Newsflash – finally a judgment as to the proper construction of the Covid safe harbour defence to insolvent trading (s 588GAAA) has dropped

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Last week on 12 December 2025 the Queensland Supreme Court (Muir J) handed down judgment in Star Recruitment Service Pty Ltd v Smith [2025] QSC 334. To date there has been limited judicial determination of the proper construction of s 588GAAA of the Corporations Act 2001 (Cth), and the meaning of s 588GAAA(1)(c). There had been two or three previous reported judgments where s 588GAAA had been considered more broadly (including Preiner v Shin [2025] NSWDC 341 and earlier this month Shaoxing Newtex Imp & Exp Co Ltd, in the matter of Mosaic Brands Limited (in liq) v Strawbridge [2025] FCA 1479). However this is the first to give close consideration to the proper construction of the provision (from [48]).

Section 588GAA(1) provides that –

Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:

(a) in the ordinary course of the company’s business; and

(b) during:

(i) the 6-month period starting on the day this section commences; or

(ii) any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and

(c) before any appointment during that period of an administrator, restructuring practitioner or liquidator of the company.

The Corporations Regulations 2001 (Cth) prescribes the safe harbour period for the purposes of s 588GAAA(1)(b)(ii) was commencing on 25 March 2020 and ending on 31 December 2020.

Essentially her Honour held that if the conditions were met, the defence applied, and here excluded the approximately $523k of debts incurred during that period, limiting the insolvent trading claim to the $1.1m odd of debts incurred outside the covid safe harbour period, from 1 January 2021.

Interestingly, in assessing insolvency (from [99]), Muir J observed that there was no utility in assessing the insolvency of the Company as at July 2020 (as argued by the plaintiff) because by the operation of s 588GAAA, the defendant was protected from an insolvent trading claim under s 588G for debts incurred by the Company at that time until 31 December 2020 (at [103]).

Key takeaway: quelling a controversy that has arisen between commentators over the past few years, Muir J held that the proper construction of s 588GAAA(1)(c) does not impose a requirement for an administrator, insolvency practitioner or liquidator to be appointed during the safe harbour period for the protection to apply. Her Honour took the view that this construction “avoids an unintended outcome completely at odds with the purpose of the provision being enacted in the first place”, which was to support businesses to not go into administration or liquidation during the covid safe harbour period (at [75]).

Newsflash – ATO found liable for Barnes v Addy knowing receipt of millions

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Yesterday, in an extraordinary postscript to the 2012 appeal case of Grimaldi v Chameleon Mining NL, the NSW Supreme Court has found the Commonwealth liable for knowing receipt of millions of dollars in unauthorised profits obtained by a de facto director Phillip Grimaldi under the first limb of Barnes v Addy, in Kupang Resources Pty Ltd v Commonwealth of Australia (No 4) [2025] NSWSC 1477. As his Honour Justice McGrath did in his judgment for consistency, I will refer to Kupang Resources Pty Ltd as “Chameleon”, per its previous name Chameleon Mining NL.

I wrote about the important decision of the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 back in 2012 (bench of Finn, Stone and Perram JJ) – see here, here and my article written for the UK Trusts and Estates Law & Tax Journal here. It has been a seminal judgment which dealt authoritatively with issues of secret commissions/bribes, directors’ fiduciary duties, de facto directors, Barnes v Addy liability and equitable remedies.

As his Honour noted in yesterday’s judgment, Grimaldi’s large unauthorised profits or “sudden influx of wealth drew the attention of the Commissioner of Taxation”. At the time of Chameleon’s success at first instance against Grimaldi in 2010 (the Chameleon Judgment), the ATO had been pursuing him for an unpaid tax debt of $36.3 million, the subject of a summary judgment in 2009. The ATO then reached a settlement with Grimaldi and his nominees for $19.5 million. The majority of that sum was first paid to the NSW Treasury in purported satisfaction of a proceeds assessment order obtained by the NSW Crime Commission under the Criminal Assets Recovery Act 1990 (NSW), before being paid to the ATO from a confiscated proceeds account. The sum was paid in tranches, the first of which was paid to the ATO on 21 October 2010, the day after delivery of the Chameleon Judgment in favour of Chameleon against Grimaldi (at [7]).

As his Honour observed at [8] –

The effect of this was that Chameleon’s victory at trial and on appeal in the Chameleon proceedings proved to be strikingly hollow. By the time the inquiry ordered to determine the amount of profits to be disgorged by Mr Grimaldi was underway, most (if not all) of Mr Grimaldi’s remaining funds had been paid to the Commissioner. Mr Grimaldi entered voluntary bankruptcy on 2 July 2014 and the inquiry was never completed.

The issues of law traversed in yesterday’s carefully reasoned judgment include the remedy of liability to account, whether personal liability for Barnes v Addy knowing receipt fixes on the conscience of the recipient and extends to cases where the claimant has no continuing proprietary interest in the subject property, whether liability in knowing receipt is extinguished by an intermediary who holds funds temporarily in a ministerial capacity, whether liability in knowing receipt extends to “downstream recipients”, and tracing.

The Court made findings of credit adverse to the only ATO witness called by the Commonwealth, an Assistant Commissioner (at [50]-[76]). Three other ATO personnel involved in the ATO’s investigations and and pursuit of Grimaldi’s tax affairs who had given affidavits in the proceedings were not called as witnesses, without explanation. The Court accepted the submissions for Chameleon on this (at [46]-[49]) and drew Jones v Dunkel inferences as to specified factual matters, including as to the knowledge of the ATO at particular points in time.

The Court held that “the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt” (at [684]). The Court found that at the time the ATO received payments from Grimaldi under the second deed of settlement, it had actual knowledge that Grimaldi had engaged in conduct in breach of the fiduciary duty he owed to Chameleon, and that the payments it received from Grimaldi were made from the proceeds of sale of the Spotter’s Fee Securities obtained by Mr Grimaldi and his nominee as the profit from his breach of fiduciary duty. It was found that the ATO knew it received payments from the bank accounts in which those proceeds were held.

However earlier, prior to reaching that state of actual knowledge, when the ATO interviewed Grimaldi in 2009, entered into the settlement in October 2010 and received payments pursuant to it after Chameleon’s judgment against Grimaldi from October 2010, the ATO’s state of knowledge satisfied each of Baden categories of knowledge #2 (wilful blindness), 3 and 4 (at [689], see also [678]-[680]).

A quick refresher on the five Baden categories of knowledge, noting that any of categories 1-4 are sufficient knowledge for the purpose of Barnes v Addy liability-

  1. Actual knowledge
  2. Wilfully shutting one’s eyes to the obvious (wilful blindness)
  3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make,
  4. Knowledge of circumstances which would indicate the facts to an honest and reasonable person, and
  5. Knowledge of circumstances which would put an honest and reasonable person on inquiry (traditional ‘constructive knowledge’).

Having found that the ATO had in effect “instituted a policy of wilful blindness in relation to the claims in the Chameleon Proceedings” (at [680]), his Honour observed at [690]-[691] –

[T]he ATO’s attitude appears to have been one of “tax now, ask questions later” but in the case of Mr Grimaldi it did not even ask the later questions when it became obvious that it should do so. The investigations undertaken by the ATO demonstrate a “want of probity” in how Mr Grimaldi came to receive the Spotter’s Fee Securities. But once the ATO knew all of the findings in the Chameleon Judgment, actual knowledge of Mr Grimaldi’s conduct replaced anything that might have required for Chameleon to rely on the other Baden categories of knowledge to establish the ATO’s liability.

In essence, I am thoroughly convinced that in all the circumtstances the Commonwealth is liable for knowing receipt under the first limb of Barnes v Addy as a matter of conscience.

The Court was clear that it held little doubt as to the appropriate outcome in this case, concluding that “Chameleon has comprehensively succeeded against the Commonwealth in its claim”, and finding that Chameleon was entitled to orders –

  1. that the Commonwealth was personally liable to account to Chameleon for the “trust property” (unauthorised profits obtained by Grimaldi) that it received,
  2. that the Commonwealth restore the property to Chameleon together with interest calculated from the time of each receipt (12-15 years ago), and
  3. that the Commonwealth pay the costs of Chameleon in the proceedings on the basis that costs follow the event of Chameleon’s success.

More to come.

Series – How to Cure Cleansing Notice Failures – Part 3: Cleansing Notice / Section 1322(4) Cases of Note

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*This is the third in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleansing notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court’s ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I have identified the legislative provisions relevant to such applications, and provided an up-to-date distillation of the applicable principles from the authorities. This part 3 of the series is illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.

Introduction

If you have not yet read Parts 1 and 2 of this series to gain an understanding of the relevant provisions and the key principles as to their application, you may find it useful first to do so. They may be read here (Part 1) and here (Part 2).

As useful illustrations of the facts of the authorities in this area, and other recent or useful cases of note, I now set out summaries of these cases, in chronological order. Interestingly, whilst not all, the overwhelming majority of decisions in this area come out of Western Australia – either their Supreme Court, or the West Australian division of the Federal Court of Australia. I have added the outcome of the unusual costs hearing last month in Sprintex Limited (No 3).

In my assessment, the leading authorities are the 2018 decision of Justice Banks-Smith of the Federal Court in Re iCandy Interactive Ltd, and that of Justice Derrington of the Federal Court in 2022 in Lake Resources NL, particularly for more challenging cases of multiple cleansing notice failures.

The high water mark cases in terms of the number of cleansing notice failures are Re Structural Monitoring Systems PLC (31 failures) and Re Power Minerals Ltd (61 failures). The high water mark case in terms of evidence indicating possible dishonest conduct on the part of the (former) company secretary is Re Austpac Resources. The high water mark case in terms of “repeat offences” and, whilst unusual and in most cases unlikely, for potential costs consequences for company secretaries and board members, is Re Sprintex Ltd (Nos 2 and 3).

Cases of Note

Re iCandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 (WA)

  1. In iCandy Interactive, the chairman of the board had been advised that he could apply to ASIC for relief from the five day rule (cannot issue a cleansing notice if shares have been in suspension for more than five days) or issue a cleansing prospectus. Having received that legal advice he told the lead manager and company secretary to proceed with the share issue that day in any event. No cleansing prospectus was issued. No holding lock was in place and the company did not apply to ASIC for relief until two days after the shares had been reinstated to the ASX and the share issue had proceeded. 29 days then passed before a voluntary suspension of the shares was facilitated, in which time about one third of recipient shareholders had traded their shares.[1] The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a). 
  2. Both limbs were found satisfied. Banks-Smith J found that aspects of the conduct of the directors and officers, in particular the chairman, were unsatisfactory.[2] However her Honour found the failures occurred through inadvertence and a failure to properly understand the significance of compliance in a timely manner, and did not consider there was conscious impropriety or a disregard of the company’s obligations to the extent of dishonesty.[3] Her Honour found it was likely the shareholders had made offers or on-sold their shares in good faith and on the assumption that no disclosure was required by them, and there was no reason the inadvertent error on the part of the company should deny relief or deny any defects in the disclosure from being corrected. It was just and equitable that the orders be made.[4]
  3. The Court then weighed the prejudice that would be suffered if the order was made against the prejudice that would be suffered if it was not, concluding that such an order was clearly in the interests of affected shareholders, as they risked exposure to claims against them absent validation. There was no good reason for inferring that validation of the relevant shares would prejudice any person. To the extent there was any prejudice to third party purchasers by such validation, that was tempered by the ability to apply to court under the orders. Her Honour concluded that in the circumstances she did not consider there would be any substantial injustice in making the orders.[5]  
  4. The application was granted and s 1322(4) orders were made.

Re Caeneus Minerals Ltd [2018] FCA 560 (WA)

  1. In Caeneus Minerals, there were 31 failures to issue cleansing notices over three and a half years. The company secretary resigned after the failures came out, but deposed to the circumstances of his failures as to the company’s compliance obligations when he had been company secretary. The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a). 
  2. Banks-Smith J was satisfied that the failures were not dishonest. The company secretary had made relatively simple errors and misunderstood the legal position as to the effect of shareholder approval or prior disclosure. The mere fact that there were many separate instances did not elevate his conduct to dishonesty.[6]
  3. The application was granted and s 1322(4) orders were made.

Re Structural Monitoring Systems PLC [2022] FCA 473 (Vic)

  1. In Structural Monitoring Systems, there were multiple failures to issue cleansing notices arising in three categories of issue of securities over two years. 
  2. Anastassiou J was satisfied that the honesty (ii) limb of s 1322(6)(a) was made out, for the purposes of the order sought under s 1322(4)(a), in the sense not of inadvertence, but an incorrect assumption as to the effect of the relevant ASIC Class Order.[7]
  3. The application was granted and s 1322(4) orders were made.

Lake Resources NL, in the matter of Lake Resources NL [2022] FCA 197 (Qld)

  1. In Lake Resources, there were 4 failures to issue cleansing notices over two months. 
  2. The question of the honesty of the responsible officer arose there where the honesty limb under s 1322(6)(a) was relied upon in seeking an order under s 1322(4)(a). The Court found that the relevant officers were under immense pressure given their volume of work and duties, and were overstretched, and the failures appeared to be by oversight.[8] Moreover, the failures accounted for just 4 share issues, when there had been 28 other share issues where cleansing notices had been duly issued through the same period.[9]
  3. In relation to the company itself, Derrington J observed[10] –
  4. Further, the company’s swift actions following the discovery of the omission also speak of an intention to comply with the regulatory requirements. It immediately notified the ASX of the issue of its failure or omission to lodge the cleansing notices. It made an appropriate announcement and voluntarily suspended trading in its shares. Its transparency and willingness to rectify the problem is both commendable and negates any suggestion of a lack of honesty on its part.
  5. The question of honesty was also considered as relevant to s 1322(6)(b) in seeking an order for relief for liability under s 1322(4)(c) – that is, the honesty of the shareholders. The Court noted that the difficulty with respect to subsequent vendors of uncleansed shares could be ameliorated in circumstances where Appendix 2A notices were issued. The warranty carried by those notices effectively indicates to the purchasers that there was no evidence of non-disclosure in the dealing with the shares. In any event the Court was willing to draw the inference that the recipients of the allocations would not have been aware of the failure to lodge the cleansing notices, and the subsequent non-disclosure, and observed it should be concluded that the subsequent vendors of the shares acted honestly.[11]
  6. The Court was also satisfied that the granting of the relief would not cause substantial injustice to any person.[12]
  7. The jurisdictional facts having been enlivened, the Court considered and was satisfied that  the discretion under s 1322(4) should be exercised to grant the orders, given: the substantial benefits from the making of the orders; the remedial action the company had taken to avoid any repetition of a similar issue the future including the reorganisation of its corporate structure giving increased oversight to compliance; the extension of time sought in that case was relatively short, measured in months not years; the ASX and ASIC had been informed of the proceedings and neither objected to the making of the relief sought; and while some shareholders had contacted the company none opposed the making of the orders.[13]
  8. The application was granted and s 1322(4) orders were made.

Re Austpac Resources NL [2023] FCA 108 (NSW)

  1. In Austpac Resources there were 8 failures to issue cleansing notices over three years. This had happened before. The company had previously sought and obtained s 1322 orders as to a failure to provide a cleansing notice in 2010. On this occasion, the discrepancies were only discovered after the company secretary was replaced. The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a). 
  2. In this case, Goodman J could not conclude that there was an absence of dishonesty on the part of the former company secretary or his service company, who were amongst the on-sellers of affected shares for whose benefit the relief of liability orders were sought under s 1322(4)(c). There had been an apparently clandestine placement of shares to the former company secretary’s service company, which ‘might cast doubt on Mr Gaston’s integrity’.[14]
  3. The application was granted and s 1322(4) orders were made, excepting a carve-out from the relief from liability order under s 1322(4)(c) for the former company secretary and his service company.

Re Power Minerals Ltd [2024] WASC 121

  1. In Power Minerals there were 61 failures to issue valid cleansing notices over five and a half years. The former managing director – who did not give evidence – was responsible for the first 28, and the company secretary was responsible for the other 33. The company relied upon all three limbs of s 1322(6)(a) – the procedural (i), the honesty (ii) and the just and equitable (iii) limbs, for the order sought under s 1322(4)(a). 
  2. The company secretary gave evidence that while the former MD was responsible, she had issued cleansing notices for 13 share issues over 4.5 years, and the company contended that on that basis the reason for the failures was inadvertence. As to the remainder, the company secretary gave evidence that her own failures were inadvertent and due to two primary factors – her competing priorities, as she was company secretary for 6 other companies and was distracted by other urgent tasks, and for share issues upon the exercise of options, that she did not know at he time that a cleansing notice was required to be given for those.[15]
  3. Hill J accepted that the relevant act, the failure to lodge the cleansing notices, was essentially of a procedural nature.[16] As to honesty, her Honour found that the failures of the company secretary were honest and inadvertent. As to the failures of the managing director, there was no direct evidence as to why they occurred. However based upon evidence that cleansing notices were issued in respect of other share issues undertaken at similar times, the Court inferred that the failures were due to inadvertence.[17] Her Honour held that it would be just and equitable to grant relief to the extent necessary to protect the interests of current shareholders and for the integrity of future trading in the plaintiff’s shares.[18]
  4. Hill J found that there was 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, and provided the usual opportunity for any party to raise a complaint within 28 days of the orders being made. Her Honour also found that there was no discretionary reason to withhold relief. There was 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. There was nothing in the evidence to suggest any minority shareholder might be oppressed. Shareholders had been notified of the contraventions, as had ASIC and the ASX, and given notice of the hearing. No shareholder had sought to intervene or given notice they wanted to be heard. The plaintiff had acted promptly to take steps to remedy the issue, including seeking a trading halt within 2 days of becoming aware of the failures, and commencing the proceedings 2 days thereafter.[19]
  5. The application was granted and s 1322(4) orders were made (though a deeming order there sought under s 1322(4)(a) as to the filing of a fresh cleansing notice was declined, on the basis there was no evidence there had been any trading in the affected shares).

Re Sprintex Limited (No 2) [2025] WASC 15

  1. Previously in 2022, Sprintex Limited (Sprintex) had sought curative orders under s 1322(4) following a failure to lodge a cleansing prospectus for an issue of shares in February 2022. The evidence included affidavits from Sprintex’s company secretary Michael Scott van Uffelen, in which he deposed to the failure being a result of inadvertent oversight, and that he was taking measures to ensure that all disclosure requirements would be complied with and that to this end, with the assistance of Sprintex’s external legal advisors, was developing a protocol for the issue of securities. The relief was granted by Justice Hill.[20]
  2. No such protocol was ever prepared. Sprintex retained its company secretary Mr van Uffelen. 
  3. Mr van Uffelen was also company secretary for Nanoveu Ltd (Nanoveu), which in March 2024 sought curative orders under s 1322(4) for 3 share issues in January and June 2023 for which it had failed to lodge cleansing notices, the late lodgment of a half year financial report, directors’ report and auditor’s report. Justice Strk accepted that the failures were inadvertent and while there was 8 months delay between discovery of the cleansing notice omissions on 10 July 2023 and filing the application on 11 March 2024, the relief was granted.[21]
  4. In November 2024, Sprintex returned to the Court this time seeking curative orders following 24 share issues affected by failures. 13 share issues were issued with cleansing notices between February and July 2024 which falsely stated that Sprintex had complied with Chapter 2M of the Act when it had not, as it had failed to lodge annual reports in the timeframe required. A further 11 share issues had been issued between September and December 2023 with no cleansing notice when one was required. Sprintex terminated Mr van Uffelen as its CFO and company secretary in October 2024.
  5. Satisfied as to the pre-conditions for relief, Justice Lundberg gave thought to whether he should exercise his discretion to grant the relief, given the decision by Sprintex to leave its corporate secretarial function in Mr van Uffelen’s hands, without proper controls in place, given his prior contraventions both at Sprintex and at Nanoveu, and without ensuring that the protocols spoken of in 2022 were actually in place. His Honour was also troubled by the decision of Mr van Uffelen not to provide affidavit evidence when Sprintex did not pay fees he had demanded. However in light of evidence and inferences that could be drawn that the failures were inadvertent and not deliberate or dishonest, and that there was no substantial injustice, his Honour granted the relief sought.[22]
  6. However his Honour found there were unusual or distinctive features in this case which justified departure from the usual position that there be no order made as to costs. In this case Justice Lundberg ordered that the costs of the application not be met out of company funds, with liberty to apply granted to Sprintex, its former company secretary Mr van Uffelen and each of the directors, noting that each will require an opportunity to be heard before any costs orders may be made against them. The unusual or distinctive features included that: Sprintex had had to seek curative orders from the Court before in 2022, when it had the same company secretary Mr van Uffelen and the same board members, yet it thereafter continued to repeatedly fail to meet is compliance requirements; Mr van Uffelen was also directly involved in Nanoveu’s contraventions which also had required a Court application – at least one of Sprintex’s directors knew about that, and at least 10 of Sprintex’s latest contraventions occurred after Nanoveu’s Court application; and that the protocol proposed to the Court in Sprintex’s 2022 application to prevent future failures of compliance was never prepared.[23]
  7. His Honour made the order whilst acknowledging the counterveiling concerns weighing against such an order, noting that in many cases the Court has given weight to the counterveiling concerns. One is that the risk of a personal costs orders should not impact the decision of past or present officers of the company to investigate matters or bring an application before the Court. Another is that the costs of an enquiry into who should bear the costs of an application may outweigh any benefit obtained. His Honour noted that in iCandy Interactive Justice Banks-Smith had considered whether to make such a costs order, which had been raised by ASIC. Her Honour observed that the ongoing costs to the company of an enquiry into who should bear the costs of the application may well be disproportionate to the outcome, and declined to depart from the usual position that no order be made as to costs.[24]

Re Sprintex Limited (No 3) [2025] WASC 59

  1. Further to Justice Ludberg’s decision in January, the company then filed an interlocutory application that costs be borne as follows: 3/4 to be apportioned to the former company secretary and his service company jointly and severally, and 1/4 to be paid equally by the company directors, and that the costs of this application be paid jointly and severally by the former company secretary and his service company. The former secretary chose to file no affidavit evidence or take any part in the application.
  2. Last month on 5 March 2025, Justice Lundberg delivered judgment on this. After consideration of the principles to be applied, including those as to awards of costs against non-parties, and of the evidence, his Honour awarded a sum which was approximately 70% of costs against the former company secretary and his service company jointly and severally, and 30% against the directors similarly. His Honour held over the decision as to the costs of this costs application for further determination, with liberty to apply.

********

Next/final instalment – Part 4 of 4: Steps to take upon discovery of a failure to lodge a cleansing notice, to successfully achieve curative orders

*******

Liability limited by a scheme approved under Professional Standards Legislation

[1] iCandy Interactive at [18]-[27].

[2] At [41].

[3] At [107]-[108].

[4] At [109]-[113].

[5] At [115]-[118].

[6] Re Caeneus Minerals Ltd [2018] FCA 560 at [43]-[44] per Banks-Smith J.

[7] Re Structural Monitoring Systems PLC [2022] FCA 473 at [24] per Anastassiou J.

[8] Lake Resources NL, in the matter of Lake Resources NL [2022] FCA 197 at [30] per Derrington J.

[9] At [31].

[10] At [32].

[11] At [34]-[37].

[12] At [38].

[13] At [44]-[49].

[14] Re Austpac Resources NL [2023] FCA 108 at [78]-[79] and [117]-[118].

[15] Power Minerals at [11]-[13].

[16] At [33]. See submissions above as to the authorities at [60]-[66].

[17] At [35].

[18] At [36].

[19] At [42]-[44].

[20] Re Sprintex Limited [2022] WASC 188.

[21] Re Nanoveu Limited [2024] WASC 329.

[22] At [100]-[104].

[23] At [118]-[119]. As noted at [118], in Re Wave Capital Limited [2003] FCA 969; (2003) 21 ACLC 1, where such an order was also made, the unusual or distinctive feature was the failure by the directors to honour a specific promise in the relevant prospectus.

[24] At [110]-[114].

Series – How to Cure Cleansing Notice Failures – Part 2: Relief under section 1322(4) of the Corporations Act – Key Provisions and Principles

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*This is the second in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleansing notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court’s ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I will identify the legislative provisions relevant to such applications, and provide an up-to-date distillation of the applicable principles from the authorities. The series in part 3 will be illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.

Introduction

It has been said of relief sought under ss 1322(4) to validate, relieve from liability or otherwise to cure the effects of failures to issue cleansing notices that[1] –

All of the above relief is within the scope of s 1322. The importance of this section should not be underestimated. It contemplates that errors may occur in relation to complying with the intricacies of the Corporations Act. It is obviously remedial in nature and should be afforded a liberal operation: Re Wave Capital Ltd [2009] FCA 969 at [27] [French J]. Nevertheless, the relatively untrammelled scope of s 1322(4) is circumscribed by the need to satisfy the requirements of s 1322(6). 

Section 1322 is commonly utilised in cases of cleansing notice failures to validate non-disclosure by shareholders who on-sell shares, and to relieve shareholders from liability: see cases collected in Re iCandy Interactive Limited [2018] FCA 533; (2018) 125 ACSR 369 (iCandy Interactive) at [43] per Banks-Smith J.[2] See also the cases summarised in part 3 of this series. 

Key Provisions

Section 1322 of the Corporations Act is entitled “Irregularities”. Relevantly section 1322(4) provides as follows – 

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 others, 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)…

(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) …

and may make such consequential or ancillary orders as the Court thinks fit. 

Section 1322(6) provides as follows –

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.

Principles

In order to satisfy the requirements of s 1322(4)(a), the Company must demonstrate that[3] – 

  1. It is an interested person within the meaning of s 1322(4),
  2. There was an act, matter or thing purporting to have been done under the Act or in relation to a corporation that may be invalid by reason of a contravention of a provision of the Act: s 1322(4)(a),
  3. Either – (i) The act, matter or thing was essentially of a procedural nature, or (ii) The person or persons concerned in or party to the contravention or failure acted honestly, or (iii) It is just and equitable that the order be made: s 1322(6)(a), and
  4. No substantial injustice has been or is likely to be caused to any person: s 1322(6)(c).

In order to satisfy the requirements of s 1322(4)(c), the Company must demonstrate similar – though not the same matters – as for s 1322(4)(a) – 

  1. It is an interested person within the meaning of s 1322(4),
  2. There was a contravention or failure of a kind referred to in s 1322(4)(a) that may give rise to the civil liability of a person: s 1322(4)(c),
  3. The person subject to the civil liability concerned acted honestly: s 1322(6)(b), and
  4. No substantial injustice has been or is likely to be caused to any person: s 1322(6)(c).

Standing – Interested person

It is well-established that the company whose shares were on-sold in breach of the Act is an interested party with standing to bring the application.[4]

The term is not defined in the Act, but as noted in Re Austpac Resources NL [2023] FCA 108; (2023) 16 ACSR 1 (Austpac Resources) by Goodman J at [92], it has been interpreted broadly. In circumstances where the company seeks relief concerning trading in its shares including the integrity of such trading, and the relief is sought in aid of a foreshadowed application for removal of a suspension of trading in its shares, the Courts are commonly satisfied that the company concerned is an interested person in such an application.[5]

Relief under s 1322(4)(a) – the Validity Declaration

The validity declaration sought is, in summary, that any offer for sale, or sale, of any of the relevant shares occurring in the period after their issue is not invalid by reason of any failure of a notice under s 708A(5)(e) or prospectus under s 706A(11) to exempt the sellers from the obligation of disclosure, and any consequent contravention by selling shareholders of s 707(3) or s 727(1) of the Act. 

There must first be an act, matter or thing purporting to have been done under the Act or in relation to a corporation that may be invalid, for s 1322(4)(a) to be engaged. It is for this reason – that on-sales of a company’s shares may be invalid – that orders are commonly made validating on-sales of shares which had been issued without a requisite cleansing notice.[6]

Section 1322(4)(a) then confers upon the Court a discretion to make a validity declaration, such a discretion being enlivened upon the satisfaction of the pre-conditions set out in ss 1322(6)(a) and (c). 

Satisfaction of one of the 3 alternative limbs of s 1322(6)(a)

Subsection 1322(6)(a) sets out 3 alternative limbs. Only one of those limbs need be satisfied in order to meet the requirements of this sub-section.[7]

In my case in January, the Company relied solely on the third of these – the just and equitable limb. 

(i) – Essentially of a procedural nature

It has been said that “the issuing of a cleansing notice has regularly been held as being essentially of a procedural nature”, and the Court has thereby been satisfied as to this limb.[8]  

However divergent views have been expressed as to this limb, some preferring the view that a contravention of s 707(3) in the nature of on-selling shares without disclosure where there had been no cleansing notice issued is not a procedural irregularity.[9]

In my opinion, the difference appears to be whether, in evaluating whether something is essentially procedural, one is focussed upon the non-issuing of a cleansing notice by the company, or the on-selling of shares without disclosure by the shareholders. In my view it is the latter – the act, matter or thing which is sought to be declared valid – to which attention is directed by the wording of s 1322(6)(a)(i). 

This may be why, as our research had suggested, in numerous cleansing notice cases this procedural limb is often not relied upon by applicants, who more commonly rely upon the just and equitable and the honesty limbs. Hence this issue is often not addressed by the Courts in the cleansing notice cases. 

In any event, it is clear that the application of s 1322(4)(a) has not been confined to procedural or quasi procedural cases. “It may be used to cure substantive as well as procedural contraventions of the [Act].”[10] I suggest that this is because the limb in s 1322(6)(a)(i) is not an essential pre-condition, but one of three alternatives. Hence clearly non-procedural irregularities may be cured through the gateway of one of the other two alternative limbs.

(ii) – That the person or persons concerned in or party to the contravention or failure acted honestly

The principles relevant to this limb were not set out at this point in my written submissions, as this limb was not relied upon in our case. Having said that, the principles relevant to this limb are addressed in a different context, later in these submissions (see below).  

(iii) – Just and Equitable

The expression “just and equitable” are words of significant width and provide the Court with a broad discretion.[11]

It has been observed that[12] – 

The words “just and equitable” are words of the widest significance and do not limit the jurisdiction of the court to any case. It is a question of fact, and each case must depend on its own circumstances. The words give the court a wide discretion. There is no necessary limit on their generality, and they are to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way.

The Courts have generally focused on the interests and conduct of the shareholders in assessing whether it is just and equitable to make orders validating the on-sales in these cases.[13]

The grounds on which the Courts have held that it is just and equitable to make the validity declaration in these cleansing notice cases include –

  1. that if relief is not granted, the title of any persons who had acquired (or any who in the future might acquire) the affected shares, may be impugned.[14] It would be just and equitable to grant relief to the extent necessary to reasonably protect the interests of current shareholders and for the integrity of future trading in the company’s shares;[15]
  2. that it is in the interests of the company’s shareholders for the contraventions to be cured, so as to allow trading in the shares to resume;[16]
  3. that it is to be inferred that the on-sellers of the affected shares are likely to have acquired their shares on the basis that they were not required to provide disclosure,[17] and that they have made offers or on-sold them in good faith on the assumption that no disclosure was required by them.[18] Those shareholders were entitled to assume that the company had done what was necessary to comply with Part 6D.2;[19]
  4. that the effect of the failure of the company to lodge effective cleansing notices or to otherwise comply with Part 6D.2 has been to expose the on-sellers to claims for relief under s 1325 of the Act; [20]
  5. that there is no evidence of knowledge or deliberate nondisclosure on the part of the shareholders.[21]

No substantial injustice – s 1322(6)(c)

Subsection 1322(6)(c) requires – both for s 13224(a) and s 1322(4)(c) orders – that the Court must be satisfied that no substantial injustice has been or is likely to be caused to any person. 

In this regard, the applicable principles may be distilled as follows – 

  1. “There are two aspects to this requirement: (a) the expression “has been” invites an inquiry as to the effect of the irregularity sought to be cured; and (b) the expression “likely to be” draws attention to the effect of the proposed order”;[22]
  2. The reference to “substantial injustice” in s 1322(6)(c) is to a real and not insubstantial or theoretical prejudice. Whether there is real injustice requires a weighing of any prejudice if the order is made, against the prejudice which would be suffered by those affected if an order is not made;[23]
  3. “A degree of prejudice to a person or persons may be outweighed if the overwhelming weight of justice is in favour of making the order”. [24] “[A]ny prejudice which may have existed may be powerfully outweighed by the benefit to shareholders of being able to resume trading in its shares”;[25]
  4. “Such an order is clearly in the interests of shareholders who have made offers or on-sold their shares, as they risk exposure to claims against them absent validation”;[26]
  5. “One mechanism by which the court may ensure that an order under s 1322(4) does not cause substantial injustice is to make an ancillary order permitting any interested person who may suffer substantial injustice to apply within a set period of time to vary or dissolve the s 1322(4) order”.[27]

Factors to which the Courts have had regard in considering whether any substantial injustice has been or is likely to be caused to any person in these cleansing notice cases include –

  1. whether there is evidence of substantial injustice caused by the contravention/s,[28] or where there is any basis to infer that substantial injustice has been or is likely to be caused to any person by the making of the orders sought;[29]
  2. that if the orders were not made, there may be a substantial injustice to the company as the offers or sale of shares may be void or voidable which could give rise to commercial uncertainty and expense;[30]
  3. that there may be substantial injustice to other ordinary shareholders of the company if the orders are not made, as they may be unable to trade their shares on an open market if the ASX were not to lift the suspension;[31]
  4. that an opportunity is to be afforded in the orders for shareholders or other parties who can demonstrate a sufficient interest to raise a complaint about the proposed orders within 28 days from the date of the orders or their publication.[32]

Exercise of the discretion

Once the Court is satisfied as to the jurisdictional matters identified in s 1322(6), the discretion in s 1322(4)(a) is enlivened, and the Courts then consider whether to exercise the discretion to make the order sought.[33]

The factors to which the Courts have had regard in considering whether to proceed to exercise their discretion to make the validity declaration in these cleansing notice cases include – 

  1. that the orders would be just and equitable & no substantial injustice – the conclusions that it would be just and equitable to make the validity declaration, and that no substantial injustice has been or is likely to be caused to any person, not only enliven the discretion but also weigh in favour of the making of the validity declaration;[34]
  2. that the orders would restore integrity in share dealings – the making of the declaration will serve to remove doubts as to the integrity of dealings in the affected shares caused by the contraventions;[35]
  3. the regulators’ position – the position of the ASX and ASIC on the application, and whether they have any concerns about the making of the validity declaration.[36]
  4. notice to shareholders – whether the company’s shareholders have been on notice of application and have sought to be heard in opposition or support of the application;[37]
  5. public policy – whether public policy would be undermined by the making of the orders.[38] Whether there is evidence of 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;[39]
  6. that public policy is not undermined by protecting shareholders only – notably, in iCandy Interactive, the Court accepted ASIC’s submission that:[40] “[I]nsofar as the s 1322(6)(a) preconditions are met and as no relief is sought for the benefit of directors, officers or the company itself, then there is no suggestion that the public policy of the remedial provision is undermined by the making of the orders.”
  7. prompt action to remedy – the promptness with which the applicant company has acted to remedy the irregularity once it had been identified.[41] Even considerable delay not enough to refuse – if there has been even considerable delay in seeking the relief sought[42] – whether an explanation for the delay has been provided which demonstrates that the company acted promptly once concerns were raised but then was hampered by various factors. Applications such as these should be brought as soon as possible. However, subject to the explanation provided, and the strength of the reasons in favour of making the validity declaration, the delay may not be sufficient reason to refuse to make the validity declaration;[43]
  8. any other reason / whether company has taken steps to address causes of failures – whether there is any other matter which might inform the exercise of the discretion and which provides a reason not to make the declaration sought. For example, whether the company has not taken steps to address the causes of its previous failures to meet its obligations;[44]
  9. frank and detailed account – whether the company applicant has provided a frank and detailed account as to the circumstances surrounding each of the share issues.[45]

As to factor (5) above, where on the evidence there are some concerns about the conduct of those involved in the contraventions, the following statements of principle are apposite – 

  1. when determining whether someone has acted honestly for the purposes of s 1322 of the Act, the Courts look to an absence of evidence of dishonesty; [46]
  2. the Courts also take into account whether the applicant company has taken prompt action to remedy the error;[47]
  3. the concept of honesty can embrace the following – (a) inadvertence or a failure to turn their mind to the relevant issue, (b) an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all, (c) a failure to understand or appreciate the significance of non-compliance;[48]
  4. any concerns about the honesty of those involved in the contraventions may not be a sufficient reason to refuse to make the validity declaration in circumstances where, relevantly, there is no reason to believe that shareholders who received or purchased the affected shares have acted otherwise than honestly. There may be no reason why doubts as to the integrity of the transactions by which the affected shares have been transferred should not be removed;[49]
  5. “[Section] 1322(6)(a) envisages that the court can make an order under s 1322 even where the court is not satisfied that the person concerned in the contravention acted honestly. So even where a person acts dishonestly, which would normally involve an element of deliberate behaviour, the legislation will permit the court to make an order under s 1322(4)(a). For instance, if the court is justified that it is just and equitable that the order sought be made (see s 1322(6)(a)(iii)), then an order under s 1322(4)(a) can be made, even though an element of dishonesty is involved. The court, of course, may not make the order sought, but s 1322(6) does not prevent the court from doing so in the appropriate circumstance.”[50]
  6. “[A]n order can be made under s 1322(4)(a) even if that provision is concerned with “irregularities” and the order is to declare a deliberate irregularity valid.”[51]

Two things were notable from our research. When I say “our”, I was ably assisted in this task by my reader, junior barrister Pan Pisani, whose research skills are exceptional (her profile may be viewed here) –

  1. invariably in the cleansing notice s 1322 cases we reviewed, where it has been determined that it is just and equitable to make the s 1322(4)(a) order for the protection of affected shareholders, and where for both s 1322(4)(a) and (c) orders the Court has been satisfied that no substantial injustice has been or is likely to be caused to any person –  the orders have been made;
  2. indeed our research of over 60 cleansing notice cases found no cleansing notice s 1322 case where the s 1322(4)(a) and (c) orders protective of shareholders had been refused once the preconditions are satisfied, even where there had been concerns as to the conduct of the officer responsible for the contraventions.[52]

Relief under s 1322(4)(c) – the Relief from Liability order

The relieving order sought is that any person who has on-sold the affected shares is relieved from any civil liability arising out of any failure of a notice under s 708A(5)(e) or prospectus under s 706A(11) to exempt the sellers from the obligation of disclosure, and any consequent contravention by selling shareholders of s 707(3) or s 727(1) of the Act.

Section 1322(4)(c) confers upon the Court a discretion to make such an order, the discretion being enlivened upon the satisfaction of the pre-conditions set out in ss 1322(6)(b) and (c). 

Honesty of the affected shareholders – s 1322(6)(b)

Subsection 1322(6)(b) requires that the person the subject of the civil liability concerned acted honestly. This makes it necessary to identify the civil liability and the persons the subject of such liability, to consider if they acted honestly. The relevant liability is a liability under ss 707(3) or 727(1) of the Act. The persons the subject of such liability and for whom relief here is sought are shareholders – the persons who on-sold affected shares.[53]

There is a body of authority that supports the view that it is open to the Court to readily infer that those shareholders have acted honestly in on-selling the shares.[54]

No substantial injustice – s 1322(6)(c)

Subsection 1322(6)(c) requires – both for s 13224(a) and s 1322(4)(c) orders – that the Court must be satisfied that no substantial injustice has been or is likely to be caused to any person. 

See above. The principles and factors cited above apply here also, but as to orders relieving of liability.

Exercise of the discretion

Once enlivened, there is a residual discretion as to whether or not to make the orders sought. Key principles to be distilled from the authorities as to the exercise of the discretion as to whether to make an order sought under s 1322(4)(c) include –

  1. satisfaction of the pre-conditions not only enlivens the discretion under s 1322(4)(c) but also weighs in favour of making the relief order;[55]
  2. “Relief of this kind is not required in order to ensure the ongoing integrity of the market. However it may be justified to provide an assurance to innocent parties, particularly where their contravention arises from a failure to disclose consequent upon the issuing company creating the impression that the shares were freely tradable at any time”;[56]
  3. “[A]n order under s 1322(6)(c) operates only for the benefit of the party concerned and will not require a consideration of wider public interest issues of a kind that may support the making of an order under s 1322(6)(a) on the basis that it is just and equitable”;;[57]
  4. whether there is any reason, including delay, not to exercise the discretion so as to make the relief from liability order.[58]

Relief from liability is sought for the protection of shareholders in these cleansing notice s 1322 cases. It is not customary to seek such relief to extend to the company or its officers.[59] Where there have been concerns as to the conduct of the officer involved in the contraventions and he and a related entity are shareholders, the Court has made an order excluding them from the protection afforded by the relief from liability order.[60]

The factors to which the Courts have had regard in considering whether to proceed to exercise their discretion to make the order to relieve shareholders from liability under s 1322(4)(c) in these cleansing notice cases have included – 

  1. that the order would relieve anyone who purchased the shares and on-sold them from potential liability or the concern of potential liability in circumstances where that potential has arisen through no fault on their part;[61] 
  2. the position of the ASX and ASIC on the application, and whether they have any concerns about the making of the order relieving shareholders from liability; [62]
  3. whether the company’s shareholders have been on notice of application and have sought to be heard in opposition or support of the application; [63]
  4. whether there appears to be any reason such as delay not to exercise the discretion so as to make the relief from liability order.[64

*****

Skipping past the ‘Contentions’ section of my written submissions, where the provisions and principles were applied to the particular facts of that case to make submissions as to why the orders sought should be granted, I will give you its conclusion –

Conclusion

It is submitted that the Company has acted promptly and diligently in this matter, in obviously difficult circumstances, which speaks to its intention to comply with the regulatory requirements. It has made early and appropriate announcements to the market and voluntarily moved to halt and then suspend trading in its shares. Its transparency and willingness to rectify the problems demonstrate the Company’s honesty and intention to properly comply. This case is not about absolution for the Company and what has occurred. The Company seeks these curative orders directed to the reasonable protection of affected shareholders and former shareholders, and in the interests of all its stakeholders. The relief sought is within the scope of s 1322, which provision is remedial in nature and should be afforded a liberal interpretation. In all the circumstances, it is submitted that the orders sought under s 1322(4) ought be made. 

*****

To this conclusion I added a late postscript, as just a few days before our Court documents and my written submissions were filed, a new case was handed down in the West Australian Supreme Court in which an unusual costs order was made. It did not alter the Company’s position, and I made submissions as to why it ought not be followed in the circumstances of our case. However it involved the potential for adverse costs orders to be made against the Company officer involved in the failures and potentially Board members, in certain cases, subject to an opportunity to be heard. As the company’s application was to be heard without contradictor – ASIC and the ASX having both taken a neutral stance on the application and declined to appear – it needed properly to be brought to his Honour’s attention. It was also brought to ASIC and the ASX’s attention. A summary of the new case will be included in Part 3 of this Series.

The Court accepted the submissions made for the client in our case, and made the orders sought. The usual position on costs was followed.

*******

Next instalment – Part 3 of 4: Some Cleansing notice / section 1322(4) Cases of Note

*******

Liability limited by a scheme approved under Professional Standards Legislation

[1] Re Lake Resources NL [2022] FCA 197 (Lake Resources) at [29] per Derrington J.

[2] Re Caeneus Minerals Ltd [2018] FCA 560 (Caeneus Minerals) at [33] per Banks-Smith J.

[3] Re Golden Gate Petroleum Ltd [2010] FCA 40; 77 ACSR 17 (Golden Gate) at [37] per McKerracher J.

[4] iCandy Interactive at [46].

[5] See also Golden Gate at [44] and Re Sprint Energy Limited [2012] FCA 1354 (Sprint Energy) at [38]-[40], both per McKerracher J, and Lake Resources at [23] per Derrington J.

[6] See Sprint Energy at [41]; Golden Gate at [45]. See further submissions below at [89].

[7] Golden Gate at [39], and the authorities there cited; Nenna v Australian Securities and Investment Commission [2011] FCA 1193; (2011) 198 FCR 32 (Nenna v ASIC) at [47] per Middleton J; Austpac Resources at [98], where Goodman J observed that being satisfied that it was just and equitable to make the validity declaration, this was sufficient to satisfy the pre-condition of s 1322(6)(a), such that it was unnecessary to consider the alternative limb there relied upon of the honesty of those concerned in the contraventions.

[8] It can be seen that this has particularly been the case in decisions of the West Australian Supreme Court. See Re Nanoveu Ltd [2024] WASC 329 (Nanoveu) at [70] per Strk J, citing as examples: Re Sprintex Ltd [2022] WASC 188 at [28]; Re Yandal Resources Ltd [2022] WASC 338 at [82]; Re Memphasys Limited [2022] WASC 269 at [56]; Re Cyprium Metals Ltd [2022] WASC 241 at [54]. See also Re Power Minerals Ltd [2024] WASC 121 (Power Minerals) at [33] per Hill J.

[9] See iCandy Interactive at [49] per Banks-Smith J and the authorities there cited in obiter (the applicant did not rely on the procedural limb in that case); Golden Gate at [46] and Sprint Energy at [42], both per McKerracher J. 

[10] Golden Gate at [40]-[41].

[11] Austpac Resources at [96].

[12] Re Superior Resources Ltd [2020] FCA 635; (2020) 144 ACSR 677 per Jackson J at 681 [18], and the authorities there cited; quoted with approval in Austpac Resources at [96].

[13] iCandy Interactive at [110] per Banks-Smith J; Austpac Resources at [90(h)]; Nanoveu at [74] per Strk J.

[14] Nanoveu at [75(a)]. 

[15] Power Minerals at [36] per Hill J.

[16] Nanoveu at [75(b)]. 

[17] Austpac Resources at [97].

[18] iCandy Interactive at [111].

[19] Austpac Resources at [97]; see also iCandy Interactive at [112]; citing Sprint Energy at [48].

[20] iCandy Interactive at [110(3)], quoted with approval in Austpac Resources at [97], citing the matter of exposure to such liability as also relevant as to whether it was just and equitable to validate on-sales under s 1322(4)(a).

[21] iCandy Interactive at [113].

[22] Austpac Resources at [99] per Goodman J, quoting with approval from Re Murray River Organics Ltd [2019] FCA 931; (2019) 138 ACSR 365 (Murray River Organics) at [35] per Anderson J.

[23] Austpac Resources at [99], quoting with approval from Murray River Organics at [37]. The reference there was in fact to “the corporation and its directors and officers” rather than “those affected”. However Murray River Organics was not a cleansing notice case, where curative orders are properly sought under s 1322(4) for the protection of affected shareholders and not the company or its directors and officers. See also iCandy Interactive at [117]; Re QBiotics Limited [2016] FCA 873 at [46] per Gleeson J.

[24] Austpac Resources at [99], quoting with approval from Murray River Organics at [36].

[25] Nanoveu at [82], per Strk J accepting the submission that this factor supported the grant of relief.

[26] iCandy Interactive at [117].

[27] Austpac Resources at [99], quoting with approval from Murray River Organics at [38]; see also iCandy Interactive at [117].

[28] See Lake Resources at [39]-[40], where the Court found the evidence showed that any information which would have been in the cleansing notices would have been somewhat minimal, or disclosed to the market, of minimal relevance, making it unlikely any person had acted in reliance on its absence. See also Austpac Resources at [100], where the Court noted that the company had provided regular updates to the ASX, and the retrospective review of one of the officers did not reveal any further information requiring disclosure.

[29] Nanoveu at [83].

[30] Nanoveu at [84].

[31] Nanoveu at [84].

[32] Nanoveu at [85]; Austpac Resources at [115]; Golden Gate at [55].

[33] See for example Lake Resources at [43] et seq. 

[34] Austpac Resources at [106].

[35] Austpac Resources at [107].

[36] Austpac Resources at [108].

[37] Austpac Resources NL at [109].

[38] Caeneus Minerals at [58] per Banks-Smith J.

[39] Nanoveu at [88].

[40] iCandy Interactive at [122]-[123]. In that case, the Court found that while the conduct of directors was open to criticism, their conduct did not involve blatant disregard of the provisions of the Act: [120]. See Schedule (summaries of cases of note) for findings as to the relevant conduct in that case, including ignoring legal advice.

[41] Nanoveu at [91]; iCandy Interactive at [54].

[42] In Austpac Resources, the company took 11 months to request a suspension of shares from trading, and almost 2 years to commence the proceeding. The orders sought were still made.

[43] Austpac Resources at [111]; see also fn99 above.

[44] Austpac Resources at [112].

[45] Power Minerals at [3], where this counted against the number of failures (61); Caeneus Minerals at [4], where this counted against the number of failures (31); Re Clancy Exploration Limited [2018] FCA 569 at [3]; Lake Resources at [32]; Re Astral Resources NL [2024] WASC 251 at [3]; Re Haranga Resources Ltd [2024] WASC 105 at [2].

[46] iCandy Interactive at [54]; Austpac Resources at [115].

[47] iCandy Interactive at [54]; Austpac Resources at [115].

[48] iCandy Interactive at [55]; Austpac Resources at [115].

[49] Austpac Resources at [110].

[50] Nenna v ASIC at [80] per Middleton J. The authority of his Honour’s dicta at [80]-[82] has been widely accepted as well established, including in the cleansing notice case of iCandy Interactive at [44] and, for example, in Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1432 at [21] per Black J, and De Kun Holding (Aust) Pty Ltd v Yuan [2017] NSWSC 106 at [19] per Pembroke J.

[51] Nenna v ASIC at [82] per Middleton J. 

[52] For example in Austpac Resources, there was evidence of self-dealing by the responsible officer. The former company secretary (who did not give evidence) had apparently made a clandestine placement of shares to his own service company, which cast doubt on his integrity. See further the summary in the Schedule. The orders sought were made, with a carve out from relief from liability for the former officer and his service company. 

[53] Austpac Resources at [114].

[54] iCandy Interactive at [58].

[55] Austpac Resources at [124].

[56] Austpac Resources at [126].

[57] Austpac Resources at [126].

[58] Austpac Resources at [124].

[59] In Golden Gate, relief was initially sought to afford protection from liability arising from the share issue contraventions also for the issuing company, its company secretary and its consultant. After concerns were raised by ASIC, the application was amended to remove them from the protections by the orders sought.

[60] See Austpac Resources at [127], where Goodman J also observed that it was open for the officer and his service company to make their own application should they choose to do so. See also [78]-[79] and [117]-[118].

[61] Lake Resources at [45(b)].

[62] Austpac Resources at [124].

[63] Austpac Resources at [124].

[64] Austpac Resources at [124].

Series – How to Cure Cleansing Notice Failures – Part 1: The Statutory Disclosure Regime for Public Companies, and When Cleansing Notices are Required for Particular Types of Share Issues

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*This is the first in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleansing notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court’s ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I will identify the legislative provisions relevant to such applications, and provide an up-to-date distillation of the applicable principles from the authorities. The series in part 3 will be illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.

Introduction

There are two sets of legislative provisions (and ASIC instruments and class orders) and associated principles which must be considered in taking instructions and bringing a Court application to cure failures to lodge cleansing notices. The first set is Part 6D.2 of the Corporations Act 2001 (Cth) (Corporations Act or Act). The second is ss 1322(4) and (6) in Part 9.5 of the Act, s 1322 being a provision which empowers the Court to cure irregularities.

This part 1 of the series provides an overview relevantly of the first set – the statutory framework of the disclosure regime for public companies, including as to when cleansing notice may be required for different types of shares issues.

It should be noted that a failure by the company to observe its disclosure obligations has ramifications for shareholders of the affected shares for the next 12 months. This is both as to the validity of on-sale transactions involving affected shares, and as to the exposure of on-selling shareholders themselves to liability for civil penalties. This is so even though the original disclosure failure was that of the company, and shareholders on-selling the affected shares are likely to have assumed in good faith that the company’s share issue had been properly compliant. It follows from these ramifications for shareholders that trading in shares of such companies should be suspended upon discovery of such a problem, and curative orders are needed. The speed and manner in which key actions should be taken will be discussed in the final part of this series (part 4).

STATUTORY FRAMEWORK – DISCLOSURE REGIME

Part 6D.2 of the Corporations Act 2001 (Cth)

Broadly, part 6D.2 of the Corporations Act requires the provision of information to investors about securities when an offer to issue or sell them is made. It is designed to ensure that investors are provided with information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered for issue or sale.

The following outline is drawn from the judgment of Goodman J in Re Austpac Resources NL [2023] FCA 108; (2023) 16 ACSR 1 (Austpac Resources)[1], who explained that the following parts of Part 6D.2 are salient, for present purpose and ignoring inapplicable exceptions.

First, as a general proposition:

(1) an offer of securities for issue needs disclosure unless ss 708 or 708AA provide otherwise: s 706; and

(2) a person must not make an offer of securities that needs disclosure under Part 6D.2 unless a disclosure document for the offer has been lodged with the Australian Securities and Investments Commission (ASIC): s 727.

Secondly, the offers of securities that require disclosure under Part 6D.2 are only those for which disclosure is required by s 707(2), (3) or (5): s 707(1).

Thirdly, s 707(3) provides – 

(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 to investors 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.

Fourthly, s 708A provides some exceptions to the requirement of disclosure prescribed by s 707(3). In so far as is presently relevant, s 708A provides:

708A Sale offers that do not need disclosure

(1) This section applies to an offer (the sale offer) of a body’s securities (the relevant securities) for sale by a person if:

Sale offers to which this section applies

(a) but for subsection (5), (11) or (12), disclosure to investors under this Part would be required by subsection 707(3) for the sale offer; and

(b) the securities were not issued by the body with the purpose referred to in subparagraph 707(3)(b)(i); and

(c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued.

…

Sale offers 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; or

(ii)   if this section applies because of subsection (1A) – both the body and the controller give the relevant market operator for the body a notice that complies with subsection (6) before the sale offers I made.

(6)   A notice complies with this subsection if the notice:

(a)   is given within 5 business days after the day on which the relevant securities were issued by the body; and

(b)   states that the body issued the relevant securities without disclosure to investors under this Part; and

(c)   states that the notice is being given under paragraph (5)(e); and

(d)   states that, as at the date of the notice, the body has complied with:

(i) the provisions of Chapter 2M as they apply to the body; and

(ii) sections 674 and 674A; and

(e)   sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)). 

(7)    For the purposes of subsection (6), excluded information is information:

(a) that has been excluded from a continuous disclosure notice in accordance with the listing rules of the relevant market operator to whom that notice is required to be given; and

(b) that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:

(i) the assets and liabilities, financial position and performance, profits and loss and prospects of the body; or

(ii) the rights and liabilities attaching to the relevant securities.

(8)   The notice given under subsection (5) must contain any excluded information only to the extent to which it is reasonable for investors and their professional advisors to expect to find the information in a disclosure document.

…

Sale offer of quoted securities – case 2

(11)  The sale offer does not need disclosure to investors under this Part if:

(b)   either:

(a)   the relevant securities are in a class of securities that are quoted securities of the body; and

(i)    a prospectus is lodged with ASIC on or after the day on which the relevant securities were issued but before the day on which the sale offer is made; or

(ii)   a prospectus is lodged with ASIC before the day on which the relevant securities are issued and offers of securities that have been made under the prospectus are still open for acceptance on the day on which the relevant securities were issued; and

(c) the prospectus is for an offer of securities issued by the body that are in the same class of securities as the relevant securities.

…       

Fifthly, the making of an offer of shares that needs disclosure under Part 6D.2 absent the lodging of a disclosure document with ASIC is a contravention of s 727 of the Act: s 727(1) and (6) (subject to the operation of s 727(5)).

Finally, a person who contravenes s 727 is exposed to proceedings for relief under s 1325 of the Act: s 1325 (and in particular s 1325(1), (5) and (7)(d)).

As to the documents commonly referred to as “cleansing notices” and “cleansing prospectuses”, these were further explained in Re Structural Monitoring Systems PLC [2022] FCA 473 (Structural Monitoring) by Anastassiou J[2] – 

Cleansing notice exception – s 708A(5) – the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer provided a cleansing notice in relation to the securities. The cleansing notice must have been given by the issuer to the ASX within 5 days of the issue of the securities, and before the sale offer was made. Sub-section 705A(6) sets out the maters which must be included in the cleansing notice, the most important of which are that the company must state that, as at the date of the notice, it has complied with its financial reporting obligations in Chapter 2M of the Act and its continuous disclosure obligations in s 674 of the Act, and the notice must include any ‘excluded information’, defined as information that has been excluded from a continuous disclosure notice in accordance with the exceptions in the ASX Listing Rules. In addition, to fall within the cleansing notice exception, s 708A(5) sets out a number of other requirements, including that the company’s securities have not been suspended from trading for more than 5 days in the 12 months prior to the issue of securities that were on-sold;

Cleansing prospectus exception – s 708A(11) – the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer lodged a cleansing prospectus in relation to the securities with ASIC. The cleansing prospectus must be lodged on or after the day on which the relevant securities were issued, but before the day on which the sale offer is made. The cleansing prospectus must be an offer for securities issued by the entity that are in the same class of securities as the relevant securities that have been issued and are to be on-sold. Unlike the cleansing notice exception, suspension from trading does not prevent reliance upon the cleansing prospectus exception. 

As to the question of the liability of on-sellers where there has been a failure of disclosure by a company upon issue of relevant shares, s 707(3) is set out above. Section 727 relevantly provides as follows – 

(1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6.2D unless a disclosure document for the offer has been lodged with ASIC.

…

(6)   A person contravenes this subsection if the person contravenes subsection (1), (2), (3) or (4).

Note:  This subsection is a civil penalty provision (see section 1317E).

When Cleansing Notices are Required for Particular Types of Share Issues

*Credit for this section goes to Emma Cook, corporate law Partner at the firm of my instructing solicitors, Thomson Geer, Brisbane Office.

(1) SPP Issues

For a Share Purchase Plan (SPP) Issue of shares, whereby shares are offered to existing shareholders, ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 (SPP ASIC Instrument) and ASIC Regulatory Guide 125 apply. ASIC gives relief under the SPP ASIC Instrument to allow ASX listed companies to offer shares to existing holders under a share purchase plan without a prospectus, so long as the offer complies with the provisions of the SPP ASIC Instrument.

Where an SPP to existing shareholders is being conducted in conjunction with a share placement, an issuer need not issue a further Cleansing Notice for the SPP offer when it follows a placement, and the issuer has lodged a Cleansing Notice under s708A(6) or s 1012DA(6) not more than 30 days before the SPP offer is made: RG 125.42, ASIC Regulatory Guide 125. 

However, where an offer under an SPP is made as a stand-alone offer (i.e. it is not offered in conjunction with a placement), a Cleansing Notice must be lodged with ASX within a 24-hour period before the SPP offer is made: RG 125.37, ASIC Regulatory Guide 125.

(2) Placements to sophisticated investors, professional investors and senior managers pursuant to ss 708(8), (11) and (12)

For a Placement Issue (i.e. to sophisticated investors, professional investors or senior managers), listed companies are required to issue compliant Cleansing Notices in accordance with section 708A (5)(e) and (6) of the Act. A Cleansing Notice is required to be given within 5 business days after the day that any shares under a placement are issued by the company, and must set out other relevant information as mandated by those provisions. 

A Cleansing Notice is not however required where shares under a Placement Issue are not being on-sold for a period of 12 months following their issue and this is documented by way of some form of escrow agreement. This is because s 707(3) will not be considered to apply to the Placement Issue, because for a 12 month period post issue they were not able to be on-sold, therefore within that period:

  • the body could not be considered to have 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; and
  • the person to whom the securities were issued could not be considered to have acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them.

(3) Incentive Plan Issues

Prior to it taking effect from 1 March 2023, ASIC Class Order [CO 14/1000] Employee incentive schemes: Listed bodies provided relief from the on-sale provisions of the Act in certain circumstances for incentive plan issues of shares. It provided that a listed body that made an offer under an employee incentive scheme covered by the Class Order did not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the offer (clause 5). Further, the Class Order provided that a person who made a sale offer of an underlying eligible product within 12 months after issue of the product did not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the sale offer where the product was issued to an eligible participant under an employee incentive scheme and the person has no reason to believe the employee incentive scheme is not covered by the Class Order (clause 7). 

A new employee share scheme regime was introduced in 2022 as follows:

  • New employee share schemes (ESS) provisions introducing an amendment to Division 1A in Part 7.12 of the Act commenced on 1 October 2022 (ESS Division); and 
  • a new legislative instrument ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 came into effect on 20 December 2022 (ESS Instrument). The ESS Instrument expands the regulatory relief under the ESS Division. Importantly, the ESS Instrument modifies section 1100ZD (regulatory relief for certain subsequent sale offers of ESS interests) so that the disclosure requirements under Part 6D.2, 6D.3 and Part 7.9 of the Corporations Act do not apply in relation to financial products that are in a class that is able to be traded on a financial market.
  • In addition to the ESS Instrument, on 16 December 2022 ASIC issued ASIC Corporations (Amendment) Instrument 2022/1022 (Amendment Instrument) to provide guidance on the continuing application of ASIC Class Order 14/1000 (CO 14/1000). The Amendment Instrument provides that relief under CO 14/1000 and CO 14/1001 may continue to apply to ESS interests offered on or prior to 1 March 2023 and accepted before 1 April 2024: paragraph 5.

For issues of ESS interests (including shares) that occurred before 1 March 2023, listed companies could avail themselves of these provisions, subject to compliance with CO 14/1000 and ASIC Regulatory Guide 49, meaning that a Cleansing Notice was not required to be issued following the issue of shares under an employee incentive plan.

However for ESS interests offered on or after 1 March 2023, the new regime under the ESS Division and ESS Instrument applies. 

For a listed company to be able to avail itself of the relief from the on-sale provisions afforded by the new regime on or after 1 March 2023, and not have to lodge a Cleansing Notice, an offer of shares would need to be made under an employee incentive plan which complied with the obligations introduced in the amendments to Division 1A of Part 7.12 of the Act and in ASIC Corporations (Employee Share Schemes) Instrument 2022/1021. If the incentive plan had not been amended in light of the new scheme and so did not so comply, a Cleansing Notice would be required.

(4) Exchangeable Share Acquisition Issues

As with Placement Issues, for an Exchangeable Share Acquisition issue of shares (which is a term that has been applied for a specific type of contractual share issue), listed companies are required to issue compliant Cleansing Notices in accordance with section 708A (5)(e) and (6) of the Act. A Cleansing Notice is required to be given within 5 business days after the day that any shares under a placement are issued by the company, and must set out other relevant information as mandated by those provisions. 

(5) Convertible Securities Agreement or Convertible Note Issues

Again, similar to a Placement Issue, once shares are issued by a public company on conversion of a Convertible Note, unless a Cleansing Notice has been issued under section 708A(12C)(e) of the Act (as notionally inserted by ASIC Corporations (Sale Offers: Securities Issued on Conversion of Convertible Notes) Instrument 2016/82)  within 2 business days before the first day on which the convertible notes were issued, the company is required to issue a compliant Cleansing Notice in accordance with section 708A (5)(e) and (6) of the Act, and such Cleansing Notice must be given within 5 business days after the day that any shares were issued.

If there are any shares issued up-front under such an arrangement, namely, not on conversion of a convertible note, then such issue will require the issue of a compliant Cleansing Notice in accordance with sections 708A (5)(e) and (6) of the Act, and such Cleansing Notice must be given within 5 business days after the day that any shares were issued.

********

Next instalment – Part 2: Relief under section 1322(4) of the Corporations Act – Key Provisions and Principles

[1] At [4]-[10].

[2] At [11], adopting this summary his Honour drew from the written submissions for the Plaintiff, written by my colleague at the Victorian Bar and fellow member of List G Barristers, Brad K Holmes.

*******

Liability limited by a scheme approved under Professional Standards Legislation

Spotlight Series #2: The Federal Court on when a recipient of an asset transferred fraudulently may be held liable – and when knowledge of a third party / outsider may be imputed to a company

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*This is the second in a series of articles / case reviews I am publishing on my website from time to time, spotlighting the work of excellent junior insolvency/commercial law barristers of up to 5ish years call, practising at the Victorian Bar in Melbourne. This second entry in the series is written by a fellow member of Lonsdale Chambers, Nicole Tyson who I’ve been working with for the past few years. Nicole has been indispensable as my junior in Supreme Court proceedings involving a dispute over an asset sale agreement and allegations as to misleading or deceptive conduct. Her VicBar profile may be viewed here.

A recent judgment of the Federal Court has considered the circumstances in which a recipient of property subject to a Black v Freedman trust will be liable for dealings with that trust property – and the important question of knowledge.

Amirbeaggi as trustee of the bankrupt estate of Hanna v Hanna (No 3) [2024] FCA 1171 (Hanna) concerned various claims arising from a property development undertaken by two partners, Mr Abdalla and Mr Hanna, in Hinchinbrook, New South Wales. 

Key Facts

Hanna concerned claims arising from properties held by Mr Abdalla and Mr Hanna, who were partners in the development of 8 townhouses at a property in Hinchinbrook, New South Wales. Whilst most claims settled prior to trial, a key claim remaining was one made by Mr Abdalla against Jarvis J Pty Ltd (Jarvis). Jarvis was an entity associated with Ms Tina He, who had been involved in property projects with Ms Shonoda (the wife of Mr Hanna). 

The claim against Jarvis related to one of the townhouses at the Hinchinbrook property – Unit 16.  The legal title to Unit 16 was acquired by Jarvis in 2019 in the following circumstances:

  • Following the purchase of Hinchinbrook by Mr Abdalla and Mr Hanna in 2013, 8 lots were created. By late 2016, four lots (Units 16, 17, 21 and 22) remained in the names of Mr Abdalla and Mr Hanna, as tenants in common in equal shares: [26] to [28].
  • From late 2015 Mr Hanna was experiencing financial difficulties on multiple fronts. His wife Ms Shonoda, an accountant, became involved in assisting him. By early 2017 the parties were discussing ending their arrangement. Ms Shonoda was involved in these discussions: [15] to [45].
  • In April 2017, the partners agreed to part ways on the basis that units 17 and 22 would be owned by Mr Abdalla and units 16 and 21 by Mr Hanna: [38].  However it appears that Mr Hanna, whose financial difficulties were worsening, was not in fact to own “his” two units. A deed of equitable mortgage was signed by which Mr Hanna and Mr Abdalla each agreed to transfer their interest in units 16 and 21 to Ms Shonoda (Mr Hanna’s wife). Mr Abdalla’s interest was to be transferred for specified consideration, of which part was still outstanding at trial: [40] and [100].
  • On 11 July 2017, following issues with the Australian Taxation Office and other creditors, a sequestration order was made against Mr Hanna: [59].
  • In the meantime, on 16 January 2018, a transfer was lodged which purported to transfer the legal title to Unit 16 from Mr Hanna and Mr Abdalla – not to Ms Shonoda – but to Jarvis (the company of Ms Shonoda’s associate Ms Tina He) for consideration of $650,000: [68] to [74]. However, whilst the transfer bore Mr Abdalla’s purported signature, the Court found that his signature was forged. He did not sign the transfer or approve of the sale of Unit 16 to Jarvis: [65] to [66]. Further, by agreement with Ms Shonoda (who paid the stamp duty and registration expenses), Jarvis paid no consideration for the transfer. Ms Shonoda paid the stamp duty and registration expenses: [74].
  • In February 2018, Mr Abdalla’s solicitor wrote to Mr Hanna and Ms Shonoda asserting that Mr Abdalla’s signature on the transfer for Unit 16 was a forgery, noting that it had been witnessed by Ms Shonoda, and warning of potentially reporting the matter to NSW Police: [77].
  • Jarvis did not retain the property. In April 2019, upon a request made by Ms Shonoda of Ms He, Jarvis transferred Unit 16 to Anthony Hanna (Ms Shonoda and Mr Hanna’s son) for nil consideration: [80].

Claim of Mr Abdalla 

Mr Abdalla claimed that the title to Unit 16 was transferred without his consent (by reason of the forgery) and his interest in it was held by Jarvis as transferee on trust for him, relying upon Black v S Freedman & Co1 and Fistar v Riverwood Legion and Community Club Ltd2. Mr Abdalla claimed that by the time of the transfer by Jarvis on to Anthony Hanna, Ms Shonoda had knowledge of the forgery, which was to be imputed to Jarvis, such that Jarvis was liable to Mr Abdalla for breach of trust (refer at [87]).

Key Findings

Mr Abdalla’s claim against Jarvis was considered by Justice Goodman at paragraphs [93] to [110]. His Honour found that Mr Abdalla held full legal title to his interest in Unit 16 in January 2018.  As to whether Jarvis then received Unit 16 as a volunteer or bona fide purchaser for value, Goodman J found that it received Unit 16 as a volunteer, noting at [96] that: 

It is [also] well-established that a person who receives trust property, otherwise than as a bona fidepurchaser for value without notice, but innocently, and thereafter acquires notice of the trust and deals with the trust property in a manner inconsistent with the trust will be obliged to account in equity for the trust property (or such as remains at the time when notice of the trust is received): see Fistar at 738 to 739 [further citations omitted].  

As to whether Jarvis had notice of the trust, his Honour found that whilst Ms He did not have notice of the forgery at the time of the initial transfer in 2018, there was a question as to whether Jarvis was on notice of the forgery before it transferred the unit on to Anthony Hanna in April 2019. His Honour was satisfied that Ms Shonoda had notice of the forgery from about 19 February 2018 [105-107].

As to whether Ms Shonoda’s notice ought be imputed to Jarvis, his Honour referred at [108] to a recent decision of the NSW Court of Appeal in July of this year in SSABR Pty Ltd v AMA Group Limited3 in which Stern JA (Ward P and Price AJA agreeing) explained that the leading authority as to the attribution of a state of mind to a company was the statement of Bright J in Brambles Holdings Ltd v Carey4, cited with approval by the majority in Krakowski v Eurolynx Properties Ltd5 as follows:

Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company.

Further passages from SSABR were also noted by his Honour, including that “in some circumstances the knowledge of the company must depend upon the knowledge of a particular person or persons who were most closely involved with the relevant transaction”6 and  that “the test for attribution of a state of mind to a company will always depend upon context and the purpose for which that attribution is sought”7. Notably for the facts of this case, given that Ms Shonoda was not a director or officer of the company Jarvis, his Honour included this passage from SSABR8 –

In the context of rectification in equity, the relevant enquiry is as to the actual subjective state of mind of a corporation in entering into a particular contract, namely the relevant decision-maker…that person will be the person who had the authority to bind the company to the contact, albeit that there may be circumstances where, in practice, the formal decision-maker has so deferred to the judgment of someone else that that person is in reality the person whose judgment was critical to the company entering into the agreement…

His Honour then found at [109]:

In circumstances where Ms He, the director of Jarvis deferred to Ms Shonoda in connection with that transfer and indeed made the transfer at the direction of Ms Shonoda, Ms Shonoda’s state of mind is to be attributed to Jarvis. It is not necessary that Ms Shonoda be the ultimate decision-maker on behalf of Jarvis with respect to the transfer of unit 16 to Anthony Hanna. It is sufficient that she was “so closely and relevantly connected with” that transfer that her knowledge for that transaction can be treated as the knowledge of Jarvis: see Krakowski at 582; Hoh v Ying Mui Pty Ltd [citations omitted]. Ms Shonoda was, to adopt the language used by Bathurst CJ (with whom Hoeben CJ at Common Law and Leeming JA agreed) in Gregg v R [citations omitted], the person who was responsible for Jarvis transferring unit 16 to Anthony Hanna.

In such circumstances, Mr Abdalla’s claim against Jarvis as to Unit 16 was established, with his Honour ordering a remedy equal to the value of his half interest in the property at the time of the transfer9.

Implications

The principles identified by his Honour as to when the state of mind of a person will be treated as that of a company are not new. It is not necessary that the person whose state of mind is attributed to a company be a director or officer of the company. That said, it is uncommon for the state of mind of someone other than a director or officer to be imputed to a company.

In that sense, the findings as to Ms Shonoda’s state of mind are unusual, as it does not appear that Ms Shonoda was a formally appointed director or officer (and nor was this a question considered by his Honour)10. However, Hanna is a useful reminder that the circumstances in which a person’s state of mind can be treated as being the state of mind of the company does not depend upon labels or titles. It is a question of context. In each case, the facts of the relevant transaction or dealing at hand must be closely analysed.  

  1. [1910] HCA 58; (1910) 12 CLR 105 ↩︎
  2. [2016] NSWCA 81; (2016) 91 NSWLR 732 ↩︎
  3. [2024] NSWCA 175 (SSABR)  ↩︎
  4. (1976) 15 SASR 270 at 279 ↩︎
  5. (1995) 183 CLR 563 (Krakowski) ↩︎
  6. Citing Krakowski at 582 ↩︎
  7. Citing Lord Hoffman in Meridian Global Funds Management ASIA Ltd v Securities Commission [1995] 2 AC 500 at 506-511 ↩︎
  8. Citing Patten LJ in Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] 2 All ER (Comm) 748 at [35], [39], [41]-[43], which passage was relied upon by the primary judge ↩︎
  9. At [110]. Whilst the judgment refers to Mr Hanna’s interest in this paragraph, it appears that this may be a typographical error and that the paragraph should refer to Mr Abdalla’s interest instead. ↩︎
  10. The question of whether Ms Shonoda may have been a (shadow or de facto) director or officer within the meaning of s 9 of the Corporations Act (2001) was not dealt with in the judgment. ↩︎

Spotlight Series #1: The High Court pronounces on the immunity of a ‘separate entity’ of a foreign state from Australian winding up proceedings

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*This is the first in a series of articles / case reviews I will be publishing here on my website from time to time, spotlighting the work of excellent junior insolvency/commercial law barristers of up to 5ish years call, practising at the Victorian Bar in Melbourne. This first entry in the series is written by my reader Panagiota Pisani who has since signed the Bar Roll on 17 October 2024 and is now available to accept briefs. Her List G Barristers profile may be viewed here.

Can a creditor commence winding up proceedings against a separate entity of a foreign State that is registered as a foreign company under Div 2 of Pt 5B.2 (‘Part 5.7 body’) of the Corporations Act 2001 (Cth) (‘Corporations Act’)?  

Last month, in Greylag Goose Leasing 1410 Designated Activity Company & Anor v PT Garuda Indonesia Ltd [2024] HCA 21, the High Court (5:2) held that the answer is no. The exception from immunity from the jurisdiction of Australian courts under ss 14(3)(a) and 22 of the Foreign States Immunities Act 1985 (Cth) (‘Immunities Act’) has no application to a winding up proceeding brought under Part 5.7 against a separate entity of a foreign State that is registered as a Part 5.7 body. For that exception to apply, the company that is sought to be wound up must be a different entity, other than the foreign State’s separate entity. 

The High Court’s decision and the possible implications for winding up proceedings in Australia are discussed below. 

Facts

PT Garuda Indonesia Ltd (‘Garuda’), incorporated in the Republic of Indonesia, is the national airline of the Republic of Indonesia and is a Part 5.7 body. 
 
Greylag Goose Leasing 1410 Designated Activity Company and Greylag Goose Leasing 1446 Designated Activity Company (together, ‘Greylag Goose’) are companies incorporated in Ireland which lease aircraft to Garuda. 
 
Greylag Goose made demands on Garuda for the payment of USD$193,003,254.55 and USD$244,968,492.29, said to be owed by Garuda.
 
Greylag Goose commenced a wind-up proceeding under Part 5.7 and sought orders in the Supreme Court of New South Wales that Garuda be wound up on the basis that it is unable to pay its debts or otherwise that it is just and equitable to do so.  Greylag Goose argued that the exception to immunity from jurisdiction provided by ss 14(3)(a) and 22 of the Immunities Act applied to the wind-up proceeding. 

Procedural History

At first instance, Hammerschlag CJ rejected Greylag Goose’s submission that the exception in ss 14(3)(a) and 22 of the Immunities Act applied to the wind-up proceeding and set aside the originating process.  That decision was upheld on appeal to the New South Wales Court of Appeal by Bell CJ, with whom Meagher and Kirk JJA agreed.

The Immunities Act and the High Court’s Findings 

Section 9 of the Immunities Act confers immunity on a foreign State from the jurisdiction of Australian courts in a proceeding. Sections 10 – 21 provide exceptions to this general immunity.

Section 14 is titled ‘Ownership, possession and use of property etc’. Sub-section 14(3)(a) provides that a foreign State is not immune in a proceeding in so far as the proceeding concerns ‘bankruptcy, insolvency or the winding up of a body corporate’.

Relatedly, although not referred to by Greylag Goose, s 11(1) provides that a foreign State is not immune in a proceeding in so far as the proceeding concerns a ‘commercial transaction’.  Commercial transaction is defined in s 11(3) as:

a commercial, trading, business, professional or industrial or like transaction into which the foreign State has entered or a like activity in which the foreign State has engaged and, without limiting the generality of the foregoing, includes: 

  1. a contract for the supply of goods or services;
  2. an agreement for a loan or some other transaction for or in respect of the provision of finance; and 
  3. a guarantee or indemnity in respect of a financial obligation; but does not include a contract of employment or a bill of exchange.

Pursuant to s 22, these exceptions, and the general immunity under s 9, apply in relation to a ‘separate entity’ of a foreign State as they apply to the foreign State.

A ‘separate entity’ in relation to a foreign State includes a body corporate, other than a body corporate that has been established by or under a law of Australia that is an agency or instrumentality of the foreign State and is not a department or organ of the foreign State’s executive government (s 3). 

It was common ground that Garuda is an agency or instrumentality of the Republic of Indonesia and on that basis is a ‘separate entity’ of a foreign State within the definition in the Immunities Act (at [10]). 

The High Court considered the purpose of s 14(3)(a), informed by the Australian Law Reform Commission’s Foreign State Immunity Report, which recommended the enactment of the Immunities Act.  The majority found that the ALRC intended that the implementation of s 14(3)(a) was to ensure that an Australian court exercising jurisdiction in a bankruptcy, insolvency or winding up proceeding would be able to adjudicate on the proprietary interests of all the interested parties, including the proprietary interests of a foreign State (at [59]). 

The majority held that as s 14(3)(a) applies through the operation of s 22 in relation to a separate entity of a foreign State in this way: the separate entity (like the foreign State itself) is the object of the exception from immunity; the ‘body corporate’ (referred to in s 14(3)(a)) is an entity other than the separate entity of the foreign State (just as it is an entity other than the foreign State itself); and the winding up of that other entity is the subject-matter of the exception (at [33]).  Accordingly, for the exception in s 14(3)(a) to apply, the winding up of a body corporate cannot be of the same entity that is the object of the immunity and its exceptions – that is either the foreign State or a separate entity of the foreign State. The winding up must be of another entity (at [32], [61]). 

Edelman J also rejected Greylag Goose’s interpretation of s 14(3)(a).  The possibility of a foreign State entity being at liberty to engage in insolvent trading in Australia, leaving creditors to race to the execution of their judgments on a first come, first served basis is, according to Edelman J, precluded by the operation of ss 11 and 22 of the Immunities Act (at [103] and [110]).  Edelman J held that (at [146], emphasis added):

No authority in this Court requires that ss 11(1) and 22 be interpreted in a manner that would require…these startling insolvency effects.  For instance, if the meaning and application of a “separate entity of a foreign State” in s 22 (read with the definition in s 3(1)) were confined to corporations in the position of a government department or corporations that were generally serving the functional purposes of a government department, then there might be reason to doubt whether Garuda would be a separate entity within s 22.  Alternatively, if a proceeding for winding up a corporation based on the failure to pay a debt arising from a commercial contract were a “proceeding concerning a commercial transaction”, then s 11(1) might have the effect that Garuda and other foreign entities like it would have no foreign State immunity in respect of such a proceeding. I am, therefore, satisfied that the elasticity of the concepts of a “commercial transaction” and “a separate entity of a foreign State” provides sufficient reason to doubt the insolvency effects discussed above.

Gordon J and Steward J (dissenting) examined the text and purpose of the Immunities Act and held that the exceptions in ss 11-21 reflect the overarching policy that “commercial or trading activities conducted by or on behalf of foreign governments should not attract the special jurisdictional immunity enjoyed by foreign States” (at [74], emphasis in original).  Consistent with this policy and the text and purpose of the Immunities Act, Gordon J and Steward J held that the better view is that the exception in s 14(3)(a) applies to remove the general immunity where the relevant proceedings concern the insolvency or winding up of the same body corporate that is the subject of the s 9 immunity (at [78]).  

Implications 

The majority’s interpretation of s 14(3)(a) may have the effect that a separate entity of a foreign State registered as a Part 5.7 body can continue to trade in Australia while insolvent without the ability of any of its creditors to insist upon its winding up (at [83]).  

Creditors can be comforted by Edelman J’s findings that the ‘elasticity’ of the concepts of “commercial transaction” in s 11 and “a separate entity of a foreign State” in s 22 are sufficient to doubt this effect (at [146]).  However, it remains unclear whether these exceptions apply to the winding up of a Part 5.7 body on just and equitable grounds.  Such applications do not always require the existence or relationship to a ‘commercial transaction’ as defined in s 11 of the Immunities Act.  Where a ‘commercial transaction’ cannot be identified but there are otherwise just and equitable grounds for the winding up of a separate entity of a foreign State, applicants are arguably left with no pathway to initiate proceedings in Australian courts. 

Legislative reform to extend the scope of s 14(3)(a) to foreign States and their separate entities may instil greater confidence amongst creditors.  It could also provide a clearer pathway for wind up applications against the separate entities of foreign States to be brought on just and equitable grounds. However such reform would mean a change in the policy discussed in the ALRC Report (1984) as underlying the Immunities Act, which could take Australia out of step with other jurisdictions, and may be unlikely.

Panagiota Pisani

Recovering “your” money when entities collapse – when can you successfully claim a Quistlose Trust?

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When a company collapses, those who had paid money to it for a particular purpose are, unsurprisingly, often keen to retrieve “their” funds. This is especially so for those who paid over money shortly prior to the collapse, or in any case where the money had not been applied for the intended purpose by the time of the collapse.

This article is about a way recovery may be achieved in equity, in some circumstances. These issues can of course arise in external administrations, hence it is also useful for administrators, receivers and liquidators to be across the principles governing Quistclose trusts.

Some of the introductory remarks below are of historical interest, as physical money has less relevance in commercial life in Australia in 2023. However as the law developed in part in that context, these remarks are instructive as to the current state of play as to property rights, the electronic recording of bank accounts and transfers of funds, and when a Quistclose trust may arise.

The first point to make is that physical money itself is capable of being the object of property rights, but is fungible. That is, one unit is identical to and interchangeable with any other unit. Once it is mixed with other money it cannot be separately identified in the same way, it has been said, that a raindrop cannot be separately identified once it has fallen into the ocean. At that point property in money is lost at common law.1

If physical money is paid into a bank account, it “passes into currency”2 and ownership of the money itself passes to the bank, which may use the money for its own lending and other purposes. The item in which any property rights may be held becomes the chose in action constituted by the debt owed by the bank to the account holder.

A bank account is nothing more or less than a chose in action, consisting “in the contractual right against the bank, ie in a debt, but a debt fluctuating in amount as moneys might be deposited and withdrawn”.3 “[T]hough in a popular sense it may be said that a depositor with a bank has “money in the bank”, in law he has but a chose in action, a right to recover from the bank the balance standing to his credit in account with the bank at the date of his demand, or the commencement of action. That recovery will be effected by an action for debt. But the money deposited becomes an asset of the bank which may use it as it pleases…”.4

Thus it is common, but a fallacy, to point to a bank account – yours or someone else’s to whom you had paid money – and say that it holds “your money”. In truth what is held is a chose in action – a debt owing by the bank to the account holder. (The reason bank accounts are so secure, particularly in Australia, is the Australian Government scheme guaranteeing deposits in banks, building societies and credit unions.)

For an entity or person who has paid money to a company for a particular purpose, the question becomes: when will equity respond to the circumstances of the payment by impressing the funds / chose in action with a trust?5

It can be an important question.

Principles – Quistclose Trusts

A Quistclose trust may arise where A pays money to B to be used for a particular purpose, and the circumstances of this transaction are such that equity regards B as holding that money – or rather, its value – on trust for A. That is, in equity, A retains a proprietary interest – not in the money itself of course, but rather in its traceable product (generally the chose in action which is the recipient’s bank account). Making a payment or a transfer for a purpose is not enough to give rise to a trust, even if that purpose is not effected and the money is subsequently misdirected or the company fails. Equity requires more before it will respond.

The prevailing view in Australia is that the Quistclose trust is explained on express trust principles, although this is not settled. Some judges continue to discuss a resulting trust analysis upon the failure of the purpose of the payment in line with the English position stemming from the early cases, including Lord Millett’s judgment in Twinsectra Ltd v Yardley6 (see below). It may be that when the position is settled here, both are embraced as the correct analysis, arising in different circumstances.

The principles governing when a Quistclose trust will be held to have been created may be distilled as follows7 –

  1. The question whether a Quistclose trust has been created will be answered by reference to the intention of the parties and the ‘essence’ of their bargain.8 The intention not to part with the beneficial ownership of the funds must be sufficiently indicated.9.
  2. The relevant intention is to be inferred from the language used by the parties in question, having regard to the nature of the transaction and the relevant circumstances of the relationship between them. It is ascertained by reference to the objective intention of the parties,10 outwardly manifested.11
  3. In determining the intention of the parties at the time, the Court can take into account events and documents which postdate the date on which the trust is said to have been created, although little weight may be given to what the parties say was the nature of the transaction at a subsequent point in time.12
  4. In a commercial setting there must be clear evidence that the parties intended a trust to arise in circumstances where a trust would not normally exist.13
  5. A Quistclose trust does not arise simply because money is paid for a particular purpose. The mere provision of money or property for a purpose is not enough.14 ‘An expectation or general understanding falls short of the necessary mutual intention that funds have been provided on the express condition that they will be earmarked for use exclusively in accordance with an agreed purpose’.15
  6. The parties must intend that the money not be used at the free disposal of the recipient.16 The transferee must be subject to restrictions on the use of the money for any other purpose.17
  7. Payment of the money into a separate account may be indicative, but not determinative, of the existence of a Quistclose trust.18 However a lack of evidence of an express requirement to keep money separate is a powerful indicator of an absence of an intention that the money was to be held on trust,19
  8. The onus of proof lies on those who assert that a trust was created.20
  9. If there was a trust, but it was created for an illegal purpose (such as the purpose of avoiding tax obligations), then the trust must fail as a matter of public policy.21
  10. Trust obligations arise where equity operates on the conscience of the holder of the legal interest. A person cannot be a trustee of property if that person is ignorant of the facts alleged to affect their conscience. That is, unless a putative trustee is aware that they are intended to hold the property for the benefit of others, their conscience will not be affected in a relevant way.22

It is clear from the authorities that the two key requirements are those at principles (5) and (6) above. As the New South Wales Supreme Court observed last year, in order for a transfer of funds or assets to be characterised as held on a Quistclose trust, the Court will look to whether the parties outwardly manifested a mutual intention that – 

  1. The money was provided for a specific purpose, and
  2. The recipient was to be subject to restrictions on the use of the money for any other purpose.23

Precedents – When the Courts will and will not uphold a Quistclose Trust claim

The most useful way to gain an understanding of how the principles are applied and where the Courts tend to draw the line as to when a Quistclose trust has and has not been created is to read cases. It is worth making sure to have regard to the most recent iterations of the Courts’ application of the principles, to see the current approach. You can then consider the facts of the case before you, and the picture will generally become clearer as to on which side of the line it likely falls.

Here, then, is a selection of 11 Quistclose trust cases, falling variously either side of the line. These are in chronological order and are mostly Australian, though I have included several English decisions. The frequency with which the issue continues to arise recently is eloquent as to how important a potential claim the Quistclose trust continues to be.

(1) Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

In the original Quistclose decision, Rolls Razor was seeking financing, and turned to the company of a significant shareholder. Quistclose Investments agreed to provide finance but as a precondition, Rolls Razor was required to pay all pre-declared dividends. The evidence was that the mutual intention of Quistclose and Rolls Razor, and indeed the essence of their bargain, was that the sum advanced by cheque should not become part of the assets of Rolls Razor but should be used exclusively for the payment of the particular class of creditors. The cheque drawn by Quistclose in favour of Rolls Razor, which represented the moneys borrowed by Rolls Razor, had been paid into a special account with Barclays who, importantly, had been informed that the account was to be used only to pay the dividend to those creditors. Rolls Razor subsequently went into liquidation. The findings as to the parties’ mutual intention was held to give rise to a primary trust in favour of those entitled to a dividend, and that if the purpose could not be carried out, the money was then held on a secondary trust to be returned to Quistclose. Quistclose trust found.

(2) Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164

In this case, Yardley obtained a loan from Twinsectra to buy a property. Twinsectra asked for a solicitor’s undertaking to secure the loan; the undertaking was to ensure that the moneys lent were not disbursed pending the acquisition of property and would only be used to acquire property. The solicitor S gave the undertaking. The moneys lent were applied in breach of the undertaking. It was argued that given Twinsectra was a commercial lender, it was difficult to conclude that it intended to retain beneficial title or create a trust over the money advanced, but failed to make this explicit in the loan agreement; that instead, all indicia pointed to an unsecured loan protected by a high interest rate and a solicitor’s personal undertaking. However, the Appellate Committee held that the solicitor’s undertaking, which was given as a condition of payment, gave rise to a Quistclose trust. Clauses 1 and 2 of the undertaking made it clear that the money was not to be at the free disposal of Mr Yardley.24 Lord Millet observed at [73] that it was not enough that the money was lent for a particular purpose because money so lent without more is at the free disposition of the borrower. Quistclose trust found.

(3) David Alan Thomson v Golden Destiny Investments Pty Ltd (No 2) [2015] NSWSC 1929

This case in 2015 involved a property development that had failed. NGI had contributed $6 million on behalf of investors. NGI argued that the $6 million was at all times impressed with a Quistclose trust. The Court however held that it was not. There was no evidence of such a mutual intention nor did the plaintiffs ever constitute themselves as trustees, nor did GDI. Once the monies were paid away to the plaintiffs, without it being impressed with a trust, it became the plaintiffs’. It was no longer NGI’s money or the investors’. Upon rescission of the original contracts, the plaintiffs were obliged to repay the $6 million to GDI. There existed a chose in action. GDI was indebted to NGI. But there was no trust. No Quistclose trust.

(4) First City Monument Bank PLC v Zumax Nigeria Ltd Ltd [2019] EWCA Civ 294

The issue in this case was whether a financial institution (IMB) held on trust for Zumax moneys credited to IMB’s bank account with Commerzbank by a nominee for Zumax from its account with a different bank, and transmitted with instructions that the credits were for onward transmission to Zumax. The Court of Appeal of England and Wales held that a trust was not established because, per Newey LJ (Lewison and Males LLJ agreeing) –

  1. In so far as it was said that the trust was an express trust, there had to be certainty of intention, objects and subject matter (which was not shown), and
  2. In so far as a resulting trust was relied upon, it was not enough to show that the moneys were paid for a purpose. More had to be shown. This could be demonstrated by showing that the money was not at the free disposition of the recipient. However that could not be shown here because there was no segregated bank account for these credits and the parties would expect the moneys held by a bank to be used by the bank for its own purposes. No Quistclose trust.

(5) Nikitins (Liquidator) v EncoreFX (Australia) Pty Ltd (in liq) No 2) [2021] FCA 27

In this case in 2021, the company EncoreFX operated a business providing foreign exchange services to businesses. On a particular day two customers deposited about $800,000 to be exchanged into USD. However before the funds could be exchanged, EncoreFX was placed into external administration. The Court found that the moneys were held under a statutory trust established by Australian financial services legislation (s 981H of the Corporations Act 2001 (Cth), although the alternative claim to a statutory trust under s 1017E failed). In obiter, it went on to find that the funds were not held on a Quistclose trust. Colvin J observed –

  1. The fact that before the payment of one of the customers, its CEO expressed the need to feel his company’s money would be safe. An employee of the recipient company said his company’s funds would be held in a trust bank account pending completion of the transactions. The Court attributed no weight to this oral conversation, as there was no evidence as to what authority (if any) that employee had to make representations on behalf of EncoreFX. Instead the correct approach was to focus upon the nature of the transaction and the objective intention.
  2. The Court examined the PDS and found the language was equivocal as to whether funds paid would be held separately. This was not enough to establish a trust. No Quistclose trust.

(6) Krejci, in the matter of Union Standard International Group Pty Ltd (in liq) [2021] FCA 1483

In this case in 2021, Union Standard had provided financial services to various customers, including a class known as “investing clients”. When it went into liquidation, there were insufficient funds to pay all creditors. The investing clients claimed a priority over funds in a particular account, on the basis those funds were held on trust for the investing clients. The Court held that a statutory trust was established by Australian financial services legislation. It went on to consider, in obiter, whether a Quistclose trust was established. It found that it was, on the basis that –

  1. everything the investing clients were told indicated to them that their funds were held and used by Union Standard as a trustee, on trust for those clients. They were told this directly by Union Standard’s agents. They were told this throughout the documentation.
  2. a Quistclose trust arose as moneys were paid by investing clients to Union Standard not to become part of Union Standard’s general assets but only to be used for the purpose of Union Standard using the moneys to generate leverage in trading transactions on behalf of the investing clients. Quistclose trust found.

(7) Re BBY Limited (Receivers and Managers Appointed)(in liq) [2022] NSWSC 29

This was a case last year where money was transferred for a purpose (payment of a margin call). The payer imposed no restrictions or conditions on BBY as to its treatment of the funds, other than its repayment within a short-time frame. Relevantly, no request was made for BBY to segregate the $3m from its general assets. The payer was not told that the funds would be deposited into a trust account of BBY, nor was an undertaking given by anyone on behalf of BBY that the $3 million advance would be used solely for paying margin calls in relation to the Aquila trade and for no other purpose, and was to be retained by BBY until so applied. The payer could have, but did not, place any conditions or restrictions on the use of the funds by BBY, or the ability of BBY to mix the funds with other monies. The payer’s submissions “conflated an expectation or general understanding that funds would be used for a specific purpose with the mutual intentions of the parties. The question [was] whether the objective intention of the parties was that the funds advanced would remain the beneficial property of the lender (even if not an exclusive beneficial interest) until the borrower applied those funds in the manner required by the stipulated purpose.” The Court held that the payment was not of moneys impressed with a trust, the payer became a creditor of BBY, and the payment was an unfair preference. No Quistclose trust.

(8) Prickly BayWaterside Ltd v British American Insurance Company Ltd (Grenada) [2022] UKPC 8 

In this Privy Council decision last year, a Mrs Lee had paid the respondent Baico a sum of money which the appellant Prickly Bay asserted was intended to be used for the purpose of payment in two years’ time of an amount which would then have become due and payable to a Mr Steele. Baico had given a guarantee that this sum would be duly paid. Prickly Bay contended that in this context Mrs Lee retained the beneficial right and title to the moneys and that Baico, having failed to pay under the guarantee, was liable to return the moneys to her. Prickly Bay failed both at first instance in Grenada, on appeal to the Eastern Carribean Court of Appeal, and in the Privy Council. In dismissing the appeal, the Board of the Privy Council observed, inter alia – 

  1. It was critical that there was no requirement that the funds be segregated, so long as money to the same amount was then paid as intended pursuant to the contractual obligations assumed. (at [42])
  2. There was nothing to indicate that Prickly Bay (or Mrs Lee on its behalf) retained any beneficial interest in the money or that it did not form part of the general assets of Baico once paid over to it. What was created was a contractual arrangement, not a trust. (at [44])
  3. Mrs Lee had remedies in contract against Baico, but did not require Baico to act as a fiduciary or to keep her subscription moneys separate from any of its own moneys. Those aspects of the parties’ arrangements were inconsistent with the retention by Prickly Bay (or Mrs Lee) of any partial beneficial interest under a Quistclose trust to enforce the performance of the purpose of the trust or alternatively the return of the moneys. (at [46]) No Quistclose trust.

(9) Goo v Sim [2022] NSWSC 420

In this case last year, the plaintiffs and Mr Sim had entered into a business venture to create an online remittance portal for the real-time transfer of money between individuals in Australia and South Korea. Mr Sim set up a South Koren company global HR for the new business. A sum of $110,000 ($109,000 cash and $1,000 transfer) was given to Mr Sim by one of the plaintiff companies, just before Global HR was incorporated, and a second cash amount of $50,000 was given to Mr Sim two months later by another plaintiff. It was alleged Mr Sim had then used the money for his own benefit rather than for the business venture, although Mr Sim said it was used for his salary and business expenses. A range of claims were brought, including a contention that the $110,000 was held on a Quistclose trust. The plaintiffs claimed the $110,000 did not become Global HR’s property or part of its assets because of the specific purpose for which the money was paid, which Global HR knew. The Court accepted that objectively, it must have been the purpose of the parties that the $110,000 was to be transferred to Global HR and to be used only for its establishment and ordinary business operations in connection with the establishment of the online remittance business in Korea. However it was not sufficient to show the money was advanced for such a purpose. There had to be other objective indicators of an intention to create a trust, and an intention that the money not become part of the general assets of Global HR. There was no evidence that Mr Goo and Mr Sim discussed a requirement to keep the money in an account separate from any other money Global HR might receive, a powerful indicator of an absence of intention that the money was intended to be held on trust. The plaintiffs did not point to any language used by the parties that was suggestive of the $110,000 being held on trust. No Quistclose trust.

(10) Eumeralla Estate Pty Ltd v Chen [2022] VSCA 78

I regard this case as probably the low water mark of Quistclose trust cases, in that at first blush it looks like a case where money was paid into a company’s bank account for a purpose, as is always the case, but with no explicit restrictions. However there was more to it than that. This was a joint venture case, with a JV agreement governing the parties’ dealings. The defendants had paid $430,000 into the JV vehicle Eumeralla’s bank account for the future development of a particular property. Ultimately the sale did not proceed. One of the plaintiffs moved the money out of the account inconsistently with the intended purpose. The Court of Appeal held that Eumeralla held the money on trust for the defendants, on the basis that the money was paid into Eumeralla’s account for a particular purpose known to all parties. It was significant that: Eumerella was incorporated to further the mutually agreed purpose of the parties, being the corporate vehicle for the property purchase and development, it conducted no other business and had that single purpose, the payment occurred pursuant to a joint venture agreement, it was not open to the plaintiffs to withdraw the money from the account as they did. Quistclose trust found.

(11) Jieyun International Investments Pty Ltd v Toorak Development Group Pty Ltd [2022] VSC 387

In this case last year, loan money was advanced by Jieyun under a loan deed pursuant to which the moneys advanced “must only be used for the Approved Purpose”, which was the purchase by Toorak Development of certain Toorak properties, and the payment of development and construction expenses. The deed repeated that the parties acknowledged and agreed that the loan must only be used for the Approved Purpose. The Court held that the moneys were held on a Quistclose trust, inferring the intention to create a trust from –

  1. Both Jieyun and Toorak Development expressly acknowledged and agreed that the advances must only be used for the Approved Purposes. This was intended to make clear that the advances were not intended to become the beneficial property of Toorak Development 
  2. There was an express restriction on the manner in which the trustee Toorak Development could deal with trust assets
  3. The fact that Toorak Development was an SPV to be trustee of the TDG Unit Trust, established for the purpose of carrying on the business of real estate, in developing the particular properties.  Quistclose trust found.

Conclusion

Quistclose trusts can be a useful tool for recovery in equity, if the circumstances of the relevant transaction/s support them. They become more acutely important when the recipient subsequently collapses. If a trust arose and the payor retains a proprietary interest in the funds paid, it may be traceable into the recipient’s bank account / chose in action and potentially – subject to matters like the tracing rules – recovered. So – when will that be the case?

The principles distilled above should be read in full. However it is clear from the authorities that the two key requirements are those at principles (5) and (6) above. As the New South Wales Supreme Court concluded last year in Re BBY Ltd, in order for a transfer of funds or assets to be characterised as held on a Quistclose trust, the Court will look to whether the parties outwardly manifested a mutual intention that –

  1. The money was provided for a specific purpose, and
  2. The recipient was to be subject to restrictions on the use of the money for any other purpose

If equity would so respond, this can be a valuable claim.

Footnotes

  1. As to the last point, see Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (Lipkin Gorman), 572 per Lord Goff of Chieveley.
  2. There is no property in currency: Lipkin Gorman at 563 per Lord Templeman. It is said that when money passes into currency property goes with possession: Ilich v The Queen (1987) 162 CLR 110, 128 per Wilson and Dawson JJ, 138-139 per Brennan J.
  3. Russell v Scott (1936) 55 CLR 440, 450-451 per Dixon and Evatt JJ.
  4. Croton v The Queen [1967] HCA 48; (1967) 117 CLR 326, 330 per Barwick CJ.
  5. Note that in some cases, a statutory trust may arise under Australian financial services legislation, such as s 981H or s 1017E of the Corporations Act 2001 (Cth). That is a topic for another paper.
  6. See eg Salvo v New Tel Limited [2005] NSWCA 281 (Salvo) at [32]-[53] per Spigelman CJ; Legal Services Board v Gillespie-Jones (2013) 249 CLR 493 at [112]-[127] per Bell, Gageler and Keane JJ; Raulfs v Fishy Bite [2012] NSWCA 135, [44]-[55] per Campbell JA; See also Abandoning the Quistclose Trust in Insolvency, Balani R, (2021) 42(1) Adelaide Law Review 259, 263. Cf Salvo at [76]-[78] per Handley JA, McManus RE Pty Ltd v Ward (2009) 74 NSWLR 662 at [25] per Palmer J, Adam v Hasabo [2019] NSWSC 1167 at [252] per Robb J; Eumeralla Estate Pty Ltd v Chen [2022] VSCA 78.
  7. The original decision is Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.
  8. Nikitins (Liquidator) v EncoreFX (Australia) Pty Ltd (in liq)(No 2) [2021] FCA 27 (Nikitins v EncoreFX) at [100], citing Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 (Re Australian Elizabethan Theatre Trust), 502-503 per Gummow J.
  9. Prickly Bay Waterside Ltd v British American Insurance Company Ltd [2022] UKPC 8; [2022] 1 WLR 2087 (Prickly Bay) at [32] per Lady Arden, delivering the judgment of the Privy Council.
  10. Nikitins v EncoreFX at [100], citing Re Australian Elizabethan Theatre Trust at 503, Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [53]-[59] per Gummow and Hayne JJ.
  11. Re BBY Limited (Receivers and Managers Appointed)(in liq) [2022] NSWSC 29 (Re BBY Limited).
  12. Prickly Bay at [37].
  13. Prickly Bay at [47].
  14. Prickly Bay at [34]; Twinsectra Ltd v Yardley [2002] 2 AC 164 (Twinsectra v Yardley) at [73].
  15. Nikitins v EncoreFX at [101], citing Legal Services Commissioner v Brereton [2011] VSCA 241; (2011) 33 VR 126 at [96] per Tate JA, Nettle and Ashley JJA agreeing.
  16. Nikitins v EncoreFX at [101], citing George v Webb [2011] NSWSC 1608 at [211] per Ward J, and Twinsectra Ltd v Yardley at 185.
  17. See Re BBY Limited.
  18. Nikitins v EncoreFX at [102], citing Walker v Corboy (1990) 19 NSWLR 382, 397-398 per Meagher JA.
  19. Raulfs v Fishy Bite [2012] NSWCA 135 at [61] per Campbell JA, Meagher and Barrett JJA agreeing.
  20. Nikitins v EncoreFX at [103], citing Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; 161 ALR 105 at [49] O’Loughlin J.
  21. Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) [2021] NSWSC 966 at [2686] per Ward CJ in Eq. Note this principle applies to all express trusts, not only Quistclose trusts.
  22. Eumeralla Estate Pty Ltd v Chen [2022] VSCA 78 at [83(g)] per the plurality. This trust law principle is not exclusive to Quistclose trusts, however this was a Quistclose trust case.
  23. See Re BBY Limited.
  24. See Prickly Bay at [23].

Worldwide freezing orders – recent developments in Australia

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Three recent Australian judgments on freezing and ancillary disclosure orders, and their application to ‘worldwide’ (outside Australia) assets, are worth noting. The first is a High Court decision as to the courts’ discretion to compel disclosure of worldwide assets pursuant to freezing and ancillary orders, despite accepting a claim to the privilege against self-incrimination. The second is a decision of the Full Federal Court on the issue of a jurisdictional precondition for worldwide freezing orders to be made by the Federal Court. The High Court has granted special leave in this case and will be hearing the appeal tomorrow, 13 October 2021. The third is an illustrative Federal Court decision handed down last week, in which worldwide freezing orders were made.

Deputy Commissioner of Taxation v Shi [2021] HCA 22

In August the High Court (4:1 majority) upheld the Deputy Commissioner’s appeal over the proper construction and application of s 128A of the Evidence Act 1995 (Cth) and whether the taxpayer in that case could – and should be permitted to – decline to comply with an order to disclose his worldwide assets relying upon the s 128A privilege against self-incrimination

The Deputy Commissioner had obtained ex parte orders in the Federal Court freezing the worldwide assets of a Mr Zu Neng (Scott) Shi, up to the unencumbered value of $41,092,549.03. Mr Shi had been the head of a large labour hire business that supplied workers through various companies, to a number of abattoirs in Victoria and NSW. The Deputy Commissioner’s evidence in support of his application dealt with investigations relating to Mr Shi, his wife and his son by the ATO and the AFP, and allegations of asset stripping, phoenix activity and systematic non-payment of taxation liabilities as well as fraud and evasion (see [56]). The sum for which the freezing orders were sought and made was the total income tax, penalty and interest for which Mr Shi had been assessed. The freezing orders were made on the acceptance by the Court that that there was a risk that assets might be removed from Australia to the detriment of the Commonwealth (see [3]-[8] and [20] of the freezing order judgment). Ancillary orders required Mr Shi to disclose all of his worldwide assets including their value, location and details, and the extent of his interest in the assets (disclosure order) (see [14]). Five months after the freezing and disclosure orders were made, judgment for the debt alleged was entered for the Commissioner by consent against Mr Shi and other respondents with costs – see [1] of the first instance judgment.)

To pause here for a moment, in practical terms, a party against whom a freezing order with a disclosure order is made, who seeks to claim the privilege against self-incrimination, generally responds to the disclosure order by filing up to three affidavits: (1) an affidavit disclosing so much of the information ordered to be disclosed to which no objection is taken (disclosure affidavit), (2) an affidavit disclosing the information required to be disclosed to which objection is taken (privilege affidavit), and (3) a separate affidavit setting out the basis of the objection (objection affidavit). As to the latter two, pursuant to s 128A(2), the privilege affidavit is delivered to the Court in a sealed envelope, and the objection affidavit is filed and served on each other party.

At first instance in the Federal Court Steward J, as his Honour then was, was satisfied that there were reasonable grounds for Mr Shi’s objection to disclosure of his worldwide assets. In other words, Mr Shi had established his claim to privilege on the grounds that disclosure of his worldwide assets may tend to incriminate him. Under s 128A(5), subject to one matter, it would follow that the Court must not require the sealed privilege affidavit to be disclosed and must return it. However a discretion lies in the space between the Court concluding the objection has reasonable grounds, and it being wholly upheld, by virtue of s 128A(6). Once it concludes under s 128A(4) that the objection has reasonable grounds, the Court then turns to consider whether to exercise its discretion under s 128A(6) to require the disclosure of the whole or part of the privilege affidavit to the other parties in the interests of justice, despite the soundness of the objection taken.

The Court may require disclosure of the information under s 128A(6) if it is satisfied of three things. In this case, the Court had to be satisfied (a) that the information disclosed in the Privilege Affidavit may tend to prove that Mr Shi had committed an offence against or arising under an Australian law (it was), (b) that the information does not tend to prove that the person has commented an offence or is liable to civil penalty under a law of a foreign country (it was), and (c) that the interests of justice so required. If it was satisfied as to all three, the Court could exercise a discretion to order all or part of the information to be disclosed.

Steward J’s decision turned upon the third of these. His Honour held that, subject to one matter, the interests of justice did favour disclosure. However his Honour considered that he was entitled to have regard to the consequences of the issue of a s 128A(7) certificate. This would mean that much of the information disclosed would not be able to be used against Mr Shi in any Australian court under s 128A(8), which would impact any future criminal proceedings as well as any future tax appeal. Steward J considered it was open to the Commissioner to exercise the powers under s 353-10 of Sch 1 to the Taxation Administration Act to obtain the same information without the ability of Mr Shi to refuse production on the grounds of self-incrimination. (see [61]) His Honour declined to order disclosure, essentially because in his view the public interest would be better served by the Commissioner obtaining the information via different means. The High Court majority held that this was an irrelevant consideration to take into account in failing to be satisfied for the purpose of s 128A(6)(c). (see [11] and [68]) The Full Federal Court had also so held. (see [62])

On appeal, the Full Court held that the interests of justice did not require disclosure of the privilege affidavit to the Commissioner, but for a different reason than at first instance. Their Honours so held on the basis that because judgment had already been entered for the Commissioner for the sum sought to be recovered, disclosure of the information was sought solely for the purpose of assisting methods of execution. This meant it was relevant to consider whether there were other available ways that execution could be assisted, including the Commissioner’s ability to examine Mr Shi as a judgment debtor under s 108 of the Civil Procedure Act 2005 (NSW). (see [62]) Lee J had also identified a risk of derivative use of the information disclosed despite ss 128A(7) and (8). Like the primary judge, but for different reasons, their Honours also declined to exercise their discretion to order disclosure.

The High Court upheld the Deputy Commissioner’s appeal, holding that these matters too were irrelevant considerations (see [11] and [68]-[69]). As to the risk of derivative use raised by Lee J, Gordon J observed that this was contrary to the proper construction of s 128A, and was addressed by a number of measures: the certificate procedure in s 128A(7), the non-derivative use prescribed in s 129A(8), the Harman undertaking; the ability of the Court to craft the form of orders made under s 128A(6) including requiring only part of the information to be disclosed, suppression or non-publication orders could be made under s 37AF of the Federal Court of Australia Act 1976 (Cth) requiring the information not be provided or disclosed to anyone other than identified persons. (see [69])

The negative proposition in s 128A(6)(b)

I pause here to address an aspect of this case worth noting, which highlights the significance for a respondent to a disclosure order in taking and establishing the claim to privilege under s 128A(2)(e) in the objection affidavit; in particular, making it clear that the respondent is objecting on the basis of a risk of incrimination as to an Australian criminal or civil penalty law, a foreign criminal or civil penalty law, or both (and providing adequate evidence as to the legal and factual foundation for that objection).

The issue arises from the negative proposition of which the Court must be satisfied under s 128A(6)(b) before it is able to exercise the discretion, a matter raised by Mr Shi in his notice of contention. That proposition is, essentially, that the information in the privilege affidavit does not tend to expose Mr Shi to criminal or civil penalty liability in a foreign country. Mr Shi submitted to the High Court that once the Full Court majority had found that the onus was on the Commissioner to satisfy the Court of that matter, it should have found that it was not open to the primary judge to be satisfied of this negative proposition. (see [64])

However Gordon J noted that under s 128A(2), it had been open to Mr Shi to object to disclosure on the grounds of the risk of incrimination as to either Australian laws or foreign laws. Mr Shi did not object with reference to his exposure to incrimination for criminal or civil liability under a foreign law. His objection had been only based upon potential incrimination under Australian law. At best, her Honour noted, Mr Shi’s solicitor and counsel had made a bare general assertion that disclosure may tend to prove the commission of an offence against a law of a foreign country. However the objection was not taken on that ground, and bare assertion by counsel was not sufficient for s 128A(2). (see [65]) Her Honour concluded that a failure to object on the grounds of foreign law meant that the question raised by s 128A(6)(b) does not arise. (see [67])

The plurality also found that Mr Shi did not take the objection based upon a tendency of the information to incriminate him for a crime or civil penalty under any Chinese law, nor did he lead any evidence capable of establishing such a tendency. However rather than concluding that the question raised by s 128A(6)(b) did not arise, their Honours concluded that the omission of such a basis for objection pursuant to s 128A(2)(e) is a sufficient evidentiary foundation for the Court, in the absence of evidence to the contrary, to be satisfied of the negative proposition in s 128A(6)(b). (see [9]-[10])

Hence the plurality and Gordon J took different paths, but arrived at the same destination. Whether or not the requirement for the Court to be satisfied of the negative proposition in s 128A(6)(b) arose here, this was no impediment in this case. The discretion to compel disclosure could properly be exercised pursuant to s 128A(6) if the interests of justice so required (and, it was held, they did). Edelman J, in dissent, disagreed, taking the view that s 128A(6)(b) placed an onus upon the Deputy Commissioner to negate Mr Shi’s prima facie entitlement to the privilege, which was not done. (see [77]-[78] and surrounding passages)

On the question of onus as to the matters set out in s 128A(6)(a) and (b), Gordon J held that it is for the party claiming the objection to set out the basis for the objection pursuant to s 128A(2) and (4). Sections 128A(6)(a) and (b) do not impose a standard or burden on that party additional to or higher than that imposed by s 128A(2) and (4). The premise that the onus is on the party seeking disclosure to satisfy the court of the matters in s 128A(6)(a) and (b) is contrary to the proper construction of s 128A. (see [70]) Edelman J in dissent disagreed, taking the view that it was for the party seeking to abrogate the privilege to satisfy the Court to exercise its discretion under s 128A(6) to strip the person of that privilege. (see [102]) Whilst generally agreeing with the views of Gordon J, the plurality did not address the issue of onus specifically.

The plurality make the point in obiter at [8] that if the person claiming the privilege based their objection to disclosure on the ground that it might incriminate them as to a criminal offence or penalty under a foreign law and if the Court was satisfied that there were reasonable grounds for the objection pursuant to s 128A(4), this would necessarily mean that the Could could not at the same time be satisfied of the negative proposition in s 128A(6)(b). This is an important point. It means that if the objection is taken based upon self-incrimination as to a foreign law, and the Court is satisfied on the material that there are reasonable grounds for the objection, then the Court cannot compel disclosure in the interests of justice. The discretion does not arise.

The interests of justice – s 128A(6)(c)

On the issue of the proper application of s 128A(6((c), and the matters properly to be considered by the Courts, the plurality Kiefel CJ, Gageler and Gleeson JJ observed –

“Evaluation of the interests of justice for the purpose of s 128A(6)(c) is informed primarily by balancing the public interest in the person to whom the extant disclosure order is directed complying with that disclosure order by disclosing information to the party to the civil proceeding in whose favour the order has been made, against the potential detriment to the person that arises from the tendency of the information to prove that the person has committed an offence against or arising under, or is liable to a civil penalty under, an Australian law. A court assessing that potential detriment must obviously take into account the prohibition in s 128A(8) on derivative use of the information disclosed. As recognised by the primary judge, and as explained by Gordon J, a court assessing that potential detriment must also take account of constraints on the use and dissemination of the disclosed information that arise within the context of the civil proceeding in which the disclosure order has been made. Those constraints include the obligation of the party to whom disclosure is made, and of any other person to whom the disclosed information might be given, not to make any use of the information other than for the purpose of the civil proceeding without leave of the court. they include too the availability of orders restricting the dissemination of the disclosed information, relevantly under s 37AF of the Federal Court of Australia Act 1976 (Cth).”

Huang v Deputy Commissioner of Taxation [2020] FCAFC 141; 280 FCR 160

In this case, the taxpayer Mr Changran Huang successfully appealed the making of worldwide freezing orders against him and an ancillary order as to the disclose of information (asset disclosure order) only insofar as it applied to assets outside Australia. Mr Huang had substantial assets in China and Hong Kong.

The freezing orders had applied to assets held by Mr Huang in Australia to the unencumbered value of over $140million as well as to assets outside Australia. Mr Huang challenged the extension of the freezing and ancillary (disclosure) orders to assets outside Australia, submitting that foreign revenue laws would not be enforced either directly or indirectly in China or Hong Kong. The Deputy Commissioner’s own case was that enforcement of a judgment against Mr Huang in Hong Kong or China “is not likely” (see [23]-[24] and [34]) although she submitted that the evidence did not establish that enforcement in China or Hong Kong or elsewhere in the world was impossible. (see [25])

The plurality, Besanko, Thawley and Stewart JJ, observed that the purpose of a freezing order as identified in r 7.32 of the Federal Court Rules 2011 (Cth) is the prevention of the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. A freezing order is no doubt an important weapon in the Court’s arsenal, but it must not be used for a purpose beyond that identified in r 7.32. (see [41]) If assets are beyond the reach of the Court’s enforcement processes, then a freezing order with respect to those assets is not for the purpose identified in r 7.32 because there is no longer a realistic possibility that the removal or disposition of the assets will frustrate or inhibit the Court’s process such that a judgment or prospective judgment will be wholly or partly unsatisfied. (see [42])

Their Honours accepted that the primary judge had applied an incorrect test, as to whether it was “not impossible” that the Deputy Commissioner may be able to take enforcement action against Mr Huang in China or Hong Kong. Their Honours held that a realistic possibility of enforcement in a foreign State is necessary. That is, there must be a realistic possibility that any judgment obtained by the plaintiff can be enforced against assets of the defendant in the place to which the proposed order relates. A test of a ‘realistic possibility’ is consistent with the approach taken by the courts in determining what must be shown in terms of the risk of the removal of assets or the disposal of assets, matters to which a freezing order is directed. (see [43] and [47]) Their Honours sought to make clear at [47] –

“At the same time, and at the risk of stating the obvious, we wish to make it clear that we are not laying down any general principle as to the evidence which will be necessary to satisfy that test. Each case is likely to turn on all its circumstances and the cogency of the evidence and the inferences which can be drawn from it.”

Their Honours then applied the test and concluded that none of the matters relied on by the primary judge, either individually or collectively, provided a basis for a conclusion that enforcement of a judgment in China or Hong Kong was a realistic possibility. (see [49] et seq) Those matters were –

  1. That there were exceptions to the presumption in Damberg v Damberg, the presumption that foreign law is the same as Australian law where a party with the onus fails to prove the content of foreign law. No particular exceptions were identified as possibly applicable. The law applied by the courts in this country will not countenance a claim by a foreign government, directly or indirectly, for the enforcement of a foreign revenue debt. (see [51]-[56])
  2. The potential use of bankruptcy procedures, the recognition of which in Hong Kong may be unaffected by the foreign revenue rule. The latter part of that proposition was doubted by the Court, where this would constitute indirect enforcement of a foreign revenue debt. (see [57]-[58])
  3. The potential willingness of the courts of Hong Kong and China to enforce Australian insolvency laws. Same point. (see [59])
  4. The possibility of Mr Huang moving assets to other jurisdictions where enforcement is readily available. There was no evidence of a threat to do this, and it was a theoretical possibility. Their Honours did not consider this could be a basis for an order restraining the disposition or diminution of assets in jurisdictions where enforcement was not a realistic possibility. (see [60])
  5. The potential willingness of the courts of China and Hong Kong to enforce Australian laws relating to the payments of penalties and interest. However these follow from the tax which is owed by reason of Australian revenue laws and arise by reason of those laws. Their Honours’ view was that it was not open to the Deputy Commissioner to argue that penalties and interest may not fall within China and Hong Kong’s reservations in the Convention on Mutual Administrative Assistance in Tax Matters in light of her failure to adduce evidence of the Convention in accordance with s 174 of the Evidence Act 1995 (Cth). In any event, in their Honours’ view penalties and interest are within the rule against the enforcement of the revenue laws of a foreign State. (see [61])

Their Honours concluded there was no realistic possibility that the Deputy Commissioners’ judgment debt would be enforceable in China or Hong Kong. (see [62]) The appeal was allowed.

On 11 February 2021, the High Court granted special leave to the Deputy Commissioner to appeal this decision. The Deputy Commissioner has submitted that the appeal is on the issue of whether the power of the Federal Court to grant a freezing order is subject to a mandatory jurisdictional precondition that there be proof of a realistic possibility of enforcement of a judgment debt against assets of the respondent in each foreign jurisdiction to which the proposed freezing order relates. The Deputy Commissioner submits that the Full Court was wrong to construe r 7.32 of the Federal Court Rules 2011 (Cth) as being subject to an unexpressed mandatory jurisdictional precondition to this effect. Difficulties of enforcement may be a permissible discretionary consideration in an application to discharge a freezing order previously made, weighed with other relevant discretionary considerations. However it ought not be a mandatory evidentiary requirement operating as a precondition to the power to grant or continue any freezing order, noting that worldwide freezing orders are frequently sought ex parte in urgent circumstances. (The DCOT’s submissions may be read here. Those for Mr Huang may be read here.) The appeal is due to be heard tomorrow 13 October 2021.

Rambaldi (Trustee) v Sumpton, in the matter of the Bankrupt Estate of Sumpton [2021] FCA 1199

In this case the Trustees in Bankruptcy of Mr Robert Sumpton had sought orders for the transfer of shares in Conecc Concrete Solutions Private Ltd, a foreign company located in India. The Bankrupt had failed to disclose his interest in these shares to the Trustees, which is an offence under s 265 of the Bankruptcy Act which may result in a maximum penalty of one year’s imprisonment.

The Trustees brought an ex parte application for freezing and ancillary (asset disclosure) orders, to reduce the risk of dissipation of those assets and preserve the Trustees’ interest in those shares for the benefit of the creditors of Mr Sumpton’s bankrupt estate. Anderson J agreed that the CCS shares fell within the description of property which vests in the Trustees following Mr Sumpton’s bankruptcy, having regard to ss 5, 58(1) and 116(1) of the Bankruptcy Act.

Applying the key principles governing freezing order applications (summarised briefly at [9]-[15]), one of the matters the Trustees needed to show was that unless the freezing order were granted, there was a reasonable apprehension that assets would be dissipated so as to frustrate the action or execution. They did not need to demonstrate a positive intention on Mr Sumpton’s part to frustrate a judgment, nor did they need to demonstrate that the risk of dissipation was more probable than not. It was enough for the Trustees to establish that, in the absence of relief, there was a danger or real risk that the assets would be dealt with in a way that would prevent them from recovering judgment.

Where allegations made against a respondent contain allegations of serious dishonesty, evidence of that nature is capable of satisfying the Court of the existence of the requisite danger to dispose of, deal with or dissipate assets: Spotlight Pty Ltd v Mehta [2019] FCA 1796 at [23]. In this regard the Trustees pointed to Mr Sumpton’s failure to disclose the shares, and that this was an offence punishable by imprisonment.

The Trustees submitted that their concern that if a freezing order is not made that their attempts to realise their interest in the CCS shares may be prevented by Mr Sumpton seeking to transfer them away without recourse to the Trustees, was based on the following matters –

  1. Mr Sumpton had failed to lodge his tax returns for the past 3 years.
  2. There had been no disclosure by Mr Sumpton of his shareholding in CCS.
  3. Mr Sumpton’s failure to provide further information in relation to his examinable affairs and answer questions in relation to his property interests.
  4. The difficulties for the Trustees in realising their interest in, and taking transmission of, the CCS shares.

The Trustees submitted that it was necessary for them to obtain a court order in the form of a ‘freezing order’, before engaging with CCS, so that they were able to engage with CCS in respect of realising the shares issued to Mr Sumpton which had vested in them as trustees of his bankrupt estate. (see [24])

His Honour noted that the Trustees sought a worldwide freezing order out of an abundance of caution in circumstances where the CCS shares relate to an Indian company. As Mr Sumpton is located in Australia and is an undischarged bankrupt, all of his assets whether local or intentional vested in the Trustees. The Trustees did not foresee any issue in effecting the transfer of the CCS shares once Mr Sumpton executed the necessary documentation.(see [27])

Anderson J referred to the pending High Court appeal from the decision in Huang v Deputy Commissioner of Taxation [2020] FCAFC 141; 280 FCR 160, and noted that there is an issue as to whether it is a jurisdictional precondition to the granting of a freezing order with respect to overseas assets, that there be a realistic possibility that any judgment obtained by the applicant can be enforced against assets of the defendant in the place to which the proposed order relates. However his Honour concluded that to the extent that the jurisdictional precondition applies, the Trustees anticipate that they will be able to obtain the transfer of the CCS shares once Mr Sumpton executes the necessary documents, or alternatively, they will be able to obtain a transfer based on the provisions of the Articles of Association and the Indian Companies Act. (see [28]-[29])

His Honour was satisfied that it was appropriate to make the freezing order in the terms sought.

Conclusion – Takeaways

On the issues dealt with in these decisions, the takeaways are these –

  1. What informs the courts’ discretion to compel disclosure of worldwide assets in the interests of justice, despite accepting the soundness of a claim to privilege against self-incrimination – The High Court in DCOT v Shi has clarified what is and is not relevant to the “interests of justice” assessment to be made by the courts under s 128A(6)(c). Evaluation of the interests of justice in each case will primarily involve weighing the balance between the public interest in the disclosure sought on the one hand, against the potential detriment of the tendency of the disclosure to incriminate a person under an Australian law on the other. It is irrelevant to consider other means the plaintiff may have for obtaining the information sought. If the courts are inclined to order disclosure notwithstanding the reasonable grounds for the claim to privilege, they will give consideration to whether to order disclosure to the whole or only part of the privilege affidavit, and what other orders ought be made to minimise the detrimental impact of the disclosure on the respondent.
  2. Who bears the onus relevant to the exercise of the discretion – The question of onus as to the matters to be established for the discretion to arise – those at ss 128A(6(a) and (b) – is not clearly settled. It may be likely that Gordon J’s view on this will be treated as authoritative, given the alignment of her Honour’s judgment with that of the plurality. That is: that the onus is not on the party seeking the disclosure, which would be contrary to the proper construction of s 128A. It is for the party claiming the objection to set out the basis for the objection pursuant to s 128A(2) and (4). Sections 128A(6)(a) and (b) do not impose a standard or burden on that party additional to or higher than that imposed by s 128A(2) and (4). (see DCOT v Shi [70])
  3. The discretion to compel disclosure despite the privilege is only available where the tendency to incriminate relates to Australian law – Where the party claiming the objection bases their objection on the risk of incrimination as to a foreign criminal or civil penalty law – and if that objection is accepted by the Court as based on reasonable grounds – the discretion to compel disclosure under s 128A(6) in the interests of justice is not available. This follows from the conclusion of the plurality in obiter that in those circumstances, the Court will be unable to be satisfied as to the negative proposition in s 128A(6)(b): the plurality in DCOT v Shi at [8].
  4. Is there a mandatory jurisdictional precondition to the making of worldwide freezing orders under the Federal Court Rules – High Court decision pending – The Full Federal Court has held in Huang v Deputy Commissioner of Taxation that there must be a ‘realistic possibility’ that any judgment obtained by the plaintiff can be enforced against assets of the defendant in the place to which the proposed order relates, for a worldwide freezing order to be made in Australia pursuant to r 7.32 of the Federal Court Rules. The High Court will hear the Deputy Commissioner’s appeal on this tomorrow, 13 October 2021. We await the High Court’s judgment with interest.

Statutory demands – setting aside under s 459G – what is a ‘genuine’ dispute or offsetting claim?

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When a company is served with a statutory demand it may apply to Court to set it aside under s 459G Corporations Act 2001 (Cth) (see also s 459J). Where the ground for the application is that the company disputes that it owes the debt, or has an offsetting claim, s 459H requires that this be genuine (see s 459H(1) and the definition of ‘off-setting’ claim in s 459H(5)). So – when will an alleged dispute or off-setting claim be accepted as genuine? Or what should be pointed to as demonstrating that it is not?

Practitioners will in some cases quickly form a preliminary view on this based upon the old ‘smacks of recent invention’ hallmark. Certainly that preliminary view may be borne out on closer examination, as was the case in a Court of Appeal decision in which I appeared some years ago – Rescom Asia Pacific v Reapfield Property Consultants Pty Ltd [2014] VSCA 92. However there is of course more to it than that. Often a fair amount of evidence is filed, which must be addressed by the parties and considered by the Courts in making a determination. Hence it is worth having regard to the principles that govern this issue.

Principles – ‘genuine’

The principles to be applied in applications to set aside statutory demands are well settled, though they are sometimes restated or collected together in different ways or with different emphases in the authorities. On this particular issue / element, my distillation of the key principles are as follows:

To be accepted as ‘genuine’[1] a dispute or offsetting claim must be shown to be both real, have some merit, and be plausible,[2] as well as authentic, not spurious or artificial or have been ‘manufactured or got up’.[3] In summary – 

  1. “The threshold is not high or demanding; a genuine dispute means there must be a plausible contention requiring investigation; and it is only if the applicant’s contentions are so devoid of substance that no further investigation is warranted that the applicant will fail. The court is not called on to determine the merits of, or to resolve, the dispute.”[4] The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).[5]
  2. “This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit ‘however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be’ not having ‘sufficient prima facie plausibility to merit further investigation as to [its] truth’.”[6]
  3. The questions for the Court have been identified as: “whether there is such a dispute and, if there is, whether it is genuine.” [7]
  4. “The claim must not be spurious or artificial, or have been ‘manufactured or got up simply for the purpose of defeating the demand made against the company’.”[8] “If the dispute is of that quality and is accordingly not advanced in good faith, it is not ‘genuine’.”[9]
  5. “[T]he court must decide whether the grounds of dispute delineated by the affidavit are grounds which, when viewed in the whole of the circumstances emerging from the evidence, indicate a plausible defence propounded in good faith and not one merely constructed in response to the pressure represented by the statutory demand.”[10]
  6. “Where an applicant to set aside a statutory demand contends for the existence of an offsetting claim it bears the onus of establishing that it is genuine in the sense of being authentic or bona fide, and real, not spurious, and not frivolous or vexatious.”[11]

In terms of the evidential burden and onus on the applicant – 

  1. “In order for [an alleged claim] to be genuine, there must be sufficient factual material to support the essential elements that go to make up that claim.”[12]
  2. “…the onus rest[s] on the [applicant] to provide a sufficient account of its dealings…to raise a genuine dispute and take the matter beyond mere assertion.”[13] 

Case Study

In Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85, Alpine Valley applied under s 459G (engaging s 459H and 459J) to set aside a statutory demand for just under $160,000 served on it by Grainlink in 2019 for unpaid invoices for grain supplied in 2018. The two companies had been trading since 2013.

Alpine Valley alleged an offsetting claim due to the alleged presence of weevils its customers had found in grain Alpine Valley had supplied to them, which it had acquired from Grainlink. Alpine Valley contended the grain was contaminated with weevil larvae at the time it was supplied by Grainlink, which had made the grain adulterated and unfit for purpose, causing Alpine Valley loss and damage. Alpine Valley estimated the value of that offsetting claim as almost $228,000, exceeding the amount of the statutory demand. (see [6]-[7],[23], [30])

Grainlink gave evidence as to is rigorous treatment and testing procedures for eliminating weevil and larvae from all grain (see [65]). Grainlink argued that Alpine Valley’s alleged offsetting claim was unsupported by probative evidence and was spurious (see [9] and [133]). Whilst Alpine Valley alleged that weevils had been a ‘constant issue’ (see [29]), Grainlink pointed out that the first time any issue was raised with them was when Alpine Valley filed its application to set aside the statutory demand in 2019 (see [132]).

Gardiner AsJ held that the offsetting claim was not genuine, based on the fact that the claim was only made after service of the demand, and was preceded by numerous promises to pay, with the reasons proffered for non-payment being cashflow problems and the internal turmoil within the company (the directors were in dispute). His Honour found that the alleged offsetting claim was not genuine, rather, it was spurious and had been ‘got up’ as an attempted means to defeat Grainlink’s demand. The application was dismissed. (see [148])

In particular, Gardiner AsJ found that the following features of the dealings between the parties in this case were ‘particularly powerful’ in convincing him that Alpine Valley’s alleged offsetting claim was not genuine (see [146]) –

  1. There was no notification of any kind by Alpine Valley of its alleged offsetting claim to Grainlink until it first served its material to set aside the statutory demand.
  2. There was evidence that Alpine Valley’s customers had received contaminated product from Alpine Valley. There were no contemporaneous documents generated by Alpine Valley connecting any of those complaints with Grainlink.
  3. Even if Alpine Valley had demonstrated that it had a genuine and arguable claim that Grainlink was responsible for the contaminated product, which his Honour found it had not, there was insufficient evidence to support the quantification of loss Alpine Valley claimed to have suffered as a result.
  4. Alpine Valley now claimed that throughout the trading period there was an endemic problem with weevil infestation in the grain. However Alpine Valley had paid all of Grainlink’s invoices between July 2013 and July 2018 without complaint.
  5. In December 2018, when Grainlink was pressing for payment of its invoices and any alleged claim would have been known to Alpine Valley, it simply conceded the amounts were overdue and a payment plan would be implemented.
  6. In January 2019 when Grainlink followed up, Alpine Valley responded that they hoped to pay $10,000 or $20,000 by the end of the month and hopefully a larger amount the following month.
  7. Grainlink then passed the matter to is collection agency. If Alpine Valley genuinely considered it had an offsetting claim, it would have raised it in its communications with the agency, and would not have been making promises to pay the debt in full.
  8. On 16 May 2019 shortly before the issue of the statutory demand, Alpine Valley made a payment of $10,000. Alpine Valley never explained why it would do so if it had a belief it had a genuine offsetting claim for a greater amount than it owed Grainlink.
  9. The age of the alleged offsetting claims, now said to have arisen throughout the trading period, was implausible.

While it is often said that the bar is not high or demanding in applications to set aside statutory demands, it still must be cleared. That an alleged dispute or off-setting claim is ‘genuine’ must be shown. In assessing the evidence, what the contemporaneous documents do – and do not – show will always be significant. For another recent example of a case involving promises to pay made without mentioning offsetting claims later raised to support an application to set aside a statutory demand, see Re CMG Automotive Pty Ltd [2020] VSC 779 – see [161], [164], [174].

[1] Within the meaning of s 459H(1) and (5).

[2] See quotes from authorities drawn together in Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [7] per Perram J; See also Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137 at [33] per Ball J and the authorities there cited.

[3] See below.

[4] SGR Pastoral Pty Ltd v Christensen [2019] QSC 229 per Bowskill J, citing Citation Resources Ltd v IBT Holdings Pty Ltd [2016] FCA 1265; (2016) 116 ACSR 274 at [17] per McKerracher J.

[5] Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, 605 per Thomas J; cited with approval in In the matter of Essential Media and Entertainment Pty Ltd [2020] NSWSC 990 at [81] per Rees J.

[6] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, 787 per McLelland CJ in Eq, oft-cited and applied, as for example in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [63] per Bell P.

[7] Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [8] per Perram J.

[8] SGR Pastoral at [52], quoting from JJMR Pty Ltd v LG International Corp [2003] QCA 519 at [18]; See also the citing of the ‘must not have been manufactured or got up’ principle from JJMR Pty Ltd in: Brandon Industries (Vic) Pty Ltd v Locker Pty Ltd [2016] VSC 373 at [150] and Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85 at [17].

[9] Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [95] per White JA, quoting from Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300; 125 ACSR 212 at [47] per Barrett AJA.

[10] Ligon 158 Pty Ltd v Huber [2016] NSWCA 330 at [10] per Barrett AJA, McColl and Meagher JJA agreeing.

[11] Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85 at [15] per Gardiner AsJ.

[12] Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137 at [40] per Ball J.

[13] Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd [2017] VSCA 51 at [78], citing Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 (McLellan CJ in Eq), TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71] (Dodds-Streeton JA,Neave and Kellam JJA agreeing).