Re Wellfully Ltd
[2021] WASC 201
•23 JUNE 2021
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE WELLFULLY LTD; EX PARTE WELLFULLY LTD [2021] WASC 201
CORAM: HILL J
HEARD: 16 APRIL 2021
DELIVERED : 19 APRIL 2021
PUBLISHED : 23 JUNE 2021
FILE NO/S: COR 65 of 2021
MATTER: IN THE MATTER OF WELLFULLY LTD
EX PARTE
WELLFULLY LTD
Plaintiff
Catchwords:
Corporations law - Securities - Application for declaratory relief that trading in shares was not invalid - Two instances where ASX considered securities were issued without a valid cleansing notice - 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 721, s 1322(4)
Result:
Application granted
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr N Wallwork |
Solicitors:
| Plaintiff | : | McNally & Co |
Case(s) referred to in decision(s):
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) 251 CLR 396
HILL J:
On 15 April 2021, the plaintiff, Wellfully Limited (Wellfully), filed an originating process seeking orders under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) relating to alleged contraventions of s 707(3) and s 727(1) of the Act. Following two separate issues of shares on 22 February 2021 and 9 April 2021, the ASX raised a concern that the cleansing notices that had been lodged were invalid.
The plaintiff has provided a frank and detailed explanation as to the circumstances surrounding each of the share issues. On the basis of the evidence before me, I was and am satisfied that any failure was caused by what the ASX considered to be an incorrect view of a legal issue rather than any deliberate disregard of the plaintiff's obligations under the Act.
At the time the matter came on for hearing on 16 April 2021, the plaintiff had not yet lodged a cleansing prospectus. This occurred on 19 April 2021. In light of the urgency with which the application was brought, on 19 April 2021, I made orders 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 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, s 708A(5).
[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 s 708A(5) of the Act are met. These include the requirement 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] Where this occurs, the disclosure requirements for offers and sales of that class of securities are met from that date.
[4] Corporations Act, s 708A(11).
Factual Background
In support of its application, Wellfully relied on four affidavits: an affidavit of Jeffrey Edwards, the managing director of the plaintiff, filed 15 April 2021; an affidavit of John Palermo, the company secretary of the plaintiff, filed 15 April 2021; an affidavit of Consuelo Patricia Fierro, a solicitor at McNally & Co, the plaintiff's solicitors, filed 16 April 2021; and an affidavit of Kathleen Marie McNally, a partner at McNally & Co, filed 19 April 2021.
Wellfully is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). It is a science-based wellness company and has developed its own line of beauty devices.[5]
[5] Affidavit of John Palermo filed 15 April 2021 [11].
On 7 November 2019, Wellfully announced that it had entered into an agreement pursuant to which it conditionally agreed to acquire 100% of the issued share capital in Export Corporation (Australia) Pty Ltd (Export Corporation).[6] Export Corporation is the owner and operator of the business 'Nutrition Systems'. Following the announcement of the share sale agreement, Wellfully suspended trading in its shares.
[6] Affidavit of John Palermo filed 15 April 2021 [20], 'JP-03'.
Due to the size and scale of the proposed acquisition of Export Corporation, the ASX exercised its discretion to require Wellfully to re‑comply with chapters 1 and 2 of the ASX Listing Rules and for the plaintiff to obtain approval from its shareholders in respect of the acquisition.[7] As a consequence, the securities of Wellfully were suspended from quotation.
[7] Affidavit of John Palermo filed 15 April 2021 [21], 'JP-04'.
On 20 March 2020, following the outbreak of the COVID‑19 pandemic, Wellfully and Export Corporation agreed to terminate the share sale agreement.[8]
[8] Affidavit of John Palermo filed 15 April 2021 [23], 'JP-05'.
In August 2020, Wellfully undertook a capital raising and reinstatement process. On 21 August 2020, the plaintiff was reinstated to quotation on the ASX.[9] That is, trading in Wellfully's shares was unable to occur for nine months and 14 days prior to its reinstatement to the ASX.
[9] Affidavit of John Palermo filed 15 April 2021 [30], 'JP-11'.
On 14 September 2020, the plaintiff changed its name from OBJ Limited to Wellfully Limited.[10]
[10] Affidavit of John Palermo filed 15 April 2021 [31].
On 1 February 2021, Wellfully entered into an agreement with CPS Capital Group Pty Ltd (CPS).[11] The mandate required CPS to assist Wellfully in placing shares with sophisticated or professional investors pursuant to s 708 of the Act.[12]
[11] Affidavit of John Palermo filed 15 April 2021 [32], 'JP-12'.
[12] Affidavit of John Palermo filed 15 April 2021 [33].
On 10 February 2021, Wellfully announced a capital raising to sophisticated or professional investors to raise approximately $4,750,000.[13] The shares the subject of the capital raising were issued in two tranches.
[13] Affidavit of John Palermo filed 15 April 2021 [34], 'JP-13'.
The first tranche of 21,973,070 shares were issued on 22 February 2021 to 177 sophisticated or professional investors. Some of these shares have since been on‑sold.[14] On the same date, Wellfully lodged a cleansing notice with the ASX.[15]
[14] Affidavit of John Palermo filed 15 April 2021 [38], [42], 'JP-14', 'JP-16'.
[15] Affidavit of John Palermo filed 15 April 2021 [39], 'JP-15'.
On 31 March 2021, Wellfully held a general meeting at which resolutions were passed ratifying the issue of the first tranche of shares on 22 February 2021 and approving the issue of the second tranche of shares on 9 April 2021.[16]
[16] Affidavit of John Palermo filed 15 April 2021 [43] – [44], 'JP-17', 'JP-18'.
On 9 April 2021, Wellfully issued the second tranche of 41,360,263 shares to 181 sophisticated or professional investors. Some of these shares have since been on-sold.[17] On the same day, Wellfully lodged a cleansing notice with the ASX.[18]
[17] Affidavit of John Palermo filed 15 April 2021 [45], [49], 'JP-19', 'JP-21'.
[18] Affidavit of John Palermo filed 15 April 2021 [46], 'JP-20'.
On 12 April 2021, Mr Edwards, the managing director of Wellfully, was informed by a representative of the ASX that there was an issue with the cleansing notices that had been lodged. This was because the ASX considered they were invalid because trading in the plaintiff's shares had been suspended for more than five days in the 12 months prior to the date the shares were issued.[19] On the same date, Mr Edwards telephoned Mr Palermo and notified him of the issue.[20]
[19] Affidavit of Jeffrey Edwards filed 15 April 2021 [7] - [8]; Affidavit of John Palermo filed 15 April 2021 [57].
[20] Affidavit of Jeffrey Edwards filed 15 April 2021 [10]; Affidavit of John Palermo filed 15 April 2021 [55].
Mr Palermo's evidence was that he believed the plaintiff was entitled to issue the cleansing notices because Wellfully's reinstatement to quotation in August 2020 acted as a 'reset date'.[21] He formed the view that the five days' suspension under the Act was assessed from the date of reinstatement.[22]
[21] Affidavit of John Palermo filed 15 April 2021 [61] – [64].
[22] Affidavit of John Palermo filed 15 April 2021 [64].
Mr Edwards' evidence was that he, and Wellfully's other directors, relied on Mr Palermo in his role as company secretary to ensure that Wellfully complied with its obligations under the Act.[23] Mr Edwards deposed that he had also formed the view that Wellfully's reinstatement to the ASX meant that the period of suspension had been 'cleansed away'.[24]
[23] Affidavit of Jeffrey Edwards filed 15 April 2021 [15] – [16].
[24] Affidavit of Jeffrey Edwards filed 15 April 2021 [14].
On 12 April 2021, the same date that Wellfully became aware of the issue, Wellfully requested a trading halt and sought further information from its share registry and CPS about whether there had been any on-sales of the shares issued on 22 February 2021 and 9 April 2021.[25]
[25] Affidavit of John Palermo filed 15 April 2021 [58].
On 13 April 2021, prior to the opening of the market, trading in Wellfully's shares was halted.[26]
[26] Affidavit of John Palermo filed 15 April 2021 [59], 'JP-26'.
On 14 April 2021, Wellfully's solicitors, McNally & Co, notified ASIC of its intention to apply to this court for relief under s 1322 of the Act.[27] This was also the subject of an ASX announcement on 14 April 2021.[28]
[27] Affidavit of John Palermo filed 15 April 2021 [70], 'JP-28'.
[28] Affidavit of John Palermo filed 15 April 2021 [69], 'JP-27'.
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:[29]
(a)the prescriptive requirements of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;[30]
(b)the court retains a discretion 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;[31]
(d)implied limitations to the broad powers in s 1322 will not be readily implied.[32] Section 1322 is remedial in character and should be applied broadly; and
(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.
[29] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174.
[30] Weinstock v Beck (2013) 251 CLR 396 [43], [53] and [64].
[31] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418, 426 [29].
[32] Weinstock v Beck [43], [55] - [56] and [64].
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).[33]
Position of ASX and ASIC
[33] 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.[34] ASIC indicated that it neither supports nor opposes the application and did not intend to appear at the hearing of the matter.[35]
Orders under s 1322(4)(a) of the Act
[34] Affidavit of Consuelo Patricia Fierro filed 16 April 2021 'CF-2'.
[35] Affidavit of Consuelo Patricia Fierro filed 16 April 2021 'CF-3'.
The plaintiff originally sought declarations under s 1322(4)(a) of the Act that any offers for sale or sale of the quoted securities issued on 22 February 2021 and on 9 April 2021 were not invalid, by reason of the failure of the plaintiff to issue a valid cleansing notice pursuant to s 708A of the Act to exempt the sellers from the obligation of disclosure under the Act, or the sellers' consequent failure to comply with s 707(3) and s 727(1) of the Act.
Prior to the matter coming on for hearing, I queried with the solicitors for Wellfully whether a cleansing prospectus under s 708A of the Act had been lodged. When the matter came on for hearing on the afternoon of 16 April 2021, Wellfully had not yet filed a cleansing prospectus. Wellfully proposed that it would not seek to lift the suspension of its shares from trading until it had been lodged.[36] Counsel who appeared for Wellfully at the hearing agreed that while the orders originally sought would cure any invalidity in the sales that had already occurred, it would not address any subsequent sales that might occur.[37] For this reason, the hearing proceeded on the basis that until a cleansing prospectus was lodged, orders would not be made by the court and that the proposed orders would be amended to provide that any offer for sale or sale of the shares between the date of their issue and the date of the cleansing prospectus was not invalid by reason of the plaintiff's failure to issue a valid notice under s 708A of the Act and the subsequent failure by the sellers to comply with the Act.
[36] Affidavit of Consuelo Patricia Fierro filed 16 April 2021 'CF-4'
[37] ts 2.
I note that:
(a)the proposed amended 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.[38]
[38] See Re Caeneus Minerals Ltd [39] - [40]; Re Classic Minerals Ltd [35] - [36].
At the hearing before me, I raised with counsel whether the plaintiff accepted that there had been a contravention of pt 6D.2 of the Act. Counsel for Wellfully conceded, for the purpose of this application, that there had been a contravention of pt 6D.2 of the Act as shares in the plaintiff had been suspended for more than five days in the 12 months prior to the relevant share issues.[39]
[39] ts 2.
For the purposes of this application, I do not consider it is necessary that I make a positive finding that there has been a contravention of the Act. Remedial relief can be sought by a party who is concerned or suspects there have been a contravention of the Act.[40] Given that the ASX did not appear at the hearing to make submissions in support of the position they have adopted, it was not appropriate or necessary for me to make any determination on whether there has in fact been a contravention of the Act.
Pre-conditions in s 1322(6)(a)
[40] Weinstock v Beck [40].
Wellfully submitted that each of the pre‑conditions in s 1322(6)(a) of the Act was satisfied. It is, of course, necessary to satisfy only one of the pre‑conditions in order to obtain relief.
Turning first 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.[41] Relevantly, Banks‑Smith J considered that:
[41] 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;[42]
(b)the concept of acting honestly can embrace:[43]
(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.[44]
[42] Re ICandy Interactive Ltd [54], [106] - [107].
[43]Re ICandy Interactive Ltd [55].
[44] Re ICandy Interactive Ltd [60] - [104].
In this case, Wellfully is concerned, on the basis of the matters raised by the ASX, that the cleansing notices lodged for the shares issued on 22 February 2021 and 9 April 2021 may be invalid as a result of Welfully's shares having been suspended from trading for a period of nine months and 14 days in the 12 months prior to the issue of the shares. I accept that any error occurred honestly as a result of both Mr Palermo and Mr Edwards believing that the date of the company's reinstatement to the ASX acted as a 'reset date' for the five days' suspension requirement under the Act, rather than any deliberate disregard by the plaintiff or its officers of the obligations under ch 6D of the Act.
I also accept that this is not a case where there has been a failure of Wellfully's 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 Wellfully's directors delegated this responsibility to the company secretary.
No substantial injustice (s 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 shares. The prejudice to them is that the sale of the shares may be void or voidable.[45]
[45] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57, 67 [63].
Second, any people who purchased shares from on-sellers may have on-sold the shares themselves by trading on the open market of the ASX since they were issued. Any further sales of shares 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 shares 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 shares. 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 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 accept that this is an appropriate timeframe in this case.
No other 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 so as to warrant refusal of the relief sought.[46]
[46] Re Wave Capital Ltd 426 [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 alleged contravention as well as the ASX and ASIC have been notified of the issue and have been given notice of this hearing.[47] No shareholder or either regulator has sought to intervene in the hearing or given notice that they want to be heard on the application.
[47] Affidavit of John Palermo filed 15 April 2015 [69] - [70], 'JP-27', 'JP-28'.
In exercising the discretion to grant relief under s 1322(4) of the Act, a relevant factor is the promptness with which Wellfully sought to remedy the alleged irregularity once it was identified.[48] In this case, on 12 April 2021, Wellfully was informed by the ASX that it considered the cleansing notices lodged in respect of the shares issued on 22 February 2021 and 9 April 2021 were not valid. On the same day, Wellfully sought a trading halt to allow it time to consider the issues in relation to this application before commencing these proceedings on 15 April 2021. On 19 April 2021, Wellfully lodged a cleansing prospectus. I accept that Wellfully acted diligently after being informed of the issue.
[48] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22, 34 [60].
Conclusion
For the following reasons, I was and am satisfied that in the circumstances of this case, relief should be granted in the amended terms sought by Wellfully. First, the evidence before me is that a number of the shares have been sold. It cannot be discounted that there have been resales of these shares. In these circumstances, I consider that it is appropriate to make the orders sought to remove any question as to title in the shares of the plaintiff. Second, on 19 April 2021, a cleansing prospectus was lodged.[49] For that reason, the order did not concern a future but a past act. Third, I am satisfied that the conduct of Wellfully was inadvertent and not in blatant disregard of its obligations under the Act. I do not consider that public policy will be undermined by granting Wellfully the relief sought.
[49] Affidavit of Kathleen Marie McNally filed 19 April 2021 [3], 'KMM-1'.
Accordingly, on 19 April 2021, after Wellfully lodged a cleansing prospectus, 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
23 JUNE 2021
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