Farms Limited and Dairy Funds Management Limited [2018] FCA 2056

Caeneus Minerals Ltd, in the matter of Caeneus Minerals Ltd [2018] FCA 560

Castillo Copper Limited, in the matter of Castillo Copper Limited [2018] FCA 602

Clancy Exploration Limited, in the matter of Clancy Exploration Limited [2018] FCA 569

Classic Minerals Limited, in the matter of Classic Minerals Limited [2018] FCA 2039

EHR Resources Ltd, in the matter of EHR Resources Ltd  [2018] FCA 997

Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17

Golden Rim Resources Ltd, in the matter of Golden Rim Resources Ltd [2019] FCA 1206

Re ICandy Interactive Limited (2018) 125 ACSR 369

Laserbond Limited (ACN 057 636 692), in the matter of Laserbond Limited (ACN 057 636 692) [2007] FCA 2056

NMRA Ltd v Gould (1995) 18 ACSR 290

Re Poseidon Nickel Ltd (2018) 129 ACSR 57

Pursuit Minerals Limited, in the matter of Pursuit Minerals Limited [2018] FCA 1127

Queensland Bauxite Ltd, in the matter of Queensland Bauxite Ltd [2018] FCA 2113

Re Silver Lake Resources Ltd (2012) 87 ACSR 436

Spectur Limited, in the matter of Spectur Limited [2019] FCA 867

TV2U International Limited, in the matter of TV2U International Limited [2016] FCA 1556

Wangle Technologies Ltd, in the matter of Wangle Technologies Ltd [2018] FCA 864

Re Wave Capital Ltd (2003) 47 ACSR 418

Weinstock v Beck  (2013) 251 CLR 396

Date of hearing: 1 November 2019
Registry: Western Australia
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 60
Counsel for the Plaintiff: Mr T Coyle
Solicitor for the Plaintiff: Steinepreis Paganin

ORDERS

WAD 540 of 2019

IN THE MATTER OF FORCE COMMODITIES LTD
BETWEEN:

FORCE COMMODITIES LTD

Plaintiff

JUDGE:

MCKERRACHER J

DATE OF ORDER:

1 NOVEMBER 2019

THE COURT ORDERS THAT:

1.Leave be granted to the plaintiff to amend the originating process in terms of the minute of proposed amended originating process filed herein.

2.The minute of proposed amended originating process do stand as the amended originating process and further service be dispensed with.

3.Pursuant to ss 1322(4)(a) and 254E of the Corporations Act 2001 (Cth), the issue of the shares…

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Re Force Commodities Ltd [2019] FCA 1815
Case
[2019] FCA 1815
Decision Date

CaseChat Overview and Summary

In the case of Force Commodities Ltd, the plaintiff, an Australian company, sought urgent orders under sections 1322(4) and 254E of the Corporations Act 2001 (Cth). The relief was sought to validate the trading in the plaintiff's shares and to relieve sellers of shares from civil liability. The application was made ex parte and on an urgent basis due to non-compliance with ASIC Class Order 09/425 and the failure to issue a valid cleansing notice. The primary legal issues involved determining whether the orders should be made under sections 1322 and 254E of the Corporations Act and whether the just and equitable ground was satisfied.

The Court found that Force Commodities was an interested party under section 1322(4) of the Act and that secondary trading had occurred, resulting in a breach of section 707(3) of the Act. The Court was satisfied that the requirements under section 1322(6) were met, including the just and equitable ground. The Court also accepted that the company secretaries made honest mistakes regarding the need for a cleansing notice and the requirements for a valid notice. The Court concluded that orders under section 1322(4)(c) relieving shareholders from civil liability should be made, as it was probable that any person who was issued with shares or purchased and on-sold such securities did so in the bona fide belief that the shares were tradable without having to make disclosure under section 707(3) of the Act.

The Court allowed the application, validating the issue of the shares and confirming that any offer for sale or sale of the shares during the specified period is not invalid due to the failure to issue a valid cleansing notice or comply with certain sections of the Act. The Court also relieved sellers of shares, except for present and past directors and officers, from any civil liability arising out of any contravention of sections 707(3) and 727(1) of the Act. The Court further ordered that a sealed copy of these orders be served on ASIC and that a copy of these orders be sent to the last known email address of each person to whom the shares were issued. The plaintiff was also directed to request the ASX to reinstate the class of securities '4CE' and to publish an announcement on the ASX markets announcement platform. No order as to costs was made.

Orders

Orders of the court

1. Leave be granted to the plaintiff to amend the originating process in terms of the minute of proposed amended originating process filed herein.

2. The minute of proposed amended originating process do stand as the amended originating process and further service be dispensed with.

3. Pursuant to ss 1322(4)(a) and 254E of the Corporations Act 2001 (Cth), the issue of the shares referred to at item 1 of Annexure A is validated and confirmed.

4. Pursuant to s 1322(4)(a) of the Act, it is declared that any offer for sale or sale of the shares referred to at item 1 of Annexure A during the period from the date of issue until 14 October 2019 is not invalid by reason of:

(a) the failure to give a notice to the Australian Securities Exchange (ASX) under paragraph 7(f)(ii) of the Australian Securities and Investment Commission (ASIC) Class Order 09/425 within the 24-hour period prior to the issue of the shares; and

(b) the seller’s consequent failure to comply with s 707(3) and 727(1) of the Act.

5. Pursuant to s 1322(4)(a) of the Act, it is declared that any offer for sale or sale of the shares listed at items 2 to 14 of Annexure A during the period from the date of issue until 14 October 2019 is not invalid by reason of:

(a) The failure to issue a valid cleansing notice under s 708A(5)(e) of the Act or a cleansing prospectus under s 708A(11) of the Act, to exempt the seller from the obligation of disclosure under the Act; and

(b) the seller’s consequent failure to comply with s 707(3) and 727(1) of the Act.

6. Pursuant to s 1322(4)(c) of the Act, any sellers of shares referred to in Annexure A save for present and past directors and officers of the plaintiff are relieved from any civil liability arising out of any contravention of ss 707(3) and 727(1) of the Act.

7. A sealed copy of these orders is to be served on ASIC as soon as reasonably practicable and upon service of these orders on ASIC, ASIC is to include these orders on its database.

8. As soon as reasonably practicable a copy of these orders is to be sent to the last known email address of each person to whom the shares referred to in Annexure A were issued.

9. The plaintiff make a request forthwith of the ASX for the class of securities ‘4CE’ to be reinstated to quotation on the ASX.

10. As soon as reasonably practicable and prior to the reinstatement of the class of securities ‘4CE’ on the ASX, the plaintiff is to publish an announcement on the ASX markets announcement platform in which a copy of these orders is included.

11. For a period of 28 days from the publication of these orders on the ASX markets announcement platform, any person who claims to have suffered substantial injustice or is likely to suffer substantial injustice by the making of any or all of these orders has liberty to apply to vary or to discharge these orders.

12. There be no order as to costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

On 1 November 2019, the Application came before the Court for hearing, Force Commodities having applied ex parte and on an urgent basis for remedial orders. I was satisfied it was appropriate to make the orders sought by Force Commodities for the reasons which follow. EVIDENCE The Application was supported by the following affidavits:·The affidavit of Mr Brewer, director of Force Commodities, affirmed 24 October 2019, which deposed to information concerning the Securities Issues.·The affidavit of Mr Kinstlinger, affirmed 28 October 2019, who was Force Commodities’ company secretary from this appointment on 10 August 2010 until his resignation on 31 August 2017. He was joint secretary with Mr Fry from 1 April 2017 until his resignation. ·The affidavit of Mr Fry affirmed 25 October 2019, who was appointed as the company secretary of Force Commodities on 1 April 2017 and resigned on 5 February 2019. He was joint secretary with Mr Kinstlinger from his appointment date until Mr Kinstlinger resigned on 31 August 2017.·The affidavit of Mr Pitcher, affirmed 25 October 2019, who was the current company secretary of Force Commodities (at the time of deposing his affidavit), having been appointed on 5 February 2019. There was also an affidavit of Mr Tydde, solicitor for Force Commodities, sworn 31 October 2019, which annexed correspondence with the Australian Securities Exchange (ASX), the Australian Securities and Investments Commission (ASIC) and also with an individual from Computershare Investor Services Pty Ltd, Force Commodities’ share registry. STATUTORY REGIME Chapter 6D of the Act imposes disclosure obligations in relation to the issue and sale of shares. In some circumstances, those requirements may be met by the issue of a notice that complies with s 708A(6) (generally known as a cleansing notice): s 708A(5). More generally, if a prospectus has been lodged in accordance with s 708A(11), no further disclosure is required under Pt 6D.2. Some provisions allow securities the subject of the regulation in Pt 6D.2 to be issued without disclosure. However, if that is done then the party to whom the securities are issued may not be able to on-sell the shares within 12 months without that party itself providing disclosure. Therefore, if the issuer does not issue a valid cleansing notice or a prospectus at the time of issue then there is a prospect that the party to whom the securities are issued must itself cause such disclosure if it wishes to on-sell those securities within 12 months. Such a party may well be unaware of such a requirement. The provisions of Pt 6D.2 of the Act which engage the cleansing notice exception are, relevantly, as follows:706 Issue offers that need disclosureAn offer of securities for issue … needs disclosure to investors under this Part unless section 708 or 708AA says otherwise.707 Sale offers that need disclosureOnly some sales need disclosure(1)An offer of securities for sale needs disclosure to investors under this Part only if disclosure is required by subsection (2), (3) or (5).…Sale amounting to indirect issue(3)An offer of a body’s securities for sale within 12 months after their issue needs disclosure to investors under this Part if:(a)the body issued the securities without disclosure under this Part; and(b)either:(i)the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or(ii)the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them;and section 708 or 708A does not say otherwise.…708A Sale offers that do not need disclosure...Sale offer of quoted securities––case 1(5) The sale offer does not need disclosure to investors under this Part if:(a)the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and(b)trading in that class of securities on a prescribed financial market on which they were quoted 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; and(c)no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and(d)no order under section 340 or 341 covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and(e)either:(i)if this section applies because of subsection (1)––the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made ……(Notes omitted.)

Decision

Reasons for decision

For the reasons given in respect of the s 1322 remedial order, I made the s 254E order. CONCLUSION I was satisfied the orders sought were appropriate. For the reasons given by Colvin J in Re Poseidon Nickel Ltd(2018) 129 ACSR 57 (at [90]-[92]), it was appropriate no cost order be made. One further matter should be noted by way of conclusion. The Western Australian District Registry of the Court has been the recipient of a significant volume of applications for remedial orders of this nature. Western Australia appears to be disproportionately represented in this regard. I refer to the following judgments in the last 18 months (with a number before this time as well):·Caeneus Minerals Ltd (9 April 2018) ·Clancy Exploration Limited, in the matter of Clancy Exploration Limited [2018] FCA 569 (10 April 2018)·ICandy Interactive Limited (13 April 2018) ·Castillo Copper Limited, in the matter of Castillo Copper Limited [2018] FCA 602 (13 April 2018) ·Wangle Technologies Ltd, in the matter of Wangle Technologies Ltd [2018] FCA 864 (7 June 2018) ·EHR Resources Ltd (17 July 2018) ·Poseidon Nickel Ltd (17 July 2018) ·Pursuit Minerals Limited, in the matter of Pursuit Minerals Limited [2018] FCA 1127 (30 July 2018) ·Australian Dairy Farms (10 October 2018)·Queensland Bauxite Ltd, in the matter of Queensland Bauxite Ltd [2018] FCA 2113 (27 November 2018) ·Classic Minerals Limited (12 December 2018) ·Spectur Limited, in the matter of Spectur Limited [2019] FCA 867 (6 June 2019) ·Golden Rim Resources Ltd, in the matter of Golden Rim Resources Ltd [2019] FCA 1206 (2 August 2019) The need for this volume of such applications is surprising. Each such application occasions costs to a company, cost probably borne by shareholders who would reasonably be entitled to anticipate regulatory compliance.

Ratio Decidendi

Legal Principle Established

On 25 October 2019, Force Commodities’ solicitors lodged the Application in this Court. CONSIDERATION It is appropriate to start by observing that Ch 6D of the Act is concerned with fundraising. As I observed in Golden Gate (at [24]):Chapter 6 is designed to ensure that investors are provided with all information that they and their professional advisers would reasonably require to make an informed assessment in connection with securities offered for issue or sale. This includes the rights and liabilities attaching to securities (and the underlying securities in the case of interests in or options over securities) and the assets, liabilities, financial position and performance, profits and losses and prospects of the body that is to issue or issued securities (or the underlying securities in the case of interest in or options over securities) that are offered for issue and, in certain cases, for sale to investors. Section 707 is an anti-avoidance provision designed to prevent the avoidance of disclosure requirements. In Golden Gate (at [27]), I identified the purposes as being to:... prevent the policy of Chapter 6D being circumvented by the issue of securities or offer of sale of securities to a party to whom disclosure is not required (under s 708 or s 708AA) and that party then offering those securities for sale to investors without disclosure. I turn to first consider relief under s 1322 of the Act. Whether validating orders should be made under ss 1322 and 254EOrders under s 1322 of the Act Force Commodities submitted, and I accepted, that it was an interested person, for the purposes of s 1322(4) of the Act, because it was someone ‘whose material legal rights or pecuniary or other economic interests are or may be substantially affected by’ its failure to issue a cleansing notice: see Golden Gate (at [44]); Caeneus Minerals Ltd, in the matter of Caeneus Minerals Ltd [2018] FCA 560 (at [38]) and Classic Minerals Limited, in the matter of Classic Minerals Limited [2018] FCA 2039 (at [34]). Secondary trading has occurred in relation to all of the Securities Issues, as appears from column 7 of the Table. Accordingly, sellers have breached s 707(3) of the Act. This qualifies as an ‘act, matter or thing that may be invalid by reason of a contravention’. The requirements under s 1322(6) are all satisfied. Force Commodities relied on the just and equitable ground in s 1322(6)(a). I am also satisfied that Force Commodities acted honestly, for the purposes of s 1322(6)(a)(ii). The company secretaries made honest mistake about the need for cleansing notices and the requirements for a valid notice. The same type of mistake was made about the requirements for a valid notice under para 7(f)(ii) of CO 09/425. Orders under s 1322(4)(c) relieving shareholders from civil liability should also be made. It is probable that any person who was issued with shares under any of the Securities Issues or purchased and on-sold such securities did so in the bona fide belief that the shares were tradable without having to make disclosure under s 707(3) of the Act: see, for example, TV2U International Limited, in the matter of TV2U International Limited [2016] FCA 1556 (at [40]) and Re Silver Lake Resources Ltd (2012) 87 ACSR 436 (at [19]).